Asbury Automotive Group Q2 2024 Earnings Call Transcript

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August 2, 2024

There are 8 speakers on the call.

Operator

Greetings, and welcome to the Asbury Automotive Group Second Quarter 2024 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, Chris Reeves, Vice President of Finance and Investor Relations.

Operator

Thank you, sir. You may begin.

Speaker 1

Thanks, 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 2024 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 Hult, 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 up the call for questions and will be available later for any follow-up questions. 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 2023, any subsequently filed quarterly reports on Form 10 Q and our earnings release issued earlier today.

Speaker 1

We expressly disclaim any responsibility to update forward looking statements. 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 have also posted an updated investor presentation on our website investors. Asburyauto.com highlighting our 2nd quarter results.

Speaker 1

It is my pleasure to now hand the call over to our CEO, David Holt. David?

Speaker 2

Thank you, Chris. Good morning, everyone. Welcome to our Q2 earnings call. I want to start by thanking our team members and our OEM and banking partners for their efforts to ensure we continue to deliver the highest possible guest experience through the challenges associated with the CDK outage. Their resourcefulness and dedication helped to ensure all store locations continue to sell and service vehicles, although certain levels of speed and efficiency were certainly impacted.

Speaker 2

Beginning on June 19, the outage affected all Asbury stores with the exception of our Coon stores, which utilize a different dealer management system. We received initial access to the DMS on July 1. However, all functions of CDK were not fully restored for us until July 8 with other plug ins and bolt on applications coming back online in the weeks thereafter. Once CDK services were restored, team members across the country worked tirelessly to recreate transactional activity that occurred during the outage back into the DMS. Due to the length of the disruption, the recovery process took approximately 12 days.

Speaker 3

To give

Speaker 2

you a sense of scale just within our parts and service business, almost 100,000 repair orders were recreated into CDK. For several years, we've talked about our disciplined investments in technology designed to create a guest experience that is both more transparent and quicker. We designed the showroom app in our ClickLane tool to facilitate in person transactions that may have started online. During the outage, this application served as the primary way for us to facilitate the sale of vehicles since click lane functionality was not impacted by CDK. Tools such as these combined with the dedication of our team members and partners help to mitigate the impact of our financial performance from the CDK incident.

Speaker 2

For the quarter, we estimate this impact to be between $0.95 $1.15 in diluted earnings per share. From a combination of fewer new and used vehicle sales, which also impacted our F and I business, a reduction in parts and service volumes and certain one time expenses related to our recovery efforts. The likelihood of recovering some portion of this through insurance or other recoveries is difficult to predict and is therefore not included in the previous mentioned estimate. Additionally, any recoveries we do receive may not occur for several quarters or longer. I'd now like to turn our focus to the performance of our business excluding the impact of the outage.

Speaker 2

Through the hard work of our team members, we delivered record 2nd quarter total revenue and record 2nd quarter parts and service revenue with $581,000,000 and gross profit of 340,000,000 dollars Our used vehicles were pacing towards 1% growth in total units on a same store basis through the 1st 2 months of the quarter. However, we ended the quarter down 2% due to the CDK outage. In parts and service, beyond the record quarter for total gross profit dollars, we saw strong performance in same store results, pacing at 8% growth going into June before finishing with 4% growth due to the CDK outage. I am pleased with the performance and momentum of this business. Now for our consolidated results for the quarter.

Speaker 2

We generated $4,200,000,000 in revenue at a gross profit margin of 17.2%. Our same store adjusted SG and A as a percentage of gross profit was 64.4 percent and 64.8% on an adjusted all store basis. We delivered an adjusted operating margin of 5.6 percent. Our adjusted earnings per share was 6.40 $4.0 and our adjusted EBITDA was $236,000,000 During the quarter, we repurchased 193,000 shares for $43,000,000 and another 160,000 shares for $36,000,000 so far in the 3rd quarter. This brings our year to date total through August 1 to 592,000 shares for 130,000,000 dollars Our approach to capital allocation is a continuous process and we're constantly evaluating the optimal balance between acquisitions, organic investments and share repurchases.

Speaker 2

We are committed to prioritizing the most strategic and accretive use of capital and we'll continue to be opportunistic in pursuing attractive avenues for growth. Effective capital allocation also extends to managing the makeup of our existing portfolio. In the Q2, we divested 2 Nissan stores and we'll continue to monitor opportunities to make other changes throughout the year. Now before I hand the call over to Dan, I want to say thank you again to our team members for their perseverance and sacrifice Through the late nights and long weekends, I was proud of how you came together to solve a common challenge, all while continuing to be the most gas centric automotive retailer. Now Dan will discuss our operation performance.

Speaker 2

Dan?

Speaker 3

Thank you, David, and good morning, everyone. First, I'd like to extend my gratitude for our team members navigating this unprecedented situation and by going above and beyond to serve our guests through this time. Your perseverance, agility and patience is greatly appreciated. During the CDK outage, we utilized our omnichannel platform Clicklane to serve as a transactional software tool, allowing us to sell vehicles in the effective stores. We retailed more than 15,200 sales through ClickLearn in the quarter with over 8,000 occurring in June.

Speaker 3

Click Link is often thought of as an online only tool. However, we use the showroom app functionality within Click Link to facilitate in store sales. Now moving to same store performance, which includes dealerships and TCA unless stated otherwise. And to help quantify the impact of the disruption on our pace, I will provide some metrics of our April May performance. Starting with new vehicles.

Speaker 3

In the period of April May, we were flat on a unit growth. Same store revenue and unit volume for the full quarter decreased 6% with varying results among the brands in our portfolio. New average gross profit per vehicle was $3,649 roughly in line with our expectations for the path of new gross profit per unit this year. New vehicle gross margin was 7.1%. Our same store new day supply was 74 days at the end of June compared to 53 days at the end of May due to the CDK outage.

Speaker 3

Turning to used vehicles. 2nd quarter unit volume decreased 2% versus last year, a percentage in line with the Q1. However, going into June, we were up 1% in volume. Our same store used day supply was 39 days at the end of the quarter, slightly higher than our historical average driven by the CDK incident. For reference, at the end of May, our day supply was 31 days for same store use.

Speaker 3

Shifting to F and I, we earned an F and I PVR of $2,124 in the quarter. As expected, the deferred revenue headwind of TCA is starting to be more pronounced. It contributed $169 of the $2.55 decrease in the F and I PVR number year over year. And we continue to expect this headwind to be impactful throughout 2024. In the Q1, our total front end yield per vehicle was $4,807 Moving to parts and service.

Speaker 3

As David mentioned earlier, we were very happy with the record performance of our parts and service business. Our parts and service gross profit going into June was facing at 8% year over year before ending the quarter up 4%. For the quarter, we earned a gross profit margin of 58.7%, an expansion of 3 14 basis points versus prior year quarter despite weather issues in several of our markets and the impact from the CDK event. I'd like to give some color on our performance in some of the revenue buckets and how the CDK outage impacted our business. Within our customer pay repair order revenue, we were pacing up 10% at the end of May ending the quarter up 4%.

Speaker 3

In warranty, we were up 17% before ending the quarter up 7% in revenue. The CDK outage was particularly significant for our wholesale parts and cleaning business. Wholesale parts was flat through May before ending down 7%. The month of June had an $8,000,000 decrease year over year or 21%. Collision was down 6% in the 1st 2 months and it finished the quarter down 11%.

Speaker 3

Despite the challenges in June, we saw great progress among our team members and stores in the West, which as a cohort outperformed the portfolio of our Eastern stores on a same store basis. I will now hand the call over to Michael to discuss our financial performance. Michael?

Speaker 4

Thank you, Dan. First off, I would like to echo what Dan and David said about our team members going above and beyond to keep the business operating during a challenging time. Truly inspirational work by all involved. Our financial results were clearly impacted by the CDK outage, but broadly speaking, we were pleased with our 2Q results through mid June and expect performance to normalize now that we are through our recovery efforts. I will now walk us through a more detailed financial overview of the quarter.

Speaker 4

Overall adjusted net income was $236,000,000 and adjusted EPS was $6.40 for the quarter. Adjusted net income for the Q2 of 2024 excludes net of tax $101,300,000 of non cash asset impairments, gain on divestitures of $2,700,000 and losses related to hail damage of $2,300,000 Adjusted net income for the Q2 of 2023 2023 excluded net of tax gain on divestiture of $10,200,000 gain on legal settlements of $1,400,000 and losses related to hail damage of 3 point $2,000,000 Adjusted SG and A as a percentage of gross profit came in at 64.8 percent driven by higher compensation, 3rd party vendor spend, elevated advertising expenses and other miscellaneous cost. We've always been disciplined with cost control and we will look

Speaker 2

to be

Speaker 4

to be in the mid-60s for the remainder of the year. The adjusted tax rate for the quarter was 25.3 percent and we still estimate our tax rate for the full year 2024 to be approximately 25%. TCA generated $21,600,000 of pre tax income the Q2 $41,000,000 year to date. We anticipate full year results to be between $65,000,000 $80,000,000 on a pre tax basis. We have delayed the rollout of TCA to Florida and Kunz, but plan to offer TCA across these markets later this year.

Speaker 4

We generated $193,000,000 of adjusted operating cash flow in the Q2 and $402,000,000 through the end of June. This is slightly higher than our typical cash flow in the 2nd quarter due to timing of payments impacted by CDK. The quarter, we repurchased $43,000,000 in shares and $103,000,000 year to date through August 1st. Excluding real estate purchases, we spent $65,000,000 on capital expenditures year to date and we anticipate full year spend to be approximately 200 dollars to $250,000,000 Free cash flow was $154,000,000 for the quarter $337,000,000 year to date. We ended the quarter with $806,000,000 of liquidity comprised of floor plan offset accounts, available on both our used and revolving credit facility and cash excluding cash of total care audit.

Speaker 4

Our pro form a adjusted net leverage was 2.7 times at the end of June, reflecting our share repurchase activity, which we view as a compelling use of capital during a period of time where we're focused on integrating our recent acquisitions. We are committed to creating opportunities in our capital allocation approach across share buybacks, M and A and organic investment opportunities. Finally, I would like to again thank our team members for their focus on the guest experience and our growth strategy. Thank you. This concludes our prepared remarks.

Speaker 4

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 Our first question comes from John Murphy with Bank of America. Please proceed with your question.

Speaker 5

Good morning, guys. Maybe just a first simple question on the CDK situation. David, as you think about sort of the catch up here as the system has normalized through the course of July, how much catch up do you think there will be as we think of sort of the different verticals of new used and parts and service?

Speaker 2

Hey, John, it's David. Over half our competitors are non CDK and they were functioning as normal and you could see it in the month end performance when you could see the local market activity, you can almost pick who is on CDK and who had a different DMS. So I think people tend to go out and make their purchases and don't tend to wait, while some will wait depending upon the product. Parts and services, you miss those opportunities to sell the hours, you don't get those hours back. So I don't think there's going to be a lot coming into the quarter.

Speaker 2

Having said that, probably the second half of July is when we got back to what I would call normal operations and we've seen a very steady increase in our parts and service gross profit and also transactional revenue grow nicely in July compared to July of prior year.

Speaker 5

Okay, that's helpful. And then just a second question on parts and service. I mean, it's running really hot, previous CDK disruption. I mean, as you think about the forward, the second half of the year and going into 2025, is sort of that mid to high single digit same store sales number, a number that you think is reasonably achievable? I mean, you got dented pretty hard here in June.

Speaker 2

Yes, absolutely. We will certainly be that and probably closer to the high single digit numbers.

Speaker 5

Okay. And then just lastly, I mean, QuickLane sounded like it was a pretty good Band Aid sort of redundancy system. But is there any thought about what you're going to do with sort of the reliance on CDK going forward? Could it be an incremental investment in Click Link to make that actually even more robust than it already is? Or I mean what is kind of the longer term thought process here?

Speaker 2

It's a great question, John. And actually when something catastrophic like this happens other than come up with quick solutions to fix that you think about going forward. Every dealership needs a deal management system and they're all capable as we've seen with other industries with cyber attacks that are coming. ClickLane's intention was always built to be a standalone transactional tool online and we think it served itself really well. It can print all the documents, even the documents where some states require wet signatures, but it's not an accounting or DMS system.

Speaker 2

So we still need an outlet to plug into. It functions on its own. It did all the transactions. It handled the leasing. It handled the financing.

Speaker 2

It handled the signatures, but it's still all those deals had to be recreated back into the DMS system. So unfortunately, our industry and I don't see a workaround, we need a deal management system or an accounting system, if you will,

Operator

Our next question comes from rajat Gupta with JPMorgan. Please proceed with your question.

Speaker 6

Great. Thanks for taking the question. I had just a follow-up on John's question earlier on parts and services. The high single digit expectation going forward, was that like a revenue number or a gross profit number? And could you give us a sense of what drove the strong gross margin expansion in the 2nd quarter in parts and services as well?

Speaker 6

I mean, was that just mix or was that just more pricing drop through? Just curious if you could unpack that a little bit. And I have a quick follow-up.

Speaker 2

Sure. The high single digits, thank you for clarifying that. We tend to focus on gross profit more than revenue because that's what ultimately pays the bill. So that's that high single digit piece of it. As far as the margin increase, it's a combination of a few things.

Speaker 2

We're a large into wholesale parts revenue and gross profit, which bring down your margins. Missing $8,000,000 in wholesale parts sales in the quarter was a massive impact and would have put us close to total revenue flat year over year on a same store basis. So that was a little bit of a tailwind picking up the margin with the lack of wholesale sales. In collision, we have so many collision outlets in the reverse. A lot of the transactional work didn't happen there because they were waiting on parts as well.

Speaker 2

So those 2 were certainly part of the indication as to why the gross margin went up, but it's also on our end. The last 90 days, we've been very focused on raising our margin within our service business alone. We saw a nice incremental growth across all our brands and all our markets and we're doing everything we can to make sure that sticks going forward.

Speaker 6

Got it. That's helpful clarification. And then the mid-60s SG and A to gross expectation for the remainder of

Speaker 2

the year,

Speaker 6

what kind of GPU assumptions on new and new side underlie that forecast? Can you give us some color there? Thank you.

Speaker 4

Yes. For the GPUs, we expect new vehicle to continue to come down throughout the remainder of the year, kind of the glide path we've been on. And then used vehicles will probably stay in the current environment. We don't see a lot of things that are going to change in the used vehicle market to raise those PVRs at least the remainder of this year. So those are both kind of current GPUs are slightly lower for new vehicles in that forecast.

Speaker 6

Got it. That's helpful clarification. Thank you. And we'll get back in queue.

Operator

Our next question comes from Ryan Sigdorf with Craig Hallum Capital Group. Please proceed with your question.

Speaker 7

Hey, good morning guys. Looking at Slide 13, just the impact from CDK outage, nice slide there to show early versus end of quarter performance. But it shows my question is, QuickLane performed as a transactional software tool enabling in store sales. I guess, can you walk through exactly kind of the burden or change to the end consumer or why so much sales were lost when you effectively had a Band Aid software system that you could transact?

Speaker 2

Craig, I'll start and then Dan can jump in. I think the one time or this is my perception. I think a lot of folks look at simply that the buckets of luxury, domestic and import. And I think you really have to unpack what's going on within each brand itself. The market performance back within sales to us had more to do with our brand mix.

Speaker 2

We had brands that were up year over year in sales. Stellantis is we have 155 dealerships. It's almost 15% of our rooftops. And it's all brands are cyclical, but it's very it's struggling right now. And when you look at our year over year decrease in unit sales in domestic, 100% of it is tied to Stellantis.

Speaker 2

Also in the import side with Nissan, it was a material impact on us as well. So even with the CDK outage because of our brand mix, we're struggling a little bit with a couple of brands that we're a little bit heavier on as far as a percentage of our business. But again, all brands are cyclical. So while it's a headwind for us right now, it's going to be a tailwind in the future as they come back for us. I think the transactional tool worked really well.

Speaker 2

Where it lacked some function was with API connections with some of the OEM financial arms. Some of them don't have their software as sophisticated as ours and don't have the ability for API connections, which make it a little bit more challenging, especially with a couple of the European brands as it relates to leasing. So that really kind of slowed down the process. But generally, I think that we performed well more than miss on volume to me had more to do with the brand mix than the outage. Dan, I don't know if you feel differently.

Speaker 3

Yes. I agree 100% with David. I do want to add Ryan that Clicklane as a transactional tool worked extremely well during the outage. But you can also we cannot forget that most of our stores are operating under ELEAD and ELEAD was also affected on the CDK outage. And what means the impact that that had to us is the moment ELEADs went down or CRM, we had no visibility to any leads or deals that we were working prior to the outage.

Speaker 3

We were in blank mode. So ClickLearn allowed us to move forward, but we lost a lot of momentum from being able to follow-up with our team member with our guests prior to the outage and that also contributed to the lack of performance.

Speaker 2

And Ryan, just to follow-up on that. ELEAD is a CRM system that's owned by CDK that we utilize. But I will say our development team internally quickly integrated with our 3rd parties to create basically within our sandbox the ability for us to capture leads and respond to them. So a little bit of delay, but we were able to get back up on top.

Speaker 7

Great. And then just for my follow-up, you guys are on path to trial for stores on Techyon. Curious if this changes kind of how you think about DMS technology, server based versus cloud based, etcetera going forward? And then anything on that timeline as well? And if you would like to comment on that legal battle between unlocking some of that data that's in the headlines, would love to hear that as well.

Speaker 2

Thanks, Ryan. I don't want to comment on ongoing legal issues. I would say we're excited about Techheon. It is 100% cloud based. We will be more all eggs in one basket with them, if you will, because we won't have nearly as many bolt on applications.

Speaker 2

But we view that as a positive deal from a transparency standpoint with our guests and our team members being able to service our customers. We intend at this point to launch the 4 stores and our shared service center in October and hopefully continue to roll out from there on starting in early 2025. We're really comfortable and we've had great conversations with Techyon on their cybersecurity and their SOC 1 and SOC 2 report and what they do. But again, as we've seen with every industry in this day and age, unfortunately, everyone is subject to some kind of cyber attack.

Speaker 7

Great. Thanks guys. Good luck.

Speaker 2

Thank you.

Operator

It appears that there are no further questions at this time. We'd now like to turn the floor back over to David Holt for closing comments.

Speaker 2

Thank you, operator. We appreciate everyone's participation today on the call and we look forward to speaking with all of you at the end of the Q3. Have a great day and a wonderful weekend. Take care.

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