Full Throttle Pop-Up Podcast with George Karolis: Presidio's Q4 2023 Quarterly Report

Welcome to a special edition of Full Throttle and our first "Pop-Up" episode.  The Presidio Group recently released their 4th Quarter 2023 Quarterly Report, and who better than to break it down than Presidio's own President, George Karolis. He is our guest today on the first Pop-Up episode of Full Throttle.  

0:00 Intro 
1:55 The Great Normalization Continues 
3:45 Presidio's Partnership with NCM
7:42 The Dealer Direction Survey 
10:29 Brand Desirability Rankings 
11:36 M&A 

Check out The Presidio Group on Linked In - https://www.linkedin.com/company/the-presidio-group-llc/

And The Presidio Group's Website - https://thepresidiogroup.com

Transcript

Welcome to this pop up Full Throttle, The Presidio Group's automotive industry podcast. I'm your host, Jason Stein Presidio's Managing Director. On a regular basis Full Throttle serves as the industry's meeting point for great conversations with leaders across the automotive world. Today we go in house with our guest, and it's all based on this, financial performance of the average US auto dealership is declining and certain store values are under pressure as normalization from the industry's pandemic era highs continues. That's what The Presidio Group's latest quarterly report said when it launched last week. The q4 2023 edition of Presidio Perspectives: A Quarterly Outlook on Auto Retail and M&A Trends sums up the industry's performance in 2023 and provides an outlook on trends happening this year. Presidio's newest report details the latest developments in the short term period we've dubbed the great normalization, the retreat of record profitability that occurred during the peak of the Coronavirus pandemic. So what are we going to look at? Well, we'll start with the Presidio NCM average dealership performance benchmark which is unique to this report. And then we'll continue on to the results of the Presidio dealer direction survey, and also look at M&A trends and the transaction outlook for the rest of the year. My guest on this pop up podcast for Full Throttle is Presidio President George Karolis. Well, it's great to have my colleague on the program as a guest for the first time. He is George Karolis, President of the Presidio Group. Welcome in George.

Thanks, Jason, good to be here with you.

It's great to be here with you. And you've got a lot to share. We do. A  Quarterly Outlook on Auto Retail and M&A Trends is out, the fourth quarter 2023. We've got our arms around how the full year went and how the fourth quarter went and I think it's summarized best with the headline, George,  the great normalization continues. What does that mean?

That's right. You know, look, everyone was pretty excited to be a dealer in post pandemic, especially in 21 and 22. With with the record profits, which were driven by really a supply and demand imbalance, you know, inventory levels at very low historical levels due to shortages and production issues. And then consumer demand at highs, and that script has flipped recently, over the last year and coming into where we are today, with inventories now, you know, double where they were in at the end of 2021. You know, I think we're at a 57 day supply or so which is nearly double and, and we you know, in particular, imports are triple where they were just two years ago. And so inventory levels have come back closer to historical norms. And consumer demand is hampered because of inflation, high rates and pressures on the consumers out there. So we have a double whammy. Although it's not quite a falling knife like like we've said, profits are still 2.5 times higher, on average, the average dealership since 2018. And dealers are still faring well, but they're having to work a little bit harder as my partner Brody said to make a little bit less. And again, this is brand and geography geography specific as well. So certain brands and geographies are faring better or worse than others. But we're very excited to have launched our our inaugural quarterly report at the end of last year. And this is our second one for the third quarter, sorry, the fourth quarter of 2023. And really excited to have that robust report out there, which has a lot more information on it and much broader information than then some of the other publications out there in the industry. 

And one of the key parts of launching the quarterly report even late last year, and certainly now into a first full year results is our partnership with NCM and the Presidio NCM average dealership performance benchmark has told us an interesting tale to end 2023 What was that? 

That's right, it confirmed what we're talking about here, which is profits are off margins are off the business is normalizing. But it's still at a higher level than pre pandemic. On average, the average dealership profits are off 20% in 2023 versus 2022. That greatly varies depending on the segment that you're in, you know, with luxury faring better than than domestic and import luxury was off a little over 12% versus domestic dealership profitability being off over a little over 23%. So it varies, but it is confirming what we're seeing, you know, until we issued our report and our partnership with NCM was a little bit of a vacuum in terms of publicly available data. And the only information was just the public companies which is about 6% of the total industry. NCM has about 25% of the dealerships in the US and so it's a broader cross section. A little different, a lot more owners than just six owners. And so really excited to have a partner with NCM and be able to issue this data on a quarterly basis that kind of gives insight and helps a lot of dealers compare themselves to others.

And in fact, Paul Faletti, CEO of NCM, said, as dealerships operational metrics continue to decline from those extraordinary levels that you had mentioned, especially in the first few years of the pandemic, they're going to benefit by looking at how the results really stack up. And in a lot of areas, Paul said, dealers took their eye off the ball during COVID, do you concur? 

Definitely concur with Paul, I think, you know, look, dealers made double to triple what they made historically. And were rolling in the dough, like to say they hit the lottery in some cases. And so it was, it was easy to get into some old bad habits, take your eye off the ball a little bit, you know, spend a little bit more money, maybe pay people a little too much, just, you know, you know, spend more on things because you had extra extra profitability, extra cash rolling in. And so it's easy to kind of get into some bad habits when when times are great. Versus we like to say, you know, let's not waste good recessions, sometimes that's the best best. You know, I'm not saying we're in a recession, but you know, when times are a little tougher, that's when folks kind of do the smart things, to batten down the hatches and manage expenses better and maximize their opportunities. And we should always be doing that, because the sky should be unlimited, and shouldn't just be doing that in tougher times. And so but we did see a lot of dealers do that. And, and we definitely concur. You know, now now more than ever is a great time to benchmark your dealership, you know, for dealers to benchmark against other dealerships and, and data will be key to helping make good decisions, best practices in particular, and what better way than to use NCM benchmark information for dealers that are both clients or prospective clients, or just some of the data that we put out with NCM . But there's some good good information in there to glean in terms of, of, you know, how to benchmark and best practice information with dealerships. In our report, we talk about a lot of the things that dealers should be focusing on, you know, to, you know, maintain profitability, minimize downside and maximize the value and retain the value of their dealerships. And some of those things were expense management and focusing on f&i and, you know, making smart decisions, controlling inventory. And a lot of those things are the same things that dealers glean from NCM on a on a regular basis.

Speaking of data that was, this is now the second quarterly report, where we've surveyed dealers, and we did it from January 19 through February 15. And those aggregated responses came from 285 survey takers about 3100 franchised dealerships, it was a bigger, more varied pool of dealers than what than those who had participated in the inaugural survey last fall. And they had some interesting, they had an interesting outlook, I guess, on where the direction of the market is going. Tell me a little bit about that.

Sure. Yeah. Look, we're excited about that survey as well. It's close to 20% of the total dealers in the country dealerships in the country represented on a number of dealerships basis. And, you know, I think what we what we heard from most dealers is two thirds, which is a majority of the dealer surveyed believe that, you know, profitability will, you know, be under pressure this year and likely decline. You know, on the flip side, though, though, dealers are still very optimistic and some of the survey results, some of the questions about valuation were interesting, where 40% of dealers, while 40% of dealers think values may decline, 40% think they may be unchanged and 15% actually think they may go up. And so that that tells us that dealers are a little bit more optimistic about the long term value of dealerships. We also had some interesting information in the survey that we gleaned in terms of headwinds and what dealers are concerned about and the top three headwinds that that dealers are concerned about, as we as we head into 2024 are interest rates and inflation, EV, and EV strategy of certain OEMs and finally, vehicle affordability. So some really good information from that survey, which really helps inform dealers about general feelings of where we are today and where things are heading in the industry. 

I thought it was interesting, George on that survey, what's your interest level in buying dealerships over the next 12 months? And you know, 31% basically said moderately interested 25% said highly interested so again over half of those survey respondents are in the market

That's right yeah close to 60% interested in growing and but interestingly next largest numbers neutral, which is not negative. They're not saying they're not interested. And so you know on from an M&A and acquisition perspective still a general positive feeling out there, still generally a seller's market but but changing somewhat depending on again brand and geography and and sentiment out there

On the brand desirability ranking, something that we also launched last quarter. No surprise, Toyota and Lexus sitting at the top but a couple of other surprises. What were those? 

Yeah, you know, no, no surprise on the on the on the flip side of that, which was Nissan and Stellantis kind of ticking down from a favourability perspective. I don't think that comes as a surprise to most. But we were it was not a surprise again to me. But we saw Subaru and Honda tick up the favorability rankings. In particular, you know, those two brands have held their own and had been stable and Honda, you know as as, as really just been been kind of the beacon there. And Subaru has really fared well and especially in certain geographies, so we're seeing a lot of favorability in those two brands, Mercedes a slight tick down, more so we expect probably because of EV strategy, kind of current EV strategy where it's taking them as well as sort of some of the OEM and dealer relations issues we hear out there, like ROFRs on deals and things like that. 

So give me the final piece of the puzzle here, which is focused on M&A and it's such a big part of the latest quarterly report, as it was the last time, what are your real takeaways from M&A And where we are right now, and maybe where we're going for the next quarter?

I mean, 2023 was the third best, you know, most, most active year from from an a perspective, m&a perspective for, you know, for the retail automotive industry. And so it was a robust year, and we actually expect that pace to continue this year and well into the future. You know, I think we've always talked about kind of the the number of interested parties out there, and it's not just the public's, in fact, nine out of 10, more than nine out of 10 deals that happen are private to private dealers, over 500 dealerships sold last year, over 350 actual transactions, and so pretty, pretty active. And we don't expect that to stop there are hundreds of dealers interested in growing. In fact, in our, in our survey, that was one of the main answers. There, there's a lot of private dealers that are looking to grow and to diversify their portfolio as well as provide opportunities for succession for for their family, and even operational talent within the organization. So we don't expect that to stop. Again, it'll vary a little bit by geography and by by brand and, you know, it might not be as as easy as it was, in the last few years, but still pretty robust and pretty in demand, you know, values are ticking down some, again, depending on geography and brand, but in some cases, values could even have gone up depending on the brand, it's hard to predict and impossible to say this is exactly what's going to happen to values now or next month or or even into the into the next 12 months, which is why it's really important to to sort of have a kind of an expert approach to understanding the value of your dealership, you know, at Presidio we we have three pillars of evaluation, and evaluation metrics was which has over over 10 criteria in terms of what goes into understanding the the earnings and the quality of the dealership, you know, kind of sustainability of earnings and geography and OEM relations. There's a lot of, a lot others but there's a lot of moving parts to to an individually unique dealership and then of course, the metrics to value a dealership, Blue Sky, a lot of a lot of talk in the industry is solely focused on Blue Sky but that's only one part of the equation only about 60% on average of the total value of a dealership, because of there's real estate and other assets also, yet a lot of most of the emphasis is on blue sky in the industry. And we sort of shy away from Blue Sky multiple talk, they haven't really changed much and since consolidation began, they've been within a band. And what's really important is to understand the unique qualities of every individual dealership and what goes into value of that dealership and sustainability of cash flows is one of the biggest moving pieces, but understanding and how to pin down and understand that cash flow stream and what it's going to be in the future is both an art and a science and there's a lot to it. So we you know, now more than ever because of the volatility of earnings, it's you know, there's a lot of different ways to triangulate value, there's no one tried and true, true method and so we look at every angle, including multiplier on revenues and kind of brand value and brand earnings potential, and then ultimately, what's most important is what's the ROI based on the value of the investment or the value of the dealership. And so, you know, it's, it's, it's important to triangulate, and there's no there one one set way to value a dealership. And, you know, it's a very unique and individualized process.

You hear the industry's best on the industry's best podcast and you've heard from him today, George Karolis president of The Presidio Group. And it is the Quarterly Outlook on Auto Retail and M&A Trends Presidio Perspectives, fourth quarter 2023. Go to thepresidiogroup.com. In order to find out more, you'll see it right there under News and Insights. George, thanks so much for being on the program. 

Thanks, Jason. Appreciate it. 

Thanks again to my guest, Presidio Group President George Karolis. And thanks for listening to this pop up version of Full Throttle, come back to us later in the month for our next interview on this platform. Email me with suggestions jstein@thepresidiogroup.com or go to the website, thepresidiogroup.com. You can follow us as well of course on LinkedIn. Thanks for listening to the program. We'll see you again next time.