GROUP 1 AUTOMOTIVE INC Q4 FY2024 earnings call

• U.S. Performance: U.S. team had outstanding Q4 results with record new vehicle units sold, sequential improvement in PRU, F&I business performed well, and parts and service revenues reached a record. Increased technician headcount by 7% in 2024 and capital program to install AC in shops for retention. - U.K. Integration: Acquired Inchcape's retail dealerships, focusing on workforce realignment, system conversions, and process changes. Facing challenges with U.K. market dynamics and EV mandates, but confident in future performance with taken actions. - Capital Allocation: Focused on new vehicle retail franchise business, balancing acquisitions, dispositions, and share repurchases, with $462 million remaining on share repurchase plan.

U.S. Operations: In the fourth quarter, U.S. achieved an all-time quarterly record in new vehicle revenues of $2.3 billion, with new vehicle units sold up 14% reported and over 8% from same-store. Used car volume grew 7% and 5% YOY, with GPU fairly consistent. Full year 2024 saw all-time annual records: new vehicle sales $10 billion, used vehicle retail sales $6.2 billion, parts and service $2.5 billion, and F&I $829 million. U.K. Operations: Fourth quarter total revenues were up 85.3% YOY due to acquisitions, but SG&A management was challenging. Integration of Inchcape's retail dealerships was ongoing, with workforce realignment and system conversions in progress.

• U.S.: Expect to continue strong performance, with focus on aftersales investment. - U.K.: Anticipates market growth in 2025, optimistic about EV mandate resolutions. SG&A target to reduce U.K. SG&A as a percent of gross by at least 300 basis points in 2025. - Capital allocation plans to continue balancing acquisitions, repurchases, and dividends.

• Risks associated with pricing, volume, inventory supply, market conditions, successful integration of acquisitions, and global economy impact on vehicle demand. U.K. facing challenges with EV mandates and higher SG&A due to Inchcape integration.

Q: Good morning ladies and gentlemen. Welcome to Group 1 Automotive's Fourth Quarter and Full Year 2024 Financial Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the call over to Mr. Pete DeLongchamps, Group 1's Senior Vice President, Manufacturer Relations and Financial Services. Please go ahead, Mr. DeLongchamps.

A: Thank you, Betsy [ph]. 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 the call this morning for comparison purposes have been posted to the 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 made 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, conditions of markets, successful integration of acquisitions 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 directly comparable GAAP measures on its website. Participating with me on today's call, Daryl Kenningham, our President and Chief Executive Officer; and Daniel McHenry, Senior Vice President and Chief Financial Officer. I'd now like to hand the call over to Daryl.

Q: I know there's a ton of uncertainty with what's going on with what's going on with the Trump administration on tariffs right now. But can you -- given what happened to GM stock yesterday, I think a lot of us watching you guys would appreciate if there's any kind of indication you can give on if such and such happens on tariffs, is there any kind of cooperation with the OEM? Or as you as the dealer, you're the importer, so you're going to bear the full cost of this normally. Is there any kind of arrangement being discussed even in terms of splitting the cost of any of these tariffs?

A: David, this is Daryl. All the OEMs are talking about the impact and they're all, I guess, for lack of a better word, war gaming, potential outcomes and what that means to their own sourcing and production plans. At this point, we haven't had any discussions with the OEMs around what kind of an impact that might look like on pricing or our costs as retailers. They are communicating regularly that they're looking at it and making adjustments but nothing specific yet.

Q: Just wanted to follow up on the U.K. comments earlier in the prepared remarks. Just given some of the headwinds with respect to the EV mandates, it looks like it is beginning to worsen more here in the fourth quarter. Just curious what kind of expectation do you have for just new car or used car sales in the U.K. for 2025? And then what implications could this have for GPUs as well? And just relatedly on U.K., I'll just ask my follow-up as well. Given the restructuring actions that you've already executed on, there's more to come here in the first quarter, it seems like you're running at an annualized level of SG&A expenses of roughly $650 million. What would -- what should we expect the new run rate to be once those restructuring actions are completed?

A: Rajat, this is Daryl. I'm going to take your question on the new vehicle demand and Daniel will take the SG&A question. On -- most forecasts in the U.K. show growth in 2025. And the underlying core retail business looks pretty good. There's EVs being forced through the fleet channel right now and that's creating margin pressure in total as a result. So that has to get resolved. And I think it will get resolved, really do. And when you just listen to some of the -- at least some of the political rhetoric in the U.K., there's much more visibility around that issue and how they should address it and what that does to their industry. And so we're optimistic that there will be some resolutions brought forward and that should result in a healthier mix of retail and fleet sales and a more natural mix of EVs. I don't know what that looks like yet but we feel like there's enough commitment and discussion around it that something will happen. And I'll turn it over to Daniel for the SG&A discussion.

Q: I just want to ask again about the trends in SG&A to gross. I know you discussed already in prepared remarks and just now about U.K. is higher as a result of the Inchcape integration but we also saw a sequential increase and year-over-year increase in the U.S. And so in what areas are you seeing the most cost inflation? And what components do you feel there's opportunity to be more efficient?

A: Daniela, this is Daniel. There was some increase in headcount SG&A as a percent of growth, small amount. Some of it was due to margin reduction in terms of the margin on new vehicles year-on-year as a percent of growth as opposed to absolute dollar.

Q: You just had a first question, Daryl, on pricing and GPUs. I mean we saw, for the first time in a while, a sequential improvement in new GPUs. Obviously, fourth quarter has some relatively strong seasonality with Lux being a little bit stronger. But just curious, as you think forward into 2025 and maybe even beyond, obviously, there's a great debate of where these GPUs are going to settle. It seems like we're kind of reaching an asymptotic limit on the downside here. But just curious your thoughts of how much of that benefit was typical seasonality and/or how much do you think we're kind of starting to scramble on the bottom here?

A: Well, I think we're -- generally, I'd agree with you, John. I think we're -- if we're not at the bottom, I think we're approaching it. I don't think the fourth quarter naturally buoyed GPUs. I mean I think it was a little bit because of the big year-end push with the luxuries, obviously. But you see day supply numbers going into the fourth quarter kind of all over the map, right? I mean, we have a few brands that were fairly heavy in stock and then we had some that were very tight and we were able to hold TRUs basically flat or up a little on a reported basis. So I think we're probably close to the bottom. I don't know if we're absolutely but I think we're probably close to the bottom. It just feels like it the contenting the vehicle the customers have. The transaction prices are much higher than they were pre-COVID. And a lot of it is due to the equipment on the vehicles. And I think we're seeing more rationalization with some of the brands on their production which obviously helps that, too.

Q: Congrats on a great quarter. I hate to beat on the U.K. thing, obviously, especially with the U.S. results being as strong as they were. I think some of us were a little surprised at some of the line items in the U.K. You'd highlighted some pretty big things in terms of the DMS changeover, the technician productivity pushing the decision-making process down to the dealerships. I was wondering if you could just elaborate more. I mean, obviously, you've hit the SG&A point, the 300 bps for next year. But just maybe giving a little more color just in terms of magnitude of just how kind of impacted negatively things are right now and how you would see that going the other direction and just how much opportunity is it to go the other direction in 2025.

A: Well, I think there's quite a bit of opportunity. The business we bought, the brands are terrific and they're in great geographies. The way they manage their business was different than us. We tend to put more decision-making in the stores because we feel like our general managers have to have flexibility to react to the marketplace and that's a better way to serve customers. The Inchcape was more centralized. They had a lot more of their decisions centralized and even things like just replacing a lift or hiring a technician had to go to the corporate office for approval. If you wanted to reprice a used car, you had to have approval in writing from the corporate office. We don't think that's the proper way to manage a retail business. We think putting guidelines and technology in place to help the operators make those decisions is the best way and then let them make those decisions based on the customer needs at the moment. And so we've moved all of that in the half of our business that's Inchcape out to the stores. And they're not going to wake up day 1 and be great at it. But I can tell you, just throughout the quarter, we saw improvements in those actions that resulted from those actions. And I feel like we're going to continue to see that. So I think there's a significant opportunity there. I'm as convinced today that we've got a great business there that can really develop and produce good returns for our shareholders. I certainly believe that. So it doesn't mean there's not work to do. There certainly is.

Q: Could you give us a little bit more color on the BEV impact in the U.K., I guess, as you're forcing them through the fleet channel on the unit GPUs and BEV versus ICE over there and maybe where you see that as the mandate is looking for 6 points higher in BEV this year?

A: Well, the margin impact is -- and we can give you some detail on it. But the margin impact of sending them through the fleet channel, those go to corporate fleets in the U.K. It's not like rental car fleets. And most companies have corporate fleet programs for their employees. And -- but the -- they tend to be subsidized and they tend to be lower price and lower margin. And so the incentives have been focused more on those fleet buyers because of theirs volume there to be able to do it. So that's the issue.

Q: Just one more question on the U.K. there. If you take the Inchcape business and the SG&A, it looks like it was like 96% in 4Q. Is there anything structurally that prevents that business from getting down to the overall corporate average in the U.K.

A: Mike, it's Daniel. I don't think there's anything structurally that prevents that from happening. If anything, my expectation would be that the Inchcape Group should be slightly better than the legacy Group 1 stores. Now, the simple reason behind that is a big differentiator between the U.S. and the U.K. as the rents are structurally higher in the U.K. than they are in the U.S. The Inchcape business tends to be more in the North of England versus the legacy Group 1 business in the South. And rents in the South of England just are structurally higher than the North. So my expectation would be that it should be as good, if not better, than the legacy U.K. business.

Q: Maybe just starting off on parts and service because the print was very strong this quarter. Is there anything we should be aware of surrounding kind of the 7% increase in revenue per repair order? I guess does warranty work or does the current scope of warranty work carry a higher revenue per RO? Or is that just a sign of kind of customer willingness to pay and your ability to pass through kind of tech cost and general inflation?

A: Well, I think some of it may be the latter. When you combine it, though, about half of our benefit in parts of service this quarter was because of higher customer counts in our stores. So we're pleased to see that. On the specific dollar increases, the average mileage continues to go up across our service drives. And so as that continues, we will see higher dollar ROs just because older vehicles need more repair. And so I believe that's what's driving it. It's not -- we're not taking necessarily any meaningful pricing that's largely behind us. And I don't think it's the environment to do it anyway.

Q: Just a follow-on question related to aftersales. Daryl, you mentioned targets for 2025 are unchanged 2024. Can you just remind us what those targets were for last year?

A: Well, I think what I was specifically referring to, Glenn, was that this past year, we grew our tech count by about 300 technicians in the U.S. and we're not lowering our expectations in the future on that. And we don't have any -- we don't feel like physical limitations in terms of our store count will limit us either because 1/3 of our stores in the U.S. have more technicians than they do stalls in the dealership. And so just the physical open number of stalls is not what we look at in terms of what's our run -- future run rate look like on being able to hire technicians. So, we intend to keep hiring at the same rate we have been in the past. And so that's what I was referring to. I don't know if that answers your question or not.