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Group 1’s U.S. F&I Team Delivers Record PVR

February 14, 2017

HOUSTON — The first question posed by investors during Group 1 Automotive’s Feb. 2 earnings call wasn’t about declining sales in group’s core Texas and Oklahoma markets, nor was it about potential threats to gross profit in 2017. The first question centered on how the international dealer group grew F&I gross profit per vehicle retailed in its U.S. region to $1,636 (PVR) in the fourth quarter of 2016.

Compared to a year ago, that per-copy average was $102, or 6.7%, higher on a same-store basis. That increase drove up same-store F&I revenue 2.3% from a year ago to $92.67 million. But those gains were partially offset by the 4.1% year-over-year decrease in retail unit sales, which totaled 56,629 units in the fourth quarter.

“I appreciate the first question on F&I. Usually, it comes toward the end of the call,” noted Pete DeLongchamps, vice president of manufacturer relations and financial services, before offering his response.

“This has been a process that we have been working on over the years and we are selling more product,” he continued. “We have had increases in most of our product offerings. Our reserve is staying pretty constant.”

For the year, the group’s U.S.-based F&I operations grew F&I PVR by $129 to an all-time record of $1,644. As Delongchamps noted, that increase was driven by F&I product penetration rates of 40% for service contracts, 30% for GAP, 14% for maintenance, and 21% for the firm’s sealant product. The executive, however, said the group’s U.S.-based F&I operations may have reached the peak in terms of PVR.  

“I would suggest you don’t model anything higher than this. We have rising interest rates coming toward us,” he warned investors and equity research analysts. “So we are pleased with the performance … but I wouldn’t model anything higher than where we currently are.”

For the quarter, total U.S. same-store revenues decreased 1.1% to $2.2 billion, driven by a 3.7% decrease in new-vehicle revenue, which totaled $1.2 billion. The gain in F&I revenue, along with the the 5.1% increase in parts and service revenue — which totaled $266 million — and 1.1% increase in used retail revenue, partially offset the decline in new-vehicle retail sales revenue.

For the quarter, new-vehicle retail sales fell 7.1% on a same-store basis from a year ago to 31,765 units sold. That decline was driven by 8% and 17% declines in new-vehicle sales in the group’s core Texas and Oklahoma markets, respectively. Texas accounted for 49% of the group’s U.S. sales in the fourth quarter, while Oklahoma accounted for 8%. California, the group’s second biggest market, accounted for 11%.

“Sales were once again negatively impacted in the Texas and Oklahoma markets due to weakness in the oil industry,” said Group 1 President and CEO Earl Hesterberg. “We were able to more than offset the volume decline with improved new-vehicle gross profit per unit. So despite a 7% decline in new-vehicle unit sales, we were able to grow total same-store gross profit by 2% due to a focus on improving new-vehicle margins, with further expansion of our parts and service operations and strong F&I per-unit result.”

During the fourth quarter, same-store gross profit on a per-unit basis increased $179 from a year ago to $2,043, with gross margin settling in at 5.4% (up from 5.1% in the year-ago period). On the pre-owned side, gross profit per unit fell $84 from a year ago to $1,322. Total same-store gross profit increased by 1.5% to $330 million

“I think there are two factors,” Hesterberg said in response to a question about what are the biggest threats to gross profit in 2017. “One is the supply, off-lease vehicles in in particular. They continue to increase in numbers year over year, which is not a surprise because everyone watched the growth of leasing in recent years. So supply is the primary factor.

“And secondarily, when you have aggressive new-vehicle incentives, new-vehicle transaction prices can start to sit down a little bit on used-car prices. I believe those are the two big factors,” he added.

Including the group’s Brazilian and U.K. markets, Group 1 Automotive retailed 170,000 new vehicles and 130,000 used units in 2016. It also delivered record revenue of $10.9 billion (up 5% from the prior year).  Net income increased 56.5% from the prior year to $147.1 million, while adjusted net income fell 1.1% to $163.7 million.

“2016 was a challenging year with economic and political disruptions in each of our regions. Our largest U.S. markets of Texas and Oklahoma were both pressured due to lower oil prices … Our U.K. region experience disruption due to the Brexit vote, and the ensuing decline in the exchange rate negatively affected both revenues and net profit,” Hesterberg noted, adding that Brazil also experienced a double-digit decline in new-vehicle sales. “Despite these significant challenges, we are proud to report that for the full year of 2016, Group 1 reported an 8% increase in adjusted earnings per diluted share to an all-time record of $7.42.”

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