Group 1 Automotive, Inc. (GPI) Earnings Call Transcript & Summary

Well, if everybody could get settled, we're going to get going with the next session here. We're very happy to have Group 1. From Group 1, we have from left to right, we've got: Jason Babbitt, Vice President and Treasurer; Pete DeLongchamps, Senior Vice President, Manufacturer Relations, Financial Services and Public Affairs, and he wears a lot of other hats, so it means like a lot of hats for Group 1; and to my left, Daniel McHenry, Senior Vice President, and CFO. So thanks so much, everybody, for joining us. We're continuing the dealer theme here this morning. Group 1 is a slightly different strategy than we've heard from -- certainly, from Penske and from other dealers. It's expanded into the U.K. Big operations, obviously, here in the U.S. It's retrenching a little bit or retrenching completely from its efforts in Brazil and it's starting to pick up the pace a little bit on acquisitions and going into sort of a little bit more of the growth mode. So there's a lot going on here. So thank you very much for joining us. There's a lot to talk about.

I'm going to kick off with the obligatory question about the over earnings to make sure we get everybody's answer on this. And your take on your potential over earnings and how things will shape up, maybe sort of not with guidance, but like over the next couple of years is where are the risks and where the opportunities for earnings to continue to remain strong?

Okay. I think if you think about Group 1 and if you roll back to 2019 and where we are today, the company is a very different company versus where it was in 2019. We have grown significantly through acquisition over the last 18 months. We've added $3 billion to our revenues in that period. We did the biggest acquisition in the company's history in November of 2021, acquiring the Prime Group, which was 28 dealerships in the Northeast of the U.S., adding $1.8 billion of revenues to the company. In addition to that, I think one of the things that we have achieved successfully is restructuring [ our ] SG&A and the fact that we have reduced the headcount in the company on a same-store basis by 20% over that period. And what we have effectively guided to is that we would expect should margins return to 2019 levels that we've taken at least 400 basis points out of our cost structure. What John said, it is correct. We've looked at our geographic regions and decided that we would move away and sell our Brazilian operation. When we went down there in 2014, the exchange rate was very different than what it was today. It was 2:1 in terms of exchange rate when today, it's closer to 5:1. So we just couldn't really get the traction that we wanted in terms of our profitability. The legislative environment down there made it difficult to grow. So we've decided to divest of that operation and reinvest the proceeds in our core business in both the U.K. and the U.S.

Okay. So if we think about that decision, I mean, what was the -- I mean, you mentioned currency is a driving factor for Brazil. But was there anything else going on with your manufacturer partners like Ford backing away from South America or anything like that, that influenced it? Or is it really sort of a micro decision on capital, both human and dollars that you thought would have better returns?

Our OEM relations in Brazil were really good. We had Land Rover/Jaguar, BMW, Toyota and Honda were our key brands. When we went there, the plan was to continue to grow the platform out. But the environment down there, political unrest and exchange rate just made that more difficult to do. And that's why we've decided to redeploy the capital elsewhere in the company.

Okay. And then getting into the new vehicle business, sort of somewhat repetitive questions on the GPU side. But I mean, there's this constant fear that GPUs are going to crater. I mean just wondering what your response is there. How do you manage that? How do you offset that? How are you thinking about that normalizing over time? And what does -- what the h*** does normal mean, actually?

So I think clearly, the margins are a function of supply. And we don't see supply coming back in the near term. And our forecast is that when supplies do return to some level of normalization, whether that's a 30-day supply, that there will be certainly some moderation of margins and maybe somewhere between pre-COVID and where we are today. But the positive of that is additional volume. So we fully forecast some moderation, but I believe will be offset by volume.

And part of that moderation in inventory, not going back to where it was pre-COVID is your business partners, being the automakers making decisions on production and you're very close to those partners. I mean, what is your view on their discipline and the idea that they won't overproduce and drive us back into an oversupplied?

Well, I think the financials speak for themselves right now for the OEMs and for the dealers. So when you hear Jim Farley and Bob Carter talk about keeping at a reasonable level, and I think Bob talked about the -- 25 to 30 days' supply at the show yesterday. I mean -- and Toyota has been very good at that over the years as you think about with -- [ relative to ] Lexus. And so they know how to do it. And we feel that with the empirical data they have today, this -- this may have some legs. And if that happens, then I think it's a long runway for the OEMs and for us from a profitability standpoint.

The other thing we're hearing on the new vehicle side and actually on the used vehicle side is that the consumer may not be as strong as we're all thinking at the moment. I mean you have certainly some different regions. And in the oil patch, I'd imagine, hopefully, people are jumping up and down and buying big trucks like crazy, but -- and very healthy. But I mean what's your view sort of on the consumer in general? And then if you think sort of regionally, particularly now you're big in the Northeast now with the Prime acquisition. You're big in Texas, you're big in the Sunbelt. I don't know, I mean, maybe general consumer health and then maybe regionally because you've got a pretty good view on some different regions.

Well, thinking back to 2009, what asset class performed the best? It was car loans because in this country, people have to drive cars. And when we look at the sequential leads, showroom ups, through our digital applications. It's been very, very consistent. So we have not seen a drop in overall demand. The pipeline both in the U.K. and the U.S. are, I'd say, 95% of the cars that have been allocated are presold. Our company, we keep a 30-day supply of used. So we turn our used car inventory 12 times a year and that's been very consistent. So we've been very disciplined in how we acquire our used cars. So from our standpoint, demand has been very, very consistent. And to your point, in Oklahoma and Texas, where we're the largest seller of retail automotive, business is fantastic. So clearly, high oil prices is a tailwind for us. And the businesses that we acquired in New England have exceeded our expectations.

And when you think about what you just mentioned on a large majority of your vehicles being presold before they're hitting the grounds. That's a significant change. I mean, in Europe, U.K. it's kind of a little bit more standard than what we have in the U.S. But everybody kind of thinks about the U.S. consumer as being overly gluttonous and impatient and they want the d*** vehicle right now. They don't want to wait for it for 3 months, but then all of a sudden it seems like they are and it's working pretty well. Does that last and persist from a consumer behavior standpoint? We can argue about what the automakers may or may not do. But do you see any -- consumer is starting to be conditioned being like this is a great product. I'm picking exactly what I want. I'm sure I'm paying a good price for it, but like -- but I'm getting exactly what I want. Is that mindset shifting? Do you feel anything like in your dealerships and when you're talking to consumers that they're okay with this?

I think in terms of luxury vehicles, the consumer has always been more okay with that than others. I think if inventory was in the grind and availability was larger, I think the consumer will revert to type. And I think for the mass market and they'll want to get their vehicles as quickly as possible.

Okay. So you think that little has changed with the American consumer on their desires for [indiscernible]...

Certain in terms of volume.

Also it goes back to the want versus the need. People want a new suburban with all the equipment, they're going to have to order it, and it's going to take 5 or 6 months. If somebody needs a car today, then they're hopefully going to find something on the lot, even though I think we closed the fourth quarter 9-day supply and not much changed in the first. But then they're going to have to look at a used vehicle because they need the transportation. And I guess the good news in all that, and I had a personal experience this week where somebody needed a car, so they're buying a used car. But because prices are holding, they're going to order the new, buy the used and then 6 months ride in the one they're buying this week. So we sold 2.

That's a good deal. Then you get that used back for inventory, that's fantastic. That's a great way to source, right? It's called the boomerang effect. So switching gears that -- how often, right? So you just gave us an example of somebody saying, I just need a car, I'll buy used for the moment. But this whole notion of somebody saying, listen, there's not enough new cars, it's not what I want. Listen, you got this used car, but I really want same specs. How much transition is there from somebody who's coming in and buying new to used? I mean we hear about that all the time, like everybody's tripping over -- I say it, maybe I'm wrong. But I mean, it's a nice clean story, but is it actually really happening, when that person wants a new car and they just like, all right, I'll buy a 3-year-old car because that's all -- I mean, that's all I can get and I want it now. Or do they wait?

It goes back to they need the car, they're going to buy what they need today. And then maybe order what they want.

But I mean how many people absolutely need a car? I mean if somebody who's increasing their fleet or buying a vehicle on a primary basis as opposed to trading one in because you've got a used car and it's working. You don't need a car. So I can't imagine that that's too large or I mean -- I don't know. I mean...

John, if you think of just the math on -- the trend in the industry is, $16.5 million, we sold $14 million last year. There's 2.5 million people that would have bought a car, and we're seeing that same trend this year. So pent-up demand is significant. And so as people come in, they need to buy a new car because their car is old. What's the average car, they're 12 years old? So you've got an aged fleet. And in this country, you've got mass transit in New York City, and that's about it. And so people need cars. And we're seeing that demand and it's continuing. So I think any commentary that you see about the demand is waning, we don't see it in our business today.

And John, I think one of the things that we've got much better at doing is mining our database and for lease returns. So when someone's lease is at 6 months out, we're trying to get them to order their new vehicle now to ensure that we get the lease returned in, to ensure that they have a vehicle whenever their lease is expiring. And I think that's just been much better for us as an organization. We're getting the new vehicle sale. We're getting reassurance that we're going to get the lease returned back and be able to go with that as a used vehicle. So I think some of the dynamics of how we operate has changed as well.

Okay. And then also thinking about on the used side sourcing. I mean I think [ Andy Kolb ] has got a great line that there's no manufacturing facility for used vehicles and that's very [ catchy ] and smart way to think about it. You guys, I think in the last quarter were saying that your used inventory was back to largely normal. So you're doing a good job of acquiring vehicles and at the right price and getting good grosses for them. How is that working? Because we're hearing from other people are having a hard -- they're not able to do it. CarMax yesterday kind of puked their same-store sales because of it or at least that's our view. I mean, there are a few who won't be able to do it. I mean, how are you doing that?

So I think one of the key advantages, the OEM franchise model is that you get trades. So 70% in Quarter 4 of our vehicles, that came from trades. One thing that we've changed and we've worked hard on is sourcing vehicles from consumers directly. So be that through the service drive, be that going on social media channels such as Craigslist and Facebook selling page, et cetera, acquiring vehicles at the stores. So what we find is that we've managed to acquire about 15% of our vehicles through those kind of channels. And that's a big step away from where we would have been before going to the auction, acquiring at least 20% of our vehicles from the open auction. In Quarter 4, we acquired about 7% of our vehicles from open auction because the competition is just too high out there for vehicles at the open auction. You've got all of the used car players, you've got the rental companies at the moment trying to acquire vehicles from auction. And what we just find is the margins that we get on the vehicles that we acquire through the way that we're sourcing vehicles is much higher than the margins if we acquired through the auction.

Something has just changed in the auctions, right? Carvana, you could consider a competitor or maybe something else, you might have other words for them, is out there and they just bought ADESA's auctions -- physical auctions. What does that mean for your sourcing strategy? Is that the kind of thing where you were buying from ADESA and now you're no longer going to buy from them? Has anything changed in the flow of vehicles? I mean, I think there's got to be a little bit of that, right? I mean -- but I mean, because Carvana is certainly a competitor on the used vehicle side? And do you think that dynamic changes much in the industry? I mean you say, "Hey, listen, I'm going to stick with car because I can do it in the digital lanes and actually do it pretty effectively, maybe at much lower cost than it wasn't in the physical lanes. I mean, what do you think of that transaction? What does it mean for your sourcing?

I don't think it means anything for us. I think it's interesting that they're going to brick-and-mortar. But we buy 8% of our used cars from the auction. So in the past, it was 20%, but we've pivoted on where we procure our cars from. So it's such a small percentage of our used car procurement that will have no impact on our company.

Okay. And on used vehicle pricing, we heard from Smoke yesterday that pricing is back up and doing a seasonal balance after a little bit of a fade from all-time highs, but we're still near all-time highs. What does this used vehicle pricing environment mean for you? I mean is it simply turn and earn and you just got to be careful about spikes up and down in used vehicle pricing? Or is the strength of used vehicle pricing just a really good thing for the used vehicle business for you at the moment? I mean how much does that matter?

So I'll tell you there's -- I think there's 2 sides to that. One is having valuable used cars in the marketplace is certainly good for the consumer. And we hear about inflation. Well, inflation works both ways. So the consumer who -- we use the example of a car they may have been paying $35,000 for a year ago, may be paying $39,000 today. So there is some inflation there. But the trade, which 60% of our customers trade a car in, that trade has also benefited from inflation as well. So maybe that car was worth $20,000 a year ago, now it's worth $28,000. So from the consumer standpoint, in many instances, we're finding a net positive because the trade is worth more than the increase on the new car. So on an operational side, we turn our used cars 12 times a year. So we've got a 30-day supply of cars, which effectively means we've got 23 days on the ground. So the risk profile for us because we're turning them so fast, if there is a significant downturn in pricing, our risk is very low because we turn the car so fast. So we're buying those cars at market price. And the one thing that we made the conscious decision of, if we're going to pay too much for a car, we'd rather do with our customers. We'd much rather than not go to the auction and pay transportation fees and auction fees. If we're going to overpay, we want to deal with the customers within our community. And that strategy has paid off very well for us. And the other piece of that strategy that has been a lot of discussion is we're not charging our consumers over MSRP. We think it's our responsibility to be fair with our customers within our community. We give them a fair trade for their -- a fair price for their trade. And we think the long play on that is in 3 to 4 years when things do normalize, we're going to have great used cars coming back that customers do not have negative equity in. Because you tack on $10,000 to a Camry, I can promise you in 3 to 4 years, you're going to be $10,000 upside down. So take it now or take it later, but we're in a position now where we think that that's the proper way to do business.

And there's another shift that's going on in the industry with -- like CarBravo from GM, where the automakers seem to want to help manage the business or get involved in the business. And just -- and we've talked a lot about CarBravo, and it seems like a little bit of a work in progress like things are -- the offering or the product itself has been somewhat morphed and I think you guys and other dealers are having some impact on how it will develop over time. But what do you think that means? How does that interface with Acceleride as a complementary competitive? Does it change much in your used business or help out a lot? I mean how do you think about CarBravo?

I think that for us, as a business, it's not going to make a big difference. I think that the direction that GM have given so far is that the deals will still come to our store. When I look at the Acceleride platform and compare it to the other platforms that are out there, I think that our Acceleride platform is equally good, if not better than any of our competitors. And I think there will be a perfect interaction with both the Acceleride platform and the CarBravo platform.

So you think those can -- those systems can largely dovetail, talk to each other? And if there's any benefit for CarBravo, you'll realize it through Acceleride? It will work well.

Absolutely.

The other thing you guys have been doing on the used car side is going deeper in the age spectrum and its -- I pause, it's value -- what's the...

Val-U-Line

Val-U-Line

Val-U-Line, right, yes. I was going to call it Value Act, but it's Val-U-Line. How successful has that been? How deep are you going in the age spectrum? And I mean how much deeper could you theoretically go over time? And what does that mean for the real estate? I mean, we always hear new car dealers don't want to sell used cars that are 10, 15 years old because it's a different customer. And you don't want those customers co-mingling and it's not the greatest experience and you need different kinds of salespeople. I mean is that still the mantra? Or can you go older and utilize similar assets -- real estate assets to go deeper in the age spectrum?

I'll talk a little bit about the kind of real estate and the spectrum. So effectively, what we used Val-U-Line for was to dispose of used vehicles that traditionally would have been going to the auction. So as an outlet for us to dispose of those and give us an extra profit element to our business. It's traditionally older vehicles, higher mileage vehicles over 7 years old. It tends to be kind of where we look at that spectrum. It's about 11% of our sales. We don't go out and actively acquire those vehicles. It tends to be just a source to dispose of our vehicles that we take in and trades that would normally have gone to the auction. So we don't see that as a growth plan for us because effectively, it's just an outlet to dispose of those vehicles. And Pete, do you want to talk a little bit about the customer base and the financing?

Sure. So as Daniel mentioned, Acceleride was kind of a paradigm shift where traditionally an 80,000 or 100,000 mile car will just go to the auction. But cars have gotten so good over the years. There's a good 100,000-mile car that's been reconditioned -- it's a terrific unit. So we are a little bit ahead of our time because we started this 5, 6 years ago, and the dealerships embraced it. And with that, we have terrific lending partners that we work with to make sure that those cars can get financed to that customer. And when we first started, it was $8,000 to $10,000 cars. Now it's probably $9,000 to $12,000 cars. So it's been a really nice addition to our used car business. And as you know, John, we've -- as a company, we've always focused on the high-margin piece of the business, which is parts and service. And so when building -- stand-alone used car buildings became fashionable, we stayed away from it. We didn't think it was a good return for shareholders' money. And I think as we sit here today, we're more right than ever because we've got plenty of opportunities at our current dealerships to grow our used car business. And when you take a look at -- normally, our company would have 30,000 new cars on the ground today, we have 3, which means there's plenty of parking places to grow our used car business without having to grow stand-alone brick-and-mortar. So we've always been very cognizant of the high-margin piece of the business. And I think when you dig into our parts and service growth, we kind of -- we lead the sector just about every quarter. I think we grew our parts and service business 17% in the fourth quarter with -- well over 20% of that was in customer pay, which is pretty remarkable. And so we put a lot of work in that. But I say that because if the parts and service business grows, that's more throughput through the service drive. And we have sales representatives on the drive talking to customers every day about kind of where they are with the car, and where equity mining -- and we know exactly where the equity is. And some customers have additional cars that they can sell to us, and we've been very successful in buying those cars. So at the heart of this model is the parts and service, and it's helping to feed our used car business.

And sort of 1 thing that just came up is Honda has willingness to go, I think they are 10 years on CPO-ing vehicles, right? So I mean, what does that mean for your used vehicle business? Because that does start to get into Val-U-Line somewhat with territory, but then you're getting a CPO vehicle, right, which has got warranty, it's going to have a much higher parts and service attach rate. Do you think that might start occurring in other automakers? Or is it just because Honda's quality is so much like -- because they're willing to do that. But like you just said a 10-year-old 100,000-mile car now is a very different asset than it was 10, 20 years ago, it's totally different. It's a great asset. It's a great vehicle.

Well, it keeps the car within the ecosystem for Honda. But for us, it's about retention. So if I can have a customer who's got a CPO warranty coming back to us for 10 years, that's a serious benefit from us. And so Honda, in particular, is really working on customer loyalty. And so we embrace that opportunity with Honda.

Yes. It just seems like a huge opportunity. Pete, you've been -- I'll say this nicely, but lying to us for a long time on F&I, right? I mean you keep telling us we can't go higher, can't go higher and you keep on finding opportunities to go higher. And I mean that in a polite way because F&I going higher is a good thing, right? That's -- I mean, what are the key drivers here? And I'll ask you again, I mean, can it go higher? I mean it just seems like there's products, there's offerings. There's things that make sense for the consumer, the consumer wins. So it's not like it's a taboo. It's not like you're doing glass etching to push things. There's real good product there. I mean, where is this going to go? And what do rates rising mean for it? A lot in there, but...

Yes, I don't want to lie you anymore, honey. But -- so the F&I business -- first of all, we're very compliant. We've got one of our great partners, [ Smith ] right in front of us here. And we've been very careful to make sure that the money we make on our customers is -- we're a 1% spread. So 1/3 of the money we make in F&I comes from originating a loan. So we think that's a fair amount. We're not making 2, we're not making 3 points, we're not making 4 points, making 1 point. And then I've got a terrific field team. I've got 9 field representatives that work with our dealers. And for us, it's all about product. And I took a very simple approach to this business, and it was the products we sell have to be good for the customer and good for the car. And what does that mean? If you have a -- I'm a big believer in paint insurance, it's paint protection, people call it mop and glow. If your paint goes bad, the insurance pays for it. I'm a big believer in selling dents. Nothing worse than coming out and seeing your new car has got a big dent in the side of it, a door dent. Big believer in selling service contracts and maintenance. Those are the main things that we sell. And where it works is that when you come to trade your car in, in 4 years and you've had a maintenance agreement, your car is in good mechanical shape. If you have a dent insurance, you don't have any dents. And if you have paint, then you're going to have good paint. So what does that mean? That you're going to get more for your trade, good for the customer, good for us. We get a great trade. So we've been focusing on that. And in some cases, we've doubled and tripled our penetrations over the last 10 years with some of these products. And we've been very specific with who our partners are. And we've been loyal to them. They've been loyal to us. And as we've grown this business, it keeps getting better. And our processes in the F&I at the actual dealerships are all very consistent. Our training is consistent, and we just have 1 process, how we do it and it continues to get better. And every quarter, I will tell you, it's a -- wow, a terrific job, everybody. Headwinds, clearly, interest rates could be a headwind because at the end of the day, it's about monthly payments. And if your monthly payment gets too high, maybe you're not going to buy that extra product. So that could be a headwind. But the psyche of the retail person is that they never want to go backwards because their pay plans are based on performance, and they've reached a level now where I just -- I can't see us going backwards. And how much we grow it, I don't want to lie to you any more, John, but it's been a big part of our company and our business. And we've had terrific -- we've had the same banking partners for years and years. We focus on the big banks, and we've got certain banks that do the business for us and in different FICO bands. And we've been loyal to those banks, and we haven't strayed away from it. So having those partnerships has made a big difference, along with the compliance and auto piece. We pride ourselves that when you look at our performance with the banks, our loss ratios are below average. It's because we give the banks good information, it's all straight up business. Their risk-based pricing works beautifully. And when you have that relationship, it makes it pretty easy to do business. So whenever there's a jump ball or a tie, we usually win them all just because of the loss ratio situation.

One thing I'd add to what Pete has to say is our Acceleride platform, which is our omnichannel selling platform. We have built in a lot of the F&I resources into that platform. And what we find is about 50% of our credit applications are now filled out online on the Acceleride platform, whether that would have been traditionally with an F&I rider or in an F&I office. So we're getting a decent chunk of savings in terms of SG&A with things coming through the Acceleride platform because we need less F&I writers. But in addition to that is what we're finding is the attachment rate through people buying through the Acceleride platform is actually higher than under the traditional momentum. And with that, something that I would never have expected would be that our per unit F&I income on the Acceleride platform is equal, if not better than what it is under the traditional platform. So I think that's something that will help us going forward as well.

And then on these service contracts, kind of leading into parts and service. I mean when you get your service contract, I mean, how does that feed into the revenue and profit in the parts and service? I mean that's -- I mean, right, I mean how does that -- I mean obviously, that person is much more likely to come back to your service base then, hopefully, almost 100%, but I'm sure it's not 100%, right? How do those economics work? They show up. They've got a 10,000-mile checkup and service. I mean, that will be part of the service contract. How does that math work?

We've got maintenance and service contracts. So the maintenance plan will cover any maintenance that is due on the car. But then the service contract can go 2, 3, 4 years above the factory warranty, customer comes in. You're right, it's big retention. We also believe in -- we use, for the most part, the OEM, 100% OEM maintenance programs. And I'd say about of our stores, about 70% OEM service contracts. But those customers come back in and it's -- from an accounting standpoint it's customer pay.

Got it. So you've made the money on the parts -- on the F&I side and then you're making money on the parts and service side, and that's running out of their pocket of reserves over in the -- in any other company. Got it. Okay. Maybe just lastly, we're run up against time here on strategy. Obviously, you backed away from Brazil, you're pushing Acceleride. You're making acquisitions a little bit more aggressively than you have in the past. I mean, how should we think about your strategy going forward, morphing, pressing the same avenues? I mean there's -- you do seem like you're starting to shift a little bit and getting a little bit more aggressive on acquisitions. Is that true? I mean how should we think about your strategy going forward because it's starting to shift a little bit?

Well, I think about 18 months ago, we openly declared that we wanted to grow the company through acquisition. In 2021, the company threw over -- threw off by $650 million of free operating cash flow. Well, we know the question is what do you do with that free operating cash flow? The number one priority for the company still remains growing the company through acquisition. So far this year, in 2022, we've acquired over $500 million of revenues, [ involve ] 2 large Toyota stores so far this year. The plan is that we will continue to grow through acquisition. But when you look at the valuation of our stock currently, we think as a company that we're massively undervalued currently. We have openly declared that we've been in buybacks in Quarter 1 of this year. Over the last 2 quarters, we bought back by 10% of our company float. So we'll continue to be balanced and growing the company through both acquisition in both the U.S. and the U.K. as and when strategic opportunities arise. And we'll continue to evaluate where our stock price sits and evaluate buybacks going forward.

So it's fair to say that the toggle is between acquisitions and buybacks. And as far as the strategy, it's pulling back from or exiting Brazil and at this point, it's the acquisition in U.S., U.K. and buybacks. That's the kind of 3 main areas where you're going to see the incremental capital push?

And dividends.

And dividend. I'm sorry, and dividends. But that would be more of a steady as opposed to massive increases right on [indiscernible]

Correct.

The toggle is really is the buybacks [ and acquisitions ]. Guys, one quick kind of follow-on. The balance sheet has been great. As the credit guy, I have to bring out the balance sheet. Bond investors have been happy partners. In this strategy, how do you guys envision keeping the balance sheet? You have a lot of flexibility on it. Just want to you ask a quick question on that?

Yes. So we ended the year at 2x levered. And when we look at leverage, we use our syndicated credit facility calculation, it's rent adjusted debt over EBITDAR. Our max is 5.75x under our facility. And we do recession case planning, and we're comfortable going up to 4x if we needed to do a large acquisition temporarily. But certainly, our desire is to keep that at or below 3x levered in a normalized state. So that's the -- we have plenty of flexibility from where we are now to our normalized cap where we can deploy additional capital, raise additional debt for M&A.

Perfect. Well, that to stay on time, we're going to wrap up. I really appreciate you guys making a trip and seeing in person. It's always a fun hanging out. Thank you so much for coming, guys.

Always a pleasure, John. Thank you.

Thank you.