Asbury Automotive Group, Inc. (NYSE:ABG) Q3 2023 Earnings Call Transcript

Asbury Automotive Group, Inc. (NYSE:ABG) Q3 2023 Earnings Call Transcript October 24, 2023

Asbury Automotive Group, Inc. misses on earnings expectations. Reported EPS is $8.12 EPS, expectations were $8.44.

Operator: Greetings, and welcome to Asbury Automotive Group Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn this call over to your host, George Villasana, Senior Vice President and Chief Legal Officer. Thank you. You may begin.

George Villasana: Thank you, 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 Third Quarter 2023 Earnings Call. The press release detailing Asbury’s third 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 the call up for questions, and we will be available for any follow-up questions later. Before we begin, we 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, including our Form 10-K for the year ended December 2022 and any subsequently filed quarterly reports on Form 10-Q and our earnings press 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 also have posted an updated investor presentation on our website at investors.asburyauto.com highlighting our third quarter results. Now it is my pleasure to hand the call over to our CEO, David Hult.

David Hult: Thank you, George. Good morning, everyone. Welcome to our third quarter earnings call. First, I’d like to commend the resiliency and strong efforts of our team members as they work diligently to deliver the most guest-centric experience in automotive retail. They have executed efficiently to maintain cost control as our business has scaled. I’ll remind everyone in the span of two years, we doubled the size of our company. The team has worked very hard to set up infrastructure to integrate processes, increase productivity and drive performance. Now on to our consolidated results for the third quarter. We delivered $3.7 billion in revenue, had an adjusted SG&A as a percentage of gross profit of 58.4%, had a gross profit margin of 18.4%.

We generated an adjusted operating margin of 7.2%. Our adjusted EBITDA was $280 million, and our adjusted EPS was $8.12. I’ll touch on some areas where we did well and other areas where we know we have work to do. As expected, this quarter, we saw some headwinds beginning with brand and model mix in new vehicles. While days supply remains at a healthy level, we are seeing some cases where high demand models are selling well, though difficult to replenish, while others remain at elevated days supply. On the used side, we continue to see a challenging market for sourcing those vehicles. We are seeing a continuation of PVRs as a whole trending to a more sustainable level. Our Parts and Service business showed year-over-year growth. Yet this is an area that was disproportionately impacted by the integration activities we mentioned last quarter.

Demand remains strong, and we are confident in the longer-term trend of our Parts and Service business. Turning to F&I. I’ll highlight two areas in the quarter. We are seeing slightly lower penetration rates in our F&I products as customers look for ways to manage lower monthly payments in a rising rate environment. Second, the way in which we account for TCA will result in a negative drag on results over the next two years as the products roll out across the legacy Asbury stores. The impact is driven by the way in which sales from the products are recorded over time rather than upfront like a third-party provider. Michael will cover in more detail in his section. Finally, our SG&A levels in the quarter demonstrated our commitment to manage our cost structure to the performance of the business.

I’m encouraged by the progress and direction of our operations and strategic initiatives. We are enthusiastic about the pending acquisition of the Jim Koons Automotive Group, a well-respected group with a phenomenal set of team members and leaders. The group generates over $3 billion in annual revenue and averages over $140 million in revenue per rooftop. Amidst the evolving backdrop of our space, I am optimistic about automotive retail and our diversified business model. We have strategically purchased quality assets making us a stronger company, part of our long-term plan to deploy capital to its best and highest use. We have entered into growing strategic markets that we haven’t operated in before, and we continue to integrate and grow the business.

We operate in an environment where the average age of the car is 12.5 years. And while SAAR levels have been trending higher, it is important to note we are still below historical levels. Our Parts and Service business will remain a critical element of our success well into the future; repairing older vehicles, addressing the complexity of newer cars and supporting numerous EV models rolling out over the next few years. Overall, we are focused on achieving our long-term strategic goals. We plan to fund the pending act of the Koons acquisition with existing liquidity and capacity. Our strong balance sheet and reliable cash flow has enabled us to undertake this deal without the need to raise additional debt or issue equity. We are well aware that interest rates have moved up, and we have adjusted our return assumptions accordingly.

We will remain strategic with our capital allocation decisioning with a focus on paying down debt in 2024. As we are winding down on year three of our 5-year plan, I am proud of the progress we have made in transforming the size and scale of our business. In just a few short years, we have grown revenue from $7 billion to $15 billion or $18 billion pending the Koons acquisition; increased adjusted EPS from nearly $13 to over $34 per share; generated over $400 million in adjusted operating cash flow to now just over $700 million before the pending Koons acquisition; increased adjusted EBITDA from $400 million to an annualized run rate of $1.2 billion. We acquired an insurance company, Total Care Auto, and introduced Clicklane, tools which fundamentally changed the buying experience.

Our 2025 growth objectives will be updated after our year-end results and the planned closing of the Koons acquisition to provide a clear road map for our long-term growth trajectory. I will now hand the call over to Dan to discuss our operating performance. Dan?

Daniel Clara: Thank you, David, and good morning, everyone. I’ll start off by once again thanking our team members to deliver the most guest-centric automotive retailer experience. Now, moving to same-store performance, which includes dealerships and TCA unless stated otherwise, starting with new vehicles. Our new vehicle inventory ended the quarter at $807 million, which represents a 36-day supply. As in previous quarters, there was significant variation among brands and models. Our new vehicle revenue grew 8% year-over-year to $1.9 billion, and unit volume grew 5% year-over-year to over 36,000 vehicles. New average gross profit per vehicle was $4,567, new vehicle gross margin was 9% this quarter. Turning to used vehicles, used retail revenue was $1 billion as unit volume was over 32,000 vehicles in the quarter.

Average used retail gross profit per vehicle was $1,862 for the quarter, a function of stronger new vehicle availability and macro conditions. Our used vehicle inventory ended the quarter at $304 million, which represents a 29-day supply. As conveyed in our opening remarks, we are still seeing challenges in sourcing inventory. We typically source about 90% of vehicles internally to maintain a strong profitability profile. We remain focused on delivering strong profitability over chasing volume in this environment. Shifting to F&I. We delivered an F&I PVR of $2,207 compared to $2,521 last year, a reflection of higher interest rates pressuring consumer payments, which impacts our F&I results. In the third quarter, our total front-end yield per vehicle was $5,514.

Moving to Parts and Service; our Parts and Service business revenue increased 3% in the quarter to $526 million growing over a tough comparison from last year’s strong same-store growth of 12%. We have also been investing across the business towards the transition of software to support a more unified process and platform for fixed up. Some of which relates to the integration activities that David mentioned in his opening remarks. We observed a mixed result among the stores in performance. Now, turning to Clicklane, please note that for Clicklane, we are reporting on an all-store basis, we achieved another all-time record with over 11,600 vehicles sold through Clicklane in the third quarter, a 71% increase year-over-year. 17% of our third quarter new and used retail sales were powered by Clicklane.

We generated $460 million in Clicklane revenue for the quarter. We are tracking to approximately $2 billion of revenue in 2023, mostly governed by constraints within pre-owned sourcing and relatively low day supply in our high-velocity brands that make up a good portion of new vehicle sales. Moving on to some Clicklane KPIs for the third quarter, 46% of Clicklane sales in Q3 were new vehicles and 54% were used; total front-end PVR of $3,018 and F&I PVR of $2,151, which equates to $5,168 of total front-end yield. The average Clicklane customer credit score was 723, which is higher than the average credit score at our stores and sequentially higher than last quarter. 92% of those that applied were approved for financing, of which 86% of those customers received instant approval, while the remaining customers required some off-line assistance.

74% were lender finance sales and 26% were cash sales. The average down payment of the finance sales continues to be over $9,000. The average distance of our Clicklane delivery from our dealerships was 40 miles, consistent with last quarter as the Western states utilize the convenience that Clicklane has to offer. We are pleased with the way Clicklane is growing and driving adoption rates. We are seeing great feedback from the customer experience. You will hear us talk about Clicklane within the context of our overall business as it becomes an integral part of the dealership model in our results. I will now hand the call over to Michael to discuss our financial performance. Michael?

Michael Welch: Thank you, Dan. To our investors, analysts, team members and other participants on the call, good morning; I would like to provide some financial highlights for our company for additional details on our financial performance [technical difficulty]

Operator: This is the operator. Did you mute your line, speakers?

Michael Welch:

2023 CapEx to be $155 million as we continue to roll out planned CapEx related to our 2021 acquisitions. Of this $155 million, about $15 million is expected to be related to the replacement of leased properties. Year-to-date, TCA made a $71 million of pretax income. We are deploying TCA in our states with larger dealer presence, and we will have all of our current stores enabled with TCA by the end of first quarter 2024. The deferrals associated with TCA rollout have begun to show up in our F&I results, which led to some headwinds in our PVR number. These trends will be more meaningful in 2024 as TCA expands within new and existing markets. We now expect pre-tax income for TCA 2023 to be $85 million.

Year-to-date, we generated $514 million of adjusted operating cash flow, a product of our robust and resilient business model. Our balance sheet continues to be strong as we ended the quarter with approximately $1.7 billion of liquidity, comprised of cash, excluding cash of Total Care Auto, floor-plan offset accounts and availability on both our used line and revolving credit facility. Last week, we reached an agreement to renew and upsize our credit facility, up from $2.55 billion to $2.8 billion at the same pricing as our previous agreement. The agreement extends the current credit facility to October 2028. This gives us the financial flexibility to support our long-term strategic objectives. We’d like to thank our OEM and banking partners for their continued support.

Our pro forma adjusted net leverage was 1.7x at the end of September, reflecting the use of cash to repurchase shares earlier in the year. As David mentioned, we anticipate using current balance sheet liquidity, mainly comprised of cash, floor-plan offset accounts and used vehicle floor-plan capacity the purchase of the pending Jim Koons acquisition. Also, pending the Koons acquisition, we anticipate our net leverage to be in the mid-2s. Our robust cash flow as a larger company will allow us to reduce leverage back to 2x or lower by the end of 2024. Finally, I’m grateful for the hard work of our Asbury team members who help us operate at a high level and continue to focus on the customer experience each and every day. Thank you. I will now pass the call back to David for closing remarks.

David?

David Hult: Thank you, Michael. I want to close our prepared remarks with a big thank you to our team members and leaders within our organization. Your efforts are noticed and greatly appreciated. Thank you. Your commitment and dedication to making a great workplace environment has also been recognized nationally. We were recently named as one of America’s Greatest Workplaces 2023 by Newsweek, receiving a five out of five star rating. And we were awarded 2024 Best Companies to Work For in the Retailers Industry by U.S. News & World Report. I commend all of you for fostering and enriching and welcoming work environment. This clearly speaks to the quality of our store leaders and our team members committed to our vision. This concludes our prepared remarks. We will now turn the call over to our operator and take your questions. Rob?

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Daniel Imbro with Stephens. Please proceed with your question.

Daniel Imbro: Hey, good morning, everybody. Thanks for taking our questions. I want to start on maybe the used business. David, obviously, things have slowed there, but curious if you can provide some color on the cadence. Did we see any noticeable changes month-to-month? And Dan, I think in your prepared remarks, you noted a focus on profitability over more volume, but GPU did still step back sequentially despite wholesale prices falling. So can you maybe talk about how you’re thinking about used GPUs in this environment as well?

David Hult: Yes. Daniel, this is David. I’ll start and then Dan can jump in. With the used car gross profit, it’s all about what you acquire the vehicle for. It’s a competitive space. There’s less vehicles out there. There’s more shopping going on. So your cost of sale as far as what we own the vehicle for is creeping up a little bit, which has put pressure on the margin. We have chosen not to chase volume. So we’re purchasing less cars at the auction than we normally would. Our thoughts are if we’re purchasing at a higher rate through the auction, you would see lower PVRs. We think we’re getting close to a sustainable level. But in this dynamic environment, it’s really difficult to predict what the future is going to be.

Daniel Clara: Daniel, Dan here. To answer your question, we did see some pressure in the valuation of the vehicles, specifically at the beginning of the quarter. And — so that put additional pressure on our margin a little bit more than we were expecting. I mean that’s what we felt a little bit short. But I will tell you, the good news is we were able to adjust quickly. That is one of the benefits of keeping a 29 to 30 day supply. As market conditions change, we’re able to adapt. And if you look at — from a wholesale perspective, because of the quick turnaround that we were able to adjust our wholesale perspective, we on vehicles that we were wholesaling because we cannot read out the store level.

Daniel Imbro: That’s helpful. And maybe if I could follow up just on the new side of the business. Obviously, new GPU is probably a bright spot. Taking through it, I mean, domestic GPUs here are still over $4,200, David, versus pre-COVID of, call it, $1,700, $1,800. Can you just walk through the buckets of how, despite inventory building, domestic GPUs are still that much higher? Is it more premium? Is it OEMs being disciplined? And then what does that tell you about the future of new vehicle GPUs, given what you’ve seen so far in that segment?

David Hult: Daniel, I’ll give you my best attempt. It’s a great question. We’re heavy with our domestic brand mix of Stellantis. So that impacts us a little bit compared to our peers, where — as we’ve said when we’ve done these acquisitions, especially the Miller acquisition, there was a lot of domestic stores in there in the Mountain states. And as I said, when we acquired them, their gross profit margins or PVRs were higher than Asbury was. So while we are seeing some deterioration from all-time highs, we’re still at very healthy profit margins. And even with the days supply creeping in some areas on domestic, we’re still able to get good gross profit. So we’re excited about that. We think it has a lot to do with the average age of the car park and the large down payments that our customers are still putting down.

Operator: Our next question is from John Murphy with Bank of America. Please proceed with your question.