Good morning, ladies and gentlemen. Welcome to the Group 1 Automotive's Second Quarter 2025 Financial Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the call over to Mr. Pete DeLongchamps, Group 1's Senior Vice President, Manufacturer Relations and Financial Services. Please go ahead, Mr. DeLongchamps.

Thank you, Nick. Good morning, everyone, and welcome to today's call. The earnings release we issued this morning and the 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 made 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, conditions of market, successful integration of acquisitions and adverse developments in the global economy and resulting impacts on 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 on today's call, Daryl Kenningham, our President and Chief Executive Officer; and Daniel McHenry, our Senior Vice President and Chief Financial Officer. I'd now like to hand the call over to Daryl.

Good morning, everyone. Our U.S. performance was excellent in the second quarter, and our U.K. team is navigating the integration of operations while growing our business in a challenging U.K. market backdrop. Our adjusted net income from continuing operations improved 12.4% in the quarter and EPS improved 17.5% on the same basis. Starting with our U.S. business. New car sales were up 6% on a same-store basis, outpacing the industry. Our PRUs held up versus the second quarter of 2024, and they were up $211 sequentially. Our inventories were flat versus the quarter and down nearly 15% compared to the end of 2024. And days supply is healthy at 48 days. Our used car volumes were up nearly 4% year-over-year and gross profits were up $29. Our F&I performance in the quarter was very solid as well, up $90 per unit. And our aftersales business is an area we continue to invest in and believe still has a great deal of opportunity. In the quarter, our aftersales gross profit was up 14.3%. Customer pay revenue was up 13.6% and warranty up 31.9%. While we certainly benefited from an easier comp versus the June 2024 CDK event, our aftersales business was strong throughout the quarter. Our May quarter-to-date performance saw CP revenues up 10.2% and warranty up 28.7%. And we saw an 8% increase in same-store RO count for the quarter. And we continue to believe that the potential of the aftersales business warrants additional investment, and we've continued forward on this front. Our flexible scheduling, all-day, Saturday focus improving and technician productivity give us significant physical capacity to increase aftersales business in our existing dealerships. And by the end of 2025, 90% of all Group 1 technicians in the U.S. will work in an air-conditioned shop. It's a boost to…

Thank you, Daryl, and good morning, everyone. In the second quarter of 2025, Group 1 Automotive reported quarterly record revenues of $5.7 billion, quarterly record gross profit of $936 million, adjusted net income of $149.6 million and quarterly adjusted diluted earnings per share from continuing operations of $11.52. Starting with our U.S. operations. Revenue growth on an as-reported and same-store basis occurred across all lines of business over the comparable prior year quarter. Notably, parts and service revenues reached a quarterly high, increasing 11.7% and 12.8% on an as-reported and same-store basis, respectively. Over the prior year comparable quarter and F&I revenues reached a quarterly high of $199 million. We experienced higher new vehicle units sold in an as reported and same-store basis of 4.6% and 6%, respectively, over the comparable prior year quarter. This reflects the resiliency of demand and our operational execution and the value generated from the ability to drive incremental volume through our dealership acquisitions. At the same time, volumes increased, we saw prices increase by 1.5% and 1% on a reported and same-store basis, coupled with a slight decline in GPUs of 0.3% and 0.9%, respectively. The higher volume more than offset the lower GPUs and contributed to an as- reported and same-store gross profit increases of 4.3% and 5%, respectively, versus the prior year comparable period. Used vehicle revenues were the third highest quarter on record and volume in the second quarter was 11 vehicle shy of the quarterly record, growing 2.7% and 3.9% on an as-reported and same-store basis versus the prior year comparable period, respectively. GPUs were also up, increasing $25 and $29 on an as-reported and same-store basis. Our processes, discipline and use of technology with pricing of used vehicles helped create this gross profit growth while driving volume against higher…

[Operator Instructions] And your first question today will come from Rajat Gupta with JPMorgan.

Good results. I had one question on the new car GPUs. A pretty strong pickup sequentially here in the quarter. Could you give us a sense of how those GPUs progressed through the course of the quarter? Maybe like how was April, May, June, before averaging out to the [ $2,665 ] that you reported for the quarter? And I have a quick follow-up.

We can get you a little more detail on that after. But we -- they were fairly strong all quarter. We didn't see a spike due to necessarily any change in inventories or any change in manufacturer incentives support or anything like that. So they stayed fairly strong through the quarter.

Understood. And just -- I just had a couple of like clarifications on the U.K. It looks like you took up your cost-out target there from GBP 22 to GBP 27 for the full year, just comparing the 2 slide decks. Could you -- is that primarily to offset some of the government imposed cost increases? Or are there like other changes you're making just in light of just the weak macro backdrop there? And just had one more quick follow-up on U.K.

Rajat, it's Daniel here. We expanded, I guess, some of our headcount reduction. The headcount reduction now today is looking circa 800 people. That's higher than we initially projected. A couple of reasons for that is that we have decided to close a couple of additional stores that are very close to other stores of the same brand that we have.

Rajat, this is Daryl. I just confirmed on the new car PRU in the U.S. There wasn't any spike between the months. It was fairly even. April was actually pretty good, but May and June held up very well. So pretty flat through the quarter.

Understood. And just lastly, just on the parts and services business in the U.K., pretty strong constant currency growth there. 6%. Given the productivity improvements, you're starting to see at Inchcape. Any color you can give us as to the expected run rate here on that into the second half, maybe early next year? Is this a sustainable number? Could it accelerate further? Any color there would be helpful.

We believe there's more room to run in the quarter. We added 8% more technicians to our technician base. And the increase that we saw in aftersales, there was actually a decline in warranty in the quarter in the U.K. That was more than offset by a higher increase in CP of 8%. We do have opportunity to increase our customer count, Rajat. There's a lot of that increase that we saw was per RO dollars. And so what we are focused on is trying to drive more car count, especially since we have 8% more technicians to be able to accommodate it.

And your next question today will come from Daniela Haigian with Morgan Stanley.

So parts and service tends to be a ballast for Group 1. You see continued strength, customer pay, margins up, technician headcounts up. But thinking out the next 1 to 3 years or so, what are the key puts and takes to think about the top line? You have, on one hand, vehicle unaffordability weighing on SAAR, which can increase mileage, create demand for reconditioning, but it also may limit the origination of newer cars that tend to have that stickiness on the service side. So what are the critical vintages to look out for? And how can Group 1 navigate that period of turbulence?

A key to growth in the next 3 years in aftersales, Daniela, in the U.S. specifically is us reaching deeper into the owner base in terms of people who have owned their cars longer. And we have to be able to increase our share of that market. So call it, 4-plus years of ownership and we need to be able to reach into that market deeper, penetrated deeper, increase our penetration there, increase our spend there. Ways to do that are -- we're looking at our -- make sure our labor rates are attractive to that customer segment. It's a sensitive customer segment on pricing. So we have to make sure that we're attractive. We have to make sure that we're not overpriced for what they're looking for. And then also the restructuring of our marketing at Group 1 to where we're now using first-party data, we know more about those customers than we ever have. And so our focus and I think success moving into the years ahead is going to be how do we reach out to those customers who've owned their cars longer than 3 years. And that's what we're putting a lot of focus on right now.

Daniela, just to add -- it's Daniel here, just to add to what Daryl said. The average car coming into our store, a 2022 vehicle versus the 2019 vehicle, which is the average age -- average model age of a car within our store, it's over 1/3 higher, the average RO value that we get from that vehicle. So it's slightly important that we keep those within our ecosystem.

Got it. Makes sense. Second question is around the used business. Large online-only retailer growing volumes 50% year-over-year in the market. They're pushing for 3 million used cars sold annually in the next 5 to 10 years. I know it's an incredibly fragmented market. How do you view the competition from the likes of these online pure-play retailers? And is there greater opportunity to grow and consolidate in the used business?

There's probably opportunity to consolidate. Yes, agreed. We try to learn from those online retailers. They're great competitors, especially in the shopping process. And those are things that we pay attention to and try to learn from. We feel like, at least today, we still have tremendous opportunity to grow our used business inside our footprint of our stores today, especially as used car sales become more digital and they're as digital as part of our business today. So we feel like we can still grow inside of our footprint. We have grown. If you were to look at our used to new ratio 5 years ago, it was much less than it is today. And we've improved our used car performance, but there's still room to run. And I think you're right. I think those digital retailers are proving that.

And your next question today will come from Federico Merendi with Bank of America.

So we've heard that OEMs for model year '26 may take some of the feature that in prior model year were basically standard and put them as optional. So basically, there will be a higher price to get the same features of last year vehicle. What have you seen on your order sheet so far?

Federico, this is Daryl Kenningham. Yes, they're just announcing 2026 contenting and some in pricing. And some are still waiting to see what happens with the tariffs. I mean the Japan announcement this week, and there's still not enough specifics around it, I don't think, for the OEMs to make pricing decisions. But we -- and then Europe is supposed to be finalized very soon. We don't -- what I -- what we believe will happen, and I think this will absolutely happen is you will see OEMs play with trim levels, contenting, repricing price walks between grades, things like that to optimize margins and reduce the impact of the tariffs. So what you stated in your question, I think, is absolutely true, and I think that will happen. And then standard equipment may become optional in the future in order to keep the base car more competitively priced.

And my follow-up would be on parts and service. So you did a great job to increase your headcount. So I was wondering for every 1% of incremental headcount, what's the translation into earnings or like gross profit for every technician that you had to your headcount basically?

Well, we can get you some more detail around it. But generally, at Group 1, how we look at a technician, they're worth about $15,000 in gross profit per month average across our brands. Some brands, it's more, some brands, it's less. But when we can put a technician in a stall and have them work for a month, that's like another $15,000 in gross profit. And that's how we kind of look at our cost. We look at the cost of not having a technician rather than the cost of what it costs to acquire a technician. So -- and Daniel can give you some more depth on that later today, if you like.

And your next question today will come from Michael Ward with Citi Research.

How do the BEV mandates in the U.K. affect your growth? What happens there?

A lot of the BEV volume, Mike, is going into corporate fleets. If you were to look at the retail mix of -- the BEV mix and just the straight retail consumer, it's like 10%, 11% of the mix. If you look at it in the corporate fleets, it's much higher than that. And it blends out at like 26% today. And when we sell cars to the corporate fleets, we still make positive margin on it, but it's less than what we make at retail. And so as long as there's all that -- it's kind of like in the U.S. when they're putting a lot of BEVs and rental car service right now, it's similar. So it's just corporate fleets there, and it drives the margin down as a result.

Okay. You made a few more acquisitions in 2Q. What is the environment like out there? Are there big lumpy acquisitions out there? I mean the Herb Chamber is one that Asbury took was a big chunk. Are there any big acquisition opportunities out there, do you think? Or is it going to be more tuck-ins that we're seeing?

Well, I think -- as a general statement, I think there will be -- in the next few years, there will be larger ones. And up to right now, the year has been fairly quiet because of the uncertainty. It feels like in the last couple of weeks, there's a little more activity. We're starting to see some more inbound here, I mean, literally in the last few days. So we'll see if that is a blip or a harbinger of it getting more active, we'll see. I'm not sure yet.

And your next question today will come from Jeff Lick with Stephens Inc.

Congrats on a great quarter again. So I was just kind of curious, this quarter, the metrics were a little more variable if you were -- if you try to predict all these. If you look at new gross new units, service and parts used, I'm just kind of curious, as you -- which ones surprised you the most? And as we look into Q3 and Q4, which ones kind of are sustainable and kind of predictive for our models and which ones might tail off?

Well, I wouldn't -- we were really pleased with the aftersales performance in both markets. I cannot tell you that we would expect to maintain what was a 13% customer pay growth on an ongoing basis. Generally, we plan for mid-single digits, maybe high mid-single digits on that. So that -- I wouldn't lean on the current aftersales growth like it is. And when you look at the warranty numbers, they won't be 31% in the quarters ahead, I don't think. It might be great if they are, but we wouldn't -- haven't planned on it. So I think there's resilience in the -- and I'll ask Pete to comment on this, especially on new cars and F&I. But on the new car side, I think there's resilience in the new car margin, Jeff. It just -- it's held up now for a year. And doesn't seem to be weakening. And the days supply in total anyway is still reasonable and the OEMs seem to be managing that well. And Pete may have some comments on F&I and used cars in terms of...

Sure. Jeff, I think that -- I wouldn't say that we were surprised. We've got our processes in place. The team is in place, and I think we've executed on the strategy that we've laid out to you over the last few years. So -- the demand is still there for use. Acquisition is very difficult. And we ended the quarter with a 31-day supply. So we were consistent there. And then I think if you look at the F&I when -- whether it's the revenue that we're getting from the finance piece of the business and along with our increased margins or increased percentages on product, it turned out to be a great quarter for us. So I think there's still demand out there for used and facilitation of finance and insurance.

It's Daniel. The only thing I would add around SG&A in U.K., in particular, there wasn't a plate change month this quarter. So I'd expect SG&A as a percent of growth to come down slightly in quarter 3 versus quarter 2 just because of that additional growth.

And then just a quick follow-up. The lease return issue, obviously, this year, down below $1 million, it looks like they're down 30%, 40% year-over-year. That should flip depending on what the buyout turn in rate is next year, but it's going to be up. That should be a good source of traffic. I don't think necessarily focused on 2026 that much given what's going on in 2025. But if you could just speak to how you guys think lease turn-in issue, how that plays out and what effect it has in 2026?

I think it's going to be very -- Jeff, this is Pete. It's difficult to forecast that because you don't know what the equity situation is going to look like next year. And it could be very good on especially the ICE vehicles. I think the wildcard on that is what the BEV lease returns look like. But with the situation with acquisition and availability, we are taking as many off-lease vehicles as possible. And I think that will continue through next year depending on pricing.

And your next question today will come from David Whiston with Morningstar.

I was just curious on the divestiture of those 2 U.K. Mercedes stores. Is that more of a geographic reason, a factory reason? Or are you not happy with Mercedes prospects in the U.K. going forward?

We're very happy with Mercedes-Benz in the U.K. We're the largest Mercedes retailer in the U.K., and we're happy about that. And we have a terrific relationship with the OEM. There was some -- in those 2 cases, those stores were closer to other stores that we owned and just in partnership with the OEM. We closed those, consolidated them into another point. So no dissatisfaction whatsoever from us for Mercedes-Benz or their agency model. And Daniel may have something.

Yes. The one store in particular was only 7 miles away from another one of our stores. And we're actually going to redevelop that store into a larger store in the coming future. So we see some cost benefit from that, and we don't expect to lose any of our customer base.

Okay. And just curious if your Toyota inventory is abnormally too low given any reluctance by them to export vehicles from Japan right now?

Well, it's low. And basically, what we have is Tacomas and Tundras. Would we like a little more? Yes, we probably would, but we're okay with tight supply at Toyota. That's for sure.

And your next question today will come from Ron Jewsikow with Guggenheim Securities.

Yes, nice quarter. On the U.K. SG&A piece, Daniel, I think you mentioned $4 million of higher costs related to required national insurance contribution changes. Was there anything else noteworthy this quarter? Because I know you've kind of had this ongoing integration effort post Inchcape and cost savings underway, but dollars were up more than that $4 million sequentially despite lower gross profits.

When I look at the dollars, I think some of it is January and February is generally a lower cost base. And it's kind of more even in quarter 2. The expectation always was that we would be slightly above 80%. SG&A as a percent of gross on the basis on an annualized basis, we expected it to be closer to 80%. But there's nothing really unusual in there apart from the increases in national insurance and national minimum wage.

Okay. No, that's super helpful. And then on parts and service slack, just kind of if warranty slows, and I understand there are probably structural tailwinds for warranty going forward. But in the event warranty work slows, just trying to stress test our model. Are you confident there's kind of enough built-up demand from customer pay to offset if there is a slowdown in warranty work? Or how should we think about the 2? I don't -- I'm just not sure if you're wall-to-wall in your service departments right now or how to think about that?

I don't think we can cover 31% increase in warranty with CP, but we think there's still room to improve CP. And as we look back on prior quarters where warranty was lower, we were able to deliver CP growth there as well. So I can't tell you be dollar for dollar. But we certainly think there's room there. And we generally feel like capacity is the key to driving aftersales growth.

And your next question today will come from Bret Jordan with Jefferies.

On U.S. GPU, I guess you saw a $29 lift in comp. Does that -- was that pulled forward? Or is that -- was there a demand surge around Liberation Day? Or do you see used GPUs sort of able to stable or expand from here?

I think, Bret, if you take a look at our trend, it's been pretty consistent on the used, and I would expect that to continue. It's -- in the used business, it's all about the acquisition and our team has done a spectacular job of navigating whether it's trades, auction purchases or outside purchases. So I think from a gross profit standpoint, it's been pretty consistent over the last year.

Okay. And then I guess, parts and service, can you sort of carve out how much was the benefit of CDK? Sort of obviously, late in the quarter last year, there was very little parts and service.

Yes. For us as a company, I think whenever we made our earnings call last year, we said that the effect of the CDK for parts and service, specifically was about $12 million in terms of our pretax income. So I would run that kind of estimate, Bret.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines, and have a great day.