Asbury Automotive Group Inc. anticipates offering in-house finance and insurance products from new subsidiary Total Care Auto within three years, CEO David Hult said.
"We see this as game-changing," he said.
Asbury would have liked to have sold its own F&I products years ago, Hult said, but the business would have presented an accounting challenge to the publicly traded dealership group.
Instead, it will acquire and incorporate Larry H. Miller Dealerships' longtime in-house F&I products company as part of its $3.2 billion deal for the retail group.
Total Care Auto "is a part of the fabric" of the Larry H. Miller group and an "extremely well-run business" that generates large margins, Hult said. It produces about $240 million in revenue, has about 2 million contracts open and delivers EBITDA margins of more than 20 percent, Asbury said in announcing the deal Sept. 29. In some cases, Hult said, Total Care Auto's margins can exceed 30 percent.
Scaling the subsidiary at Asbury "really puts a nice business model together for us and really stabilizes our organization," Hult said.
F&I departments have in general become more lucrative for dealership groups, according to a Seaport Research Partners report this week.
"The continued unrelenting growth of F&I revenue (well beyond what many investors believed was possible) has essentially offset the secular compression in new and used vehicle margins such that 'front-end yields' have remained relatively stable," senior analyst Glenn Chin wrote.
At the time of the deal announcement, Larry H. Miller Dealerships had 54 franchised stores and seven used-only rooftops; Asbury had 91 facilities.
Asbury, of Duluth, Ga., ranks No. 6 on Automotive News' most recent list of the top 150 dealership groups based in the U.S., with retail sales of 95,165 new vehicles in 2020. Larry H. Miller Dealerships, of Sandy, Utah, ranks eighth, with retail sales of 61,097 new vehicles last year.
"This lucrative business spreading across all of Asbury should help boost earnings and EBIT margin over time," David Whiston of Morningstar wrote in a report last week.
Asbury CFO Michael Welch on Monday described bringing Total Care Auto to the Asbury stores as "probably a two- or three-year rollout." Spreading out the project would minimize the accounting grief — revenue from an F&I product sale is recorded over the life of the contract, not immediately — and Asbury will need time to scale the Total Care Auto business itself, he said.
Analysts last week said rolling out Total Care Auto's F&I products gradually made sense from a risk management perspective. Similar to traditional auto insurance, an F&I contract imposes the risk that the provider will have to pay a claim someday.
But the deal changes the nature of that risk for Asbury. If a customer files a claim on an F&I product such as a vehicle service contract, Asbury will very likely find itself paying one of its own service centers to complete the work. It's more of a wash than a liability.
In 90 percent of Total Care Auto's claims, the customer has brought their vehicle in for work at a Larry H. Miller facility.
"We really see the opportunity to grow service retention," Hult said.
As Hult described it, the transition from Asbury's existing F&I products provider would proceed fairly smoothly. "It's just timing," he said.
The contract was coming due anyway, and Asbury has talked to the provider about restructuring.
"Coincidentally, it just happened to work out that way," Hult said of the timing. And as the Total Auto Care rollout will take up to three years, "we'll certainly have a long relationship with a good partner."
Products represent one part of a dealership's F&I revenue stream. Interest from vehicle financing is the other key element.
That also could be brought in-house with an Asbury captive finance company, something that Hult expressed interest in during the August JPMorgan Auto Conference.
"It's fair to say that we're interested in learning more about it and understanding it," Hult said.
However, of the two F&I revenue streams, "the insurance business is far less risk," he said.
Asbury had been at an early stage of exploring the captive finance idea, according to Hult. Now that it has a large transaction to digest, "we'll put that on the shelf a bit."
Asbury averaged $1,775 in net same-store F&I profit per vehicle last year, a 7 percent increase over 2019. For comparison, the $1,775 figure is a 77 percent increase over the $1,003 in 2010. Overall, F&I represented 4.3 percent of Asbury's revenue but 24.9 percent of its gross profit in 2020. In 2010, the group reported deriving only 3 percent of revenue and 17.9 percent of gross profit from F&I.