Group 1 Automotive, Inc.

Q1 2024 Earnings Conference Call

4/24/2024

spk01: Please be advised that this call is being recorded. I'd now like to turn the floor over to Mr. Pete DeLongshaw, Group 1 Senior Vice President of Manufacturer Relations, Financial Services, and Public Affairs. Please go ahead, Mr. DeLongshaw.
spk04: Thank you, Jamie, and good morning, everyone, and welcome to today's call. The earnings released we issued this morning and they related to slide presentation that include reconciliations related to the adjusted results we will refer to on this call for comparison purposes have been posted to Group 1's website. Before we begin, I'd like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures. Except for historical information mentioned during the conference call, statements made by management of Group 1 Automotive are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve both known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. These risks include but are not limited to risks associated with pricing, volume, inventory supply due to increased customer demand and reduced manufacturing production levels due to some component shortages, conditions of markets, successful integration of our pending Ingecape acquisition, and adverse developments in the global economy and resulting impacts on demand for new and used vehicles and related services. Those and other risks are described in the company's filings with the Securities and Exchange Commission. In addition, certain non-GAAP financial measures as defined under SEC rules, may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on its website. Participating on the call today, Darrell Kenningham, our President and Chief Executive Officer, and Daniel McHenry, Senior Vice President and Chief Financial Officer. I'd now like to turn the call over to Darrell.
spk07: Good morning, everyone. Last week, we announced our acquisition of Inchcape Retail, the largest dealership transaction in Group 1's history. We're thrilled to have successfully come to an agreement with Inchcape PLC on this generational acquisition. There are several benefits to Group 1. One, we'd like to grow. The acquisition gives us access to markets where we previously had no presence, and it also adds scale to markets where we have existing presence. The brand mix at Inchcape is outstanding. Very little facility investment is required, and we felt the valuation was exceptional. The Inchcape business is well-run, and our cultures align very well. We believe that combining Group 1 UK with Inchcape will benefit all of our UK stores. And Inchcape is accretive from day one, and we believe we will see an immediate EPS impact. Properly allocating our shareholders' capital is our highest priority. When evaluating an acquisition, we run disciplined valuation models with realistic expectations, incorporating growth and investment. The return generated through that modeling is compared to the expected return of repurchasing our stock, paying down debt, or using the capital for other uses. From our perspective, the valuation on the Inchcape transaction was excellent and provided an outstanding use of our shareholders' capital. In a four-week period during the first quarter of this year, we closed on three transactions that were similarly attractive in the U.S. What's also important to note is that we passed on a number of acquisitions that didn't meet our investment hurdles. Some of those were in great markets with great brands. However, we will not chase revenue just for the sake of growing. We will chase returns. In the first quarter, it's important to note we also disposed of stores that did not meet our return expectations. As you've seen over the last two years, we've balanced acquisitions and dispositions with repurchasing our shares. We've bought $3 billion of revenue, disposed of $945 million of revenue, and repurchased 23% of the company. Although we had some operating bumps in the fourth quarter in the U.K., Our teams reacted well. Our used car inventory is very healthy, our grosses have returned, and we've implemented significant expense reductions. Daniel McHenry will speak more specifically to those actions in a moment. We are a pure play dealership group. While we regularly evaluate other business opportunities, we believe the best use of capital to grow the company is in new vehicle franchise dealerships. It may not be that way forever, but that is what we see in today's economic and competitive environment. We also believe close partnerships with OEMs has never been more important. OEMs need great retail partners now more than ever. The great ones admit that and execute against that. They need our capital, professionalism, and execution to win in this ultra competitive environment. We don't see that changing in the future. we actually see that OEM relationship growing in importance. And we believe the Inchcape acquisition allows Group 1 an outstanding opportunity to demonstrate that. Now, I'll turn the call over to Daniel McHenry for an operating and financial overview. Daniel?
spk02: Thank you, Darrell, and good morning, everyone. In the first quarter of 2024, Group 1 Automotive reported $130 million in adjusted net income and delivering a quarterly adjusted diluted EPS from continuing operation of $9.49. Current quarter total revenues of 4.5 billion were the highest first quarter revenues in company history, supported by all lines of business, and parts and service revenue of 576.2 million were an all-time high. Starting with our U.S. operations, new vehicle units sold outpaced the industry, up 8% on a same-store basis and 14% on a reported basis. During the first quarter, 17% of our new vehicle sales in the U.S. were pre-sales, down from 24% in the prior quarter. These strong unit sales reflect the resiliency of demand and our emphasis on driving volume. GPUs performed about as expected and continue on their slow glide path down as inventories return. In used cars, GPUs increased $245 sequentially, with units sales up 8%. Given the speed and depth that the industry used car valuations declined in the US during the latter half of 2023, We are pleased with our ability to hold margins and increase volume. We believe this is testament to our process discipline with pricing and our use of technology. Our F&I gross profit per unit of $2,340 only minimally declined on a same-store sequential quarter basis and increased 3% year over year. We expect some continued pressure on used vehicle finance penetration due to existing interest rates and higher lender requirements for some buyers. However, we expect continued improvement on new vehicle finance penetration due to increasing OEM incentives. After sales first quarter revenues and gross profits outperformed the prior year comparable quarter on a same store basis. and we achieved a record U.S. parts and service revenues of approximately $500 million. We continue to believe that after sales is an area for Group 1 to differentiate, and we will continue to invest in that part of our business. Wrapping up the U.S., let's shift to SG&A. Adjusted SG&A as a percentage of gross profit increased 260 basis points year over year. to 65.7%, but remains considerably from pre-COVID levels of around 70% as new vehicle margins continue to normalize. Let's turn to the UK. The UK improved from fourth quarter of 2023. Our UK team delivered record quarterly revenues driven by new vehicles and parts and service, which grew 10% and 9% respectively. We experienced declining new vehicle margins, a continuation at the initial onset of the quarter of the difficult used market first experienced in the fourth quarter of 2023, and improved cost control as we worked to remove costs throughout the quarter. While hotel losses were down 34% per unit versus the sequential quarter, we experienced an even steeper improvement in February and March. Used vehicle gross profit per unit improved $229, or 20% on the sequential quarter basis. We believe vehicle demand remains resilient, and new vehicles availability is still constrained, keeping new vehicle pricing and GPUs elevated. As of March 31st, our new vehicle order bank was approximately 12,500 units. As a reminder, our UK business mix is predominantly luxury, and those consumers are more resilient during times of economic uncertainty. Our UK operations began rebalancing of its used vehicle inventory during the fourth quarter of 2023. and continued into the first quarter of 2024. This continued rebalancing resulted in an $840 loss per vehicle sold through the wholesale channels in the first quarter, an improvement from the $1,300 loss per vehicle in the fourth quarter. We have improved our used vehicle agency and reduced our used vehicle inventory by 12 days, from 58 days in December 31st to 46 days. UK adjusted SG&A as a percent of gross profit decreased by 772 basis points sequentially, reflecting the impact of our cost-cutting efforts that began in the fourth quarter of 2023. Cost-cutting took place throughout the entirety of the first quarter of 2024, resulting in an elevated adjusted SG&A which was 1,020 basis points higher year over year. We also experienced the impact of the decline in gross margins across all lines of our business as compared to the prior year quarter. Turning to our balance sheet and liquidity, as of March 31st, we had $42 million of cash on hand and another $180 million invested in our floor plan offset accounts. accessible immediately, bringing total cash liquidity to $222 million. We also had $241 million available to borrow on our acquisition line, bringing total immediate available liquidity to $463 million. In the first quarter of 2024, we generated $171 million of adjusted operating cash flow and $128 million of free cash flow after backing out 43 million of CapEx. This capital was deployed through a combination of acquisitions, share repurchases, and dividends. In the first quarter of 2024, we spent 54 million, repurchasing approximately 203,000 shares at an average price of $264.41, resulting in a 1.5 reduction in share count over the quarter. Our share count as of today is signed to approximately $13.5 million. Our balance sheet, cash flow generation, and leverage position will continue to support flexible capital allocation approach, including serious consideration of share repurchases in addition to pursuing external growth opportunities. Our rent-adjusted leverage ratio as defined by our U.S. syndicated credit facility was 2.45 times at the end of March. Our strong balance sheet will continue to allow for meaningful and balanced capital deployment. Our quarterly floor plan interest of $20.5 million was an increase of $7.9 million from the prior year due to higher inventory holdings. We effectively manage our floor plan interest expense by holding excess cash on our floor plan offset accounts, reducing the balance exposed to interest, as well as through our portfolio of interest rate shops, which saved us $2 million of interest expense versus the comparable prior year quarter. Quarterly non-floor plan interest expense of $29.3 million increased $9.6 million from the prior year quarter primarily related to higher interest from increased borrowings on our acquisition line, the benefit in the prior year of the de-designated swap, increased mortgage-related borrowings, and higher interest on existing borrowings. Our floor plan interest rate swaps, similar. Our mortgage swap portfolio saved us 0.4 million in the current quarter versus the comparable period. As of March 31st, approximately 56% of our $4.2 billion in floor plan and other debt was fixed. Therefore, the annual EPS impact is only about $1.05 for every 100 basis point increase in the secured overnight funding rate, or SOFR, which is the benchmark rate referenced in our floor plan and mortgage debt instruments.
spk05: Let's turn to capital allocation.
spk02: We deploy a return-focused capital allocation strategy that balances opportunistic portfolio management and return of capital to our shareholders in the form of quarterly dividends and share buybacks. During the quarter, we acquired expected annual revenues of $1 billion. We spent $54 million to repurchase 1.5% of our outstanding common shares and paid dividends of $6 million. We continue to explore ways to consolidate our holdings in highly profitable, scalable dealerships and dealership clusters. We believe the dealership business is the best use of our capital and have demonstrated our ability to successfully integrate acquisitions very quickly. We continue to explore opportunities to capture immediate growth through acquisitions. We also believe divesting smaller, underperforming stores and brands is a critical part of our strategy as well. We believe this approach is critical to our growth story, which leverages our skill and proven integration capabilities, optimizes our rooftop performance, and grows the company in a meaningful and incremental manner. For additional detail regarding our financial condition, please refer to the schedules of additional information attached in the news release, as well as our investor presentation posted on our website. I will now turn the call over to the operator to begin our question and answer session. Operator.
spk01: Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star and one on your telephone keypad. If you are using a speaker phone, we do ask that you please pick up your handset prior to pressing the keys. To withdraw your questions, you may press star and two. In addition, we do ask that you please limit yourselves to one question and one follow-up. At this time, we'll pause momentarily to assemble the roster. Our first question today comes from John Murphy from Bank of America. Please go ahead with your question.
spk03: Good morning, everybody. First question on the Inchcape and the acquisition. It's an interesting acquisition. I'm just curious if in addition to sort of the benefit of acquiring a good company and growth, that there could be sort of the knock-on benefit of helping solve some of the management issues that you had in the U.K. towards the end of last year. And this may be if you can update us on sort of the turn and actions that have taken in that business and where that stands. So it sounds like Inchcape might be a lot more than just a good acquisition. It might help with a lot of the management issues.
spk07: Thank you, John. You know, we bought eight Inchcape stores a few years ago, and the talent – level at EngCape is fabulous. The heads of business that run those stores for us today all came from EngCape. And we are excited about the talent level and the management depth at EngCape. They really have some fabulous people. And so I can affirm that we are excited about that. That is definitely an add-on benefit for us. So And on the specific actions that we took in the fourth quarter and the first quarter to get our issues behind us in our own UK operation, we went through a cost-cutting exercise on an SG&A basis that touched a variety of parts of the company, including headcount. And we also reduced our demo fleets, loaner fleets, which are a huge expense for us as well. And so aside from the SG&A and the headcount issues and the loaner and demo, we also put a great deal more emphasis on our use for our aging in turn. Made some organizational changes around that to put some more focus on it. And we're pleased with the results we saw in the first quarter. We believe some of those actions will result in improved performance throughout the year.
spk03: And, Darrell, if I could just sneak in one follow-up. You mentioned something about the partnerships with OEMs improving. I'm just wondering if you can maybe talk about that a bit and maybe on the level of, you know, what does it mean for acquisitions, what does it mean potentially for parts and service, and what could it mean for the used vehicle business? I don't know if you could touch on those three and generally kind of what you're what you mean by improved partnerships with OEMs?
spk07: Well, I think a lot of the OEMs are taking what they do in a market like the UK, where they have fewer partners with bigger footprints. And I think they're bringing that thinking to the US. And I think they really value the right partner. And I think they really are trying to drive that, specifically in certain brands. And they do that through the way they work with us on acquisitions, the creativity that we apply, and the opportunities that we're provided. And I can tell you, if you look at the three acquisitions we did in the U.S. in February and early March, fabulous brands across a variety of OEMs in some great markets. And I think I can point to our our great relationship with those OEMs that enabled that. And I think they are continuing to look, they understand that there's, you know, our business is a 5% margin business and it takes capital and great execution at retail to make their brand successful. And I think they're recognizing that more every day. So that's why I say that. And I think that applies not just to you know, additional acquisitions, but in the way they execute across a lot of the tactical elements that you mentioned, like used cars and parts of service. They're looking for dealer groups that can innovate, and I think that helps in those areas.
spk05: Our next question comes from Michael Ward from Freedom Capital. Please go ahead with your question. Hey, you there.
spk06: I'm sorry. Good morning, everyone.
spk05: Hi, Mike.
spk06: Can you hear me okay? Yes. Daniel, could you shed some color on the acquisition cost in one queue and maybe even net it out with the sales? And then with the Inchcape acquisition, you have the acquisition and the real estate, or is it one price for both?
spk02: So let's start with the Inchcape acquisition first. The price that was quoted in our press release included the real estate for Inchcape. So effectively, the 220 million pounds that was quoted was for real estate. And the balance between the price quoted and the 220 million was effectively the goodwill and all other net assets. You know, for the deals that we've done in the U.S., you know, we typically don't quote the price that we pay for those deals. However, what I will say that all of those deals fell within our return model. So we model on the basis of a discounted cash flow basis. And we have a targeted rate of return of approximately 12%. on those acquisitions, and all of those acquisitions fell within those targets.
spk06: Okay. All right. So netted out, though, it's somewhere in that neighborhood of about $200 million, then, it sounds like, between buying and some of the proceeds from the disposals?
spk02: It'll be more than that, Mike. Okay. For one queue. For one queue, correct.
spk06: Okay. Okay. And just one last thing on Inchcape. I wonder if you could talk a little bit, Daryl, about some of the longer-term relationships and how that came about. You said you acquired eight other stores from them at some previous point. You have a history of having long relationships with some of the acquisitions you make, and I'm just wondering how this fits in and your confidence level that it's going to be like some of the others that fit in pretty well, like Prime fit in pretty well to the Group 1 network.
spk07: Yeah, we were... when you know we bought some of inchcape's ford stores and volkswagen stores and um seven or eight years ago and um the integration was very good inchcape now inchcape's been in the retail business in the uk for 50 years and they're a sophisticated operator and we really benefited from some of the things they brought us on that acquisition and you know the oem mix that we're we're getting with this acquisition. We own all of those OEMs today, and we own all but two of them in the UK today. The two we don't own today in the UK are Porsche and Lexus. We own all of the others today, and we've got what I believe are very productive, positive relationships with those OEMs. And that's based primarily on performance. And our willingness and ability to invest in their brand, like in facilities, et cetera. So, yeah, those relationships for us go back quite a ways and often bridge both countries.
spk05: And our next question comes from David Whiston from Morningstar.
spk01: Please go ahead with your questions.
spk00: Thanks. Good morning. Just a couple from me. On you, you guys continue to do pretty well there, despite all the pressures in that space. Do you have any kind of national algorithm, or is it just more of a data approach that's a bit less centralized?
spk07: We're getting more centralized, David. One, with the technology we use, and we switched technology about a year ago year and a half ago, maybe. And I think we're leveraging it better today. We also have made some changes in some of our aging policies, some of our intra-company transfer policies to be able to put vehicles where they will have the highest velocity at the most opportunistic profit on a faster basis. And I think we're seeing the results of all of that. And Um, we're, we're able to keep our year over year growth rates up, even though we have less inventory, we have 26 days of inventory and we're still able to keep the, um, velocity, uh, and the, and the year over year improvements in place and, and the PRU is holding up well. So I think it's a variety of things, uh, that, that the team is doing. We're, we're, we're approaching it, um, more on a standardized basis than we ever have. And we have more resources on it today than we ever have, too.
spk00: And in the U.S. market, are you seeing any kind of meaningful increase in leasing yet?
spk07: Actually, our leasing was down a tick in the quarter, but it's up significantly from where it's been the last couple of years. We've got the number in our deck, I think.
spk02: David, it's Daniel here. New vehicle leasing year on year, so quarter 1-24 versus quarter 1-23, we saw 460 basis points increase. So leasing today is up to 18.6% of our new vehicle sales.
spk05: And our next question comes from Rajat Gupta from J.P.
spk01: Morgan. Please go ahead with your question.
spk08: Great. Good morning. Thanks for taking the question. The first one was on services. Pretty good growth, you know, in customer pay and warranty. But it looks like collision and wholesale parts were slow, and especially collision was weak. Any sense of, you know, what drove that reversion? You know, one of your peers reported yesterday also it was just quite weak in that category. I was curious, how should we think about that part of the service business recovering, also the wholesale parts, and just in the context of the overall service growth as well, how should we see things trending through the course of the year? I have a follow-up.
spk07: A couple of comments, Rajat. On collision, I can't assign a value to this, but what we do seem to be seeing are insurance companies totaling more vehicles because of the used car valuations that have been falling. And so that is certainly impacting the collision business, which will to some effect affect the wholesale parts business. Also, you know, we're trying to be smart about our wholesale parts business. That can be a lot of revenue and not a lot of margin. And so we're kind of in the process right now of at least reviewing to make sure that we're generating positive returns on that. So that could be affecting some of that revenue on the wholesale parts business. But we were pleased with the CP performance, as you mentioned, and we added more technicians year over year again, and that continues to be a focus for us.
spk08: I mean, should we expect this kind of like year-over-year growth rate, you know, to continue for the remainder of the year? You know, should we expect, you know, some kind of like improvement, or is this a good level to zoom, you know, for the remaining of the year on the overall parts and service segment?
spk07: I think we're kind of comfortable with where we are today as trying to estimate where we would be in the future.
spk05: Our next question comes from Glenn Shin from Peaport Research Partners. Please go ahead with your question.
spk09: Good morning, folks. Just going back to the UK cost cuts, can you share with us how much of a benefit was realized in the first quarter? And then can you remind us, I think you mentioned in the fourth quarter you expected annualized savings of, was it $8 to $10 million, if you can just confirm that?
spk02: Glenn, I think that's for our annualized saving of $8 to $10 million. The cost cuts took place throughout the quarter. You know, it takes a little longer in the UK to generate some of these savings just with the employment law that's there. But I would expect to see the full benefit of the cost cuts in quarter two.
spk09: but I'm trying to get to how much more incrementally we should expect. So how much was realized in the first quarter, Daniel?
spk02: I would say 50% of it was realized in the first quarter if you assume that, you know, the redundancies took place, you know, 50% through the quarter effectively.
spk09: Okay, very good. That's helpful. Thanks. Then just a question on full-size pickups. There's some stories of rising inventory numbers some to triple-digit levels. We saw RAM cutting employees and production. Have you guys detected a change in the demand profile for full-size pickups?
spk07: You know, I wouldn't – I've seen some of that press, too, Glenn. And, you know, when we kind of look across our mix, you know, the GM – Brands were pretty good. The Ram was down a tick, and F-Series was down a tick. Toyota was up significantly, and actually, so we were, you know, overall, we were up a little bit in large pickup sales year over year. So it's hard for me to square that with what I've seen in some of the press.
spk02: Glenn, one thing I'll add to that is our Texas exposure makes a big difference. for pickup sales.
spk07: And if you look at our truck day supply compared to the car, they're right together.
spk05: Our next question is a follow-up from Rajat Gupta from J.P.
spk01: Morgan. Please proceed with your follow-up.
spk08: Great. Thanks for getting me back in the queue. I just wanted to clarify on SG&A in the U.S. in particular. If you look at the gross profit versus the SG&A, we saw a slightly higher pickup on the SG&A dollars versus the gross profit. Was that just seasonality? Maybe some deleveraging because of the service business? Just curious what happened there and How should we think about, you know, that leverage profile through the course of the year?
spk02: You know, Rajat, there's a couple of things. All right, Daniel. You know, what we've always said is, you know, coming out of this, we would expect that SG&A as a percent of gross would drop from 74% pre-pandemic to around 70% with, you know, kind of 400 basis points out of SG&A as a percent of gross going forward. Now clearly some of the grosses are dropping on new vehicles, and we continue to see about $100 a month reduction in that, and that affects SG&A as a percent of gross. There's a couple other things that I would add. Clearly we didn't get all of the costs out in the UK in the quarter for its full benefit that we will see going forward in quarter two. So we would expect on an ongoing basis SG&A as a percent of gross. all things being equal to continue to reduce in the UK. Taking on some of these new acquisition stores, you know, often, you know, there's slightly elevated costs that come as we take on some of these new acquisition stores. And particularly if you buy a store halfway through a month, it's just tougher. SG&A as a percent of gross as we bed those stores in. So I think you need to take some of that into account as well whenever you look at the change in SG&A as a percent of gross.
spk08: Understood. That makes sense.
spk05: Thanks for clarifying.
spk01: Thank you, Richard. And ladies and gentlemen, with that being our final question for today, we'll close out today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
Disclaimer

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.

-

-