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

Good day, and welcome to the Q3 2022 earnings call. This conference is being recorded. At this time, I'd like to hand the call over to Karen Reid. Please go ahead.

Thanks, operator, and good morning, everyone. As noted, today's call is being recorded and will be available for replay later this afternoon. Welcome to Asbury Group's Third Quarter 2022 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 prepared remarks, we will open the call up for questions and will be available later for any follow-up questions. Before we begin, we must 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 expectation, 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 fillings with the SEC from time to time, including our Form 10-K for the year ended December 2021, any subsequently filed quarterly [ report ] on Form 10-Q and our earnings 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 have also posted an updated investor presentation on our website, investors.asburyauto.com, highlighting our third quarter results. It is my pleasure to hand the call over to our CEO, David Hult. David?

Thank you, Karen, and good morning, everyone. Welcome to our third quarter earnings call. Before we get started today, I would like to take the opportunity to say that our thoughts are with all those affected by Hurricane Ian. Thankfully, our team members living in the path of the storm are safe. Also thanks to the preparedness of our teams, we are fortunate in avoiding any notable damage to our stores and inventories. I will note that although we make did adjustments to net income to reflect the effect of Hurricane Ian, we estimate that the store closures had a negative earnings impact of $0.14 per diluted share on our third quarter results. For the third quarter, we grew adjusted EBITDA by $115 million to $329 million, an increase of 54%. We grew adjusted EPS from $7.36 to $9.23, an increase of 25%. We delivered an 8.1% adjusted operating margin, increased revenue by $1.5 billion to $3.9 billion and gross profit by $288 million to $768 million, and drove F&I gross profit per vehicle to $2,480, up $569 from prior year. During the quarter, we continued to integrate our acquisitions, build a strong balance sheet and reduce our net leverage. Our days supply increased to 19 days, partially due to deliveries delayed by Hurricane Ian, yet still low day supply and inventory affecting overall unit sales. Year-to-date, we have generated $782 million of adjusted operating cash flow. Net leverage has decreased from 2.7x at year-end to 1.9x at the end of the third quarter. Our strong cash flow and reduced leverage enables our focused capital allocation strategy. Currently, the car park average age is over 12 years. We have pent-up demand from supply constraints over the past 2 years, and our parts and service revenue continues to strengthen. We look forward to continuing to deliver strong results for our shareholders, being outstanding partners with our OEMs to steward their great brands now and in the future, and offering an environment where our team members can thrive, while providing the most guest-centric experience in automotive retail. Once again, I would like to acknowledge the hard work and dedication of all my fellow Asbury team members. It is through your passion and persistence that we continue to deliver these strong results for our shareholders and to be the most guest-centric automotive retailer. Thank you. I will now hand the call over to Dan to discuss our operating performance. Dan?

Thank you, David, and good morning, everyone. I would also like to thank all our teams nationwide for their hard work, dedication and commitment to delivering an exceptional guest experience. Now I will turn to our same-store performance compared to the third quarter of 2021 unless stated otherwise. Starting with new vehicles. In the third quarter, new vehicle inventory continued to remain well below normalized levels and consumer demand outstripped supply. At the end of September, our total new vehicle inventory was $332 million and our day supply was at 19 days, up 7 days from the prior year quarter. Due to supply constraints, new vehicle volume declined 16% year-over-year. However, we experienced a significant increase in our new average gross profit per vehicle, which increased $717 from the prior year quarter to $5,782. We anticipate new inventory levels to remain low through the end of the year, and we are focused on maximizing profitability while also remaining steadfast in our commitment to our guests. Turning to used vehicles. Used retail revenue was flat to last year. Our total used vehicle inventory ended the quarter at $368 million, which represents a [Technical Difficulty] supply. Our used to new ratio for the quarter was 120%, up from 112% in the prior year quarter and in line with our second quarter of 2022. Shifting to F&I. We delivered another strong quarter with an F&I PVR of $2,254, an increase of $339 compared to the prior year quarter. Thank you to our F&I team once again for this impressive result. In the third quarter, our total front-end yield per vehicle increased $307 per vehicle to $5,916. Moving to parts and service. Our parts and service revenue increased 12% in the quarter. Our customer pay revenue continued its momentum with a [Technical Difficulty] growth. Jumping to Clicklane. Not including LHM and Stevinson, we sold over 6,800 vehicles through Clicklane in the third quarter, a 13% increase year-over-year. In fact, Q3 was Clicklane's best quarter ever. We experienced a 16% increase in visits to our website, reaching a noteworthy 10 million visitors in the quarter. Based on the [Technical Difficulty] from our legacy Asbury stores, we are on pace to generate approximately $1 billion of revenue from Clicklane in 2022. We are excited to announce that Clicklane is now rolled out to the Stevinson and LHM stores. We expect to generate $2.2 billion in revenue for 2023 from Clicklane across all stores. Though sales of new vehicles continue to be constrained by a lack of inventory we achieved, 92% of our transactions this quarter were with customers [Technical Difficulty] more incremental to Asbury's dealership network. Average transaction time remained roughly in line with prior quarters with 8 minutes for cash deals and 14 minutes for finance deals. Total front-end PVR of $3,450 and F&I PVR of $2,093, which equates to a total of 5,543 of total front-end yield. The average Clicklane customers score increased to 718, which is higher than the average credit score at our stores and demonstrates a robust omnichannel consumer. The average down payment per vehicle was $9,481, up from $6,713 or 41% versus last year. 81% of consumers seeking financing received instant approval, while an additional 10% required some off-line assistance. 91% of those that applied went for financing. 41% of Clicklane sales had trade-ins with 53% of such trades reconditioned and retailed to consumers. And 95% of our Clicklane deliveries were within a 20-mile radius of our stores, thus allowing us the opportunity to retain our new customers in service departments. Clicklane customers are converting at more than double the rate of traditional Internet leads,, but we won't see the full potential until inventory levels normalize. We achieved almost 200,000 online service appointments, an increase of over 50,000 or 35% compared to Q3 of last year. I will now hand the call over to Michael to discuss our financial performance. Michael?

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 for the quarter, please see our financial supplement and our press release today and our investor presentation on our website. Overall, compared to the third quarter of last year, adjusted net income increased 43% to $205 million and adjusted EPS increased 25% to $9.23. Net income for the third quarter of 2021 was adjusted primarily for the sale of dealerships, which netted to $0.18 per diluted share. Third quarter 2022 did not have any adjustments. The estimated reduction in EPS due to Hurricane Ian was $0.14 per diluted share. As David mentioned earlier, we did not include this impact as [Technical Difficulty] results, but are providing to help size the hurricane effect. During the last week of September, we experienced lost business for closures of our 24 stores in Florida, which represents approximately 35% of the same-store unit sales. And we continue to pay our team members while those stores were closed. We estimate the impact of same-store SG&A as a percentage of gross profit to be 40 basis points, thus 50.4% when excluding the impact of the hurricane. Year-to-date, we generated adjusted operating cash flow of $782 million. Excluding real estate purchases, year-to-date, we spent approximately [ $50 ] million on capital expenditures. Our balance sheet remains strong as we ended the quarter with approximately $1.2 billion of liquidity, comprised of cash, excluding cash at Total Care Auto, floor plan offset accounts and availability on both our used line and revolving credit facility. We recently amended our credit agreement to enhance flexibility in supporting our strategic objectives. Also at the end of the quarter, our pro forma adjusted net leverage ratio stood at 1.9x, down from 2.7x at year-end and 2.1x at the end of the second quarter. For 2022, we are planning for CapEx of approximately $120 million. This amount excludes real estate purchases. For the quarter, TCA made $22 million pre-tax income, which included $1.9 million of net investment losses. Excluding the investment losses, TCA would have made $24 million for the quarter. TCA provides us the opportunity to expand horizontally into our F&I business. TCA has generated $65 million of income year-to-date on the [Technical Difficulty] excluding net losses on investments. We now have expanded TCA into all of our Colorado stores, and we anticipate a full rollout to our existing stores by the end of 2023. As a reminder, we expect EBITDA from this unique asset to hit $185 million by 2025. Finally, I would also like to thank all of our team members at Asbury who have dedicated themselves to building a brighter future for ourselves, our communities, our shareholders and all of our stakeholders. I will now hand it back over to David to provide some closing remarks. David?

Thank you, Michael. In closing, with our diversified revenue streams, we continue to generate robust cash flow and profits. And with the age of the nation's car park at historic highs and our fixed operations [ going ] so strongly, the resilience of this business model continues to deliver solid results. We've maintained our disciplined expense control through significant revenue growth, almost doubling the size of the company in a depressed car environment. We continue driving towards strong execution across these lines, and we are always evaluating and optimizing our portfolio. This concludes our prepared remarks. We'll now turn the call over to the operator and take your questions. Operator?

[Operator Instructions] We will now take our first question from Daniel Imbro from Stephens.

David, I want to start talking about Clicklane actually. I think in the slide, you said 95% of deliveries were within 20 miles. I mean, do we have enough data yet to track the service attachment on those sales and how sticky they are? Is it the same as a physical sale? Just thinking about the lifetime value of using Clicklane more in-market versus new markets and what you're seeing on the data side there?

It's a great question, Daniel. It varies by market depending upon whether it's a metro or a single point market, but it generally lines up with what we're selling out of our conventional stores. The benefit and our focus to stay within a 25 to 50 mile radius is really to ensure we capture that parts and service business. Our intent is to govern sales beyond 50 miles when possible because, again, the revenue from parts and service is just too important to us.

Got it. But no data yet on whether that's, I guess, working or you're keeping those service sales?

Yes, it's early on. A lot of them are coming up on their first oil changes. And like I said, so far, we're seeing similar results as if we sold the car in the showroom compared to Clicklane.

Got it Second one I want to ask on was on the F&I redesign you guys talked about last quarter. I think that included some bundling and new tools. How is that progressing [Technical Difficulty]? But then obviously, the FTC -- I'll tie that in with that question -- they've closed the comment period talking about potentially looking at and impacting the F&I departments. So how does that impact your F&I business or some of the bundling and other tools you've introduced there?

This is Dan. I'll start with the last question, and then I'll go to the second iteration of our F&I tool. I think we've always done and supported the proper disclosure and full transparency in the F&I products. That is the right thing to do for our consumers and it is the right thing to do for our business. So we've always operated under that condition and we will continue to operate. And we will adjust to whatever the FTC puts out there, again, under the full transparency spectrum. From the second iteration of Clicklane, it's the first quarter where we started rolling it out. We don't have enough data for me to really share with you on what is going on. What I will tell you is that we continue to tweak it based on what we see from a consumer standpoint on what they like, what they don't like and continue to make adjustments to make sure that we're providing what they want on the digital aspect of the sale.

The only thing I would add to that as it relates to the FTC and pending stuff, we have a tremendous amount of folks that are professionals at disclosing these products and selling them professionally. Traditionally, our mix is 50% products and 30% reserve. Everyone is compliant trained. We're constantly tweaking our training to get better at what we do. At the end of the day, just like I'm sure all our peers do, we strive to only sell products that are needed from our consumers and add value. and certainly have a tremendous amount of confidence, whatever the outcome is, we'll maintain our F&I numbers.

Great. And then last one for me. I just want to touch on the SG&A side. I think you continue to lead the peer group, staying in the high 50s despite GPUs normalizing. Any update on [Technical Difficulty] where that ratio of SG&A to growth shake out either in '23 or '24 as the industry evolves given the cost savings you guys have realized?

Yes. I mean I think the thing in there is productivity per employees is one of the key things for us and then also the change in our business in terms of selling some of our car stores in Mississippi and replacing those with Park Place and then some of the new acquisitions. We still have ways to go on the acquisitions. But we think when the margins come back to whatever they end up back at, if that's 24 -- '23 or '24, we're kind of in that 60% range for SG&A percentage of gross, to low 60%. But also there's some potential to be able to bring that number back down into that mid-50s range once Clicklane gets enough volume under it. And that will help us change the comp structure in the stores. But that's kind of a second wave when Clicklane gets to be a higher percentage of our sales.

And I would add to that, Daniel. If you look at our same-store SG&A, it was 55.8%, which is pretty solid. And it obviously shows that we haven't reached our synergies yet with our acquisitions. So there's definitely some tailwind there for us to work on over the next 12 months to get that in line with the rest of the company.

John Murphy, Bank of America.

Obviously, there's a lot of crosscurrents going on here that are a little bit unusual, particularly on the new vehicle ply side of the equation. Just curious. It seems like you guys had slightly lower volume but higher grosses, and it seems to be kind of varying between group and conversely some -- slightly better volume, but lot lower grosses. But still very strong grosses in general. I mean when do you think this is going to normalize? I know you guys said you think it will stay tight through the end of the year. But it seems like it's going to stay relatively tight well into next year, which should be supportive of grosses well into next year. But what is your take on this? And how do you manage this? Do you just keep taking much higher grosses and fight through this? Or I mean, how you're thinking about it and how do you manage it?

John, this is David. I'll start and then Dan can jump in. This is one of those deals where they're not all going to come back at the same time. I think, generally, a lot of the domestics [Technical Difficulty] supply will come back late first quarter into second quarter. And the imports and luxury, it really could be the second half of the year at best. Still hard to tell. When you look at our quarterly results and the tables and where the unit sales came from, the vast majority of the volume comes from import. And when you look at a couple of the import brands that represent 25% of our import business that we never had a 5-day supply of cars in the quarter, that's why you're seeing such strong margin. I think those brands are still going to struggle into the first half of next year and get back to a normalized day supply. So we're still selling -- preselling into our pipeline percentage-wise, a little bit less than prior quarter, but still really great results of pre-selling cars that are coming. So the demand is still there. And I can't stress enough a point on the script. With the average age of the car around 12 years, there's just that natural attrition or benefit that we're going to have that even whatever headwinds come our way, we feel like that we'll maintain better than most sectors. There's something you want to add?

No, I have nothing to add. Well said.

And then to follow up on that. I mean we're going to be in a constraint -- it sounds like we'll be in a constrained environment well into next year. And even a reasonable recovery on the new side is going to take a long time to restock the 1 and 6 year old car fleet. I mean it might take 3 years plus at least before you even get a recovery there. Does that bode well for your parts and service business? And can you push growth there further? Where is your cap in your service base? And is there an opportunity for you to really grow that much faster to offset what might be a still continued constraint on our used vehicle business?

Yes. John, I'll start with the parts and service piece first. One person's opinion, not guidance, but I think the next 10 years parts and services has a tremendous opportunity to have tremendous strength. You think about the number of combustible engines on the road, electric cars coming. This quarter is no different than the previous 4 quarters for us. Our highest repair order dollars per ticket were on electric vehicles. So the first generation warranty work is going to be strong in those vehicles as they enter into the market. So between combustible engine, higher retention numbers, electric business coming back to us for retention, larger dollars generated, we think parts and service is going to be in a great space for a while. When you look at our used business, we were backwards 10% in the quarter, we were backwards pretty good in PVR. But when you break down the PVR and you look at what we normally generate for gross profit on our trade-ins, we were $2,300, $2,400 a car, which was significantly higher than what our overall number was. And it's because of your point. The used market has been so depressed for so long. Cars haven't been available. When you're buying cars in the open market, you only get them if you pay more than anybody else. So that certainly has been bringing down our margin. We think over time, it will normalize. But it's going to be a ways out. I mean it's probably a good 18 to 24 months out before we start to really get some of our trade business back normal.

Got it. And then just -- I'm sorry, just one last thing, David. You had mentioned something about Clicklane and that you didn't want to go much beyond a 50-mile radius around stores because you don't retain the consumer for parts and service. I'm just curious. Is there a normal physical radius for the normal physical stores before we get into Clicklane that you think that might be 10 or 20 miles, and it's now larger because of Clicklane, of 50 miles? Or is it just Clicklane will garner a higher market share in that 50-mile radius, and it's kind of the same as what you think about with a normal physical store?

Yes, I'll start and then Dan can jump in. I think what's been consistent through the quarters, which has been a little bit surprising to me, is that north of 90% of the customers that have purchased live in our communities, but haven't done business with our stores. So I look at that as a couple of things. The independents or the private caps that we're dealing within the markets don't have the full transactional tools. The consumers with the strong credit scores see the value and time saved, and we're gaining these customers for it. I think we're going to continue to see strong penetration for the next few quarters until the private side catches up with the technology. But it's just logic based. I mean if you could purchase a car in 14 minutes compared to sitting in a showroom for 2.5 hours, what's a better use of your time? We think that will continue to grow. I think the other aspect is within our tool. If you're buying a car in New York and you're buying it from one of our stores in Atlanta, when you purchase the vehicle, you type in your address where you want the car delivered to and it's almost like Google Maps. We map out in real time exactly how many miles it is to you and what the cost per mile is or the overall cost to ship the car to you. So you have to factor that into that delivery, if you will, or that cost to deliver the vehicle is being passed on to the consumer. We don't have it marked up. We have a national transportation company that services us well and servicing those customers well. But it's an additional expense to the consumer. So it's not to say that we haven't shipped cars 500 or 1,000 miles. We have. We just don't like to do it because we want to retain the relationship.

The one thing I'll echo -- I mean, what David is saying is, going back to the primary market area responsibility that we [ learned ] by our OEM partners, it's key to maintain that. And as you -- as I mentioned in my script, we had -- we reached close to 200,000 online service appointments. And when we look at convenience, which is really what the -- ultimately what the consumer wants within the primary market area that we service, I think that, that has given us the competitive advantage. And that's what we're seeing that -- the model is stay right within our PMA and reaping the benefits of it from a retention standpoint and the entire domino effect.

Ryan Sigdahl from Craig-Hallum Capital Group.

I want to start on Clicklane. So solid metrics. The Board continues to get better there. But curious on the 2023 guidance for $2.2 billion in sales. I think I caught that right in the prepared remarks. But growth has been slowing sequentially on a unit basis there. I guess, what are the main drivers to more than double sales year-over-year next year?