Papa Johns International Q2 2023 Earnings Call Transcript

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July 25, 2023

There are 9 speakers on the call.

Operator

Greetings, and welcome to the Asbury Automotive Group Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, George Villasana, Senior Vice President and Chief Legal Officer.

Operator

Thank you, sir. You may begin.

Speaker 1

Thank you, operator, and good morning. As noted, today's call is being recorded and will be available for replay later this afternoon. Welcome to Asbury Automotive Group's Q2 2023 earnings call. The press release detailing Asbury's 2nd quarter results was issued earlier this morning and is posted on our website at investors. Asburyauto.com.

Speaker 1

Participating with me today are David Holt, our President and Chief Executive Officer Dan Clara, our Senior Vice President of Operations and Michael Welch, our Senior Vice President and Chief Financial Officer. At the conclusion of our remarks, we will open the call up for Before we begin, we must remind you that the discussion during the call today is likely to contain forward looking statements. Forward looking statements are statements other than those which are historical in nature, which may include financial projections, forecasts and current expectations, each of which are subject to significant uncertainties. For information regarding certain of the risks that may cause actual results to differ materially from these statements, Please see our filings with the SEC from time to time, including our Form 10 ks for the year ended December 2022, Any subsequently filed quarterly reports on Form 10 Q and our earnings release issued earlier today. We disclaim any responsibility to update forward looking statements.

Speaker 1

In addition, certain non GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, we provide reconciliations of any such non GAAP financial measures to the most directly comparable GAAP measures on our website. We also have posted an updated investor presentation on our website, investors. Asburyauto.com highlighting our 2nd quarter results. Now it is my pleasure to hand the call over to our CEO, David Holt.

Speaker 1

David?

Speaker 2

Thank you, George, and good morning, everyone. Welcome to our Q2 earnings call. I'm proud of the team's performance in Q2. Our strong cost discipline and continued work to maximize our gross profit streams Generated strong results this quarter. We've also been opportunistic utilizing our strong cash flow from operations for share repurchases.

Speaker 2

We repurchased over 1,000,000 shares year to date with 960,000 of those shares repurchased in the 2nd quarter alone For $190,000,000 Within this current macro environment, we are well positioned due to our diversified business model, Our strong balance sheet, our focus on profitability and our North Star to be the most guest centric automotive retailer. Now I'll turn to our consolidated results for the Q2 of 2023. We delivered $3,700,000,000 in revenue at a gross profit margin of 19.1%. Our adjusted SG and A as a percentage of gross profit was 57%, generating an adjusted operating margin of 7.8%. Our adjusted EBITDA was $307,000,000 and adjusted EPS was $8.95 Looking forward, we are optimistic about the future of automotive retail.

Speaker 2

We operate in an environment where the average age of the car is 12.5 years, The highest it's ever been. While SAAR levels have been trending higher, they're still well below historical levels. The combination of older cars, complexity of new cars and the transition to EVs enables consistent growth within our parts and service business. With our strong balance sheet and robust liquidity, we are looking to deploy capital through opportunistic share buybacks and acquisitions. We continue to aggressively pursue acquisitions that will be accretive to Asbury.

Speaker 2

We are disciplined stewards of capital. We are strategic when the capital allocation opportunities arise such as our recent share repurchase activity. Again, I'm pleased with the 2nd quarter results, especially with regards to our expense management. We have been and continue to be thoughtful operators Finally, I would like to extend a thank you to my fellow team members for a terrific first half of twenty twenty three.

Speaker 3

I'll now hand the call over to

Speaker 2

Dan to discuss our operating performance. Dan?

Speaker 3

Thank you, David, and good morning, everyone. I would also like to say thank you to all our team members for their hard work, dedication and commitment to be the most guest centric automotive retailer. Now moving to same store performance, which includes dealerships and CCA unless stated otherwise. Starting with new vehicles. Our new vehicle inventory ended the quarter at $766,000,000 which represents a 32 day supply.

Speaker 3

There was significant variation among brands and models. Our new vehicle revenue grew 8% year over year. New average gross profit per vehicle was $4,832 New vehicle gross margin was 9.5% this quarter. Turning to used vehicles. Used retail revenue and unit volume were both down 15% compared to prior year quarter.

Speaker 3

Used retail gross profit per vehicle was $2,085 for the quarter. Our used vehicle inventory ended the quarter at $358,000,000 which represents a 35 day supply. Shifting to F and I. We delivered an F and I PBR of $2,369 It's a slight decrease of $42 compared to the prior year quarter. In the Q2, our total front end yield per vehicle was $5,959 a decrease of $605 Moving to parts and service.

Speaker 3

Our parts and service business revenue increased 6% in the quarter. Customer pay revenue also grew 6% and we expanded its gross profit by 6%. As a reminder, when we acquired LHM, we stated a full integration would take 5 years. We are now in year 2 and we're implementing significant changes from a process and systems perspective. This significant degree of change does have an effect on our operations.

Speaker 3

This quarter we saw that the average repair order of the battery EVs was over 1.5 times higher than the average Internal combustion vehicle dollars per RO. For reference, today about 95% of ROs Our internal combustion vehicles. While the proportion of EVs we service is much smaller than internal combustion cars, The number of ROs for EVs has increased sequentially since Q2 of 2022. As the market prepares for increased penetration of EVs, we feel our parts and service business is in a strong position for growth to accommodate these vehicles for years to come. Now turning to ClickLearn.

Speaker 3

Please note that for Clicklane, we are reporting on an all store basis. We set another all time record of over 11,400 vehicles Through Click Link in the 2nd quarter, a 74% increase year over year and a 6% increase over the previous best, Which was last quarter. 16% of our 2nd quarter new and used retail sales were powered by ClickLean. We're pleased to see that 48% of ClickLane sales in Q2 were new vehicles and 52% were used. We generated $500,000,000 in ClickLane revenue for the quarter and we are now tracking to approximately $2,100,000,000 in revenue In 2023, slightly behind our original estimate for the year.

Speaker 3

Moving on to some KPIs for the Q2. Total front end PBR of $3,333 and an F and I PBR of $2,408 which equates to $5,740 of total front end yield. The average QuickLane customer credit score was 7.17 Which is higher than the average credit score at our stores. 91% of those that applied were approved for financing, of which 78% of those customers received instant approval, while the remaining customers require some offline assistance. 74% were lender finance sales and 26% were cash sales.

Speaker 3

The average distance of a Click Link delivery from our dealerships was 44 miles, A natural increase from prior quarters as the Western states utilize the convenience that Click Link has to offer. Once again, I would like to thank our teams for providing a high level of service, which defines us and drives us to constantly do the right thing. I will now hand the call over to Michael to discuss our financial performance. Michael?

Speaker 4

Thank you, Dan. To our investors, analysts, Team members and other participants on the call, good morning. I would like to provide some financial highlights for our company. For additional details on our financial performance for the quarter, Please see our financial supplement in our press release today and our investor presentation on our website. Overall, adjusted net income was $188,000,000 And adjusted EPS was $8.95 for the quarter.

Speaker 4

Adjusted net income for the Q2 of 2023 excludes net of tax Gains of $11,600,000 related to $10,200,000 gain on the sale of a dealership and $1,400,000 gain from a legal settlement. Adjusted net income also excludes a $3,200,000 loss due to hail damage. These items decreased 2023 second quarter diluted EPS at $0.40 Adjusted net income for the Q2 of 2022 excludes losses, net of tax $21,500,000 or $0.97 per diluted share related to losses on the sale of dealerships and a collision center. Our effective tax rate for the Q2 of 2023 was 24.8 percent in line with the Q2 of 2022. We estimate our tax rate for the full year 2023 at 24.9%.

Speaker 4

Excluding real estate purchases, we spent 41,000,000 We expect full year 2023 CapEx to be $185,000,000 as we continue to roll out planned CapEx 2020 1 acquisitions. Of this $185,000,000 about 20,000,000 is related to replacement of leased properties. Year to date, TCA made $51,000,000 of pre tax income. We are still on track to deploy TCA into the rest of our stores by the end of 2023. Due to the deferral of the income associated with the store rollouts In our larger states, we had conservatively expected TCA to generate $25,000,000 of pre tax income for 2023.

Speaker 4

The amortization of higher deferral from prior years replaced by lower deferral in the current years due to lower unit sales in 2023 has increased TCA's income above our previous expectations. We now expect pre tax income for TCA for 2023 to be $75,000,000 For the Q2 of 2023, we generated $174,000,000 of adjusted operating cash flow, driven by a robust business model. As David mentioned earlier, We repurchased 960,000 shares for $190,000,000 in the quarter. In June, we also prepaid Our 2013 BofA mortgage for $24,000,000 Our pro form a adjusted net leverage was 1.7 times at the end of June, reflecting the use of cash to repurchase shares. Our balance sheet remains strong as we ended the quarter with approximately $1,600,000,000 of liquidity, Comprised of cash excluding cash to Total Care Auto, floorplan offset accounts and availability on both our used line and revolving credit facility.

Speaker 4

Finally, I would like to join David and Dan by thanking our Asbury team members. Thank you for your dedication to superior service and delivering strong results. This concludes our prepared remarks. We will now turn the call over to the operator to take your questions. Operator?

Operator

Thank you. We will now be conducting a question and answer Thank you. Our first question comes from the line of Daniel Imbro with Stephens. Please proceed with your question.

Speaker 5

Hey, good morning everybody. Thanks for taking our questions.

Speaker 2

Good morning.

Speaker 5

I wanted to actually on the expense side of the P and L. I thought SG and A gross was really impressive The quarter actually stepping down sequentially. Can you talk about just what drove the leverage? Is it savings from a click lane? Is it some of the divestitures you guys Done.

Speaker 5

And then maybe taking a step back, what opportunities still remain to optimize SG and A to growth, understanding there will be some deleverage just as

Speaker 2

Thank you for the question, Daniel. We've always for a lot of years now, we've led the peer With SG and A, and we try and operate as efficiently as we can. We do think going forward, we have opportunities to Lower our expense a little bit more over the next couple of years. But I think part of it in the quarter or 2, we maintained pretty healthy margins, We certainly kept SG and A in check as well. But I would think for the next 12 to 18 months as we're working on Our software efficiencies and productivity, there's opportunities for us to improve.

Speaker 2

Clicklane is growing a little bit, it's a little bit over 16% of our sales. It's growing at a consistent pace, but as that picks up, there will be tailwinds with expense there. Right now, there are really no benefits from an expense standpoint with ClickLine the way we're compensating today.

Speaker 5

Got it. And then maybe shifting to the new side of the business. Inventory built a couple of days, but you maintained GPUs nicely despite the domestic Exposure, can you just talk about GPU trends maybe through the quarter? And were there any notable weak spots within the portfolio's profitability?

Speaker 2

I would tell you to your point on the domestics, we're back to what I would call a normal day supply of domestic vehicles. We're pretty close to it. And we're still well over $4,600 a car. I think all of our peers and ourselves have been talking about it. We're not going to go back to 2019 levels, And we certainly don't see that anytime in our near future.

Speaker 2

We think our folks in the stores are doing a really great job at ordering the right inventory And maximizing the gross profit per transaction. We anticipate as we sit here today that to continue into the near future.

Speaker 5

Perfect. And then last one for me. Maybe on the balance sheet, Michael wrapping up. You guys deployed more cash from ops towards buyback, but it does still sound like there's an appetite Remini, can you talk about what you're looking for in the target? Are you looking to expand your brand mix with certain OEMs?

Speaker 5

And then I know today TCA is It's not a use of cash, but when we look at the longer term targets, is there going to need to be any cash infusion to get there or is that going to be self funding from its own cash?

Speaker 4

I'll take the TCA question first and then let David take the acquisition question. On TCA, if you think about the customer before TCA, the customer paid us at dealership, we kept a percentage of that income and kept it as cash to the dealership and then took the rest of the cash and sent it off to a 3rd party provider. And so all that cash that kind of funds TCA is from our customers. And so we're just taking the cash from the customers. Part of it stays at the dealership level and we can use for Operating purposes, share buybacks, acquisitions, the rest of it goes into the investment bucket at TCA.

Speaker 4

So there's no cash that we have to come out of pocket to support that. It's all customer driven.

Speaker 2

From the acquisition standpoint, we divested 1 store in the quarter and it was mainly due to Logistics, there was a market where we only had one store. We couldn't find acquisitions in that market that were We're going to strengthen that market, so we decided to sell that one store and we also avoided a large CapEx project in doing that. So we thought it was the best use of cash. We're very focused on portfolio management, the brands that we have and where the stores sit within which states. We are aggressively in conversations with acquisitions now.

Speaker 2

We've seen a lot. Obviously, we haven't announced anything because we haven't been Able to land something that meets our criteria in the states and brands that we want. We're hopeful with our current conversations that Something will come together, but as you know, these things take time and you just have to play them out.

Speaker 5

Perfect. Well, I appreciate all the color this morning and best of luck.

Speaker 2

Thank you.

Operator

Our next question comes from the line of John Murphy with Bank of America. Please proceed with your question.

Speaker 6

Good morning, guys. I just wanted to ask about parts and service. You had some very interesting comments about Your experience with EV so far and what we heard just from on the GM call, the $792,000,000 charge they took for The Bolt recall. So it seems like there's going to be opportunity for warranty work or repair work on EVs that might be far higher as you're saying 5 times on the ROs Versus the average ICE vehicle. I just what are you expecting there?

Speaker 6

Is there a big capital investment that needs to go on In the service base to get ready for that? And then also maybe conversely, just in a more traditional sense, I mean, how much pent up service work do you think there still is, is, get people Finally come back and actually are doing the work they need to do out there.

Speaker 3

Hi, John. Good morning. This is Dan. Just before I answer your question, just a correction, the EV ROs, customer pay ROs was 1.5 compared to Sorry

Speaker 7

about that.

Speaker 3

I just want to make that correction. No problem. First question, as far as the EB and any Infrastructure investment that is required. Yes, there it does require and I'll start first with the technician Tremendous amount of training that goes into that, where technicians go to the local OEMs outside of the market or in a lot of the cases inside the market, but then also got The proper equipment and as you can imagine a tremendous amount of infrastructure being invested in the charging stations for these vehicles Because as we see that transition, we need to make sure that not only service the guests that are acquiring the cars, But also we're able to fully charge them while they're in our service departments or while we are prepping them for delivery for a lack of a better term. As far as the pent up demand, you see the average age of parked car is 12.5 years.

Speaker 3

So definitely and we also see some consumers keeping cars longer based on those numbers. So the pent up demand is still there And we feel that in the near future, we'll continue to positively impact us.

Speaker 2

And just to add some color to the sales, It will probably come up later, but I'll just mention it now. We're still sitting at a point where 30% of our vehicles are pre sold.

Speaker 8

That's very helpful. But I'm just sorry, back to the parts and service same store.

Speaker 2

I mean, is this the

Speaker 6

kind of thing that with this pent up demand and what's going on with EVs that you think sort of a mid single digit growth rate on a same store sales basis is reasonable of in the near term for parts and service to assume? I mean, it seems like it's pretty sticky and it's trending there, but I'm just curious what your view is on that?

Speaker 2

Yes, we really do. I think up until 2030 and maybe beyond parts and service is going to be pretty strong. It was a bumpy quarter for us with parts and service. We have a lot going on with all our acquisitions out west, integrating new software Changing processes, so that takes a period of time and a toll in your business so you can become efficient with it. But we definitely think Mid to high single digit numbers are certainly very conservative for the foreseeable future.

Speaker 6

Okay. And then just lastly, floorplan interest expense, I mean, obviously, great performance there. You guys are managing the growth very well with, I guess, a lot of hedging instruments. Can you just explain What's going on there and how successful you think you'll be at mitigating the rate rises along with the actual unit rise over time as the industry recovers?

Speaker 4

Yes. So on the floor plan side, most of that's just the floor plan offset account. We negotiated the ability to put To basically offset 100% of the floor plan, so all the excess cash we have right now is parked against that floor plan balance. So it's not hedging, it's just use of cash to offset the balance.

Speaker 8

Okay. That's very helpful. Thank you very much guys.

Speaker 2

Thank you, John.

Operator

Our next question comes from the line of Rajat Gupta with JPMorgan. Please proceed with your question.

Speaker 7

Great. Thanks for taking the question. I just wanted to follow-up on the previous question on new car GPUs. Curious if you could give us a sense of how your electric vehicle mix is today, both in terms of unit sales and inventory? And was there an outsized impact from a moderation in grosses on those EVs relative to ICE that Had an impact in the quarter.

Speaker 7

And if that were the case, when do we expect it to flush out of the system and get back to a more normal level? Thanks.

Speaker 5

And I

Speaker 7

have a follow-up.

Speaker 3

Good morning, Rajat. This is Dan. I'll address last question first and then if I forget one, please remind me. But what we're seeing with the EVs From a pricing standpoint and also from a margin standpoint, yes, it does have an impact when you see The supply and demand, but I will tell you the biggest impact that we see is the level of support from the tax credits that you that might be available out there. When the tax credits are readily available for those cars, those that inventory moves at a much faster pace.

Speaker 3

And also The need for discounting is not as much needed as When the credit is not there. So and we see that in different pockets that we operate both positively impacted and then negatively Can you remind me what your second question was, please?

Speaker 7

Just like is there any way to quantify like what the GPU impact was From electric vehicles. And any color on like just the day supply of EVs versus ICE today In your inventory on the ground?

Speaker 2

Yes. Yes. Rizat, this is David. I would tell you that the gross profits when you look at our PBRs that we put in the tables, they're pretty much similar to what you see there. It does vary by model Or by brand, I should say.

Speaker 2

But our luxury stores with their EVs, they're moving pretty well and the gross profits are Pretty close to what the combustible engine gross profits are. And with some of the midline imports, same scenario. Some of the brands with Hyundai and Mercedes, as two examples with vehicles, we're doing a nice job of turning that inventory. And we feel the gross profits are very much in line with what you see with the rest of our combustible engine gross profits.

Speaker 7

Got it. That's helpful color. And then also following up on John's question on parts and services. The Q1 to Q2, we saw some deceleration in the year over year rate. You talked about some of the operational integration impacts from LHM.

Speaker 7

Was that A driver of that deceleration or was it like this is where you had expected to land irrespective? Just curious like if there's any way to Think about like why that decelerated or was it like industry specific? Was it company specific? Because some of your peers like have a higher number there, It's

Speaker 2

an excellent point. We certainly most of the deceleration It's with the conversion stores out west and changing software. I mean, we have a lot of tenured folks out there, hard working people That we're used to doing things a certain way. When you go through some CMS changes that we've had and change the software that we're using in parts and service, which also changes processes at the same time. It has a cause and effect from a performance standpoint and it takes a little It's probably foreseeable for the next quarter or 2 to see similar results.

Speaker 2

But then we're hoping right after that we should be starting to see the efficiencies and folks getting used to the new software and we'd be back to normal if you will. Just when you think about it, in that brief period of time between the Stephenson and Miller acquisition and Arapahoe stuff, We almost doubled the company within 30 days. That was a significant size impact to our company as a whole. So there's a lot of transition that we're going through. Last year was more a year where we kept things sustained and didn't really go through a lot of conversions and change.

Speaker 2

And this is the year that we chose to really tackle that. So our folks out there are probably frustrated with us a little bit some of the change in implementation of software, but once everyone gets used to it, we think we'll be at a much better place and more efficient out there Like our legacy stores are.

Speaker 7

Got it. Great. Thanks for taking the two questions and I'll get back in queue for follow ups. Thanks.

Speaker 2

Thank you.

Operator

One moment while we repull for additional questions. Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.

Speaker 8

Hey, good morning guys.

Speaker 2

Good morning. Good morning.

Speaker 8

Your comment on domestic GPU still holding over 4,600. Is there a lot of dispersion in the domestics? I mean, does that include Stellantis where there is The highest inventory level or are they all only number 46?

Speaker 2

No, Brett, it's a good question. And Stellantis, as you can see, is our highest percent of domestic. It is our highest day supply as well. We're really pleasantly surprised. All three manufacturers are very similar So their PVR is where they are.

Speaker 2

So there's no huge disparity between any of the 3.

Speaker 8

Okay, Great. And sort of big picture question on the 5 year plan, looking at it and obviously a lot of talk about the integration plans for 2023. What's the biggest risk? Is it sort of a SAAR supply demand volume risk or integration of acquired stores? I mean, it's sort of how do you Bakit, the challenges to the 5 year plan?

Speaker 2

Yes, I would say it's threefold. Finding the right acquisitions to make sure we can hit our target. That 5 year plan was based on a 17 SAAR, so we haven't seen that for a while and may not see it for a little while as well. We think the conversion piece really differs. Miller was an anomaly because it was so large to take something like that on.

Speaker 2

Our prior acquisitions that were smaller were much easier to integrate. So we don't see that as a big risk or an issue. It's really about finding the right acquisitions to add to us getting back to a 17,000,000 star, I would think of the big ones. And then being patient and consistent with Clicklane. We really think we have something there that we can build on.

Speaker 2

It continues to grow. It's a good percentage of our business. And we want to see that become a larger percent of our business. We think that has great opportunity to grow as well.

Speaker 8

Okay, great. And just you said 30% of the vehicles were pre sold. Could you tell us what percent were sold at MSRP?

Speaker 2

So when you think about that, I don't have the exact percentage for you, but when you think about it, most The pre sold vehicles will be sold at or very close to MSRP. And you think about our luxury and import, Almost 50% of the volume come from Lexus, Mercedes, Toyota and Honda. All those brands we have a low day supply. So you could imagine that a lot of those vehicles are pre sold in those lines, which are going to garner high PPRs.

Speaker 8

Okay, Great. Thank you.

Operator

Thank you. We have no further questions at this time. Mr. Hull, I would now like to turn the floor back Over to you for closing comments.

Speaker 2

Thank you, operator. We appreciate everyone's participation in today's call. We look forward to our next conversation

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