Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Group 1 Automotive Inc (GPI, Financial) reported a record total revenue of $4.7 billion for the second quarter of 2024.
- The company achieved all-time records in new vehicle sales ($2.4 billion) and F&I revenues ($200 million).
- Despite the CDK outage, the US team demonstrated exceptional teamwork and resilience, minimizing the financial impact.
- Group 1 Automotive Inc (GPI) successfully integrated new acquisitions, including four Mercedes Benz dealerships and the pending Inchcape acquisition, expected to add $2.7 billion in revenue.
- The company maintained strong SG&A leverage, with US adjusted SG&A as a percentage of gross profit decreasing by 130 basis points sequentially to 64.4%.
Negative Points
- The CDK outage significantly impacted US operations from June 19 to June 26, resulting in an estimated pretax income impact of $17 million.
- One-time pretax compensation payments of $5.9 million were made to employees, affecting earnings per diluted share by $0.34.
- The UK operations faced challenges, with adjusted SG&A as a percentage of gross profit remaining high and used vehicle performance being weak.
- The company experienced severe weather events in Houston, further impacting operations and financial performance.
- Interest rate increases pose a risk, with an annual EPS impact of about $1.23 for every 100 basis points increase in the secured overnight funding rate.
Q & A Highlights
Q: Hi, and congrats on a strong execution this quarter. I wanted to just follow-up on just the CDK impact in the second quarter. And how should we think about the run rate of certain components of the P&L into July or the third quarter, if you could give us? And really, the focus was more on SG&A to growth. And clearly, not very strong execution sequentially despite some of the deleveraging you might have seen from lost sales and lost service. So could you help like frame for us, how should we think about the SG&A to gross level into the third quarter? And any color you could give us around how the service business is doing so far in July and your expectation for the third quarter and anything else that you might want to highlight?
A: Rajat. Daryl. One clarification in our script. We had mentioned that our head count was down 5% from 2019, but our technician head count is up actually 20% since that time period. So I wanted to clarify that point. And that's one reason our SG&A as a percentage of gross has been good as we've done a really good job managing our overall head count and only adding where it drives capacity and after-sales effectively. So that's allowed us to maintain our aftersales growth over a period of time and control SG&A at the same time. So I think in terms of -- and I'll ask Daniel to speak to some more SG&A issues. But I think in terms of the CDK impact, I think largely, most of the impact is behind us. The CRM came up a little later than the DMS did. So there's still some work being done to try to recover the information on those customers as we move forward. But we've seen the recovery, I would say, much of it is behind us, and I don't expect a material impact in the third quarter.
Q: When we think, Daniel, about that parts and service that may have been lost during the CDK outage, is that the kind of revenue that you think could get and gross that can get picked back up or got picked back up? Or is that kind of just lost in the wind and we should see a normalization but not necessarily a catch back up in the third quarter?
A: John, it's Daniel here. It's kind of hard to judge so early in the quarter and we had some pretty severe weather in Houston in the first week, two weeks of the quarter. And it's harder to pick up parts and service business because that's more of a definitive our effectively our time slot that you've sold or the technician side, it's harder to pick that up, but I would expect there to be some pickup and from that. However, I think the vehicle pickup, that does well to be out there as well because clearly, I think a lot of those sales could have just been delayed sales with to many stores and to many operators under the CDK platform.
Q: Just on SG&A growth in the US, I mean because you give us this helpful breakout of US. versus UK. Given the US was still hurt from deleveraging, is it fair to assume that the 64.4% that you saw in the US, should continue to move lower from here because of some catch-up in July and just because ex-CDK, that number would have actually been better than the 64.4% reported? And just like any color on like services into July that you can give us as well, thanks.
A: Tough to predict on the 64.4%. We saw our front-end margins on new vehicles stay relatively flat sequentially year over year -- quarter over quarter. So that certainly helped us. And we're obviously watching that margin and that obviously impacts the SG&A number -- percentage of gross numbers. So tough to predict if it will move lower in the near term, Rajat. We're seeing our service business. You saw it in through May, our CP was up 6% year-over-year same-store. Our warranty was up [12%] year-over-year same-store. We're really happy with that. We continue to be able to add technician capacity, which is driving that. And we expect we'll be able to continue that here into the rest of the year as well.
Q: Just a second follow-up on interest rates, I mean, Daniel, you mentioned the impact if rates go up, but got it forbid rates go back down, which hopefully they will sometime soon. Is that impact sort of linear on the downside? And then also, if we think about sort of the flow-through of rates, I mean the whole industry has faced about a 400 basis-points increase in borrowing rates at the consumer level the last 2.5 years, but pricing has been very resilient. Grosses have come down a little bit from the peak. But how do you think about what could happen on the demand side and the pricing side as that massive surge in interest rate and expense backs off and the consumer can maybe put a little bit more money not to interest expense, but to the price of the vehicle and maybe grosses. I mean it just seems like there is a misunderstanding of how big a headwind is, this interest burden is and to the consumer and it might actually be relieved sometime soon?
A: John, this is Peter DeLongchamps. I think you're absolutely correct. One of the things that we're fortunate to have is a terrific financial services company attached to the OEMs that have been able to cement the rates. You look at our attachment rates now they're up to 75% penetration on new F&I. So that's a positive. And I think where we can also really pick up some business through lower rates from the used side because those penetration rates are 60% to 63%. So I think you're spot on. With lower rates, it's going to certainly help our used car business and make the new car affordability, I think better for the consumer.
Q: Thanks. Good morning on just first a clarification on CDK and a follow-up with that is, um, did you say losses $0.97 plus of $0.34 for the comps was $1.31 total?
A: David, this is Daniel. At $1.31 total, but the disaster pay in our mind was already adjusted out of the $9.80. And so the difference in the $9.80 and what you would deem to be the losses about $1.
Q: And is it just luck that you guys got your service back -- core service back in about a week or were you able work CDK, that somehow in the senses (laughter)
A: Absolutely. No luck at all, David, come on. The harder you work, David, the luckier you will get. David, it's hard to say why. I mean one, we think our systems are architected in a way that helped us move faster, we felt comfortable being able
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
