Peter C. Delongchamps - Vice President of Financial Services and Manufacturer Relations Earl J. Hesterberg - Chief Executive Officer, President, Executive Director and Member of Finance/Risk Management Committee John C. Rickel - Chief Financial Officer, Chief Accounting Officer and Senior Vice President.

Elizabeth Lane Suzuki - BofA Merrill Lynch, Research Division David H. Lim - Wells Fargo Securities, LLC, Research Division N. Richard Nelson - Stephens Inc., Research Division James J. Albertine - Stifel, Nicolaus & Company, Incorporated, Research Division Ravi Shanker - Morgan Stanley, Research Division Scott L.

Stember - Sidoti & Company, LLC Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division William R. Armstrong - CL King & Associates, Inc., Research Division.

Good morning, ladies and gentlemen, and welcome to Group 1 Automotive's 2014 Second Quarter Conference Call. Please be advised that this call is being recorded. [Operator Instructions] I would now like to turn the call over to Mr. Pete Delongchamps, Group 1's Vice President of Financial Services and Manufacturer Relations. Please go ahead, Mr.

Delongchamps..

Thank you, Andrew. And good morning, everyone, and welcome to today's call. The earnings release we issued this morning and a related slide presentation that includes reconciliations related to the adjusted results we'll refer to on this call for comparison purposes have been updated to the 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 and the conditions of markets.

Those and other risks are described in the company's filings with the SEC over the past 12 months. Copies of these filings are available from both the SEC and the company. 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 today, Earl Hesterberg, our President and Chief Executive Officer; John Rickel, our Senior Vice President and Chief Financial Officer; and Lance Parker, our Vice President and Corporate Controller. Please note that all comparisons and comparative remarks are to the same prior year period, unless otherwise stated.

I'd like to now hand the call over to Earl..

Thank you, Pete, and good morning, everyone. On an adjusted basis, Group 1 earned $40 million in the second quarter, which equates to $1.47 per diluted share. On a GAAP basis, net income and EPS were $16.9 million and $0.62, respectively. John will cover the adjustments in more detail.

But the largest was the onetime loss we booked as a result of the purchase and retirement of 80% of our 3% convertible senior notes.

This action, in conjunction with the mandatory redemption of all of our remaining 2.25% convertible senior notes, which will take place in early September, will significantly simplify our capital structure and reduce both the variability and the absolute amount of our diluted share count.

As an example, the increase in our average share price during the second quarter drove an increase in our diluted share count of 1.3 million shares compared with the same period a year ago. This negatively impacted adjusted EPS by $0.07.

Based on the second quarter stock price, the reductions in our convertible senior notes will eliminate approximately 2.2 million shares of dilution by the start of the fourth quarter of the year. For the quarter, total revenue increased $176.5 million or 7.6% to a record $2.5 billion despite extreme weakness in the Brazilian market.

The increase was driven by improvements in all areas of the business, with new vehicle revenue up 6.5%, used retail revenue up 7.9%, parts and service revenue up 8.5% and finance and insurance revenue up 12.9%. The results varied across our geographic exposures. The U.K.

had another very strong quarter, with total revenue growth of 21.2%, reflecting strong growth across each segment of the business. The U.S. operations also had solid growth, with total revenue increasing 9.5%, driven by the improving U.S. sales environment and recent acquisitions. While the U.S.

market remains very competitive, new vehicle margins have stabilized at about first quarter levels. Brazil was our most challenging market this quarter, with the effect of political and economic uncertainty, further magnified by significant consumer disruptions associated with World Cup activities that spanned approximately half the quarter.

Revenue for our Brazilian operations was down 18.8% in total, primarily explained by a 23.6% decline in new vehicle sales. The team partially offset the weak new vehicle selling environment with improvements in used retail sales, which were up 7.6%, and improvements in F&I, which was up 10.9%.

Given the rapid falloff in revenue, we were not able to fully adjust costs quickly enough. Compared with the same period a year ago, our small loss in Q2 this year versus a solid profit last year explained approximately $0.15 of adjusted EPS deterioration in the quarter.

On a consolidated basis for the quarter, we retailed 42,456 new vehicles and 26,721 used retail units, with new unit sales up 2.2% and used retail unit sales increasing 4.2%. Group 1's new vehicle unit sales mix was 81.7%, U.S.; 9.8%, Brazil; and 8.5%, U.K.

Toyota/Lexus sales accounted for 27.2% of our new vehicle unit sales, while BMW/Mini, Honda/Acura and Ford all represented over 10% of our new vehicle unit sales, while Nissan was at 9.3%.

New vehicle inventory rose slightly to a 72-day supply or 33,540 units at the end of the second quarter, compared to a 67-day supply for the second quarter of 2013. Used vehicle inventory stood at 15,106 units or a 35-day supply, compared to a 33-day supply for the second quarter of 2013.

Same-store consolidated revenue grew 4.2% driven by increases of 5.6% in parts and service and 9.9% in finance and insurance. Our same-store consolidated finance and insurance income per retail unit increased $124 to $1,319, with strong improvements in each of the 3 country groups.

Relative to our cost performance, on a consolidated basis, selling, general and administrative expenses as a percent of gross profit increased an adjusted 30 basis points to 73.1%, the increase more than explained by the deterioration in our Brazilian operations.

Total adjusted SG&A as a percent of gross profit improved 30 basis points in the U.S., and SG&A improved 260 basis points in the U.K. We continue to monitor and adjust our cost structure as we have in recent quarters to address the ongoing pressure on new and used vehicle margins.

We are also accelerating efforts in Brazil to reduce the expense structure to better reflect the recent significant slowdown in the economy. I'll now turn the call over to our CFO, John Rickel, to go over our second quarter financial results in more detail.

John?.

Thank you, Earl, and good morning, everyone. Our adjusted net income for the second quarter of 2014 rose $248,000 or 0.6% over our comparable 2013 results to $40 million. On a per share diluted basis, adjusted earnings declined 3.3% to $1.47 as a result of a 5.1% increase in weighted average diluted shares outstanding.

As Earl mentioned, our second quarter 2014 convertible note dilution of 2.9 million shares increased by 1.3 million shares from the second quarter of last year. Of the 2.9 million convertible share dilution, 2.3 million related to the 3% convertible note, of which over 80% were repurchased in late June 2014.

The other 600,000 diluted shares relate to our 2.25% convertible notes, of which we have filed a mandatory redemption notice, and we will repurchase all of these notes in early September 2014.

These results for 2014 exclude $23.1 million of net after-tax adjustments, including $20.8 million of charges related to the partial redemption of our 3% convertible notes; $1.1 million of asset impairments, mainly attributable to the relocation of the dealership onto owned real estate; and $1 million related to hailstorms in Shawnee Mission, Kansas and Rock Hill, South Carolina.

The comparable results for the second quarter of 2013 exclude $2.3 million of net after-tax adjustments, including $6.8 million of charges related to catastrophic events and $400,000 of charges related to noncash asset impairments. These adjustments were partially offset by a $4.8 million net after-tax gain on dealership and real estate transactions.

Starting with a summary of our consolidated results. For the quarter, we generated $2.51 billion in total revenues. This was an improvement of $176.5 million or 7.6% from the same period a year ago and reflects increases in each of our business units. Our gross profit increased $27.9 million or 8.2% from the second quarter a year ago to $369.1 million.

For the quarter, adjusted SG&A as a percent of gross profit increased 30 basis points to 73.1%, and adjusted operating margin was 3.5%. The increase in SG&A as a percent of gross profit relates specifically to the weakening of the Brazilian economy relative to the second quarter of the prior year.

Floor plan interest expense decreased $500,000 or 5% from prior year to $10.3 million. This decrease is primarily explained by the credit facility amendment that took place in mid-2013, which lowered our U.S. new and used floor plan borrowing rate by 25 basis points.

Other interest expense increased $3 million or 31.3% to $12.6 million, which includes approximately $1.1 million in interest incurred on our $350 million of 5% senior secured -- unsecured notes, prior to the redemption of our 3% convertible notes.

The remaining $1.9 million increase is attributable to an increase in weighted average debt outstanding of $219 million, primarily explained by additional real estate-related financing, including mortgage borrowings associated with recent dealership acquisitions, as well as an increase in weighted average borrowings on our acquisition line during the second quarter of 2014.

Our adjusted consolidated effective tax rate for the quarter was 39%. We expect our tax rate to be approximately 38% over the remainder of 2014. Now turning to the second quarter same-store results, which now include a full 3 months of Brazil results from each period.

In the second quarter, we reported revenues of $2.37 billion, which was a $94.5 million or 4.2% increase from the comparable 2013 period. Within this total, new vehicle revenues were up 3%, and used vehicle retail revenues improved 4.2%.

Both finance and insurance, and parts and service delivered another strong quarter, growing revenues 9.9% and 5.6%, respectively. New vehicle revenue increased to $1.4 billion as a 0.7% decrease in unit sales was more than offset by an increase in our average new vehicle sales price of $1,263 to $34,542 per unit.

By country, same-store new vehicle unit sales increased 3% in the U.S., 0.6% in the U.K. and decreased 23.4% in Brazil. Our used retail revenues improved $22.5 million to $543.5 million and an increase in our average used vehicle retail sales price of $867 to $21,787 per unit.

F&I revenue per retail unit rose 10.4% to $1,319 driven by increases in both income per contract and penetration rates for most of our major product offerings. The 5.6% revenue growth in parts and service is explained by increases of 16.6% in wholesale parts, 7.6% in warranty, 5.2% in collision and 0.5% in customer pay. Within these totals, U.S.

parts and services revenue was up 5.4%, with wholesale up 11.3%, warranty up 7.8%, collision up 3.8% and customer pay up 2.1%. In the U.S., as manufacturer-paid maintenance continues to expand, there is an ongoing shift of business from customer pay to warranty.

Overall, given the strong comparative data we were up against this quarter of 8.8% growth in the same period a year ago, which was driven by significant collision work following a large hailstorm in Oklahoma, we're pleased with our parts and service revenue growth.

As a reminder, our parts and services revenues are not impacted by increases in internal business. The revenue associated with internal work is eliminated upon consolidation. This varies across the sector. Some of our competitors account for internal work differently.

In aggregate, our same-store gross profit grew $14.5 million or 4.3% to $347.2 million. Our same-store new vehicle gross profit dollars declined 4%, as slightly lower volumes combined with a $64 decline in gross profit per unit to $1,902. By country, U.S.

new vehicle gross profit increased approximately 1% as a $36 decrease in gross profit per retail unit partially offset the 3% increase in unit sales.

In the U.K., a $510 increase in gross profit per retail unit, explained by a mix shift towards luxury brands and dropping some low-margin fleet business, combined with a slight increase in unit sales, resulting in a new vehicle gross profit increase of 26.5%.

In Brazil, a $509 decrease in gross profit per retail unit, coupled with a 23.4% decrease in unit sales, resulted in a 37.4% decrease in new vehicle gross profit. Our used vehicle retail gross profit was up 0.1% as unit sales grew slightly, and gross profit per unit remained at $1,704.

Our F&I gross profit grew $7.7 million or 9.9%, reflecting the improved per retail unit previously mentioned. Finally, parts and service gross profit grew $9.3 million or 7%, primarily reflecting the strong revenue growth mentioned previously, as well as an 80 basis point improvement in margins to 53.3%.

For the second quarter, we grew our total gross profit by $14.5 million, while adjusted SG&A expenses rose $13.5 million. As a result, our adjusted SG&A as a percent of gross profit increased 90 basis points to 72.7%, primarily attributed to the weakening of the Brazilian economy as previously mentioned.

Turning now to our geographic segments, starting with the U.S. market on an actual basis. Total U.S. revenues grew 9.5% to $2.06 billion, driven by increases of 12.3% in F&I revenue, 10.4% in new vehicle revenue, 8.8% in parts and service revenue and 7.4% in total used vehicle revenue.

The increase in our parts and service revenues reflects growth in all areas of the business, and our F&I revenue growth reflects a 5.3% increase in retail vehicle sales volume, coupled with improved profitability per retail unit, which grew $91 or 6.7% to $1,442.

Total gross profit improved 9.1% driven by a 10% increase in parts and service, as well as the F&I increase that I've just mentioned. Second quarter, we grew our gross profit by $26.3 million, while adjusted SG&A expense rose $17.9 million. As a result, our adjusted SG&A as a percent of gross profit improved 30 basis points to 71.3%.

Adjusted operating margin for the U.S. business segment held at 4%. Related to our U.K. segment. Our U.K. operating team delivered another outstanding quarter, with total revenues for the U.K. segment up 21.2% from the prior year to $251.3 million.

As there has been no acquisition or disposition activity in the past 12 months, this metric is on a same-store basis as well. New vehicle revenues grew 19.3% on slightly more retail unit sales and an increase of $5,705 in the average sales price per unit to $36,349.

This increase in average sales price is attributed to a mix shift towards our BMW and Audi luxury brands. Used vehicle retail revenues improved 25.4% on 7.8% more retail units and an increase of $3,785 in the average sales price per unit to $26,934. Parts and service revenues improved 18.7%, representing double-digit increases in each segment.

Our F&I income growth of 26.7% reflects the 3.5% increase in total retail unit sales and a 22.5% increase in gross profit per retail unit to $709. During the second quarter, total gross profit grew 24.4%, reflecting healthy increases across each business segment.

We also leveraged our costs, and adjusted SG&A as a percent of gross profit improved 260 basis points to 75.6%. Operating margins in the U.K. business segment increased 30 basis points to 2.5%. Related to our Brazil segment.

On a macro basis, the economy has slowed significantly from the second quarter of last year, and the World Cup further served to pressure new vehicle sales. As such, we retailed 4,145 new units compared to 5,337 units in the second quarter of 2013, a decrease of 22.3%.

We did, however, show positive growth in each of the other business segments as we increased total used gross profit by 10.3%, parts and service gross profit by 6.2% and F&I gross profit by 10.9%. The increase in F&I was despite a decrease in total retail unit of 16.6% as we increased F&I gross profit per retail unit by $131 or 32.8% to $531.

Our adjusted SG&A as a percent of gross profit was 95.1% compared to 80.5% a year ago, while our operating margin decreased 170 basis points to 0.3%. For the quarter, the Brazil segment was not profitable, and we expect continued economic pressure in the short term that will limit our operations to break even over the remainder of 2014.

Turning to our consolidated liquidity and capital structure. As of June 30, 2014, we had $21.3 million of cash on hand, and another $64.6 million that was invested in our floor plan offset account, bringing immediately available funds to a total of $85.9 million.

In addition, we had $220.8 million available on our acquisition line that can also be used for general corporate purposes. As such, our total liquidity at June 30, 2014, was $306.7 million. Year-to-date, for 2014, we have generated $104.1 million of operating cash flow on an adjusted basis.

As previously announced, we successfully tendered for roughly 80% of the then $115 million at face value of outstanding 3% convertible notes and paid cash of $210.4 million, excluding accrued interest.

After the quarter ended, we also received cash proceeds of $26.4 million related to the unwind of the associated calls and warrants, resulting in a net transaction cost of $184 million. To fund this transaction, we issued $350 million of 5% senior unsecured notes due 2022.

The excess cash from this bond offering we used to pay down our acquisition line and for general corporate purposes. As of June 30, $22.5 million of face value with 3% convertible notes remain outstanding. We also announced the mandatory redemption of all $182.8 million at face value of our 2.25% convertible notes.

This transaction will be finalized in early September. When completed at the start of the fourth quarter this year, our redemptions of both the 3% and 2.25% convertible notes are estimated to improve EPS by approximately $0.09 per quarter.

Please refer to our investor presentation on the website for the pro forma income statement effect from both of these transactions. With regards to our real estate investment portfolio, we owned $674 million of land and buildings at June 30, which represents 42% of our dealership locations.

To finance these holdings, we've utilized our mortgage facility and executed borrowings under other real estate specific debt agreements. As of June 30, we had $66.3 million outstanding under our mortgage facility and $293.9 million of other real estate debt, excluding capital leases.

During the second quarter, we used $4.1 million to pay dividends of $0.17 per share, an increase of $0.01 per share over the second quarter of last year.

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. With that, I'll now turn it back over to Earl..

Thanks, John. Related to our 2014 corporate development efforts, in the second quarter we previously announced the acquisition of Mercedes-Benz and Kia dealerships in Texas and in July, announced the acquisition of Chevrolet and Mazda dealerships also in Texas.

Additionally, we were also granted a Sprinter franchise in Beverly Hills, California in June. Year-to-date, we estimate the total annualized revenues from our 2014 acquisitions to be $535 million.

As also previously announced, we disposed of a Hyundai franchise in April in New Orleans, Louisiana, with annualized revenue of $20 million and a Volvo franchise on Long Island, New York in June, with annualized revenue of $30 million. We continue to adjust our dealership portfolio to ensure we are generating appropriate returns for our shareholders.

I'll now turn the call over to the operator for your questions..

[Operator Instructions] The first question comes from John Murphy of Bank of America Merrill Lynch..

This is Liz Suzuki on for John. It looks like U.S. same-store revenue growth was a little lighter than what we might have expected, especially on the used vehicle side.

Is there anything you're seeing on the used -- in the used environment that might be causing growth to slow a little bit in the U.S.?.

This is Earl. Yes, I -- my impression was that the used car market overall was a little bit softer last quarter. I couldn't tell you exactly why, although in June, I had the impression that there was a lot of new vehicle volume pressure from a variety of OEMs to hit targets and things, and perhaps new cars sat down on used cars a bit.

In our case, we had a big variation -- the biggest variation I have seen in a long time among performance from various geographies. And much of our weakness was driven by an actual 20% decrease in used car sales in New Jersey and New York. We also had a couple of markets that were flat.

But generally, our used car performance was much better than our total corporate metric would indicate. So we were depressed a bit by a couple of poor performances in specific geographies, and the same was true on new vehicles. We had a little bigger variation than I'd seen before..

Okay, interesting. And with all the recalls that have been announced, not just at GM but several other automakers as well.

Is your parts and service business seeing any benefit from that yet? And if not, what do you think the likely timing of any real volume growth would be from recalls?.

Well, quite frankly, these recalls that have received the most publicity, notably, the General Motors ones, and the ones that have been announced here in the last month by a couple of other manufacturers, we've had virtually no impact yet. Parts aren't available in many cases, or not sufficient parts.

So -- but for the last year or so, I think it's fair to say that our overall business has had a positive effect from a variety of recalls, but probably not the ones that you're thinking of -- that you've heard the most about recently..

Okay.

And is there enough capacity in the service space for any real -- for a material increase in volume if those parts do start to become available and you see any real short-term bump in parts and service from recalls?.

There is capacity, but I have to tell you we always struggle with technicians. We could use more technicians, and we've been trying to increase our human capacity for quite some time. So we have the physical plant necessary, but we're going to continue to drive to increase the number of technicians we have..

The next question comes from David Lim of Wells Fargo Securities..

So the question I have is, I was wondering if you could flesh this out for me. Brazil same-store sales on an F&I portion of the business there, it looks like new vehicles declined about 24%; used vehicles did better.

Is it just that the 35% increase per unit, is that mainly due to mix? Or can you explain that a little bit more? What kind of products are you guys selling that you guys could enjoy that kind of a lift when new vehicle sales were down?.

Well, the improvement we've had has just been by putting focus on it for the first time probably in the corporation's history. There's not a big extended service contract market there. There are some legal limitations on finance income, but we actually sell auto insurance there. And that's one of the prime products.

I don't know, Pete, if you have anything to add to that..

I do not..

Okay..

Got you. And then we've noticed that the U.S. new vehicle same-store sales underperformed relative to overall U.S. industry, and obviously, there could be some functions related to mix and fleet. But also, we noticed the gross margin declined year-over-year.

Can you just sort of speak to the dynamics of what happened in the quarter? And to tag along with that, did you have enough used vehicle inventory going into Q2?.

Yes, couple of questions there. Yes, there continues to be pressure on new vehicle margins, but they really weren't dramatically different in the second quarter than they were in the first. That was 20 basis points or so lower than a year ago. So there continues to be some pressure, but I think we've flattened out a bit there.

On the new vehicle sales performance, I just alluded to it a moment ago when we chatted about used vehicles. We were, again, very uneven by geography. Our -- most of our core markets actually were quite strong. South Texas, California and the Gulf Coast were all up almost 9% in new vehicle sales, but we were down almost 6% in New York and New Jersey.

We were flat for the first time in the Atlantic Coast, and we were very weak in New Orleans. So we had a huge spread. But overall, I would say new vehicle sales were probably a little bit better than what our average metric indicated. Relative to used vehicle inventory, we don't have any different problems now than we've had over the last year or 2.

There were some shortages of good late model used cars, but nothing different than what we've experienced in the past..

Got you. Just 2 more questions on -- the U.K. same-store sales parts and service was really strong at plus 19%. I was wondering if you could sort of share with us, what are the underlying difference, if any, between the U.S. and the U.K.? What I'm really trying to get here is if the U.S. can come close to the U.K. performance.

Or are there massive fundamental differences in parts and service that sort of evade that?.

Well, strangely enough, there isn't nearly the recall influence in the U.K., which is counterintuitive to the point you're trying to make.

So -- but I think the main benefit there is simply the units in operation and the kind of the economic attitude there, the consumer confidence, most of our growth is coming from BMW and Audi brands and the expanding units of -- in operation. And those customers are loyal, and they're bringing their cars back..

Got you. And my final question is staying on the U.S. parts and services.

Can you provide like a rough revenue mix or split between vehicles in the 0- to 5-years range versus 6- to 11-year range? What I'm trying to get at here is in your parts and service business, I mean, how was that sort of weighted between those 2 verticals or categories?.

Yes, this is John Rickel. We don't have detailed specifics, but I will tell you, the vast majority of our profitability would be in that kind of 0 to 6. Once you get beyond that, they start to fall off really rapidly..

Yes, they tend to go to, like, the outside mechanics for one reason or another..

Well, I mean, partially, if you think about it, most of these are customers that we have met through, either selling them a new vehicle or used. And by the time a car gets to 6 years old, it's probably changed ownerships. So you lose the relationship a lot of times..

Is it also the fact that most new vehicle powertrain warranties expire after 5 years, too?.

Well, certainly, that's a piece of it. I mean, the bumper-to-bumper stuff tends to be after 3 years and the powertrains, 5 or 6, yes..

The next question comes from Rick Nelson of Stephens Inc..

I wanted to ask about the markets in Brazil, which has been a challenge. The U.K., really strong. But World Cup had to have been disruptive. You'd called out $0.15 year-over-year, have pressures there. Earl, if you could discuss the outlook for that market, what you're doing, I guess, to -- from an expense standpoint to adjust [ph]..

Yes, sure, Rick. Thank you. Yes, the market -- we have no near-term positive hope for the market, at least through the election. The election is in early October. Even if you watch the World Cup, I think you could see some of the election spilled into that. And so that's creating a lot of the uncertainty.

So that means we have to be more aggressive in our cost-cutting. I just got back from Brazil 2 or 3 days ago. So we did launch on Monday, a much more drastic resizing effort. Since Monday, we've eliminated 100 positions. I expect within a couple of weeks, that number will be 150. That's somewhere around 10% of our headcount.

We will do as much of that as possible through attrition, but we've got to resize the business. The big issues for us are the French brands. Peugeot was down 20% in the first 6 months. And Renault shows being up, but as much as 40% of Renault sales are fleets. So the throughput in the dealerships is way down. And Nissan is our other challenge.

Their sales are down 16%, although they've opened a new factory in Brazil recently, and by August, that's supposed to turn up. But we have no choice but to resize our business, particularly in those 3 brands, the lower levels.

Our Land Rover business is still very good and profitable, but it's down 15% this year as they transitioned to local production. And we do 9% or 10% of all the Land Rovers in Brazil and 9% or 10% of all the BMWs. So we are resizing there very aggressively.

I also think it's safe to say we'll make a few adjustments to our portfolio, if possible, over the next 6 to 9 months as well there..

Have the sales trends changed as of late, especially since the World Cup ended?.

No. Of course, it was a disaster during the 3 or 4 weeks of the competition. It did appear last weekend that some customers started to come out again. But I don't have any data yet to see what kind of bounce-back we're going to get.

But the country did pretty much come to a standstill during the World Cup, and we even had days with no customers in the shop. But I must say that there's still an underlying base in Brazil. Unemployment is not an issue. The people have jobs. There's cranes all over São Paulo and Rio.

So with some policy changes or a pro-business government, Brazil could turn around fairly quickly. But until the election in October, I don't expect a lot of changing consumer confidence..

Okay. And then the strength in the U.K. across all the segments, the used business really strong there, 25% same-store growth and units up 7.8%.

Is that OEMs punching cars over there? What was the driver to the used -- strong used result?.

Well, our management team says it's due to their brilliant abilities. But there is always in the U.K. a big low-mileage used business. It kind of goes with aggressive OEM activities, but I haven't really seen any increase in that.

It just seems that the vehicle sales market, new and used, remains very, very strong, and we expect a very strong September based on kind of the early order bank buildup..

Next question comes from James Albertine of Stifel..

September was a question I had as well. On the parts and service business, I was wondering if you could give a sense for -- it looks like you've now transitioned out of sort of an investment phase as it relates to your inbound call center.

So I wanted to get sort of an indication of the benefits that you're seeing from that investment and maybe some advantages, you think, that gives you kind of looking forward into the back half of this year..

Well, we have been very pleased with those investments. But I have to tell you, we continue to struggle to stay up with the volume and keep the service levels up. And the parts and service business remains very strong, and I'm still very optimistic about it.

I think there were -- some question -- our comp number may look a little lower than it has in previous quarters. But the second quarter last year, I think we were up over 8%..

8.8%..

8.8% last year, and we had a bit of a hail tailwind in some of that number a year ago. So overall, I would tell you, the parts and service business is still strong. And as someone noted on the call, there's a lot of recall work to support us in the third and fourth quarter, I think..

That's great detail. I appreciate the insights. And then as it relates to recalls, any sense that for some of the older units that are being recalled, that customers are recognizing the advantages now in miles per gallon and sort of infotainment and so forth with newer vehicles.

And rather than have those vehicles replaced as you'd expect -- I'm sorry, fixed as you'd expect, they are, in fact, replacing them with new or used vehicles.

Are you seeing any of that flow through the system?.

I have no evidence of that yet, but I have to tell you, I don't think we have as much traffic in the dealerships yet on these old model recalls as you might expect us to. And I'm not sure yet how many of these customers are going to come in. So we'll have to wait and see about that.

Some of these cars are very, very old, in my experience, as you get a very low return rate on some of these very old cars..

Got you. And then if I could sneak one more in on M&A. And you guys have had a great cadence relative to your peer group, so congratulations there. But as it relates to the OEMs, do you see -- and I think we've heard that on the luxury side, Lexus in particular.

But do you see the OEMs relaxing their sort of standards as it relates to aggregate ownership?.

I do believe Lexus might have made a small policy change in that direction, but I haven't seen any major movement in that direction overall..

The next question comes from Ravi Shanker of Morgan Stanley..

For F&I, you guys went -- a little bit counter to the industry, in that you had a very strong year-on-year improvement versus the industry, which seemed to slow down in the quarter.

Any reason to explain that? Or is this just your own execution, which was good? Or are you still seeing the industry kind of pick up or see tailwinds in F&I?.

Ravi, this is Pete Delongchamps. Thank you for the question. I think that we've put a business plan in place 5 years ago. We've been executing on it. I've got a field team that is working directly with the dealerships on a daily basis. We also now have an F&I representative in the U.K., which is driving improvement.

So this is just a follow-up to the things that we've put in place. We continue to work very hard on the underperforming stores. And we've got great partners, both on our product side, but with our lenders as well. So it's a plan coming together, and we're very pleased with the results and thankful for the job our dealers have done for us..

Got it. And then on new pricing, specifically, the other dealers and I think you yourself mentioned in this call that there's been a pretty meaningful uptick in competitive pressures on the new pricing side. And you've mentioned in the past about mass import kind of being the source of that.

I know we certainly expect the Japanese brands to come up with some really cool new products over the next couple of years.

Do you think that eases that? Or do you think as we push on towards new cyclical highs in the SAAR, we might see more of this price competition on the new side?.

Yes, Ravi, this is John Rickel. The -- I think the positive within the quarter was that we actually saw some stability, certainly sequentially. We actually saw our new vehicle margins tick up just a little bit. Clearly, if there is a new product that comes, you've got the redesigned Camry, you've got F-Series. Traditionally, that's good for margins.

But at this point, it is -- continues to be competitive. And I think what we've said is we would kind of guide to continuing to model at about these levels for the foreseeable future..

Understood. And just finally on Brazil, I think it's understandable that you saw a disruption in the quarter because of the World Cup and coming up to the elections. I'm just wondering what kind of visibility you guys have in the Brazilian market even beyond that. And I have to ask you this.

I'm wondering if you would consider at all exiting Brazil if this doesn't turn around sometime very soon..

Yes, Ravi, this is Earl. No, I have absolutely no intention recommending that we exit Brazil. In fact, the more I work with the country, the more excited I am about its future. Days like today aren't a great day to be in Brazil, I can assure you of that. But over 4 years, I've been through these things many, many times.

So no, and I think it's one of the most exciting markets in the world, probably after China. And we have great people, and we have great brands. We have some adjustments, I think, we need to make. First of all, costs in the near term. Long term, we have to adjust our brands a bit in the footprint.

But no, I think it's going to be a great long-term investment for our shareholders. That said, we've got some real heavy lifting to do in the near term because it is highly unpredictable. But there's 200 million people there, a growing middle class, they all need cars. They have no public transportation. They love cars.

Somebody's going to be the best car dealer group in Brazil, and I'm pretty sure it's going to be Group 1..

[Operator Instructions] The next question comes from Scott Stember of Sidoti & Company..

In the U.S.

on the new car side, could you talk about brand mix and how some of your brands performed compared to what the industry did?.

Yes. And again, Scott, I think our performance was spotty by geography. Big variations we don't normally see. And our Ford business is still very good, but I don't think we were as strong in Ford in this quarter as we were probably for the last year or so. Our Toyota business remains very solid.

There's pressure on those margins, but the volume is pretty good. And I would say BMW business is still very, very strong. So those are our major brands, and I think Ford is probably one where we didn't do as well as we've had in, probably the previous 4 or 5 quarters. That's what comes to mind based on the data I remember looking at.

Do you have any other comment?.

Yes. I think Earl said the key ones -- this is John. The other ones, we've performed about what the market did on Honda. Honda was about flat. We were about flat. We had some shrink with Nissan. We were up double digits there. And the other one that we were really, really strong with was Hyundai.

We were up double digits with Hyundai and kind of outperformed what they did in the market..

Okay. And by region, I know you mentioned a couple of areas that were weak.

But how did you guys do in Texas and Oklahoma?.

Actually, Oklahoma was weak. I should have mentioned that before. It was down about 2%, which is, again, the first weakness we've seen there in a long, long time. But South Texas was up 9%. California was up almost 9%. North Texas wasn't quite as strong as South Texas, but our Bay and the Gulf Coast, our major markets, were very strong.

But we were weak primarily from New York, New Jersey, down the Atlantic Coast..

Yes, the one thing, Scott, on Oklahoma that I would mention is that, perversely enough, we had a hailstorm there a year ago. And when that happens, you get big hail sales that actually move a lot of inventory. So we were up against a pretty difficult comp in Oklahoma because of the hail-related sales last year..

Okay, got you. And, John, just one last question, a follow-up on your comments about Brazil being break-even at best in the back half of the year.

Is that assuming any pickup in sales? Or is that just strictly related to the cost cuts that you implemented on Monday?.

No, we assumed some pickup, Scott. This is Earl. We -- the -- we basically couldn't have a lower sales level than what we had during that World Cup time period. So there'll be some increase in gross profit as we move through the end of the year.

Now historically, November, December aren't particularly strong, but there will be a little bit higher gross profit generation levels than what we saw in the second half of the second quarter..

The next question comes from Brett Hoselton of KeyBanc..

I was hoping you could speak to gross profit throughput. If I calculated things correctly, it looks like in the U.S., you had about a 32% gross profit throughput. On a fully consolidated basis, it looks like it's around 22%.

And, John, can you kind of just talk about maybe some of the unusual things that impacted that and where you expect that to go going forward?.

Sure. And your calculations, I think, are certainly in the ballpark. Clearly, Brazil contributed to the consolidated piece. And as Earl indicated, we've launched some pretty significant cost reduction efforts down there. We'll need to see the traction we get, how quickly that comes to be able to really comment on the consolidated piece. The U.S.

certainly was a little bit of a disappointment, too. I mean, normally, we would anticipate $0.40 to $0.50 of flow-through, and it was below that. So there's some additional work that we're doing on cost in the U.S. as well..

So there is nothing that you would necessarily call out as particularly unusual or onetime or something along those lines? It's just a matter of, we need to kind of make some adjustments, and that'll hopefully benefit it over the next few quarters or something like that?.

I think that's fair, Brett..

Okay.

And then from an M&A standpoint, can you speak to, as you compare M&A activity today versus where we were maybe 6 months or a year ago, can you speak to the deal flow, how many deals are you seeing and/or multiples? And then where are you at today in terms of kind of the pace of acquisitions? Is there any reason to believe that you might slow down or speed up the pace of acquisitions?.

Brett, this is Earl. Yes, my impression is that the overall activity level and the deal flow has slowed down recently than what -- because it's been quite strong in the last 6 to 12 months. But there's certainly still activity out there. We plan to continue to try to grow in the U.S. and the U.K., in particular.

As I mentioned, we may rebalance our portfolio a little bit in both Brazil and the U.S. I think you can expect some dispositions from us also in the U.S. So yes, we don't have any strategic reason to stop our growth, but we have to, again, be disciplined at our return on investment hurdles.

And pricing has been pretty high in the market, so that may be another reason that -- for some of the activity to slow down a bit..

And kind of specifically along those lines, Lithia made a pretty large acquisition. You might consider it transformational.

Your thoughts on the potential of doing something similar at Group 1 is -- or would you consider your pace of acquisition to be more consistent with where you've been historically?.

Yes. I think the large-magnitude acquisition we made was in Brazil, but I don't see a potential for large-scale acquisitions in the U.S. or the U.K. for our company..

The next question comes from Bill Armstrong of CL King Associates..

I was wondering if you could discuss incentive activity during the quarter. We've heard that some incentive activity may have impacted used car sales a little bit in the industry. I was wondering if you've seen any of that..

Well, I think it's -- it have may been -- I think it was a bit more aggressive. I think it's always a bit more aggressive, though, as you come into the big spring and summer selling months. Generally speaking, for OEMs and dealers, if you don't sell cars in those months, you're not going to have much of a year.

So there are some very powerful OEMs out there, all fighting for share. So there was reasonably brisk incentive activity in the second quarter, and I would expect it in the third. I wouldn't say necessarily that the costs per unit are getting out of control by the OEMs, but there is plenty of competition out there for market share..

Do you think that might have impacted used car sales on the margin?.

Yes, I had that feeling in June. At least based on our experience, there was an awful lot of pressure to hit buying targets and things. So I did have the impression that there was a lot of focus on the new vehicle side of the business by a lot of dealerships, not just ours, in June at the quarter end..

Okay.

And within used, what were your same-store sales for certified preowned in the U.S.?.

I don't have it on a same-store basis, but I think it's still somewhere around 30% of our total sales..

Yes, it's about 30% of our mix, Bill, but I don't have the actual increase in same-store basis split that fine..

Okay.

30% of your total used, you mean?.

Correct..

Yes..

What would that have been a year ago? Any idea about that?.

About the same..

About the same, so about flat then. Okay.

And then final question, what do you think were the drivers that caused New York and New Jersey to be weaker than the rest of the country?.

Well, I don't have -- we always assume it to be management. It's hard to get used vehicle market information on a timely basis. So I don't -- we've made some management changes, I would tell you that. And we also may make some portfolio adjustments..

This concludes our question-and-answer session. I would like to turn the conference back over to Earl Hesterberg, President and CEO, for any closing remarks..

Thanks to everyone for joining us today. We look forward to updating you on our third quarter earnings in October..

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