AutoNation, Inc. (NYSE:AN) Q4 2022 Earnings Call Transcript

AutoNation, Inc. (NYSE:AN) Q4 2022 Earnings Call Transcript February 17, 2023

Operator: Good morning. My name is Breka, and I will be your conference operator for today. At this time, I would like to welcome everyone to the AutoNation Fourth Quarter 2022 Earnings Conference Call. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Derek Fiebig, Vice President of Investor Relations. You may begin your conference.

Derek Fiebig: Thank you, Breka, and good morning, everyone. I’d like to welcome you to AutoNation’s fourth quarter €˜22 conference call and webcast. Leading our call today will be Mike Manley, our Chief Executive Officer; and Joe Lower, our Chief Financial Officer. Following their remarks, we will open up the call for questions. Before beginning, I’d like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements.

Additional discussion of factors that could cause our actual results to differ materially are contained in our press release issued today and in our SEC filings. Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our press release and on our website located at investors.autonation.com With that, I’ll turn the call over to Mike.

Mike Manley: Yes. Thanks, Eric. Good morning, everyone. Thank you for joining us. 2022 was a great year for AutoNation and full consecutive record quarter. Tremendous results driven by the entire AutoNation team, and I know many of you are on the call. So my personal congratulations to all of you. Joe is going to take us through the result in detail, but I’m going to just touch on some of the headline numbers. Q4 new vehicle retail industry was up 2% with us posting a same-store 4% increase over prior year. New vehicle industry declined by 6%, which in my view was significantly driven by constrained used vehicle inventory, which also was a key driver of our used vehicle sales being down 11% in the quarter. Total revenue up year-over-year in the quarter to $6.7 billion bringing our full-year revenue and a $27 billion, up 4.4%.

So notwithstanding the increased availability of new vehicle inventory in a somewhat choppy used vehicle market, both on the retail and wholesale side, our continued disciplined approach to used unit margin can be seen in the quarter, particularly in our used vehicle margins. This combined with another strong performance on our customer financial services team delivered a total variable per unit margin of more than $6,300, which despite being down from peak level a year ago, was essentially flat sequentially and an acceptable result in my view given the market conditions. Now coming into the year, we challenged our aftersales teams to consistently grow their business and their performance. And I’m pleased to report that they are making excellent progress as they delivered double-digit sales growth combined with margin expansion.

Now with well controlled expenses, which Joe will expand on in more detail, we delivered $1.4 billion of adjusted net income for the year with a margin of 5.2%. So when I look back at 2022, I think you can now consistently see as we’ve discussed before, the business drivers that I consider a structural improvement, compared to pre-pandemic levels. These are clearly CFS, which is driven by our focus on product penetration, our intense focus on sales effectiveness, our drive for operational improvements in our after sales business and finally our SG&A control, all of which have contributed to our record results for the year. Now with a focus on cash conversion, which remained at nearly 100%, we generated strong free cash flow for the year in excess of $1.3 billion and this gave us significant flexibility to allocate capital in a disciplined way.

During the year, we generated $1.7 billion in cash from operations, we invested more than $0.5 billion in our business, which included maintenance projects to ensure continued underlying performance from our core business, organic growth investments, which obviously included the additional AutoNation USA stores and the acquisition of key assets to expand our business. In addition, in the year, we returned $1.7 billion to our shareholders. Now that returns to shareholders was in the form of share repurchases and during the year, we bought back 15.6 million shares at an average price of $110 per share, which I think is an excellent investment in ourselves. And given all our activity and our operational performance, we’re able to deliver an adjusted EPS result of $6.37 for the fourth quarter at over 10% year-over-year.

We often on these calls talk about the future, and I think for the foreseeable future, the retail industry will continue to evolve, including how customers approach vehicle ownership and usage. And that’s an exciting time frankly to be in this segment, and we believe the evolving landscape offers many opportunities. Automation already has some excellent assets. First and foremost, of course, is our privilege of representing great OEM brands in strong territories, which has enabled us to transact with over 11 million unique customers from nearly 9 million households, another significant undervalued strength of our company. And notwithstanding the fact that we typically add around 300,000 additional customers per year to our database, we know that within our existing customer base, which as I’ve already pointed out is extensive, there’s significant opportunities to grow our business by covering a broader part of the automotive value chain giving us an enhanced opportunity to reactivate inactive customers, improve our retention of new customers significantly and the products and services, we offer increase of frequency within which we interact with our customers.

So as a result, in addition to acquiring a select number of additional dealerships, we made three key acquisitions that were focused on expanding and extending the reach of the AutoNation brand. Last fall, we acquired CIG Financial creating AutoNation Finance, and establishing an in-house CFS solution for current and future customers. This business in addition to legacy relationships is currently focused on servicing used vehicle buyers at our AutoNation USA stores, but will expand to our franchise stores later this year. Obviously as this business grows, we will have an increasing more recurring revenue stream. Now this January, we acquired RepairSmith, a mobile automotive repair and maintenance solution. The acquisition expands our range of services and creates meaningful after sales business opportunities, including utilizing another channel to provide service to automation’s existing customer base, and introducing additional vehicle owners, who have purchased vehicles outside the AutoNation dealer network.

RepairSmith also gives our AN USA brand a unique service proposition and customer experience offering a range of off the sales products and services that are standalone used car sales competitors, frankly, just do not have. As you know, we’ve consistently gone after sales business, which is more recurring revenue stream with a high percentage of customers bring their vehicles into service under warranty. The rate decrease is rapidly after the warranty period ends. And RepairSmith now expands our reach and provides a very convenient means for customers to service their off-warranty vehicles. Finally, we also improved our digital retailing experience with an enhanced digital storefront and our collaboration with TrueCar. All of these activities are targeted and focused to create a stronger, more competitive business that is less exposed to the cyclical nature of the automotive industry and places us in more control of our destiny.

And as I said at the beginning, we’re a great time to be in this segment. Now with that, I’ll hand over to Joe, who will take you through the details of our results. Joe?

Joe Lower: Thank you, Mike, and good morning, everyone. Today, we reported fourth quarter total revenue of $6.7 billion, an increase of 2% year-over-year. AutoNation’s new unit sales increased by 4% in the quarter, compared to a 2% increase in the retail SAAR. Strong performance in our higher margin premium luxury brands helped support our new unit PBR, which was over $5,600 for the quarter. The overall new market remained very healthy during the quarter as more than half of our vehicles were sold at or above MSRP. This has trended down, but it’s still far higher than historical levels. Total used unit sales were down 9% in the fourth quarter, PBR remains fairly constant from the third quarter and reflected discipline in our pricing strategy.

We continue to focus on self-sourcing our used vehicle inventory, which represented 94% of our vehicle acquisitions in the fourth quarter. While good, this needs to increase and we have ramped up our will buy your car efforts to fuel greater used unit sales. After sales gross profit grew 12% year-over-year on both higher revenue and increased margins as we continue to drive strong performance in this area of our business. While under appreciated by some, the recurring revenue stream from after sales alone increased full-year gross profit by more than $225 million to $1.9 billion in 2022 with a strong outlook for the future. CFS performance was also very strong and we continue to lease the sector with PBRs consistently above $2,700. Moving to costs, SG&A as a percentage of gross profit on an adjusted basis was 59.2% for the quarter, significantly below pre-pandemic levels, reflecting permanent structural changes to our cost basis.

Year-over-year, SG&A increased by only 1.5%. As expected in the fourth quarter SG&A as a percentage of gross profit was slightly higher than recent periods, reflecting investments in technology and new business initiatives. Fourth quarter floorplan interest expense of $20 million was impacted primarily by rate and compounded by increased inventory levels. The quarterly expense increased from $11 million in the third quarter and $5 million a year ago. Reported net income for the quarter was $286 million or $5.72 per share. Adjusted EPS of $6.37 was a record for the fourth quarter and an 11% increase, compared to EPS of $5.76 a year ago. The adjustments to this year’s EPS include acquisition related expenses, including upfront non-cash reserve recorded at the time of the acquisition of the CIG loan portfolio.

Our operating performance and cash flow generation remained very strong with record cash from operations totaling $1.7 billion for the year. This provides a significant capacity to deploy capital into our businesses and return capital to our shareholders. As Mike mentioned, for the full-year 2022, we invested more than $0.5 billion to expand our business. This included the acquisition of CIG Financial and the Moreland dealerships in Colorado. Expansion of the AN USA used retail footprint and meaningful investments to enhance and expand our digital capabilities. We further expanded our business with the acquisition of RepairSmith, which closed last month. We also continue to expand our AutoNation USA footprint adding stores in St. Louis in November, as well as Austin and Albuquerque last month, bringing the current store count to 15.

The AutoNation USA stores play an integral part of both our long-term growth plans and the achievement of scale, scope and density in our markets to better serve and meet the needs of our customers. We have more than 20 additional facilities currently under development with an expectation that we will open 10 new stores over the next 12-months. We also returned significant capital to our shareholders via share repurchase, as Mike mentioned. During 2022, we invested $1.7 billion reducing our share count by 25% to 47.6 million shares at year end. Full-year share repurchases totaled 15.6 million shares, 4.6 of which were repurchased in the fourth quarter alone. Thus far in 2023, we have purchased an additional 800,000 shares with more than $1 billion of remaining share repurchase authority.

We ended the fourth quarter with a total liquidity of approximately $1.8 billion. Our current leverage ratio of debt to EBITDA of 1.6 times remains well below our historical 2 times to 3 times range. And looking ahead, we will continue to focus on operational excellence and disciplined capital allocation supporting growth to drive long-term shareholder value. With that, I will turn the call back over to Mike.

Mike Manley: Yes. Thank you, Joe. Derek, would you open for questions, sir?

Derek Fiebig.: Yes. I think we can, yes.

Mike Manley: Operator, can you remind the audience how to queue up for questions please?

Operator:

Mike Manley: Hello, are you there?

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Q&A Session

Operator: We have our first question from John Murphy of Bank of America.

John Murphy: Great. Good morning, guys. Can you hear me?

Mike Manley: We can. Good morning.

John Murphy: Good morning. Just maybe a first question on the inventory front. Things are slowly returning to normal, maybe in aggregate, but are still a bit tight. But there’s some pretty big dispersions between the D3 getting closer to normal and the J3 maybe being very tight. I’m just curious if you can kind of comment where that stands, did the inventory levels stand for you and what you think the implications may be for GPUs we go forward and maybe sort of the dispersion in GPUs and the different brands?

Mike Manley: Yes. Good morning, John. I’ll take this and then Joe can jump in as well. I mean, you’re exactly right, if you look at our overall inventory levels and our days of supply, it’s still very, very low. Obviously, what we are doing is we track it by all of the OEMs and across all of our brands that we represent, our inventory levels as a percentage of national are still below, sales as a percentage of national sales. So from a — if you like from a balance perspective, I think even those that have been able to replenish inventory faster than other OEMs, we’re still in a good shape. And Joe and I were talking over the last few days obviously as we prepared for this and really looking in detail at our inventory. I think the key for us is not absolute numbers of inventory, but how that translates into day’s supply as we go through the year.

And that obviously brings you on to one of the key questions and that’s what we think is going to happen with new vehicle volume. So as I sit and look at this year, I think there’s strong potential for new vehicle volume under the right circumstances to be above $15 million, and I think we’ll end the year with continued low — relatively low — very relatively low, frankly, when you look back at some of the previous year’s inventory levels on a day’s supply basis. And as a result of that, I think there will be some continued mitigation on new vehicle margin. But frankly, if you look at what happened over the period of 2022, really, I just see a continuation of that, but somewhat compensated by volume increases across the brand. So sorry for a wondering answer that obviously these things are all tied together.

Joe, do you want to add anything?

Joe Lower: Yes, I just — kind of further elaborate on the same theme. John, if you look, the days I hope of 75 to 90 days of inventory are long in the past. I also think periods of nine days are unsustainable, we’re at 19. And I think with cooperation from our partners, a 30 to 45-day type normal is a pretty healthy place for everyone to operate. And so whether we get to that by the end of this year, I don’t know, but to me that would be a nice level that would serve everyone’s interest, I think exceptionally well and that’s kind of how we’re thinking about the business right now.

John Murphy: Okay. That’s helpful. And then just a second question, slightly multipronged on cap allocation and human capital allocation. The finance business is going to grow. Just kind of want to understand where that goes and exactly what you really are intending to do there? RepairSmith is another sort of leg of the stool, that is new and might augment or should augment the aftersales business. And Mike, your — think something very interesting about reactivating customers, which I’d love to hear what that means and if RepairSmith helps there? And then obviously there’s the share buybacks. So if you think about an AutoNation USA, if you think about sort of the flow of your cap and free cash flow to the finance business, to the after sales and the extension there, AutoNation USA and then buybacks.