Asbury Automotive Group Inc Q3 FY2021 Earnings Call

Good day and welcome to the Asbury Automotive Group Q3 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Karen Reid. Please go ahead.

Thanks, operator, and good morning, everyone. As noted, today’s call is being recorded and will be available for replay later this afternoon. Welcome to Asbury Automotive Third Quarter 2021 Earnings Call. The press release detailing Asbury’s third-quarter results was issued earlier this morning and is posted on our website at 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 the call up for questions and I will be available later today for any follow-up questions that you may have. 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 certain 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 2020, any subsequently filed 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, asburyauto.com, highlighting our third quarter results. It is now my pleasure to hand the call over to our CEO, David Hult. David?

Thank you, Karen, and good morning, everyone. Welcome to our third quarter earnings call. In our earnings release this morning, we reported adjusted EPS of $7.36, a record third quarter, up 80% over the prior year. Our new car inventory levels continue to be challenged due to the chip shortage. Our team delivered strong results and enabled us to deliver an impressive gross margin of 20%, an all-time record and an expansion of 180 basis points versus the third quarter last year. These results demonstrate the resilience and strength of the franchise model with its full suite of services through the car ownership journey, from sales to service contributing to sustained profitability. We've also stayed disciplined in managing expenses, resulting in an adjusted SG&A as a percentage of gross profit of 55.3%, a 580 basis point improvement versus the prior year. Our total revenue for the quarter was up 30% year-over-year, and total gross profit was up 43%. Due to this record performance and strong cash flow, our balance sheet remains strong. Our net leverage ratio ended this quarter at 1.2 times. A quick update on our five-year strategic plan. Same-store revenue growth assuming 2020 annualized revenue for Park Place is up 105 and is exceeding expectations regarding Clicklane, our unit sales are pacing ahead of our projection for year one. We have made great strides this quarter on our acquisition pillar. As announced, we expect to close on a transformative acquisition of the Larry H. Miller Dealerships and Total Care Auto in the fourth quarter. With their strong name and brand mix in the right states and our aligned cultures, we look forward to jointly deploying our capabilities and growing together. In addition, we closed two acquisitions recently, Greeley Subaru in the Denver market and Kahlo Chrysler Jeep Dodge in Indianapolis and are scheduled to close Arapahoe Hyundai Genesis in the Denver market today. With another acquisition still under contract and expected to close in the fourth quarter as well, in total in 2021, we anticipate that we will close on $6.6 billion of annualized revenue from acquisitions. With these results, we maintain full confidence in the execution of our growth strategy, and we will update our five-year plan during our Q1 earnings call in 2022. I would like to welcome Michael Welch, our new CFO, to the Asbury team. He brings his vast knowledge of the auto retail business along with his broad experience in finance. We worked together at Groupon for many years and I'm excited to be working with him again. I am also thrilled to welcome our new team members in Indianapolis and in Colorado into the Asbury family. And finally, I would like to address all of my teammates at Asbury. Our ability to add quality stores, who like us care about serving our guests and being highly engaged in our communities could not have happened without you. You all have given us the ability to thoughtfully grow our core business because you align behind our vision and you are executing each and every day. I appreciate all of you and I'm thankful to be part of this team. People make the difference in any organization and you are making us the best place to work, do business, and grow your careers. Thank you. I'll now hand the call over to Dan to discuss our operating performance. Dan?

Thank you, David, and good morning, everyone. My remarks were preparing for our same-store performance compared to the third quarter of 2020 unless stated otherwise. Looking at new vehicles, based on current market conditions, we continue to be focused on being opportunistic with our inventory and improving grosses to maximize profit. Our new average gross profit per vehicle was $4,808, up $21,369, or 97% from the prior year period. All segment margins were up significantly from the prior year period. At the end of September, our total new vehicle inventory was $121.9 million, and our days supply was at 12 days, down 35 days from the prior year. There’s still no clear understanding of when production will return to normal levels. We expect the days supply to remain low throughout the remainder of the year and into 2022. Turning to used vehicles, our used retail volume increased 27% while gross margin was 8.4%, representing an average gross profit per vehicle of $2,402. As a result of our performance, our gross profit was up 45%. Our used vehicle inventory ended the quarter at $236.4 million, which represents a 28-day supply, down 7 days from the prior year. Our used-to-new ratio for the quarter was 113%. Turning to F&I, our strong, consistent and sustainable growth in F&I delivered an increase of $155 to $1,955 per vehicle retail from the prior quarter. In the third quarter, our front-end yield per vehicle increased $1,400 per vehicle to an all-time record of $5,487. Turning to parts and service, our parts and service revenue increased 10% in the quarter. Though warranty revenue dropped 18%, our customer pay revenue continues its healthy recovery, posting a 13% growth. Overall, our total fixed gross profit increased 10%, while total fixed margin was 60.9%. Now, I would like to provide an update on our omni-channel initiatives. Our digital marketing team continues to do an outstanding job generating traffic to our website. Our commitment years ago to Google organic search continues to drive efficiencies in times where inventory is shrinking, allowing us to increase traffic without spending media dollars. In Q3, we had over 6.3 million unique visitors, a 12% increase versus Q3 2020. Another initiative is to increase online service appointments. We achieved over 143,000 online service appointments, an all-time record and a 12% increase versus Q3 2020. This component positively impacts service retention and increased the dollars per repair work. Now, with two full quarters of Clicklane, and all stores under our belt, we would like to share some performance metrics. We sold 6,000 vehicles through Clicklane in Q3, of which 47% of them were new vehicles and 53% used. 93% of our transactions this quarter were with customers that were new to Asbury’s dealership network. The average transaction time continues to be consistent with the previous quarter, 8 minutes for cash sales and 14 minutes for finance deals. Total front-end yield of $5,400. The average credit score is higher than the average credit score at our stores. Total front-end yield of $4,396 on trades taken through Clicklane. We continue to expect annualized volume through Clicklane of approximately 30,000 vehicles by year-end. As expected, Clicklane customers are converting at greater rates than traditional Internet leads. We remain quite excited about the performance of Clicklane thus far as it is tracking ahead of its targets. Finally, I would like to thank all our teammates in the field for their hard work, dedication and commitment to delivering an exceptional guest experience. In addition, I would like to extend a warm welcome to our new team members from Subaru, Carlos CDJR and Arapahoe Hyundai, Genesis. All of you have built tremendous organizations that properly align with our North Star of being the most guest-centric automotive retailer. Our future is bright and I look forward to meeting all of you. Michael, welcome to Asbury. Your depth of knowledge in the automotive business is already making a significant impact on our company. I am enjoying working with you and look forward to growing Asbury together. I will now hand the call over to Michael to discuss our financial performance. Michael?

Thank you both for the warm welcome. I’m excited to be part of the Asbury team and have the opportunity to work with David again. I look forward to working with the team on our growth journey. To our investors, analysts, and other participants on our call, good morning. I would like to provide some financial highlights which mark yet another record quarter for our company. For additional details on our financial performance for the quarter, please see our financial supplement in our press release today. Overall, compared to the third quarter of last year, our actions to manage gross profit and control expenses resulted in a third-quarter adjusted operating margin of 8.5%, an increase of 109 basis points above the same period last year and an all-time record. Adjusted operating income increased 69% to $204.5 million, a third-quarter record. Adjusted net income increased 81% to $143.6 million, another third-quarter record. Net income for the third quarter of 2021 was adjusted for acquisition expenses of $3.5 million or $0.13 per diluted share and a gain on dealership divestitures of $8 million or $0.31 per diluted share. Net income for the third quarter 2020 was adjusted for a gain on dealership divestiture of $24.7 million, or $0.96 per diluted share. Acquisition costs of $1.3 million or $0.05 per diluted share and $700,000 or $0.03 per diluted share for a real estate-related charge. Our effective tax rate was 23.7% for the third quarter of 2021, compared to 24.8% in 2020. Floor plan interest expense for the quarter decreased by $1.5 million over the prior year driven by lower inventory levels. With respect to capital deployed this quarter, we acquired a Subaru store in Colorado utilizing approximately $16 million of our cash on the balance sheet. In addition, we spent approximately $15 million on capital expenditures, and we repaid approximately $9 million of debt. Also, as part of our strategy to optimize our portfolio, we divested of our BMW store in Charlottesville, resulting in proceeds of $18 million net of its mortgage payoff. As a result of our operational performance, our balance sheet is quite healthy as we enter the quarter with approximately $780 million of liquidity comprised of cash, floor plan offset accounts and availability on both our used line and revolving credit facility. Also, at the end of the quarter, our net leverage ratio stood at 1.2 times, well below our targeted net leverage of 3 times. With our announced acquisitions under contract, we are working toward financing the exciting growth of Asbury. As announced in late September, we plan to raise the combination of permanent debt and equity financing prior to the closing of the Larry H. Miller acquisition. We are working with our supportive group to upsize our credit facility and syndicate the real estate mortgage finances. We plan to close both ahead of our acquisition of Larry H. Miller Dealerships later this year. Although the transaction is initially expected to take our net leverage above our targeted range of 3 times, we believe that we can deleverage approximately 3 times during 2023 given the highly accretive nature of the deal from our strong free cash flow generation. As we look forward to the remainder of 2021, we anticipate similar conditions to what we have seen this quarter. New vehicle inventory supplies are likely to remain low and unpredictable until next year. In closing, I would like to thank our teams across the businesses who continue to work tirelessly during these unprecedented times to ensure our current and long-term success. I would also like to welcome our new team members from our recent acquisitions. I look forward to working with you and continuing to build our strong culture that you are bringing to Asbury. This concludes our prepared remarks. We’ll now turn the call over to the operator and take your questions.

Thank you. Our first question comes from Rick Nelson with Stephens.

Thanks. Good morning. Terrific quarter. So I guess to begin from a balance sheet standpoint, where do you see the pro forma leverage going post the $6.6 billion in revenue that you're acquiring? And how should we think about the capital priorities going forward? Are we in a deleverage mode? Is that the focus over the near term post these deals?

Rick, thank you for your question. Yeah, from a leverage perspective, after we close the deals, we expect leverage to be in the high 3s. From a capital allocation perspective, we will be in a deleveraging mode in 2022 and 2023 just to bring that leverage back down to our 3 times target. However, we can also take the cash flow for deleveraging perspective, either pay back debt or if we found some acquisitions that provided EBITDA that didn’t require additional leverage, that would also provide some deleveraging ability as well.

Okay. Thanks for that, Michael. Also the $900 million in incremental revenues, could you talk about the composition of those dealerships, maybe what markets they are in and the size of the group that you're bringing in?

Rick, this is David. We discussed this morning at Kahlo, the Greeley Subaru and Arapahoe Hyundai deals. When you take those three out, it leaves a balance of about $740 million in revenue, which is all in one group. Since it hasn't been fully announced yet, we don't want to disclose it, but the brand mix is about 50% luxury and then mostly imports with one domestic store as well. It's really a very strong group with the right brand mix in a market that we've been trying to grow.

Great. Thanks for that. Maybe as a follow-up to that, if you could speak to the multiples that you're looking at for those stores?

Yeah. So on the one that we haven't announced yet, off the top of my head, I believe it's about an 8 multiple between a 7 and 8 multiple. There’s good upside in the stores and the opportunity to grow them within the marketplace, and there’s a little bit of CapEx involved as well.

Right. Larry Miller deal, I'm sure they're bringing some digital outsources to the group. If you could speak to any potential challenges integrating that group into Clicklane and the opportunities there?

Sure, absolutely. The integration should go pretty smooth, as we're all on the same software systems and DMS. We’re retaining all the senior executive management team and really kind of like we did with Park Place that operated in its silo. They're extremely strong brands with great leadership, and the stores perform extremely well. There's a lot of capabilities there for us to enhance their digital side. They’re extremely strong operators, but there's an opportunity for digital. I don't think that will be a focus the first few months. It'll mainly be about integrating the folks and getting to know one another and creating that trust and relationship, and then starting to integrate the software. But like anything, there's always potential in every acquisition to grow.

Great. Thanks for that. Finally, if I could ask you about Total Care Auto, the opportunities to bring that in-house, what sort of financial implications that has on the upside and any potential risks that that strategy brings?

Great. This is David. I'll start and then Michael can jump in. I would tell you it's a very stable business. The Miller organization has had it for over 30 years. It's highly rated and they do an extremely good job at paying claims, with a strong balance sheet. We see it as very accretive to us. Margins are significantly higher than our operations, and they're essentially generating over $50 million a year in EBITDA on a sales base of 115,000 cars. When you integrate Asbury at over 200,000 car sales into that, you can see the upside potential there. We’re excited about what it can do. Another huge benefit that it's had for that organization is their extremely strong service retention numbers. It's a true hand-in-glove relationship between TCA and the Miller organization. Yeah, Rick, one thing that will cause a little bit of slowness for how we integrate is from an accounting perspective. That will cause a little bit of noise, moving dealership profits from a day-one profit to a kind of deferred basis and amortizing it over the life of the contract as an insurance business. Because of that, it will take us a few years to be able to bring Asbury fully into their mix. Additionally, to bring Asbury into that business, they have to size themselves a bit more for the additional business and obtain some insurance licenses in some states where they currently don’t operate. We have a little bit of work to do to fully integrate Asbury.

Got it. Okay. Thanks a lot.

Right through this year, 2022-2023 in particular.

Okay. Thanks for that. Good luck.

Thank you, Rick.

Thank you. Our next question comes from John Murphy with Bank of America.

Good morning, everyone. This is Aileen Smith on for John. First question on the new vehicle business. Can you talk about the entrance versus exit rate in the quarter on gross margins and GPUs? And more specifically, is it fair to assume that growth improved through the quarter as the inventory environment tightened, or rather dropped off with sales trends? Just trying to think about what the launch point should be for Q3 into Q4 and then further into 2022.

Yeah. Good morning, this is Dan. The margins as we entered Q3 were pretty stable throughout the quarter, although I would say we had a bit of an uptick as we were exiting the quarter, mainly driven by supply and demand. As we move forward, as I said in my script, we see the inventory constraints continuing into 2022. So we expect the margins to rise along with inventory pressures.

Okay, great. And then, can you talk a bit about the prioritization, if at all for the used vehicle business between same-store sales comps versus gross margins and GPUs? Relative to the new vehicle business quarter-on-quarter, gross margins were down, but the offsetting factor is obviously a material acceleration in same-store sales growth. Is this something we should look at as a structural trend going forward as you continue to focus on the used vehicle market for growth opportunities, or is this purely a function of broader market dynamics, which could be more transitory in nature?

I think it’s just a product of the market. If you look at our cost of sale or average selling price in used cars, it increased 16% and that is something that we're seeing as inventories drop down in new cars. Our cost of sale for used cars is going up. A lot of customers that have purchased cars in recent years, their cars are worth more today. So they are opting to trade that car in or sell it back to us. I believe that components of this will continue as long as the market conditions stay the same. And to be honest, we're not saying, 'Hey, let's grow the used car business from a volume standpoint and sacrifice margin.' We believe that we can achieve both in this market.

Got it. And one last one, if I may. I know you referenced your own update of your five-year plan next year, which I think we can reasonably assume is a function of the Larry Miller acquisition and obviously driving acquired revenue much higher than the target you've previously outlined. But the other key component of your five-year plan is Clicklane. Should we also be thinking about Clicklane and organic growth in the business having upside versus your prior targets or would you say the rollout on this front is coming more in line with expectations?

Yeah. This is David. I'll try to address it. And if I don't hit it right, please come back. When we looked at Clicklane for the next five years, we did it on a monthly basis by store with conversions increasing each year to get to that valuation. As it relates to year one, we're technically six months fully into it. From a conversion standpoint, we're about two percentage points below where we expected it to be, but because there has been additional traffic, we're exceeding our volume target. It’s a bit tricky with Clicklane right now because of the lack of inventory. There is a lot of traffic, but not a lot of inventory to purchase from. So it's hard to fully assess the conversions right now with the lack of inventory. However, we're really happy with what we've seen, how it's been received by consumers, and we anticipate the conversion rate to increase in 2022 and certainly in '23 and '24 as consumers become more comfortable transacting online, and as the tools continue to become more sophisticated and easier to use.

Got it. That makes a lot of sense. Thanks for taking the questions.

Thank you.

Thank you. Our next question comes from Ryan Sigdahl with Craig Hallum Capital Group.

Good morning. Nice quarter and thanks for taking my questions. Curious on mobile mechanics. I mean, you talk about Clicklane a lot, but how much opportunity is there from a parts and service standpoint to really digitize that and go closer to the consumer and bring it to them?

Yeah. It's a great question. I would tell you over the last five years, between different initiatives we've made on our own and adding a service tracker element, we're seeing higher conversion rates than we've seen in the last four or five years, meaning consumers are approving more work than they had in years past, and they're spending more dollars per order. This has a lot to do with the aging of the cars as well. We do see more opportunities to be digital and more engaged and transparent with the consumer, and that'll come over time. We've seen tremendous benefits so far from what we've observed. And mainly our source is text messaging. We're communicating through text message. The NPIs and how the multipoint inspections on how the car is doing, and their ability to communicate directly with the technician, and then pay for the service are all done through text as well. So this continues to grow and we’re getting great feedback. Overall, consumers converting at a higher rate tells us their level of comfort and transparency is improving.

Got you. And then just on the inventory. I know it’s not to belabor the point, but 12-day supply on the new side. I guess how has that trended in the months subsequent to the quarter-end? And then also comment on used as well.

Good morning. This is Dan, by the way. The day supply around the quarter, we've been around that 12-day supply from the beginning of the quarter and we remain consistent. The stores are doing a great job. I think I mentioned this in the previous call, the stores are pre-selling incoming units well. So we've adjusted to the market demands, and again, the stores and the operators are doing a fantastic job. From a used car perspective, our day supply remains consistent with where we were operating a year ago. We continue to acquire inventory from mainstream sources such as trade-ins, lease turn-ins, and direct-to-consumer purchases, approximately 79% of our inventory is coming from those three venues.

Last question for me, and I'll turn it over to the others. But Mercedes, they're cutting dealer trade margins by 50 basis points to help pay for EVs. Any comment there or any concern, I guess, with other OEMs doing this and potentially squeezing dealer margins?

Yeah. This is David. The quick reaction is no, as it relates to Mercedes. We really enjoy the partnership with them and the brand. We have high-margin business with them. Consumers really appreciate the brand as well. We view this as a partnership. A small cut into the margin to set up for the future is essentially an investment for both of us, and we’re proud to represent their brand. As for other manufacturers that might do it, it's hard to comment on something that you can't see and aren't aware of yet. However, we see this relationship as a partnership, and we have to have a stake in the game too. But we don’t see that margin pressure with Mercedes materially affecting us.

Thanks, guys. Good luck.

Thank you. Our next question comes from Grace Kim with Morgan Stanley.

Hi. Thank you for taking my question and congrats on the quarter. On behalf of Adam Jonas, how sustainable do you expect SG&A to gross to be going forward taking into account your digital strategy and recent acquisitions?

Sure, Grace. This is David. After what I’ve said, Michael will jump in. I would tell you the SG&A is impressive right now for a couple of different reasons. The obvious supply and demand and high margins is helping dramatically. But as the pandemic started, we got our production per employee at a much higher rate. Looking ahead over three to five years, we believe the retail franchise model will change a little bit in how you compensate and what that looks like. So we think that the current SG&A is certainly here to stay for at least the next year. And then with improving software and capabilities and Clicklane growing, we see future opportunities to strengthen the SG&A or optimize it for lack of a better term.

Got it. That's really helpful. Shifting gears a bit, how would you characterize high-quality strategic acquisitions going forward?

It's a great question. When we discussed the five-year plan for $5 billion in revenue, you're never going to get to $1 billion each year, but the thought process is what are we generating cash flow and what do we take on, not knowing that an acquisition like Larry H. Miller might come up. There are a lot of stores for sale. Many stores transact, but every store is not the same. Even if the brand name might be similar, some groups and cultures are pretty strong and align with us well. When we find a group that we believe aligns well, we try to be very aggressive in pursuing it. The other opportunities, we might not pursue not that they’re bad assets, but they might not align with us. When you look at the acquisitions we've made in the last 3.5 years, they’ve proven to be extremely accretive to our growth with very low turnover rates. That tells us that we’re finding the right acquisitions that align well and we’re making good investments with shareholders' money.

Got it. Thank you very much and congrats again.

Thank you.

Thank you. Our next question comes from Rajat Gupta with JPMorgan.

Hi, good morning. Thanks for taking the question. Just had a follow-up question on productivity savings. Could you remind us of where your headcount level is currently?

Before the couple of acquisitions we just did, Rajat, our headcount was right at 8,300.

Got it. It looks like you were at 8,500 before Park Place. You're now at 8,300 today. Your volumes are up meaningfully with this from the 2019 levels on a combined basis. So I'm curious if there's a way to parse out these productivity benefits across permanent headcount reductions, moves to digital like Clicklane, and the lower inventory levels we're dealing with at the stores today. Just trying to get a sense, as inventory starts to come back, you know – who knows – maybe 2023, whether you're like-for-like headcount is able to maintain these current levels of productivity once we get there. And I have a follow-up question. Thanks.

Sure Rajat. This is David. Yes, we believe we can maintain these productivity levels per employee, mainly due to the software applications that we've implemented, which make it easier for our folks to become more productive. We think the current numbers will remain stable for the next 18 to 24 months. After that, we see another opportunity to increase productivity per employee, and that’s where our focus is. The reason why we think it’s 18 to 24 months out is primarily related to software improvements.

Understood. Great. That's encouraging. Just shifting gears completely to parts and services. Can you give us a sense of how the exit rate was for that business? And in the third quarter, how is the fourth quarter shaping up there in terms of just improvement in that trajectory? I also wanted to ask about the warranty business specifically, given the supply shortages, but also given we have sold fewer than normal levels of new vehicles over the last couple of years. How do you see that playing through in terms of the overall business in maybe 2022-2023, given the retention rates are pretty high in the first two or three years? Could you tie this together? That’d be really helpful and also provide some near-term trends? Thanks.

So Rajat, this is Dan. Good morning. From a fixed operations business for the quarter, as you can see, the warranty business really pulled back. That's largely due to a variety of issues across domestic, import, and luxury segments, along with the campaigns we saw last year concerning fuel pumps and a few dashboards and door actuators. We’ve seen a significant pullback because of that, impacting our warranty traffic. Customer pay is recovering pretty well. Our customer pay gross profit was up 10%. We continue to see a healthy recovery as well. From a unit and operational standpoint, warranty is difficult to forecast because it’s driven by recalls or issues such as fuel pumps. We really don't control that variable. So, if something happens, we expect warranties to come back up; if not, we’ll continue focusing on growing the customer pay.

To add on that, Dan mentioned the customer pay was up by 10%. The actual growth was 12%, which is positive. It's essential to focus on the dollars per repair order going up. If I heard your inquiry right, the new car customer tends to hang around in the first few years. In our organization, one key metric we consistently track daily on customer pay side is the average miles coming into our store. As it stands, we’re just under 70,000 miles for the average car from a customer pay perspective coming into the company. We take that as a healthy sign; as the car park continues to age, and as there’s availability for everyone keeping up with demand, we see parts and service maintaining sustainable growth.

Got it. That's really helpful. Thanks so much for all the color and good luck.

Thank you.

Thank you. Our next question comes from Stephanie Moore with Truist.

Hi. Good morning. Thanks for the question.

Absolutely.

I wanted to touch on we're about one year into the Park Place acquisition. So I'd love to get any comments on how that acquisition has performed, maybe some areas that exceeded your expectations, a few that fell short, and perhaps anything interesting from the integration process. Any color here would be helpful. Thank you.

Sure, Stephanie. This is David. I said this before the acquisition when it was announced: if we could only buy one dealership group in the United States, what would it be? And I would have said Park Place. It's not just about the brand mix, which is excellent, but it's the people as well. Tremendous leadership in that organization, along with dedicated employees. They are a well-disciplined and well-run group that truly cares about their customer base and has earned the brand recognition they’ve developed. Evaluating it a year in, we’re exceeding our year-three targets from a financial standpoint. There aren’t many surprises because they are everything we thought they would be. They’re the best at what they do, they care about their customers and execute consistently, and we're proud to associate with them, sharing ideas to improve our operations. It's been a phenomenal acquisition for us.

Absolutely. Thank you. And then just switching to the F&I front, would love to hear your thoughts; there's obviously been – I think there's an opportunity that you spoke on earlier about coming out of the Larry H. Miller acquisition and building on your F&I. But is there anything else, setting the acquisition aside, that you could focus on to increase gross profit per unit on an F&I standpoint, anything more organically that you have working on? Thanks.

Morning, Stephanie. This is Dan. From an F&I standpoint, we believe our top performers have little room for growth. We continually focus on our bottom 20% performers, and to the extent we can continue to train and improve their performance, that's where we expect our growth to come from.

We appreciate the fact that 70% of our F&I number comes from product sales, and only 30% is reserve. The Larry Miller Group actually has better penetration of these numbers than we do. So we're excited to learn from them and grow in that segment. We do believe there's room for upside in F&I given we are certainly not at the top of the charts compared to our peer group.

Great. Thank you so much.

Thank you.

Thank you. Our next question comes from Bret Jordan with Jefferies.

A question on Clicklane. With a bit more experience now, does the product skew to a higher demographic or is it more focused on luxury? You discussed earlier higher repair orders and higher FICO scores, but does that channel really migrate to one segment of your mix, luxury, or import versus domestic?

Good morning, Bret. This is Dan. No. We're seeing consistent use across the brands from ultra-luxury to luxury, import, and domestic, so the tool is well-received across the board.

I would say some of the brands and I can't explain it, but some of the brands that convert at a high rate include Hyundai, Kia, and Lexus are a few of the brands that do exceptionally well with the tool.

Okay, great. On the M&A side, you mentioned multiples starting in that six to eight times. Are we looking at trailing 12 months here or are we adjusting for what we’ve seen in the surge in profitability recently and looking at a longer term to that six to eight times?

I appreciate that question. No one is pricing the multiple on the trailing 12 months. You really have to look at the last three to five years and the market that it’s in and the brand that it’s in, and then the performance within the brand in that market. An example would be if the store is operating at 200% sales efficiency compared to 80% sales efficiency when looking at the upside in it. So, it's more based upon the three to five-year average when we refer to those multiples.

Thank you. Our next question comes from David Whiston with Morningstar.

Hi, everyone. I'm going back to the Clicklane demographic discussion from a second ago. You're getting, it sounds like, a lot of exposure across all your brands, even the volume brands. But at the end of the day, it's more the higher FICO credit customers that are transacting with the tool. So, why is that and can you get the lower FICO credit customers to engage more and actually transact?

Hey, David. This is David. I’ll jump in and then Dan can certainly add. I would tell you on an average quarter between 8% and 10% of our business is referred to as lower credit or subprime. The rest is above that range. It becomes a lot more complicated with subprime online transactions because of the documentation required and what's needed. It's not impossible. We believe the reason you're seeing higher credit scores and down payments on the tool is simply that consumers with a 750-plus Beacon score understand that they’re not worried about financing and realize they can get what they want. When you think about ease and convenience, that clear consumer, knowing they have the credit to transact, would prefer a 14-minute online transaction rather than sitting in a showroom for two and a half hours. That gravitational pull draws them in. While we do see lower credit scores as well, it’s not just all 750 plus consumers; there’s a broad mix, but the score average is certainly higher. We credit that change to our previous tool and the main reason is our belief being that high credit score customers know they can complete the transaction and it's not merely a lead generator.

Okay. Compared to a few months ago with the inventory continuing to be poor, are you seeing customers, especially new vehicle customers, or would-be new vehicle customers, more likely to buy used compared to a few months ago, or are they at a point where they’re saying forget it. I’ll come back when inventory is better?

Good morning. This is Dan again. Some customers are indeed moving into used vehicles. It really depends on their circumstances. If they have to have a car now, they're willing to consider that option. We're also seeing customers willing to give up a particular package or an option and settle for a car that's incoming in the next few days or one available on the dealer's lot.

Okay. Finally, are you worried at all about inflation for consumers' ability to buy a vehicle next year?

This is David. Inflation is always a concern. I would say, in this past quarter and in the past 12 months, we find it reassuring to see credit scores increasing, down payments rising, and financing terms shortening slightly, indicating there’s a lot of cash in consumers’ pockets. They are using it at their discretion. We have already witnessed inflation in many areas, but concerning automobiles, I wouldn't classify inflation as such; I would define margin pressure as simply supply and demand. The inflationary aspects of the automotive cycle aren't materially significant from our perspective; they differ from consumer staples like food.

Okay, thank you.

Thank you very much. This concludes today's discussion. We appreciate your participation and look forward to speaking with you after the fourth quarter. Have a great day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.