Asbury Automotive Group, Inc. (NYSE:ABG) Q4 2023 Earnings Call Transcript February 8, 2024
Asbury Automotive Group, Inc. misses on earnings expectations. Reported EPS is $7.12 EPS, expectations were $7.74. ABG isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to Asbury Automotive Group Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Chris Reeves, Vice President of Finance and Treasurer. Thank you. You may begin.
Chris Reeves: 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 Fourth Quarter 2023 Earnings Call. The press release detailing Asbury’s fourth quarter results, issued earlier this morning and is posted on our website at investors.asburyauto.com. 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-K for the year ended December 2022. As any subsequently filed report quarterly reports on Form 10-Q and our earnings release issued earlier today. 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 fourth quarter — highlighting our fourth quarter results. It is my pleasure to now hand the call over to our CEO, David Hult. David?
David Hult: Thank you, Chris, and good morning, everyone. Welcome to our fourth quarter and year-end earnings call. 2023 was a productive year. with meaningful growth from M&A and growth within our stores. A reflection of our hard work that was recognized with several accolades. This year, we were ranked 18th on Forbes list of America’s Best Midsized companies. We were recently named as one of America’s Greatest Workplaces 2023 by Newsweek, receiving a 5- to 5-star rating based on company reviews. Koons was also awarded by Newsweek, 1 of the few auto retailers alongside us named for this distinction. And we were honored to be named 2024 Best Companies to Work For in the retailers’ industry by U.S. News and World Report. These are great affirmations on our journey to be the most guest-centric automotive retailer.
It must start internally before you can see it externally. Now for our consolidated results for the full year of 2023. We delivered $14.8 billion in revenue, had a gross profit margin of 18.6%. Our adjusted SG&A as a percentage of gross profit was 58.5%. We generated an adjusted operating margin of 7.3%. Our adjusted earnings per share was $32.60 and our adjusted EBITDA was over $1.1 billion. In addition to the Koons acquisition, we repurchased 1.3 million shares for $258 million, and we produced an adjusted operating cash flow of $705 million. Looking to the future, we are committed to deploying capital to its best and highest use to strengthening our balance sheet and to running strong disciplined operations. The world has evolved significantly since we initially laid out our vision for growth in December of 2020, and we are very pleased with what we have achieved so far, including $11 billion of acquired revenue and the strategic entry into markets we have circled for many years.
We have strong convictions for this vision of smart growth. This vision acts a strategic framework for how we think about our business, serving to inform our decision-making along the path, $30 billion or greater in revenue. This framework allows us to continuously adapt to macro factors that may impact the time line for our journey, but not how we think about achieving it. To us, we believe it is more realistic to consider it a matter of when rather than if. As we prioritize discipline and balanced capital allocation, being good operators of our business by accelerating same-store growth and seeking opportunities through M&A activity. We plan to deploy capital when the opportunity arises, such as with Koons. We were fortunate to make a great acquisition in a great market with an outstanding group of team members and leaders.
Going forward, we will continue to seek acquisitions of this caliber. We plan to optimize our portfolio for markets with strong demographics and friendly state franchise laws and assets with quality operators and performance. There are additional details about our updated vision and framework in our investor presentation. Before I hand the call over to Dan, I’d like to once again express my appreciation for all our team members for their continued focus on the guest experience and their hard work. Thank you all very much. Now Dan will discuss our operations performance. Dan?
Daniel Clara: Thank you, David, and good morning, everyone. I’ll start off by once again thanking our team members who are focused on delivering the most guest-centric automotive retailer experience and ensuring our success. Now moving to same-store performance, which includes dealerships and TCA unless stated otherwise. Starting with new vehicles. Our same-store new day supply was 43 days at the end of December, an increase of 7 days from September. As a reminder, December is a good sales month for us and it has a positive impact on day supply. We continue to see wide variation among models and disparity in combustible hybrid and electric vehicles, day supply, even within the same brands. We don’t know what 2024 will bring, but we will continue to manage day supply as best we can.
Our new vehicle business generated solid performance. For the quarter, same-store revenue grew 10% in the quarter and 7% for the year. New units volume grew 7% in the fourth quarter and 3% overall. New average gross profit per vehicle was $4,272 in the quarter. New vehicle gross margin was 8.3% this quarter and 9.2% for the year. Turning to used vehicles. Used retail revenue decreased 12% for the quarter and full year as unit volume was down 10% in both the quarter and full year. Used retail gross profit per vehicle was $1,666 for the quarter, driven by a constrained environment to cost-effectively source quality vehicles. Our same-store used DSO was 32 days supply. We’re looking at 2024 as a tough year to acquire preowned vehicles with a small pool of lease and rental fleets to from.
Shifting to F&I. We delivered an F&I PVR of $2,295 in the quarter, compared to $2,621 last year, a reflection of higher interest rates pressure in consumer payments. The deferred revenue headwind of TCA contributed of $142 to the PVR decrease in the same-store F&I PVR number year-over-year. And this headwind will grow throughout 2024. For the full year, same-store F&I PVR was $2,308. In the fourth quarter, our total funding yield per vehicle was $5,438. Moving to Parts and Service. Our Parts and Service business revenue was $499 million comparable to prior year quarter. Gross profit was $278 million, in line with prior year quarter, and we earned a gross profit margin of 55.6%. Non-converted stores, total Parts and Service gross profit was up 4% for the quarter.
Stores that went through the conversion brought the company down to flat in the quarter. We believe in first quarter, we will see an uptick in our business. For the year, we generated 5% growth in same-store revenue and gross profit, with a full year gross profit margin of 55.3%. Finally, Clicklane is progressing well, posting a 32% growth in total retail units year-over-year versus prior year quarter. We are pleased by the shift we have seen in new vehicle penetration, which grew to 51% of total Clicklane units in the fourth quarter versus 42% in the prior year. We remain committed and focused on the growth of Clicklane and are excited about the path forward. As time has gone on, it has become a more integrated part of our dealership model, which is to serve our guests in the many ways they choose to shop.
And so it makes sense to speak about it within the larger scope of our performance going forward. I will now hand the call over to Michael to discuss our financial performance. Michael?
Michael Welch: Thank you, Dan. To our investors, analysts, team members and other participants on our 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 for the quarter was $146 million and adjusted EPS was $7.12 for the quarter. Adjusted net income for the fourth quarter of 2023 excludes net of tax $88.1 million of noncash asset impairments, $900,000 of noncash fixed asset write-offs and $1.8 million of professional fees related to the acquisition of the Koons automotive companies. These items increased 2023 fourth quarter diluted EPS by $4.42.
Adjusted net income for the fourth quarter 2022 excludes net of tax expenses related to a significant acquisition that did not materialize at $2 million and gains on dealership divestitures net primarily related to the North Carolina stores of $153 million. The tax rate for the quarter was 26.6%, which included a onetime deferred tax impact related to an increase in our estimated future state effective tax rate due to the acquisition of Koons. We had to revalue our net deferred tax liability for this increase in the state tax rate. The impact was $1.4 million or $0.07 per share. On an adjusted basis, our fourth quarter tax rate was 25.5%, and we estimate our tax rate for the full year 2024 of 24.8%. . For the full year, TCA generated $91 million of pretax income.
For 2024, we anticipate TCA pretax income to be between $20 million and $40 million, or decrease between $1.90 and $2.60 per share. Due to the increased deferred revenue impact of recently implemented stores and states with OLED policies rolling off. We completed the rollout to all of our markets in 2023, except for Florida and Koons. We expect to complete the remaining stores by mid-2024. We believe 2024 and 2025 will be the most impacted with TCA headwinds until the effect of revenue deferral are behind us. For the full year, we generated $705 million of adjusted operating cash flow, which enabled us to repurchase shares and make a sizable acquisition. Excluding real estate purchases, we spent $142 million on capital expenditures in 2023.
Free cash flow for the year was $563 million. We expect CapEx through 2026 to be elevated relative to prior years, partially driven by higher store count for our M&A activity over the past few years, which is driving a higher near-term need for CapEx and facility relocations. We plan for approximately $250 million in CapEx per year. We ended the quarter with $460 million of liquidity comprised of cash, excluding cash at total floor plan offset accounts and availability on our revolving credit facility. As a reminder, we utilized existing balance sheet liquidity, including our floor plan offset accounts to acquire Koons in the fourth quarter. For the quarter, we had $8 million of floor plan expense interest expense, mostly incurred after the closing of the deal in mid-December.
We will have an elevated amount of floor plan interest expense in 2024 since we will have a lower balance in our floor plan offset accounts. Our pro forma adjusted net leverage was 2.5x at the end of December, and we anticipate bringing leverage back to approximately 2x by the end of 2024. That said, we will remain opportunistic with capital allocation, including share buybacks and acquisitions. Finally, I would like to extend my thanks to our valued team members and leaders for a strong year through the growth process and look forward to what 2024 and beyond brings. Thank you. This concludes our prepared remarks. We will now turn the call over to the operator and take your questions. Rob?
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