Auto Team America at NADA - Buy-Sell Forum and CEO-CFO Forum

AUTO TEAM AMERICA AT NADA – BUY-SELL FORUM AND CEO-CFO FORUM

Industry Update

Industry 

• 2019 actual sales was 17.0M units sold compared to 17.3M in 2018, down 1.3%.  2020 expected to be another 300,000 units lower than 2019 at 16.7M.  2023 and 2024 sales projected at 13M to 14M units.  

• Harder for retail sales due to higher cost of vehicles (new and used), inflation masked by injections from the central bank, increase in fleet sales, volatility of gas prices and total miles driven has slowed down. 

• Sales mix still favors trucks over cars with a 2.5:1 ratio.  

• Focus of manufacturers to bring electric vehicles to market.  Success will be dependent upon teamwork to create the technology as well as leveraging of research and development.

• Electric vehicles sales represent a small fraction of new vehicle sales.  People are found to buy Tesla vehicles not because it is electric, but because it’s a Tesla.  Infrastructure issues, battery life, and charge time still effecting attractiveness of electric vehicles.

• Current increase in % sales of Electric Vehicles are just replacements for Hybrid Vehicles % decrease.  Only a switch from Hybrid to EV, no growth on alternative fuel vehicle sales.

• Effect of new laws on fuel economy will be dependent on who or where the laws will be written.  Possibly more strict if coming out from California. 

• Higher fuel economy/lower emission vehicles is contrary to public demand as evident with truck to car mix.  New laws will need to define the meaning of emissions.  Carbon dioxide or pollutants?

Operations

• Average dealership saw expenses decrease by 0.5% and net profit up 3.2% to an average of $1.4M in 2019.

• Fixed operation experiences the third straight year of growth for the average dealership.  Fixed operations continue to be the main driver of dealership profits. 

• New vehicle – Revenue 54%, Gross Profit 18%

• Used vehicle – Revenue 30%, Gross Profit 13%

• F & I – Revenue 4%, Gross Profit 28%

• P & S – Revenue 12%, Gross Profit 41%

• In 2019, $485B spent on repairs and parts in the US, dealers only captured 20% of that amount.

• Service experienced some challenges due to improve quality and competition.  Current customers do not complain on price, more on convenience.

• Focus on digital marketing as more leads generated from websites (notably mobile sites)

• 63% find purchasing dealership online

• 69% of customers only interact using mobile phone

• 81% of buyers research for 3 months prior to purchase

• 41% of buyers are ready to purchase when arriving at the dealership door

• 42% of store visits come from YouTube, representing 8% of advertising budget

• Use of AI in advertising to target specific buyers rather than a blind mail out.

• Newer not always better.  55% of new vehicle buyers have considered used vehicles. 

Buy/Sell

M & A Trends

• 200 dealerships exchanged hands up to Q3 2019 compared to 317 in 2018.  Final quarter of 2019 saw a slight catch up with an additional 73 transactions.  Still an overall 25% decrease in the number of transactions from 2018.

• Pubco activity similar to the prior year with the number of transactions, but spent 1.7 times more in 2019 than in 2018. 

• Multiples have remained relatively steady compared to the multiples of a year ago.

• Average Blue Sky for 2019 was $6.7M compared to $6.6M in 2018.  Not much change in values.

• What buyers are looking for:

• New markets for which they do not have an existing presence

• Fill holes in big markets

• Bigger groups with good operations and efficiency

• Dealerships that have possible synergies with existing rooftops

• Underperforming dealerships if in rural areas

• Real estate along with the deal or option to buy later (more control over expenses)

• Brand’s ability for reinsurance

• Cheap real estate and lower tax regions

• Most importantly, it has to make sense\

• Keys to a good acquisition

• Retaining of employees

• Training is on the same page as other dealerships in the group

• Ease of absorbing dealership into national contracts (DMS, CRM)

• Publics look to sell underperformers and dealerships that are “structurally wrong” (ie. can’t fix location and/or market)

• Publics such as Auto Nation getting into ancillary service markets such as aftermarket part stores and collision centers.

Valuation

• German luxury dealerships and Lexus dealerships with steady multiples of 6.5 to 8.0.  Porsche higher at 8.0 to 9.0 times.

• Audi and Jaguar/Land Rover steady with multiples of 5.5 to 7.5.

• Toyota and Honda steady with multiples of 5.5 to 6.5.

• Domestic brands also steady at 4 to 5 times.

Consolidation

• Consolidation continued in 2019 with publics gathering additional market share.  Lithia market share of 5%, Auto Nation with 2%.

• Asbury putting aside $1B in 2020 for acquisitions.

Dealership of the Future

Dealerships

• Dealership model works as dealers are resilient and able to adapt despite margin compression, lower SAAR, introduction of disrupters and changes in laws.

• 8500 projected rooftops to support the market demand.

• At 17M units, dealers will still be able to make a good profit on operations.  At 13M to 14M units, will see slight decrease in profit, but manageable.

• Currently, baby boomers, millennials and gen X are the largest licensed groups respectively. 

• Marketing efforts to change to the latter two as they are the future vehicle buyers.

• Population growth will drive future sales.  Anticipated 30M/12% growth by 2030 and 77M/24% growth by 2050.

• As the price of new (non-luxury) vehicles rise, the demand for used luxury will be on the increase.  Pressure on margins due to competition (Carvana, Carmax).

• Dealership facilities will shrink as a result of digitalization.

• US market may not be able to absorb/support the extra volume from Chinese manufacturers entering the market.

• Ride share will just be another option for travel.  Millennials and gen X now have the resources to enter the vehicle market.

Impact of Technology

• All cars will be connected cars by 2025 (tied to dealership/manufacturer/internet, not AI vehicles).

• Electric vehicles may represent 6% of vehicles on the road by 2025 with all manufacturers having their own versions out in the market.

• Sales and service personnel needs to be “tech savvy” to be able to provide expertise to customers.

• Vehicles will require less servicing due to less moving parts, but technology will drive up the cost of servicing.  Opportunity for service department as independent garages may not have the capability or knowledge to service.

• By 2025, all vehicles will have some type of AI embedded in the vehicle.  Totally autonomous vehicle will not be available at that time yet.

AutoTeam America Buy-Sell Summit and CEO-CFO Forum

Alan Haig, Haig Partners

John Murphy, Bank of America Merrill Lynch Global

HIGH CAR PRICES ARE LOCKING OUT YOUNGER SHOPPERS

Auto dealers want to lure young buyers back to new-car lots. Auto makers have in recent years turned away from cheaper models, such as hatchbacks and small sedans, to focus their lineups on the higher-priced SUVs and trucks that have surged in popularity with the drop in fuel prices. The shift has helped lift new-vehicle prices to record levels and boost profitability for the auto sector. But dealers, gathering at a conference in Las Vegas this past weekend, warned that the trend is also pricing many buyers out of the new-car market. The main casualty, they said, are younger adults. “We really do need the younger buyers in these new vehicles,” said Charlie Gilchrist, the 2019 chairman of the National Automobile Dealers Association, in an interview.

Source: The Wall Street Journal

AUTO INDUSTRY TOLD A LOOMING SKILLS SHORTAGE IS A 'QUIET CRISIS'

Canada’s automotive industry can learn a lot from software giants such as Microsoft Corp. about using internships and other post-secondary school partnerships to fill a looming skills gap, the 2020 Automotive News Canada Congress heard last week. Too few post-secondary students are being prepared for the jobs of the future and, in particular, the impact of robotics, said John Stackhouse, senior vice-president, Office of the COE, Royal Bank of Canada.

“At RBC, we consider this a quiet crisis,” he said in a speech at the Metro Toronto Convention Centre Feb. 13.

Contrary to popular belief, technological change will create more jobs in the future, not fewer, he said. Many will require the so-called soft skills, such as complex problem solving, critical thinking and communication, that are common to many professions, he said. But workers will require retraining in specific skills to take on news tasks. Traditional auto industry jobs, such as service mechanic, are changing, he noted, opening them up to new groups of workers. A field traditionally dominated by men, the job now requires more computer and communication skills than physical strength.  “It’s no longer the grease-monkey skills from decades past. I see this as a tremendous opportunity.”

One solution to the looming skills shortage is for the auto industry to partner with more post-secondary institutions to tap into new labour pools, including underrepresented groups like women and indigenous Canadians, he said. Investing in training and development costs money, he acknowledged. “But we can’t afford not to do this. The labour shortage is so great.”

In exchange, business can benefit from the fresh perspective young trainees bring, he added.

“There are 7 millennials in Canada who have grown up completely digital, who understand your problems differently,” Stackhouse said.

Source: Automotive News Canada

SONIC AUTOMOTIVE CHAIN RAMPS UP ITS ECHOPARK USED ONLY DEALERSHIPS

Auto dealership chain Sonic Automotive is looking to greatly expand its EchoPark brand of standalone used-car dealerships to a major metro area near you, especially if you live in the Sunbelt. Sonic spent five years and millions of dollars getting the EchoPark customer-experience formula right, including no-haggle pricing, and having a single salesperson stay with the customer through the whole process, including financing, CEO David Smith said.

Source: Forbes

NISSAN IS WORTH LESS THAN SUBARU AFTER SHARES PLUMMET

Nissan Motor Co. shares fell to a decade low after the company cut its full-year profit outlook and scrapped its year-end dividend payout, slipping to fifth place by market value among Japan’s automakers. Nissan shares fell 9.6% to their lowest since 2009 in Tokyo on Friday, leaving the company with a market capitalization of 2.17 trillion yen ($19.8 billion), behind Subaru Corp., Suzuki Motor Corp., Honda Motor Co. and Toyota Motor Corp. Nissan’s stock is down 19% since the start of the year, after declining 28% in 2019 and 22% in 2018.

Source: Bloomberg

WHERE IN THE WORLD ARE DETROIT'S ENTRY-LEVEL VEHICLES?

Since its development of the Model T in 1908, Ford Motor Co. has been synonymous with building affordable, entry-level vehicles for the working class. By 1924 the price of a Model T Runabout had fallen to just $260 — the equivalent of about $3,900 in today's dollars. Fast-forward to 2020, and Ford does not offer a single vehicle for less than $20,000 when delivery fees are included. And Ford is not alone. As Detroit automakers increasingly abandon affordable sedans for higher-priced SUVs, Asian carmakers are only too happy to pick up those entry-level sales and possibly gain loyal customers for life.

Source: The Detroit News

A FORD SERVICE TECH'S NEWEST TOOL? VIRTUAL REALITY HEADSET

Ford Motor Co., in partnership with automotive supplier Robert Bosch, will use virtual reality to teach service technicians at dealerships how to work on the upcoming Mustang Mach-E electric crossover. Through the use of a VR headset, techs can learn how to service the crossover's battery pack and how to remove and install the main battery. Bosch said it's working on updates that would allow techs to virtually enter the vehicle. Ford is the first automaker to pilot the application in its service technician powertrain repair course, the company said.

Source: Automotive News

FORD CUTS FIESTA PRODUCTION AT GERMAN PLANT ON FALLING UK DEMAND

Ford has cut production of the Fiesta small hatchback at its plant in Cologne, Germany, in reaction to factors including a drop in U.K. sales. The model is the best-selling car in the U.K., Europe's second largest market.

Ford will reduce Fiesta production to four days a week, down from five, at the plant in a move that will affect 2,200 workers. The reduced output is expected to last until year-end, with a review in May, a Ford spokesman told Automotive News Europe.

"Southern Europe and the United Kingdom are seeing weaker demand [for the Fiesta], leading to the need to adjust production," the spokesman said.

Overall sales of new cars in the U.K. fell 7.3 percent in January as consumers held back from big purchases due to factors including ongoing economic uncertainty following Brexit.

The Cologne plant produces 1,150 Fiestas a day, with a third of that output going to the U.K.

Source: Automotive News Europe

BMW GEARING UP DEALERS FOR ELECTRIFICATION

It’s been three years since BMW dealers in the U.S. complained loudly to brand executives at the National Automobile Dealers Assn.’s convention and expo in New Orleans about inconsistent marketing messages, overly conservative vehicle styling and lackluster showroom upgrades. Many of those issues have been addressed to the point that this year’s franchise meeting at the NADA convention here wrapped up early, needing only about half the allotted time for presentations by company management and questions from dealers.

Source: WardsAuto

FCA SECURES MINOR VICTORY IN GM'S RACKETEERING SUIT

Fiat Chrysler Automobiles NV on Tuesday secured a small victory in General Motors Co.'s civil racketeering suit against the Italian American automaker. U.S. District Judge Paul Borman is allowing Fiat Chrysler to delay turning over the documents requested by the Detroit automaker until he determines whether the case should be dismissed. GM is seeking to prove its allegations that a years-long bribery conspiracy by Fiat Chrysler executives corrupted labor negotiations and hurt GM, which FCA has called "groundless."

Source: The Detroit News

AUTOMOTIVE LOAN DEFAULT RATES DECLINE

On Tuesday, S&P Dow Jones Indices and Experian released data through January, and analysts found the auto-finance default rate dropped 3 basis points on a sequential comparison to settle at 0.99%. The decline left the auto default rate below 1% for the first time since August when it was 0.98%. And how did 2019 start for the auto space? The auto-default rate last January was exactly the same at 0.99%. The readings to begin 2018, 2017 and 2016 all came in above 1% as analysts pegged them at 1.07%, 1.06% and 1.04%, respectively.

Source: Auto Remarketing

FRENCH PROSECUTORS STEP UP GHOSN PROBE OVER PALACE PARTY

French prosecutors have stepped up their investigation into alleged misappropriation of funds at Renault by former boss Carlos Ghosn, saying a judge had now been assigned to the case to launch a formal investigation.

The prosecutor's office in Nanterre, on the outskirts of Paris, had since last year been looking into a party Ghosn had thrown for his wife at the sumptuous Versailles palace among other financial dealings. It said in a statement on Wednesday a judge would now examine several charges linked to Renault and levelled at an unnamed person or people. A judicial source confirmed that Ghosn was among them.

A lawyer for Ghosn said he welcomed the opportunity to give his version of the events.

"We will provide our explanations to the designated magistrate after we can finally have access to the case file," lawyer Jean-Yves Le Borgne told Reuters.

Ghosn -- now in Lebanon after he fled prosecution in Japan on financial misconduct charges -- has repeatedly denied any wrongdoing. Reuters reported in January that judges, who have wider powers than investigators to pursue a criminal case, were set to get involved, potentially bringing prosecution a step closer. The prosecutor's office said the case involved suspect financial flows between Renault and a car dealership in Oman, as well as spending on trips and events. Prosecutors had been looking into whether Ghosn knowingly used company resources to throw a party that was for private purposes - his wife's birthday - in 2016.

Ghosn's lawyers have said he did nothing wrong, but there may have been a misunderstanding between Versailles and party planners over who was to foot the bill for renting the venue. Another event at Versailles in 2014, when Ghosn held a corporate party to celebrate the 15-year anniversary of Renault's alliance with Japan's Nissan, will now also fall under the scope of the investigation, the judicial source said.

At a news conference in January, Ghosn rejected allegations that most of the guests at the party -- paid for by RNBV, a Dutch-based holding company for Renault and Nissan -- were his own friends and family, saying the companies had invited business contacts from dealerships and other partners.

Renault conducted its own internal inquiry into Ghosn's time at the carmaker and handed over information to prosecutors last year. This included its probe into millions of euros described as dealer incentives to an Omani distributor.

Source: Reuters