Q4 2023 Group 1 Automotive Inc Earnings Call

Participants

Peter DeLongchamps; SVP of Manufacturer Relations, Financial Services & Public Affairs; Group 1 Automotive, Inc.

Daryl Kenningham; President, CEO & Director; Group 1 Automotive, Inc.

Daniel McHenry; SVP & CFO; Group 1 Automotive, Inc.

John Murphy; Analyst; Bank of America Securities

Adam Jonas; Analyst; Morgan Stanley

Rajat Gupta; Analyst; JPMorgan Chase & Co

David Whiston; Analyst; Morningstar Inc.

Daniel Imbro; Analyst; Stephens Inc.

Michael Ward; Analyst; Freedom Capital Markets

Presentation

Operator

Presentation of fourth 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 DeLongchamps Group one's Senior Vice President of Manufacturer Relations, Financial Services and Public Affairs. Please go ahead, Mr. DeLongchamps.

Peter DeLongchamps

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 one'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 one 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 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 most directly comparable GAAP measures on its website.
Participating with me on the call today, Daryl Kenningham , our President and Chief Executive Officer, and Daniel McHenry, our Senior Vice President and Chief Financial Officer, I'd now like to hand the call over to Daryl.

Daryl Kenningham

Good morning. In the fourth quarter of 2023, the Group one Automotive reported $131.2 million in adjusted net income and delivered quarterly adjusted diluted EPS from continuing operations of $9.50. Current year total revenues of $17.9 billion were the highest in company history, supported by all lines of business. And total gross profit exceeded $3 billion, an all-time record, driven by parts and service gross profit of $1.2 billion start with our US operations, new vehicle units sold outpaced the industry.
We were up 14% on a same-store basis and up 19% on an as-reported basis during the fourth quarter 24% of our new vehicle sales in the US for pre-sales, down from 30% in the prior quarter. The strong unit sales reflect the resiliency of demand and our emphasis on driving volume. Gross profits performed about as expected and continue on their slow glide path down as inventories return used cars. Retail used vehicle GPUs performed well in the quarter, increasing $160 over the prior year quarter, with unit sales remaining flat.
Giving the speed and depth that the industry used car valuations declined in the U.S. during the fourth quarter, we're pleased with our ability to hold volume and increase margins. We believe this is testament excuse me, to our process discipline with pricing and our use of technology.
Our F&I gross profit per unit of $2342 only only minimally declined on a same-store sequential quarter basis. It appears that finance attach rate 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 after sales quarter revenues and gross profits outperformed the prior year as customer pay was up nearly 7%, and we achieved record annual parts and service revenues and gross profit in excess of the $1 billion for the full year of 2023.
We continue to believe that Acthar sales is an area for Group one 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 retention through more convenient service hours training of our service advisory 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 rather than service them. However, we still see significant opportunities to drive aftersales growth in our business. As an example, we booked over 10,000 customer appointments in the quarter using artificial intelligence helping to meet our customers when and where they want to engage and to do business.
Wrapping up the US, let's shift to SG&A. U.s. adjusted SG&A as SG&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.
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 fourth quarter, 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, our UK team delivered full 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 31st, our new vehicle order bank was approximately 13,000 units, nearly five 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 a rebalancing of its used vehicle inventory during the fourth quarter. That will continue into the first quarter of 2024. This rebalancing resulted in a $1,300 loss per vehicle sold through our wholesale channels.
UK adjusted SG&A as a percentage of gross profit increased 850 basis points sequentially and 1,040 basis points year over year. As a reminder, during the last half of 2023, 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 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 in addition, we are consolidating our customer contact center and reducing our overall headcount by 10%, and 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 revenue revenues of $1.1 billion. We spent $173 million to repurchase 5.1 of our outstanding common shares. We paid dividends of $25 million. 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 million, and we acquired six dealerships with an average revenue of $183 million. 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 mix. I will now turn the call over to our CFO, Daniel McHenry, to provide a balance sheet and liquidity overview. Daniel?

Daniel McHenry

Thank you, Daryl, and good morning, everyone. As of December 31st, we had $57 million of cash on hand and another $275 million invested in our floorplan offset accounts, bringing total cash liquidity to $332 million. We also had $463 million available to borrow on our acquisition line, bringing total immediate available liquidity to $795 million.
In the full year 2023, we generated $720 million of operating cash flow and $581 million of free cash flow after backing out $139 million of CapEx. This capital was deployed through a combination of acquisitions, share repurchases and dividends.
In the fourth quarter of 2023, we spent $42 million repurchasing approximately 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 is down to approximately $13.7 million. 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 US 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 floorplan interest of $19.4 million was an increase of $9.7 million from the prior year due to higher vehicle inventory holdings. Current year floorplan interest of $64.1 million was an increase of $36.8 million.
We effectively manage our floorplan interest expense by holding excess cash in our floorplan offset accounts, reducing the balance exposed to interest as well as through our portfolio of interest rate swaps, which saved us $2 million of interest rate expense versus the comparable prior year quarter and $14.6 million versus the comparable prior year.
Quarterly non-core planned interest expense of $27.7 million increased $5.7 million from the prior year and current year non floor plan interest expense of $99.8 million increased $22.3 million. Similar to our floorplan interest rate swaps, our mortgage swap portfolio saved us $1.6 million in the current quarter versus the comparable period and $15.5 million in the current year versus the comparable period.
As of December 31st, approximately 60% of our $3.7 billion in floorplan 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 so far, which is the benchmark rate referenced in our floorplan 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 on our website.

Daryl Kenningham

Thank you, Daniel. In 2024, we expect to aggressively pursue M&A opportunities that are accretive to our business. Our well-positioned balance sheet is a 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&A opportunities beyond the initial economics.
Thank you for your time today, and we look forward to speaking with you throughout 2024. This concludes our prepared remarks. I'll now turn the call over to the operator to begin the question and answer session. Jamie,

Question and Answer Session

Operator

We will now begin the question and answer session (Operator Instructions)
John Murphy, Bank of America. Please go ahead with your question.

John Murphy

Good morning, guys. Tom, just I guess the first and biggest question is from Daryl is on the UK use business and the business in general over there, what exactly is going on? I mean, did the the team get a little bit to extended used vehicle inventory and weren't tight on on on your turn earn strategies?
Or is there something else sort of be a bigger and more problematic there. And maybe this kind of thing that we'll see you work out of you in the first quarter and by the second quarter were closer to normalized?

Daryl Kenningham

I'd say to answer your last question first, John, this is by the way we will yes, we will see a improvement in Q1 and then hopefully is 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 was very challenging. We saw a couple of warnings from some of the used car retailers in the UK during the quarter.
And I think the process that we had in place, which we've since changed and gone to a more centralized process of valuation and pricing. It wasn't really conducive to a really dynamic market just to be totally candid with you. So we've centralized that with a team of experts and and better visibility and transparency and more accountable decision making.
And we believe that will show immediate benefits. So those are those are that those are that's my take on what the what the issues were unused.

John Murphy

Okay. And then just maybe one follow-up on just your backlog in the US. I mean, there's lots of cross currents in stories positively negatively on the US consumer, but just curious in your showrooms on your discussion with your GMs, what is the state of play of ops walking into dealerships or happened online to accelerate this? Or what's the mood and tenor of those discussions? And I mean, what's your take on demand for this year?

Daryl Kenningham

Mood that moves Good. Traffic counts are good. And we were really pleased with our 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 days supply is manageable. And so demand is soaking up that additional production.
And we were we were ecstatic, especially with the last few days of December, I mean, so really just some some some really record days that were really good to see. And so I think to me that, that portends good things for 2024, the margins have come down about will we expect that about $100 a month.
And that's that's kind of where they continue to trend. And and you'll see some changes between franchises a bit, but generally, it's as predicted, and I would say demand is looks good.

Operator

Adam Jonas, Morgan Stanley. Please go ahead with your question.

Adam Jonas

Hey, Darryl. 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 in still in tight supply? I mean, I wouldn't be shocked if you saw hybrid sales up to 40%, 50%. I mean, like really, really high this year.
But I didn't know if you want to add some color on that part of the market and then some for dealers where you do have on electric vehicle offerings. What's your latest on the on the ground from the floor sentiment indicator on one consumers? It seems like demand slowing, but I didn't want to assume anything without hearing from you guys? Thanks.

Daryl Kenningham

Sure thing, Adam, this is Darryl, 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. The one of the hottest vehicles we have anywhere in our dealerships is a Toyota Sienna.
It's an all hybrid power plant and believe it or not a mini vending model, how does the test we've got the new Camry on coming out with all 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 across the across the on the brands that we have, and that's what we see. EV.
We see some 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 interest around London in December. And the fourth quarter was a much softer UK demand on NPEs and in the US, 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 in the U.S. side.

Daniel McHenry

And it's Daniel here. Just to add, I think Daryl said in terms of its percentage of our total inventory units and EV and at quarter three with 6.5%, and it's still 6.5% today. So we haven't seen any particular increase as a percentage of total inventory or in terms of EV.

Adam Jonas

Appreciate that, guys. If I can just squeeze squeeze in one more on floor plan interest. I don't know if you had a blended, Daniel, a blended view on what your floorplan interest is today and kind of where it might be might have moved.
My my checks suggest that it was looking kind of scary in the fall, maybe has moderated a bit and maybe on the on the leading edge, maybe coming down a bit from a phone, the phone market rates, but it was wanted to know if you could put some put a number on that. Thanks, guys. Thanks for taking questions you are at.

Daniel McHenry

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

Operator

Rajat Gupta, JP Morgan. Please go ahead with your question.

Rajat Gupta

Great. Thanks for taking the question. I had a first question just on parts and services. Com, it did look like on the revenue growth on a same-store basis did slow down there quite a bit in the fourth quarter, both in the US and UK.
I'm curious if you're able to you dissect that a little bit more for us, how much of that slowdown was traffic versus ticket or how much was like from the selling days lower selling days. I know you have a four-day work week, but I don't know the selling days had an impact at all or are you just if you could like just help break that apart for us would be helpful.

Daryl Kenningham

And 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, Rich, that's not normally we normally double digit increases. We're lapping the two really good. Fourth quarters last year were up 13% year before that were up '22.
And so we are seeing from our customer counts are growing and 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 is our Saturday business after COVID, the Saturday business, it 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 on our service departments are open all day Saturday, which is fairly unique in the industry.
And you don't see that in a lot of a lot of lot of dealerships. And so we're putting a lot more focus and emphasis on on that with our customers and then later in the quarter, we started to see that volume really increase on Saturdays, which I expect we'll see that continued through the quarter through the year.

Rajat Gupta

I'm sorry, got it. And what was there any impact from the strike, but all that experience in the quarter?

Daryl Kenningham

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

Operator

David Whiston, Morningstar. Please go ahead with your question.

David Whiston

Thanks. Good morning. I want to go back to the UK, as I'm sure you guys know the UK used vehicle market has been soft for everybody for a while now. And I'm just curious, in Q4, did things get a lot worse or has it just been piling 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.

Daniel McHenry

David, it's Daniel here. I'll take the first part of that question. In terms of used inventories, we came out of September with probably too much inventory. September is traditionally a big registration month in the UK.
You get a lot of trades and that month specifically and rolling into October, November and December, the drop that was seen at the auction prices was over 10% in the UK over those three months. 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.

Daryl Kenningham

Yes, we are we're addressing that head count, honestly, David, because our head count 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 fourth quarter and in the used vehicles and some other areas we felt like it was it was the right thing to do.
We've had better discipline in the US on that than we have in the UK. And so it wasn't necessarily related specifically to used cars and general overall resource allocation.

David Whiston

Okay. And switching gears here to some scare and some others have talked about wanting to franchise now. I'm just curious if you guys are interested in, are any of the start-ups in getting a franchise or are they too early in their lifecycle for you.

Daryl Kenningham

You know, from 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 getting harder.

Operator

Daniel Imbro, Stephens Inc. Please go ahead with your question.

Daniel Imbro

Your bank hasn't had a question on. I want to start on the cost side actually, I guess two quick I a clarifier ours one, you mentioned the 10% headcount reduction. Any way you could size the annual cost savings of $15 million to $20 million and $30 million plus. Any sizing on that? And then you're lowering SG&A in the UK. Is there a risk you find yourself in the same position in the US and maybe a year or two as the industry continues to normalize? Or how do you think about the cost saves here? Profitability normalizes?

Daniel McHenry

So I'll take the first part of that question. Samuel here, Daniel, regarding the absolute dollar number that we would expect to take guide in terms of headcount, that's somewhere between $8 million and $10 million. So the other thing that we're laser focused on is our loaner car fleet demonstrator fleet because clearly they're taking them big drops in valuation at the moment, we see that being somewhere around a $3 million saving.

Daryl Kenningham

Great. And then any annual on that, Dominic? Yes, I think that's a little more on the head count. We're still down versus 2019 in the U.S. on head count on a same-store basis down quite a bit 7%. So in the UK, we were not we were heavier in the UK on a relative basis versus 2019, a same-store so we had opportunity in the UK.
Would that ever hit us in the U.S. from Well, who knows? I mean, it depends on what business conditions do. We we've done a better job in our U.S. business, managing that headcount than we have in new cases.

Daniel Imbro

Helpful. And then maybe on the UK on a follow-up. I think last quarter you mentioned almost 18,000 units in the backlog this morning, you mentioned still five months of backlog. Can you help us reconcile that with the 2% decline in same-store units?
I guess there was a an expectation that that level of backlog would help insulate result and you keep growing despite the market slowing. So any color you can provide on the one didn't play out and how we should think about growth going forward, just despite the backlog?

Daryl Kenningham

Well, we didn't keep up with the new car industry in the fourth quarter in the U.K. And we built inventory in the new car side, even though we still have a fairly robust our order bank and we have to do a better job with our with our throughput of our inventory.
So 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 the right vehicles and the right brands. And so that's part of our art actions that we're taking in the UK because honestly, while we while we overperformed in the US on exactly that metric we underperformed and pay on exactly that thing. So we have some work to do around driving more customer demand or still.

Operator

Michael Ward, Freedom capital markets. Please go ahead with your question.

Michael Ward

Thanks very much. Good morning, everyone. From the parts and service side in the US, I think you mentioned that the customer pay was up 7%. What were the how did collision or warranty or wholesale do collision?

Daryl Kenningham

Was down a tick 1.8 CP was up 6.5 as you mentioned the warranty was up a little over four.

Michael Ward

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

Daryl Kenningham

No, I think it's a tough comp. We've seen collision grow at 25%-30% over a year over the last two years basically. And also collisions are a real small part of our business, it's $5 million in gross profit a month. For our cases, it's not much it's like less than 4% of our business.

Michael Ward

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

Daryl Kenningham

Yes.

Michael Ward

Okay. And that was at 1,300 units, I think you said something like that?

Daryl Kenningham

$1,300 per unit.

Michael Ward

$1,300 per unit. Okay. And that contributed to it. Okay. And then just one last thing on the UK, March, another big registration month and any indications on orders you have for March or is that part of the 13,000 backlog? What can we expect as we go into Q1?

Daryl Kenningham

Well, it's part of the backlog. We haven't broken it down for which is March of 2016. Now some of you can get that information. You know, the Sorin in the UK is expected to grow about 10% this year. And so and to us, that's encouraging and we have inventory going into the end of March, which is nice to have. So hopefully, we'll be able to take advantage of it Mike.

Operator

And our next question is a follow-up from Rajat Gupta, JP Morgan. Please go ahead with your follow up.

Rajat Gupta

Greg, thanks for squeezing me in again here. I had a question on a new GPUs or one of them was in our Pinnacle. Can you help us dissect the sequential moderation across our different brands like import domestic luxury home and you also mentioned like $100 a month was consistent with what you had expected. And is that something you expect to continue your I know in the first quarter as well I just want to clarify those two points.

Daryl Kenningham

I guess the answer to all of that is Yes, Roger. We saw you know, there was there was nothing that really stood out as well, one brand going completely different way than every every other brand. But we saw were down $1,212 year over year on a pure use on the new car side.
So and that's and that trend has seen that just continue since we've come out of COVID. And so we're still seeing that. It's generally across the board on the brands, um, you know, with the with Santos, we're heavy in inventory there. So there's a little pressure on that, obviously, but we're only 4% mix of Stellantis. So hopefully that won't hurt us too Benson.

Rajat Gupta

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. We thank everyone for joining. Have a great day. You may now disconnect your lines.