Group 1 Automotive, Inc. (NYSE:GPI) Q2 2023 Earnings Call Transcript
Group 1 Automotive, Inc. (NYSE:GPI) Q2 2023 Earnings Call Transcript July 26, 2023
Group 1 Automotive, Inc. beats earnings expectations. Reported EPS is $12, expectations were $11.03.
Operator: Good morning, ladies and gentlemen. Welcome to Group 1 Automotive's 2023 Second Quarter Financial Results Conference Call. Please be advised that this call is being recorded. I would now 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. 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 that 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 some component shortages, additions 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 recently comparable GAAP measures on this 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 turn the call over to Daryl.
Daryl Kenningham: Thank you, Pete. Good morning, everyone. In the second quarter of 2023, Group 1 Automotive reported $166.1 million in adjusted net income and record total quarterly revenues of $4.6 billion, led by all-time highs in new vehicle, parts and -- parts and service and finance and insurance revenues. Our parts and service team continued to deliver record revenue levels for nine consecutive quarters. We also set an all-time record for quarterly total gross profit, supported by an all-time record parts and service growth of $304.1 million. We continued to deploy capital efficiently in the quarter to acquire the highly desirable Beck & Masten stores, further strengthening our strong Texas footprint with an outstanding brand.
We also returned capital to our shareholders by repurchasing $31 million in shares during the quarter. Our strong cash flow and leverage position, which Daniel McHenry will cover in a minute, will continue to allow for significant capital deployment flexibility in the remainder of 2023. Now turning to our second quarter results, starting with our US operations. We ended the quarter sequentially flat with 27 days supply of new vehicles, 31 days supply of used vehicles. Consistent with our comments on inventory last quarter, our domestic brands have improved slightly and import brands have remained very constrained. Approximately, 28% of our US business is Toyota and Lexus, which continues to be very tight at a combined five-day supply. Our new vehicle revenues increased an impressive 19% sequentially and 22% over the second quarter of last year.
While we saw a slight moderation in GPUs, new vehicle units sold reached the second highest level in company history, a 19% increase over the first quarter and 16% over the second quarter of last year. 33% of our new vehicle sales in the US were presales, down from 40% in the prior quarter. Used vehicles were challenged in the second quarter with sourcing more difficult from the lack of new vehicle supply. We entered the quarter low on used vehicles. However, we picked up some ground as the quarter progressed, thanks in large part to trade-ins from record low -- record new vehicle sales. Source used inventory, we continue to focus on organic sourcing efforts, including acquisitions through AcceleRide, customer trades and service drive acquisitions.
Finance and insurance business has remained strong, with same-store gross profit per unit at $2,379, a sequential quarter improvement. Despite this resiliency, looking forward, we expect pressure on finance penetration rates driven by existing interest rates and slightly tighter lender requirements for some buyers. Now turning to aftersales. Our US performance was outstanding. Aftersales revenues grew double digits and same-store revenues were up over 8%, led by strong customer pay same-store growth of nearly 12%. Technician headcount grew 10% in the second quarter, and we continue to invest in new ways to reach our customers through one-to-one marketing technology and by using artificial intelligence. We continue to invest in aftersales and believe parts and service will be a strength through the rest of 2023.
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Our second quarter US adjusted SG&A as a percentage of gross profit was 61.7%, an increase of only 303 basis points from prior year and a decrease of 1.4% sequentially and down from over 70% in pre-pandemic 2019. We do see some pressure from reduced margins and inflationary costs. We expect that a material portion of our SG&A savings will be permanent. Now to AcceleRide, where our customers continue to vote yes. During the second quarter, we saw deeper engagement through AcceleRide. Over 80% of our customers engaged in some way in their transaction through AcceleRide and nearly half of our customers engaged AcceleRide on at least five steps of the car buying process. We experienced significant year-over-year increases in trade-ins, credit applications, F&I attachment and significantly more sales.
12,200 vehicles sold in the quarter, that was up 78% year-over-year. Turning to the UK. Vehicle demand remains resilient and new vehicle availability is still constrained, keeping vehicle GPU strong. New and used GPUs outpaced the prior year quarter by 7% and 5.4% respectively. We continue to see signs of production improvement by certain manufacturers as demonstrated by the 10% increase in same-store new vehicle units sold. As of June 30, our new vehicle order bank was approximately 19,400 units, a 10% increase over the prior quarter. As a reminder, our UK business mix is predominantly luxury, and those customers are more resilient during times of economic uncertainty. And our aftersales growth in the UK has been outstanding, with same-store revenues and gross profit on a local currency basis increasing 19.8% and 17.2%, respectively.
Similar to our efforts in the US, we’ve worked to grow technician headcount, experiencing an approximate 10% increase over the prior year. We have also invested in improvements to our UK customer contact center, streamlining operations and improving the customer experience. 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 June 30, we had $23 million of cash on hand and another $268 million invested in our floorplan offset accounts, bringing total cash liquidity to $291 million. We also had $338 million available to borrow on our acquisition line, bringing total immediate available liquidity to $628 million. Through the first half of 2023, we generated $387 million of adjusted operating cash flow and $311 million of free cash flow after backing out $75 million of CapEx. This capital was deployed through a combination of acquisitions, share repurchases and dividends. During the current quarter, we spent $31 million, repurchasing approximately 141,000 shares at an average price of $221.52.
The result of this repurchase activity is just over 1% reduction in share count over the current quarter. Our share count as of today is down to approximately 14.1 million. Our rent-adjusted leverage ratio as defined by our US syndicated credit facility was 2.1 times at the end of June. Our strong balance sheet will continue to allow for meaningful and balanced capital deployment. Our quarterly floorplan interest of $15.6 million, was an increase of $9.7 million from the prior year, entirely due to higher vehicle inventory holdings. We effectively managed our floorplan interest expense by holding excess cash on our floorplan offset accounts, reducing the balance exposed to interest as well as to our portfolio of interest rate swaps, which saved us $4.7 million in interest expense versus the comparable prior year quarter.
Non-floorplan interest expense of $25.9 million, increased $7.4 million from the prior year. However, our mortgage rate swap portfolio saved us $1 million versus the comparable period. As of June 30, approximately 63% of our $3.4 billion in floorplan and other debt was fixed. Therefore, an annual EPS impact is only about $0.69 for every 100 basis point increase in the secured overnight funding rate, or SOFR, which is the benchmark rate referred to 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. I will now turn the call back over to Daryl.
Daryl Kenningham: Thank you, Daniel. Related to our corporate development efforts, we expect to find additional growth opportunities in 2023. Growing our US and UK businesses remains a top capital allocation priority. However, our balance sheet, cash flow generation and leverage position will continue to support a flexible and efficient capital allocation approach, which will likely include serious consideration of share repurchases in addition to pursuing external growth. This concludes our prepared remarks. I'll now turn the call over to the operator to begin the question-and-answer session. Jamie?
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