Q2 2023 Group 1 Automotive Inc Earnings Call
Participants
Daniel James McHenry; Senior VP & CFO; Group 1 Automotive, Inc.
Daryl Adam Kenningham; CEO, President & Director; Group 1 Automotive, Inc.
Peter C. DeLongchamps; SVP of Manufacturer Relations, Financial Services & Public Affairs; Group 1 Automotive, Inc.
Daniel Robert Imbro; MD & Research Analyst; Stephens Inc., Research Division
David Whiston; Sector Strategist; Morningstar Inc., Research Division
John Joseph Murphy; MD and Lead United States Auto Analyst; BofA Securities, Research Division
Rajat Gupta; Research Analyst; JPMorgan Chase & Co, Research Division
Unidentified Analyst
Presentation
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.
Peter C. 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 Automotive are forward-looking statements that are made pursuant to the safe harbor business 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 Adam 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 service and finance and insurance revenues. Our parts and service team continued to deliver record revenue levels for 9 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 continue 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 U.S. operations. We ended the quarter sequentially flat with 27 days supply of new vehicles, 31 day 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 U.S. business is Toyota and Lexus, which continues to be very tight at a combined 5-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 U.S. 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 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 Sun buyers.
Now turning to aftersales. Our U.S. 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.
Our second quarter U.S. 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 5 steps of the car buying process. We experienced significant year-over-year increases in trade-ins, credit applications, F&I attachment as significantly more sales. 12,200 vehicles sold in the quarter that was up 78% year-over-year.
Turning to the U.K. 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 U.K. business mix is predominantly luxury, and those customers are more resilient during times of economic uncertainty. And our aftersales growth in the U.K. 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 U.S., we work to grow technician headcount, experiencing an approximate 10% increase over the prior year. We have also invested in improvements to our U.K. 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 James 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 U.S. syndicated credit facility was 2.1x 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 with 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 Adam Kenningham
Thank you, Daniel. Related to our corporate development efforts, we expect to find additional growth opportunities in 2023. Growing our U.S. and U.K. 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?
Question and Answer Session
Operator
(Operator Instructions) Our first question today comes from Daniel Imbro from Stephens Inc.
Daniel Robert Imbro
On the -- I want to start on the used vehicle side of the house. GPU is slightly better, but the units obviously have been like, kind of across the industry. Just wanted you guys maybe expound on that, kind of what you're seeing on the ground? Is it more of a supply issue with a lack of late model use coming back? Is it a demand-driven issue because of financing rates? And how do you think that kind of materializes through the back half of this year, given what you're seeing out in the market?
Daryl Adam Kenningham
Daniel, it's Daryl. I don't think what we're seeing is any different than what you've heard from the rest of the industry. There's -- we're kind of at the peak of the COVID off-lease return trough. So there's not a lot of inventory coming back into the market off-lease. Also, our fastest selling and lowest day supply vehicles continue to be cheaper vehicles, and there's more pressure on those segments for affordability, but those people tend to move down.
Our average selling price moved down almost a couple of thousand bucks over -- year-over-year. So it's, I think, more of a function of availability of inventory at the lower levels. And I expect that we'll see some of that. We saw -- during the quarter, we saw it sequentially improve month over month over month. And I expect we'll continue to see that improve a little bit as the year progresses.
Daniel Robert Imbro
Got it. And then, Pete, I want to follow up on the U.S. F&I per unit. It was up over $100 sequentially. Is that driven by higher product attachment? I would think loan size is down. Finance penetration is probably down year-over-year. Can you talk to what the drivers of kind of the sequential growth are? And then maybe how sustainable this level could be on a per unit basis?
Peter C. DeLongchamps
Sure, Daniel. Thanks. We feel good about the overall performance of F&I. Our product penetrations were either up or held steady year-over-year and sequentially improved. So I think there's been a lot of focus on the finance pen, which we've seen an improvement in new. Used vehicle still is a headwind clearly. And I think that's result of rates. Our rates are up about 250 basis points year-over-year. So we're focusing on the product. And we've had, I think, really good partnerships with our major lenders, which has been helpful.
Operator
Our next question comes from John Murphy from Bank of America.
John Joseph Murphy
I just wanted to touch on parts and service, where you continue to outperform at least our expectations, and it's a very -- I mean, it's happening quarter after quarter. I'm just curious how sustainable you think that is, if this is just an issue of getting more techs and you'll be able to continue to grow over time and how you're getting all these techs? I mean adding 10% in the quarter is pretty impressive.
I know that the 4-day flexible work week is helping to some degree, but it seems like there's some other secret sauce that might -- you guys might be using your to get all those folks. So can you just kind of expand on the parts and service strength and the potential going forward?
Daryl Adam Kenningham
John, this is Daryl. We're -- we invest heavy in parts and service. And we find when we acquired dealerships, which we've done quite a bit of acquisition over the last couple of years, we almost always find underinvestment in parts and service, and that is the first place we invest, whether it's capacity, equipment, staffing, training, and we do that as quickly as possible with all the new acquisitions.
And given all the stores we've acquired over the last couple of years, I think that's part of the puzzle. Another part of the puzzle is the technician recruiting. We have significant efforts underway there, and the 4-day work week is certainly part of it. We have other programs that we do that support tuitions and training and uniform sponsorships and mentoring programs and where we have a career pathing in place for our technicians.
And -- so I think there's a whole combination of things. I can't tell you there's a secret sauce. It's -- we just try to put a lot of focus on a number of areas. And then we really -- what I see happening right now is we're all benefiting probably from some pricing in the market over the last couple of years, which I think has come to an end and coming to an end. And I think the game is turning to throughput again here in the future.
And a lot of our focus and efforts will be towards that. We still see a lot of demand out there. Carpark is still really aged. There's still a lot of repairs to be done on vehicles that have been -- that are older units, older vehicles. And -- so I believe that there's still -- the outlook is for parts and service is still bright -- really bright, still opportunistic.
John Joseph Murphy
And just one follow-up on AcceleRide. You may mention that 50% of your customers were going through 5 steps of the transaction with AcceleRide. I'm just wondering if you can kind of explain what exactly those 5 steps are? How many steps there are that you count in a transaction? And when would this ultimately start saving you cost or helping you maybe reduce headcount? And I don't know if you can quantify that, but how do you think about that potential savings over time?
Daryl Adam Kenningham
Well, we saw -- we saw our productivity improvements in the quarter. We did mention them in the script, but we did see productivity improvements with our sales teams year-over-year, and we attribute that to AcceleRide. We also -- there's about 10 steps in AcceleRide. And the thing we want to do is engage customers as much as we can through AcceleRide.
And so -- and we're testing a few things around the country. We don't -- we've done some -- a few things here in the last 6 months or so where we are focused on the way we've been using AcceleRide and then we're also trying a few new things in some markets, determine how that affects engagement, how it affects closing rates, how it affects the customer experience as well. So we're still in the early days of AcceleRide we feel like. I don't -- I can't tell you what a number is. I don't think we'll see a day where 100% of our customers are going 100% of the time through AcceleRide.
We've designed it so that customers can choose where they engage and don't engage. We try not to make it lockstep, and we try not to make it where -- if they want to take another path, they can. So it's flexible. So long-winded answer to your question, John, but I think we're still learning as we go.
Daniel James McHenry
John, just -- it's Daniel here. And just to add to what Daryl has said, to put it into perspective, sales person productivity has increased by 32%. That's the average number of units a sales person would sell versus pre-pandemic. And as Daryl says, we see that continuing to increase.
Operator
Our next question comes from David Whiston from Morningstar.
David Whiston
Just going back to the service technicians, particularly the U.K. headcount increase. I know you've got some good initiatives like the 4-day work week went out, but I'm just curious in the U.K. market what else may have helped there? Are people perhaps more eager to work than they were a year or 2 ago? Just any other labor market dynamics you can share specific to that market?
Daryl Adam Kenningham
We're experimenting with 4-day work week there, David. We are -- it's not nearly as ingrained there as it is in the U.S. The work schedules in the U.K. are different at retail. So the value of a 4-day work week is different there than it is in the U.S. But the things we're trying to do are make sure that our compensation is certainly at a competitive level and we're working to try to ensure that we're kind of the workplace of choice for our team.
We've also added some significant resources in our aftersales team at our corporate level in the U.K., which has helped us significantly put some more focus and emphasis on technician recruiting.
David Whiston
And on used, obviously, it's a struggle for everybody, but your metrics, to me, they didn't -- the year-over-year delta just didn't seem as large of a decline as I remember seeing at some of the other dealers. And I'm just curious or maybe are you not cutting prices right now quite as hard there as prices are coming down? Or are you just procuring inventory smarter than in the past?
Daryl Adam Kenningham
Well, I'd love to say we're smarter. I would say we're trying to be disciplined. We implemented some new technology about a year ago that I think is really helping us with one of our partners, and it's helping us stay more disciplined on our pricing. And I believe that's helping us quite a bit. The old days of where a used car manager will go and price their inventory, we're kind of trying to get away from that because we want the technology to help us lead that. And so we implemented some things about a year ago to help us do that, and I believe that's paying some dividends.
Operator
Our next question comes from Rajat Gupta from JPMorgan.
Rajat Gupta
I just wanted to like ask a broader picture question just on in terms of consumer, health of consumer. Obviously, you talked about the interest rate impact and how that's impacting news and like your financing. But in general, we have seen new car volumes held in much better than expected so far year-to-date. Curious to what do you think might be driving that in the context of the pricing in the rate environment? And what is your sense of how it can persist through the course of the year?
And tied to that, is there a range you can give us in terms of how you think the new car GPUs might play out into the third quarter and maybe into the fourth? And I have a follow-up.
Daryl Adam Kenningham
Rajat, in terms of the consumer, we see consumers just looking at the order banks in the U.K., looking at the presales in the U.S. I mean to us, that indicates a pretty healthy, strong consumer. Looking at the aftersales pull-through, we see evidence of a pretty strong consumer. We're seeing a little pressure in F&I, but it's just a little bit, honestly, I mean it's $100. I mean -- so from a consumer perspective, we see good things there.
And I don't know if that will change. In terms of the gross profit trends you asked about on new cars, I don't believe we will see anything different than what we have seen over the last couple of quarters, 3 quarters where it's a gradual decline from where it's been, but we don't see any cliffs out there at all.
Rajat Gupta
Got it. That's helpful. And maybe just on capital allocation priorities. Buyback has been a little lighter this year relative to what you did in the last couple of years. Obviously, you've spent a little more on M&A here. Curious how you're thinking about balancing that in the second half? Maybe any comments around just the M&A environment, what kind of deals are flowing into the pipeline? How the multiples are? Just like how the activity is and willingness for deals to close?
Daryl Adam Kenningham
We believe we want to deploy capital efficiently. We want to buy the right kind of deals. And if you look at our last 5 or 6 deals, that's really indicative of the kind of purchases we're looking for. In Toyota, North Austin and our big Chevy deal we did in Florida and the Beck & Masten acquisition here in Houston and down in South Texas. So those are the type of acquisitions we want to do. And those are the kind we are looking for in growth markets.
And we if we can't find those, then we will deploy capital towards stock buybacks, which you saw a great example of that last year where we bought quite company back. So we believe that that's still an opportunity. But we want to grow the company, and that's a priority for us. So that comes first but not at any cost.
Operator
Our next question comes from Daniela Higgins from Morgan Stanley.
Unidentified Analyst
So I wanted to ask about rising EV inventory. Do you have any comments around incremental demand for EVs from the start of the year to now? Any sense of change in demand in recent weeks? Or just any commentary on inventory levels rising overall?
Daryl Adam Kenningham
Our EV day supply is 61 days. And -- so it's a little higher. It's a small universe for us. We have 11,000 roughly units in stock. 700 of those -- 740 of those are EVs. So -- and it's hard to draw conclusions about general trends based on that small of the number. But we have -- it's concentrated in just a few brands. And in some of the brands, there's a little more support for sales to sell them. And in other brands, there's a bit of a struggle. But that's the difference between our EV and our ICE inventory levels at this point.
Operator
And ladies and gentlemen, with that, we will be ending today's question-and-answer session as well as today's presentation. We thank everyone for joining today's conference call. You may now disconnect your lines.
