Group 1 Automotive, Inc. (GPI) Q3 2022 Earnings Call Transcript

Group 1 Automotive, Inc. (GPI)

Q3 2022 Earnings Conference Call

October 26, 2022 10:00 AM ET

Company Participants

Pete DeLongchamps - Senior Vice President, Manufacturer Relations, Financial Services & Public Affairs

Earl Hesterberg - Chief Executive Officer

Daryl Kenningham - President & Chief Operating Officer

Daniel McHenry - Senior Vice President & Chief Financial Officer

Conference Call Participants

Daniel Imbro - Stephens

Michael Ward - Benchmark

John Murphy - Bank of America

Rajat Gupta - JPMorgan

Ali Faghri - Guggenheim



Good morning, ladies and gentlemen. Welcome to Group 1 Automotive's 2022 Third Quarter Financial Results Conference Call. Please be advised that this call is being recorded.

I'd now like to turn the call over to Mr. Pete DeLongchamps, Group 1's Senior Vice President of Manufacturer Relations, Financial Services and Public Affairs. Please go ahead, Mr. DeLongchamps.

Pete DeLongchamps

Thank you, Anthony, and 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 we will refer to on this call for comparison purposes have been posted to Group 1's website.

Before we begin, I'd like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures. Except for historical information mentioned during the conference call, statements made by management of Group 1 Automotive are forward-looking statements that are pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve both known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results.

Those risks include, but are not limited to, risks associated with pricing, volume, inventory supply due to increased customer demand and reduced manufacturing production levels due to component shortages, conditions of markets and adverse developments in the global economy as well as the public health prices related to the COVID-19 virus, and resulting impacts on the 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 directly comparable GAAP measures on its website.

Participating with me today on the call Earl Hesterberg, our Chief Executive Officer; Daryl Kenningham, President and Chief Operating Officer; and Daniel McHenry, Senior Vice President and Chief Financial Officer.

I'll now hand the call over to Earl.

Earl Hesterberg

Thank you, Pete, and good morning, everyone. I'm pleased to report that for the quarter, Group 1 generated adjusted net income of $188 million from continuing operations. This equates to adjusted earnings per share of $12 per diluted share, an increase of 27% over the prior year and ties to the previous quarter for our all-time best quarterly earnings per share result.

Our adjusted results exclude non-core items totaling $9 million of after-tax gains, which primarily resulted from the sale of the dealership franchise in real estate during the quarter. These results were largely due to continued strong new vehicle margins that were able to more than offset weak supply, continued double-digit same-store growth in our Aftersales business, significant contributions from our recent acquisitions and record profitability from our UK region.

One of the challenges we faced in the US in the quarter was a decline in industry used vehicle price levels. This required quick action by our team to rapidly sell-through our existing inventory, so we could restock at latest market price levels. This action enabled us to slightly increase sales in a market which declined double-digits. However, our used vehicle margins declined sequentially from roughly $1,900 a unit in the second quarter to roughly $1,600 in the third quarter.

Our ongoing used vehicle stocking level of approximately 30 days supply enables us to react very quickly to market changes of this nature.

Consumer demand in the UK remains steady and new vehicle availability is still constrained. Our new vehicle order bank remains at nearly 17,000 units, which is consistent with the end of June and represents more than a six-month backlog based on our 2022 sales pace.

As a reminder, our UK business mix is predominantly luxury brands, and those consumers are more resilient during times of economic uncertainty. We continue to believe that pent-up demand built over the past several years due to both Brexit and the very strict pandemic lockdowns, will help drive strong UK vehicle demand well into 2023.

We're also seeing continued strength in the state of Texas. Market once again collectively outperformed our total US same-store growth in new vehicle sales, used vehicle sales, after sales and net profitability. Texas demographic trends continue to be a positive tailwind for the company due to population growth, reasonable cost of living, low taxes, and a friendly business environment. We believe our geographic exposure is both a near-term and longer-term advantage for our company and shareholders.

Finally, our company-wide after sales performance continues to be a key profit driver. We delivered over 10% consolidated same-store gross profit growth on a local currency basis, which is even more impressive given the tough double-digit growth comps from last year's consolidated results. Our after sales initiatives and recruiting efforts continue to drive outsized growth in this segment.

To provide some color on our US second quarter performance, I'll now turn the call over to Daryl Kenningham.

Daryl Kenningham

Thank you, Earl, and good morning, everyone. As of September 30, we had 5,000 US new vehicle units in stock. That represents a 15-day supply, a slight increase from June. Inventory increases mainly in our domestic brands and import brands remain very constrained. As a reminder, 30% of our US business is Toyota and Lexus, which continues to be very tight at a combined 5-day supply.

Despite fewer new car sales in the quarter versus a year ago, our same-store used retail sales increased 2% in an industry that was down 12%. Our organic sourcing efforts continued successfully during the quarter, including 10,300 vehicles acquired from individuals through AcceleRide.

As a franchise dealer, we also have a distinct advantage over used on the operators due to our numerous organic sourcing channels available only to us, including our service drives, the lease returns, OEM closed auctions.

Although the quarter preserved a challenging used vehicle pricing environment, we maintained our discipline with a 31-day supply of used inventory. As Earl mentioned, this allowed us to quickly rebase our inventories at current market prices.

Our US after sales performance was outstanding once again, generating double-digit same-store gross profit growth, despite facing mid-teen growth comps from a year ago. For our technician recruiting and retention efforts, we increased our same-store technician headcount by 14% versus the third quarter of 2021....

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