Asbury Automotive Group, Inc. (ABG) on Q1 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, good day and welcome to the Asbury Automotive Group First Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Karen Reid. Please go ahead.
Karen Reid: Thanks, David, and good morning everyone. As David mentioned, today's call is being recorded and will be available for replay later this afternoon. Welcome to Asbury Automotive First Quarter 2021 Earnings Call. I'm Karen Reid, Asbury's new Treasurer, and Head of Investor Relations. I look forward to engaging with our analysts and our investor community. The press release detailing Asbury's first quarter results was issued earlier this morning and is posted on our website at asburyauto.com. Participating with me today are David Hult, our President and Chief Executive Officer; PJ Guido, our Chief Financial Officer; and Dan Clara, our Senior Vice President of Operations. At the conclusion of our remarks, we will open up the call for questions, and I will be available later for any follow-up questions that you may have.
David Hult: Thank you, Karen. We are excited to have you on our team. Welcome to our first quarter earnings call. We have just reported record adjusted EPS of $4.68, up 160% over the prior year. SAAR continues to recover from prior year lows despite supply chain disruptions due to the chip shortage and COVID. The strong demand in the face of lower days supply helped us deliver a strong gross margin of 17.5%, an expansion of 60 basis points versus the first quarter of last year. We've also stayed disciplined in managing expenses, resulting in SG&A as a percentage of gross profit of 62.7%, an 880 basis point improvement versus prior year. Of note, this result includes an estimated $0.22 negative EPS impact from the winter storm experience in February that caused us to close stores in several markets along with some structural damage.
Dan Clara: Thank you, David, and good morning everyone. My remarks will pertain to our same store performance compared to the first quarter of 2020. Looking at new vehicles. Based on current market conditions, we are focused on being opportunistic with our inventory and improving gross to maximize profit. Our new average gross profit per vehicle was up $640 per car or 39% from the prior year period. All segment margins were up significantly from the prior year period. Factoring in the acquisition of Park Place, luxury represented 45% of our total revenue, up from 34% in the first quarter of 2020, driving our all-store new vehicle PVRs up $1,114 or 67%. At the end of March, our total new vehicle inventory was $527 million and our days supply was at an all-time low of 34 days, down 71 days from the prior year. Some of our brands were below 20 day supply during the quarter and experienced major challenges due to the lack of inventory. With no clear understanding of when production will return to normal levels, we expect that the days supply to remain low throughout the remainder of the year.
PJ Guido: Thank you, Dan, and good morning everyone. I'd like to provide some financial highlights which mark yet another record quarter for our company. For additional details on our financial performance for the quarter, I would refer you to our financial supplement in our press release dated today, April 27th, 2021. Overall, compared to the first quarter of last year, total revenue was 36% higher than last year. Gross margin expanded by 60 basis points to 17.5%, driven by our focus on maximizing gross profit in a market where demand continues to outweigh supply. Moving down the P&L, we saw SG&A as a percent of gross profit decreased by 880 basis points to 62.7%. We estimate that SG&A would have been approximately 100 basis points lower, absent the impact on gross profit and expenses of the winter storm that resulted in store closures in several markets and also caused damage to a few of our Texas stores. Our actions to manage gross profit and control expenses resulted in a record first quarter adjusted operating margin of 6.1%, an increase of 180 basis points above the same period last year. Adjusted net income increased 161% to $90.7 million, and adjusted EPS increased by 160% versus the prior year period, maintaining our momentum coming out of 2020. Net income for the first quarter 2021 was adjusted for the following pre-tax items. Gain on legal settlements of $3.5 million or $0.14 per diluted share. Gain on real estate sales of $1.1 million or $0.03 per diluted share. And real estate related charges of $1.8 million or $0.07 per diluted share. Net income for the first quarter of 2020 was adjusted up -- up for pre-tax items totaling $20.4 million or $0.79 per diluted share. For specific details on 2020 adjustments, please reference this morning's press release. Our effective tax rate was 22.3% for the first quarter 2021 compared to 19.1% in 2020. Floor plan interest expense for the quarter decreased by $4.1 million over the prior year quarter, driven primarily by lower inventory levels and lower LIBOR rates. With respect to capital deployed this quarter, we spent approximately $17 million on store improvements in real estate and we repaid approximately $14 million of debt.
Operator: Thank you, ladies and gentlemen. Our first question comes from Rick Nelson with Stephens.
Rick Nelson: Thanks a lot. Good morning. So it sounds like you're expecting inventory to remain tight here. Do you think you can maintain these GPUs and the SG&A expense ratio in an environment like this? And because their potential here at 34 days of supply now, where you see that going to potentially become even more problematic.
David Hult: You know, Eric, as we all know -- this is David. It's a fluid situation. It's a fantastic question. As we sit here today, we received far less cars in the month of April than we anticipated. But looking forward at May, we're anticipating more inventory to come in than we received in April.
Rick Nelson: Thanks for that color, David. Are there brands that are more impacted by the semiconductor shortage than others, or how those have looked across the spectrum?
Dan Clara: Good morning, Rick. This is Dan. Yes, listen, every every brand is definitely impacted, but I would say Domestics are more impacted than some of the other ones that we're seeing out there.
Rick Nelson: Got you. Thanks. I'm curious on the used side of the house, what proportion of vehicles are you sourcing internally and what proportion are you going to auction and what do you see going on in the auction market nowadays.
Dan Clara: Yeah, Rick, another great question. So we source in -- over 50% of our cars come in from the trading perspective, auction prices as you can imagine are at an all time high and the availability is -- continues to be scarce at the auction.
Rick Nelson: In parts and service, it was quite a differential customer pay same-store up 3%, warranty down 13%. Curious what's driving that differential and PL outlook I just for those two drivers to service and parts
David Hult: Rick, this is David. The warranty, it did have some blows with the brand and what's going on with recalls and everything. So across the board, Import domestic luxury which is down everywhere in warranty, don't read much into that. I mean that kind of pops up and down and will continue to do that throughout the year. We're really excited about customer pay when you think about it. We probably had close to 40% of our stores at one point or another closed down in February. So we were dramatically impacted in February, not only with sales but in parts and service. March came back so strong, it was actually ahead of '19 pace numbers. And as we sit here in April, we're experiencing the same. So, the customers are back on the road, the service business is back. We always had a laddering collision coming back, and now collision is back as well. So while we're feeling it on the variable side with some shortages with inventory, thankfully Parts and Service is picking up on that. And just to go back and touch on what Dan said about the used cars and acquisitions with 50% coming from trades. Our other resources is buying directly from consumers off lease vehicles from the manufacturers, certainly within our service drive and loaner car fleet. So we got a -- certainly a tight day supply but we think it's one that the inventory turns quickly and we're creating great margins with it.
Rick Nelson: Great. And I would like to sneak one more in here about April. You talked about the inventory challenges, how do sales look and GPUs. Are they continuing to be elevated?
David Hult: Yeah, just what you've seen in the first quarter results, we're experiencing that as we sit here today in April as well.
Rick Nelson: Great. Thanks a lot, and good luck.
David Hult: Thank you.
Operator: Thank you. Our next question comes from John Murphy with Bank of America.
John Murphy: Good morning, guys. I just had a first question on on inventory. I mean, you, as well as rest of the industry has done a great job of turning inventory faster and it hasn't had a significant impact on sales, and short tendered it to some extent, but it's not been a major negative. What point or what inventory level you think you start running into constraints on supply being able to deliver the consumer what they want. And also on the inventory side, we all know often dogs sit around in inventory, I'm just curious if you think that you've kind of -- you and the industry have worked out a lot of these unattractive vehicles and now we're really just looking at really hot selling vehicles in inventory that are turning fast.
David Hult: It's a great question. And again it's such a fluid situation and you don't have a long runway to look over the next 90 days what's coming. So my comments that I'm going to make are based on sitting here today. Our perception is we're going to receive almost double the inventory in May that we received in April. I can tell you sitting here today, if we receive the same inventory levels in May that we received in April, we would struggle to get to the new unit sales that we need to get to. So, no insight to June at this point, but we're confident where we're sitting in April and we're confident with May assuming we receive the production that we were told we're going to receive. As it relates to the hot selling products as you point to, the OEMs are really great at this. And while the chip shortage is there, they've really been shifting their production to the faster selling vehicles. So to your point about some of the dogs that sit out there, I'm sure there is a few strays every now and then. But it's really very light inventory and it's moving pretty quickly. The demand is very high, which is obviously, you can see everyone's benefiting from in the margins, and I can't see it slowing down anytime soon. Because it's also with people coming back is going to be a pent-up demand on the fleet side as well.
John Murphy: Yeah, it's pretty encouraging. Okay. And then just second question, Park Place obviously was a big acquisition, but you guys didn't even mention it much in the quarter. Just curious it sounds the integration is going very smoothly because there's no noise about it. So I mean that's a good sign. And given that that appears to be going so well, you've got a $5 billion target over your five year plan. Could you get more aggressive on acquisitions? I mean, some of your peers are talking about that kind of number almost on an annual basis, or doing that almost on an annual basis. I mean is there opportunity to get more aggressive and even larger than what you're targeting at the moment?
David Hult: Yeah, it's a great question, John, I'll touch on Park Place real quick. The largest acquisition Asbury's history from a dollar standpoint, but from a meaning standpoint and really setting us up for who we want to be. I mean we look at Park Place as the crown jewel in the automotive industry. The professionals that we have there, the general managers, the senior team that runs the business there is everything we thought it was and more, but it takes a lot of communication and care to make sure things go smoothly, and we're looking at the long-term relationships and run. So very, very excited what we're seeing there and it kind of shows in our total numbers compared to the same-store. So that'll continue to progress and the relationship is great and acquisition transition is going great at this point. As it relates to acquisitions, in the time that I've been with the company, we've never had more conversations going on than what we have now. Everyone one month, their price is based off COVID numbers. I don't think that that's in the shareholders' best interest to buy every acquisition based on COVID numbers and there has to be some discipline and common sense of the numbers. So while we feel the need to want to acquire things right now, we're not going to go outside our structure because it's about the long game and doing the right thing with the shareholders' equity. So we'll stay disciplined. We know deals will come our way. We like a lot of the conversations that we're in now. There aren't any deals being announced that we haven't looked at, but we're really not just into acquiring revenue. We really want to make sure it's revenue that is meaningful for the company for five, ten years from now. And we're not just buying at a moment in time when the earnings and multiples are very high.
John Murphy: Okay. And then the last question that all kind of weave together with that, I mean quickly you gave us some metrics which were helpful. But very curious what kind of geographic reach or extension in your reach that is giving you if you can tell us sort of early days and even with that, what kind of market share gains you may be seeing in your existing markets because of the ease of transaction for the consumer.
David Hult: Sure. It's a great question. And keep in mind, every store in the company has it, but some stores were rolled out in the last week of the quarter. We're seeing the luxury customers really take advantage of the tool. We're seeing the import customers really take advantage of the tool, seeing it a little bit on the domestic side, but I think we're really hurting with inventory on the domestic side which is making it difficult, you can't purchase what you don't have. With push start, we were seeing 70%, 80% used, and 20%, 30% new. It's about a 60/4o split used to new right now. And we're certainly obviously acquiring a lot of customers with sales transactions that we never did business with before. We're shipping a lot of vehicles. But I think that is somewhat normal as well right now with low day supply and people really looking for their vehicles. I think the key metrics to really focus on, it's not a lead generation to transactional tool. Most people's tools are seeing a lot of subprime and are struggling to get the financing. Our average credit score so far in Clicklane is higher than the store average. Nine out of ten people are getting financed. Double the cash being put down on a Clicklane consumer compared to in-store. These are very strong metric that says strong creditworthy people are buying these cars online, trading vehicles with pay-offs and taking delivery of them at home. And I can't emphasize enough, it's just started. So this is only going to build incrementally over time. And we believe we're the first in this space to have a full transactional tool, not a lead generation, not a piece of the sale, a full transactional tool, which puts us in the driver's seat for really growing the tool. And like I said, we launched Dallas store at the end of the quarter, we've already launched Parts and Accessories on it now as well. So we're going to continue to innovate with this tool and we're going to get better each and every month. And we'll certainly continue every quarter to share the information what we're seeing. But it's very, very promising.
John Murphy: And sorry, David, if I can follow-up on that. So if we think about Clicklane and your acquisition strategy, I mean you could argue that this digital overlay means that you might not need to make as any acquisitions and you have a much farther reach so you can gain market share that way, or conversely some are arguing that you need to build a greater national network to really leverage the digital overlay. Which way do you think it is . How do you approach the marriage of the two?
David Hult: Hey, John, it's an excellent question, and look there is more than one way to climb a mountain, but from our perspective is brick and mortar is permanent and it's expensive. And if the transaction happens online, then it's really just a supply chain delivery. I've used this example before so I used it again. As we sit here today, we currently don't have any stores in Phoenix. If we chose to put a ring around the city of Phoenix with 5.5 million population and start marketing Clicklane, no differently than Carvana we could start doing transactions within that marketplace, which would create much higher SG&A numbers than what we're currently doing without that brick and mortar. So we will continue to build out our markets, but because of the tool that we have and our ability to move vehicles around, we absolutely do not believe we have to be in every market to do business in each segment of the country.
John Murphy: Okay. That's incredibly helpful, thank you very much.
David Hult: Thank you.
Operator: Thank you. Our next question comes from Ryan Sigdahl with the Craig Hallum Capital Group.
Ryan Sigdahl: Good morning, guys, thanks for taking my questions.
David Hult: Good morning.
Ryan Sigdahl: Just one quick follow-up on Clicklane. So looking at the Clicklane website, also looking at Asbury website, seems very similar between the two. Curious if you plan to run kind of side by side websites there or if you plan to consolidate those at any point in the future.
David Hult: Sure, Ryan. As a reminder, with the franchise stores, all the OEMs require us to use certain vendors for our websites. So we certainly have to stick to those policies. Clicklane will continue to grow, and depending upon whether we have franchise stores in that market or not, it will grow in different ways. When I talked about the
