Group 1 Automotive, Inc. (NYSE:GPI) Q1 2024 Earnings Call Transcript

Group 1 Automotive, Inc. (NYSE:GPI) Q1 2024 Earnings Call Transcript April 24, 2024

Group 1 Automotive, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. Welcome to Group 1 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 1 Senior Vice President of Manufacturer Relations, Financial Services, and Public Affairs. Please go ahead, Mr. DeLongchamps.

Pete DeLongchamps: Thank you, Jamie. And good morning, everyone, and welcome to today's call. The earnings release, we issued this morning and a 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 1'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 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.

These risks include, but are not limited to, risks associated with pricing, volume, inventory supply due to increased customer demand and reduced manufacture production levels, due to some component shortages, conditions of markets, successful integration of our pending Inchcape acquisition, 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 on the call today, Daryl Kenningham, 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 Daryl.

Daryl Kenningham: Good morning, everyone. Last week, we announced our acquisition of Inchcape Retail, the largest dealership transaction in Group 1's history. We're thrilled to have successfully come to an agreement, with Inchcape plc on this generational acquisition. There are several benefits to Group 1. 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 low facility investment is required, and we felt the valuation was exceptional. The Inchcape business is well run, and our culture is aligned very well. We believe that combining Group 1 U.K. with Inchcape will benefit all of our U.K. stores.

And Inchcape is accretive from day one, and we 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 investment. The return generated through that modeling, is compared to the expected return of repurchasing our stock, 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 U.S. What's also important to note, is that we 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 first quarter, it's important to note, we also disposed the 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've 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 U.K., our teams reacted well. Our used car inventory is very healthy. Our grosses have returned. And we've implemented significant expense reductions. Daniel McHenry 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 admit that, and execute against that. 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 see that OEM relationship growing in importance. And we believe the Inchcape acquisition, allows Group 1 an outstanding opportunity to demonstrate that.

Now I'll turn the call over to Daniel McHenry, for an operating and financial overview. Daniel?

Daniel McHenry: Thank you, Daryl, and good morning, everyone. In the first quarter of 2024, Group 1 Automotive reported $130 million in adjusted net income, and delivering a 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 U.S. 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 U.S. were pre-sales, down from 24% in the prior quarter. These strong unit sales reflect the resiliency of demand, and our emphasis on driving volume.

A line of new and used cars in a large auto dealership's showroom.

GPUs performed about as expected, and continue on their slow glide path down as inventories return. In 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 U.S., 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 and 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 on 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 after sales, is an area for Group 1 to differentiate, and we will continue to invest in that part of our business. Wrapping up the U.S., 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 U.K. The U.K. improved from fourth quarter of 2023. Our U.K. 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 first 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 unit versus the sequential quarter, we experienced an even steeper improvement in February and March. Used vehicle gross profit per unit improved $229, or 20% on a sequential quarter basis. We believe vehicle 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 U.K. business mix is predominantly luxury, and those consumers are more resilient during times of economic uncertainty.

Our U.K. 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 31 to 46 days. U.K. 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 31, we had $42 million of cash on hand, and another $180 million invested in our floorplan offset accounts, accessible 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 to $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 down 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 U.S. syndicated credit facility was 2.45 times at the end of March. Our strong balance sheet will to allow, 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 shops, 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 swap, 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 31, approximately 56% of our $4.2 billion in floorplan, and other debt was fixed. Therefore, the annual EPS impact is only about $1.05 for every 100 basis point increase in the secured overnight funding rate or SOFR, which is the benchmark rate referenced in our floorplan, and mortgage debt instruments. Let's turn to capital allocation. We deploy a return-focused capital allocation strategy that balances opportunistic 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, and paid 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, and 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?

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