This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk06: Good morning, everyone, and welcome to Group One Automotive's 2021 fourth quarter and full year financial results conference call. Please be advised that this call is being recorded. And now I'd like to turn the conference call over to Mr. Pete DeLongshaw, Group One's Senior Vice President of Manufacturer Relations, Financial Services and Public Affairs. Please go ahead, Mr. DeLongshaw.
spk04: Thank you, Jamie. 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'll 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 conference call, statements made by management Group 1 automotive are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve both known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ material from forecast 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 due to component shortages, conditions of markets, and adverse developments in the global economy, as well as the public health crisis related to the COVID-19 virus 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 today on the call, Earl Hesterberg, our President and Chief Executive Officer, Daryl Kenningham, our President of U.S. Brazilian Operations, Daniel McHenry, Senior Vice President and Chief Financial Officer, and also joining us is Chris Gillette, our VP and Corporate Controller. I'd like to hand the call over to Earl.
spk09: Thank you, Pete, and good morning, everyone. 2021 was another record year for Group 1 Automotive, driven by strong vehicle sales demand, strong margins due to vehicle supply constraints, double-digit growth in after-sales as miles driven have recovered, and continued strong expense control as we benefit from process and personnel efficiencies realized during the pandemic. We achieved record adjusted net income of $642 million and record adjusted earnings per share of $35.02 per share in 2021, which represents year-over-year growth of over 90 percent for both metrics. This strong performance was consistent across all three of our regions, I should note that the pending sale of our Brazilian business is likely to close during the second quarter of this year. In addition to strong same-store growth of 24 percent in revenue and 37 percent in gross profit, 2021 was also a record year for external growth with the acquisition of $2.5 billion in annualized revenues. This was driven by the acquisition of the Prime Automotive Group in the Northeastern U.S. and the Robinsons Group in the UK. The 2021 acquisitions further diversify our footprint outside of the energy belt, and early indications from these new stores are all very positive. Most importantly, this strong growth initiative did not preclude us from returning meaningful capital to shareholders, with share repurchases of $211 million. These repurchases, which predominantly took place in November and December, represented 6 percent of our beginning of 2021 share count. Our strong cash flow and leverage position, which Daniel will cover in a minute, will continue to allow for significant capital deployment flexibility in 2022. Turning to our fourth quarter results, I'm pleased to report that for the quarter, Group 1 generated adjusted net income of $172 million inclusive of Brazil, which is now classified as discontinued operations within our financial statements. This equates to adjusted earnings per share of $9.54 per diluted share, an increase of 68 percent over the prior year. Our adjusted results exclude non-core items totaling approximately $85 million of net after-tax losses. This net amount consists primarily of a $78 million non-cash charge related to our pending disposal of our Brazilian discontinued operations due to historical exchange rate translation adjustments recorded within accumulated other comprehensive income on our balance sheet that are required to be taken through earnings upon the sale of a foreign entity. The remaining charges relate primarily to transaction costs associated with the acquisition of the Prime Automotive Group. These profit results were largely a result of our strong vehicle margins that were able to more than offset weak new vehicle supply, as well as continued strong growth in our U.S. after sales business and impressive cost control. Consumer demand for vehicles remains extremely strong heading into 2022, and we continue to sell most units almost immediately after OEM delivery. This dynamic should continue throughout the first half of the year and potentially further out, assuming no material change in consumer demand. As of December 31st, we have 3,400 U.S. new vehicle inventory units in stock, representing a nine-day supply. Our used inventory situation is much stronger at 14,400 units and a 36-day supply. Darrell will speak more about inventory shortly. The continued recovery in our after-sales business is very impressive. Our U.S. market saw an 18% increase in same-store after-sales revenues versus prior year. Again, Darrell will provide more detail on our U.S. results in a moment. As with the U.S., Consumer demand for vehicles in the U.K. is extremely strong, and new vehicle availability is severely constrained. We have an order bank with most of our major U.K. brands, extending well into the second half of 2022. Strong margins were able to more than offset sales declines due to inventory shortages, and we're proud to report that we generated an all-time fourth quarter and full year profit records in 2021. We believe pent-up demand built over the past several years due to both Brexit and the pandemic will help drive strong UK vehicle demand into the foreseeable future. To provide some color on our U.S. fourth quarter performance, I'll now turn the call over to Darrell Kenningham.
spk10: Thank you, Earl. The factors contributing to our U.S. fourth quarter were a result of outstanding growth in all segments of our business and continued focus on controlling costs and driving productivity. Our Q3 inventory receipts grew each month throughout the fourth quarter on the same sore basis. However, our inventories are still tight and led to a majority of units being pre-sold. As a reminder, our focus is on driving long-term relationships with our customers. We direct our stores to selling at MSRP helps to create the kind of sticky relationships that feeds our segment-leading after-sales performance. We realize it costs us some SG&A leverage in the short term, but for us, it's much more important to drive retention in the strongest part of our business, which is after-sales. Our same-store used vehicle retail unit sales improved by 3% versus the fourth quarter of 2020, despite a 15% decrease in new vehicle units. In 2021, improved focus on sourcing resulted in acquiring 16% more units through trades and more than doubling the number of vehicles acquired from individuals. As a franchise dealer, we have a distinct advantage over used-only operators due to the numerous channels of sourcing available to us, including our service drives, lease returns, and OEM closed auctions. The most encouraging ProfitDriver was once again our after-sales performance. Our customer pay business continues to ramp up following a very strong first half of the year, with 22% same-store revenue growth compared to the fourth quarter of 2020. Our same-store collision revenues increased 29%, and wholesale parts revenues increased 27%. This allowed us to grow same-store after-sales revenue by 18%, versus the fourth quarter of 2020, despite continued double-digit headwinds in warranty. We foresee after-sales continuing to improve over the near term. I'd like to provide another quarterly update on Acceleride, our digital retailing platform. Acceleride continues to be a critical solution for digitally selling and acquiring vehicles at Group 1 dealerships. In 2021, we sold almost 20,000 vehicles through Acceleride, including over 4,700 in the fourth quarter. For the quarter, that's a 36% increase over last year. We also continue to increase employee productivity and professionalism by using Acceleride for in-person deals. In the fourth quarter, 52% of all of our traditional sales utilized Acceleride's capabilities in the showroom. Together, our sales team and customers can digitally locate vehicles, structure deals, complete credit applications, and much more. For context on productivity, our legacy Group 1 dealerships sold over 20% more vehicles per salesperson in December than our newly acquired Northeast dealerships, which were not on Acceleride at the time. We've launched Acceleride in the new dealerships in mid-January, and we anticipate seeing an uptick in productivity over the coming months. During the quarter, we purchased nearly 5,300 used vehicles from customers through Acceleron, either through trades or individual acquisitions. That's up 8% from the third quarter. Also, in 2021, we digitally paid 2,500 customers through Zelle for the purchase of their used vehicle. The ability to provide electronic payments to customers in under an hour is a key differentiator for us. Expect to see more advancements, efficiencies, and growth with Acceleride as 2022 unfolds. I'll now turn the call over to our CFO, Daniel McKendry, to provide a balance sheet and liquidity review. Daniel?
spk03: Thank you, Darrell, and good morning, everyone. As of December 31, we had $15 million of cash on hand and another $272 million invested in our floor plan offset accounts, bringing total cash liquidity to $287 million. We generated 162 million of adjusted operating cash flow in the fourth quarter and 133 million of free cash flow after backing out 29 million of CapEx. This brings 2021 full-year free cash flow to 656 million. This capital was deployed through a combination of acquisitions, share repurchases, and dividends. During the fourth quarter, we spent $192 million repurchasing 978,000 shares, bringing our total 2021 repurchases to 1.1 million shares at an average price of $190.82 for a total spend of $211 million. This represented 6% of our beginning-of-the-year share count. Our rent-adjusted leverage ratio, as defined by our U.S. syndicated credit facility, was two times at the end of December, inclusive of the prime acquisition. This strong leverage position will continue to allow for meaningful capital deployment in 2022 if appropriate opportunities exist. Finally, related to interest expense. Our quarterly floor plan interest of $7.2 million was a decrease of $1.2 million, or 15% from the prior year, due to lower vehicle inventory holdings. Non-floor plan interest expense increased $2.6 million, or 19% from prior year, primarily due to the debt raised in conjunction with the prime acquisitions. For additional detail regarding our financial condition, please refer to the schedules of additional information attached in the news release, as well as the investor presentation posted on our website. I will now turn the call back over to Earl.
spk09: Thanks, Daniel. Related to our corporate development efforts, we expect to find additional external growth opportunities in 2022. Growing our U.S. and U.K. businesses remains our top capital allocation priority. However, our balance sheet, cash flow generation, and leverage position will continue to support a flexible capital allocation approach, which will likely include serious consideration of share repurchases in addition to pursuing external growth. This concludes our prepared remarks, and I'll now turn the call over to the operator to begin the question and answer session. Operator?
spk06: Ladies and gentlemen, at this time, we'll begin the question and answer session. If you would like to ask a question, you may do so by pressing star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. Once again, that is star and then one to ask a question. We'll pause momentarily to assemble the roster. Our first question today comes from Michael Ward from Benchmark. Please go ahead with your question.
spk01: Thanks very much. Good morning, everyone. Two things. If I'm reading this right, if I take the reported fourth quarter numbers in the U.S. and then subtract out the same store, the bulk of that is going to be prime. And if I'm reading that right, there's been a pretty quick and smooth integration of prime. Am I reading that correctly? And if so, can you talk about some of the things that drove that?
spk10: We're really happy with Prime, the performance so far. The integration effort that we undertook was the largest in our company's history, and we integrated everything from day one in every dealership, from IT personnel, everything got integrated to Group 1 standards. And we had over 100 people involved with that, Mike, on the ground up in New England, and So we believe it was a really good transition. The employee retention of the existing stores up there was very high, very little loss in that regard, and we're really very, very pleased with the performance.
spk01: Now, were there parts and services performance? Was that similar to what the rest of the company saw? And could you talk a little bit about what's driving that? I mean, the The customer pay in the collision is through the roof. I mean, twice what the rest of the market is doing, and are there things behind that?
spk10: You know, philosophically, what's driving, obviously, our customer pay business is our legacy stores and just our staffing models and our – philosophical approach that we need to be available for our customers when they want to do business. And so we still are leveraging our four-day work week. And we still have some work to do in the Prime stores. We're pleased with their parts and service business. But, you know, most of that performance, obviously, was in our legacy stores.
spk01: Earl? Yeah, I think I'll pick up the same app. Go ahead.
spk09: Yeah, no, Mike, I think the key there, this is Earl, is it will take us a little more time to get our four-day work week installed in those stores because you need a certain number of techs in each shop to do that. And then that will enable us to expand some of the hours of operation there. in those prime stores, which to a large degree don't match the extended hours of operation we have in many of our legacy stores.
spk01: Thank you. Thank you very much.
spk06: Our next question comes from Rick Nelson from Stevens. Please go ahead with your question.
spk08: Thanks a lot. Good morning. Nice quarter. A question about Brazil. What led you to the decision to sell that? Is there more asset optimization here in the cards?
spk09: Very simple. Two reasons we decided to divest of Brazil. The first one is the exchange rate. We could never outrun it. It was 2 to 1 when we went down there. Brazil was fourth biggest car market in the world, bigger than Germany, and it's still going to be a huge market someday. But the exchange rate of 2 to 1 is now more like 5 to 1, and we'd make more profit every year in local currency, and it would translate into less dollars. So we're kind of spinning the tires there. But beyond that, we had planned to take the original platform of 24 dealerships And we thought by now we'd be 50 to 75 dealerships. And we just could not grow the business externally because we discovered that the acquisition process legally in Brazil was requiring that we assume too many liabilities from the seller. And we just couldn't do that for our shareholders. Tax and employee types of liabilities. And we just could not do enough asset deals to grow like we would in the U.S. So the fact that we couldn't make it bigger and leverage our scale was kind of the final factor in deciding that we'd like to deploy that capital where we can grow faster.
spk08: That all makes sense. Thanks for that. Is there going to be some overhead related to Brazil that you're going to have to continue to carry your SG&A until that's the best.
spk09: Quite frankly, Rick, there wasn't a lot of overhead here working with Brazil. Obviously, we consolidated accounts and provided some IT support. So, yeah, there would be a little savings, but I would not consider that to be material at the headquarters here.
spk03: Rick, it's Daniel here. On an ongoing basis... We'll still have to consolidate some information, but it will be very limited on an onward-going basis.
spk08: Okay, gotcha. Thanks for that. Also, I'd like to address inventory. Looks like used inventory has really improved meaningfully, yet you're able to sustain these outsized GPUs. Do you think that? is going to continue as we push forward.
spk10: Unused, right?
spk08: Yeah.
spk10: This is Darrell. You know, the used market obviously is super dynamic. We're able to keep the inventories at the level they are because we changed our sourcing model. And the good thing about... The PRUs is we manage our inventory very tightly, so any changes in the pricing environment, we can react very quickly. I don't know when it's going to change. I feel like it's going to change at some point this year, but I don't know when. I've read some outside external forecasts in the last week that suggest it will stay where it is and any changes will be very moderate later in the year. But what I do know is we've set up our business to be able to react to it if it's sooner or later. So that's what we know at this point.
spk08: Finally, if I could ask on the acquisition environment and your appetite, are you going to take some time here to digest Prime or Are you guys in the market to do more deals here relatively soon?
spk09: Yes, Rick. This is Earl. As Daryl just commented a few minutes ago, we've integrated Prime to a very large degree already. So that is not going to impede our ability or desire to grow. We can, of course, continue to improve those stores, but the heavy lifting is over there. So yes, we are definitely interested in acquisitions. I'm quite confident we will continue to execute some that make sense this year. We need to be careful because you can't value these stores based on current margins and things like that. But that said, and we were very conservative with how we valued Prime. We have to look at more traditional vehicle margins when we're going to spend money on acquisitions. But yeah, I see external growth for us this year, certainly in the U.S. We're interested in the U.K., but I think it's more likely in the U.S., But also, given the undervalued nature of our shares, I think we will also be returning capital to shareholders this year with share repurchases, just as I'm looking at it today. So, yeah, I think we will be growing in returning capital to shareholders this year.
spk08: Great. Good to hear. Thanks, and good luck. Thank you.
spk06: Our next question comes from John Murphy from Bank of America. Please go ahead with your question.
spk05: Good morning, guys. Just a first question around inventory, Earl. And I apologize, I've got industry numbers off the top of my head. I don't have your unit numbers. But if we think about the start of last year, we were at about 3 million units of dealer inventory at large. And now we're just over 1 million units. So as we think about the course of this year, even if the automaker is huff and puff, It's hard to believe they're going to get anywhere near normal on inventory, and the chips don't exist, so it's really very unlikely. What is your sense on when this normalizes, and what does normalize mean go forward? Because it seems like there's a fair amount of discipline that's coming in from the automakers, at least in the way they're talking about it. And what do you think the implications are for GPUs? Because obviously the short inventory environment is driving the GPUs higher. If we don't go back to the bloated levels before, it seems like GPUs might remain relatively strong versus history, but not as good as now.
spk09: Well, John, this is Earl, and I'm going to let Daryl comment as well. But I have not been able to predict on this subject with any accuracy at all. I continue to be shocked. And every month seems to delay the recovery another month. Clearly, no one's building inventory still in terms of building up. We're still 26,000 units or more below where we were pre-COVID, and that was before we added Prime and those other groups or the other acquisitions last year. So it does seem it's going to take a long time to add, let's say, 20,000, 25,000 units back to inventory in excess of what we're selling today. every month because we continue to sell what we get. And of course, there were some warnings this week by, I believe, Honda and Toyota. Or maybe it was Nissan and Toyota. But it seems that there are some issues beyond chips as well now with COVID interruptions and shipping interruptions and things like that. So I can't even keep track of all the stated reasons. But it would certainly seem the first half of the year is going to remain with severe new vehicle inventory shortages. I don't know what will happen in the second half of the year, but with five months left in the first half of the year, I don't see any material recovery in the next five. Daryl?
spk10: I don't have anything to add to that one.
spk05: Thank you. I'm sorry, Earl. I mean, just with the context of your industry knowledge, what do you think The normal will be when the automakers become unconstrained and can build back inventory. Is it 40 to 50 days as opposed to 60 to 65 days? I mean, where do you think they land? I mean, they're making all-time record profits at these very low volumes as well. So I'm just curious how you, I mean, you've been in the industry a long time, know a lot about it. I mean, how do you think about that?
spk09: Well, I would hope no one would ever go over 50 days again. And, of course, historically the domestics always had well over that because of these, you know, the big variation on built combinations of full-size trucks and things like that. But, you know, for decades Toyota dealers have operated well below 30 days and never missed that much business as far as I could tell. So, you know, I think most brands can operate in 30 to 40 days. And hopefully there will be a corporate memory that the OEMs also can see this benefit and try to manage that way as we go forward. However, any time these large auto companies start fighting for market share, that's when the discipline can erode.
spk05: Okay. And then just a second question, you know, over time, you know, GPs will normalize to whatever level, you know, they may land at. But, you know, given what's going on this year, you're going to have a lot of capital to redeploy. I mean, you could argue that it's going to be a year that's at least as good as last year on a core basis, and then you layer in prime. So, that free cash flow number in the mid-600 million level should be significantly, or I would think should be higher. I'm not going to ask you to give an exact outlook, but I would assume it would be a lot higher. So the benefit of all this is that you've got great cash now, and it can be redeployed. As you think about the normalization of the business, is that capital and the redeployment of that capital enough to continue to grow earnings in 23 and 24 years? I mean, there's enough birth or structural business added here through used parts and service growth plus your acquisitions to offset what might be some pressure on grosses.
spk09: Yeah, absolutely. And, of course, that's the way we're looking at it now. And there's no doubt that 23 can be incredibly strong in that regard. Once you get out to 24... I know a lot of people like to pretend they can predict that, but this is a dynamic business. But when we look at our after-sales business growing 18%, and that's the core of our business. That's 40% to 45% of our gross profit. And this is with warranty going backwards and collision soft. We're growing 18% in the U.S. and 15% as a corporation. And we're focused on that part of our business more than anything because that is what we can control. We can't control our new vehicle supply, right? So, yeah, I think this bodes very, very well for us. And continuing to add scale and continuing to capture more service business is really what we're focused on right now.
spk10: John, this is Darrell. I would add on versus the fourth quarter of 2019, our customer paid business was also up 20%.
spk05: Yeah, that's very helpful. Just lastly, you just made one comment about your sales folks being 20% more efficient or selling 20% more vehicles in your core versus the acquired stores. of this last year. I'm just curious if there's room to increase efficiency on your existing core sales folks and how fast you can get your acquired sales folks up to this level of efficiency.
spk10: This is Darrell. We believe the second part of your question, the new SOARs we think will be able to get them up fairly quickly. We have a very good launch plan, execution plan in place that we started in mid-January with those stores. The second thing is I believe there is room in the legacy stores, John. I can't tell you how much room there is. I think the more digital adoption there is by customers and inside our stores, I think the better that is for productivity.
spk05: Okay. Great. Thank you very much, guys.
spk06: And our next question comes from David Whiston from Morningstar. Please go ahead with your question.
spk07: Thanks. Good morning. Earl, I wanted to start with a comment you made a few minutes ago about if a market share price breaks out. In that scenario, if it were to happen, and hopefully it won't, how much pushback do you have on the factories and avoid taking too much allocation, or are they going to force it on you?
spk09: How much pushback from factories on what? I'm sorry. On allocations, vehicle allocations.
spk03: Yes, they start to increase.
spk09: Well, it's been so long since we had to push back, I don't remember how to do that. But, yeah, I think. No, we have always run our businesses for our shareholders. And I think over the years, most of the OEMs, have become more sophisticated in that regard, and they understand that too much inventory is bad for us, and we're not going to take it, and it's bad for them, too. And that lesson is really being driven home right now to the OEMs as to the cost of excess inventory. The distribution channels in both the U.S. and U.K. have been overstuffed for a decade or more, and now that if they get leaned out, you can see what it does for the OEM profits also. It's much better for them. And so I think we're going to be in a much better position going forward, and we have our inventory targets, and should we ever get back to them, we will have to turn down the vehicles.
spk10: David, this is Darrell. I would add one thing to Earl's comments. We will push back to be able to manage our own inventories based on what's best for our shareholders, but the market-based supply will determine the gross profit outlook. And so if the OEMs do go too far on overproduction, that will determine what happens to the grosses in the marketplace.
spk07: Okay, thanks. And moving on to... There's a bill recently introduced in Congress on basically expanding that Massachusetts right to repair scenario nationwide. I know you've got a lot of presence in Massachusetts. Are you at all worried about this legislation, or is it really a non-issue?
spk09: Well, that particular Massachusetts bill has been around for many years, and that threat or that threat You know, that issue of better access for aftermarket repair has been around for a long time. So I don't see that as material to what we do for a living. We have as much service business available to us as we can capture, and our goal is to make our customers loyal and continue to get more of our customers back in our shop. So that is an issue I assume more for the OEMs than for us.
spk07: Okay, and on the use pricing being so high and it should come down eventually, perhaps in 23 we could be looking at a lot of negative equity for consumers who want to perhaps get rid of a vehicle. Just curious, your lending partners, traditionally, how willing are they to roll negative equity into a loan for a new vehicle? And do you think maybe they would be willing to put more of that negative equity in a loan in the past, given what's happened recently?
spk04: Sure, David. This is Pete Delongshaw. And when you look back, we've had lenders that go up to 130% loan-to-value. But for our company, the way that we manage our lenders and with our loss ratios, I will tell you that negative equity is not something we're concerned about with our lending partners. And the other piece that Darrell alluded to is that we've been very disciplined in and not overcharging our customers because one of the concerns is in two to three years, these customers that pay substantially over sticker price, that will lead to negative equity. So we're managing our transactional pricing today with a long-term view. Right now, the lenders have remarkably low loss ratios because people have equity in their cars, but in the conversations I've had with lenders, their appetite continues to be very strong. Okay, great. Thank you.
spk06: Our next question comes from Rajat Gupta from JP Morgan. Please go ahead with your question.
spk00: Great. Good morning. Thanks for taking the questions. Amy, on Acceleride, could you talk about the progress on the rollout of the integrated delivery feeds? And also maybe on the integration with the Prime Automotive Network. Tell us how that's progressing. When do you think you can overlay that? And in general, how do you see the Acceleride platform scaling in 2022? Any targets? any volume target that you have that you can share.
spk10: I have a follow up, thanks. Daryl, delivery fees, we've integrated it into Acceleride. We had it in about 40 stores in the fourth quarter and continue to roll it out through the rest of the network. And in the new acquisition in New England, we have rolled out Acceleride. We are rolling out Acceleride in all of those stores as we speak. And we started that in the third week of January. and we expect that by the end of the first quarter we'll be fully rolled out there, and we expect adoption to be able to do it. What we feel like is a really good execution plan there, and we have some huge advocates for it in those stores because previously Prime didn't have much of a digital strategy. So we feel like it's a real advantage. And then what was the rest of your question? Oh, about targets and things like that? You know, we haven't set a target per se. I mean, we did 20,000 units last year. I feel like there's still more upside from there, obviously, and it'll become a bigger and bigger piece of our business, but we don't have targets that we share externally with it, but I think if you look back at our growth with Accelerize since we launched it, I think you can expect to continue to see that same kind of growth moving forward.
spk00: Understood. Maybe a broader question on just inflation. How do you see inflation in general, you know, like impacting your business, you know, more from like an SG&A standpoint? We know that a lot of the personnel costs, you know, you know, salespeople, like my managers, you know, highly variable in nature. But curious if you're starting to see any of the wage inflation, you know, start to creep in into your expenses. And obviously productivity has been very strong, offsetting a lot of that. But just curious to get a thought, you know, how you see that impacting your profitability in the more near to medium term.
spk09: Thanks. This is Earl Rajat. Yeah, we've seen it in some support positions, but as you mentioned, the vast majority of our employee costs are productive people, and so they are paid by what they produce. Where we will see it start to creep in will be in things like call center and some staff and support people. But that is not the biggest part of our cost structure. But there's no doubt that inflation's here. And there's going to be some interest rate increases, too.
spk03: Rajat, one thing that I'll add in the interest rate increase or changes, you know, to mitigate rising interest rates, we've swapped out a large part of our floating debt. So for every 100 basis points increase in the LIBOR, that would only negatively impact our full year earnings per share by about 21 cents. So that's helpful going forward.
spk00: Got it. Got it. That's helpful. Maybe just last one on capital allocation. You mentioned earlier that, you know, you will be doing capital allocation Any numbers you can put around that? What kind of leverage are you willing to add? Is it just using the access free cash flow or are you willing to take on more leverage to do that? I'm just curious if you could give us some sort of a range around that.
spk09: Well, I think relative to acquisition volume that we can comfortably do, and then clearly we have more debt capacity if we want it, but as we said last year, we have the capacity to easily add a billion dollars of revenue per year. You know, we need to find acquisitions that fit with the geography and brand and financial requirements that we have, but we're pretty comfortable you know, with planning that way. And we just think our shares are severely undervalued. And so, you know, buying, investing in our own acquisitions isn't a bad thing to do either. So clearly this is a dynamic market in terms of which acquisitions are available and what our share price is. But I'm quite confident we're going to pursue both those avenues this year.
spk03: Rajat and Daniel, again, in response to the leverage question, we added $2.5 billion of revenues last year. Our leverage is around two times coming out of 2021. I think as a company, for the right acquisition, we would feel comfortable extending our leverage ratio to three times or perhaps three and a half times for a short period for the right acquisition. So that will give you some guidance on where we are with that.
spk00: Understood. Great. Thanks for the call, and good luck. Thank you, Rajat.
spk03: Thanks.
spk06: And, ladies and gentlemen, with that, we'll end today's question and answer session. I'd like to turn the floor back over to Earl Hesterberg for any closing remarks.
spk09: Okay. Thanks to everyone for joining us today. We look forward to updating you on our first quarter earnings call in April. Thank you.
spk06: And, ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for attending. You may now disconnect your lines.
Disclaimer