Q1 2024 Asbury Automotive Group Inc Earnings Call

Participants

Chris Reeds

Daniel Clara; SVP of Operations; Asbury Automotive Group, Inc.

David W. Hult; President, CEO & Director; Asbury Automotive Group, Inc.

Michael D. Welch; Senior VP & CFO; Asbury Automotive Group, Inc.

Bret David Jordan; MD & Equity Analyst; Jefferies LLC, Research Division

David Whiston; Sector Strategist; Morningstar Inc., Research Division

John Joseph Murphy; MD and Lead United States Auto Analyst; BofA Securities, Research Division

Rajat Gupta; Research Analyst; JPMorgan Chase & Co, Research Division

Ryan Ronald Sigdahl; Partner & Senior Research Analyst of Institutional Research; Craig-Hallum Capital Group LLC, Research Division

Presentation

Operator

Greetings, and welcome to the Asbury Automotive Group First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.
(Operator's Instructions)
I would now like to turn the conference over to your host, Chris Reeds, VP of Finance and Investor Relations.

Chris Reeds

Please go ahead. Thanks, operator, and good morning. As noted, today's call is being recorded and will be available for replay later this afternoon. Welcome to Asbury Automotive Group's First Quarter 2024 Earnings Call. The press release detailing Asbury's first quarter results was issued earlier this morning and is posted on our website 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 remarks, we will open up the call for questions, and we 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 2023, 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 website. We have also posted an updated investor presentation on our website, investors.asburyauto.com, highlighting our first quarter results. It is my pleasure to now hand the call over to our CEO, David Hult. David?

David W. Hult

Thank you, Chris. Good morning, everyone. Welcome to our first quarter earnings call. I want to start by saying I am proud of the hard-working efforts of our team members who delivered our first ever quarter of more than $4 billion in revenue. As we continue to progress along our growth strategy, it is important to reflect on the performance of all of our team members, leaders and platforms that are powering our path forward, including our first fully operational quarter with our new team members from the Koons Group. Thank you all very much. In our second quarter 2023 earnings release, we said there would be integration-related headwinds to our parts and service business that will extend into the third and fourth quarter before improving in Q1 of 2024. This quarter's performance shows we are progressing and expect this portion of the business to grow at mid-single digits or higher through year-end. In the fourth quarter earnings call, we discussed our commitment to a more aggressive stance in our preowned sourcing. We maintain same-store PVRs quarter-over-quarter and increased same-store unit volume by more than 9% or 2,700 units versus the fourth quarter of 2023.

Now for our consolidated results for the first quarter. We generated $4.2 billion in revenue at a gross profit margin of 17.9%. In our SG&A as a percentage of gross profit was 62.5%. We delivered an operating margin of 6.3%. Our earnings per share was $7.21 and our EBITDA was $259 million. As part of our multiyear capital allocation plan, we repurchased 240,000 shares for $50 million in the first quarter. We continue to be opportunistic with our capital deployment, prioritizing the most strategic and accretive use of capital. We continuously evaluate the performance of our portfolio, making acquisitions or divestitures where it makes the most sense. We divested Alexa store in Delaware during the first quarter per our OEM framework agreement, and we will monitor opportunities to make other changes to the portfolio throughout the year. Looking ahead, there are factors like our brand mix that may influence our volumes on new and lead to near-term headwinds on performance. We are still in a tight market when it comes to sourcing quality used vehicles efficiently, and we will continue to prioritize profitable growth.

I'd also like to highlight that we published our corporate responsibility report this month. We invite you to read it if you haven't already. Now before I hand the call over to Dan, I want to say thank you again to our team members as together we strive to be the most gas-centric automotive retailer. Now Dan will discuss our operational performance. Dan?

Daniel Clara

Thank you, David, and good morning, everyone. I'll join David and also thanking our team members driving our strong results and delivering a best-in-class experience. Now moving to same-store performance, which includes dealerships in TCA unless stated otherwise. Starting with new vehicles. Overall, we were pleased with our new vehicle PVR performance given current market conditions. Same-store revenue decreased 1%, and new unit volume was flat to prior year. New average gross profit per vehicle was $3,988, and the new vehicle gross margin was 7.8%. Our same-store new day supply was 53 days at the end of March compared to 43 days at the end of the fourth quarter, a trend consistent with industry-wide growth in inventory. We continue to manage to an appropriate day supply and volume in new cars, given our brand mix. Turning to used vehicles. Used retail revenue decreased 4% for the quarter as we expected due to lower cost of sales. Unit volume, while down less than 2% year-over-year increased on a sequential basis, as David mentioned earlier.

Used retail gross profit per vehicle was $1,647, roughly in line with the fourth quarter of 2023. We appreciate the progress of the team's performance on volume and gross profit in such a challenging environment. Our same-store used DSI was 25 days supply. We still view 2024 as a challenging year to acquire preowned vehicles until supply returns. Shifting to F&I. We delivered an F&I PVR of 2,218 in the quarter, holding resilient amid continued pressure on consumer payments. On a consolidated all-store basis, our PVR was $2,259. The deferred revenue headwind of TCA contributed $67 or the $85 decrease in consolidated F&I PVR number year-over-year, and we anticipate this headwind to be impactful throughout 2024. In the first quarter, our total funding yield per vehicle was $5,080. Moving to parts and service. Our parts and service gross profit grew 6%, and we earned a gross profit margin of 56.9%, an expansion of 213 basis points versus prior year first quarter despite weather issues in several of our markets. The last several quarters, as we mentioned, were impacted by integration efforts, and it is encouraging to see our fixed operations business return to growth.

The hard work of our teammates and leaders is paying off, and we expect even better performance in the quarters ahead. Finally, on a same-store basis, we retailed 10,833 units through Clicklane or about 16% of overall units. New vehicle represented 5,186 of these units, a 14% increase in new volume over first quarter last year, and those vehicles are making up a larger portion of Clicklane transactions versus the first quarter of 2023. Consistent with recent trends, over 90% of customers are new customers to Asbury, and we remain committed to this key differentiating omnichannel tool. I will now hand the call over to Michael to discuss our financial performance. Michael?

Michael D. Welch

Thank you, Dan, to our investors, analysts, team members and other participants on our call good morning. I would like to provide some financial highlights for our company for additional details on our financial performance for the quarter. Please see our financial supplement in our press release today and our investor presentation on our website. Overall, net income was $147.1 million, and EPS was $7.21 for the quarter. There were no non-GAAP adjustments to net income for the first quarter of 2024 or 2023. SG&A as a percentage of gross profit came in at 62.5% versus 61% in the fourth quarter of 2023, driven by higher service loaner costs, elevated advertising expenses and several Q1 specific costs, namely share-based compensation. For the year, we expect SG&A as a percentage of gross profit to be in the low 60s. Tax rate for the quarter was 24.9%, and we estimate our tax rate for the full year 2024 to be approximately 25%. TCA generated $19.5 million of pretax income in the first quarter, and we anticipate full year results to be between $30 million and $45 million on a pretax basis. We plan to offer TCA across our remaining stores in Florida and cons later this year. For the quarter, we generated $209 million of adjusted operating cash flow, a portion of which was used to our previously mentioned share repurchase activity.

Excluding real estate purchases, we spent $26 million on capital expenditures in the first quarter, and we anticipate full year spend to be $200 million to $225 million. Free cash flows of $183 million for the quarter. We ended the quarter with $712 million of liquidity, comprised of floorplan offset accounts, availability on both our used line and revolving credit facility and cash, excluding cash of total Parada. While we will continue to use our floorplan offset account to manage interest expense, we expect floor plan costs to remain relatively flat through the year as we balanced the impact of rising inventory levels with the opportunity cost of deploying the cash to more accretive activities. Our pro forma adjusted net leverage was 2.6x at the end of March, and we will continue to be opportunistic in our capital allocation approach across share buybacks, M&A and organic investment opportunities. Finally, I would like to join David and Dan as we thank our valued team members and leaders for a strong quarter and start to the year. Thank you. This concludes our prepared remarks. We will now turn the call over to the operator, and thanks for your questions. Operator?

Question and Answer Session

Operator

Thank you.
(Operator's Instructions)
Our first question comes from the line of John Murphy with Bank of America.

John Joseph Murphy

Just Dave, just one quick question on the store that was sold per framework agreement. I'm just curious if you can sort of discuss what that brand is or was? And how the framework agreements are potentially morphing or easing as you guys are on the acquisition pace and other stronger acquisition pace or maybe not changing at all?

David W. Hult

Sure, John. This is David. I'll take my best shot at it. The store divested of was the Lexus store. We are limited in every framework agreement we have with every manufacturer is different. And we're limited to only own 8 Lexus stores in the U.S., and that's consistent with the brand, whether you're public or private. So whenever we buy a group that has a lexus store and then if we're captatured 8and we have 8, it's always going to include a divestiture at some point in time. There's extreme differences within framework agreements between all manufacturers. So there's no easy way of stating it. But I'll tell you, our framework agreements haven't changed in a while. Some have been updated in the last couple of years. And based upon our geographic locations of our stores and our brand mix, we're not governed at this point to grow other than with specifically the number of Lexus stores we have.

John Joseph Murphy

Got it. Okay. That's very helpful. And then the used environment seems like it's challenging from a supply standpoint. Given that we've sold so few vehicle -- new vehicles in the past 3 or 4 years, when is your expectation of that supply actually improving? It seems like that's more like potentially even a 26 event as opposed to a 25? And what can you do in the interim to deal with that shortage?

David W. Hult

Generally, we've been focused on gross profit over volume. And as we said in the fourth quarter, we're going to kind of pivot a little bit. Historically, our company purchases about 10% outside of our structure, cars to bring in to sell. Last quarter is about 20%, which obviously put pressure on our PBR. To your point, really since COVID began up 2 or 3 years forward, there's really a depletion of multiple millions of vehicles that didn't hit the market. So we're in that pool now where this year, and I believe next year to is going to be a more challenging year. I think this is the toughest year. I think you get some relief next year with some fleet business from rental car companies and that stuff. But I would think normalization would be early '26 potentially into '25.

John Joseph Murphy

Got it. And then just one last one on parts and service. I mean 6% was great. It was actually up against a somewhat tough comp. As we think about the rest of the year, the comps get a bit easier. It sounds like you're making progress in acquired stores that are going into the base. Could we think about a 5% plus parts and service or sort of high single-digit parts and service same-store sales comp maybe for the remainder of the year and potentially maybe even beyond that?

Daniel Clara

John, this is Dan. I'll start and then David can add on whatever I miss. Yes, we're very happy with the progress that the team members are making and have shown over the past few quarters as we integrated the new acquisition. And to answer your question directly, yes, I think that that's a realistic target as we continue through 2024 million to 5% growth.

David W. Hult

No, John, I really don't have anything to add. I would tell you we're pleased with the margin increase. Like everyone else in the first quarter, we suffered some shutdown of some days in the Mountain States because of heavy weather. Between Colorado and Utah and Idaho, we have almost 40 stores, I think, 38 stores to be specific. And we had multiple days that we were shut down and you just can't make up for those fixed days. But as Dan stated, the progress is certainly good. It's continuing into this quarter. And to your point, the second half of the year as our comps get easier. So we should certainly see a minimum of 5% or greater.

Operator

Our next question comes from the line of Rajat Gupta with JPMorgan.

Rajat Gupta

Great. Just had a question on SG&A first. It looks like there was some deleveraging here in the quarter because of the weak domestic brand unit sales and maybe still a little slower growth in service business. But curious, as a service business now returns to mid-single-digit type growth and whatever you're embedding in terms of new GPU expectations for the course of the year? And how should we think about that SG&A to growth ratio moving forward from these levels? And I have a quick follow-up.

Michael D. Welch

This is Michael. On the SG&A side, we'll have the continued decline in new vehicle gross profit, which will put pressure on the SG&A. But to your point, the return of fixed off to good growth and then a few items that are unique to the first quarter that we're going to be able to cut some costs out later in the year. We think we can hold these kind of low 60s levels for SG&A percentage of growth going forward.

David W. Hult

And Rajat, I'll just add to that. While the domestic volume was not great. I still think PBR, like 3,900 all is extremely healthy. And certainly, you can maintain SG&A costs in that market. Brands are cyclical as far as how as they go. We have a heavy mix of Stellantis. And it was a tough quarter for Stellantis as everybody knows, and certainly was for us as well. But we know over time that will change.

Rajat Gupta

And what's the kind of like GPU decline like you or assuming like the same pace for the rest of the year, like on the first quarter or...

David W. Hult

Yes, our assumption is $300 a quarter, but you could have a plus/minus in any given quarter to kind of the natural trend of kind of $300 over the next few quarters.

Rajat Gupta

Got it. Got it. And just a follow-up on capital allocation. You mentioned earlier on like using the full plan offset as like a lever to manage those for plant expenses. But you did buy back some stock here in the first quarter. Like how should we think about that decision between buyback versus M&A in the current backdrop and what you're seeing in your pipeline for deals today?

David W. Hult

I would say our opinion, we're proud of our business and our operating margins, and we think that our multiple is low. And generally, when you look at that, it seems like it's a better return to potentially look at stock buybacks. In the current market that we're in, there's certainly a lot of stores on the market from an M&A standpoint. But I think we really want to be extremely selective. It's never been about the growth for us and how large we get. It's really about the returns for our shareholders and how well we run our business. So every month, we're constantly evaluating what's the best use of capital. But I would say from an acquisition standpoint, it would have to be something that was accretive for us and really interesting for us at this stage.

Michael D. Welch

And on the floor plan expense side, the increase in inventory over the rest of the year and then some of the cash will be able to put to the offset count. We think that floor plan expense number for the first quarter will continue through the rest of the year, again, increased inventory and then a little bit of cash going into the offset account.

Operator

Our next question comes from the line of Ryan Sigdahl with Craig Holland Capital Group.

Ryan Ronald Sigdahl

I want to say on the use side. So you have challenges on the used vehicle supply that's fairly obvious across the industry. Your GPU was down sequentially despite favorable industry seasonality or peers being up, et cetera. So I guess curious to dig a little bit deeper on your takeaways, kind of in early metrics, positive and negative from leaning volume relative to your internal expectations when you made that strategy pivot.

David W. Hult

Yes. And I mentioned it earlier. I would say we -- percentage-wise, we doubled the number of cars we purchase. We make significantly less gross profit on a vehicle that we have to purchase because we're competing to buy it within the market. When we trade in a vehicle, we're still north of $2,000 a vehicle, and we think that's very healthy. Some of the benefits, I'm sure our peers have discussed it in the past, -- is your parts and service increased business from reconditioning cost and the F&I income that you pick up as well. But there still has to be a healthy balance, and you really have to make sure you maintain what we would think would consider a healthy front-end margin on preowned. Dan, I don't know if there's any you want to add.

Daniel Clara

I'll just add a little bit more color. And yes, we saw sequentially dropping, I think, from 1666 to1,6.47 from a PBR standpoint, back to your point. But then from a new car -- I mean, from a used cost standpoint, I believe we increased it 9% sequentially quarter-over-quarter. And that just goes to validate the strategy adjustment that we made that we announced at the end of Q4 in 2023, that we were going to get more aggressive goal after the volume because we know back to what David stated, the benefits that it brings to our internal gross profit in parts and service, F&I and then obviously, putting another unit in operation out there that we can service down the road.

Ryan Ronald Sigdahl

Helpful. Anything else on -- from a regional standpoint? I know you called out some weather impact, but anything Southeast, Southwest, Texas to call out?

David W. Hult

No, I would say -- I mean, for us, it was fairly stable. We saw a little bit of a hit for us in full-size trucks. -- from a year-over-year perspective. But the imports performed extremely well. We have a very low day supply of them, probably could have done better there as well. We had the tough headwind for Stellantis. -- but the other 2 domestic brands held up pretty well in the quarter. In luxury is very stable for us. So all in all, based upon the market and what went on in the first quarter, we're pleased with what the team did from a performance standpoint.

Operator

[Operator's Instructions)
Our next question comes from the line of Bret Jordan with Jefferies.

Bret David Jordan

New GPUs, I think you talked about 300 a quarter for the next few quarters. Is it reasonable to think then the 3,000-ish is the -- is what you expect to be the new base level for new GPUs?

David W. Hult

Yes. Bret, this is David. It's really tough to navigate. Will it be rate drops throughout the year. How aggressive do the incentives get. It still the adage of supply and demand. Right now, the demand is high on imports, the day supply is low. So the margins are holding up really well. In the near term, we don't see that dramatically changing. So we think that holds up pretty well. Even back in '19 and before, our domestic gross profits were always pretty healthy. because now the amount of domestic stores we've added out in the Mountain States, we anticipate that will do well and certainly above what '19 did. And luxury is going to be mixed as well, but that's a pretty resilient market. Our margins are still really high. There may be some fall off there. But we think wherever the falloff is it's significantly above where it was in the past, which gives us a good edge into keeping our SG&A down.

Bret David Jordan

Okay. And then on Clicklane. -- you talked in the past about those transactions usually physically close to the sampling dealership. Is that still the case? And I guess, what are you seeing in F&I attachment in those online transactions?

Daniel Clara

Brett, this is Dan. Yes, we are still seeing the average delivery distance in Q1 of 2024 was 49 miles. So pretty consistent to what we have seen in Q4 '23, that was 51. And then just as a reference point in Q3 of '23 was 40 miles. So pretty consistent with what we're seeing there. From an F&I PVR, we are looking at for the Q1 to '24, we finished around $21.90 a car, which is slightly below about 1.3% below sequentially and about 3.7% behind last year. So we are happy with the numbers. Like I stated in my script earlier today, we're committed to this omnichannel, and we strongly believe that it is going to continue to enhance the guest experience.

Bret David Jordan

Great. And I could slip one more in. I guess, what are you seeing on OE lease promotions? Are they ramping up lease focus in the lines where inventory is building or is that pretty stable?

Daniel Clara

We are starting to see, yes, increasing slightly. And obviously, it depends by OEM as well. But to answer your question directly, yes, we're starting to see a slight increase.

Operator

Our next question comes from the line of David Whiston with Morningstar.

David Whiston

First, a 2-part question on consumers' willingness to spend. Unit volume for luxury was down just a little bit, whereas as you noted, import is doing quite well still on the volume side. And so is there any hesitation with luxury customers on spending money in any way? And then also across all of your segments of volume more luxury, is there any hesitation on consumers in terms of not getting a vehicle option they would have a few years ago or not doing TCA or not getting an F&I product attachment they would have earlier?

David W. Hult

It's a great question. I would tell you with any new hot luxury vehicle that comes out regardless of the price point, they sell right away, they're presold. So I think it's more of a timing issue. From our perspective, we view the first quarter as being stable, and we actually thought it was pretty good. There's still some transitioning within the luxury brands with model mix and timing, and you never have enough of the SUVs and you might have a few extra EVs, and that's balancing out as well. But I think it's pretty healthy there, and that luxury customer is pretty resilient. When you get to the import side, and even domestic, and then Dan could add more color to this than I can. But you're reaching a price point with those interest rates where they are, it's affecting the F&I numbers a little bit. It's affecting the cost of sale.

You've seen it come down. I think our cost of sale unused was back in '22 at a high of like $325 -- so it's down dramatically and it's continuing to come down. But on the new side, it's only coming down slightly because the build probably hasn't caught up yet. So there is a little bit of pressure, but still, again, on the import side, if there's a new product coming out, like anything else. The demand is higher than supply and the margins are holding up well. So the market, we feel has been pretty resilient. We don't think that we can sustain another rate increase or 2, I think that would be a little painful for us. But so far, I would say, generally speaking, the customer base has been fairly resilient. Dan anything you want to add?

Daniel Clara

I agree, nothing to add.

David Whiston

Okay. On the balance sheet and capital allocation, there's buybacks in M&A, but there's also possibly debt reduction, but the earnings normalizing. Do you feel the need to accelerate that reduction at some point this year?

Daniel Clara

No. I mean our stated range is kind of 2.5% to 3%. If we don't find anything good returns, and we will be good, but the share buybacks acquisitions are a good allocations, but we don't need to get it down kind of into the below 2.5. But we'd like to be in this kind of mid-2% range with the EBITDA coming down -- or the gross profit coming down on the new vehicle side.

David W. Hult

And I would say with the stacks we have out there with the bonds, you can only chip away so much of it. And the big stack that's in 26 is really mortgages at considering the rates in the market significantly lower than what the market rates are. So it's really tough to justify taking that capital and paying off 3% debt.

David Whiston

Okay. And on -- you mentioned you probably can't handle rates going up much. But if we were to actually get even one rate cut, is that going to matter in your opinion this year? Or do we need multiple rate cuts for the consumer to feel better?

David W. Hult

Yes. This is just an opinion. Obviously, no way of knowing, but I don't think one rate cut is going to -- it's a nice park. It will probably do well for the market for the day or so. But from our standpoint, it probably needs 2 or 3 rate cuts for us to really, what I would call a tailwind for us.

Operator

Thank you. Ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the call back to David Hult for closing remarks.

David W. Hult

Thank you, operator. This concludes our call today. We appreciate everyone's participation, and we're looking forward to speaking with all of you at the end of the second quarter. Have a great day.

Operator

This concludes today's conference. You may now disconnect your lines at this time. Enjoy the rest of your day.