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Good morning, ladies and gentlemen, and welcome to Group 1 Automotive's 2023 Third Quarter Financial Results Conference Call. Please be advised that this call is being recorded. At this time, I'd 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 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 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 increased customer demand and reduced manufacturer 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'd now like to hand the call over to Daryl.

Good morning, everyone. In the third quarter of 2023, Group 1 Automotive reported $169.8 million in adjusted net income. Record total quarterly revenues of $4.7 billion, an all-time quarterly revenues across all major lines of business. Our teams also delivered record quarterly adjusted diluted EPS from continuing operations of $12.07, an increase from the third quarter of 2022. Starting with our US operations. Our inventory levels remained relatively flat from the second quarter of 2023, no major shifts in mix, including from our brands affected by the UAW strike. In the third quarter, Stellantis was 4% of our mix; Ford, 7%; and General Motors, 10%. On a same-store basis, our used -- our US new vehicle unit sales were up nearly 12%. During the third quarter, 30% of our new vehicle sales in the US were presales, down a bit from 33% in the prior quarter. Also important to note, in a tough used vehicle environment, our used vehicle sales were up both year-over-year and sequentially and our gross margins were up year-over-year. We saw strengthening throughout the quarter in our used vehicle margins. In addition, we saw strengthening in our CPO business to nearly 25% of our mix. CPO is a key driver of loyalty and aftersales and repurchase and we continue to focus on organic sourcing, including acquisitions through AcceleRide customer trades, which were up in the quarter and service drive acquisitions. Our outstanding F&I team also achieved record quarterly revenues, capitalizing on the opportunities to sell products that are both good for our customers and good for their vehicles. Our gross profit per unit sold of $2,367 only minimally declined on a same-store sequential basis. We expect some continued pressure on finance penetration due to existing interest rates and slightly tighter lender requirements for some used vehicle buyers. Now shifting to aftersales. We focus on the aftersales impact on the customer journey by increasing customer retention through more convenient service hours, training of our service advisers, selling service contracts with vehicle sales and improved customer relationship management software that allows us to provide targeted marketing to our customers. We continue to believe that aftersales is an area of underinvestment in our industry and we invest heavily and without reservation when we acquire new stores. With this focus, our parts and service team continues to achieve record results, notching the tenth consecutive quarter of record revenues and an all-time quarterly high in gross profit. We continue to focus on the hiring and retention of technicians in this challenging labor market. Our four-day workweek benefits our customers by extending our hours of operation during the week and a return -- in return, leads to higher technician productivity in our shops. We continue to explore avenues to increase our capacity and drive more incremental productivity. We also continue to invest in new ways to reach our customers through one-to-one marketing technology and by using artificial intelligence. In the third quarter, we set over 360,000 service appointments digitally and through our customer development center. We also generated over 10,000 customer appointments with just six brands using artificial intelligence. We believe these AI customers to be incremental, and expect this initiative to grow and generate more incremental service business in the future. Now let's shift to SG&A. US adjusted SG&A as a percentage of gross profit increased only 88 basis points year-over-year and improved sequentially, reflecting our focus on controlling costs in this inflationary environment and the structural cost improvements made since the pandemic. Current adjusted SG&A as a percentage of gross profit of 61.4% continues to be down from 70.5% in pre-pandemic 2019. Now a quick look at the UK. The UK achieved record quarterly revenues, thanks to record used vehicle performance. Vehicle demand remains resilient and new vehicle availability is still constrained, keeping vehicle pricing and GPU strong. We continue to see signs of production improvement year-over-year by certain manufacturers as demonstrated by the near 10% increase in same-store new vehicle units sold. Despite this increase in same-store units sold, we experienced vehicle delivery shortages from BMW, Mini and Volkswagen in the third quarter of 2023, limiting our upside potential for the quarter. The lack of vehicle deliveries from these manufacturers resulted in higher-than-anticipated SG&A as a percentage of gross profit, giving our staffing levels, assuming the sale of these vehicles. As of September 30th, our new vehicle order bank was approximately 17,700 units. As a reminder, our UK business mix is predominantly luxury and those consumers are more resilient during times of economic uncertainty. And now to capital allocation. We deployed a return-focused capital allocation strategy that balances the use of our capital between opportunistic portfolio management, share buybacks and the return of capital to shareholders in the form of quarterly dividends. This approach continues to benefit our shareholders, allowing us to achieve all-time high in adjusted diluted earnings per common share from continuing operations in the third quarter. Successful portfolio management involves not only acquiring great assets, but also disposing of assets for which we believe a higher return proposition exists. In the third quarter of 2023, we disposed of eight franchises and voluntarily terminated a ninth franchise. We intend to benefit our shareholders by using the proceeds from these sales to either buy additional dealerships or buy back additional shares. Our number one priority is growing the company. We evaluate all brands and geographies to expand our portfolio, seeking to acquire dealerships or dealership clusters in growth positioned or economically stable markets or that are economically accretive to our existing markets. In October 2023, we consummated the pending acquisition of a Subaru dealership in Manchester, New Hampshire, bringing the number of franchises owned in Manchester to five. Our recent acquisitions of Beck & Masten GMC and Kia dealerships as well as Estero Bay Chevrolet in Florida, serve as a reminder of the strength of this portfolio optimization approach. We continue to explore ways to consolidate our holdings in highly profitable, scalable dealerships and dealership clusters. We believe this is a critical element to our growth story, which leverages our scale and proven integration capabilities, optimizes our rooftop performance and grows the company in a meaningful and incremental manner. 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 September 30th, we had $53 million of cash on hand and another $211 million invested in our floorplan offset accounts, bringing total cash liquidity to $264 million. We also had $463 million available to borrow on our acquisition line, bringing total immediate available liquidity to $726 million. For the first nine months of 2023, we generated $555 million of adjusted operating cash flow and $448 million of free cash flow after backing out $107 million of CapEx. This capital was deployed through a combination of acquisitions, share repurchases and dividends. During the current quarter, we spent $65 million, repurchasing approximately 246,000 shares, at an average price of $261.89. The result of this repurchase activity is just over a 1.7% reduction in share count over the current quarter. Our share count as of today is down to approximately 13.8 million. Our balance sheet, cash flow generation and leverage position will continue to support flexible capital allocation approach, including serious consideration of share repurchases, in addition to pursuing external growth opportunities. Our rent-adjusted leverage ratio, as defined by our US syndicated credit facility was two times at the end of September. Our strong balance sheet will continue to allow for meaningful and balanced capital deployment. Our quarterly floorplan interest of $16.5 million was an increase of $10 million from the prior year, entirely due to higher vehicle inventory holdings. We effectively managed our floorplan interest expense by holding excess cash in our floorplan offset accounts, reducing the balance exposed to interest as well as to our portfolio of interest rate swaps, which saved us $3.4 million of interest expense versus the comparable prior year quarter. Non-floorplan interest expense of $26.5 million increased $6.9 million from prior year. However, our mortgage swap portfolio saved us $3.5 million versus the comparable period. As of September 30th, approximately 65% of our $3.4 billion in floorplan and other debt was fixed. Therefore, an annual EPS impact is only about $0.66 for every 100 basis point increase in the secured overnight funding rate or SOFR which is the benchmark reference 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. This concludes our prepared remarks. I will now turn the call over to the operator to begin the question-and-answer session. Operator?

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from John Murphy from Bank of America. Please go ahead with your question.

Good morning, guys. Daryl, I just wanted to ask a question on inventory levels. You mentioned that they are tight and constraining your sales in the UK. But I'm just curious what your take is on inventory levels here in the US? And are they sufficient? Or are they constraining sales? And maybe kind of secondly to that, where do you think inventory levels are going, so that we can understand our floorplan interest expense may go?

John. Good morning. I think the surprising -- I guess surprising -- maybe not so surprising thing about the inventories, Q3 over Q2, is they didn't change much on a day supply basis. I think we were up two days. And the mix between brands didn't change very much. We saw Stellantis coming down a little bit. We saw a little bit of remix with some of the luxuries. But I think that it's constraining sales in probably the import brands. And when you look at our day supply is still almost single-digits in those brands. And if you look at the sales growth that's there, and we still have 30% of our mix, was basically presold, which, at this point, I'm a little surprised by. And the -- so I think there's probably more inventory coming in those brands. I think the luxuries are probably in about the right place. I think they've got some mix issues to deal with between EV and non-EV. And then the domestics, I think, are fine in terms of their total. We'll see what happens with the UAW impact, especially with the plans that were announced this week.

And if I could sneak in one follow-up on F&I. I mean it sounds like it's a slight pressure point, still doing fairly well. But could you just remind us what part of F&I PVR is product? And what is spread-based? And what your sort of thoughts on that going forward? I mean there's a lot of good product in there the consumer benefits from. So I'm just curious what you think the risk or even opportunity is going forward there.

Hi, John. It's Pete DeLongchamps. So the -- we were very pleased with the overall F&I business. And I think it continues to be the headwind with used car penetrations were down about 400 basis points year-over-year. One-third of our revenue and gross profit comes from the spread and the originations, two-thirds from product. And I'll tell you, when I look at the overall results, our product penetrations haven't varied more than 100 basis points either way on any of our product penetration. So we're really pleased with the product sales that we've had, which has certainly helped keep our PRU numbers in line.

John, one thing we do see is, as Pete mentioned, even though we're not -- we don't over rely on rate, when we do lose some attachment on financing, oftentimes, we're able to preserve some incrementality on the product sales. So as an example, don't take this literally, but if we lose three points of finance penetration on used cars, we might only lose 1.5 points or so of product penetration. So there's still some we're able to preserve.

And our next question comes from Rajat Gupta from JPMorgan. Please go ahead with your question.

Great. Thanks for taking the question and congrats on the execution. I had a question on parts and services. Could you help us understand or help us gauge any potential impact from the part shortages, especially General Motor and Ford, where you have a little higher exposure? Anyway to quantify what that impact could be? When should we start to worry about shortages hitting your stores? Any color on that would be helpful and I have a follow-up.

Rajat, this is Daryl. So far the impact has been minimal. We purchased ahead and stocked up on the fastest moving parts in advance of the strike or advance the contract negotiations, I should say. And so we're still able to -- we're still living off of that extra stock. We also were able to leverage our other stores around the country when we do have a part shortage. I don't think it's unreasonable to think that, in the next quarter, we'll start to see more part shortage issues from the two brands you mentioned. I don't know that they'll be significant. The OEMs have been fairly responsive with being able to supply us, but I don't know that it's -- I think it will probably be a bigger issue for us in Q4 than it was in Q3, but I can't say it will be severe.

Got it. Have you already started to feel that impact in the fourth quarter? Or does the strike need to continue for another week or so before you start to feel that?

Well, we won't have a full picture until after the quarter is over, so it's hard to say right now.

Got it. Got it. Just on SG&A then, helpful color on the slide deck around the productivity improvements. In the past, you've given us some color around how much permanent SG&A to gross reduction you expect to see. I think you mentioned like 300 to 400 basis points in the past like this was probably more than a year ago. Curious as to -- if you have any update to that based on what you're seeing in the business, even in the UK? Any new guide rails or guardrails we should be thinking about in terms of what normalized SG&A to gross should be for the business? Thanks.

Rajat, it's Daniel here. I think an important statistic to note that I don't think is in our investor deck is that we're still 7% down in terms of head count in the US versus 2019 on a same-store basis. And with that, we have added 11% more technicians. So the element related to SG&A is down even more than 7% in terms of head count. And at this time, I don't see any of that head count returning. Clearly, 30% additional productivity per salesperson. Again, I don't see us going back to the ways that we were pre-pandemic. So I think all of that cost reduction -- that people headcount that's added is added permanently. In terms of the guidance, I guess, that we've given, pre-pandemic, whole company, we were at 74% SG&A as a percent of growth. I don't see that ever being above 70%, all subject to recession or major changes in the industry.

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

Thanks. Good morning. Really impressed by the used vehicle performance. I wanted to just look at both sides of it really. Like how are you convincing the consumer, who is really struggling with used affordability, to pay over $30,000? But then on the procurement side, how are you keeping the GPU up as well?

David, good morning. Daryl. I think we're being smarter about what we're sourcing and how we're sourcing. We implemented some new technology about a year ago, which helps us with acquisition and it helps us with pricing. And it's much more responsive. It takes more of our, for lack of a better word, our gut instinct out of it and relies much more heavily on data and market intelligence on a mass basis, not just on a car-by-car basis. And we're, I believe, leveraging that better today than we ever have. So I think we're probably getting some incrementality out of our used car performance that we have not seen in the past. And so I think that's the results of what you're seeing and I believe that's really the difference. We added some additional training in our dealerships around the country and some staffing around the country to try to help with the execution on used cars about a year ago as well and I think some of that is coming to fruition. So I believe those are things that are helping us. And we get, I mean, you know this we -- just the advantage we have of being able to source things organically is just a real advantage for us. And so we're -- compared to the used car pure plays. And so we're extremely fortunate to be able to do that.

And staying on that topic, I mean, on the consumer side, though, they're really struggling. Are they -- have you changed your mix in any way to make it worthwhile to them to pay up? Or are you just able to get better?

The ASPs are down a little bit, almost $2,000, I believe, year-over-year. So we are seeing that the pricing is coming down some. And we're responding with the right stock to be able to do that, and that's how we were able to preserve our gross margins. And so I think we're being more responsive with what we're stocking given the market today, that there's more pressure on it from a price and payment perspective.

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

Thanks. Good morning, everyone.

Good morning, Mike.

Two questions. First one, a quick one. Are you seeing any change at all in credit availability for consumers? And then the second question is more kind of strategic. It seems like you're selling off some of the smaller stores and you're growing some of the bigger ones. And I'm guessing like that should imply that the parts and service departments get bigger. Am I reading that correctly?

Mike, I'll take your second question, and then Pete will take your first question. This is Daryl. You're reading it correctly. You're reading exactly correctly. We're looking for our portfolio. We want to generally operate in clusters and generally with higher revenue rooftop stores where we can build and develop scale on a better basis. And that certainly helps us feed our parts and service business, which, for us, we consider one of our real strengths and something we invest heavily in. So, yes, absolutely. And when you look at our acquisitions over the last couple of years, whether it's Beck & Masten, or Toyota North Austin, or Estebero Bay Chevrolet, they are large, high-revenue stores. And for Beck & Masten and Toyota North Austin, they're right in the middle of a cluster of other stores that we own. So ability to leverage scale and ability to grow and leverage our SG&A base and drive more parts of service are all key benefits in that case. And then on the F&I question and the buyers and the lending environment, I'll ask Pete to speak to that.

Mike, what we've seen with credit is it's certainly available. And I think that our strategy of partnering with the big banks in all different credit tiers is certainly paying a dividend for us right now. There has been some tightening clearly on loan-to-value and some of their metrics. But with the way we run our business with audit and compliance, our loss ratios are in line or better than with all of our lenders. So we've had great partnerships. And I ask our operators all the time, if we lost car deals due to credit? And it's -- that's a resounding no.

We're also seeing the OEM captives really, really or get more aggressive right now. And I think that really helps us as new car dealers, obviously, give us an avenue to be able to rely on and support from them that they've stepped up with some additional programs and support as well.

Daryl, if I could follow up on the dealership issue. You have a couple of good charts in the slides in there about the parts business and the growth and the benefits AcceleRide and EV sales. As vehicles become more complex, especially on the battery electric side, the service has to be done at the dealers because there is no independent aftermarket. Are your stores able to service some of these other start-up EV companies that are service constrained, call it, like a Rivian?

Well, I hope that we have all the work we can do with our own brands. We haven't had any discussions with anybody like a Rivian or anything like that around any repair work or warranty work or anything like that. Could we -- I'm certain that if we work on the brands we do, we could work on those. But our focus is on the brands that we have relationships with today, Mike.

Mike, can I just add two thing to that. It's Daniel here. We do the collision work for the EV. So we are approved that some of our collision centers for work and those start-up companies or more established EV operators.

[Operator Instructions] Our next question comes from Daniel Imbro from Stephens Inc. Please go ahead with your question.

Hey, good morning, guys and congrats on the quarter.

Thank you.

Daryl, I want to start -- or a follow up on the service side. So obviously, trends remain strong there. You talked about parts availability. Let's go over to labor side. So you've been able to hire and retain for a while here with the four-day workweek, but I think you guys have been testing some new comp plans. Just curious how the reception has been? Is that helping you kind of maintain your lead on the hiring side? And has anything changed materially on the technician availability or retention?

Daniel, thank you. Yes, we are still focused on attracting technicians and have had some success over the last year attracting them. Our turnover rate with technicians is down year-over-year. And then we are also piloting some different compensation plans that are -- we hope will make us a more attractive place to work and we hope will give technicians more certainty in their compensation. And right now, we've got that in about four stores that we're piloting and measuring. We want to make sure we maintain our productivity and our throughput, as well as employee retention and engagement, obviously, are super important there. So yes, we're testing that. We're also taking a hard look at our shop productivity, Daniel. There's traditional metrics around how much work we can put through our existing shop base. But then, are there some other levers we can pull to either increase the capacity of those shops or increase the throughput and productivity of those shops? And so we're taking a look at some things we might be able to do there. So -- we -- at the end of the day, we still see lots of room to run. And aftersales, we see lots of opportunity in aftersales. And we continue to want to invest there and think that there's going to be continued growth there for a long time into the future.

That's helpful. I appreciate it. And then, Daniel, maybe one, is you're having about cap allocation. So you've made good progress, obviously, on the portfolio optimization. But curious what you're seeing. Are seller multiples continuing to compress in the M&A market as we move further from peak same-store earnings? And I guess with the stock multiple compressing and the cash flow generation, where do share repurchases kind of fall in your capital priorities from here just as you look at how to spend that free cash?

Daniel, as Daryl said, our key priority is to continue to grow the company. I think it's fair to say there's a lot of potential acquisitions on the market at the moment. I think the market is more buoyant at the moment than probably it has ever been. Quality acquisitions are still more expensive and I think that the prices will continue to compress. We're going to remain balanced in terms of capital allocation as and when we think it's opportunistic to buy our stock back. We'll continue to buy our stock back and I think that was clearly messaged in our prepared remarks.