Group 1 Automotive, Inc. (NYSE:GPI) Q4 2023 Earnings Call Transcript

Group 1 Automotive, Inc. (NYSE:GPI) Q4 2023 Earnings Call Transcript January 31, 2024

Group 1 Automotive, Inc. misses on earnings expectations. Reported EPS is $9.5 EPS, expectations were $10.49. GPI isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. Welcome to Group 1 Automotive’s Fourth Quarter and Full Year 2023 Financial Results Conference Call. Please be advised for this call is being recorded. I would now like to turn the floor over to Mr. Pete DeLongchamps, Group 1’s Senior Vice President of Manufacturer Relations, Financial Services and Public Affairs. Please go ahead, Mr. DeLongchamps.

Pete DeLongchamps: Thank you, Jamie, and 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 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.

Those risks include, but are not limited to, risks associated with pricing, volume, inventory supply due to increased customer demand, and reduced manufacturer production levels, conditions of markets, and adverse developments in the global economy and resulting impacts on demand for new and used vehicles, and related services. Those and other risks are described in the company’s filings with the Securities and Exchange Commission. In addition, certain non-GAAP financial measures, as defined under SEC rules, may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any such non-GAAP financial measures, to the most directly comparable GAAP measures on its website. Participating with me on the call today Daryl Kenningham, our President and Chief Executive Officer; and Daniel McHenry, Senior Vice President and Chief Financial Officer.

I’d now like to hand the call over to Daryl.

Daryl Kenningham: Good morning, everyone. Good morning. In the fourth quarter of 2023, Group 1 Automotive reported $131.2 million in adjusted net income, and delivered quarterly adjusted diluted EPS, from continuing operations of $9.50. Current year total revenues of $17.9 billion were the highest in company history, supported by all lines of business, and total gross profit exceeded $3 billion, all-time record, driven by parts and service growth profit of $1.2 billion. To start with our U.S. operations, new vehicle units sold outpaced the industry. We were up 14% on a same-store basis, and up 19% on an as-reported basis. During the fourth quarter, 24% of our new vehicle sales in the U.S. were pre-sales, down from 30% in the prior quarter.

These strong unit sales, reflect the resiliency of demand, and our emphasis on driving volume. Gross profits performed about as expected, and continue on their slow glide path down, as inventories return. In used cars, retail used vehicle GPUs performed well in the quarter, increasing $160 over the prior year quarter, with unit sales remaining flat. Giving the speed and depth that the industry used car valuations declined in the U.S. during the fourth quarter, we’re pleased with our ability to hold volume and increase margin. We believe this is testament to our process discipline with pricing and our use of technology. Our F&I gross profit per unit of $2,342 only minimally declined on a same-store sequential quarter basis. It appears that finance attachment rates in used cars have now leveled off, while new vehicle finance attachment is increasing again.

We expect some continued pressure on finance penetration due to existing interest rates, and slightly tighter lender requirements for some buyers. Our after sales fourth quarter revenues and gross profits, outperformed the prior year as customer pay was up nearly 7%, and we achieved record annual parts and service revenues and gross profit in excess of $1 billion for the full year of 2023. 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. Our focus is on the after sales impact of the customer journey, specifically increasing customer attention through more convenient service hours, training of our service advisors and technicians, flexible work schedules, improved customer relationship management software, and more innovative marketing using data science and technology, to reach our customers in a more relevant and timely way.

As inventories return, it’s clear that some customers may trade in their vehicles rather than service them. However, we still see significant opportunities, to drive after sales growth in our business. As an example, we booked over 10,000 customer appointments in the quarter, using artificial intelligence, helping to meet our customers when, and where they want to engage, and to do business with us. Wrapping up the U.S., let’s shift to SG&A. U.S. adjusted SG&A as a percentage of gross, increased 260 basis points to 63.8%, down considerably from pre-COVID levels of around 70%. Despite this fact, we believe we can do more, to provide value to our shareholders. We’re renewing our focus on controlling costs, in this inflationary environment, and investing to add to the structural cost improvements made since the pandemic.

Leveraging our local and national scale, we will engage in new actions to unlock key synergies, through smart standardization across our network. Now turning to the U.K. The U.K. underperformed in the fourth quarter, largely due to a difficult used car market, underperformance in new vehicle sales volume, and a lack of cost control. This underperformance, should not overshadow what was otherwise, a stellar year for our U.K. business. Our U.K. team delivered – record full year revenues driven by all lines of service, and record gross profit, driven by new vehicles, parts, and service. We believe vehicle demand remains resilient, and new vehicle availability is still constrained, keeping new vehicle pricing and GPU strong. As of December 31, our new vehicle order bank was approximately 13,000 units, nearly five months of backlog.

As a reminder, our U.K. business is predominantly luxury, and those customers are more resilient, during times of economic uncertainty. Our U.K. operations, began a rebalancing of its used vehicle inventory, during the fourth quarter. It will continue into the first quarter of 2024. This rebalancing resulted in a $1,300 loss per vehicle sold through our wholesale channels. U.K. adjusted SG&A as a percentage of gross profit, increased 850 basis points sequentially, and 1,040 basis points year-over-year. As a reminder, during the last half of 2023, we appointed a new U.K. Managing Director and a new U.K. CFO, both of whom are deeply experienced in the retail automotive business. During the quarter, we started to implement a number of corrective actions, to address our performance.

We are revamping our marketing spend and approach, launching a new digital retail initiative, restructuring our used car operations, to focus on more proactive sourcing, valuation, and pricing. In addition, we are consolidating our customer contact center, and reducing our overall headcount by 10%. We expect these actions to produce material improvement in the months ahead. Now turning to capital allocation, we deploy a return focused capital allocation strategy that, balances portfolio management and the return of capital to shareholders, through quarterly dividends and share buybacks. During the year, we acquired expected annual revenues of $1.1 billion. We spent $173 million to repurchase 5.1% of our outstanding common shares. We paid dividends of $25 million.

We continue to explore ways to consolidate our holdings in highly profitable, scalable dealerships and dealership clusters. As an example, in 2023, we disposed of 11 dealerships with an average revenue of $37 million, and we acquired six dealerships with an average revenue of $183 million. We believe the dealership business, is the best use of capital, and we have demonstrated our ability, to successfully integrate acquisitions very quickly. We continue to explore opportunities, to capture immediate growth through acquisition, and we also believe divesting smaller, underperforming stores and brands, is a critical part of our strategy as well. We believe this approach is critical to our growth story, which leverages our scale and proven integration capabilities, optimizes our rooftop performance, and grows the company in a meaningful and incremental manner.

I will now turn the call over to our CFO, Daniel McHenry, to provide a balance sheet and liquidity overview. Daniel?

Daniel McHenry: Thank you, Daryl and good morning, everyone. As of December 31, we had $57 million of cash on hand and another $275 million invested in our floor-plan offset accounts, bringing total cash liquidity to $332 million. We also had $463 million available to borrow on our acquisition line, bringing total immediate available liquidity to $795 million. In the full year, 2023, we generated $720 million of operating cash flow and $581 million of free cash flow, after backing out $139 million of CapEx. This capital was deployed through a combination of acquisitions, share repurchases, and dividends. In the fourth quarter of 2023, we spent $42 million repurchasing approximately 161,000 shares at an average price of $262.25, resulting in a 1.1 reduction in share count, over the quarter.

For the full year of 2023, we repurchased 729,000 shares at an average price of $236.78, resulting in a 5.1 reduction in share count over the year. Our share count as of today, is down to approximately 13.7 million. Our balance sheet, cash flow generation, and leverage position, will allow us to continue to support a flexible capital allocation approach, including consideration of share repurchases, in addition to pursuing growth opportunities. Our rent adjusted leverage ratio as defined by our U.S. syndicated credit facility was 2.1 times at the end of December. Our strong balance sheet will continue to allow, for meaningful and balanced capital deployment. Our quarterly floor-plan interest of $19.4 million was an increase of $9.7 million from the prior year due to higher vehicle inventory holdings.

Current year floor-plan interest of $64.1 million was an increase of $36.8 million. We effectively manage our floor-plan interest expense by holding excess cash in our floor-plan offset accounts, reducing the balance exposed to interest as well as through our portfolio of interest rate swaps, which saved us $2 million of interest rate expense, versus a comparable prior year quarter and $14.6 million versus a comparable prior year. Quarterly non-floor-plan interest expense of $27.7 million, increased $5.7 million from the prior year, and current year non-floor-plan interest expense of $99.8 million, increased $22.3 million. Similar to our floor-plan interest rate swaps, our mortgage swap portfolio saved us $1.6 million in the current quarter, versus the comparable period, and $15.5 million in the current year, versus the comparable period.

As of December 31, approximately 60% of our $3.7 billion in floor-plan and other debt was fixed. Therefore, the annual EPS impact is only about $0.81 for every 100 basis points increase in secured overnight funding rate or SOFR, which is the benchmark rate referenced in our floor-plan and mortgage debt instruments. For additional information regarding our financial condition, please refer to the schedules of additional information attached to the news release, as well as the investor presentation posted on our website.

Daryl Kenningham: Thank you, Daniel. In 2024, we expect to aggressively pursue M&A opportunities that, are accretive to our business. Our well-positioned balance sheet, is a source of strength that, we believe provides a significant runway, for our more aggressive growth strategy in 2024. In addition to our balance sheet strength, we’re proven integrators with a track record of extracting additional value, from M&A opportunities, beyond the initial economics. Thank you for your time today, and we look forward to speaking with you throughout 2024. This concludes our prepared remarks. I’ll now turn the call over to the operator to begin the question and answer session. Jamie?

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Q&A Session

Operator: [Operator Instructions] Our first question today comes from John Murphy from Bank of America. Please go ahead with your question.

John Murphy: Good morning, guys. I guess the first and biggest question is Daryl is on the U.K. used business, and the business in general over there. What exactly is going on? I mean, did the team get a little bit too extended in used vehicle inventory, and weren’t tight on turn-to-earn strategies? Is there something else sort of bigger and more problematic there? And is this the kind of thing that, we’ll see you work out of in the first quarter, and by the second quarter, we’re closer to normalized?

Daryl Kenningham: I think to answer your last question first, John, this is Daryl, by the way. Yes, we will see improvement in Q1 and then hopefully, it’s behind us in Q2. I think, there are a few things that drove, the issues in the U.K. in the quarter. The used car market is very challenging, saw a couple of warnings from some of the used car retailers in the U.K. during the quarter. And I think, the process that we had in place, which we have since changed, and gone to a more centralized process of valuation and pricing, that wasn’t really conducive to a really dynamic market, just to be totally candid with you. So, we’ve centralized that with a team of experts and better visibility, and transparency and more accountable decision-making, and we believe that will show immediate benefits. So those were – that’s my take on what the issues were on used cars.

John Murphy: Okay. And then just maybe one follow-up, just to hear back in the U.S. I mean, there’s lots of cross currents and stories positively and negatively on the U.S. consumer. I’m just curious in your showrooms, in your discussion with your GMs, what is the state of play of ops walking into dealerships or hopping online to accelerate? So what’s the mood and tenor of those discussions? I mean what’s your take on demand for this year?

Daryl Kenningham: Mood’s good. Traffic counts are good. We were really pleased with our growth in the quarter, especially a new vehicle. 14% same-store growth outpaced the industry. And we were encouraged. Inventories, while they’re returning, the day supply is manageable. So the demand is soaking up that additional production. And we were ecstatic, especially with the last few days of December. I mean, really just some really record days that were really good to see. And so to me, that portends good things for 2024. The margins have come down about what we expected, about $100 a month, and that’s kind of where they continue to trend. And you see some changes between franchises a bit. But generally, it’s as predicted, and I would say demand looks good.

Operator: Our next question comes from Adam Jonas from Morgan Stanley. Please go ahead with your question.

Adam Jonas: Hi, Daryl. Hi, Daniel. Thanks for taking the question. You guys have really super strong exposure to the Japanese OEMs, and they, in turn, very well positioned for hybrids and plug-in hybrids. So, I was curious your commentary on inventory levels, for those vehicles that seem to be, still in tight supply. I mean, I wouldn’t be shocked if you saw hybrid sales up, shoot, 40%, 50%. I mean, like really, really high this year. But I didn’t know if you wanted to add some color on that part of the market. And then for dealers where you do have electric vehicle offerings, what’s your latest on the ground from the floor sentiment indicator on consumers? It seems like demand’s slowing, but I didn’t want to assume anything without hearing from you guys? Thanks.

Daryl Kenningham: Sure thing, Adam. This is Daryl, and I’ll encourage Daniel to chime in as well. To answer your question on hybrids, hybrids are fabulous. And I use Toyota as an example. One of the hottest vehicles we have anywhere in our dealerships is a Toyota Sienna. It’s an all-hybrid power plant. And believe it or not, a minivan being one of the hottest vehicles we’ve got. The new Camry is coming out with an all-hybrid powertrain, which I think is an indication of what it is. The General Motors announced new plug-in hybrids coming to the country soon. They announced that yesterday, I believe. So hybrid demand is really good. And across – the brands that we have, and that’s what we see. EV, we see softening in EV. We do see some moderation in the production levels.

But we do definitely see softening, especially in the U.K. And – that’s what drove some of the new car issues, for us around London in December, in the fourth quarter was that – this is, not the much softer U.K. demand on EVs. And in the U.S., I don’t know that I’m going to give you any perspective that, you don’t already have on it, but definitely a softening. We see pressure on gross margins on EVs that, we certainly don’t see on hybrids, or ICE vehicles in the U.S.

Daniel McHenry: Adam, it’s Daniel here. Just to add to what Daryl says, in terms of the percentage of our total inventory units, and EV in quarter three was 6.5% and it’s still 6.5% today. So, we haven’t seen any particular increase, as a percentage of total inventory, or in terms of EV.

Adam Jonas: I appreciate that. If I can just squeeze in one more on floor-plan interest. I didn’t know if you had a blended, Daniel, a blended view on what your floor-plan interest is today, and kind of where it might have moved. My check suggests that it was looking kind of scary in the fall, so maybe it’s moderated a bit, and maybe on the leading edge, maybe coming down a bit, following the market rates. But I just wanted to know if you could put a number on that? Thanks, guys. Thanks for taking the questions.