Yahoo Finance AutoNation, Inc. (NYSE:AN) Q1 2024 Earnings Call Transcript
AutoNation, Inc. (NYSE:AN) Q1 2024 Earnings Call Transcript April 26, 2024
AutoNation, Inc. beats earnings expectations. Reported EPS is $4.49, expectations were $4.27. AutoNation, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the AutoNation First Quarter 2024 Conference Call. My name is Carla, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Derek Fiebig, Vice President of Investor Relations. You may now begin.
Derek Fiebig: Thank you, Carla, and good morning, everyone. I’d like to welcome you to the first quarter 2024 conference call for AutoNation. Leading our call today will be Mike Manley, our Chief Executive Officer; and Tom Szlosek, our Chief Financial Officer. Following their remarks, we'll open up the call for questions. Before beginning, I'd like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements.
Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued today, and in our filings with the SEC. Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our materials and on our website at located at investors.autonation.com. With that, I'll turn the call over to Mike.
Michael Manley: Thank you, Derek, and good morning, everybody and thank you for joining us today. I'm going to start on Slide 3 and as usual provide some opening remarks before Tom takes you through our first quarter results in greater detail. Consumer demand for vehicles in the first quarter was robust and in fact this is the first time we have had a quarterly increase in both new and used vehicle sales since the second quarter of 2021. Now specific to new vehicles, you might recall that new unit sales were up 8% in the fourth quarter and now were up 7% in the first quarter. Now as you know, new vehicles are the flywheel of our various revenue streams, [Indiscernible] continued strong trends, but certainly encouraging I think for our future.
Now as expected, the average selling price of new vehicles decreased 5% resulting in a new vehicle revenue increase of 2% for the quarter. New vehicle margins were down $325 on a sequential basis, modestly better than the rate of decline we experienced in the fourth quarter and the rate I previously signaled for the first quarter. New vehicle supply chain is in the final stages of recovery and our inventory is also nearing normalized levels. That does continue to be a wide range of inventory by model make and segments with some approaching historic levels. New vehicle inventory in terms of dollars increased approximately 5% since the beginning of the quarter, compared to a rate of sequential increase approaching 25% for the past eight quarters and you may see that as a signal of a declining rate of increase of new vehicle inventory on the ground.
For used vehicles, same-store unit decreased 2% from the same quarter a year ago, while total units were up 2% reflecting the growth of AN USA stores in the year. Sequentially, used vehicle units were up 6%. Now in the fourth quarter earnings release we discussed the market factors impacting our used vehicle business including tight availability, a return to historical depreciation patterns and lower demand in high priced vehicles. We also discussed our planned actions to align inventory levels and the turn rate with the market and shared our view that used vehicle PVRs would improve late in the first quarter. While the same market factors prevail, I am pleased to know that the team has completed the inventory alignment actions and we have experienced improvement in unit profitability in each month of the first quarter as we had expected.
The first quarter PVR of $1,473 was better than the fourth quarter and we are encouraged with the March PVR exit rate. Customer financial services was again a strong point in the quarter. Our product attachment rates were solid and our team continued to effectively navigate a challenging interest rate environment. After sales delivered another outstanding quarter and congrats to the team, well done. Total store revenue was up 8%, but evenly, well not evenly really, but across all product categories and gross profit as you can see was up 9%. Now I think the greater complexity of vehicles is leading to higher values per repair order. And this coupled with increased number of repair orders from a year ago resulted in an excellent total performance.
The strength of our balance sheet and cash generation continues to give us optionality on capital deployment. CapEx was stable for the quarter. We ended up passing on a number of M&A opportunities that did not meet our return requirements, but make no mistake our appetite and capacity for acquisitions in our cost base is strong. Also we continue to balance share repurchase opportunities with targeted leverage levels and as of yesterday, we have repurchased $250 million of AutoNation shares in 2024, reducing the share count by another 4% since the beginning of the year. Our Board of Directors has also approved an additional $1 billion under our share repurchase program. Now aside from the solid quarter from a financial perspective, there are few other highlights I'd like to touch on.
We continue to focus on developing our offerings that enable us to realize a greater share of our customers’ transportation spend. AutoNation Finance originated over $160 million of loans during the quarter and the portfolio balance now exceeds $560 million. We also continued with the rollout of AN USA footprint with four store openings during the quarter, three were in Florida and one in Nevada adding density to these markets and bringing our store count to 23. Our business model is clearly resilient, working well and we continue to deliver strong financial performance. And this performance is of course made possible by our 24,000 plus dedicated AutoNation Associates to take care of our customers every day. And with that Tom, I'm going to pass the call over to you.
Thomas Szlosek: Thank you, Mike. Turning to Slide 4 to discuss our first quarter P&L. I'll cover this page in summary fashion and will jump into the individual components on some of the later pages. Total revenue increased 1% with the growth standing out from parts and service at 8%. Our growth in new vehicle revenues was largely offset by similar declines in used vehicle revenues. Gross profit of $1.2 billion was 18.5% of revenues and as expected down in nominal dollars from 2023. The growth in our high margin parts and service business partially offset the impact of declining new and used vehicle unit profits. Adjusted SG&A was relatively stable at $786 million corresponding was flat, offset by higher spending for our expanded store footprint and advertising to aid our growth initiatives, as well as used vehicle acquisition efforts.
This resulted in our adjusted operating income of $348 million for the quarter, which ended at 5.4% of revenue. Below the operating line, our first quarter results were impacted by higher interest expenses, mainly for floorplan debt and benefited from lower income tax expense. First quarter floorplan interest expense of $49 million was up from $27 million a year ago, a reflection of higher rates and inventory levels as expected. Net of OEM incentive which are included in gross margin, new vehicle floorplan expense changed from a benefit of $4 million in 2023 to a cost of $15 million in 2024. Income tax expense for the quarter was $63 million, compared to $93 million in 2023, reflecting lower taxable income and a slightly higher tax rate. All in, this resulted in net income of $190 million, compared to net income of $289 million a year ago.
Our share repurchase activity helped to partially offset the EPS effects of the net income decline. Total shares repurchased over the past year decreased our average shares outstanding by 11% from Q1 2023 to $42.3 million shares at the end of the second quarter - first quarter in 2024. This was about - this of course is a benefit for our EPS which was $4.49 for the quarter and historically return on our share repurchases has been quite attractive. Let me move to Slide 5 for some color on new vehicle performance for the quarter. New vehicle volumes – unit volumes were up 7%, including increases of 19% for imports and a 4% decrease in premium luxury. Domestic unit volumes were flat year-over-year. On average, new vehicle unit revenue decreased 5% in the quarter, while new vehicle unit cost declined around 1.5% resulting in a moderation of new vehicle gross profit PVRs. The $325 sequential decline from the fourth quarter in new vehicle PVRs was largely in line with what we had called for and lower than declines in previous quarters even with the seasonal sequential shift away from premium luxury brands that typically occurs in the first quarter.
New vehicle inventory levels, including vehicles in transit has increased from 21,000 units at the end of March last year to 38,000 units this past quarter. On a days basis, we had total new vehicle inventory levels of 44 days, which increased from 25 days last year and 36 days in the fourth quarter. We had 69 days of domestic inventory, 44 days of luxury and 30 days of imported brand. Slide 6, in used vehicles, we had a volume unit increase of 2% from a year ago or minus 2% on a same-store basis. These rates improved significantly from the negative 4% total store and negative 8% same-store rates we experienced in the fourth quarter. Average used vehicle selling prices moderated year-over-year by 5% reflecting the shift to lower priced used vehicles.
Our same-store unit sales vehicles priced under 20,000 increased 5%. Mike discussed the encouraging outcomes in used vehicle PVRs in the quarter, driven by the teams’ realignment actions. Used vehicle inventory levels decreased from 39 days in the fourth quarter to 31 days in the first quarter which we feel positions us well for the second quarter. Used vehicle sales and profitability continue to be a big area of focus for us as we emphasize effective sourcing, pricing and speed, while optimizing customer satisfaction. Then move to Slide 7 on Customer Financial Services, a great story as Mike mentioned particularly in a high interest rate environment where fixed monthly budgets can hinder customer ability to pursue value at all fronts. We've been able to maintain product attachment rates and our gross profit PVRs declined only modestly, the majority of which is related to the shifting economics related to AutoNation Finance lending.
As a reminder, the accounting for customer loans from AutoNation Finance requires that we eliminate the upfront fees from CBS or CFS PVRs. However, over the course of a loan with AutoNation Finance, the profitability for AutoNation is expected to be more than two and a half times that of a non- AutoNation Finance model. Speaking of AutoNation Finance, Mike gave you some of the numbers. I'll expand on that a little bit here. The business is on track for over $700 million in originations in 2024, all from AutoNation stores and we expect the portfolio to more than double during 2024. It is already the number one lender across the AutoNation enterprise. Its credit profile, fee rates and profitability also continue to improve and we are finding that AutoNation Finance is deepening the relationship we have with our customers.
So far this acquisition is proving out nicely, with a track of cash on cash returns on equity. Back on PVRs, we've also seen an increase in leasing, which represented 24% of new sales in the first quarter, compared to 17% in the same quarter of 2023. This is a minor headwind for CBS PVR as leased vehicles historically have lower CFS attachment rates. Let me move to Slide 8, after sales represented 46% of our total gross profit for the quarter, compared to 40% a year ago and continued to grow. Total store revenue increased 8% to nearly $1.2 billion and same-store revenue increased 7%. Warranty and internal pay, both experienced double-digit year-over-year growth. The customer pay is also tracking well gross way. The value per order is improving and our total number of repair orders has also increased.
Total store gross profit grew 9% year-over-year and by 8% on a same-store basis. Our gross profit margins were up more than 50 basis points from 47% reflecting higher value repair orders and the scale benefits from an increase in a number of repair orders. This high margin business is a key part of our continued engagement with our customers and we are focused on capacity utilization and technician development to support the continued growth of the business. Importantly, our total technician workforce increased 5% from a year ago on a same and total store basis. On Slide 9, our adjusted operating income margin was 5.4% for the quarter, down from last year, but flat sequentially and up approximately 150 basis points from pre-pandemic levels.
The decrease from 2023 mostly reflects the moderation in new vehicle gross profit per unit, which was expected and is consistent with the industry, as well as higher SG&A. The growth in SG&A reflects investments for growth including higher spending to support used vehicle acquisitions and the larger AN USA footprint, as well as alternative transportation for after sales customers, increased advertising spend and inflation. Normalized SG&A as a percentage of gross profit is expected to remain lower than pre-pandemic level. Moving to Slide 10, our adjusted free cash flow for the quarter was $257 million, compared to $368 million a year ago. As you can see, conversion relative to our net income improved. During the quarter, we sharpened our focus on our cash cycle times across the business, which helped to achieve these conversion results.
We closely monitor metrics for our key operating cycles and have resources and programs in place to drive efficiency that needs. While we expect new vehicle inventory levels to increase as manufacturer supply chains improve, we are focused on continuing to accelerate the velocity with which we turn our overall vehicle inventory. During the quarter, we reduced our used our vehicle inventory balances and the related non-trade floorplan financing by more than 15%. Consistent with the expansion of AutoNation Finance, our auto loans receivable related to loans originated in our own stores increased by approximately $115 million in the quarter. And as I mentioned, we expect continued growth in this portfolio. CapEx for the quarter was $94 million, level with a year ago.
This resulted in adjusted free cash flow of $250 million and a strong conversion of 135% of our adjusted net income. Being a strong generator of cash provides optionality in terms of capital allocation. Slide 11 shows our capital allocation for the first quarter, compared with the similar period in 2023. You'll notice a year-over-year increase of almost $400 million in net debt pay down and almost $300 million decrease in share repurchases. Some of this shift is timing and at shortly after quarter end as Mike mentioned, we executed more than $200 million of additional share repurchases. But we are mindful to need to maintain appropriate leverage levels in this dynamic environment, while pursuing maximum shareholder returns through a combination of M&A in our core space and share repurchases.
At quarter end, our leverage was at 2.25 times EBITDA, near the low end of our 2 to 3 times target and we continue to maintain our investment-grade credit rating. As Mike mentioned, our Board approved an additional $1 billion in share repurchase authorization. Now I'll turn to call back to Mike to provide some commentary on the path forward.
Michael Manley: Yeah, thank you, Tom. As we said, I'm going to give you just a little bit more commentary before we open up for the Q&A this day and add some color in terms of how we're seeing things and some of the things that we are focused on. So, let's start on the new side of the business where, as we’ve said, vehicle supply continues to rise. And I think inventory levels will continue to increase over the full course of 2024, but as I kind of indicated in my opening comments, not at the pace over the last two years. We can all see that leasing and retail incentives are picking up, yet both remain below the pre-pandemic levels, which I think gives the OEMs quite a lot of drypowder and optionality as the year develops.
So I see - I see that on a positive basis in terms of new vehicle sales. Obviously, a lot of discussion about bad introductions and customer interest in these. But I think it's going to be a key dynamic throughout the year. And as we have seen and it's true in everything – excuse me – it’s all about balance and it does appear that OEMs are adjusting their plans and actions to match demand more closely and from our point of view, this is just going to be well received. Hybrids do continue to do well in the marketplace and if you look at our brand portfolio, that gives us great exposure I think for this portion of the marketplace. And I'm going to briefly touch on new margins, because obviously we've said, we expect them to continue to moderate over the course of this year, probably at a similar place really to our experience over the last over the last two quarters.
But I do remain very positive about new vehicle margin. And used vehicle margins remains constrained, used vehicle market remains constrained and as we all know late model used availability remains limited and we will be prepared at the time, but I think the team is being nimble in their approach to the market and very, very focused on the effectiveness of vehicle acquisition, pricing and of course inventory turn. CFS, as Tom and I both mentioned earlier, the strength of the organization and I really expect that to continue to perform well even with continued pressures coming from overall monthly payments, the vehicle meets our tools, as well as OEM actions to support unit sales. After sales has been and is going to remain a significant focus for us for the year.
And you can see some of the results coming through in the efforts of the team in Q1. Obviously, we had some pretty good growth and great growth actually coming at same in 2023. So comps are going to become a little bit difficult as we get through the year, but growth is really what we're looking at in terms of a dollar sense and I think that business will continue to grow attractively for us. And obviously, as you would expect, we are focused on managing the things that we are more control of and those variables which include cash flow and capital deployment. And so with that, we will dive in directly to the Q&A please.
Derek Fiebig : Yeah, Carla, if you could please remind people how to get in queue for questions?
Operator: [Operator Instructions] Our first question comes from John Murphy from Bank of America. Your line is now open.
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