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Good morning, ladies and gentlemen. Welcome to Group 1 Automotive's 2023 First Quarter Financial Results Conference Call. Please be advised that this call is being recorded. I'd now like to turn the floor 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, Jamie, and 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 due to the increased customer demand and reduced manufacturing production levels due to component shortages, conditions of markets 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 the call today, Daryl Kenningham, our President and Chief Executive Officer; and Daniel McHenry, Senior Vice President and Chief Financial Officer. I'll now hand the call over to Daryl.

Good morning everyone. In the first quarter of 2023, Group 1 Automotive reported $156.1 million in adjusted net income and a record first quarter adjusted diluted earnings per share of $10.93. This exceptional performance was led by record-breaking performances yet again by our outstanding after-sales teams in both the U.S. and the U.K. We also set new first quarter records in new vehicle revenues and new and used vehicle unit sales. We continue to return capital to our shareholders by repurchasing $35 million in shares during the quarter. Our strong cash flow and leverage position, which Daniel McHenry will cover in a minute, provided us an opportunity to add a high-performing Chevrolet store to our Florida footprint and will continue to allow for significant capital deployment flexibility in the remainder of 2023. Now, turning to our first quarter results. Starting with our U.S. operations, as of March 31 we ended the quarter with 27 days’ supply of new vehicles and a 25 day supply of used vehicles. Inventory is a bit higher in our domestic brands and import brands remain fairly constrained. Approximately 27% of our U.S. business is Toyota and Lexus, which continues to be very tight at a combined 5 days’ supply. Our new vehicle sales increased 2%, right in line with the retail industry. During the quarter 40% of our new vehicle sales in the U.S. were pre-sales, down from 46% in the prior quarter. We've seen indications of manufacturer production discipline, which we believe points to slower margin normalization over time. We do expect new vehicle margins to eventually settle above our pre-pandemic levels. We experienced a sequential quarter improvement in used vehicle margins and vehicle unit sales. The source used inventory, we continue to focus on organic sourcing efforts, including acquisitions through AcceleRide, customer trade-ins, and service drive acquisitions. Our F&I business has remained strong with same store gross profit per unit at $2,259, showing only minimal sequential decline. Looking forward, we do expect some continued moderation in F&I gross profit due to pressure on finance penetration rates, driven by existing interest rates and a slightly tighter lending requirement for some buyers. Now turning to after sales. Our U.S. performance was outstanding. Customer pay generated 15.9% increase same store growth. Collision was up 17.5%, warranty up 9%, and wholesale parts up 7.7%. We increased our same store technician headcount by 10% in the quarter. In the first quarter we set over 300,000 service appointments digitally and through our customer development center. We also continue to find ways to reach incremental customers through our one-to-one marketing initiatives and by using artificial intelligence. The first quarter we generated nearly 8,000 customer appointments in just three brands using AI. We believe these customers to be incremental and expect this initiative to grow and generate more incremental service business in the future. We continue to invest in after sales and believe parts of service will be a strength through the rest of 2023. Our first quarter U.S. adjusted SG&A as a percentage of gross profit was 63.1%, an increase of only 3.1% from the prior year and down from 74.2% in pre-pandemic 2019. While we do see some pressure from reduced margins and inflationary costs, we expect that a material portion of these SG&A savings will be permanent as we continue to leverage technology. Now to AcceleRide, where our customers continue to vote ‘yes’. During the first quarter we sold an all-time record of 12,500 vehicles through AcceleRide, 19.2% of our U.S. retail sales, also an all-time record. Just as important is that over 78% of our customers engaged with AcceleRide in some way in their transaction, a percentage that continues to increase. To further validate our confidence in AcceleRide, JD Power recently completed an assessment of the digital retail and customer offerings. They found Group 1's AcceleRide to be the most complete end-to-end digital shopping and buying experience among nearly 70 OEM, dealer, and third-party solutions. Now turning to the U.K. Vehicle demand remains steady and new vehicle availability is still constrained. We are seeing signs of production improvement by certain manufacturers, as demonstrated by the 19% increase in new vehicle units sold. As of March 31, our new vehicle order bank was approximately 17,600 units, which represents more than a six-month backlog based on our current sales pace. As a reminder, our U.K. business mix is predominantly luxury and those customers are more resilient during times of economic uncertainty. Also, at this point we've not seen a material impact on our Mercedes-Benz gross margins due to the agency model. And our after-sales growth in the U.K. has been outstanding, with same-store gross profit growth on a local currency basis of 21% for the first quarter in 2023. I will now turn the call over to our CFO, Daniel McHenry to provide a balance sheet and liquidity overview. Daniel?

Thank you, Daryl, and good morning everyone. As of March 31, we had $21 million of cash-on-hand and another $123 million invested in our floorplan offset account, bringing total cash liquidity to $144 million. We also had $528 million available to borrow on our acquisition line, bringing total, immediate available liquidity to $672 million. In quarter one 2023, we generated $191 million of adjusted operating cash flow and $151 million of free cash flow after backing out $40 million of CapEx. This capital was deployed through a combination of acquisitions, share repurchases and dividends. During the current quarter we spent $35 million repurchasing approximately 181,000 shares at an average price of $191.85. The result of this repurchase activity is just over a 1.3% reduction in our share count over the current quarter. Our share count as of today is down to approximately $14.1 million. Our rent-adjusted leverage ratio as defined by our U.S. Syndicated Credit facility was 1.9x at the end of March. Our strong balance sheet will continue to allow for a meaningful and balanced capital deployment. Our quarterly floor plan interest of $12.6 million was an increase of $7.4 million from the prior year, entirely due to higher vehicle inventory holdings. We effectively managed our floor plan interest expense by holding excess cash on our floor plan offset accounts, reducing the balance exposed to interest, as well as through our portfolio of interest rate swaps, which saves us $4.5 million of interest expense versus the comparable prior year quarter. Non-floor plan interest expense of $19.7 million increased $2.2 million from the prior year. However, our mortgage swap portfolio saves us $5.4 million versus the comparable period. As of March 31, approximately 70% of our $3.1 billion in floor plan and other debt was fixed. Therefore, the annual EPS impact is only about $0.55 for every 100 basis point increase in the Secured Overnight Funding Rate or SOFR, which is the benchmark referenced in our floor plan and mortgage debt instruments. For further 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 Daryl.

Thank you, Daniel. Related to our corporate development efforts, we expect to find additional external growth opportunities in 2023. Growing our U.S. and U.K. businesses remains a 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 serious consideration of share repurchases, in addition to pursuing external growth. This concludes our prepared remarks. I will now turn the call over to the operator to begin the question-and-answer session. Jamie?

[Operator Instructions]. And our first question today comes from John Murphy from Bank of America. Please go ahead with your question.

Good morning, guys. Just on parts and service, I mean it was real positive in the quarter and it's continued to transfer to you, outpacing a lot of your, you know what seems to be going on in the market. I'm just curious how much greater of an opportunity you think you have there structurally as opposed to what's just going on with market dynamics here in the short run? What is the gating factor and how do you get after it in fixing whatever those gating factors may be?

John, this is Daryl. We feel like there's still opportunity for growth in our parts and service business. When you consider our retention rates on our customers, we retain two-thirds of our customers. We feel like we can do a better job retaining more of them. When you consider the amount of work that our customers still elect to defer, we feel like that's an opportunity and we still have hundreds of open bays in our shops that we can put technicians and we've had some success filling shops with technicians, and in many cases we have more technicians than we do bays in some dealerships, so productivity within those shops. So we feel like with a 13-year-old car park, there's still plenty of opportunity out there for us.

So, Daryl, would it be fair to say the gating, the right gating factor right now is getting your hands or hiring enough techs to fill those hundreds of open bays I mean, and what's sort of the process for doing that?

Yeah, hiring techs is certainly a key piece of it. Driving productivity through our stores is certainly another piece of it, and reaching customers in new ways. I gave an example of that in my comments, is a piece of it as well. So we try to be creative with our compensation plans to attract people. We try to be creative with our scheduling to attract people and so far we've seen some success with that and continue to do that.

Our next question comes from Daniel Imbro from Stephens Incorporated. Please go ahead with your question.

Yep. Good morning, guys. Thanks for taking our questions and congrats on the quarter. I wanted to ask, I’ll start on the used side of the U.S. market. You know we've seen demand headwinds for a while, but the unit growth is only down about 2% or was it better than the industry. And I wanted to ask about the supply. I mean, if you think about 2023 and 2024, we should start to see supply headwinds just from the dearth of young used cars out there. So, I'm curious how you think about growing used units in this backdrop and how you'd be able to grow it given what looks like a lack of supply coming.

Well, I think Daniel, the key for us as a franchise dealer is almost 70% of our used car inventory comes from trade-ins. And so what we are really focused on right now is how to do a better job with those customers trying to appraise those cars and trade for those cars when a customer comes in. We fortunately don't have to rely on the open markets too much for inventory. And we have a much bigger source of used car inventory in those trades. So that's where a lot of our focus is right now.

Got it. And then I wanted to follow up on John's parts and service question. You know, in the slides I think you guys added some data around service retention. I guess, where do you think your retention stacks up versus the industry at about 68%? And then what can you do to drive that higher? And has that ever been something you've focused on driving higher or is this a new initiative that could maybe contribute to additional parts and service growth relative to history?

Well, we have OEM, we have retention measures at every OEM that we're responsible for hitting and they all measure them a little bit differently to be honest with you Daniel. So I don't know that we'll ever find an apples and apples comparison across all of the peer group on retention. But within each OEM we generally are ahead of the averages on our retention. But we also feel like we should be too. We're more sophisticated. We have better technology. We feel like with the professionalism and the training and the caliber of the people and the facilities, the investment in after sales and equipment that we have, that we should certainly be better. Our aggressive approach to wide open schedules, which is unusual; our aggressive approach to full Saturdays, which is unusual, we feel like we should be ahead of the industry on retention, and we feel like there's still some more opportunity there for us.

Daniel, its Daniel here. Just to add to what Daryl said, a lot of this data comes from a source that compares other dealer groups on ourselves and we are well above the kind of national average at the 68% that's shown in the data. In addition to that, I think if you go back about five years, that number would have been closer to 50% rather than 68%. So, it's something I think as a company that we've really driven that percentage up over the years.

I think just one more comment there, Daniel. As the transition to alternative power trains happens, I think that helps us with retention too. I think that helps franchise dealers and that helps those who are able to invest in working on those kind of power trains.

Our next question comes from Adam Jonas from Morgan Stanley. Please go ahead with your question.

Hey, thanks. Hey Daryl! Hey Daniel! So would love to see if you're seeing any sign of tighter lending either in new or used in the month of April after the close of the quarter. And then I have a follow-up. Thanks.

Adam, this is Daryl. I'm going to let Pete get into that. He's got some information he can share with you.

Thank you.

Sure Adam. So, it's interesting. There's certainly been a lot of press and discussion around the lenders. And in looking at the first quarter and what's been happening, there's been a slight shift amongst the lenders where we've actually got some lenders who – our approval rates and our volumes are up. There's also been some tightening with some other lenders. But I think when you look at our overall strategy of utilizing the big banks for all of our retail lending, it's paying off for us. So I would tell you as of right now, we are seeing no headwinds with lender availability and retail credit.

Thanks, Pete. Just to follow-up, could you give – and I appreciate the information you were given on the order book, pre-order trends, that's really useful. Wondering if you had similar information on lease returns, which I imagine you're starting to anniversary on the worst part of COVID, but just would love to see some numbers behind that in terms of lease volume returns in your stores trend either sequentially or year-on-year and kind of your outlook on that. Thanks.

I don't have a number to give you, and maybe we can follow up with you later. But based on just some bits of data I've seen, I agree with you. It's at a low point given the cycle on COVID.

Our next question comes from David Whiston from Morningstar. Please go ahead with your question.

Thanks. Good morning. Just curious what's driving that nearly 10% decline in F&I PRU. Is that primarily less attachment? Because your ATP’s did go up 4.5%, so I was just curious why F&I didn't grow with it.

Sure, David. This is Pete, and I'll refer you to page 17 of our investor deck. But if you take a look, vehicle service contracts, maintenance and our other products, penetrations are all relatively flat or up. But the real headwind has been in finance penetration on used vehicles, and we've been talking about that throughout the first quarter with investor calls, but that's our biggest headwind right now is finance [inaudible] on use.

Okay. And can you talk a little bit about how AcceleRide customers are engaging deeper than before?

Well, we see every month, David, they engage more on a deeper level. The number of customers that engage multiple times is up. It's in the high 60% range now. Almost 80% of our customers touch AcceleRide in some way, and then 19% of our customers used AcceleRide to purchase the vehicle. So we're just seeing more and more engagement. We're doing more integration with AcceleRide. That's saving time for customers and our team and that's driving some productivity improvements. So we're trying to listen hard to our customers and just respond to what they ask for and how they want to shop.

Our next question comes from Rajat Gupta from J.P. Morgan. Please go ahead with your question.

Great! Good morning. Thanks for taking the questions. Just had a first one on just the U.K. and the Mercedes stores which have moved to an agency model. Could you give us a sense of what the GPUs were for those stores, maybe retail and F&I separately? And have you also started to right-size those stores for these new GPU economics? And maybe like just broader comment on how the profitability of those stores are trending versus pre-agency or versus pre-pandemic? And I have a follow-up. Thanks.

Okay. Hi Rajat. This is Daryl. I'll answer some of that and then if Daniel has anything to add, he'll jump in. On agency in the U.K., we have five Mercedes stores in the U.K. out of 61 dealerships and actually two of them are very small. So it's not a huge part of our business there admittedly. What we have seen, we saw that the gross profit change that we saw in our Mercedes business in the U.K. was not any different than what we saw among the rest of our brands. We had some brands that sell a little more. We have some brands that sell a little less. So we didn't see a material difference between our Benz stores and the rest of them. In terms of profitability of the dealerships, we haven't seen really any difference. And we've only been at it for three months now, so over time we may see something different. I can tell you my impression from OEM contacts in the U.K. and the discussions we've had with them is they are listening to their retailers on this and they are paying a lot of attention to what's happening at retail on it and they are willing to make adjustments. Daniel, anything you would add?

Yeah, Rajat, I think the percentage drop, and it's a relatively small drop in GPUs. I think you need to take into account the offset there in expenses and the big expense primarily being around floor plan and the demo station cars that you're expected to run in the U.K. I think as Daryl rightly says, the profit of the dealership is not really being impacted, because those costs have effectively gone. So all in all I think we're still in the same position as we were before, feeling pretty neutral about it.

And that is versus, like are you referring that versus like 2022 or versus 2019, when you mentioned the profit?

2022, same quarter ‘22.

Got it, got it. Okay, that's helpful. Just to follow-up on capital allocation, broadly how are you thinking about deploying cash in this current macro backdrop? You know, like your peers seem to be taking different approaches. Some are being more aggressive, even levering up to buy back shares. Some are looking to be a little more conservative, waiting for more certainty around the macro before doing buyback or M&A. So I was curious, how are you strategizing that? And then just maybe specifically on M&A, did it give us a sense of what the pipeline is looking like and what the multiples are looking like for assets out there? Thanks.

I would say that there's opportunities out there for acquisitions. We're looking at – quite a few are coming in. I would say there is a certain portion of sellers that have unrealistic expectations and I always like to tell people we'll never win a bidding war. But we try to stick to discipline with what we will pay for a group of stores, and we've continued that. We want to grow the company, that is true, and that's always our first choice. However, as we've shown over the last two years, really year and a half, we will buy back shares when we feel like they are a better value than going to the external markets to buy stores. So that's still a significant option for us, which is something we'll continue to keep on the table. That has not changed for us.

And our next question comes from Seaport Research Partners. Please state your name, followed by your question and follow-up.

Good morning, folks. Glenn Chen.

Good morning, Glenn.

Good morning. So just some quick follow-ups. First on the drivers of the service and parts growth, which was impressive by the way. Can you just share how much was related to the increase in the volume of repair orders and how much is attributable to the size of them?

In both markets, Glenn, a third of the lift was related to customer count increases and two-thirds of the lift was pricing or dollars per customer, both margin growth and [inaudible].

Okay. And the... [Cross Talk]

Sorry Glenn, just to add to that. I think if you look in the deck, you'll see that as vehicles are getting older, our average dollar per repair order is increasing. I think that goes back to the real emphasis that we're putting on customer retention that's exhibited in the deck that we have in there, because I think ultimately that's really helping us grow our parts and service business.

Okay. And just out of curiosity, the repair order count, is that – how does that compare to pre-pandemic? Just trying to get a feel for if. Are we back to normal already or ahead of normal?

I would have to look. I don’t want to jump into that.

Okay. Okay, that's fine, very good. And then, sorry, I hopped on the call late, but did you mention what warranty did, same store basis year-over-year?

Warranty was up 9%, correct. Collision was up 17%.

And our next question comes from Michael Ward from Benchmark. Please go ahead with your question.

Thanks very much. Just a quick follow-up on the F&I side. On the used vehicle, you mentioned that the financing partly explained the decline year-over-year in F&I per unit. Is that because more people are buying out vehicles?

No Mike. This is Pete. I think that what's happening is when we're not getting the attachment, we're losing that business to cash buyers or possibly credit unions.

Oh, okay. Oh, that's what I meant. So cash buyers or credit unions, okay. Just to get cheaper rates?

It's all based on rates.

Okay. And then, do you have any indication of what percentage of your current incoming orders – in the U.K. you gave us the six months it sounds like they are sold out. What about the U.S.? Are you still seeing these high 40% to 50% type take rates on vehicles expected to come in?

In the quarter we did 40% of them were pre-sold. I would kind of use that as your measure.

In pre-COVID, that was below 10%?

Probably 10% to 15%, maybe something like that. Yeah.