Group 1 Automotive Inc
NYSE:GPI
Earnings Call Analysis
Q4-2023 Analysis
Group 1 Automotive Inc
In the landscape of Group 1 Automotive's operational achievements, the fourth quarter of 2023 stands out as a period of robust financial health and growth. The company announced an adjusted net income of $131.2 million, complemented by a quarterly adjusted diluted EPS from continuing operations at $9.50. Throughout the year, the business sustained a revenue influx totaling $17.9 billion, marking its highest to date, undergirded by contributions from all its active lines. A monumental gross profit surpassing $3 billion crowned the fiscal year, with parts and service gross profit contributing a notable $1.2 billion to this tally.
A 14% increase on a same-store basis and a 19% uptick on an as-reported basis in new vehicle units sold within the U.S. signifies Group 1's commanding lead over industry norms. This surge in sales illustrates the continued potency of consumer demand and validates the company's strategic focus on driving volume. Although new vehicle sales experienced a slight decline from presales, this didn't hinder the company’s unit sales performance. Used vehicle margins exhibited resilience, evidencing the company's adeptness in navigating pricing challenges and leveraging technology.
Group 1 Automotive's after sales operations have reaped considerable gains with nearly a 7% boost in customer pay. The full year's record revenues and gross profit exceeding $1 billion showcase the division's potential as a key differentiator for the company. Astute investments in the after sales arena aim to augment the customer journey through enhanced service hours and innovative marketing strategies that leverage data science.
Efforts in the US to calibrate SG&A expenses to the tune of a 260-basis-point reduction underscore a relentless drive to improve cost-effectiveness. This tightening of SG&A expenses to 63.8% from pre-COVID levels indicates a deliberate approach to managing cost structures in an inflationary environment. However, the UK segment faced challenges, pointing to a need for strategic reforms including a pivot to digital initiatives, restructuring of used car operations, and headcount reductions aimed at realizing performance gains.
An intricate balance characterizes Group 1's capital allocation strategy, which successfully navigates portfolio management with shareholder value enhancement. The company's astute acquisitions projected to bring in $1.1 billion in annual revenues, coupled with share repurchases resulting in a 5.1% reduction in outstanding shares, underscore a meticulous and return-focused capital management philosophy. Further, the deployment of abundant operating and free cash flow into strategic investments, share buybacks, and dividends reflects a well-calibrated financial strategy.
Group 1 Automotive embraces an enviable position of financial strength, with a balance sheet solidified by $795 million in available liquidity. This robust foundation, characterized by a controlled rent-adjusted leverage ratio of 2.1x and robust cash flow generation, presents favorable circumstances for aggressive pursuit of accretive mergers and acquisitions in 2024. The company's disposition as proficient integrators empowers them to derive exceptional value from M&A activities that go beyond initial calculations. Looking ahead, the company communicates an eagerness to capitalize on these opportunities and sustain dialogues with the investor community in the coming year.
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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.
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 the Group 1's website.
Before we begin, I'd like to make some brief remarks about forward-looking statements and 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, our Senior Vice President and Chief Financial Officer. I'd now like to hand the call over to Daryl.
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, an all-time record, driven by parts and service gross profit of $1.2 billion.
Let’s 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 presales, 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. Given 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 retention through more convenient service hours, training of our service advisers 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 5 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 that 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 6 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 roof-top 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?
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 [ stands at ] 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 2.1x 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 managed 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 the comparable prior year quarter and $14.6 million versus the comparable prior year. Quarterly nonfloor plan interest expense of $27.7 million increased $5.7 million from the prior year and current year nonfloor 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.
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 us 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?
We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from John Murphy from Bank of America.
Just 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, or is there something else sort of bigger and more problematic there? And is this 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?
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 was very challenging. We 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've 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 are -- that's my take on what the issues were on used cars.
Okay. And then just maybe one follow-up, just here, 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 us walking into dealerships or hopping online to AcceleRide? Sort of what's the mood and tenor of those discussions? And I mean, what's your take on demand for this year?
The mood’s good. Traffic counts are good. We were really pleased with our growth in the quarter, especially in 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 expect at 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 is -- looks good.
Our next question comes from Adam Jonas from Morgan Stanley.
Daryl, Daniel, you guys have really super strong exposure to the Japanese OEMs. And they, in turn, are very well positioned for hybrids and plug-in hybrids. So, I was curious of 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.
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 the 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 all-hybrid powertrain, which I think is an indication of what it is. General Motors announced new plug-in hybrids coming to the country soon. They announced that yesterday, I believe. So hybrid demand is really good 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 and the fourth quarter was a 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.
Adam, it's Daniel here. Just to add to what Daryl said, in terms of a percentage of our total inventory units, EV in quarter 3 was 6.5%, and it's still 6.5% today. So we haven't seen any particular increase as a percentage of total inventory in terms of EV.
I appreciate that, guys. 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 be -- might have moved. My check suggests that it was looking kind of scary in the fall. 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.
In terms of our inventory, in terms of days supply, it hasn't increased as much as you may well have expected. We have seen total units increase by about 35% in that term. And our floor plan will increase exactly by that [indiscernible] effectively. We've seen some moderation in interest, but it's fairly low. It's going to continue on a constant basis.
Our next question comes from Rajat Gupta from JPMorgan.
I had a first question just on parts and services. It did look like the revenue growth on a same-store basis did slow down there quite a bit in the fourth quarter, both in the U.S. and U.K. I’m curious if you're able to dissect that a little bit more for us? How much of that slowdown was traffic versus ticket? How much was, like, from the selling days, lower selling days? I know you have the [ full] days work week, but I don't know if the selling days had an impact at all? Or yes, just if you could, like, just break that apart for us, that would be helpful.
One of the things that's I think important to think about is, for us, we focus heavily on customer pay, which was up 7%, which you're right, Rajat, that's not normally – we've normally double-digit increases. We're lapping 2 really good fourth quarters. Last year, we were up 13%. Year before that, we were up 22%. And so we are seeing our customer counts aren't growing as much, and that's something that we're focused on now.
And what we saw after COVID, one trend that we have really seen is our Saturday business. After COVID, the Saturday business didn't come back as quickly as the rest of our business, and we're really trying to put a lot more focus and attention on -- you know, our service departments are open all day Saturday, which is fairly unique in the industry. You don't see that in a lot of dealerships. And so we're putting a lot more focus and emphasis on that with our customers. And then later in the quarter, we started to see that volume really increase on Saturdays, which I expect we'll see that continue through the quarter -- through the year, I'm sorry.
Got it. And was there any impact from the strike at all that you experienced in the quarter?
Not that we could discern. There was a few parts things for us, but the strike itself, honestly, I wish I could blame something on that, but I don't -- we didn't see any material impact other than a few parts delays here.
Our next question comes from David Whiston from Morningstar.
I want to go back to the U.K. As I'm sure you guys know, the U.K. used vehicle market has been soft for everybody for a while now. I'm just curious. In Q4, did things get a lot worse, or has it just been piling up to a point where you finally decided we have to do headcount reductions? I'm just trying to figure out if anything really changed severely negatively in Q4.
David, it's Daniel here. I'll take the first part of that question.
In terms of used inventory, we came out of September with probably too much inventory. September is traditionally the big registration month in the U.K. You get a lot of trades in that month specifically. Rolling into October, November and December, the drop that was seen in the auction prices was over 10% in the U.K. over those 3 months. So, I think that was a change that was seen there in that period that hadn't been seen historically. So, I would say that was a market correction or a onetime hit effectively that happened in the U.K.
I'll let Daryl pick up on the headcount reductions and costs.
Yes, we're addressing the head count, honestly, David, because our headcount crept up last year, over the last couple of years, actually, in the U.K. And it got beyond the level that we were comfortable with. And given the challenge in the fourth quarter in used vehicles and some other areas, we felt like it was the right thing to do. We've had better discipline in the U.S. on that than we have in the U.K, and so it wasn't necessarily related specifically to used cars. That just a general overall resource allocation.
And switching gears here to [indiscernible] and some others have talked about wanting to franchise now. I'm just curious if you guys are interested in any of the EV start-ups and getting a franchise? Or are they too early in their life cycle for you?
We've looked at a couple of them over the last couple of years. It's really hard to get them to pencil-in. I think the math is getting harder.
And our next question comes from Daniel Imbro from Stephens Inc.
I want to start on the cost side, actually. I guess 2 quick SG&A clarifiers. One, you mentioned the 10% headcount reduction. Any way you could size-up the annual cost savings? Is it $15 million to $20 million? Is it $30-plus million? Like, any sizing on that?
And then you're lowering SG&A in the U.K. Is there a risk you find yourself in the same position in the U.S. in maybe a year or 2 as the industry continues to normalize? Or how do you think about the cost base here as profitability normalizes?
So, I'll take the first part of that question. It’s Daniel here. Daniel, regarding the absolute dollar number that we would expect to take out in terms of headcount, that's somewhere between $8 million and $10 million.
The other thing that we're laser-focused on is our loaner car fleet, demonstrator fleet, because clearly they're taking big drops in valuation at the moment. We see that being somewhere around a $3 million saving.
A little more on the headcount, we're still down versus 2019 in the U.S. on headcount on a same-store basis, down quite a bit, 7%. So, in the U.K., we were not. We were heavier in the U.K. on a relative basis versus 2019 same-store. So we had opportunity in the U.K. Would that ever hit us in the U.S? Well, who knows? I mean it depends on what business conditions do. We've done a better job in our U.S. business managing the headcount than we have in the U.K. business.
Helpful. And then maybe, on the U.K., another follow-up. I think, last quarter, you mentioned almost 18,000 units in the backlog. This morning, you mentioned still 5 months of backlog. Can you help us reconcile that with the 2% decline in same-store units? I guess there was an expectation that that level of backlog would help insulate results and you can keep growing despite the market slowing. So, any color you can provide on maybe why that didn't play out and how we should think about growth going forward just by backlog?
Well, we didn't keep up with the new car industry in the fourth quarter in the U.K., and we built inventory on the new car side, even though we still have a fairly robust order bank. And we have to do a better job with our throughput of our inventory. That's one of the reasons that we've taken a hard look at how we're marketing. Are we driving the right traffic? Are we focused on the right vehicles and the right brands? And so that's part of our actions that we're taking in the U.K. because, honestly, while we overperformed in the U.S. on exactly that metric, we underperformed in the U.K. on exactly that thing. So, we have some work to do around driving more customer demand to our store.
Our next question comes from Mike Ward from Freedom Capital Markets.
On the parts and service side in the U.S., I think you mentioned that the customer pay was up 7%. What were the -- how did collision or warranty or wholesale do?
Collision was down a tick, 1.8%. CP was up 6.5%. As you mentioned, the warranty was up a little over 4%.
Okay, so the weak spot was in collision. So, was that regional, or is it just a tough comp?
No, I think it's a tough comp. We've seen collision grow at 30 -- 25%, 30% over the last 2 years basically. Also, collision is a real small part of our business. I mean, it's $5 million in gross profit a month for us. It's not much. It's, like, less than 3 -- 4% of our business or something.
And on the U.K. side, it sounds like some of the adjustment on used vehicle was almost onetime in nature. It sounds like you liquidated some inventory that you were holding on to a little bit too long. Is that the right read?
Yes.
Okay. And that was the 1,300 units, I think you said, something like that?
$1,300 per unit.
Oh, $1,300 a unit? Okay. Okay. That contributed to it. And then just one last thing on the U.K. March is another big registration month. Any indications on orders you have for March, or is that part of the 13,000 backlog? What could we expect as we go into Q1?
Well, it's part of the backlog. We haven't broken it down for which is March [indiscernible] we can get that information. The SAAR in the U.K. is expected to grow about 10% this year. And so, to us, that's encouraging. And we have inventory going into March, which is nice to have. So, hopefully, we'll be able to take advantage of it, Mike.
And our next question is a follow-up from Rajat Gupta from JPMorgan.
I had a question on new PRUs. One of them was -- could you help us dissect the sequential moderation across different brands, like import, domestic, luxury? And you also mentioned, like, the $100 a month was consistent with what you had expected. I mean, is that something you expect to continue here in the first quarter as well? I just want to clarify those 2 points.
I guess the answer to all of that is yes, Rajat. We saw -- there was nothing that really stood out as one brand going a completely different way than every other brand. But we saw we’re down $1,212 year-over-year in PRUs on the new car side. And that trend has seemed to just continue since we've come out of COVID. And so we're still seeing that. It's generally across the board on the brands. With Stellantis, we're heavy in inventory there, so there's a little pressure on that, obviously. But we are only 4% mix of Stellantis, so hopefully, that won't hurt us too bad.
That’s helpful.
And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session as well as today's presentation. We thank everyone for joining. Have a great day. You may now disconnect your lines.