Asbury Automotive Group, Inc. (NYSE:ABG) Q4 2022 Earnings Call Transcript

Asbury Automotive Group, Inc. (NYSE:ABG) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Greetings. Welcome to Asbury Automotive Group’s Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen only mode . Please note that this conference is being recorded. At this time, I’ll turn the conference over to Karen Reid, Vice President and Corporate Treasurer. Ms. Reid, you may now begin.

Karen Reid: Thanks, Rob, and good morning, everyone. As noted, today’s call is being recorded and will be available for replay later this afternoon. Welcome to Asbury Automotive Group’s fourth quarter 2022 earnings call. The press release detailing Asbury’s fourth quarter results was issued earlier this morning and is posted on our Web site at investors.asburyauto.com. Participating with me today are David Hult, our President and Chief Executive Officer; Dan Clara, our Senior Vice President of Operations; and Michael Welch, our Senior Vice President and Chief Financial Officer. At the conclusion of our prepared remarks, we will open the call up for questions and will be available later for any follow-up questions. 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 significant 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, 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 GAAP measures on our Web site.

We’ve also posted an updated investor presentation on our Web site investors.asburyauto.com highlighting our fourth quarter and full year 2022 results. It is now my pleasure to hand the call over to our CEO, David Hult. David?

David Hult: Thank you, Karen, and good morning, everyone. Welcome to our fourth quarter and full year 2022 earnings call. 2022 was a record year for Asbury. We generated $15.4 billion in revenue, up $5.6 billion from 2021. Our adjusted EBITDA for the year was $1.3 billion, an increase of over $500 million and we expanded adjusted earnings per share by 38% to $37.66. We sold over 300,000 vehicles in 2022 and hit a milestone in number of cars we serviced at over 3 million. All of this is a result of our long term trajectory to manage effectively through our growth even at a much larger size. Looking back to 2017, we were a company with $6.5 billion in revenue. We have grown responsibly to over $15 billion in 2022. We have refined and maintained our operational discipline throughout this period going from an adjusted SG&A to gross profit profile of 69.1% in 2017 to 56.8% for 2022.

Through continuously enhancing our execution and optimizing our portfolio, we have been accretive and efficient while more than doubling the size and power of the company. Turning now to our results in the fourth quarter. We grew adjusted EBITDA by $71 million to $319 million, an increase of 29%; expanded adjusted EPS from $7.46 to $9.12, an increase of 22%; delivered an 8.2% adjusted operating margin; increased revenue by $1.1 billion to $3.7 billion; and grew gross profit by $196 million to $738 million. Our gross profit margin was 19.9% and our adjusted SG&A as a percentage of gross profit was 56.7%. For the full year 2022, we generated $987 million of adjusted operating cash flow, an increase of $355 million over last year, which speaks to our robust business model.

At the end of December, we had $1.5 billion in liquidity. Even with large acquisitions in recent years, we have been diligent about our debt levels to support our long term growth. Adjusted net leverage has decreased a full turn from 2.7 times at the end of 2021 to 1.7 times at the end of 2022. Our strong cash flow, liquidity and balance sheet allows us flexibility and muscle to deploy our strategy. It enables us to be opportunistic with potential acquisitions or share buybacks. As announced, we repurchased 1.6 million shares during 2022 for approximately $300 million. Our board has approved an increase to our share repurchase authorization about $108 million to $200 million. We continuously evaluate acquisition opportunities that make sense for Asbury.

We believe based on the last several acquisitions that we have shown discipline and held ourselves accountable to our robust criteria for opportunistic growth. In December, we divested the North Carolina stores as part of our continuous portfolio optimization. These nine stores represent an estimated annualized revenue of $590 million. We are opportunistic, strategic and thoughtful regarding our capital allocation and maximizing our returns to our shareholders. Our guest centric model also relies on providing a high level of commitment to our team members by offering best in class benefits, including equity awards to our teammates in our stores, which is unique among our peers. Our team members have also been giving back to their communities as volunteer hours were up nearly 70% year over year to our volunteer time off program of up to 40 hours per team member.

Finally, I would like to thank all of my team members for an incredible year and a strong start to 2023. It is your hard work and dedication that provides a great guest experience and strengthens the performance of our business, but the best is yet to come. Thank you. I’ll now hand the call over to Dan to discuss our operating performance. Dan?

Dan Clara: Thank you, David, and good morning, everyone. I would also like to extend my thanks to all our team members for their extraordinary results in 2022 and their commitment to consistently delivering an exceptional guest experience. My remarks will pertain to the same store performance unless stated otherwise. Starting with new vehicles. Our new vehicle inventory ended the quarter at $254 million, which represents a 20 day supply. Our day supply fluctuated by segment with domestic being at 30 days, import at 13 days and luxury at 21 days. Even if missed continued supply constraints, our new vehicle volume was flat year over year while we grew new vehicle revenue by 3%. New average gross profit per vehicle decreased $704 from the per year quarter.

For the full year 2022, we increased new vehicle gross profit by 7% year over year. On a PBR basis, it increased by $1,348 or 30% to $5,815 for the full year. Turning to used vehicles. Used retail revenue was down 5% from the per year quarter as the expected choppiness to the market persisted. Used retail gross profit per vehicle was $1,842 for the quarter, a decrease of $840 from the per year quarter. Our used vehicle inventory ended the quarter at $202 million, which represents a 26 day supply. Our used to new ratio for the quarter was 101%, down from 108% from the prior year quarter. Shifting to F&I. We delivered another strong quarter with an F&I PBR of $2,233, an increase of $241 compared to the prior year quarter. In the fourth quarter, our total front end yield per vehicle decreased on a year over year basis by $474 per vehicle to $5,984.

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Moving to parts and service. Our parts and service revenue increased 12% in the quarter. Customer pay revenue built upon its momentum with a 13% growth and we expanded its gross profit by 14%. Now turning to Clicklane. Please note that for Clicklane, we are reporting on an all store basis. As a reminder, this was the first quarter which included LHM in Stevenson sales since our full rollout. We sold an all time record of over 8,400 vehicles through Clicklane in the fourth quarter, a 67% increase year-over-year and a 24% increase over the previous best, which was last quarter. For the full year 2022, we generated approximately $1.1 billion of revenue from Clicklane with over 27,500 vehicles sold via our fully transactional online tool. We expect to generate $2.5 billion in revenue for 2023 from Clicklane across all stores.

A key differentiator for Clicklane is our loan marketplace, which works with 51 different lenders, banks and credit unions to give the consumer the power to select the finance offerings that are best for them. In the fourth quarter, we optimized our F&I menu to 2.0 by presenting a bundle of suggested products, which are tailored to the vehicle, the location and the customer’s usage. This allows the Clicklane consumer to be informed and let them select the best choices for protecting their asset. We are also adding functionality in the first half of 2023 to bring in new features, including enhanced integrations with OEM captive finance arms. During the fourth quarter, over 92% of our transactions were with customers that were incremental to Asbury’s dealership network.

Average transaction time remained roughly in line with prior quarters, 8 minutes for cash deals and 14 minutes for finance deals. Total front end PBR of $3,518 and an F&I PBR of $2,001, which equates to $5,519 for total front end yield. The average Clicklane customer credit score increased quarter-over-quarter to , which is higher than the average credit score at our stores. 87% of those that applied were approved for financing. 77% of customers received an instant approval while an additional 10% of customers require some offline assistance. The average distance of a Clicklane delivery from our dealerships was 18.6 miles, giving us the opportunity to retain our new customers in our parts and service department. Clicklane customers are converting at more than double the rate of traditional internet leads.

And while we won’t see the full potential until inventory levels normalize, we are seeing strong early results. Our top conversion rates among individual stores were executed at 20% for domestic vehicles, 28% for imports and 48% for luxury. In our journey to become the most guest centric automotive retailer, we know the most important differentiator we have is the level of service we provide. Consistently delivering an exceptional guest experience builds trust amongst our clients who in return reward us with loyalty and retention. I will now hand the call over to Michael to discuss our financial performance. Michael?

Michael Welch: Thank you, Dan. To our investors, analysts, team members and other participants on the call, good morning. I would like to provide some financial highlights for our company. For additional details on our financial performance for the quarter, please see our financial supplement and our press release today and our investor presentation on our Web site. Overall compared to the fourth quarter of last year, adjusted net income increased 24% to $202 million and adjusted EPS increased 22% to $9.12. Adjusted net income for the fourth quarter 2022 excludes expenses of $2.7 million related to a significant acquisition that did not materialize and gains on dealership divestitures net of $202.7 million, primarily related to the North Carolina stores, all of which netted to $6.83 per diluted share.

For reference, we received $322 million in cash proceeds for the sale of these divested stores. Adjusted net income for the fourth quarter 2021 excludes acquisition expenses and acquisition financing expenses of $28.9 million or $1.02 per diluted share. Our effective tax rate for the full year was 24.4% versus 23.7% in 2021. We anticipate our 2023 tax expense to be approximately 24.5%. For 2022, we generate adjusted operating cash flow of $987 million. Excluding real estate purchases, we spend approximately $95 million on capital expenditures for the full year. We expect this to be approximately $200 million for the full year 2023 as we continued to plan CapEx related to our 2021 acquisitions. Of this $200 million, about $20 million is related to replacement of lease properties.

For the quarter, TCA made $28 million of pre-taxed income, which included $4 million of net investment income. TCA generated $80 million of pre-tax income for the year. We anticipate a full rollout of TCA products to our remaining stores by the end of 2023. For GAAP, we are required to defer the commission receive of dealerships for TCA products over the life of the contract. To maintain comparability, we will continue to reflect the commission received for such sales in the dealership segment at the time of sale and record the deferral of that income in the TCA segment. With the ownership of TCA, while the overall profitability of the transaction is higher the timing of income recognition is deferred and amortized over the life of the contract.

We expect the negative deferral impact to last two to three years. Due to the deferral of the income associated with these store rollouts, we expect TCA to generate $25 million of pre-tax income for 2023. Our balance sheet remains strong, as we end of the year with approximately $1.5 billion of liquidity, comprised of cash, excluding cash and total care auto, floor plan offset accounts and availability on both our used line and revolving credit facility. Also, at the end of the year, our proforma adjusted net leverage ratio stood at 1.7 times down from 2.7 times at the end of 2021. We generated robust cash flow — by generating robust cash flow we were able to quickly lower our net leverage ratio after our large acquisition in 2021, and strengthen our balance sheet to provide flexibility to achieve our strategic goals.

We’ll continue to monitor the M&A market as we believe there are potential opportunities that would enhance our already strong dealership portfolio and we will look to return capital through share purchases. Since the start of 2022, we have repurchased approximately 1.7 million shares for $308 million. As David mentioned earlier, our board has approved an increase to our share purchase authorization of $108 million to $200 million. Finally, I would also like to join David and Dan in thanking our team members at Asbury, for not only a strong quarter but another strong year. Your hard work and dedication drive our excellent performance. I will now hand the call back over to David to providing some closing remarks. David?

David Hult: Thank you, Michael. As we look to 2023, we believe we are well positioned in a market where the average age of the car is over 12 years old and day supply begins to build. Also, our fixed operations continues to be strong we anticipate this will continue for 2023. We are planning our business for a SAR in the mid $14 million range. We believe with our disciplined cost management and agile expense structure heading into 2023, we can adapt to changing conditions, including one with a recovering if uneven day supply for the industry. Finally, our robust cash flow and balance sheet enables us to have both the flexibility and strength for us to be opportunistic when it comes to well our well diversified revenue streams and when it comes to acquisitions and buybacks. This concludes our prepared remarks. We’ll now turn the call over to the operator and take your question. Operator?

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Q&A Session

Operator: And our first question is from the line of Daniel Imbro with Stephens.

Daniel Imbro: David, I want to start on the new vehicle side of the industry. Obviously, earlier this week, large OEMs started reporting, talking about carrying 20, 30 days lower inventory than historical levels. Your inventory is slowly building up to the mid 20s. I guess could you update us on how your conversations are going with the OEM partners? And how do you think about the trajectory of inventory? Maybe shed light on how you think that evolves through €˜23 and maybe into next year, that’d be great.

David Hult: I’ll start with the fourth quarter. Our volume numbers are a little deceiving, because while the day supply was where it was in the quarter, our largest volume luxury and import stores had single digit day supply, so that really governed our ability to grow what was there. As we walk into 2023, we’re still — have over 35% of our inventory coming in pre-sold, so it’s still a robust pipeline. I think it’s going to be a different year for all manufacturers. I think some are going to come back a lot sooner with day supply, and some it’ll take them most of the year to catch up to it. So I think it depends upon which brand you’re talking about. And amongst our peers and ourselves, it’s going to really come down to the mix of brands that we have. So we anticipate a quick recovery in the first half of the year with Stellantis, and then another domestic. But it’s going to be a slower uptick as it relates to say Toyota and Honda.

Daniel Imbro: And as we think about the GPU implications of that, obviously, I think new GPU is better than most expected this quarter, barely declining sequentially. I mean, what have you learned about the ability to price as inventory improves and how do you think that relationship, that inverse relationship with inventory shake out through the year?

David Hult: What I’ll say the last few years have been difficult to navigate it from a prediction standpoint between COVID and supply chain issues and so on. But I’ll tell you, all the conversations the last few quarters have been when does it get back to 19 levels, I just don’t see that. €˜19 have a $17 million SAR, we’re forecasting less than a $15 million SAR. You can look back over history, when SARs are below $16 million, margins hold up pretty well. We think a lot of the OEMs have learned from their day supply, but that doesn’t mean you won’t have spikes at certain moments in time. I think they’ve been real comfortable with not bringing large incentives to the market. If inventory does back up on a day supply, I assume they’ll come forward with incentives.

And again, because the average age of the car is over 12 years, while we think it’s not going to be a gangbuster year, we anticipate margins to hold pretty well. It will certainly vary by OEM depending upon day supply. But as we look at Asbury as a whole, we think it’ll be a pretty good year for new car margins for us.

Daniel Imbro: And then last one for me, maybe Michael, jumping over to the balance sheet. You paid down a lot of debt. I think the buyback update was encouraging last week. I wanted to ask just for some color. I mean, you guys were active divesting stores in 4Q. How should we think about capital allocation but also just the portfolio going forward? Are we done with divestitures, are you back to being a net acquirer in the market? Any update there on use of capital as we move forward.