Peter C. Delongchamps - Vice President of Manufacturer Relations, Financial Services & Public Affairs 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.

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

Hoselton - KeyBanc Capital Markets Inc., Research Division William R. Armstrong - CL King & Associates, Inc., Research Division Paresh Jain - Morgan Stanley, Research Division Yejay Ying - Morgan Stanley, Research Division.

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

Good morning, and thank you, Amy, 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'll refer to on this call for comparison purposes have been posted to the Group 1 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 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 last 12 months. Copies of these filings are also available from the Securities and Exchange Commission 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 with me on today's call, 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 in prepared remarks are to the same prior year period, unless otherwise stated.

I'll now hand the call over to Earl..

Thank you, Pete, and good morning, everyone. On an adjusted basis, Group 1 earned $39.8 million in the third quarter, which equates to $1.57 per diluted share. On a GAAP basis, net income and EPS were $26.2 million and $1.03, respectively.

Our 2014 third quarter earnings results exclude $13.6 million of net after-tax adjustments, with the single largest item being a onetime loss of $17.9 million related to the repurchase of all of our remaining convertible senior notes. Eliminating these notes simplifies our balance sheet and will be accretive to our results going forward.

John will cover the adjustments in more detail momentarily. For the quarter, total revenue increased $286.3 million or 12.2% to a record $2.6 billion.

This increase was driven by improvements in all areas of the business with new vehicle revenue up 9.7%, used retail revenue up 16.2%, parts and service revenue up 14.3% and finance and insurance revenue up 17.7%. The results varied across our geographic exposures. The U.S.

operations had strong growth, with total revenue increasing 15.1%, driven by the improving U.S. sales environment and recent acquisitions. Some of this growth will be tempered in Q4 as we made some dispositions late in the quarter representing $275 million of annualized revenue. The U.K.

had another very solid quarter with total revenue growth of 7.4% reflecting significant growth across the used vehicle, parts and service, and finance and insurance segments, partially offset by softer sales in new vehicle retail.

The weakness in new vehicles reflects a decision we made to stop some high-volume low-margin fleet sales, primarily within our Ford business, several quarters ago. For Brazil, the market remains very weak, down 12% in Q3. But our revenue was down only 8% from the prior year period, about equal to our second quarter results.

Within that total, strong growth of 12.2% in used retail, 9.8% in parts and service and 18.6% in F&I were partial offsets to weaker new vehicle revenues. Most importantly, our Brazilian business returned to profit in Q3. While the U.S. market remains very competitive, we saw same-store new vehicle margins improve slightly, up $21 per unit to $1,675.

Same-store finance and insurance income for retail unit continued to expand and margins on our same-store parts and service business improved 80 basis points to 53.6%. Same-store used retail margins declined slightly to $1,547 or $82 per unit. Used sales were impacted to some degree by the strength of new vehicle sales in August and early September.

On a consolidated basis for the quarter, we retailed 44,494 new vehicles and 28,776 used retail units, with new unit sales up 5.2% and used retail unit sales increasing 10.4%. Group 1's new vehicle unit sales mix was 82.3% U.S., 9.2% Brazil, and 8.5% U.K.

Our new vehicle brand mix was led by Toyota/Lexus sales, which accounted for 28.3% of our new vehicle unit sales, while BMW/MINI, Honda/Acura and Ford all represented over 10% of our new vehicle unit sales and Nissan was at 8.9%. At the end of the third quarter, U.S.

new vehicle inventories stood at 27,515 units, which equates to a 75 days’ supply compared to a 79 days’ supply for the third quarter of 2013. U.S. used vehicle inventories stood at 12,112 units, which equates to a 30-day supply compared to a 35-day supply for the third quarter of 2013.

Same-store consolidated revenue grew 5.5% driven by increases of 8.4% in used vehicle retail sales, 7.4% in parts and service and 10% in finance and insurance.

Our same-store consolidated finance and insurance income per retail unit increased $114 to $1,336, with robust improvements in each of the 3 country groups, including a $76 per unit increase in the U.S. to an all-time quarterly record of $1,475 per unit.

Relative to our cost performance, on a consolidated basis, selling, general and administrative expenses as a percent of gross profit improved an adjusted 120 basis points to 73.9% with the improvement explained by focused cost reduction efforts across all of our operations.

Total adjusted SG&A as a percent of gross profit improved 110 basis points in the U.S. and 230 basis points in the U.K. In Brazil, we have made significant progress on reducing costs through a major restructuring which reduced total headcount by 150 positions or approximately 10%.

On a sequential basis, SG&A as a percentage of gross profit improved 820 basis points to 86.9%. Largely as a result of these cost improvements, we were profitable this quarter in Brazil. This result is a great testimony to the quality of our Brazilian management team.

I'll now turn the call over to our CFO, John Rickel, to go over our third quarter financial results in more detail.

John?.

Thank you, Earl. Good morning, everyone. Our adjusted net income for the third quarter of 2014 rose $6.9 million or 21% over our comparable 2013 results to $39.8 million. On a fully diluted per share basis, adjusted earnings increased 30.8% to $1.57.

These results for 2014 exclude $13.6 million of net after-tax adjustments including $17.9 million of charges related to the repurchase of all of our 2.25% as well as a remainder of our 3% convertible notes, and $6.6 million of asset impairments primarily associated with the pending disposition of vacated U.S.

dealership real estate and 3 Renault franchises in Brazil. These charges were partially offset by a net after-tax $8.6 million gain on the sale of U.S. dealerships and associated real estate and a $3.4 million income tax benefit related to deductible goodwill in Brazil.

The comparable results for the third quarter of 2013 excluded $101,000 of net after-tax adjustments. Starting with a summary of our consolidated results. For the quarter, we generated $2.6 billion in total revenue, which was an all-time quarterly record.

This was an improvement of $286.3 million or 12.2% for the same period a year ago and reflects healthy increases in each of our business segments. Our gross profit increased $45.2 million or 13.7% from the third quarter a year ago to $374.7 million.

For the quarter, adjusted SG&A as a percent of gross profit improved 120 basis points to 73.9%, and adjusted operating margin was 3.3%. Floor plan interest expense decreased roughly $250,000 or 2.2% from prior year to $10.5 million primarily due to lower floor plan borrowings in Brazil.

Other interest expense increased $3.3 million or 32.8% to $13.2 million. This increase is primarily attributable to an increase in weighted average debt outstanding related to our issuance of $550 million of 5% bonds, which we used to retire our 2.25% and our 3% convertible notes over the prior 2 quarters.

Our adjusted consolidated effective tax rate for the quarter was 37.1%, reflecting the favorable mix impact of increased profitability in the U.K. We expect our tax rate to be approximately 38% over the remainder of 2014. Now turning to the third quarter same-store results.

In the third quarter, we reported revenues of $2.4 billion, which was $125 million or a 5.5% increase from the comparable 2013 period. Within this total, new vehicle revenue was up 3.4% and used vehicle retail revenues improved 8.4%.

Both finance and insurance and parts and service delivered another strong quarter, growing revenues 10% and 7.4%, respectively. New vehicle revenue increased to $1.4 billion as a slight decrease in unit sales was more than offset by an increase in our average new vehicle sales price of $1,354 to $34,128 per unit.

By country, same-store new vehicle unit sales increased 4.4% in the U.S, decreased 12.4% in the U.K. and decreased 21.9% in Brazil. Our used retail revenues improved $43.2 million to $558.8 million on a 2.5% increase in unit sales and an increase in our average used vehicle retail sales price of $1,155 to $21,475.

F&I revenue per retail unit rose 9.3% to $1,336 driven by increases in income per contract and penetration rates for most of our major product offerings. The 7.4% revenue growth in parts and service is explained by increases of 20.7% in warranty, 14% in wholesale parts, 3.6% in collision and approximately 1% in customer pay.

There were a number of high-volume recalls in the third quarter from General Motors, BMW, Toyota and Ford, which contributed to the warranty increase. Also as manufacturer-paid maintenance continues to expand in the U.S., there's an ongoing shift of business from customer pay to warranty.

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

In aggregate, our same-store gross profit grew $21 million or 6.5% to $343.7 million. Our same-store new vehicle gross profit dollars increased 2.8%. The slightly lower volumes were more than offset by a $60 increase in gross profit per unit to $1,801.

Our used vehicle retail gross profit decreased 0.7% as a 2.5% increase in unit sales was more than offset by a gross profit per unit decrease of $50 to $1,550. Our F&I gross profit grew $8.1 million or 10%, reflecting the improved dollars per retail unit previously mentioned.

Finally, parts and service gross profit grew $11.1 million or 8.5%, primarily reflecting the strong revenue growth mentioned previously as well as a 50 basis point improvement in margins to 52.8%. For the third quarter, we grew our total gross profit by $21 million, while adjusted SG&A expenses rose $11.9 million.

This equates to a gross profit flow-through of 43%, which is well within our target of 40% to 50%. As a result, our adjusted SG&A as a percent of gross profit decreased 100 basis points to 73%. Turning now to our geographic segments starting with the U.S. market on an actual basis. Total U.S.

revenues grew 15.1% to $2.2 billion driven by increases of 17.9% in F&I revenue, 17.4% in total used vehicle revenue, 14.1% in new vehicle revenue and 14.1% in parts and service revenue.

The increase in our parts and service revenues reflects growth in all areas of the business, and our F&I revenue growth reflects an 11.8% increase in retail vehicle sales volume coupled with improved profitability per retail unit, which grew $75 or 5.5% to $1,450.

Total gross profit improved 14.9% driven by increases of 15.5% in parts and service and 14.6% in new vehicles as well as the F&I increase that I just mentioned. For the third quarter, we grew our gross profit by $41.7 million, while adjusted SG&A expenses rose $27.4 million.

As a result, our adjusted SG&A as a percent of gross profit improved 110 basis points to 72.9%. Adjusted operating margin for the U.S. business segment increased 20 basis points to 3.6%. Related to our U.K. segment. Our U.K. operating team delivered another outstanding quarter with total gross profit for the U.K. segment up 17% from prior year.

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 gross profit grew 18.6% as an increase in gross profit per unit of $643 to $2,466 more than offset a 12.4% decline in unit sales.

This increase in gross profit per unit and decrease in unit sales is directly attributable to a decision we made several quarters ago to discontinue some high-volume low-profit new vehicle sales at our Ford dealerships. Used vehicle retail gross profit improved 8.2% on 5.5% more retail units, and an increase of $39 in gross profit per unit to $1,572.

Parts and service gross profit improved 19.9% representing double-digit increases in each segment. Our F&I income growth of 13.2% is attributable to a 20.1% increase in gross profit per retail unit to $747, which was partially offset by a 5.8% decrease in total retail units.

During the third quarter, we also leveraged our cost and SG&A as a percent of gross profit improved 230 basis points to 74.7%. Operating margins in the U.K. business segment increased 50 basis points to 2.7%. Related to our Brazil segment.

On a macro basis as discussed on the second quarter call, the economy has slowed from the prior year and the uncertain political environment due to the pending election has hindered economic expansion. As such, we retailed 4,072 new units compared to 5,139 in the third quarter of 2013, a decrease of 20.8%.

We did, however, show positive growth in each of the other business segments as we increased total used gross profit by 26%, parts and service gross profit by 9.1% and F&I gross profit by 18.6%. The increase in F&I was despite a decrease in total retail units of 18.5% as we increased F&I gross profit per retail unit by $180 or 45.3% to $577.

The headcount reductions discussed by Earl drove an 820 basis point sequential improvement in adjusted SG&A as a percent of gross profit from 95.1% in the prior quarter to 86.9% this quarter.

The cost reductions coupled with the improvements in our used, parts and service and F&I business segments allowed us to generate a profit in Brazil for the quarter. Turning to our consolidated liquidity and capital structure.

As of September 30, 2014, we had $50.7 million of cash on hand and another $62.5 million that was invested in our floor plan offset account, bringing immediately available funds to a total of $113.2 million. In addition, we had $252.3 million available on our acquisition line that could also be used for general corporate purposes.

As such, our total liquidity at September 30, 2014, was $365.5 million. As of September 30, we completed the repurchase of all remaining 3% convertible notes as well as completing the previously announced redemption of all $182.8 million face value of our 2.25% convertible notes.

These repurchases were funded using proceeds from the $200 million add-on to our 5% coupon bond issuance as well as excess funds from the original $350 million issuance that occurred in the second quarter.

Beginning next quarter, the ongoing impact of the repurchase of both the 3% and the 2.25% convertible notes is estimated to reduce our diluted share count by an additional 800,000 shares from third quarter levels.

In total, the combination of these actions with the previously reported redemption of 80% of our 3% notes in the second quarter has reduced our fully diluted share count by approximately 2.7 million shares, and improved EPS by approximately $0.12 per quarter assuming a stock price of $75.

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 $653.3 million of land and buildings at September 30, which represents 41% 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 September 30, we had $58.8 million outstanding under our mortgage facility and $296.6 million of other real estate debt, excluding capital leases.

During the third quarter, we repurchased approximately 230,000 shares of our outstanding stock at an average price of $73.09 for a total of $16.8 million. As of September 30, we had $37.7 million of share repurchase authorization remaining. Also in the third quarter, we used $4 million to pay dividends of $0.17 per share.

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 back over to Earl..

Thanks, John. Related to our 2014 corporate development efforts. We previously announced the acquisition of a Chevrolet and Mazda franchise in Houston, Texas, a Mercedes-Benz and Sprinter franchise in the Metropolitan area of San Antonio, Texas, and a Mercedes-Benz franchise in Brazil.

Year-to-date, we have acquired 12 franchises worldwide that we estimate to generate approximately $680 million in annual revenues. We previously announced divestitures of a Honda franchise in New Jersey and a BMW/MINI franchise and a Mercedes-Benz and Sprinter franchise in New York.

On September 30, 2014, the company disposed of a Volkswagen dealership in Florida, which generated approximately $15 million in trailing 12-month revenues. Year-to-date, Group 1 has divested 7 franchises that generated roughly $390 million in trailing 12-month revenues.

At the end of September, we also signed a letter of intent to dispose of our 3 Renault stores in Brazil. Because that transaction is not yet closed, it is not included in these revenues. We continue to adjust our dealership portfolio to ensure we are generating appropriate returns for our shareholders. That concludes our prepared remarks.

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

Operator?.

[Operator Instructions] Our first question comes from Rick Nelson at Stevens..

Can you speak to the increase in the gross profit per unit in the U.K? It was pretty substantial?.

On -- across the board or in total? I mean, across the board or new vehicles? I'm sorry..

Yes, on new car per unit, up 35%..

Yes, it was a play change month and we had exceptionally strong months in our luxury brands, which are 2/3 of our dealerships of Audi and BMW..

Rick, this is John. The other key driver there was, as we mentioned in the scripts, we made a decision to get out of some really low-margin, high-volume fleet business we've been doing. That really helped improve the gross profit per retail unit.

We improved $643 per unit, largely driven by that decision to get out of that low-volume fleet, low-margin, high-volume fleet business..

In this quarter last year, there was 1 deal for very, very low profit of 600 units and that deal did not recur..

The acquisition pace, really seems to be heating up, $370 million of revenue acquired this quarter. If you could comment on the acquisition multiples and the pipeline that you see out there..

Certainly, Rick. This is Earl. Yes, we had some opportunities earlier in the year and they were large opportunities and I believe those will work well for our shareholders. I don't see those same opportunities for our company at the moment. It does appear that prices have gotten very, very high.

And while there still seems to be a lot of businesses on the market, I don't see that type of pace in the U.S. in the near term..

Okay. Also I'd like to ask you about within the U.S. regional areas of strength and weakness. I know that Northeast has been a challenge.

Is that still the case? And central region, is that performing well?.

Certainly, yes. Of course, Texas remains very strong and so does Boston and New Hampshire, New England was very strong for us this quarter. The weaker area for us has been New Jersey and New York. We exited New York. New Jersey is still a challenge for us.

Of course we have dealerships in Atlantic City and you've probably read about the casinos and some of the issues in that part of the world. So that's still a weak area. Also on the Gulf Coast, in particular, New Orleans. In New Orleans, in fact the total Louisiana, new car market is down significantly this year.

So I'd say the weak areas for us were New Jersey and the Gulf Coast..

Your next question comes from Scott Stember at Sidoti & Company..

On the new car side in the U.S., your gross margins were flat with a year ago.

Can you just talk about mix between luxury or strength of luxury versus mid-line imports and how that played into what appears to be a pretty strong gross margin quarter for you guys?.

I don't think the quarter was particularly strong. I think it was just basically steady and I know it bumped up a little bit. But I think that's normal. That's normal noise. It's still a very competitive market. I don't think we had a big change of luxury or Japanese brand mix. So I think it's pretty much steady as it has been for us.

We work hard to try to maximize the margins, but it's very difficult to do in a competitive market with a lot of strong OEMs and strong dealers fighting for share..

Yes, Scott, this is John Rickel. It really wasn't mix driven. It was -- most of the improvement really came out of the domestic brands was where we saw most of the margin improvement..

Okay, got you. And on the parts and service, so if we wanted to break it out by country, the percentages that you talked about on a same-store basis, the warranty and customer pay. Is there any way to maybe parse that out a little bit more by country, U.S. versus U.K.

versus Brazil?.

Sure. This is John again. Let me just, one second. The U.S.-- [Technical Difficulty].

Sorry, that was us. Yes, the U.S. had kind of similar sort of growth. We were up 6.1% on a U.S. basis, and kind of followed the same pattern, Scott. Most of the growth was warranty, was up 20.2%. Wholesale was up 8.6%. Collision was up 1.8% and customer pay was up about 1%..

Okay. Got you....

And then U.K. was up 21.8% on a same-store basis. They had double-digits across each of the segments. And then Brazil was up 8.4%, with a lot of that explained by improvements in collision..

Okay. I was just trying to get to the 1% increase in customer pay and the ongoing shift of some of these included maintenance programs from customer pay to warranty.

Could you maybe just quantify high-level how many hundreds of basis points that's accounting for so we can get to a true customer pay number?.

Scott, this is John. That's really kind of difficult because some of that stuff is mixed in. I mean, when we've looked at this previously, it's a couple hundred basis points, but -- I mean, that's really a rough guess..

The next question comes from David Lim at Wells Fargo..

So my first question is, strong SG&A to gross profit leverage in the quarter. I was wondering if you could peel back the onion there and sort of give us additional color? Obviously, SG&A grew at a slower clip versus gross profit.

Can you sort of bucket the major areas where you got some cost savings? And will that flow through going to the next quarter as well as in 2015?.

Yes, David, this is John Rickel. I mean, kind of the big buckets, obviously, Brazil, it was to a large degree, headcount driven. The team has done a great job of restructuring and kind of sizing the business down there for kind of the present sales environment.

And we clearly think that, that -- that those levels of savings are sustainable and probably some ability to continue to grow those as we go forward. U.K. was kind of leverage across each of the areas. A lot of it is we've continued to build scale. And we're leveraging things like personnel.

And as long as the gross profit dollars continue to grow there, we should be able to leverage that as well. And then the U.S., advertising was certainly one of the buckets, and we continue to be very focused on being efficient with the advertising. So I think that's sustainable as well..

The other question I have is on the same-store sales on the U.K. in particular. I know that you've mentioned about the -- not participating in the fleet.

But if we exclude the Ford side said of the business and we just focus on your BMW as well as Audi franchises, how did they perform on a same-store sales basis in the quarter? And are you seeing any kind of issues with the U.K.

consumer in general?.

Well, we haven't seen any issues with the consumer yet, David. But our Audi and BMW stores have performed extremely well. I would say the Audi stores grew sales more than the BMW stores because our BMW stores are more mature. We've owned those businesses for a longer period of time and we perform at a higher level.

Our Audi and Ford businesses are not as mature. So we -- we've probably performed a little bit better on the Audi side of the business in units, but they were both very strong profit performances for the quarter..

Yes, and David, I would add, this is John, that when you look at it, we basically performed consistent with what the industry change were for those brands. If you exclude the decision we made on the Ford fleet business, basically the team performed at what the market adjusted for our brands' results were for the quarter.

So we're very pleased with how the sales were over there..

Great. And then the other question I have is, I know that I might be getting a little bit ahead of myself, but any preliminary thoughts on 2015 U.S.

industry sales?.

David, this is Earl. I think there'll be small growth again. And I'm looking at the other industry experts and some of the OEM meetings I've attended. Most people think this year is coming in at 16.4 million. Our original forecast this year was 16.3 million. So we were pretty much on that.

I know one of the bigger OEMs that we deal with is forecasting 16.7 million for next year. And I would think that, that range and anywhere up to 17 million should still be possible next year. So I would see a little bit of growth again next year. Things seem very stable..

And just finally, my last question is, here is, are you seeing any kind of irrational behavior in the leasing front where OEMs are playing more with the residual values as of late?.

Not as of late, David, I think most of the OEMs in the recent 1- to 2-year period have gotten fairly aggressive in leasing, but I haven't seen anything atypical lately. But I may not be close enough to it to be a good source for that..

Our next question comes from John Murphy, Bank of America Merrill Lynch..

This is Liz Suzuki on for John. Just looking at the used vehicle business in the U.S. Your average transaction price went up by about 4%, but your gross profit per unit declined a fair amount.

Can you just comment on what's happening in the supply demand dynamics that's causing that discrepancy?.

Sure, this is Earl. There was some pressure in the used car business in the quarter. First of all after August, generally, there's a seasonal pressure in terms of downward prices in the guidebooks. But also I think it's been well-publicized that there is some increasing supply with off-lease vehicles and things like that.

And then, in addition, there were some pretty aggressive new car marketing pushes, particularly through Labor Day and August. And I think new car prices and transaction prices probably sat down on used car prices. So when the market shifts like that and there's pressure on demand, I think we all try to keep our inventory turning and keep it clean.

So we've probably retailed some vehicles at a lower margin rather than send them to auction and take a small wholesale profit. So I think it's a combination of increasing supply and new car pressure pushing down on used car demand..

Okay. And going back to same-store sales in the U.K. It looks like parts and service was incredibly strong, which I imagine wouldn't have been impacted by that shift away from fleet.

So what was the driver of this strong parts and service performance there? And were there particular incentives or initiatives that the company was putting in place?.

Well I'd like to tell you it was our brilliance, but I think, it's a combination of the longer we've operated these dealerships, the more we've been able to increase our capacity and operate them more efficiently. But also we've now had several years of increasing industry sales in the U.K.

So you get that same unit in operation profile that we have in the U.S. where we're in the sweet spot now where the universe of 1-, 2- and 3-year old units in operation is really ballooned from a few years ago. So we're in a sweet spot in the U.K. as well.

And with the majority of our business being luxury brands, Audi and BMW, those owners have a very high rate of loyalty. So I think those are the main factors that really gave us an impressive quarter..

Okay, and just one more quick one, which is, as we look at your plans for your store footprint and trying to model acquisitions versus dispositions, what's the estimated net impact of the acquired stores versus dispositions for 2015 in terms of what would not be included in the same-store base?.

Well, that's impossible for me to predict just because the market is so dynamic and most everything we do is somewhat opportunistic. When we find something that works for us strategically and a good return on investment, we'll do our best to acquire it.

And the major dispositions in terms of major assets that we have that haven't been performing, underperforming dealerships, so we want to dispose of, we've taken care of that at this point. So I couldn't really help you model anything because I don't know..

Our next question comes from James Albertine at Stifel..

Very quickly if I could on the divestitures or dispositions as well. You made a comment earlier that suggested that pricing has actually gotten a little higher as it relates to the acquisition environment, the M&A environment.

So is your decision to dispose of the Long Island dealerships, the Honda in New Jersey and so forth, more a function of that? Or is there something about operating in contiguous markets that you're learning is better for leverage or better for your longer-term trajectory? Just something operational that is driving those decisions?.

Well each market is so different. Again, it's awful hard for me to give you a rule of thumb. In the case of exiting the Long Island market, it was just very high-cost place to do business. And we had some major capital expenditures required that was only going to make that worse.

And we just didn't have a consistent track record of generating the profits that we needed for a good return for our shareholders. So we had opportunities to invest in places like Texas, where we are highly confident that we have scale, leverage and know what we will get out of an investment.

So it was really kind of a shareholder driven thought process. But each market is so different and the dynamics are so different. We're constantly evaluating that and it's kind of hard for me to prognosticate much beyond that..

And some of those required capital expenditures, I would assume, are sort of overhang from the hurricane impact a year and a bit ago?.

More of the -- there was some of that and some was the need to expand and increase efficiency. But much of it and most of it was OEM driven..

Okay. Great. And also wanted to get your opinion as it relates to capital allocation.

How do you balance the return on capital commitment for an M&A driven deal versus maybe looking at the dislocation and sentiment and the share prices as of lately for your group in terms of more of a share repurchase focus?.

Jamie, it's a great question. This is John. I mean, clearly, we think that if we can continue to find acquisitions that hit our return parameters, those 15% to 20% free tax returns on a discounted cash flow basis, we think those are great places to deploy capital. But we're also prepared to return capital to shareholders.

The repurchase of the convertibles over the summer was in effect doing that. We took out 2.7 million shares as a part of that. And then at the end of the quarter, right after the blackouts all lifted, we were able to get in and actually buy some shares back at what we thought were attractive prices. So we're going to continue to monitor it.

And we've got, I think, a really good track record of being good stewards of the capital and buying stuff that's opportunistic. So we watch what's going on and deploy the capital accordingly..

And if I could sneak in a housekeeping question and then I'll turn it back to the queue. Any FX translation impact that we should think about as it relates to the U.K.

and Brazil during the quarter? We had thought it would be more of a headwind just based on the trajectory that we had seen versus the dollar and the pound, but any color there? And apologies if I missed it, if it's in the release..

Jamie, this is John. That's a good question. No, there really was not a lot. The pound on average for the third quarter hadn't really moved very much from where it was third quarter last year and similar with the Brazilian real. So there's very minimal FX impact in the quarter..

Next question comes from Brett Hoselton at KeyBanc..

First, just to kind of sum up, it sounds like on the luxury brands, you're saying that the performance from a total gross profit standpoint, very good in the luxury brands in the U.K. It sounds like in the U.S., kind of in line with the import brands and so forth.

Is that a fair characterization of what you're saying?.

Yes, Brett, I think that's a fair summary..

And then in the U.S., used vehicle gross profit per unit has been a hot topic since a peer of yours preannounced.

So my question to you is, how -- it looks like you had a little bit of pressure on used vehicle gross profit per unit, can you talk to that? Was there anything specific in the quarter? Or is it just kind of moved around a bit and it was down and that's okay?.

Well, there was a little bit of pressure in the quarter, Brett. The -- and it's -- I'm not sure how much of it is increasing supply and how much of it was some downward pressure on transaction prices for new vehicle. You remember how big the August SAAR was. There was a lot of activity by the OEMs. So there was a little bit of pressure.

But we keep our inventory pretty clean at about 30 to say 33 or 34 [ph] days supply. So we can adjust pretty quickly. So, but there were some pressure..

And then, Brazil, obviously, a headwind year-over-year but I'm really interested in kind of knowing, what are you seeing on the ground sequentially? How did, relative to second quarter, how did third quarter perform? And then as you've kind of gotten in here, the fourth quarter, are you generally seeing it declining or continue to decline, stabilizing or improving sequentially?.

Well sequentially, the market was a bit better in the third quarter just because the World Cup disruption was not there. But it's certainly not a strong market. But at least we had a normal number of business days in each of the months in the quarter. We would not have been profitable in my opinion had we not taken drastic cost reduction actions.

So I still think that Brazil market is indeed weak because the economy overall is weak. Unfortunately for the fourth quarter, it's impossible to predict because of this presidential election, which is preoccupying the entire country.

And we'll just have to see what the overall attitude and psychological environment is once the winner of the run-off is selected. And every year in the second half of December, there isn't a lot of activity in Brazil. They start their summer holidays and Christmas holidays. And so we'll just have to see.

But we knew that which is another reason we had urgency in cutting costs..

And then from an acquisition divestiture standpoint, you've -- I think you've seen a little bit more divestiture activity then you've seen in, say, previous years. And you kind of call your mix and so forth. I understand that.

But as you look through forward into 2015, how should we think about your divestiture activity? In other words, is this -- were you just going through a period where it's unusually high? But are there some additional divestitures of significance as you look forward?.

I would characterize our divestitures in the third quarter, of our businesses that large is very unusual. I think there's always a potential for small divestitures as we fine tune our portfolio. But I don't see any major divestitures of several hundred million dollars in revenue like we had in the third quarter.

I don't see that on the near-term horizon..

[Operator Instructions] And our next question comes from Bill Armstrong at CL King..

Back to Brazil. You had a very substantial increase in used vehicle gross profit per unit.

What's driving that? And how sustainable is that improvement?.

Yes, Bill, this is John Rickel. I mean, part of that has been that we've been able to provide a little bit of additional capital so that they can actually keep some of their units around a little bit longer. That was one of those things that when we did the acquisition in 2013 that we are able to bring to the table.

So I think by helping them with some of their bank lines and improving access to capital, they've just been able to keep a little bit more inventory. And we think that, that's certainly a part of the business we can continue to help them with..

Does that provide you with a competitive advantage also?.

Yes, we think so. And we look versus the other groups down there what we're able to bring to the table with the strength of the balance sheet and the relationships we have with banks. We definitely think it's a competitive advantage going forward..

Okay. Back in the U.S. on the acquisition front, I think in -- I think Earl's opening comments, he mentioned that asking prices are getting pretty high, although we keep hearing that more and more sellers are putting their dealers up for sale.

So are you -- how does that work out? Are you seeing more deals coming your way, but they're just asking too much money? Or how do you see this market kind of evolving right now?.

You stated it precisely as I would have. I have seen more deals on the market in the last couple of months. But the ones that I've seen, the prices just wouldn't work for a proper return on investment. So that can change tomorrow. It's very dynamic also. But you summed it up pretty well..

I know -- an asking price is different than an actual transaction price.

Given the fact that there seems to be a lot of sellers out there, are these sellers willing to at least negotiate so they can get a deal done? Or are they just kind of fishing?.

That's a good point too. And almost every deal starts with an asking price that's too high. So I think, maybe perhaps a point you're making, there is potential for more acquisitions because there are so many deals out there and prices do get negotiated. So the potential exists. Yes..

Our next question comes from Ravi Shanker at Morgan Stanley..

This is Paresh Jain in for Ravi. Couple of questions, one on U.K. and then one on Brazil. In U.K., you guys are seeing significant F&I per vehicle growth? And you also have one of your dealer peers making about $1,000 per vehicle there.

Is that something you can get to over time? Or is there something that works differently for you guys?.

Yes, this is John Rickel. I mean, certainly, we've taken notice of what our peer has done and we have put more emphasis. We've been very pleased with the increases. Whether or not we can get all the away to $1,000, I don't know. It's certainly a good goal for us. I would point out that they have significantly more scale in the market.

And that helps some of the volume bonuses that they receive from at least one of the manufacturers that we're aware of. But with that, we have made good improvement and we continue to look for additional opportunities to move the number up there..

That's good color. On Brazil, you guys mentioned that there's still significant uncertainty and volatility there, but you guys recently added another dealership.

What gives you confidence to increase your footprint there at this point of time? And can we expect more to come?.

Well, we're in Brazil for the long-term. And what I've learned over the years is, you build these businesses for the long term. And the peaks and the valleys are unpleasant noise, but our job is to make that the strongest business we can. And we did that quite deliberately in the U.K.

over 6 or 7 years, and we now have a pretty strong business and we're going to do the same thing in Brazil. So actually, the bottom of the market is the time to strengthen your portfolio.

And for us to be able to join the Mercedes dealer network is something that is a strategic positive for our company, whether we're at a valley or peak in a market like Brazil. So we're going to continue to try to make that organization stronger and more efficient.

And then some day when the market comes back, hopefully we'll have disproportionate leverage to the upside. So we're not afraid to be prudent in strengthening that business..

The other point that I would add to that, I think, is really the key as well is, take a look at the results for this quarter, what that team did. What gives us the confidence is we have a very professional, very strong management team down there.

I think everybody has been impressed by the fact we were able to turn from a loss last quarter to a profit this quarter. That's the sort of thing that also gives us confidence to continue to expand down there is we've got a very good management team..

Understood. And finally a housekeeping one, if I may, and apologies if I missed this earlier.

Have you guys stated what your used supply was at the end of 3Q versus 2Q and what the mix looked like?.

U.S. used supply was at 30 days. And that would have been down probably a couple of days from where we were at second quarter..

At this time, we show no further questions.

Would you like to make any closing remarks?.

Thanks, everyone, for joining us today. We look forward to updating you on our fourth quarter earnings call in February..

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