AutoNation, Inc. (NYSE:AN) Q1 2022 Earnings Conference Call April 21, 2022 10:00 AM ET
Company Participants
Ankur Shah – Manager of Investor Relations
Mike Manley – Chief Executive Officer and Director
Joe Lower – Executive Vice President and Chief Financial Officer
Conference Call Participants
Rajat Gupta – J.P. Morgan
Adam Jonas – Morgan Stanley
John Murphy – Bank of America
Ethan Huntley – Jefferies
Stephanie Moore – Truist
Colin Langan – Wells Fargo
David Whiston – Morningstar
Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.
Operator
00:02 Good morning. My name is Alex and I’ll be your conference operator today. At this time, I would like to welcome everyone to the AutoNation First Quarter 2022 Earnings Conference Call. [Operator Instructions] After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you.
00:31 I would now like to turn the call over to Ankur Shah, Manager of Investor Relations. You may begin your conference.
Ankur Shah
00:40 Good morning, and welcome to the AutoNation’s first quarter 2022 conference call and webcast. Please ensure that your lines are muted until the operator announces your turn to ask a question. Leading our call today will be Mike Manley, our Chief Executive Officer; and Joe Lower, our Chief Financial Officer. Following their remarks we will open up the call for questions. I will be available by phone following the call to address any additional questions that you may have.
01:07 Before we begin, let me read our brief statement regarding forward-looking comments. Certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued earlier today and in our SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K.
01:54 And now I’ll turn the call over to AutoNation’s Chief Executive Officer, Mike Manley.
Mike Manley
01:59 Yes. Thanks, Ankur. Well, good morning everybody and thank you for joining us. Firstly, I am pleased to report that the momentum with which AutoNation ended 2021 continued through to the first quarter of this year. From our view, consumer demand for personal vehicle ownership remained strong across both our new and our used channels and our service and parts business is clearly showing the benefits of both increased miles travel and our focus on increasing our penetration into the after sales market. And maybe as a result so today AutoNation reports record first quarter performance with earnings per share of $5.78, which is an increase of 103% and revenue of $6.8 billion, which increased $849 million or 14%, compared to prior year.
02:45 Now, from a new sales perspective, our performance reflects the effect of continued tight supply basically with volumes down and new margins stable from the end of last year. Year-to-date I can say compared to prior year, we have not seen any reduction in lead demand for new vehicles or really any foreseeable segment shifting as a result of current economic conditions. Now, our used car performance reflected good volume growth on a same-store basis and the continued expansion of our AutoNation USA business and this helped maintain our revenue and total gross profit.
03:17 Now, during the quarter we sharpened our analytic capabilities, which are increasingly educating our buying, placement and pricing decisions in the used market and these disciplines are work in progress, but I think you can clearly see they’re going to have a beneficial impact on our business. For example, during the quarter, we recognize the need to rebalance some of our used vehicle inventory to help improve term and margin. And as a result in the quarter we saw a temporary reduction in used margin per unit sold, but because of these actions as we enter the second quarter margin turn have already improved.
03:52 As we all know success in the used car market, basically dictated by your ability to manufacture great quality, well priced desirable used cars and this clearly covers key elements of the business, including efficient and effective reconditioning for example, but it all starts fundamentally with your ability to competitively acquire used inventory and with strong consumer demand we continue to focus on our self-sourcing capabilities for used vehicles, which I think further strengthened both our franchise dealerships, but also our AutoNation USA businesses.
4:24 And as I’ve mentioned before, nearly all of our pre-owned vehicles retailed to self-source, which includes our growing We’ll Buy Your Car channel, which purchases directly from consumers, and when I look back at the first quarter we self-sourced 94% of our pre-owned vehicles that we acquired.
04:42 Now, as previously announced, the company entered two new markets this quarter with AutoNation USA Charlotte in North Carolina and AutoNation USA in Charleston in South Carolina and our AutoNation USA stores continue to exceed our expectations in these two new stores were both profitable during the first four months of operation and we remain on plan to open 12 additional stores over the year and our target, as you know, is to have over 130 for these stores in operation from coast-to-coast by the end of 2026. These stores will continue to leverage the AutoNation brand, the scale that we have and our proven customer centric processes to capture a larger share of the used vehicle market.
05:23 Moving on to after sales, as I mentioned earlier, our team delivered what I consider to be a tremendous quarter with an increase in after sales gross profit of 19% and I’m going to come back to this a little bit more in my closing comments. We continue to build our compelling customer value proposition through the combination of our digital tools and physical assets and going to leverage, not just our existing business, but also AutoNation USA growth plan and our embedded structural improvements coupled with the rich data analytical capabilities that we continue to build and this is going to help grow and strengthen our business and the AutoNation brand.
05:59 But before I hand over to Joe, who is going to take you through our results in more detail, I’m going to briefly touch again on a topic that we did discuss last quarter when we reviewed our year-end results. During that time I talked about a number of key profit drivers and disciplines that now structurally embedded into the groups, such as our used to new sales volume focus, our customer financial service performance, our after sales penetration and margin and expense control. And I’m pleased to recognize that when I review the results for Q1, you can again see the benefits of this focus and discipline coming through strongly.
06:30 Great performance from our sales and CFS teams growing our used business and our per unit CFS performance, our service and parts teams led by our technicians, service line [indiscernible] and our parts teams delivered strong performance improvement and as you see all of our associates and frankly that’s — whether they worked in our dealerships, collision centers, auction or support functions around the country demonstrated the continued clear focus on margin, but also expense control discipline.
06:58 And I think these things are important and I’ll touch on them again, because performance efficiency and effectiveness in these areas in my view is sustainable, and as such, really do help decouple our company from the more circumstantial elements that could be viewed as transitional such as supply and demand driven constraints.
07:15 Now these embedded structural improvements in our performance should not be discounted, because ultimately they do translate into long-term sustainable value and they provide us with more control over where we’re going and the opportunity to focus on expanding and developing our customer-centric personal transportation solutions, while driving results for our manufacturer partners. So I just want to end this introduction by congratulating all of the people that work with AutoNation for the results they delivered in the quarter, thanking them for what they do.
07:42 And with that Joe I’m going to hand over to you.
Joe Lower
07:45 Thank you, Mike, and good morning, everyone. Today, we reported first quarter total revenue of $6.8 billion, an increase of 14% year-over-year. This increase was driven largely by used vehicle revenue, up 47% over the same period. Supply chain disruption continues to govern new vehicle availability as we saw a 6% decline in new vehicle revenue as we effectively sold every new vehicle received with inventory falling below year-end levels.
08:16 We continue to see demand exceed supply during the first quarter. With this, we remain focused on optimizing new vehicle margins and sourcing used vehicle inventory to support sales in our AutoNation USA expansion. For the quarter, total variable gross profit increased 31% year-over-year driven by an increase in total variable PVR of $1,671 or an increase of 38%. The decline in new units of 19% was partially offset by growth in new units of 11%. Our after-sales business continues to gain momentum with after-sales gross profit increasing 19% on a year-over-year basis. Taken together, total gross profit increased 27%, compared to the prior year.
09:07 Shifting to cost, we continue to deliver significant SG&A leverage due to strong cost discipline and robust vehicle margins. First quarter SG&A as a percentage of gross profit was 56.6%, a 610 basis point improvement, compared to the year ago period, as measured against gross profit our metrics improve across all key categories with overhead decreasing 210 basis points, compensation decreasing 340 basis points and advertising decreasing 60 basis points. The combination of strong growth in gross profit, strict cost discipline and opportunistic share repurchase generated net income for the quarter of $362 million or $5.78 per share. EPS was up 107% versus prior year adjusted EPS of $2.79. This reflects our eight consecutive quarter of all-time high adjusted EPS.
10:09 Turning to the balance sheet and liquidity, our cash balance at the end of Q1 was $608 million, which mainly consist of the proceeds from our recent notes offering. Combined with our additional borrowing capacity, total quarter end liquidity was $2.4 billion. We continue to deploy capital to grow our business and drive long-term shareholder returns. During the first quarter, we entered two new markets with AutoNation USA stores as Mike mentioned earlier. We’ve also continued to repurchase our own shares. During the first quarter, we repurchased 3.5 million shares for an aggregate purchase price of $381 million. We purchased an additional 1.4 million shares thus far in Q2 for total year-to-date repurchase of $518 million or almost 8% of our shares outstanding at the beginning of this year.
11:04 The company has $376 million available for additional share repurchase under our current authorization. And as of April 19th there were approximately 58 million shares outstanding. We continue to maintain ample capacity on our balance sheet. At the end of the first quarter, our net leverage ratio was 1.3 times net debt to EBITDA, slightly lower than at the end of the fourth quarter and well below our historical range of approximately 2 times to 3 times leverage. We continue to demonstrate strong operational execution and disciplined capital allocation. Going forward, we remain focused on leveraging our balance sheet and strong cash flows to drive long-term shareholder value.
11:47 With that I will turn the call back over to Mike.
Mike Manley
11:50 Thanks, Joe. Just a couple of comments I made before we get into Q&A session and that’s around our structure and the people that we have. You will have seen some announcements as we got into April really finished last year and got into the first quarter of basically the — some realignment of our existing businesses. With couple of elements I’m going to touch on is obviously the two new Chief Operating Officer roles that we have with Dave Koehler coming in. Dave is going to look after our non-franchise businesses, so that we can make sure we have appropriate focus on that is going to be significant growth opportunities, some of which already identified, some of which is work in progress, but Dave and his teams will be making sure that, that gets the folks that it needs.
12:30 And then Steve Kwak will look after our franchise businesses and that again remains our core business naturally, and we’ll get the additional focus of new roles that we brought into the organization, which basically our market brand president roles. That’s going to strengthen our relationships with our manufacturers, but really get the focus so that we can work really alongside manufacturers’ partners across our three automotive segments of domestic, import and premium Luxury. So, what I think this will do is it will bring significant focus based upon individual brands within our overall AutoNation Group, but also now teas out areas of the business that moving to offer, I think, significant growth with the right level of focus and dedication so.
13:19 And with that, I think, we can open up for questions, please.
Question-and-Answer Session
Operator
13:26 [Operator Instructions] Our first question comes from the line of Rajat Gupta from J.P. Morgan. Rajat, your line is now open.
Rajat Gupta
13:44 Great. Thanks for taking the question. Just had a first question on the used car business. The GPUs there are normalized faster than maybe what we saw at your peers, Lithia still had pretty good margin there. Just curious as to what drove that normalization. Was it more of prioritization on growth versus margins? Or was there something else to highlight there that was more temporary, maybe if you could start there. Thanks.
Mike Manley
14:21 Yes, sure, Rajat. This is Mike. No, it’s completely temporary, as I mentioned in my comments. Towards the end of last year and progressively through Q1, we’ve been I think strengthening our data analytics with regard to used vehicles not just in terms of being more precise in what vehicles, what segments, what geographies are moving and in which direction, but also how that applies to our inventory levels, and frankly, I didn’t like some of the — as a result of that, frankly I didn’t like some of the profile that we had and I wanted to make sure, whilst we were developed in a very strong quarter that we took the necessary actions to realign it. And I’m pleased to say that was completed in the quarter. Our term rates have improved and our margins have rebounded in the way that I hoped they would. So I just think it was appropriate action based upon a continued focus on us in terms of data and data analytics.
Rajat Gupta
15:15 Understood. So do we expect margins to move back higher here going forward? Obviously, like there other governors around like used car pricing and term factors that are probably not in your control, but maybe like if you could help us understand like where do we expect those used car GPUs to settle relative to what they were pre-pandemic?
Mike Manley
15:43 That already moved up as a result of the actions we completed, but I wanted them to get done in the quarter. So, they’ve already moved up I think. When I think about GPUs even though we have seen some movement from pre-pandemic levels, the actual margin on the basis of sales prices remained relatively flat. But I expect as we bring additional efficiencies in the business in terms of the conversion of overall purchase of the used vehicle to get it [presses] (ph) ready for sale and the speed again to market, but there is actually opportunity to us to improve margins beyond what you saw pre-pandemic in use. So that piece is very much a focus internally and it talks to some of the things that I commented on in terms of some of the structural changes that we’re making. But the rule margin that you see reflected in the quarter was driven by exactly what I said it was a — really was a realignment of some inventory that was completed in the quarter regards of delivering margins that much better and heading in the right direction, but as I mentioned, I still think there is even further upside. Thank you.
Rajat Gupta
16:44 Got it, got it. Great, thanks for the color. And maybe you mentioned last quarter that you have a captive finco in your mind that you plan to maybe build at some point, curious like if your thoughts on that have evolved at all over the last couple of months. Where are you in that planning process? When could we expect to see that? And maybe, like if you could comment on like just a broader auto lending environment today. Is there any stress that you’re seeing in terms of ability — just ability for lenders to pass on some of the interest rate increases all that we’re seeing on the benchmark side? Just maybe if you could frame that as well along with just updated thoughts on the captive?
Mike Manley
17:42 Yes. Well, let me say if my thoughts evolved on the may trust out of captive think and no, but they’re certainly solidified. I view it as an important piece of the business for us going forward for our AutoNation USA stores. I think when I think about our business, one of the reasons why I wanted to slightly restructure it was to enable us to put in place the tools that AutoNation USA needs to be successful going forward. Obviously, on the franchise side, we have relationships with our OEMs and that’s slightly important, but we have a business that is in a growth phase, it will continue to grow. It’s proven that the model is working. And it means in my view to have the flexibility at a time finco. That finco like most successful fincos will not be responsible for picking up the whole book. Naturally, you’re going to remain in partnerships with people that have been supportive during a period of growth before and I expect that to happen going forward. You will absolutely hear more on this subject as the year develops, but one of the things that we will do is I think the group has always done is not rush to purchase.
18:47 I think that there are opportunities in the market that may — that are interesting at this moment in time. And as we find what is the right opportunity and the Board agrees with that, we will make the appropriate move. In terms of our conversion rate on used, I can tell you it remained strong. At this moment in time, we are not seeing a drop off in terms of conversion. You can see from our CFS, our customer financial services performance that in fact that’s improving. It’s been a strength of ours and continues to be a strength of ours.
19:17 So, at this moment in time what I can tell you is, when I look at both the top level of inquiries and also some of the conversion rates by mix, we’re not really seeing any dramatic shift except in the sub, I would say $22,000 mark, where we are seeing a drop off of not [indiscernible] enquiries, but with the drop off of conversion and that’s more to do with inventory, as you know, that inventory is relatively tight across the industry and we’re seeing the same thing, but it’s been more than supplemented by an increase in plus $40,000 enquiries. So did that help [indiscernible] for you.
Rajat Gupta
19:58 Yes, absolutely. Thanks so much for all the color and good luck. I’ll get back in queue.
Mike Manley
20:06 Thank you.
Operator
20:08 Thank you. Our next question comes from Adam Jonas of Morgan Stanley. Adam, your line is now open.
Adam Jonas
20:17 Hey, Mike. Is there a precedent for OEMs to raise MSRPs intra-model year that you’ve seen?
Mike Manley
20:29 I have seen OEMs make, what I would call inflationary price adjustments during model years. It’s certainly something that I have seen on multiple occasions, they are typically in response to, as we see inflationary pressures in the marketplace, but some of those may not be a pure MSRPs, some maybe incentive adjustments and certain things change in the marketplace. So that is not unprecedented in my view in my experience.
Adam Jonas
21:04 Thanks, Mike. Another one on Ford and Jim Farley, I believe you have 42 Ford stores. I hear Ford made some comments in February saying and I’m kind of paraphrasing here, Mike, bear with me that dealers that would charge significant mark-ups on the lightning won’t be allocated. Now, I’m not a lawyer, but that sounds like getting close to different franchisement talk. Is he able to — is that legal or is Ford actually able to do unallocate someone that charges over MSRP for product in the current franchise agreement?
Mike Manley
21:43 What I would say is that and I’m not an attorney, so I’m going to give you my view. What I would say is that there are mechanisms, and this is in the Ford thing by the way. And I would tell you that Jim’s sentiment in this area is probably going to be echoed by most of the OMEs. What I can tell you is that the OEMs in the current franchise agreement need to treat their dealers, whether it’s a large group of individuals broadly in the similar manner that’s keeping the state franchise growth. Now having said the LBS, which that was obviously there are mechanisms that OEMs want to undo employees try and make sure that the value they perceive in their vehicles pass onto their customers. So, Jim is reacting to a huge amount of demand for lightning, which is in the marketplace and as you know that now shut off reservations for that vehicle. And what he is trying to do, which I think is reasonable, is to make sure the vehicle is the market at a price point that is supportive of the brand of the F-150 and there are many ways that he can — many ways he can influence that and a lot of those ways are within the franchise regulations, some of which may be outside, but there are a lot within.
Adam Jonas
23:01 Okay, Mike. If I can just squeeze in one more please, appreciate it. Agency model, it seems like from my perspective that seems like a good development for a company like AutoNation, kind of, just like you focus on the areas where you are — have greater capability and where you win on service and efficiency. I would love your thoughts on that at a high level, am I wrong that if we are in some secure way ending up in some kind of fixed commission and/or fixed percentage or whatever. But that’s not necessarily a bad thing. I know there’s a lot of details there but love your thoughts high level. Thanks.
Mike Manley
23:40 Yes, no problem. So you can say whatever words you want, I think whether you call it an agency or whether the dealership agreement or dealer agreement. One of the things that in my mind is absolutely certain as we move forward is that there needs to be a much less friction in the sales process than is historically been and it needs to be more price transparency. And I think that the reset that we have been through over the last two years is a good opportunity, particularly with the transition to new power trains to make sure that, that continues in the marketplace.
24:12 And for me what we’ve recognized is that there is opportunity to remove cost from the distribution channel and there is opportunity for us to encourage customers to maybe pre-order more than they’ve done in the past, which also add some efficiency. I think given the increased price of electric power trains and that should be passed on to the customer to make sure that this transition is as smooth as possible and AutoNation will be a part of that. And that means reasonable margins for the work that we do and it means we’ll continue to compete as a customer-focused business. So, in principle, I’m agreeing with what you said. I just don’t particularly want to label an agency model or anything else because frankly I think is good business.
Adam Jonas
24:54 Appreciate it, Mike. Thanks.
Operator
24:58 Thank you. Our next question comes from John Murphy of Bank of America. John, your line is now open.
John Murphy
25:06 Good morning, Mike. Maybe just to follow-up on the pricing and maybe the more important question is, are you seeing OEMs increase invoice pricing to you. I mean, MSRP is a suggested price in the market, but what you get charge of the invoice. So it seems like that might be more important thing to focus on, because they are looking at the gross that you’re making and you make it big gross on new, so is there any increase there to maybe kind of claw back some of that and share a little bit in this, the wealth on the GPU a little bit more?
Mike Manley
25:42 So, John, I apologize. We have 30 brands. I’m going to have to talk a little bit more general and if you want to circle back with this feel free to do so. Yes, when OEMs might be interim and Adam asked the question interim model year changes that do really to inflationary pressures typically in the past that results obviously in an increase to us, so they don’t get any benefit from it and ultimately therefore portion that gets passed into the marketplace. It’s interesting, I think, because what was actually happening today is vehicle have been sold to MSRP and the margins that we are getting are as a result of vehicles being sold to MSRP, I thought that fundamentally that was the business model we supposed to be achieving, and I never was able to achieve it as a CEO of an OEM for all those the reasons partly, because the levels of inventory that were in that retail network have to be turned and they have to be turned in the fashion that meant heavy discounting. We’re not in that position anymore.
26:40 But last time I looked, many OEMs were also benefiting from improvement in terms of their margin and I think that’s, I think, frankly, that’s going to continue. So if you want more specific details then feel free, as I mentioned, to reach out to us. But if I look generally our new car pricing now, our new car pricing is AutoNation, the quarter is very stable, very stable. So I, in fact, saw a downward in terms of our average price on new vehicles, which was driven by mix, not driven by incentives or further discounting. So I think we’ve now seen the level of stability in new car pricing that we didn’t have through the early part of last year. So obviously the year-over-year comps quite large at this moment in time. But as we get into the second half, you’re going to see and stabilize down significantly.
John Murphy
27:36 Yes, I’m sorry, Mike. Maybe just to be clear, I mean, right, I mean your growth is a function of what you charge the consumer less your invoice price from the automaker that you’re charged net of any, kind of, floor planed financing assistance. So I’m just curious, have you seen any actions by automakers on the pricing to you on invoice that would change that it seems like to increase relative to the MSRP, meaning are they narrowing the gap between MSRP and the invoice they charge you, right? The MSRP is what’s in the market, invoice what charged to you? I’m just curious, is there a change in that gap?
Mike Manley
28:10 Now, I understand your question, John. So [Multiple Speakers]
John Murphy
28:19 Okay. Yes, second question and because I can only do simple math, let’s just think about this in simple terms. I mean, the buybacks basically improve your EPS by 5.4% in the quarter, if you look at the 66% versus a 62.6% from the fourth quarter to the first quarter. And if you kind of drew a linear sort of math on that, that would be equivalent of view acquiring 18.3 franchises or $1.4 billion in revenue in the quarter, obviously, it’s a similar PE about 5 times where your stock is trading right now. I mean, it just seems like buying back your stock all day long makes so much more sense making any acquisitions and you bought back at roughly 109 bucks on average through the quarter. You’re below that now.
29:04 Do you just stay very aggressive or I mean not aggressive, I mean, is it balance, right, it’s the right thing to do on buying back your stock and not making new vehicle acquisitions and then pressing the used growth. I’m just, as it seems like the exact right strategy and you’re executing on it, if you comp it versus what the splashy announcements were made on the acquisition side by some other competitors with smaller networks just seems like you’re having a much bigger impact in immediate return on your earnings per share structurally over time.
Mike Manley
29:38 Yes, I think as we’ve seen over the last 24-months and we’ll continue to say the way that people are valuing companies is changing and will continue to change, but the math that you did broadly was right with the exception of one thing and that is that some of the acquisitions that we’re looking at and frankly are pursuing will give us I think a multiple higher than the historical business has been able to generate, because our industry is going to change. And with that change is going to come opportunities that frankly will be more under our control as a retailer than we’ve been in the past and bring more incremental benefits to our shareholders in terms of value.
30:18 But one of the things that AutoNation has done is, I think they have not — there has been a strategy to try and maximize the benefit to the shareholders where capital has been and certainly in the first quarter with everything that was going on and the fact that we are reviewing and have reviewed some of our strategic priorities it was best for us to maintain that activity and you’ve seen the results come through, but that doesn’t mean to say there aren’t attractive acquisition opportunities for us, there are, and as the year goes through you’ll hopefully see some.
John Murphy
30:49 And then just last on AutoNation USA stores 130 by 2026. I mean, you’re making good progress there. It seems like the business is working well. Why is 130 the right number? Could it be significantly higher?
Mike Manley
31:05 Yes, I think [indiscernible] that it was done, it was really looking at two things, one was, which are the most attractive markets that we are not necessarily in with our existing footprint and by that I’m talking about franchise business as well. And then the second thing was — has the group is thinking about its capital allocation what would be a reasonable allocation of capital over that period. I can tell you that our thoughts on that have continue to mature, partly because as they were putting and we can now, obviously we put in AutoNation USA stores, the model has been tweaked to make more efficient and so today the AutoNation USA stores slightly different than the past.
31:42 And secondly, I also think about these stores, not just purely as a place where used cars are sold. These stores in the future can do many other things for us, so that 130 is our baseline today. It may will grow and we might get more aggressive for other reasons.
John Murphy
31:58 Okay. Very helpful. Thank you so much.
Operator
32:03 Thank you. Our next question comes from Bret Jordan of Jefferies. Bret, your line is now open.
Ethan Huntley
32:10 Hey, good morning. This is Ethan Huntley on for Bret. Thanks for taking our questions. Maybe just going back here to supply and maybe the cadence of supply, I know new inventory sort of came down to eight days from nine and used to 30 from 40. But can you maybe just provide a little bit of color on sort of the cadence of supply and whether things might have improved at all or would you sort of bouncing along the bottom here?
Mike Manley
32:40 Frankly, I think what we are doing is bouncing along the bottom, but I don’t think is just — as you said, one of the things that I wanted to do with our team to increase our turn rate. It’s — and we’ve been able to do that and I think that’s why you’ve seen days of supply really level out. What’s been interesting for me as we’ve come into this year, obviously none of this could really foresee the ongoing impacts of things that happening around the world and they are going to have impact on people’s original plans in terms of their production levels. But what I do know is, given this market, it’s a key market for all of the OEMs and I do know that the intent is there to improve as soon as possible. From my point of view, you’re not really going to see anything until the third or fourth quarter, but I know you’re asking individual OEMs. So, our focus is let’s sell more aggressively up the pipeline, which is a new scale for the industry in the U.S. and let’s make sure we’re turning the inventory as fast as possible when it lands and they’re two key things that are in our control and they’re the things we’re focused on.
Ethan Huntley
33:50 Okay, great. That’s helpful. Thank you. And then maybe just here on the floor plan. Did floor plan subsidies exceed expenses for the quarter?
Mike Manley
34:02 I can give you my gut of that reaction, but Joe is just double checking and make sure we don’t give you the wrong data point. It did slightly.
Joe Lower
34:13 It did slightly, I mean, obviously now floor plan is relatively low from an expense perspective, because obviously you can see by the days turn that our actual expenses relatively modest, but incentives have also come down marginally for the same reasons.
Mike Manley
34:31 Thanks, Joe.
Ethan Huntley
34:34 Okay, thank you. And then just sort of lastly here on the service category, a 15.5% comp was solid there, can you just sort of help break out the difference in traffic versus average ticket?
Mike Manley
34:52 Yes. Can you just give it more specifically question please, Ethan.
Ethan Huntley
35:00 Sorry.
Mike Manley
35:02 Could you be more specific with your question. You are asking me through our service departments how is that changing and growing, what is specifically you’re looking for?
Ethan Huntley
35:12 Yes, just in the service category, did you see the comp of 15.5% was that primarily driven through inflationary pricing and increased prices or is it a pickup in sort of traffic?
Mike Manley
35:26 We are seeing two dynamics there. Firstly, we have seen an improvement in traffic from a customer perspective and an improvement in internal work slightly offset by a decrease in warranty, because obviously the vehicle — new vehicle already is dropping. But it’s been more than offset by an increase in consumer both volume and a slight increase in per ticket and internal work as I used volume increases.
Ethan Huntley
35:54 Okay, great. Thank you very much.
Operator
35:58 Thank you. Our next question comes from Stephanie Moore of Truist. Stephanie, your line is now open.
Stephanie Moore
36:07 Hi, good morning. I wanted to touch on the new vehicle side of your business and maybe you can speak to, if you’re seeing any change in the consumer profile of your new vehicle buyer, either from a credit quality standpoint or median average income and kind of thinking forward as we go through what it could be a potential recessionary environment certainly a rising interest rate environment, how you think your new vehicle business positioned now versus prior cycle. Thank you.
Mike Manley
36:41 No, I’m not seeing any foreseeable change in terms of the profile of customers coming through new vehicles. In fact, if you look at the traffic both coming through our digital — all of our web pages, as well as looking into our stores it is in fact up and continues to grow year-over-year. Our conversion rates obviously with the level of inventory and the demand that we’ve got remaining strong. So outside of that is difficult, because of the environment that we’re in to really pinpoint if there is something underlying that’s happening.
37:14 In terms of where I think new vehicles going forward, if you looked at the SAAR in the first three months of this year, it’s bouncing around $13 million, $14 million and typically those numbers would have been associated with the recessionary period obviously. So even if you see us because of economic conditions, consumer confidence, whatever, see a reduction in that demand. I think the levels that we’re at now would still be maintained going forward, because as I said they historically more associated with periods of recession and where we sit right at this moment in time.
Stephanie Moore
37:57 Got it. So I guess maybe said another way, given the rise we’ve seen in just new vehicle MSRPs, are you seeing affordability issue with the average consumer? Or do you find that they’re trading up for the benefits of the vehicle? Or do you think it’s more of a shift to the used market, I guess, the angle I’m looking for.
Mike Manley
38:18 Okay. Well, I try and give you an angle on the answer then. If you look at the increase in used vehicle wholesale prices and the increase in new vehicle prices, the gap between them actually narrowed over the period of last year. So that’s a theoretical cost to change, in my mind. So if you were trading in vehicle then your position really has been not materially impacted by rising prices, because you’ve got it on both sides that obviously doesn’t apply to people that are buying a vehicle for the first time in the marketplace. Outside of that, I can’t really give you much color, because our turn rates are so high is difficult to see what may be a slight movement in terms of affordability, because we frankly have customers for basically everything is coming.
Stephanie Moore
39:02 Got it. No, that makes sense. I appreciate it. Thank you.
Operator
39:07 Thank you. Our next question comes from Colin Langan from Wells Fargo. Colin, your line is now open.
Colin Langan
39:16 Great, thanks for taking my questions. Just wanted to follow-up on the finco, I thought in your comments you said something you’re in no rush to purchase. I mean is the plan to acquire a finco or is this something about, or are there thoughts to really more do it organically?
Mike Manley
39:35 From my perspective if there is the right target in the marketplace that would be by far my preferred route to do it.
Colin Langan
39:48 Got it, okay. And then you also — in your intro comments talking about costs and SG&A was quite low in the quarter. Are there any notable actions that we should be aware of that are going to drive that structural cost? I mean, we’re really are some of the key drivers that you’re kind of getting at in terms of structural cost coming down coming out of this crisis?
Joe Lower
40:10 Yes, I’ll address that it’s really saying, we’ve talked about in the past. It starts with really starting to leverage the digital capabilities we have both in the sales and stores operations, as well as the back office. So you go back to the beginning 2020, I mean, we’re 13% down on headcount on a same store basis, right? That is continue to kind of drive through the operations. Our digital tools have allowed us to be more efficient in advertising. And so these are — in my perspective, structural changes we’ve made that have reduced, if you will, the fixed across cost structure of the business, which we’re maintaining the discipline going forward. So we expect that we will continue to have a much more favorable SG&A as a percentage of gross going forward by maintaining that discipline and ensuring that we continue to leverage the tools most effectively and we continue to invest in those tools to make sure that they’re state of the art.
Colin Langan
41:09 Great. All right. Thanks for taking my question.
Operator
41:13 Thank you. [Operator Instructions] Our next question comes from David Whiston of Morningstar. David, your line is now open.
David Whiston
41:27 Thanks, good morning. First on the USA stores, as you go into new metro areas from a marketing perspective, how are you introducing the stores in the brand to consumers? Is it mostly Internet or radio or TV?
Mike Manley
41:44 Frankly, it’s a combination of all of the above. I think what Joe didn’t touch on is one of the efficiencies that Mark Cannon and his team has been able to generate is the way that they are communicating in the use of different media channels and I think that, that typically what we would do is really use the data that’s available to see how the demographic that we’re targeting in that particular area is consuming information and then just basically built an optimum plan to try and make sure that we hit communication goals and marketing those in the timeframe that we need to launch and he does that individually by each and every market even though there’s obviously a lot of commonality and then effectively runs it out.
David Whiston
42:33 And on SG&A, if we were to have a recession later, obviously a lot was already cut in 2020 other than reducing advertising in a downturn, are you guys already close to the bone or do you think there is more cuts you could come up with, if you had to?
Joe Lower
42:52 We are continually evaluating the cost structure and we have a number of initiatives underway to continue to operate the stores more efficiently. So we today have a large share service center in Dallas. We continue to look at ways to optimize that and make our stores more and more efficient and that is an ongoing journey that will have ongoing benefit. So the answer is I don’t like to think cut into the bone. I’d like to think about optimizing the organization and that’s clearly something we see additional opportunity going forward.
David Whiston
43:24 Okay. And finally on with inflation perhaps sticking around short-term or even long-term, if there were to be a longer term problem, would that change your M&A strategy at all in terms of would you want to be more towards volume brands due to lower prices or more — focus more on the premium side because those customers perhaps aren’t as bothered by inflation.
Mike Manley
43:50 Well, I mean, frankly, we’re in a cyclical business, right? So obviously for me I like the blend that we have in terms of brands. I think it’s a really good blend particularly when I think through the plan for the individual OEMs are put in place because ultimately the product that they are working on today really is going to dictate the success on the new car side of the business going forward and that are reviewed now across many of our OEMs and product lines. Firstly, I am encouraged by the level of investment has been made. And secondly, it doesn’t really change my view on the balance that we have in our portfolio today. I think it just reinforces. We have a good balance.
David Whiston
44:32 Okay, thank you.
Operator
44:35 Thank you. There are no further questions at this time. Mr. Manley, I turn the call back over to you.
Mike Manley
44:43 Thank you. Again, thanks for being on the call today. As I said before, I think it’s good that the momentum that we have finishing of last year continued into the first quarter. I really just end by saying and we touched on it in some of the questions as well, I think that there are a number of changes that have been structurally made to the group that will continue to be in place, but for me will make us more efficient I think the focus on cost that we discussed with Joe in answers to the question will continue going forward. And I look forward to seeing our Q2 ends for us and hopefully you’ll be on call in a few months’ time. So thank you for your time this morning.
Operator
45:22 Thank you for joining today’s conference call. You may now disconnect.
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