Episode 10 - President and CEO of Asbury Automotive Group, David Hult

For Episode 10 of Full Throttle, we are joined by Asbury Automotive Group's President and CEO, David Hult. Topics of discussion include the state of the automotive industry, Asbury's Carvana experiment, Asbury's priority list for the second half of 2023, and much more. Tune in and don't forget to subscribe so you don't miss out on our upcoming episodes featuring a variety of top automotive industry experts! 

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Transcript

This is Full Throttle, the Presidio Group's automotive industry podcast. I'm your host Jason Stein, Presidio's Managing Director and also host of Sirius XM's Cars and Culture on business channel 132. On a monthly basis, Full Throttle serves as the industry's meeting point for great conversations with leaders across the automotive world. 

In 37 years you think you've seen it all, the last three is nothing but a curveball after curveball after curveball. You know, I think the market's certainly cooling off, interest rates have a big play in that. I think we've been stable because unemployment remains low. But not everyone's equal. Some brands still have a single day supply. Demand is pretty good for them. Other brands have a 60 day supply, and it's a little bit more challenging.

There are few rides that have the velocity twists and turns and upside down moments as the auto industry in the last few years. Just ask the public retailers and the leaders in the industry who have had to navigate all they could to keep business on the rails through the low lows and high highs. Or we can just ask David Hult, in many ways Asbury's President and CEO has lived a dozen lives in the last few. And today amidst inventory concerns, labor concerns and a transition to technology. David Hult is juggling as much as he can. So what is his view on the industry just over halfway past 2023? And what is his outlook for the retail automotive industry with regard to both sales and profitability? Today, he's our guest to talk about inventory used vehicle acquisitions, and even a Carvana experiment Asbury performed a few years ago, as a learning exercise for the company. We also get David's view on acquisitions, including the group's appetite to get to its goal of $32 billion in revenue by 2025. And how has the integration of Larry H Miller gone? Have there been any interesting surprises good and not so good along the way? Finally, we'll talk technology and the impact it can play on retail development. No one better than David to explore all of those topics. And he's my guest on Full Throttle.

Hi, this is David Hult. And this is Presidio's Full Throttle podcast.

Great to welcome you into the program, David. It's been a little while and it's always good to be with you and see you.

You as well. 

Give me your view of the industry right now. It's it's it's been a while since we chatted last about where you thought the state of the industry was. But what's your outlook for 2023? For the retail automotive industry?

You know, after 37 years, you think you've seen it all.The last three is nothing but a curveball after curveball after curveball. You know, I think the market is certainly cooling off, interest rates have a big play in that. I think we've been stable because unemployment remains low. But not everyone's equal. Some brands still have a single day supply. Demand is pretty good for them. Other brands have 60 days supply. And it's a little bit more challenging. I think the other piece of it, too, is a timing standpoint, the cost of sale on vehicles sold last couple of years is really spiked. And right now people are looking for a lower cost of sale. So these $80 $90,000 pickup trucks aren't moving like they used to, which is becoming more of a challenge. So I think this year is really going to be settling in and everyone keeps talking or referring back to '19. I don't know that I see that. But there's a lot of challenges out there, you got a depleted used car market. The last three years, there's been no fleet business because there hasn't been new car vehicles. So you have a much smaller pool. Values are bouncing around but even more so than values there's finding inventory. So it's it's a challenging time in the market, I'd say the one thing that's consistent for us is parts and service. I think it'll be strong, at least for the next seven to 10 years for a litany of reasons. I think finance and insurance is going to be fine. But the rates are certainly a challenge to go up over 500 basis points in the year has certainly put a lot of pressure on the payments. So we're just looking at each brand and what they have to offer. We're not chasing volume, we're focused on margin as best we can and managing the environment. While certainly keeping an eye towards acquisitions.

Let's talk about a couple of aspects that you just mentioned. We'll start with inventory, Asbury was back to a 30 day supply of new vehicles at the end of the first quarter. How has the inventory recovery been at Asbury since then, and how's it shaking out by brand?

Yeah, I would say generally it hasn't changed. It's it's running right at that same number, maybe slightly below. You know, our highest day supplie is on the domestic side. And more so with one brand than any of the others. And like I said most of the imports, we're running a single day supply, with the exception of Hyundai, Nissan and Kia.

Yeah. You've said that the domestics you just mentioned that have rebuilt inventory faster even to the point that some Stellantis brand vehicles were in that 60 day plus range. Is that putting some automakers into the position of being needing to return to the more traditional consumer incentive levels that maybe existed before the pandemic?

You know, certainly that's happening. I would say they were probably a little slow to react. But it's easy to be a Monday morning quarterback, I think it's it's it's a twofold issue. It's late with incentives, and then your cost of sale transaction, and what your consumers looking for, it's going to take a little bit of time to adjust in my opinion. Trucks were hotter than heck forever, and they still do well, but they're not as hot as they were. So I think there's an imbalance of the right cost of sale. And incentives that may be quite aren't as aggressive enough to what the market needs because of the high cost of sale. 

How are you handling used vehicle acquisitions and inventory as we're now fully into the period where maybe pandemic production interruptions have hurt the supply of late model used cars coming back to the market? 

Yeah, that's a great question. And everyone has a different plan. But, you know, we decided the end of last year, the way we saw 23, inventory was going to be tight. We thought we were going to be governed by how many new cars we could sell so we were going to be governed on the trade side, the average age of the car is over 12 years now. I don't want to change volume. The one thing that's gone up since the pandemic started is my cost of sale, to sell something is much higher than it was. I'm far more efficient, but I'm still paying more. So for me to go out and buy a used car and make $1,000 doesn't make any sense to me. I'd rather not buy the car tie up the capital and make that sale because it's not going to give me the return that I need. So we decided not to chase volume, we're going to focus on our acquisition costs, buying cars direct from consumers and our trade-ins, and buy as little as we have to at the auctions. So I don't think at any point this year, you're gonna see us chasing volume and pre owned at all.

As we talked about used cars, a few years back, you decided to buy a vehicle from Carvana as a learning exercise. What did you learn about the Carvana approach by doing that? And did it lead to any adjustments in Asbury's own used car strategy?

So I think they've been a great disrupter and to grow as fast as they did. Everyone can knock everyone, I think they've done a nice job. They all have their challenges. And like I've said, from the beginning, without parts and service, it's you're going to be challenged no matter what. But having said that, you know, what I learned was, you still need car people. The software is great, but it's still about the experience. If you don't, if you get the software, right, you don't get the delivery, right, or the registration paperwork, right. That's a problem. In the, in the car that we purchased, you know, they're a public company trying to be profitable and grow, we brought it to one of our stores, it still needed some work. And there were aftermarket parts on the car, as you might expect. So I still hold true to the fact that when you have a franchise, there's a benefit with that shingle between CPO, Parts and Service, incentives, standalone used cars, those can be profitable. I don't think it makes sense because I don't think it can give you the return that a full franchise store can.

One of the big issues that exists when we talked with other folks on this program has been labor shortage, and specifically skilled labor and highly technical labor, those who are able to take on the technological changes that are occurring, are you finding the same things?

No, it hasn't changed. Pre pandemic, we were struggling and finding technicians and retaining them. And I'm still in the same boat today. A little more hopeful today than I was three years ago. With the AV and technology, the youth are interested in working on those vehicles and see a path for a profession there. So I think, you know, two or three years it won't be as bad as it is right now. But we're all pretty aggressively looking for technicians, the rest of the positions in the dealership, we're in pretty good shape. Three quarters of our promotions come from within our company. So it's really just making sure we hire the right people that philosophically align with our vision. 

Still super competitive. Right, David? 

It is. That absolutely is. Yeah, it absolutely is. I mean, we give stock to over 400 technicians a year in the company.

And on investments in EV infrastructure within a dealership, how are you tackling some of those problems? You know, we talked to a lot of dealers who say that, you know, the amount of investment is sizable, and they're not seeing a strong ROI that's immediate. What's your view there?

You know, I learned from a lot of great car dealers that I worked for young in my career, never sit on the fence, you either gotta be all in or all out. While I don't think EVs is the full solution for everything in the future, I think we have to be all in. So we've chosen to do that. But years ago, we started investing in wiring in technology within our stores to be prepared for the charging stations that are needed. We're spending millions every year between tools training and charging. And we'll continue to do that. Not 100% Sure I don't have a line of sight on when it's gonna pay off or if it will pay off. But I think we have to be a good partner for the OEM. They're making a big investment and we need to as well.

It's a confusing landscape, isn't it? When you talk about shifting regulations, even in European countries now and the possibility of things changing in this country. Some automakers have said we have to make our. we have to put a stake in the ground, we have to make our play and and the retailers will have to follow with us. But it is a moving target. Right, David?

It sure is. And it varies dramatically by state. You know, California has the highest penetration with EVs. They also have the best infrastructure. You get up into the northeast, it's not great, but you can manage it. You get down into the southwest and southeast, it's a little bit more complicated. There's an awful lot of folks that don't own homes so charging is complicated. And there are a lot of people that don't qualify for some of the tax incentives. I think the next 18 to 24 months are going to be interesting, because there's an awful lot of EVs coming to market. And we're truly going to test the market to see if the desire is there to purchase those vehicles.

Yeah, let's talk about technology and the impact it can play on the retail development. And I'm talking about the shopping experience. Clicklane digital retailing, you've said you expect about half of Asbury's vehicle sales to involve your, your Clicklane platform within a few years. What percentage is that at right now, and what is it going to take to get to the 50% mark?

Well, and that 50% mark is all about getting the software in the showroom. But six months ago, we built a showroom application for it. And we've been rolling out the stores on that. So the concept is whether you want to drive the car at night, or whether you don't want to buy the car in line or not. When you come in this showroom and drive the car, there's no reason at that point when you made a buying decision that you can't utilize the software. So we're very focused on that. And I would tell you the stores that we rolled out the Showroom App on, that have embraced it because you understand car people it takes time to transform change. But there's stores that have embraced it, you know, 35 to 40% of their sales today are going through that software. But that's not someone sitting at home, there's a percentage of that, a lot of these people are on their phone or on the right pad in the showroom. 70% of the transactions are been done on the cell phone. Hasn't been a desktop hasn't been an iPad. So we're going to continue to roll that out and push it because it's just logic based. If you can do a transaction 14 minutes, you can give the customers the choices of who they want to do business with what F&I products they want to buy, and I can make money both in the front and back end and be more proficient about it. Why wouldn't I do it? We don't have a call center attached to it, you don't need it. If you have a call center attached to it, then that means there's something wrong with the software. But you know, we're growing. And I think when we announced quarterly earnings this time around, they'll see how we're progressing along with it. I think I'll probably talk a little bit more about that showroom map in this next earnings call as well.

Wonderful. Look forward to that. Speaking of F&I you acquired the F&I business, Total Care Auto, as part of the Larry H. Miller transaction, where is Asbury on rolling out the sales of those F&I products across your dealership network? And what's the long term potential of owning that business?

You know, full disclosure, when we were negotiating the deal, I tried to carve out the insurance business because I didn't understand it. Now that I understand it I thank God that they didn't allow me to do that. It's gonna be a tremendous asset. For us, it's really well managed. It's a very mature company. We have all Colorado rolled out, all of Texas rolled out, all of South Carolina and rolled out, we're about to start Georgia. And then we'll do we'll finish up in Florida, Indiana has been rolled out in St. Louis as well. So we're making really good progress. It's generating a lot of cash, it's going to be extremely profitable for us. And it's a good differentiator from our core business and what we have and when you think about it, when it is paying out a claim, it's paying it out to our store. So we really liked the business model. We love the leadership that's running the insurance business. And we just think it's going to be a differentiator for us. We looked at the finance business hard, if we wanted to get into lending. And I just felt at the end of the day, it was our core competency. And I was more intrigued by the insurance business. And I think for us, the insurance business was the right choice.

How has that integration gone with the Larry H. Miller acquisition? Has there been any interesting surprises? Good, not so good along the way? 

Yeah, I think it's time you know, for F&I folks selling a product is selling a product, and the products are all coverage wise the same. So it's really not much of a difference there. Little bit of difference with the folks to get used to the different names, and you know, time and mileage on some of the plans. But I would say it's really gone out pretty seamlessly. It wasn't a tough transition. It was harder to get the insurance approvals in each state than it was actually rolling out the product.

Asbury has been on the record, saying that is still looking for dealership acquisitions to fuel its growth targets. Of course, the Miller acquisition was a blockbuster, as they say, how are you doing on the goal to get to $32 billion in revenue by 2025. And what kind of deal making is in the plan to help you get there?

You know, I'll start off by saying, I don't feel the pressure to hit that number, I feel the pressure to make sure we acquire the right assets, and build a sustainable company that makes sense. So we've passed on a lot of acquisitions in the last year, just because I didn't think they were good fits for us. We announced in the first quarter, we expensed two and a half million dollars working on a large acquisition, that in the ninth inning didn't happen. That was unfortunate, it was a large acquisition, that would have been good. We have our oars in the water, we're working on a lot of things, there's a couple that we're pretty excited about. But as you know, deals are complicated. And they take time. We're hopeful that they can come together. But we like what we've purchased, we'd like the people that we've added, we like our business model, you know, for the last 10 years, when we were the smallest and even through our growth, we've maintained the lowest SGNA and highest operating margins throughout that entire decade. And we're proud of that. And we've been real disciplined on what we've acquired. Stevenson. Park Place, Mike Shaw, these are tremendous dealers with great people. And they've been tremendous assets and teammates in our organization.

As we wind toward the second half of the year. Now, what's on your priority list that maybe concerns you the most or that has the most opportunity?

Yeah, I would say really being on the domestic side, being hyper focused on how we're ordering vehicles to making ensure that we get the right mix and right cost of sale that we need. On the import side, it's continuing to cross my fingers and hope the the inventory shows up and the day supply grows, because the demand is still there at this point, making sure that we don't lose focus on our level of service. Really, and how we sell and service vehicles is the most part, not too focused on pre-owned, I don't think I can control it. So we're just kind of stay with our model that we have, as it relates to pre-owned and be hyper focused on acquisitions, really making sure that we're not missing anything, and that we're aggressive on the deals that we think make really great sense for us. 

On that note, Asbury also divested a few stories in 2022. Do you anticipate more of that? Or is the network kind of where you want it to be pending future acquisitions?

Sure, I'll share something with you. I'm debt averse. We've created enough debt through our acquisitions. So I don't want to do any more acquisitions with having to go to the market for money. That divestiture in the fourth quarter in North Carolina was really our lower performing platform. And it was an opportunity for us to gain capital to help fund that larger acquisition that we thought we were gonna get. And unfortunately, it didn't happen. Wouldn't have sold that platform if I knew that that deal was going to fall through. Those things happen. But we sold to a good Dealer, and I'm sure it will do well with those stores. It gave us the capital. So it's in the bank and we're ready to do business.

You said it at the opening, this business throws you so many curveballs, it's sometimes hard to hard to gauge exactly where they're coming from. But I know you're taking big swings at the plate here. Right, David?

We try and we have a lot of great people. But at the end of the day, we're stewards. We really want to leave it better than what we saw and when we came in. We really want someone to look back and say they've really bought great assets, they're good operators, and they did a good job of capital allocation.

Great. I am most appreciative of being with you here again today. Thank you for joining me on Full Throttle. Thanks for giving your insights in where the market is and where you're headed in the future.

I appreciate the opportunity and would do anything for you. So happy to be here.

Thank you so much, David.

Thanks again to my guest, David Hult, President and CEO of Asbury Automotive Group, and thanks for listening to Full Throttle. Come back to us later in the month for our next interview on this platform. Suggestions? You can email me at jstein@thepresidiogroup.com and to learn more about the Presidio group, go to thepresidiogroup.com or follow us on LinkedIn. Thanks for listening.