Asbury Automotive Group Inc

Good day and welcome to the Asbury Automotive Group Q1 2022 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Karen Reed. Please go ahead.

Thanks, Mary, and good morning, everyone. As noticed, today's call is being recorded and will be available for replay later this afternoon. Welcome to Asbury Automotive Group's first quarter 2022 earnings call. The press release detailing Asbury's first quarter results was issued earlier this morning and is posted on our website at AsburyAuto.com. Participating with me today are David Holt, our President and Chief Executive Officer, Dan Clara, our Senior VP of Operations, and Michael Welch, our Senior VP and Chief Financial Officer. At the conclusion of our remarks, we will open the call up for questions, and I will be available later for any follow-up questions that you may have. Before we begin, we must remind you that the discussion during the call today is likely to contain forward-looking statements. Forward-looking statements are statements other than those which are historical in nature, which may include financial projections, forecasts, and current expectations, each of which are subject to certain uncertainties. For information regarding certain of the risks that may cause actual results to differ materially from these statements, please see our filings with the SEC from time to time including our Form 10-K for the year ended December 2021 and any subsequently filed quarterly reports on Form 10-Q and our earnings release issued earlier today. We expressly disclaim any responsibility to update forward-looking statements. In addition, certain non-GAAP financial measures, as defined under SEC rules, may be discussed on this call. As required by applicable SEC rules, we provide reconciliations of any such non-GAAP financial measures to the most directly comparable gap measures on our website. We've also posted an updated investor presentation on our website, AsburyAuto.com, highlighting our first quarter results. It is now my pleasure to hand the call over to our CEO, David Holtz. David?

Thank you, Karen, and good morning, everyone. Welcome to our first quarter earnings call. Our first quarter results were an all-time record for any quarter in Asbury's history. We continued to experience strong consumer demand, although our ability to meet this demand was constrained by very low new vehicle inventory. For the quarter, we grew adjusted EBITDA by $195 million to $336 million, and adjusted EPS from $4.68 to $9.27. an increase of 98 percent. We delivered 8.2 percent adjusted operating margin, up 210 basis points. We increased revenue by $1.7 billion to $3.9 billion and increased gross profit by $409 million to $792 million. We drove F&I gross profit per vehicle to a record 2481. up $742. It continues to have a disciplined approach around SG&A, resulting in a decline of 520 basis points from the prior year's first quarter. This was the first full quarter reflecting all of our 2021 acquisitions under the ASBRI umbrella, and the strategic fit is clear. We are excited about our team and our ability to execute on our 25 plan. We see tremendous opportunity ahead of us as we roll out Clicklane to all acquired dealerships and integrate TCA into the legacy Asbury stores. Due to our record performance and strong cash flow, our balance sheet remains strong. Our adjusted operating cash flow for the first quarter was $406 million, an increase of $290 million over the first quarter of 2021. Our net leverage ended this quarter at 2.2 times. During the quarter, we repurchased $200 million of our stock, which completed our share repurchase authorization. As we announced in our earnings release this morning, our Board of Directors has approved a new 200 million share repurchase authorization. Our near-term priority is to continue to integrate our recent acquisitions and use our strong free cash flow to lower our net debt level and return cash to shareholders through opportunistic share repurchases. At the same time, we'll continue to monitor the M&A market as we believe there are potential opportunities that would enhance our already strong dealership portfolio. Due to the strong pace of acquisitions last year, we exceeded our five-year acquisition target in the first year of the plan. Today, we will be providing an update to our strategic growth plan that I will briefly discuss later in the call. We continue to operate in an unusual macro environment, and experience strong demand across all of our revenue streams. We do not anticipate a meaningful recovery in inventory levels in 2022 and believe these levels are unlikely to fully normalize until 2023. In these unusual times, our industry has benefited, which is reflected in our first quarter results and demonstrates the value and the resilience of the franchise model. We look forward to continuing to deliver strong results for our shareholders, be outstanding partners with our OEMs to steward their great brands, and offer an environment where our team members can thrive while providing the most gas-centric experience in automotive retail.

Dan? Thank you, David, and good morning, everyone. First, thank you to all of our dedicated teammates who worked so hard to fulfill our commitment to being the most guest-centric automotive retailer. This quarter was a busy one for Asbury as we continue to integrate acquisitions made in the fourth quarter of 2021, work to close on our divestitures, and develop the plan to expand ClickLink to acquire stores and TCA to legacy Asbury stores. Now, I'll turn to our same-store performance compared to the first quarter of 2021, unless stated otherwise. Starting with new vehicles. In the first quarter, new vehicle inventory remained well below normalized levels, and consumer demand continued to outstrip supply. At the end of March, our total new vehicle inventory was $207 million, and our day supply was at 10 days, down 24 days from the prior year quarter. Given this dynamic, our new vehicle volume declined 20% year over year. However, we experienced a significant increase in our new average gross profit per vehicle, which increased $2,995 from the first quarter 2021 to a total of $5,750. We anticipate new inventory levels to remain low through 2022 and we are focused on maximizing profitability while also remaining steadfast in our commitment to our guests and our mission to be the most guest-centric automotive retailer. Turning to used vehicles, our used vehicle retail volume increased 6%, which contributed to a 32% increase in used vehicle retail revenue. Used gross profit PBR increased by $209, to $2,228 compared to the first quarter of 2021, resulting in a 17% increase in used retail gross profit. Our total used vehicle inventory ended the quarter at $378 million, which represents a 28-day supply, up one day from the prior year. Our used to new ratio for the quarter was 114%. Shifting to F&I, our strong, consistent, and sustainable growth in F&I delivered an increase of $634 to $2,376 per vehicle retail from the prior year quarter. I'd like to thank our F&I team for this tremendous result. In addition, in the first quarter, our total front-end yield per vehicle increased $2,096 per vehicle to a record of $6,253. Moving to parts and service. Our parts and service revenue increased 14% in the quarter. The warranty revenue, which is outside of our control, dropped 12%. Our customer pay revenue continued a strong rebound, posting 17% growth, which is triple our normal growth. We achieved over 176,000 online service appointments, a 29% increase over the prior year quarter. Benefits of increasing online service appointments include enhancement to the customer experience, higher customer retention, higher conversion rates, and higher dollars generated per repair order, which ultimately provides higher returns to our shareholders. We now have four full quarters with Clicklane at all legacy stores, and we couldn't be more pleased at the results we're seeing. We sold over 5,600 vehicles through Clicklane in the first quarter, of which 38% of them were new vehicles and 62% were used. In fact, March was Clicklane's best month ever. We believe sales of new vehicles were depressed due to a lack of inventory. 92% of our transactions this quarter were with customers that were incremental to Asbury's dealership network. Average transaction time remained roughly in line with prior quarters, as we saw a half-minute increase to 8.5 minutes for cash deals and about a half-minute decrease to 13.6 minutes for finance deals. In Q1, ClickLink deals had a front-end yield of $3,804 and an F&I per vehicle retail of $2,291, which equates to a $6,095 of total front-end yield. The average ClickLink customer credit score continues to be over 700, which is higher than the average credit score at our stores. The average down payment for new vehicles was $8,921, and for use was $6,869. Eighty-one percent of consumers seeking financing received instant approval, while an additional nine percent required some offline assistance. Ninety percent of those that applied were approved for financing. Forty-three percent of click lane sales had trade-ins, with 62% of such trades reconditioned and retailed to consumers. And 95% of our ClickLink deliveries are within a 50-mile radius of our stores, thus allowing us the opportunity to retain our new customers in our parts and service departments. ClickLink customers are converting at nearly double the rate of traditional internet leads, but we won't see the full potential until inventory levels normalize. We are excited about the continued growth of Clicklane and the opportunity to accelerate that growth as we roll it out to our newly acquired stores. I will now hand the call over to Michael to discuss our financial performance. Michael.

Thank you, Dan. To our investors, analysts, team members, and other participants on our call, good morning. I would like to provide some financial highlights which marked another record quarter for our company. For additional details on our financial performance for the quarter, Please see our financial supplement in our press release today and our investor presentation on our website. As Dan mentioned, the first quarter was a busy one with a number of internal initiatives going on. Overall, compared to the first quarter last year, we generated significant adjusted operating cash flow of $406 million, a year-over-year increase of $290 million, which combined with proceeds from the best of stores allowed us to pay down $374 million of debt and our used vehicle floor plan line. and we purchased $200 million of our shares. Adjusted net income increased 134% to $212 million, and adjusted EPS increased 98% to $9.27. Net income for the first quarter of 2022 was adjusted for one-time pre-tax gains totaling $34 million, or $1.11 per diluted share, primarily related to the sale of four dealerships in the quarter. Net income for the first quarter of 2021 What's adjusted for one-time pre-tax gains of $4.6 million, or $0.17 per dilutive share, primarily related to gain on legal settlements, and pre-tax real estate related charges of $1.8 million, or $0.07 per dilutive share. Excluding real estate purchases, we spent approximately $21 million on capital expenditures in the first quarter. Our balance sheet remains strong as we end the quarter with approximately $805 million of liquidity. comprised of cash, excluding cash at total care auto, floor plan offset accounts, and availability on both our use line and revolving credit facilities. Also at the end of the quarter, our pro forma adjusted net leverage ratio stood at 2.2 times, down from 2.7 times at year end. As David stated, today we announced that our board has approved a new $200 million share repurchase authorization. For 2022, we are planning on capex of approximately $175 million. This amount excludes real estate-related purchases and potential lease buyout opportunities that we consider to be financing transactions. One item that is a bit of a change is how we account for TCA revenue and expenses, and we've included a breakout of TCA versus dealership operations in our earnings release. This quarter was our first full quarter of TCA. For the quarter, TCA made $16 million of pre-tax income, which included $2.7 million of unrealized losses on equity investments. Excluding the unrealized losses, TCA would have made $19 million for the quarter. We are currently working on the system integration and state licensing requirements for the Asbury rollout of TCA and plan to start our pilot for a rollout in 2Q. In closing, I would also like to thank all of our teammates throughout Asbury who dedicated themselves to building a brighter future for ourselves, our communities, our shareholders, and all of our stakeholders. I will now hand the call back over to David to discuss the update to our strategic plan. David?

Thank you, Michael. As we mentioned on our last earnings call, today we are providing an update to our strategic plan, which can be referenced on slides 12 through 25 of our investor presentation. The acquisitions we made in 2021 almost doubled our annual revenue. Today, Asbury Automotive is a much larger, more productive, and financially sound company with more opportunities to drive top-line growth. One example, with TCA, we are able to stay involved in the entire customer lifecycle, as well as now benefit from the claim side, which was never available to us before. Regarding ClickLane, given the metrics we spoke about earlier, we see a significant opportunity to leverage the high conversion rate as we roll out to the stores we acquired and provide a common digital platform. Our original plan for revenue growth or revenues was to grow from 8 billion to 20 billion by 2025. Because of the significant progress we made in 2021, on a pro forma basis, we are now just over 15 billion in revenue. I will now simply refer to slide 24 of the presentation deck. Our new revenue goal is $32 billion by 2025, representing an incremental $12 billion. The $12 billion is comprised of an additional same-store growth of $2 billion, an additional $3 billion in click lane revenue, and $7 billion from acquisitions. In terms of earnings per share, we are targeting EPS to be greater than $55 per share. This assumes a one-times leverage. If we were to increase our leverage to two times and use those proceeds to purchase additional stores or buy back our stock, our EPS could exceed $70 per share. Now referring to slide number 25. our free cash flow generated from our business of 3 billion and a modest increase to two times leverage for an incremental 3 billion, we would have over 6 billion in cash to deploy between 2022 to 2025. So in closing, we believe that we have the right brands in the right states with the right people to execute our strategy to grow and improve our business. We are generating strong cash flow that will continue to lower our net leverage while allowing us the flexibility to balance acquiring additional assets and returning cash to shareholders through share repurchases. Finally, I would like to acknowledge the hard work and dedication of my fellow Asbury teammates. It is through your efforts that Asbury continues to produce strong results for our shareholders while bringing us closer to our goal of being the most guest-centric automotive retailer. Thank you all very much. This concludes our prepared remarks. We will now turn the call over to the operator and take your questions. Operator?

Thank you. If you'd like to ask a question at this time, please signal by pressing star 1 on your telephone keypad. Please ensure the function on your telephone is switched off to allow your signal to reach your equipment. Again, please press star 1 to ask a question. And we can now take our first question from Daniel Imbrow of Stephen Inc. Please go ahead.

Yeah, hey, good morning, guys, and congratulations on the great quarter. Thank you. David, I want to start on the used side of business. I mean, the organic used growth up sticks was near the best of the peer group, and GPU really hung in there. So could you talk about maybe what you're seeing in terms of use demand and how you guys successfully capturing that use sale while maintaining GPUs.

Yeah, good morning. This is Dan. I'll be glad to take the question. So we're pretty satisfied with the results, even though we continue to focus on the acquisition of the inventory. We all know that is in used cars where the return is generated. close to 85, 86% of our acquisition is coming through the consumer, whether it is in a form of lease turnings, trades, or buying cars directly from the consumer. And we know and we believe that that is what is allowing us to continue to report the margins and the PBRs that you are seeing today. In addition to that, The benefits that Clicklane brings to be able to provide a digital retail environment online, we see the benefit of that as well from a use core perspective. So overall, we will continue to focus on that strategy and continue to execute as we move forward.

The one thing I'll add to that, we decoupled our trade tool inside of Clicklane. to allow consumers to sell their vehicles direct to us. We'll talk about it in detail at the end of the second quarter because we're fully launched in the month of April. And we had it going at pilot stores or half our company, if you will, in the prior quarter or the current quarter we're talking about, the first quarter. We're seeing tremendous results in acquiring cars direct from consumers, which is helping stabilize our inventory, but most importantly, Our ability to create margin or a gross profit per vehicle on used vehicles is really all about the acquisition of the car. The market dictates the price. If you cannot acquire the car at the proper price, you will dramatically be impacted in the margin is our belief. So we're really trying to be opportunistic and really make it easy for consumers to sell their vehicles to us, which we believe is helping support our gross profit per vehicle.

Great. That's really helpful. And then my follow-up, I wanted to ask on the rollout of TCA. You have some really bullish commentary in the slides about the opportunity, but should we expect this rollout to be linear, or is there a training of store employees or some kind of infrastructure that needs to be stood up first at the Asbury stores before we can really accelerate the rollout of the product?

I'll start, and Michael can jump in and clean up anything I screw up. I'll tell you the easiest piece of it will be the rollout in the stores because the folks in the stores are used to selling the products, so that'll be very quick and efficient. We've really been working on the backside of the plumbing. I mean, it's a standalone insurance company to get it right in all the stores before we start to implement it. Michael discussed in a script that in Q2, we will start to roll out the legacy Asbury stores. You know, our goal isn't the quarter-to-quarter race. It's the long-term vision of where we're going as an organization. We plan to roll out the whole company within 12 to 18 months. So somewhere in that time frame, 100% of the Asbury stores will be on TCA.

And just a reminder from a, you know, as David said, 12 to 18 months for the rollout to the stores, from the impact on the financial statement, because we have to defer the revenue, there will be a lag in terms of when you'll see those results kind of come through the financials because we now have to defer that revenue over the life of the contract. And so from a P&L perspective, it's probably two to three years away before you start seeing the positive results through the P&L.

Got it. That's helpful. Thanks so much, guys. Thank you.

And we can now take our next question from John Murphy of Bank of America. Please go ahead.

Good morning, guys. Maybe just to follow up on the TCA to stay on the same topic. I mean, the funding and the balance sheet, I mean, that's going to be in a tax-advantaged state or offshore. I'm just curious how, in addition to sort of the benefits of just the ongoing earnings, right, the potential tax implications or the lack thereof might be even more beneficial than what we just see in the earnings.

So currently, TCA is set up as a Utah entity. And so that's the current setup. We're looking into the, you know, kind of tax advantage pieces to kind of handle it with the bigger scale now. And so currently we do not have any of those baked into the forecast, but something we are looking at from a perspective of, you know, currently it's Utah, and does it make sense to have any of it elsewhere?

I've got to imagine it makes sense to have it elsewhere, right? I mean, it could be meaningfully. It could be. meaningfully positive to the ongoing earnings distribution as far as cash versus what you would realize otherwise with the tax.

Okay, so that's significant.

Yeah, that's huge, right? I mean, on just the structure of that, forget about the rollout, isn't it?

So there's two pieces of TCA. There's a true regulated insurance company, and then there's an F&I product piece. And so, yeah, there's some tax benefits. We just got to weigh the cost of the setup and the different pieces and then what that is worth on a tax basis. So I agree with you that there's some benefits there. We just got to go through and kind of figure out the pieces of that and get it set up for the bigger company.

Got it. Okay. Okay. It seems like there might be more upside. And that gets to the second question on slide 25. When you're looking at this range, I understand – you know, the benefit of leverage and, you know, being maybe more aggressive in expansion. But, David, as you look at this, you know, how do you, you know, think about leverage? I mean, you know, going from one to two turns, going from $55 to $70 plus seems like, you know, two turns is not too aggressive or really risky. I mean, how are you thinking about leverage, you know, in general as you're redeploying capital for growth here?

Just to clarify, the leverage is 2025, so back to a more normalized margin environment. That two times leverage is on a normalized basis. I agree with you that two times is not an overly aggressive target. I think that two to three times leverage is still where we want to be in a normalized environment. Being below two times just allows you the flexibility to go after larger acquisitions. where if you're kind of up near that three times, you don't have that same flexibility. So I think a one to two times leverage is the right place to have the opportunity to go after those larger deals.

I would just add, I mean, our history is we're a conservative company, and any targets we put out there, we certainly hit or exceed and usually exceed them. It's difficult to know what the environment is going to be at that moment in time. This was a conservative approach to us. And certainly in this 25-year plan, we've normalized margins as well. This whole plan is not based on current margins. We've certainly brought them back down to normalization in the future years coming up to 25. Okay.

I mean, I guess that begs the question is what does normal mean going forward? Is it 2019 and prior? margins is what you're thinking there, or is there some potential benefit from automakers now being much more disciplined on supply versus demand and maybe getting a little bit better grosses on the new side? And then the mix of the business obviously shifting to used and more parts of service, that means that there could be such from a mixed basis upside in margins. Is that how you're thinking about it? Is it you just get the 2019 levels and just get the benefit from the mix of what you're driving in the business, or... or is there some potential slight upside from the 2019 levels?

Yeah, no, and everyone keeps referring to 2019, and I brought this up a few times. I'll bring it up again. We will never see 2019 margins again in our company. We're a different company, not because of our size, but because of the accretive acquisitions that we've done. We sold off all of Mississippi, which was our lowest margin platform, and we've increased through Park Place, LHM and Stevenson, all of them are accretive in margins to where we were in 19. We're also, from a productivity standpoint, on the legacy Asbury stores alone, it hasn't been integrated in any of the acquisitions yet, but from a productivity standpoint, from 2019, we've had a 50% increase of the variable side for production per employee for sales advisors. So that's significant, and we see more upside where technology is going and where click late is going. So I would tell you, John, and I'll just speak specifically to Asbury, when we're in that high four or 5% margin business, my belief is we'll be somewhere in the 6% or higher range on new car margins when things normalize. Now, as it relates to margins on used cars, I would simply tell you, you know, the cost of sales is a reflection of margin. Our gross profit now is in the $2,200 range. We don't see that materially changing much when we get back to a normalized environment.

Got it. And that just gets to my last question on the SG&A front. I mean, we always like to think about it as a percent of gross margin. I mean, it's a reasonable way to think about it, but then there's an absolute dollar level and then there's all this technological efficiency that you just kind of highlighted. How should we think about SG&A, you know, going forward? I mean, you know, the dumb guy's simple way is, hey, you know, it's, you know, mid-50% to 60%. Maybe it's, you know, higher than that. Maybe it's lower than that. But, you know, how do you think about that? Because it's much more complicated than just, hey, it's a percent of gross, you know, good starting place to talk about it. But, I mean, how do you think about it?

Sure, I'll start and Michael can finish it. You know, the way we've modeled this and looked at it, and we're tracking exactly where we expect it to be at this point, so it gives us confidence that we're on the right track to execute the 25-year plan. We believe that there's an opportunity to improve SG&A significantly over where we were in 2019, but somewhere around where we are today. So I don't see what's going on in the macro sense, what's going on in the economy, what interest rates, you know, different things look like at that moment in time. But as we sit here today and we forecast it out and you see our SAR plan that we forecasted, that doesn't assume a recession. So assuming as we sit here today, we model this out, we have the opportunity, both through efficiency of our software and production per employee, to have a tailwind with SG&A.

So baseline, we should think about high 50s and with an opportunity to maybe grind better as grosses improve and you get efficiency in the system. Is that a fair way to say it? But you're not even really assuming that just yet.

Yeah, so look, we have it. When we did these five-year plans, we don't aggregate the numbers. We do it literally by store, by market. I would tell you, you know, if things play out the way we anticipate, we should be in the mid-50s to upper 50s, you know, somewhere in that bracket.

Okay, that's very helpful. Thank you so much.

Thank you.

And we can now take our next question from Ryan Sindel of Craig Hallam Capital Group. Please go ahead.

Good morning, guys. Congrats on the results, progress. Thank you. Curious on two kind of, I guess, financial questions. One, divesting seven stores, what's the annual revenue you're going to lose from those? And then secondly, on parts and service, same-store sales strong at 14%, even excluding TCA, but the gross margin was a bit weaker kind of year over year. Anything to call out there?

So on the divestitures, I'll give you just a quarter estimate. For the quarter, those stores represented $162 million of revenue on the quarter. So that just kind of gives you a run rate for the quarter. You back that number out.

And similar for the other three, I guess? Are they all similar sized?

That includes the four stores sold in the quarter plus the three stores that we sold on April 1st. So that's all seven stores, what they represented in the quarter. Got it.

And then on parts and service.

You have 3.75 billion.

Ryan, this is Dan. I'll take the other parts and service. So the parts and service margin is a direct reflection of just the mix that we're seeing. As you see in our tables, our wholesale parts grew up 25%, which carries your lowest margin. And then in addition to that, when you see some of the warranty pullback that we have experienced out there with some of the OEMs, the mix of that warranty pullback and the margin that we carried in there is what is bringing us down.

And I'll say with the Miller organization, we're happy to sacrifice that margin. They're impressive as it relates to wholesale parts and many other areas, but that's just one that sticks out. And there's certainly a lot of learnings there for us for our legacy Asbury stores as well.

Great. One more for me. So on Quicklane, a lot of good incremental progress there. Curious on the traffic sources. I was going to break out kind of what percent of that is organic versus paid SEM or other paid channels.

So, Ryan, this is Dan again. I'll start it and then David can clean it up. But since we launched Clicklane, we have not gone out there and spent millions of dollars advertising Clicklane. And the vast majority of our advertising dollars go, from a store standpoint, go for the digital transaction and the digital traffic that we push to our websites. So I will tell you that the vast majority of the traffic is coming from organic growth and the traffic that we push to the website.

And just to put a harder number on it, I'd tell you about 25% is for paid search. There just hasn't been a logical reason for us to really promote it without any inventory. And I can't stress it enough that the 5,600 sales are simply the 90 legacy Asbury stores. We haven't rolled it out to any of the acquisitions yet. Again, because of TCA, the plumbing, click lane being a fully transactional tool, not a lead generator, it takes time to do that. We'll start to roll out our first store towards the end of this quarter, but none of the additional 70 stores that we purchased

are on click lane at all so that growth that number is solely the legacy source great thanks guys good luck thank you thank you we can now take our next question from glenn jinn of seaport research partners please go ahead ah thank you good morning folks and congratulations on the upsized plan nice to see such a ambitious plan very encouraging and thank you for all the detail around it. David, I just want to probe your comments a little about normalized margins, what those might be going forward. I mean, I understood that you will benefit from these terrific acquisitions you've made, but maybe just from a broader industry perspective, I mean, is it safe even to use or look at 2019 as the baseline only because Prior to that, I mean, new margins at least, if not as much on the U side, but new margins were in secular decline for a very long period. Is that to say that you think 2019 may have been the bottom?

I would say a bottom in kind of the end of an era. You've had a tremendous amount of acquisitions and growth. consolidation since 19, you've had really disruption of electric EVs coming in, consumers pre-ordering at more acceptable margins, for lack of a better term. The question is, if you believe normalized margins are end of 23, 24, what does that mean, how many electric cars are going to be on the road, what's the incentives going to be for the government. The stronger the incentives, the more it supports margins. I just don't think as an industry you'll see 19 again for a long time. I think a lot has changed since then. And you see the profit from our partners with the manufacturers. They found ways to be more efficient in what they do. So I think between technology finally catching up to an archaic space, meaning automotive retail, the introduction of EVs, the consumer perception, demand, and their comfort level acquiring online. And oddly enough, when you go online and one price it, for lack of a better term, you end up at a better margin place than letting someone negotiate. So I just think it's, you know, our industry has been hampered the last year or two with What happens with EV? Does the franchise model go away? You know, as I sit here today and I worry about the franchise model, I feel better every day about the franchise model and know the meaningful role that we play and the strong partner that we can be. And just looking at some of these startup electric companies and how they're struggling and what they're going through and the quality of the products that our manufacturers make and our ability to present those products and sell them, I just think we're in a different space. And now you add technology to it and you add efficiency to it and you change how you compensate people. I just see this as a much better value proposition. And I use this term around here, so I'll use it again. You know, right now we're a plane taking off and we're in the clouds. It's a little bumpy and everyone can't see above the clouds yet. But when we get above the clouds in the next 18 to 24 months, I think things are going to look really good for our industry as a whole. That's my belief.

Mm-hmm. Okay. Yeah, understood and appreciate the thoughts. And then next, I apologize if I missed it, but did you guys talk about how the upsized plan will be funded? Do you think it can be funded internally or organically? Or do you anticipate having to access the capital markets?

No, if you look at the one-time leverage number, that is all, you know, the acquisitions are paid for out of free cash flow. So no additional debt or equity needs to be raised.

Okay, very good. Also good to hear. And then lastly, just on acquisitions and dispositions, any thoughts, gentlemen, on where those acquisitions will be or the types of stores that you're going to be looking at? Are you looking to build out the network or really just bulking up in markets where you already exist?

You know, in doing this for 36 years on the retail side, you created a lot of relationships and a lot of friends. and a lot of dealers see value in partnering with us. You know, we have the ability through relationships today to go out and purchase another $5 billion if we wanted to today. Our goal isn't to grow quickly. Our goal is to grow thoughtfully and be great capital allocators for our shareholders. So I think that the time and cadence and pace is important. I think the states where you've seen this grow in our thought process of balancing the brands with the right states, you won't see us differ from that. And acquisitions going forward will be accretive for us. The one thing I don't think our space gets a lot of look at is portfolio management. What did they buy? What did they sell? What did that do from an accretion standpoint? Not from a top line revenue, but what did that really do to them as a whole? And so I think you'll see us really manage the portfolio well. You'll see more divestitures over time, probably, at some point in the future, and you'll certainly see more acquisitions as well, but that's just really maximizing the portfolio to generate the highest returns and create the most stable company for our employees and our shareholders.

Okay, very good. And then lastly, still on acquisition and disposition, can you confirm these this bunch of seven stores that you disposed of, is that portfolio management or fine-tuning, David, or is it merely to comply with OEM framework agreements?

Yeah, and in this particular case, without getting too much into the weeds, it had nothing to do with framework. Every manufacturer... and we're thankful to represent the Turner and Lexus brand, and we love them and the relationship and the senior management teams. But when we went into this, it's a timing situation. We were competing to buy LHM with a group of people we didn't know who we were competing against and didn't know were getting the deal. The Stevenson deal, you know, was in my 20 group in the 90s when I was the GM of a Turner store. There was a relationship there. That came together quick. We didn't want to pass on that opportunity, not knowing if we were going to get the Miller organization. Then fast forward, we signed Stevenson, and then we got the Miller one. So we knew we had an issue because the manufacturer has a limit to how many stores you can own in a region. So we knew that we would have to sell some stores. Did we want to sell any of them? Of course not. But we had to comply and respect the relationship that we do with the manufacturer. And we fully aligned quickly with what we needed to do. They were tremendous partners in working with us to divest of those stores. So we think it all happened quickly and timely because of the strong relationship. And we're happy with where we are today with our portfolio.

Okay, terrific. Thank you for all the feedback. Thank you.

We can now take our next question from Rajat Gupta of JP Morgan. Please go ahead.

Hi, good morning. Thanks for taking the question. The first question was on just the used car, used vehicle unit growth trajectory. You know, you're currently run rating roughly growth to 150,000 annual units. You know, with the acquisition targets in the four-year plan, you know, you probably – you know, that runway becomes like $200,000 to $20,000. And by 2025, we're expecting that to move from that $220,000 to like $340,000, you know, which is roughly like a 15% CAGR. How should we get conviction around that? You know, particularly when supply is a bit tight here in the near term, you know, it just seems like a bit of a hockey stick round in the out here. So maybe if you could like help us bridge that and And also, like, put that in the context of Clicklane, you know, how much conviction you already have that, you know, that incremental contribution is going to come through. Thanks. I have a follow-up.

Yeah, good morning, Rajat. This is Dan. I'll take the first part of the question, and then David can clean it up. You know, let's look at the big picture from a market level. We talk about 40 million used cars that are sold on an annual basis. 45 to 50% of those transactions happen between private parties. We believe that as the digitization of our industry continues to evolve, and with us being one of the very few that have a fully transactional tool, as that consumer continues to adapt and accept the digital transaction online, those private party customers are not going to want to transact between private parties because that is not going to be available for them. So that is going to give us a competitive advantage that we will certainly take and go after. So we see being able to pull from that market share, for lack of a better term, that is out there.

And I'll add to it. And if you look at slide 19, I don't know how well it's showing up, but there's a hockey stick arrow in there. So I like your terminology with that. I would tell you that the reduced cars that are out there now clearly won't be a problem in the future. When you normalize SAR and you get the fleets back up to normal levels and you get those cars coming back to market that aren't coming back to market now make it much easier. When you go from, you know, 91 stores to 225-ish stores, while I understand the kegger comment in there, you've got 40 million cars. typically on an average year plus of used sales. So when you talk about incremental growth or market share gain, on the franchise side, you're somewhat restricted because of your PMA, but you're unrestricted as it relates to pre-owned. So we looked at our growth from 2019, 2020, our average per store, where we're at, where we're going. And again, I'll say it again, I know it's repetitive, but The 5600 was with 90 legacy stores, none of the acquisitions going forward, and with no new car inventory to have on there. And when we originally launched the tool, we were selling more new than used on click lanes. So we've done this exercise by store. We're looking at SAR and making our assumptions. We understand, and we'll talk about it next quarter, the number of cars we're acquiring directly from consumers. This isn't an overly aggressive number for us. We feel like this is logical to be it. And I made a comment earlier, the Miller organization is phenomenal at a lot of things, and wholesale parts is one of them, employee retention, taking care of the guests or others. But a huge opportunity for them is the use-to-do ratio. Even in the quarter, and it shows between our total and our same store, they're a pretty good distance behind us in use-to-do ratio. So we'll work with that very talented team over time to dramatically improve that use-to-new ratio. When you take their size of an organization and get them up to our use-to-new ratio, there's a meaningful tailwind there as well.

Got it. Got it. That's helpful, Kalar. And then maybe just last one on parts and services. You know, you have mid-single-digit growth dialed in there for the next, you know, next few years. you know, it seems it seems a bit conservative, you know, like pre COVID, you know, the average franchise dealer average, you know, five, 6%. And, you know, well, with inflation, and, you know, you know, with customer pay, and, you know, with, with, with my German continue to ram back and, you know, just opportunity to gain share from, you know, smaller independent, you know, just curious as to,

um what's governing that mid single digit target you know is that conservative or you know just there's more what's factored into that would be helpful to know thanks it's an excellent question um quite honestly one we debated for a while there's a lot of factors uh it's it i'll i'll start with the answer and then babble for a minute uh the answer is it's extremely conservative um We had a 30% growth rate in the last four years for consumers as far as what they're spending with us per transaction. We see a lot of where it's coming from and why, and we see how it's going forward. And as we sit here today, and I've said this before, every quarter we track the dollars per repair order on combustible engine, hybrid, and fully electric vehicles. And we didn't talk about it, but this quarter was no different. The dollar values are significantly higher on the fully electric vehicles The question will be, as cars become the average age of the car, we all know how old it is right now, does that start to change in 24 and 25 with the availability of all the cars that are going to be out there and the heavy, what we believe to be federal incentives to buy these cars? And if there's a lot of car transactions in those years, will that materially change the dollars spent in the service department because maybe the average miles coming to the shop are lower? Now, there's 270 million-plus cars on the road. Again, the average age is much older. Approximately the average age of a car that comes through our service department is 70,000 miles. So we've made a lot of, again, this five-year plan, it's almost like a balance sheet statement. It's a moment in time. As we sit here today and we plan out through 25, we've put together what we believe is a conservative plan, and we've literally looked at it by store, by market, and what our potential is to grow. So it's a very fair comment. It is extremely conservative. There potentially is upside in it. There's just so many factors that come into play. We just didn't feel confident enough to raise it without being able to back it up.

Got it. Got it. Makes sense. It looks like you win either way, either more units or more service. It shows the resiliency of the model. Yes.

And we can now take our next question from Stephanie Moore of Troost. Please go ahead.

Hi, good morning. I think continuing on the same kind of question thread here on EVs, you know, maybe you could talk a little bit about the conversations you're having with the OEMs right now about the introduction of EVs over the next several years. I think you have nice perspective just given your breadth of OEM brand coverage. you know, maybe what are expectations from the OEMs in terms of capital investments on your end, you know, everything from just, you know, the stores to charging stations, thoughts about, you know, agency models or direct-to-consumer or pre-orders. I would love to get just general color on EV introduction.

Sure. You know, I think we do a good job at running the business day-to-day, and the manufacturers do a great job at looking ahead in planning for the future, getting us ready for the future and building quality products. We've been installing charging stations for four years at our dealerships and very mature with that at this standpoint. I would tell you Tesla has done extremely well. They've been a great disruptor, but they haven't had anyone to compete against. No one has really been in that space offering a lot of products and going at them. Over the next couple of years, you're going to see that change materially as far as what comes to market. Sitting in my seat, I get the opportunity to drive a lot of cars that have either just come out or aren't coming out for a year or so. And I would just say, from a fit and finish and a quality standpoint, I'm extremely excited with the electric products that are coming out from the manufacturers. And I believe that they're better than the fit and finish and quality of the Tesla product. Now, everyone has their own opinion. It's just one person's opinion. I'm not knocking them. But that, again, excites me more about the future and what's happening. And like anything else, like our software and like the battery technology, everything is going to improve over time. The government wants to go down this road, so we believe the incentives are going to be there for a while. So we think we're really well-positioned. with what I would call a mature supply chain, meaning the brick and mortar is out there. You see Carvana, you see Tesla, you see all these startup electric companies or direct-to-consumer companies realizing the need for brick and mortar. That's already mature. That's already out there. The investments have already been made. Where we're at and where we've been at the last couple of years is making significant investments in our team, training our folks to sell electric vehicles and training them on the technology. Most importantly, training our technicians to work on these very complicated and quite honestly dangerous cars to work on. So again, extremely optimistic about the space. Haven't seen from almost every manufacturer from a quality standpoint what they're coming out with for electric cars. I think it's going to be a fun time to see how these legacy OEMs really stand tall against the disruptors.

Great. No, that's really helpful. And then I think switching gears, you know, a topic that's been coming up I think more as of late has just been the affordability of vehicles in this environment. Obviously new prices are quite high. Used have, you know, also increased, you know, pretty meaningfully. Now we have rising interest rates. What do you view, you know, kind of where it stands on just overall affordability and just on the new and used side? And do you think that changed at all during the quarter or in April?

Sure. You know, the reason we quoted the average down payments, you know, $9,000, I'm rounding numbers, a $9,000 down payment on a new car is significant. We didn't see that pre-pandemic. Almost $7,000 on a used car. What that tells me is the consumer has a lot of cash to spend. And even though inflation is running high, their incomes have gone up dramatically and they've been sitting on cash and the age of the car is there. So we've had zero interruption with raising rates as it relates to the consumer side of things or the desired demand to buy vehicles. I can't predict the future. I don't know what's going to happen in Ukraine. It's certainly affecting us on the supply chain issue with some brands. So there's a lot of variables still out there. But we're optimistic where we sit today, how strong and resilient the consumer is, how much cash that they have. and their propensity and willingness to want to buy. 90% of our business, a little bit over 90%, is prime business. So we're a very small player in the subprime business. I'm sure it affects subprime more in folks living paycheck to paycheck, which where the inflation would affect them more. But we're not seeing any issue at this point.

Great.

Appreciate all the color today. Thank you.

Thank you.

We can now take our next question from Brett Jordan of Jefferies. Please go ahead.

Hey, good morning, guys. On the 17% customer pay growth, could you tell us what was price versus traffic?

Yeah, I would say it was 60% price, meaning the consumers were spending more. And probably almost 40% traffic.

Is there a feeling for like same skew price, like an inflation number in there, or is it just that, you know, obviously the 60 would include mixed shift as well, but is there a feeling for like what pricing on a same job would be?

Yeah, there's no inflation in there at all. We haven't adjusted our prices as it relates to that to align with inflation. Okay. Okay.

And then I think, you know, investor perception is that battery electric vehicles don't need any service, and you're saying that they have a higher repair bill. Is that something you see going forward, or do you think this is just because these are new vehicles with bugs that will be worked out over time? I mean, as you look at the BEV population, are they additive to your service business long term or negative?

Yeah. You know, again, one person's opinions. My belief is the propensity or the frequency of them coming to the shop will be less, but the time in dollars will be greater. Not just what they spend, but what we end up charging because of sophistication to work at it. And, you know, putting electric aside and not talking about autonomous, there are some technology features in cars today. Braking where your car can brake, you know, with someone in front of you, lane changing, shifting and alerting you. That's all technology that can have bugs in them. So while the cars really get heavy content with technology, not just the battery piece, it allows for more opportunity for things to go wrong. And when you talk about driving a 5,000-pound vehicle at 60 miles an hour down the road, there's a lot of liability in touching those cars. So you've really got to be thoughtful and think about what you're going to do over the airwaves. that are nice to have and what you're going to do that may have a real liability issue when driving the vehicle. So we see that we're really positioned well. We're not surprised by the additional dollars. To your point, technology will get better over time. It's going to take a while. And then you factor in the roads and the potholes and the weather. They all play a role with the software and technology in these vehicles as far as their performance.

Right. Thank you. Thank you.

We can now take our final question from David Whiston of Morningstar Equity Research. Please go ahead.

Thanks. Good morning. On Clicklane, is the conversion rate so much higher versus traditional digital because of the tool itself being so good, which I think it is, or is it because these customers are already more committed to buying than other customers would be just because they do enter the ClickLane portal.

David, good morning. This is Dan. I'll start and then turn it over to David. So, you know, if you look at our data from ClickLane, with the average credit score being over 700, you think about that consumer. That consumer is at the very, they know that we have a fully transactional tool, which gives us a competitive advantage. from that perspective. So that consumer does not want to go through the traditional process and go spend three, four hours in a store and are taking full advantage of the technology that we have out there that makes it a lot more efficient to buy and acquire that inventory where they want to, how they want to, and at the time of the day that the best benefits the guest. So we believe that the tool is attracting a very good credit score customer. But in addition to that, just the fact that it is one of the very, very few fully transactional tool is giving us the better results as well.

And I would say, just to add on top of that, you know, we had prior tools. And they were what I would call more lead generators to what a lot of the tools are out there now. We saw a lower credit score customer. We saw lower down payments. I think the consumer appreciates their time. And to be able to do a transaction in 14 minutes instead of sitting in a showroom for two hours is meaningful. If you have a fully autonomous transactional digital platform, you don't have a need for a call center. If you have a call center, That only frustrates the consumer more. Think about if you're trying to buy any kind of product online, you can't finish it. You need to get on with a call center to figure things out. That's not a fun experience. It's frustrating. So we don't have a call center. We believe that the tool speaks for itself and it's only going to continue to grow. And that old stupid adage, we're all consumers. We love to buy things. We don't love to be sold things. So the ability in your own safe environment To go through a tool, select which lender you want to use, decide what F&I products, if any, you want, be able to sign in your home and pay for it is meaningful. We have this software called Invite to Pay, which people pay via text and email. In 2018, we did $12 million annually on this Invite to Pay tool online or via text. We did over $100 million last year because it's convenient. So we're constantly focused on that North Star. It's not about what's best for us to generate the most money, what's best for the manufacturer for them. It's what's best for the consumer. And our logic is if we give them the best tool and be most transparent, logically they'll want to transact with us more. And, again, going back to that concept, people like to buy. We believe that's why the F&I number is so high. We're not repitching. We're not selling. There's no interruption on that F&I process. That almost 2,300 per in F&I is the customer self-selecting themselves. And we think that's the power. And no different than the first smartphone or any technology, this is year one. As people become more comfortable with the software and the software improves, later in this quarter, we'll roll out our second iteration of our F&I platform on ClickLane. It's a significant improvement to our current version. So we're constantly working on it. We will continue to improve the tool as well. But it's just logic-based. Convenience, time, transparency is going to win out every time for the consumer.

Yeah, and I totally agree with you. I see what you mean about the efficiency and the convenience. It's attracting perhaps a more wealthier, higher credit quality customer. But at the same time, doesn't the digital aspect also make it easier for some people who have lower credit quality who are afraid to go to the store? It doesn't sound like that's happening with Clicklane. I'm just curious, is Clicklane maybe crowding out that lower credit quality customer?

No, that's a great comment, and it's one that we really never talk about. I'm going to We all journey through life, so we have our ups and downs, and we never judge anyone's situation and why they might be affected by a low credit score. So this isn't to disparage anyone. And I entered the car business in the mid-'80s. From the mid-'80s till today, anyone that is in a position of need as it relates to being assisted with financing, they're the first people to reach out for help. That was pre-websites. and them showing up at the store and disclosing their situation after websites, them reaching out via lead saying, help me. That business has been there for decades. It'll always be there, and it doesn't stop with click lane. We didn't get everyone financed. We got 90% of the people financed, 90% of the people needed assistance, 10% of the people we could not get financed. What I would tell you is, Most people that have a situation, they want to personally talk about it. And so that's when more human intervention and understanding and empathy gets involved to understand their situation to best assist them. The software isn't a machine learning tool at this point to where it can identify that and work through a subprime customer's issues.

Okay, thanks. That's helpful.

And we have no further questions this time. I would like to now hand the call back to David Holt for any additional or closing remarks.

Thank you very much, Operator. This concludes today's discussion. We appreciate your participation today and look forward to talking to you at the end of the next quarter. Have a great day.

This concludes today's call. Thank you for your participation. You may now disconnect.