Q1 2024 Group 1 Automotive Inc Earnings Call

Participants

Peter Delongchamps; Senior Vice President, Manufacturer Relations, Financial Services and Public Affairs; Group 1 Automotive Inc

Daryl Kenningham; President, Chief Executive Officer, Director; Group 1 Automotive Inc

Daniel McHenry; Chief Financial Officer, Senior Vice President; Group 1 Automotive Inc

John Murphy; Analyst; BofA Global Research

Michael Ward; Analyst; Freedom Capital Markets

David Whiston; Analyst; Morningstar, Inc.

Rajat Gupta; Analyst; JPMorgan

Glenn Chin; Analyst; Seaport Research Partners

Presentation

Operator

Good morning, ladies and gentlemen. Welcome to Group one Automotive's First Quarter 2024 financial results conference call. Please be advised that this call is being recorded. I'd now like to turn the floor over to Mr. Pete DeLongchamps, Group one's Senior Vice President of Manufacturer Relations, Financial Services and Public Affairs. Please go ahead, Mr. DeLongchamps.

Peter Delongchamps

Thank you, Jamie, and good morning, everyone, and welcome to today's call. The earnings release we issued this morning and the 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 one'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 one. 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 Inchcape acquisition and adverse developments of 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. Daryl telling him 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.

Daryl Kenningham

Good morning, everyone. Last week we announced our acquisition of Inchcape retail, the largest dealer dealership transaction in Group one's history. We're thrilled to have successfully come to an agreement with Inchcape plc on this generational acquisition. There are several benefits to Groupon. 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 one UK with Inchcape will benefit all of our UK stores and Inchcape is accretive from day one. And we will 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 investments. The return generated through that modeling as compared to the expected return of repurchasing our stock or 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 US.
What's also important to note is that we've 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 fourth 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 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 UK, our teams reacted well, our used car inventory is very healthy. Our grosses have returned and we've implemented significant expense reductions. Daniel McAndrew 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 embed that and execute against them. 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 said OEM relationship growing in importance, and we believe the Inchcape acquisition allows Groupon an outstanding opportunity to demonstrate that.
Now I'll turn the call over to Daniel McKenzie for an operating and financial overview. Daniel?

Daniel McHenry

Thank you, Daryl, and good morning, everyone. In the first quarter of 2024 Group one, automotive reported $130 million in adjusted net income and delivering it 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 US 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 US were pre-sales, down from 24% in the prior quarter. The strong unit sales reflect the resiliency of demand on our emphasis on driving volume. Gpus performed about as expected and continue under slow glide path down as inventories retired and used cars GPUs increased $245 sequentially with units sales up 8%, giving 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 increased volume. We believe this is testament to our process discipline with pricing on 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 in 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 aftersales the scenario for Group one to differentiate, and we will continue to invest in that part of our business.
Wrapping up the US, 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 Q4 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 pressure experienced in the fourth quarter of 2023 and improved cost control as we work to remove costs throughout the quarter, while wholesale losses were down 34% per units versus the sequential quarter, we experienced an even steeper improvement in February and March. Used vehicle gross profit per unit improved $229 are 20% on a sequential quarter basis. We believe backhaul demand remains resilient and new vehicles availability is still constrained, keeping new vehicle pricing and GPUs elevated. As of March 31, 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, 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 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 floorplan offset accounts assessable 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 $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 US syndicated credit facility was 2.45 times at the end of March. Our strong balance sheet will continue to ally for meaningful and balanced capital deployment. Our quarterly floorplan 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 floorplan interest expense by holding excess cash in our floorplan 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 expense versus the comparable prior year quarter. Quarterly non floorplan 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 swaps, increased mortgage related borrowings and higher interest on existing borrowings. Our floorplan 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 floorplan and other debt was fixed. Therefore, the annual EPS impact is only about $1 and $0.05 for every hundred basis point increase in secured overnight funding rates are so far, which is the benchmark rate reference in our floorplan and mortgage debt instruments.
Let's turn to capital allocation. We deploy our return-focused capital allocation strategy that balance of that balances opportunistic of 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 unpaid 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. I 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 scale 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?

Question and Answer Session

Operator

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 speakerphone, we do ask that you please pick up your handset prior to pressing the key 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.

John Murphy

And good morning, everybody on your Derek. Just a first question on the Inchcape in the acquisition on your it sounds like it's an interesting acquisition. I'm just curious if in addition to sort of the benefit of acquiring a good a good company on viewing and growth 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 just maybe if you can update us on sort of the turn and actions that have taken that business and where that stands? So it sounds like Inchcape might be a lot more than just dumb a good acquisition It might help us a lot of the management issues.

Daryl Kenningham

thank you, John. You know, we bought eight Inchcape stores a few years ago and the talent level at Inchcape is fabulous. The heads of business that run those stores for us today, all came from Inchcape and we are excited about the talent level and the management depth at Inchcape. They are they are really, really have some fabulous people. And so I can affirm that we are excited about that. And that is definitely an add-on benefit for us.
So and on the specific actions that we took in the fourth quarter in the first quarter to get our own issues behind us and our own new Corus Quay operation, we went through a cost cutting exercise on an SG&A basis that touch the variety of parts of the Company and turn and including a head count. 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 used car aging in turn, made some organizational changes around that to put some more focus on it. And we are pleased with the results we saw in the first quarter. We believe some of those actions will result in improved performance throughout the year.

John Murphy

And then if I could just sneak in one follow-up. You mentioned something about the partnerships with OEM.s improving. I was just wondering if you can maybe talk about that a bit and maybe on the level of your 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? And I don't know if you could touch on those three and generally kind of what your what you mean by improved partnerships with OEMs?

Daryl Kenningham

Well, I think from 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 U.S. And I think they really value the right partner. And I think they really are trying to drive that this specifically in certain brands. And and they do that through the way they work with us on acquisitions, the creativity that we apply and the opportunities that are 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 brands successful. And I think they're recognizing that more everyday. So that's why I say that. And I think that applies not just that, 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 for dealer groups that can innovate. And I think that helps in those areas.

Operator

Our next question comes from Michael Ward from Freedom capital. Please go ahead with your question.
Mr. what does it harder? Are you there?

Michael Ward

I'm sorry. Good morning, everyone. Can you hear me?
Okay. Daniel, could you shed some color on the acquisition costs in 1Q and maybe you maybe never even netted out with the sales. And then with the instrument Inchcape acquisition, you have the acquisition and the real estate or is it one price?

Daniel McHenry

So let's start with the Inchcape acquisition price. The price that was quoted in our press release included the real estate for Inchcape So effectively, the [GBP220] million that was quoted was for real estate and and the balance between the price quoted and the [220] million was effectively the goodwill and all other net assets and yield for the deals that we've done in the US. And we typically don't quote the price that we that we pay for those deals. And however, what I will say that all of those deals that fell within our return model. And so we model on the basis of a discounted and cash flow and basis. And we have a targeted rate of return of approximately 12% on those acquisitions. And all of those acquisitions fell, but within those targets.

Michael Ward

Okay. So netted out though with somewhere in that neighborhood of about 200 million. Then it sounds like between buying in is some of the proceeds from the disposal?

Daniel McHenry

It will be it will be more than that, Mike, going on,

Michael Ward

for 1Q,

Daniel McHenry

for 1Q. Correct.

Michael Ward

Okay, okay. And just one last thing on Inchcape. I wonder if you could talk a little bit, Darryl about some of the longer-term relationships and how that came about. You said you acquired eight other stores from them at some previous points. 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 have been in pretty well like prime fitting pretty well to the Groupon network.

Daryl Kenningham

Yes, we were when we bought some of Inchcape sports stores and Volkswagen stores and <unk> seven or eight years ago, and and the integration was very good. Inchcape Inchcape has been in the retail business, the UK for 50 years, and they're sophisticated operator. And we really benefited from some of the things they brought us on that acquisition and the OEM mix that 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.
Yes, that's those those relationships for us go back quite a ways and bridge and often often bridge both countries.

Operator

And our next question comes from David Whiston from Morningstar. Please go ahead with your question.

David Whiston

Thank you. Good morning. Um, just a couple for me on some unused. You guys continue to do pretty well there despite all the pressures in that space. And do you have any kind of national algorithm or is it just more of a data approach? That's a bit less centralized?

Daryl Kenningham

We're getting more centralized, Stephen one with the technology we use and we switch technology about a year ago, you're going to have to go moving, and I think we're leveraging it better today. We also have made some changes in some of our aging policies some of our intracompany 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 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 velocity and the year-over-year improvements in place and the PRU is holding up well. So I think it's a variety of things that the team is doing we're approaching it more more on a standardized basis than we ever have. And we're we have more resources on it today than we ever have.

David Whiston

And in the US market are you seeing any kind of a meaningful increase in leasing yet?

Daryl Kenningham

Actually, our leasing was out of second quarter, but it's up significantly from where it's been the last couple of years. So we've got the number in our deck.

Daniel McHenry

I think we do it, David, it's Daniel here at new vehicle leasing year on year, so quarter one, '24 versus quarter one '23, we saw 460 basis point increase. So leasing today is up to 18.6% of our new vehicle sales.

Operator

And our next question comes from Rajat Gupta from JPMorgan. Please go ahead with your question for.

Rajat Gupta

Great. Good morning.
Thanks for taking the questions. On. Our first one was on armed services of here. Pretty pretty good growth now in customer pay and warranty on mobile, it looks like collision and wholesale parts or wear slow and especially collision was weak. And any sense of you know, what drove what drove that reversion? One of your peers reported yesterday also, which was quite weak in that category. I'm just curious like how should we think about that part of the service business recovering and also the wholesale parts. And just in the context of the overall service growth as well, how should we how should we see things trending through the course of the year.

Daryl Kenningham

I have a follow-up couple of comments, Roger, 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 on. And that is that is certainly impacting the collision business, which will have some effect that affect the wholesale parts business.
Also, 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 were generating positive returns on that. So that could be affecting some of that. Some of that revenue on the wholesale parts business, but we were pleased with the CP performance, as you mentioned, and we were added we added and more technicians year over year, and that continues to be a focus for us.

Rajat Gupta

Got. I mean, should we expect this kind of a year-over-year growth rate to continue for the remainder of the year? Or should we expect no from kind of like improvement or is this a good level to assume for the remaining of the year? The overall Parts and Service segment?

Daryl Kenningham

I think we're kind of comfortable with where we are today as trend estimate where we will be in the future.

Operator

Our next question comes from Glenn Chin from P core research partners. Please go ahead with your question.

Glenn Chin

Good morning, folks. Tom, just going back to the UK cost cuts, can you share with us how much of benefit 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 million to $10 million?

Daniel McHenry

If you can just confirm that, Glenn, I think that for our annualized saving of $8 million to $10 million of cost cuts took place throughout the quarter. It takes a little longer in the UK to generate some of these savings and just with the employment law that that's there. And but I would expect to see the full benefit of the cost cuts in quarter two.

Glenn Chin

And but I'm trying to get to how much more incrementally we should expect.
So.
So how much was realized?

Daniel McHenry

I'll have annualized, I would say 50% of it was realized in the first quarter.
If you assume that you know, there are redundancies to place, you know, 50% for the quarter effectively.

Glenn Chin

Okay.
Very good. That's helpful.
Thanks.
And then just a question on full-size pickups there's some stories of rising inventory, some of the triple digit levels we saw ram cutting employees and production. Have you guys detected a change in the demand profile for and full-size pickups on your?

Daryl Kenningham

I wouldn't have seen some of that press to come, Glenn. And when we kind of look across our mix, the GM brands were pretty good. The ram was down a tick and F-Series was down a tick. Some Toyota was up significantly and actually so we were know overall we were up a little bit in the large pickup sales year over year. So it's hard for me to square that with what I've seen and some of the press.

Daniel McHenry

But Glenn, one thing I'll add to that is our Texas exposure makes a big difference for pickup sales.

Daryl Kenningham

And if you look at our truck days supplier to compared to the car itself, they're right together.

Operator

Our next question is a follow-up from Rishad Gupta from JPMorgan. Please proceed with your follow-up.

Rajat Gupta

Great, thanks.
Thanks for getting me back in the queue. I just wanted to clarify on SG&A in the US in particular, if I look at like the gross profit versus the SG&A. So we saw a slightly higher pick up on the SG&A dollars.
No, versus the gross profit. I mean, was that just seasonality or maybe, you know, some deleveraging because of the service business. Just curious what happened there and how should we think about, you know, that leverage profile now through the course of the year or I guess

Daniel McHenry

there's a couple of things are it's Daniel. What we've always said is coming out of this. We would expect that SG&A as a percentage of gross would drop from 74% pre-pandemic to around 70%. And with your 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 of other things that I would add. Clearly, we didn't get all of the cost side in the UK in the quarter and first 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 and all things being equal to continue to reduce in any case taking on some of these new acquisition stores. And you're often and there's slightly elevated costs that come as we take on some of those these new acquisition stores and particularly by-store halfway through a month, it's just tougher and a SG&A as a percentage of growth as we bed those stores. Then I think you need to take some of that interest into account as well whenever you look at the change in SG&A as a percent of growth.

Rajat Gupta

Understood. That makes sense. Thanks for clarifying.

Daryl Kenningham

Thank you, Roger.

Operator

And ladies and gentlemen, with that being our final question for today, we will close out today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.