Asbury Automotive Group, Inc. (ABG) Earnings Call Transcript & Summary

Got it. Yes. I mean it's already at a pretty impressive stage today. So yes, looking forward to further enhancements to that platform. Could you help recap for us a little bit in terms of the economics on Clicklane because as this conversion keeps on increasing and it becomes a bigger portion of your overall transaction, maybe if you can give us a sense of just the GPU on that? Not talking in today's pricing environment, but let more normalized, the front-end versus the F&I, what the key differences might be? Or at least what you're seeing today versus just the in-store business?

It's a fantastic question, and I don't know that we have an answer. But in this environment, naturally, the gross profits look good. I don't think that this is realistic. But I would say in the normal environment, our biggest question more so than the front-end margin was on the F&I side, where consumers are going to purchase products on their own and sell select or would we see a material difference in our F&I numbers lowering? I believe when we get into a normal market, our margins on Clicklane are going to be -- front-end margins are going to be the same as what you see in the stores. I could be wrong, but that's the belief at this point. Now that we've seen a number of transactions on Clicklane in the thousands, we believe that we feel confident that the F&I numbers are going to be there as well. So again, early adoption, things could certainly pivot in either direction and change over time. But what we've seen so far, as far as the credit score of the customer, the down payments, the products that they're purchasing, I think we're the only peer that's selling more new than used on their transactional tool. That might change because of inventory balances right now. But I think those are all positive signs for the future, that the high beacon score customers have the belief. If you have a transactional tool, I'll use it because it saves me time. The fact that they're buying F&I products just gives us confidence that we're heading down the right road. And this is something that will have a positive effect on us in the long run.

Got it. That's helpful. I know, David, we had this conversation during earnings that Clicklane, most of the transactions, 90% plus are probably prime customers on that. And you see that as like a big market opportunity on its own. And there's no real need to like move lower in the credit spectrum. The question I'm trying to get at is, as Clicklane scales and consumers get comfortable with that platform, and you continue to enhance that platform, is there a possibility to maybe start thinking about lending business or captive finance business just so you can have more control over that approval or that transaction and then maybe start to move lower down the spectrum, just so that you can get those approvals done faster? And we have seen as like at some of the peers that the economics there are still pretty lucrative. So just is that in the roadmap? Just any thoughts on that?

Yes. No, it's a great question. I would tell you, we're certainly interested in looking at creating a captive of our own. But again, just doing this for so many years, subprime business is tough. I mean, there's much higher loss ratios. The complexity of things that you need in documentation to be able to do the loan, it's very labor-intensive. Maybe software can get to a 0.1 day where you can automate that. But if we were ever going to open a finance captive, we would run it as a separate silo because you can't have the folks on the operations side determining who's getting financed or not, you need to make good logical decisions. And just because we're approving subprime customers today, that doesn't mean they're not going to be losses tomorrow. So we really want to be very thoughtful about the approach. As we saw nationally last year, credit scores are getting better. They're good this year as well. If 90% of our business, and there's so much more of it there for us to have, is there on the prime side and 80% of it is getting it approved autonomously within 15 seconds and only 10% is needing our help, we feel like that's a pretty solid model with low loss ratios that make sense, which is the reason why it's enticing for us to look at a finance captive.

Got it. Got it. That makes a ton of sense. Just lastly, on Clicklane, the demo that we saw a few days ago. You have this insurance product integrated, the Salty platform. I mean, this -- to me, it seems like a very obvious thing to have like historically, just from a consumer perspective? And so I think the way it was integrated on the platform is very impressive. Any metrics you could share for us in terms of what kind of economics that adds to the business? And I think like it goes even beyond auto insurance. And so like just how big of an opportunity is that? And if you give us some numbers around that would be really helpful.

Well, again, excellent question. We'll share numbers after the quarter. This is really our first quarter with the tool in there. I'll tell you, I sold cars in the '80s. And back then, you had an insurance agent that you did business with and you refer customers to them. I think what Salty is doing, aggregating some of the larger carriers and giving consumers the opportunity and transparency to get competitive pricing that easy. We were interested in it for two reasons: one, creating a sticky relationship with our customers and being full service; and two, another revenue stream. We're paid a commission on the premium, and we're excited about that. In the last quarter, we talked about the number of cars we sell -- our customers are paying over $350 million a year in insurance premiums. If they happen to buy other policies for other cars or homeowners or that kind of stuff for them as well, we get the same commission on that as well. And then any renewals going forward, we get our commission as well. So it could be something that snowballs well over time. It's really too early for us to be quoting any numbers and saying how well it's going to do. But the concept, the reason we did it, we looked at Clicklane and said, we allow transparency with Clicklane. They can select their lender, they can see the F&I products. Kind of a visual way of you making your own decision. It just seem natural to offer car insurance and just a competitive quote. And it's a simple question, which you probably saw, it just says, "Would you like a competitive quote," yes or no?" If you say no, that's it, it's over. If you say, yes, because of insurance regulations later on, there's a series of questions you're going to have to ask. But then very quickly, without you having to waste any time, you can shop it against your premiums and see it. For the high net worth customer, they already have their relationships, they're not going to move. But for the average consumer that's out there, they don't have that ability now easily to shop insurance. So to be able to do that, get that quote back, we saw that as a nice value add for our customers. And that was the motivation.

Got it. Great. Shifting gears to productivity and SG&A. As I mentioned in some of like the earlier presentations, of course, like in the second quarter, gross margins were a big upside surprise for us, for investors. But to me, I think like what stuck out in your presentation and maybe in some of your peers, was that like how good the productivity was. Some of the permanent headcount reductions that happened seem to be sticky, and you're able to do even more or sell even more units than you did in 2019 with that lower head count and significantly more. So the question is like what's driven this sudden enhancement in productivity? Is inventory something -- got something to do with that? Can you sustain this going forward? And then maybe relatedly, say you come back to a level of GPU that was in 2019, where do we think SG&A to gross lands for the company?

Sure. A lot of great questions in there. I'll tell you technology has held automotive back from being efficient. You have 2 archaic DMS systems. You've got 30 different plug-on softwares. Very inefficient to do business with a consumer and for a consumer to do business with you. Now you couple it with being open 7 days. 20 years ago, people were driving their families on their lots. You had all kinds of traffic on your lots. 50, 60 people, on your lot, looking at cars at one time, now it's online. Well, the problem is when it's online, if I'm getting a 1,000 leads a month in my store, and I'm selling 100 cars, I'm not staffing my store for the 100 car sales. I'm staffing it for the 1,000 leads because I go to service them all. So you start off very inefficiently. And because you didn't have a transactional tool online, those other 900 customers that didn't buy from me, they bought somewhere. They just didn't like my price, they didn't like my engagement, they didn't like my speed, they didn't like something about the process. But if you invert that and put the process in the consumer's hands, the only one to stop them from transacting is themselves. We believe this early adoption of transactional tools online is in its infancy. Every year, it's going to get stickier and people are going to get more comfortable transacting online. I'm of the belief by 2025, no proof, it's just an opinion in doing this for so long, that 50% of the transactions will be done online. But that online means it's on your phone. You probably saw ours is mobile adaptive, whether I'm doing it at home or doing it at work or I stop at halfway through, and I want to come in and drive the car first, and then I just grab an iPad off our magnetic stand or finish it on my phone, that's an online transaction. If you get to the point where you're doing 50% of your business on a tool like Clicklane or any of the other tools that are out there that get better over time, think about how you could staff your stores? What the conversion rates will be? And now you no longer have to pay 100% commission. You can actually pay a very moderate salary, have a higher caliber employee offering a different level of experience for the consumer. So I think it's bumpy in the next couple of years, trying to get the technology right and getting consumers to accept it. But then once you get past that, I think you have an opportunity to really change the experience in the showroom for a consumer, change the number of people that you staff in a store, pay them differently, more consistently, but not so much commission where they're up and down and have a different quality person in the showroom. And then as you scale and grow your business, if you kept your commissions flat, there's some benefit to be had there as well. So it's tough to say where the SG&A lands when it's all said and done. I'll tell you selfishly when it comes just to Asbury, we're a different company today than we were pre-COVID. Pre-COVID, we're in that Park Place. We had Mississippi. We didn't have Colorado. Colorado's higher-margin business, we have that now. Mississippi was a tougher business for us. We don't have that. Park Place is a higher-margin business. So I think even if the numbers settle back down to pre-COVID numbers, I think we're still at a different set of numbers because we're a different company than we were back then.

Got it. Got it. That's great color. We have just a few minutes left. I wanted to shift gears to capital allocation, that's such a key part of your long-term growth and your targets. Could you give us some more color around just the near-term pipeline from an M&A perspective. You've talked about roughly $400 million revenue and NOI. Just give us a sense of the multiples' geography? And then also the $8 billion to $9 billion under consideration, any mix of the kind of assets there, large versus small, like just any more details around M&A and just the M&A environment right now would be helpful?

Sure. So as you know, we signed NDAs and everything we look at. So I'll try and be as general as I can. I've never seen the M&A market as open and as hot as it is now. There's a lot of deals in the market, and there's a lot of big deals. Some of them, Lithia is already purchased and you've seen them convert. It's a perfect deal, it's a large deal. The Keyes deal was a large deal. The Park Place was a large deal. In the last 12 months or in the next 6 months, you'll see large transactions taking place that we haven't seen in our industry for a long time. So I think that's very helpful and hopeful as it relates to consolidation. As far as multiples go, there's no easy enter to a multiple. A multiple for Mercedes store in Dallas is different for the same Mercedes store in Atlanta and the same Mercedes store in New York compared to Idaho. So I think you really have to look at the markets you're doing business in and what you think is a fair multiple for that. We kind of look more of our IRR over a 10-year period and basically say, what are the synergies? What are the opportunities? The $400 million that we talked about are in markets that we're interested in and that we've been trying to grow in or fill out further. So we think when we look at an acquisition, it's going to be equal to or more accretive than what we're currently doing. Otherwise, it doesn't make sense for us. So we're not going to look at California, we're not going to look at New York, we're not going to look at New Jersey. There are certain markets that we're interested in, in doing business and trying to grow scale, and that's what we'll do. To the $8 billion or so that I talked about on the earnings call, there wasn't a lot of deals in that number to get up to that $8 billion number. So it's a competitive market space. They're big deals. Do we have the appetite for a big deal? Of course, we do. We did Park Place. That was a good-sized deal, but it's not just about buying revenue. Is this culturally a good fit for us? Is this going to be accretive for our shareholders? Does this fit our business model? And if it doesn't, then we simply walk away from it. It doesn't mean there was a bad transaction for someone else, it just means it wasn't right for us.

Got it. Great. I think you just hit the 2:30 mark. There's always like several questions and it's not enough time. But as always, really appreciate you joining us and hope to see you again next year as well. And thanks, everyone, on the webcast as well.

Thank you for your time. Thank you.

Thank you.