Good morning, ladies and gentlemen. Welcome to Group 1 Automotive's 2022 Third Quarter Financial Results Conference Call. Please be advised that this call is being recorded. I'd now like to turn the call over to Mr. Pete DeLongchamps, Group 1's Senior Vice President of Manufacturer Relations, Financial Services and Public Affairs. Please go ahead, Mr. DeLongchamps.

Thank you, Anthony, and good morning, everyone, and welcome to today's call. The earnings release we issued this morning and a related slide presentation that include reconciliations related to the adjusted results we will refer to on this call for comparison purposes have been posted to Group 1's website. Before we begin, I'd like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures. Except for historical information mentioned during the conference call, statements made by management of Group 1 Automotive are forward-looking statements that are pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve both known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Those risks include, but are not limited to, risks associated with pricing, volume, inventory supply due to increased customer demand and reduced manufacturing production levels due to component shortages, conditions of markets and adverse developments in the global economy as well as the public health prices related to the COVID-19 virus, and resulting impacts on the demand for new and used vehicles, and related services. Those and other risks are described in the company's filings with the Securities and Exchange Commission. In addition, certain non-GAAP financial measures, as defined under SEC rules, may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on its website. Participating with me today on the call Earl Hesterberg, our Chief Executive Officer; Daryl Kenningham, President and Chief Operating Officer; and Daniel McHenry, Senior Vice President and Chief Financial Officer. I'll now hand the call over to Earl.

Thank you, Pete, and good morning, everyone. I'm pleased to report that for the quarter, Group 1 generated adjusted net income of $188 million from continuing operations. This equates to adjusted earnings per share of $12 per diluted share, an increase of 27% over the prior year and ties to the previous quarter for our all-time best quarterly earnings per share result. Our adjusted results exclude non-core items totaling $9 million of after-tax gains, which primarily resulted from the sale of the dealership franchise in real estate during the quarter. These results were largely due to continued strong new vehicle margins that were able to more than offset weak supply, continued double-digit same-store growth in our Aftersales business, significant contributions from our recent acquisitions and record profitability from our UK region. One of the challenges we faced in the US in the quarter was a decline in industry used vehicle price levels. This required quick action by our team to rapidly sell-through our existing inventory, so we could restock at latest market price levels. This action enabled us to slightly increase sales in a market which declined double-digits. However, our used vehicle margins declined sequentially from roughly $1,900 a unit in the second quarter to roughly $1,600 in the third quarter. Our ongoing used vehicle stocking level of approximately 30 days supply enables us to react very quickly to market changes of this nature. Consumer demand in the UK remains steady and new vehicle availability is still constrained. Our new vehicle order bank remains at nearly 17,000 units, which is consistent with the end of June and represents more than a six-month backlog based on our 2022 sales pace. As a reminder, our UK business mix is predominantly luxury brands, and those consumers are more resilient during times of economic uncertainty. We continue to believe that pent-up demand built over the past several years due to both Brexit and the very strict pandemic lockdowns, will help drive strong UK vehicle demand well into 2023. We're also seeing continued strength in the state of Texas. Market once again collectively outperformed our total US same-store growth in new vehicle sales, used vehicle sales, after sales and net profitability. Texas demographic trends continue to be a positive tailwind for the company due to population growth, reasonable cost of living, low taxes, and a friendly business environment. We believe our geographic exposure is both a near-term and longer-term advantage for our company and shareholders. Finally, our company-wide after sales performance continues to be a key profit driver. We delivered over 10% consolidated same-store gross profit growth on a local currency basis, which is even more impressive given the tough double-digit growth comps from last year's consolidated results. Our after sales initiatives and recruiting efforts continue to drive outsized growth in this segment. To provide some color on our US second quarter performance, I'll now turn the call over to Daryl Kenningham.

Thank you, Earl, and good morning, everyone. As of September 30, we had 5,000 US new vehicle units in stock. That represents a 15-day supply, a slight increase from June. Inventory increases mainly in our domestic brands and import brands remain very constrained. As a reminder, 30% of our US business is Toyota and Lexus, which continues to be very tight at a combined 5-day supply. Despite fewer new car sales in the quarter versus a year ago, our same-store used retail sales increased 2% in an industry that was down 12%. Our organic sourcing efforts continued successfully during the quarter, including 10,300 vehicles acquired from individuals through AcceleRide. As a franchise dealer, we also have a distinct advantage over used on the operators due to our numerous organic sourcing channels available only to us, including our service drives, the lease returns, OEM closed auctions. Although the quarter preserved a challenging used vehicle pricing environment, we maintained our discipline with a 31-day supply of used inventory. As Earl mentioned, this allowed us to quickly rebase our inventories at current market prices. Our US after sales performance was outstanding once again, generating double-digit same-store gross profit growth, despite facing mid-teen growth comps from a year ago. For our technician recruiting and retention efforts, we increased our same-store technician headcount by 14% versus the third quarter of 2021. Following a very strong 2021, our customer pay business generated 11% same-store revenue growth compared to a year ago, and their collision revenues increased 21%. We foresee our aftersales business continuing to be a strength over the course of 2022 and into 2023. Our F&I business was up $174 per retail unit retail in the quarter. We're seeing improved product trend penetrations nearly across the board. We continue to maintain cost discipline, despite the normalization of used vehicle margins. Our third quarter adjusted SG&A as a percentage of gross profit was 60.6%, an increase of roughly 1 percentage point over the first half of 2022 and down from over 70% in the pre-pandemic third quarter of 2019. And lastly, I'm happy to say that our customers continued to vote yes on Acceleride. We sold an all-time record 7600 vehicles through Acceleride in the second quarter, in the first quarter 11% of our US retail sales, also an all-time record. Just as important is that 74% of our customers used Acceleride in their transaction in some way in the month of September. We're also looking forward to our full integration of Acceleride with our DMS, CRM and credit software. We continue to test it in several dealerships and expect a full rollout in the months ahead. Our early results are very positive, and we expect this will provide faster and more transparent transactions for our customers. I'll now turn the call over to our CFO, Daniel McHenry, to provide a balance sheet and liquidity review. Daniel?

Thank you, Darryl, and good morning, everyone. As of September 30, we had $21 million of cash on hand and another $218 million invested in our floor plan offset accounts, bringing total cash liquidity to $239 million. We also had $551 million available to borrow on our acquisition line, bringing total immediate available liquidity to $790 million. Through the first nine months of 2022, we generated $730 million of adjusted operating cash flow and $647 million of free cash flow after backing out $83 million of CapEx. This capital was deployed through a combination of acquisitions, share repurchases and dividends. This year-to-date, we have spent $460 million, repurchasing nearly 2.7 million shares at an average price of $171.1 and over the last 12 months, we have repurchased 20% of our share float. Our share count as of today is approximately $14.6 million. This significant repurchase activity in addition to the acquisition of over $2.5 billion in revenues over the last 12 months illustrates our commitment to accretive capital allocation. Our rent-adjusted leverage ratio as defined by our US syndicated credit facility was 1.8 times at the end of September. Our strong balance sheet will continue to allow meaningful and balanced capital deployment. Finally, related to interest expense, our quarterly floor plan interest of $6.5 million was an increase of $2.2 million from the prior year, due to both higher vehicle inventory holdings and interest rates. Non-floor plan interest expense increased by $6.5 million from the prior year, primarily due to the debt raised in conjunction with the Prime acquisition. As a reminder, the majority of our debt has been fixed through interest rate swaps. As of September 30, 77% of our $2.7 billion in floorplan and other debt was fixed. Therefore, the go-forward annual impact to EPS is only $0.32 for every 100 basis point increase in the secured overnight funding rate or SOFR which is the benchmark rates referenced in our floorplan and mortgage debt instruments. For additional detail regarding our financial condition, please refer to the schedules of additional information attached to the news release as well as the investor presentation posted on our website. I will now turn the call back over to Earl.

Thank you, Daniel. In 2022, we have continued our focus on high-quality external growth actions with the purchase of six dealerships that are expected to generate $740 million of annual revenues. These dealerships add to our existing scale in the Austin, Albuquerque and Shreveport markets in the US and the South end market in the UK. Growing our US and UK businesses remains our top capital allocation priority. However, our balance sheet cash flow generation and leverage position will continue to support a flexible capital allocation approach, which will likely include further share repurchases in addition to the 20% of our outstanding shares we have repurchased over the last year. This concludes our prepared remarks. I'll now turn the call over to the operator to begin the question-and-answer session. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Daniel Imbro with Stephens. You may now go ahead.

Yes. Hi, good morning, guys. Thanks for taking my questions. My first question was sort of the new side of the business. Obviously, days inventory is very steady. You talked about a forward order book of demand here. What does that look like compared to a few months ago, if I think about how much of your inventory is maybe pre-sold here in the US? And then thinking about seasonality on the new side, typically, GPUs step up in the fourth quarter. I'd say now is anything but normal, but how should we think about that seasonality playing out in this environment in light of the order book that you're seeing today? A – Daryl Kenningham: Daniel, I'm going to -- this is Daryl. I will take the US side of that, and then Earl will speak to the UK side of that question. In the US, start with the end first. The OEMs are optimistic about the fourth quarter with the inventories that are up a little bit, especially in certain brands. I believe we'll see some of that materialize, I really will. Some of the supply chain issues that the industry over the last 1.5 years or so, a lot of those are behind us. We're seeing smoother flow of vehicles, and that will impact the fourth quarter positive way and in -- and we're still tracking under a 12 million unit retail SAAR in the US. So there's still plenty of demand. When we look at our pre-solds in the US, they are about even with where they were in the second quarter. And so, we feel like there's still plenty of -- plenty demand there. And in the UK, as we mentioned in the script, we had no material change to our new vehicle order bank, which is somewhere around 17,000 units. And in the last two or three quarters, we're just retailing a little over 7,000 units per quarter. So you can see that's a healthy backlog. And what we're seeing in the UK that supports the continuation of that is a wave of new models, particularly from the luxury brands we represent that are either plug-in hybrid or battery electric vehicles. And there's a dynamic in the UK market that really stimulates further new vehicle purchases, because of the tax scheme that supports plug-in hybrid, battery electric or alternative fuel vehicles. And big part of the UK market, we would call fleet in the US, but it's really company cars and it's known as a user chooser market. And the people who drive these vehicles, although their company pays for the vehicle itself, these individuals who drive, they pay the tax. And over time, it's going to be more and more advantageous for them to buy new vehicles with either battery electric or plug-in hybrid technology. So we're seeing that, as it continues to refill our order bank.

And, Daryl, did I miss it, did you mention the seasonality GPUs, like, regular seasonality would say, things improve. But, obviously, sound like production is going to improve. So would you guys assume new GPU maybe sets down a bit in the fourth quarter, just given that comment on volume?

Hey. It's hard for me. I haven't predicted GPUs correctly and I hate to draw a guess. But I do know this of the things that we believe in and we see every day is, relationship with our captives, they will support a lot of business.

That makes sense. And for my follow-up question, I want to ask on AcceleRide. Specifically curious, as you continue to scale it and we see penetration jump, do you see usage jump? What have you learned about the long-term cost saving opportunities? Is it more than you thought it might be? Is it less? Just trying to understand, as more of the consumer does this online and what does that mean for the long-term SG&A profile of the business?

Well, I believe, over time, what you see is a selling model that changes for customers and for -- maybe we staff our stores, schedule our teams, the type of people we hire and the skill sets. And – well, I think, there's definitely -- importantly, as a retail business, we've staffed to cover the hours that we’re open. In today's world, we're staffing more for the appointments that are set and driven through AcceleRide. And so, that has a big change on the way we will staff. And we're seeing the productivity improvements are holding, that we've seen since us AcceleRide and they continue to hold even as I start to increase. But, yes, I believe that we'll see a different staffing model moving forward. I think, it's not an overnight. It's not a light switch, but I do believe that it will evolve.

Daniel, its Daniel here. I think there's one thing that I would say in addition to what Daryl said. I think it will also help us having the integration of AcceleRide, our DMS and CRM and credit software all in one place as well. And I think that will give us further synergies once we roll out throughout our stores.

Our next question will go from Michael Ward with Benchmark. You may now go ahead.

Thanks. Good morning, everyone. I think two areas of your business that seem to be outpacing the rest of the market are the F&I and service? And just today, I think you're saying that your technician count is actually increasing. It sounds like you're getting a lot of retention. Somehow, they all seem to be connected. Can you talk about some of the things you've done over the last several years that's building on that and what it means going forward?

Mike, this is Daryl. I'll speak to service. Pete will speak to F&I. Service, we firmly believe we have to be -- philosophically have to be available when our customers want to do business with us. So we try not to limit our schedules in our shops. We try to be open as much as possible and have as many appointment slots as available as possible. That's different than some of our competitors. Some of our competitors will limit appointments slot. We don't like to do that at all. Second thing is we have several retention programs in place for technicians. Some of them are recruiting based mental programs. We ensure that our pay is at or above market with our technicians and that's strategically one of the most important things we can do to be successful in after sales moving forward. And what we've seen over the last few years is human capacity will drive your volume, and we can provide customers with a reason that come into our stores. But if we don't have people to work on the cars, that doesn't -- that's where a lot of our focus and emphasis is. And you know all about our four day work week in that scheduling process and then using more and more technology to try to drive efficiency in our shops as well. It's offering a very high level…

Mike, on the F&I, we're very pleased with the -- as we continue to improve on our processes. The fact that we increased $17 for the quarter and $218 same-store, so it continues to be a process improvement, and we're very pleased with how our product penetration rates have increased. And we have not seen any headwinds with lending whatsoever. So we're bullish moving forward on the F&I business.

As you make -- as you integrate these different acquisitions, how fast can they come on to the GPI system, whether it's AcceleRide or your call center? I mean, how fast are they brought in? And are they able to see a pretty quick improvement in service revenue?

Mike, Daryl. We try to integrate them as quickly as possible on all of our technology, our phone systems, AccelRide on everything we do. Sometimes we pace that out a little bit just depending on if the DMS has to change because that's a huge change in a store. If the DMS has to change, we might take, say, a month or two to do that. But generally, we try to get them on as quickly as possible.

Our next question will come from John Murphy with Bank of America. You may now go ahead.

Good morning guys. Just a first question for you, Earl. Is this the last conference call, you're going to be doing as CEO, I believe?

Yes by popular demand, it will be the last one I'm doing. It's my 70th and final one. Yes, John.

Well, congratulations for a very long, great run in at Group 1 and the industry, and Darryl you've had a great run, but we’re expecting a lot more. So congratulations to you, too. I hope that doesn't count against my question count here.

That was the easiest question I've ever had, John.

Yeah. Well, congratulations really. It's been a great run. On after sales, to follow-up on Mike's question. Daryl, as you think about capacity utilization, how do you think about that now and where you're at and where you ultimately can go? I mean, we know that the four-day work week has been very helpful. But I mean where are you and where do you think you can go in the service base?

Well, we have stores, John, where we have 10 service base and 17 or 18 technicians. And we have other stores one of stores in New England, I was at a couple of weeks ago. We have 29 service base and 45 technicians. And so we feel like while we may not be able to have that ratio at every store, we feel like we can definitely have more technicians than we have physical stall count, and it doesn't mean we won't invest in more brick-and-mortar for service capacity. Where we do see that need is especially in some acquisitions we do, we tend to see that the acquisitions are under built and after sales, especially for our taste. And so we will invest there. But we feel like there's more upside. And I would also say in the UK, I think I would tell you that we have a lot of upside in the UK.

Yeah. This is Earl. I do think, one of our big growth opportunities in the future, which Daryl is fully aware of, and he’s toured a lot of these shops with me in the UK is we are not yet at the same level of after sales sophistication in the UK than we are in the US in the brands we have there, such as Audi and BMW and Mercedes and Land Rover will really support a lot more service business for us if we can implement some of the general concepts that we've been able to implement in the US and after sales.

Okay. That's incredibly helpful. And just one follow-up on the F&I PVR. Can you give us a breakdown of the components of that 21, 25 because I think there's a lot of concern that rates might be rising and that's going to compress your F&I PVR or pricing might come down and that might compress F&I PVR. So I mean what are the major components of that 21, 25. So that we can understand what the risk or opportunity may ultimately be there?

Sure, John. This is Pete. About one-third of the business comes from origination of financing loans. The rest of it comes from product sales. So -- and it's been like that for a long time. So we're very happy with the equilibrium. But I think the key is to keep that one-third rate and the rest, the increases come from additional product penetration, we still got some room to run.

Our next question will come from Rajat Gupta with JPMorgan. You may now go ahead.

Great. Thanks for taking the question. Maybe just to address what the economy and there's really a lot of uncertainty around there. You've heard mixed commentary from private and public dealers underlying demand trends. Curious to get a take on how you're feeling about the health of the consumer in general underlying demand trends into the fourth quarter, maybe into next year as well. And maybe for planning purposes, if a doomsday scenario does turn out to be true and 2023 is a recessionary year. Are you able to give us a sense of -- or any bound reason on how we should think about the earnings power of the company? And what are the key variables that would go into those assumptions? And I have a follow-up. Thanks.

This is Earl. I'll kind of take the first shot at a bit of that. But we can't deny that on a broad basis, consumers are under pressure when there's inflation at this level in this type of economic turmoil. But the majority of our business is with higher income people, not just necessarily with luxury brand business, which dominates in the UK and is a big part of our US business. But when you look at the vehicles that OEMs are building and our average sales price, which is somewhere near $50,000 space, we are dealing with people who have the wherewithal to continue to buy vehicles even though the monthly payments are some significant amount above where they were two or three years ago. And this backlog of vehicles in both markets that we operate in, are generally pretty expensive vehicles. In addition, most of the used cars we sell tend to be at the higher end of the used car market, which is, let's say, three years old or younger. That's the business we're in. We're in a franchise business. And again, as Daryl mentioned, the affordability of a vehicle is generally a financing matter. And these captive credit companies of our major partners are very powerful. So, the combination of that and the cushion between the level of supply and demand is something that's going to give us some legs and clearly, there is some normalization that's going to occur and has a curve. We've seen normalization in used vehicle prices in both the US and the UK this year. And that's why we mentioned we had to be very responsive and reactive to flush those vehicles out of our system, which we're able to do, because we only have a 30-day supply. And that's one of the advantages of this business model as we can react. But nothing in the pace of normalization has surprised us. We have been prepared for it. We'll continue to be prepared for it. And our business is flexible enough or will continue to react. So, we don't have any big trepidation about next year or anything like that. Our core businesses such as aftersales and new vehicle sales are going to remain strong in the near term.

Rajat, it's Daniel here. There's a number of things that I would add to what Earl has to say. The core of our business is, our parts and service business. And if you look back to the '08 recession, the parts and service business contracted by far less than any other element of our business. It was kind of mid-single digits that is contracted. And I think that will sell us some good stay. Should there be a recession in 2023. As well as that, we've continued to grow our company with our capital allocation, either through share buybacks, that will help towards our continued EPS as well as growing the company by nearly $3 billion in revenues over the last 18 months. So I think a combination of that will help us weather any recession.

And let me just make one more point, if I might. Both of these markets we operate in, the UK and the US. In the UK, this is the third straight year of 1.6 million units of industry sales. This is a market that four or five years ago did 2.7 million units. So those are recession level sales that we've operated under three straight years. The U.S., we're running at, what, 13.3, 13.5. Historically, those are recession level sales. That's 2 million units below what you would normally expect, even in just kind of an average economy. So we have already been operating at recession-level new vehicle sales.

Got it. Maybe just before I ask the follow-up question. I also wanted to echo John's comments and congratulate both Earl and Darryl going forward. So just on SG&A, you -- in the past, you had mentioned 300 basis points of structural SG&A to gross reduction versus pre-pandemic when GPUs would revert to normal. Is that still a good framework to think about? You mentioned earlier that productivity is sustaining there are other back-end integrations happening around the DMS and the credit app. And some of your peers have also talked about a higher degree of permanent reduction. So I was curious to get your latest thoughts on that as well on what level of SG&A growth – for what level of SG&A growth should be a more normalized number when GPUs do go back to normal?

Sure, Rajat. It's Daniel. If you look at where we were pre-pandemic 2019, as a company as a whole, we were at 74% there about. In terms of where we are with our modeling at the moment, we don't ever see our SG&A subject to [indiscernible] recession or any kind of disaster going back to about 70%. We -- as of today, it's sitting in our early 60s. Clearly, as the margins move, it will be somewhere between the 6% and 7%.

[Operator Instructions] Our next question will come from Ali Faghri with Guggenheim. You may now go ahead.

Hi, everyone. Thanks for taking my question. So your new car GPU remained strong in the quarter. But I guess, are you seeing any signs of more meaningful GPU compression in maybe September or October? And then, I guess, as part of that, what's your expectation on when new GPUs will fully normalize one of your competitors reported last week and talked about new GPU likely to normalize by mid to late 2023. Curious your thoughts on that and if your view differs.

Ali, this is Daryl. You know, we're seeing some -- a little compression. Our results show that from quarter-to-quarter. When it will normalize? I don't know. It's -- I think the OEMs in general have more discipline on supply I believe that. And if -- the OEMs results are very good as well, their earnings are very high at these kind of production levels and so I think based on the model that works for them, as well. And so hopefully, the days of the distribution channels being stuffed are behind us. Even in the brands where we see a little higher days supply today than we did in the second quarter, they're still very reasonable, 20 days or something like that rather than six or seven. So that's terrific. And that gives customers a little more choice and helps us satisfy a need a little quicker than we've been able to. So we're pleased with that. And I can't forecast what quarter it might be or what month it might be. I don't know. I do believe that, the model works and they'll continue to try to drive this way.

Yeah. Let me see if I can add some color for you, at least on the US part of the business. We mentioned several times a pre-COVID Group 1 Automotive had 29,000 new vehicles in inventory. And we have been quoting for a year that we've had less than 4,000. And I think what Daryl told you today is yeah, we do have more vehicles now. We have 5,000. We have 5,000, not 29,000. We have 35 more dealerships at the moment than we had – we had 29,000. So maybe that gives you a frame of reference. Now 25% of our company is Toyota and Lexus and a week ago, I spoke with the General Manager of one of our biggest Toyota dealerships. Now pre-COVID this Toyota dealership had 1,000 new Toyotas on the ground at all times. I asked the person how many they had on the ground last week and the number was 7. And so – and I think Daryl mentioned we have a 5-day supply of Toyota and that's 25% of our company. So yes, there are some brands that will normalize more quickly than others, but we are not anywhere in the ballpark of pre-COVID inventory level.

That's really helpful color. And a follow-up, if I may. On the F&I side, so clearly remained strong in the third quarter, it sounds like you aren't seeing any real headwinds yet. But maybe you can talk about how much of the improvement in F&I per unit versus 2019 is structural versus cyclical? I think maybe put another way, what's your expectation for F&I per unit into 2023 as new and used car ATPs start to inevitably normalize and maybe vehicle affordability challenges caused consumers to purchase fewer insurance products?

First, I'm not sure if normalized on ATPs is going to really happen. When you think about the price of these cars and what the customers want on these cars with technology. So I don't think we're going to see headwinds there. And I do think this is structural. And I think that you look at the history of our performance with F&I, it's been very solid with an increase over the last 15 years. So we're – as I said earlier, we're bullish on the F&I business and as you model, I think that you can look at these levels that we have today and feel comfortable with them.

Great. Thanks for taking my questions. And Earl, congrats on the retirement and best of luck.

Thank you so much.

This concludes our question-and-answer session. I'd like to turn the conference back over to Earl for any closing remarks. End of Q&A:

So thanks to everybody for joining us today. The team will look forward to updating you on our fourth quarter earnings call in February.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.