Group 1 Automotive, Inc. (NYSE:GPI) Q3 2023 Earnings Call Transcript
Group 1 Automotive, Inc. (NYSE:GPI) Q3 2023 Earnings Call Transcript October 25, 2023
Group 1 Automotive, Inc. beats earnings expectations. Reported EPS is $12.07, expectations were $11.32.
Operator: Good morning, ladies and gentlemen, and welcome to Group 1 Automotive's 2023 Third Quarter Financial Results Conference Call. Please be advised that this call is being recorded. At this time, I'd like to turn the floor over to Mr. Pete DeLongchamps, Group 1's 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.
Those risks include, but are not limited to, risks associated with pricing, volume, inventory supply due to increased customer demand and reduced manufacturer production levels due to component shortages, conditions of markets 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 with me 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 hand the call over to Daryl.
Daryl Kenningham: Good morning, everyone. In the third quarter of 2023, Group 1 Automotive reported $169.8 million in adjusted net income. Record total quarterly revenues of $4.7 billion, an all-time quarterly revenues across all major lines of business. Our teams also delivered record quarterly adjusted diluted EPS from continuing operations of $12.07, an increase from the third quarter of 2022. Starting with our US operations. Our inventory levels remained relatively flat from the second quarter of 2023, no major shifts in mix, including from our brands affected by the UAW strike. In the third quarter, Stellantis was 4% of our mix; Ford, 7%; and General Motors, 10%. On a same-store basis, our used -- our US new vehicle unit sales were up nearly 12%.
During the third quarter, 30% of our new vehicle sales in the US were presales, down a bit from 33% in the prior quarter. Also important to note, in a tough used vehicle environment, our used vehicle sales were up both year-over-year and sequentially and our gross margins were up year-over-year. We saw strengthening throughout the quarter in our used vehicle margins. In addition, we saw strengthening in our CPO business to nearly 25% of our mix. CPO is a key driver of loyalty and aftersales and repurchase and we continue to focus on organic sourcing, including acquisitions through AcceleRide customer trades, which were up in the quarter and service drive acquisitions. Our outstanding F&I team also achieved record quarterly revenues, capitalizing on the opportunities to sell products that are both good for our customers and good for their vehicles.
Our gross profit per unit sold of $2,367 only minimally declined on a same-store sequential basis. We expect some continued pressure on finance penetration due to existing interest rates and slightly tighter lender requirements for some used vehicle buyers. Now shifting to aftersales. We focus on the aftersales impact on the customer journey by increasing customer retention through more convenient service hours, training of our service advisers, selling service contracts with vehicle sales and improved customer relationship management software that allows us to provide targeted marketing to our customers. We continue to believe that aftersales is an area of underinvestment in our industry and we invest heavily and without reservation when we acquire new stores.
With this focus, our parts and service team continues to achieve record results, notching the tenth consecutive quarter of record revenues and an all-time quarterly high in gross profit. We continue to focus on the hiring and retention of technicians in this challenging labor market. Our four-day workweek benefits our customers by extending our hours of operation during the week and a return -- in return, leads to higher technician productivity in our shops. We continue to explore avenues to increase our capacity and drive more incremental productivity. We also continue to invest in new ways to reach our customers through one-to-one marketing technology and by using artificial intelligence. In the third quarter, we set over 360,000 service appointments digitally and through our customer development center.
We also generated over 10,000 customer appointments with just six brands using artificial intelligence. We believe these AI customers to be incremental, and expect this initiative to grow and generate more incremental service business in the future. Now let's shift to SG&A. US adjusted SG&A as a percentage of gross profit increased only 88 basis points year-over-year and improved sequentially, reflecting our focus on controlling costs in this inflationary environment and the structural cost improvements made since the pandemic. Current adjusted SG&A as a percentage of gross profit of 61.4% continues to be down from 70.5% in pre-pandemic 2019. Now a quick look at the UK. The UK achieved record quarterly revenues, thanks to record used vehicle performance.
Vehicle demand remains resilient and new vehicle availability is still constrained, keeping vehicle pricing and GPU strong. We continue to see signs of production improvement year-over-year by certain manufacturers as demonstrated by the near 10% increase in same-store new vehicle units sold. Despite this increase in same-store units sold, we experienced vehicle delivery shortages from BMW, Mini and Volkswagen in the third quarter of 2023, limiting our upside potential for the quarter. The lack of vehicle deliveries from these manufacturers resulted in higher-than-anticipated SG&A as a percentage of gross profit, giving our staffing levels, assuming the sale of these vehicles. As of September 30th, our new vehicle order bank was approximately 17,700 units.
As a reminder, our UK business mix is predominantly luxury and those consumers are more resilient during times of economic uncertainty. And now to capital allocation. We deployed a return-focused capital allocation strategy that balances the use of our capital between opportunistic portfolio management, share buybacks and the return of capital to shareholders in the form of quarterly dividends. This approach continues to benefit our shareholders, allowing us to achieve all-time high in adjusted diluted earnings per common share from continuing operations in the third quarter. Successful portfolio management involves not only acquiring great assets, but also disposing of assets for which we believe a higher return proposition exists. In the third quarter of 2023, we disposed of eight franchises and voluntarily terminated a ninth franchise.
We intend to benefit our shareholders by using the proceeds from these sales to either buy additional dealerships or buy back additional shares. Our number one priority is growing the company. We evaluate all brands and geographies to expand our portfolio, seeking to acquire dealerships or dealership clusters in growth positioned or economically stable markets or that are economically accretive to our existing markets. In October 2023, we consummated the pending acquisition of a Subaru dealership in Manchester, New Hampshire, bringing the number of franchises owned in Manchester to five. Our recent acquisitions of Beck & Masten GMC and Kia dealerships as well as Estero Bay Chevrolet in Florida, serve as a reminder of the strength of this portfolio optimization approach.
We continue to explore ways to consolidate our holdings in highly profitable, scalable dealerships and dealership clusters. We believe this is a critical element 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. I will now turn the call over to our CFO, Daniel McHenry, to provide a balance sheet and liquidity overview. Daniel?
Daniel McHenry: Thank you, Daryl, and good morning, everyone. As of September 30th, we had $53 million of cash on hand and another $211 million invested in our floorplan offset accounts, bringing total cash liquidity to $264 million. We also had $463 million available to borrow on our acquisition line, bringing total immediate available liquidity to $726 million. For the first nine months of 2023, we generated $555 million of adjusted operating cash flow and $448 million of free cash flow after backing out $107 million of CapEx. This capital was deployed through a combination of acquisitions, share repurchases and dividends. During the current quarter, we spent $65 million, repurchasing approximately 246,000 shares, at an average price of $261.89.
The result of this repurchase activity is just over a 1.7% reduction in share count over the current quarter. Our share count as of today is down to approximately 13.8 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 US syndicated credit facility was two times at the end of September. Our strong balance sheet will continue to allow for meaningful and balanced capital deployment. Our quarterly floorplan interest of $16.5 million was an increase of $10 million from the prior year, entirely due to higher vehicle inventory holdings.
We effectively managed our floorplan interest expense by holding excess cash in our floorplan offset accounts, reducing the balance exposed to interest as well as to our portfolio of interest rate swaps, which saved us $3.4 million of interest expense versus the comparable prior year quarter. Non-floorplan interest expense of $26.5 million increased $6.9 million from prior year. However, our mortgage swap portfolio saved us $3.5 million versus the comparable period. As of September 30th, approximately 65% of our $3.4 billion in floorplan and other debt was fixed. Therefore, an annual EPS impact is only about $0.66 for every 100 basis point increase in the secured overnight funding rate or SOFR which is the benchmark reference in our floorplan and mortgage debt instruments.
For additional detail regarding our financial condition, please refer to the schedules of additional information attached to the news release as well as the investor presentation posted on our website. This concludes our prepared remarks. I will now turn the call over to the operator to begin the question-and-answer session. Operator?
See also 20 Most Bicycle-Friendly Countries in the World and 25 Largest Alcohol Companies in the World in 2023.
To continue reading the Q&A session, please click here.
