Hello, everybody. I'm Adam Jonas. I head of Morgan Stanley's Global Auto and Shared Mobility team at Morgan Stanley. Really pleased to have with me join us for this half hour session, the Group one team. We got Daniel McHenry, Senior Vice President and Chief Financial Officer Pete DeLongchamp, Senior Vice President, Manufacturer Relations, Financial Services and Public Affairs and Jason Babbitt, Senior Vice President, Manufacturer Relations, Financial Services and Public Affairs.
I've got we got the whole team here and really looking forward to having a good discussion about Group one and the state of the industry. Before we do that, I just wanted to read a disclaimer that this call is for Morgan Stanley clients and appropriate employees only, not for members of the press. For important disclosures, please see the website www.morganstanley.com/researchdisclosures. And if you have any questions, please don't hesitate to reach out to your Morgan Stanley sales representative. With that, Group one team, maybe Daniel and Pete, Jason, I wanted to give you guys a couple of minutes off the top to make any introductory remarks, emphasize any key messages for investors here.
Terrific. This is Pete DeLongshaw. I'll just speak for a moment, but I did want to make one clarification. Jason Babbitt is our Corporate Treasurer. So I
thank thank you thank you for that, Pete.
That's okay because I don't wanna do his job. He damn sure doesn't wanna do mine.
Yeah.
So anyway
That that's a long that's a long title. That that title's that title's too long for two people, maybe maybe for you, but treasurer is a little bit easier.
Well, it's how we work here. From an SG and A standpoint, Earl Hesterberg gives us all like three or four jobs and pays us for one. So that's how it works. But anyway, thanks for joining us everybody. We have a 186 dealerships worldwide, a 119 in The US, 50 in The UK, and 17 in Brazil.
Clearly, we've been through a very interesting time, but I think we also proved the resilience of our model with our with our results. You know, so two q results were were were terrific. We set an all time record for for low SG and A. We reacted very quickly when the pandemic hit, which shows the flexibility of the model. But I think the other thing that that we clearly demonstrated through all this is our ability to to pivot on what we'd call traditional retailing to more of a to an online presence.
Our Acceleride platform, we set a record last month with over a thousand sales, 12,000 leads. So our omnichannel initiatives are really paying off. We've got a separate deck if anybody's interested in seeing that. But, we've, we've been very successful in in working with our customers how and when they wanna do it, whether it's whether it's traditional, pickup at the dealership or contactless delivery or or home delivery. We've been able to to do all that.
And all the while, you know, getting our parts and service business back to almost a pre to a pre COVID level, which is everyone knows the the parts and service business, the key to our business at a 54% margin. That's what we really pride ourselves on. And then the f and I business continues to be industry leading. So it's been an interesting six to seven months, but we've we've come out of this so far with a lot of success. So with that, we'll open it up back to you, Adam.
Yes. Let's go through a few things. I want to talk tick off a few boxes on demand, inventory used, credit, etcetera. Let's start with demand. How does demand look so far on the data you've seen in the third quarter?
Anything you want to call out is rate of change better or worse by region, by segment? And I'd be curious as you talk to your stores, the character of the recovery, how much of it you think is due to pent up demand that maybe isn't to be extrapolated? Anything you worry of extrapolating here?
Hi. It's Daniel here. We we aren't seeing any material differences between the markets currently. The oil markets in particularly, which we have a significant presence in, we're watching very closely. However, they're still performing in line with the other markets.
Certainly the v was to be expected since the SAAR dropped below 10,000,000 for a bit, but we are still well below COVID levels. I think it is likely that the SAAR remains these levels for the foreseeable future until unemployment recovers significantly and we return and the returns to 17,000,000 SAAR, just won't happen that quickly as long as fleet remains depressed.
Well, let's talk about sorry, the please.
I I would just add that those are, those comments, are more specific to The US market. Yeah. Daniel, do you want to talk about The U. K. Market?
We're seeing better resilience there.
So The U. K. Market is slightly different. If you look back when the pandemic hit in March, The U. K.
Dealerships were closed throughout April and May and reopened again on the June 1. At
the
March, we had about 5,000 cars that we had taken orders for that we hadn't delivered. Some of those got delivered in quarter two, but a significant number of those have rolled into quarter three. Traditionally in The UK, people tend to order new cars in advance opposed to collecting from the dealership that day, that week. So order bank has been building, and building at a significant level since we reopened. I guess that the two months that we were closed, there's been significant pent up demand there.
And September is the second biggest registration month The UK. 40% of cars get sold in March and September, and the market's proving resilient there.
Thanks, Daniel. So let's talk about dealers' stock levels. I mean, lots been discussed about how critically low it is in some segments, particularly in full size pickups and SUVs. How long do you expect that to normalize based on the shipments you're getting from the OEMs? You think this can get resolved within 2020?
Or could the tightness kind of extend into next year?
Well, I guess the good news through all this, Adam, is that margins are up substantially through the inventory shortages. But we think it's gonna normalize by end of the year, mid fourth quarter, and we're starting to already see some pickup there. But clearly, the hot models, whether it's Toyota Tacoma or Silverado, there's still a shortage. But the OEMs, I think, have really done a tremendous job of getting things reopened, getting the supplies changed, reestablished. So, you know, I think this past month, we for every car we wholesaled, we we retailed it just as quickly.
So, you know, we still have, you know, clearly some day supply issues with full size pickup trucks. But all in all, we're very pleased with the way the OEMs have responded through this.
I mean, we've seen the impact on used prices. It's been just astonishing. Manheim seems to be setting a record every month. Curious if you could comment on your used business, either in volume, GPU, and kind of any commentary you could offer on folks. It's good.
We love our used business. But I mean, this seems because it seems crazy, Pete. I mean, how long when do you expect this to start normalizing? And is that and and is that is that really also a derivative of of just the tightness of of the new inventory driving people in the used? Or are you really seeing, based on the conversations, a bit more of a maybe temporary, but higher for longer change where people are leaving cities and this kind of urbanization trend kind of moves backward for longer than people think?
Well, you know, first of all, Adam, you and I have been talking about this for ten years. The the the collapse of the used car business has never quite happened.
Never. I've been on I've on ten years in a row.
Oh, yeah. No. You know, and I didn't argue with you much. It's like, you know, they've all these off lease cars kept coming. They kept coming, we just kept selling them.
So, you know but, you know, clearly, the demand is there for used. And, you know, when when we saw, you know, April roll around and used car prices were down 15%, you know, we were clearing the decks as fast as we could. And then, you know, a month later, we're out trying to buy as many as we can. So but that's all that's all very positive. And, you know, for us, we're agnostic whether we sell a new or used car, but the used car business has remained robust.
You know, we're gonna end up, you know, probably the thirty day supply of cars, which we normally are at. And so, you know, for us, what the pricing is, it's commodity. We're turning these cars every month. So, you know, what we're focusing on is, you know, how many cars can we take and trade rather than having to go to the auction. And I think our team's done a spectacular job with that and hopefully we'll see that at quarter end.
And you're seeing a little bit of wholesale moderation at the auctions and that's due to the time of year where the book changes in September. But, you know, there's it's it's clear that used cars continue to be very favorable amongst the public. And and what we're really pleased with is that, you know, we've been able to post some incredible results without having to go build standalone buildings and utilize shareholder capital to to do standalone. And we're leveraging the the physical footprints we have today. And then also, you know, our our Acceleride platform, digital platform has been very, very helpful in in improving our used car business as well along with the value line initiative that we launched a few years ago.
So I know our strategy is a little bit different than some others and we probably haven't got the credit we deserve within the financial community, but we think from a return on shareholders interest, it's it's been a great play for us.
Adam, I think one of the things that we've noticed in particular in The UK is I guess a lot of our dealerships are around metro areas and people just don't want to use public transport, as much as they wanted to previously, be that the tube in London or or bus. So we have seen, a big increase in in the price point used car. So the cheaper used car where people are, you know, saying, I don't wanna travel into town every day on the train. I'll I'll get a used car instead. So it's been significant increase there.
And I guess the other thing that needs to be taken into account is that people aren't really going on holidays at the moment or vacation. So instead, they're the miles driven is is increasing. And, you know, particularly people that perhaps didn't have a car before are looking to have a car so that that they can vacation in their car as well.
Well, let me go on that last point, on that that that really the pretty juicy part of your business is this aftermarket and service business that you highlighted. Are you seeing that like, can you comment on where that business is now versus pre COVID in terms of capacity or number of your bays that are opened up or the amount of business that's come back versus what it was before? However, you want to express it and whether that business you think reflects higher miles driven in the markets you're participating.
Yes. So this is Jason. The customer pay has been much more resilient. We've seen some pressure on collision, which is to be expected with miles driven being down. And then wholesale parts as well, a lot of that is driven by collision business.
We've seen some weakness there. But customer pay has been pretty resilient for us. We've had some there's some pretty tough headwinds year over year with warranty. We had some pretty beneficial recalls in the recent history that we're lapping. But in general, you know, customers are are, you know, getting their their cars taken care of.
They they have to. There's you know, in most of our markets, there's not a good public transport system as an option. And even when when those options are available, like Daniel said, they're choosing to drive those their own cars. And really maintaining your car is not a is not an option to a lot of these people.
Mhmm. Alright. I wanna go back to used for a second. You mentioned a thirty day supply of used Are you back to normal?
Or are you saying that you're getting back to thirty give me what's normal again and where you are today.
If you look back over, you know, the last fifteen years of our company, we've been at thirty to thirty four days supply of cars. And, you know, I think at the August, we ended up right at 30. We'll see how the quarter ends up, but we've we've been able to keep a a decent supply of of cars on the used car lots.
Okay. On credit, how would you describe the credit availability or financial institution willingness to lend today versus pre COVID? I understand it's resilient. I I I guess, is it is it fully back? Is it even better than before?
How would you characterize it?
I would say it's consistent, Adam. The I've seen a few banks change some of their LTV requirements, but I will tell you that credit availability has not cost us any business whatsoever.
Alright. And maybe just a finer point on that. I know there were a lot of the captive and third parties were were reaching out, you know, in March, April, even into May, extending people, you know, furloughing payments. In some cases, we're giving payments, but mainly just stretching out, you know, stay in your car longer. Let's stretch you out in your lease.
And and and I understand that can create some noise now as we as we sequentially lap that and then we have maybe a higher number of lease returns because you're getting lease returns that would have normally come in April and May. Is that am I characterizing that right? And how is that impacting the supply of of used vehicles into your into your lots and or the credit quality you're seeing?
Well, there there certainly were some some extensions of leases which are now, you know, starting to show back up at the dealership. And and as a franchise dealer that can use certified pre owned as an advantage, that's that's a big benefit to us. So, you know, and and like I said before, if we can keep our day supply in that 30 to 35 and turn them once, you know, that's that's a 12 times turn. That, that protects us from any type of, depreciation on these cars and keeps our cars fresh. So, you know, anytime we can, as a franchise dealer, get first crack at all these cars, that's a that's a benefit to us.
Alright. Let's talk about resiliency. COVID, your business model has proven yet again to be just incredibly resilient to economic shock. I mean, you know, you saw how how well you handled it in 'eight, 'nine and you've done it again. Your ability to flex down variable and fixed costs really on display.
But as we exit the crisis, how much of these costs, whether they're sales or advertising or other structural costs that you were forced to get out for frankly for survival and just because you had to do it. How much of those come back on? How much of the cost savings are permanent?
Adam, it's Daniel. A material amount of the cost reduction should be permanent and that's mostly in compensation and advertising expense. During lockdown, we saw how productive our reduced workforce was in April and May and have permanently adjusted the productivity targets accordingly. Near term, the expectation is that we'll be in the low mid sixties in The US and for modeling purposes, we would expect 2021 to be at least 300 basis points more efficient in The US versus 2019, so below 70%. Our 2021 target for The UK is 80%, assuming there's a favorable outcome of Brexit this year.
Okay. Thanks for that, Daniel. So maybe if I were to ask the question in a slightly different way. When your revenues get back to a level that they were pre COVID, how much cost much cost cutting have you taken out?
Yes. So I don't know that we've necessarily put a dollar figure to that. I think it works out to about $50,000,000 a year. We've more been focused on the percentage of gross profit. So as Daniel said, the math we've done based on reduced advertising and employee productivity, that works out to what we believe is at least 300 basis points of SG and A.
And when we did the dollar math on that, that's at least $50,000,000 a year. Okay. Thanks for clarifying. And and that's it. That's at 02/2019, you know, normalized gross profit levels.
Appreciate that. Thanks, Jason. So I want to switch to some other idiosyncratic topics affecting the business and the customer. EVs, who do you think has got some of the most exciting product in EVs? I mean, like every day there's a new announcement whether it's GM doing stuff or this morning Ford talking about making the electric 150, F-one 150 in Rouge.
Yeah, just any comments on EV demand and whether the consumer is ready for this? Have you seen any kind of change of interest in EV, I don't know, excitement from the consumers post COVID?
So, this is Pete. So I guess the question is, interesting versus technology. So the some of the General Motors technology is is, I think, industry leading. But is it interesting is the question. And, you know, I I think the Audi e tron is spectacular and very interesting, but it's not selling particularly well.
You know, but clearly, you know, Volkswagen Audi, BMW has got a full lineup coming, but we're still not seeing robust demand. I mean, there's there's interest, but in those markets that we're in, we're not seeing a high level of demand for the products. And which is another reason we really like our our Toyota exposure because I think the the OEMs that win are the ones that are gonna be able to pivot on on on gas, on battery electric.
Mhmm.
Toyota's putting a a a a big bet on hydrogen coming up in the future. So the I think the OEM that has the ability to meet demand on their production platforms is the one that's gonna win through all this because a 100% electric, I don't think is gonna be able to be sustainable for some of these big companies. I mean, clearly, Tesla's done a a terrific job with with with, with their brand. But is there enough demand out there for everybody? This is I think the big question.
And Adam, let me let me and maybe I'm preempting your next question here, but let me add on to this because, you know, what we really get asked about a lot related to EVs is how does this impact our business, particularly parts and service. And what we've seen, I mean granted it's limited because if you're talking about full BEV, we don't sell that many of them. Nissan, Chevy, BMW has a couple. But in that in that dataset, you know, that that we've researched, that we've sold, what we found is while those vehicles aren't coming back to our service departments quite as much. I mean, it's close, but they aren't coming back as much.
The the average repair order cost is higher. I I think I think you'll so in short, I I don't think we're really worried on the parts and service side that this is gonna have, you know, any sort of detrimental impact to us. I I think what it will do is a continuation of of what we've seen over the past, you know, ten years or, you know, even longer is that this franchise dealers are gonna continue to capture market shares, vehicles become more complex. And I think BEV's fall into some of that complexity.
Alright. So let me let me unpack that. So so you're you're saying that returning to dealership, and again, it's early days and it's not a ton of volume. So let's let's get that on the table. But based on what you've seen, they come into service almost as much and the repair bill is noticeably higher.
And so am I to read from that that EVs are actually a more expensive cost of ownership from a from a service standpoint? They are more expensive to service?
That is what we've seen in our data. Obviously, as we, you know, caveat it, that's a small sample size. But, yes, that is what we've seen in our data. And I let let me let me clarify. I don't know that they're more expensive.
I I would point to something, you know, we we've done research on Edmunds. They look at the Nissan Leaf versus Toyota Toyota Corolla. And that that's kind of a a fair comparison that we've looked at. The the total five year cost of ownership between the two and just looking at the maintenance, maintenance, not, you know, insurance, gas, all
that. Yeah.
Just looking at the maintenance cost of the five years of ownership is pretty similar. So I don't I don't think our results are are that far off from what others are experiencing.
Okay. That's that's that's cool. So I wanna talk about the start ups. Which of the start ups on the EV side because I don't really think there's many start ups in the ICE side. Let's just let's be honest there.
But which of them have gotten your attention? And the reason why I'm asking is because the the the topic of dealer distribution distribution of the product is kinda like the elephant in the room. Mean, you got all sorts of people raise billions of dollars. They got a sick PowerPoint spreadsheet. They might even have a plant.
They do deals with GM or other folks, some don't. And then they're like and you're like, how are gonna sell these things? And their answer is like, don't ask me. Alright. Well, someone's gonna do it.
Right? And they you know, Elon has shown and I think, you know, the they've done it controversially, let's say, but he's he did he did the hard way. He did it himself and we might agree that he could have gotten a lot better results if he went franchise model or some hybrid model, but that's just what he's done for now. Right? How do you think those startups, and from your seat, can and will approach distribution?
And how is group one positioned to, like, sit across from a Lucid or a Fisker or a Nikola or a Rivian and say, hey, here's our turnkey approach. You need to have there's no point launching a sexy new product and then have a shitty service. Let us help you get this let's do this the right way. You follow my question. So kind of yeah.
How do you see it panning out? Is there this Tesla loophole where you think people are gonna do their own dealers or you think they're gonna come to you guys?
So the dealer model clearly works. And, you know, I think Elon's got a an issue in front of him with service because the volumes are starting to ramp up. I can't tell you how many times, you know, Tesla customers who also are one of our customers, they break down. And who are they calling? They're calling us.
So I think as you know, and and when you look look at what's happened in China in the last twenty years, they went to a dealer model. And the dealer model works. And because you need that expertise with parts and service, especially with electric. You think about the complexity and and the dangers of working on electric car, you know, we're we're investing, you know, substantial amount of money to make sure that our shops are fully prepared to handle electric service. So you can't take an electric car to, you know, a mom and pop and get it fixed.
Mhmm.
And you can
get the tires changed, but you've gotta come to a franchise dealer. So, you know, when you see you know, in Houston, for example, which is a a big city, there's one there's one Tesla service repair center, and it takes it takes a long time to get your car in the shop. So, you know, if if one of these one of these companies came to us, we'd certainly listen and we'd certainly talk to them, and and we could, you know, probably we could probably help. But it's gotta be a good business equation for us. But I think you're absolutely right.
It is the elephant in the room. Distribution, no matter what business it is, is always the most difficult thing to perfect. To mention not to not to mention the financial piece of it. You know, in today's model, when a Chevrolet comes across the line, we pay for it immediately. I mean, it's on our books.
Elon's, it takes him, you know, how long before he gets paid. And and, you know, I think as as these things are very capital intensive, they're gonna have to be pay quick and close attention to the cash flow, which is something that we do very well.
Alright. I wanna move to your favorite topic, then I'll take a couple questions if we have time from the from the webcast. Carvana, your favorite company okay. Maybe your favorite multiple. Sorry.
Your favorite multiple. Their market cap their market cap's 30,000,000,000. Right? And good on them. I'm thinking, you know, there's some there's a message the stock market's sending us.
Right? That the digital opportunity and used at least, maybe other parts of your business is just freaking huge. And so how does group one get a Carvana multiple? And if we just put the cynicism aside for a second and say, hey, look, you know, there's some stuff they're doing that is that that that that you could apply in a different way, given that you have different physical assets and different and and and a different a different ecosystem. But how do you get that multiple?
And what do they do that you're like, you know what? This is a great opportunity for us too.
The pandemic has moved customers into more online transacting across many industries. And we're definitely seeing this in auto retail as well. The utilization of our Acceleride Pro M platform has roughly tripled in quarter two twenty twenty versus quarter two twenty twenty nine and allowed us to become a more efficient business. As of now, there isn't a material percentage of customers who are taking the entire transaction from start to finish online, including delivery, but it should migrate towards that and an entirely online performance over time. In August, we had over 11,600 engagements with Acceleride and over a thousand units were sold according to our monthly records.
We began utilizing Acceleride as a full customer life cycle program. We're in the process of modernizing our current life cycle process. And in the next few months, we should have a program that is much more streamlined, more targeted, and more integrated with accelerated marketing. We will also introduce an artificial intelligence into the process which will utilize our massive database to project each customer's progression path in the life cycle using predictive analytics. These analytics will be used to send a targeted message to each customer using actionable insights and will be fully automated to effectively manage customer responses.
Regarding Carvana, I don't think group one is likely to ever achieve the kind of multiple nor does something that we think is even remotely sustainable for them. We are not going to target revenue growth for the sake of hoping to achieve a higher stock mark multiple. We will continue to be disciplined as it relates to balancing organic and inorganic revenue and profit growth as well as returns and invested capital.
So and, Adam, this is Pete. And I think if if you if you take a look at the platform we have in place, whether you know, we look at omnichannel as any touch point a customer may have. And as you know, you know, we opened up a service call center ten years ago, and, you know, we're answering seven pre COVID, we're answering 7,000 calls a day and converting half of those into service appointments. You know, 30% of our service appointments now are are handled through a a mobile app. And so the customers have a way to digitally communicate with us however they like.
And I will boldly say that the platform that we have in place is up to or better than any other online retailer, whether it's Carvana or Vroom or our our our competitors with AutoNation. And we have a very solid platform in place. I think they're I think we maybe not have have not done a good enough job messaging it, but our customers are certainly utilizing it. And, you know, we can we can be online retailers, and we're we're seeing it, be very successful.
Well, then just carve that thing out and get 10,000,000,000 in the bank, baby. Come on. What are you waiting for?
Alright.
No. I appreciate that that that detailed response and the messaging there. And I also wanna thank Daniel, Pete, Jason, who is not senior vice president, manufacturer relations, financial service and public affairs. Nor does he want to be. No no no disrespect, Pete.
But anyway, thanks thanks all three of you for your time. And we're gonna end the webcast now except for me to say Daniel, Pete, Jason, stay safe. And thanks again. And next year, actually, let's go to California. Okay?
We'll see you in Laguna. Over to.
Yeah. It's real Laguna. Take care, everybody.