Daryl Kenningham - President of U.S. Operations Earl Hesterberg - CEO, President & Executive Director John Rickel - SVP, CFO & CAO Lance Parker - Former VP & Corporate Controller.

Irina Hodakovsky - KeyBanc Richard Nelson - Stephens David Tamberrino - Goldman Sachs David Lim - Wells Fargo David Whiston - Morningstar Derek Glynn - Consumer Edge Research.

Good morning, ladies and gentlemen. Welcome to Group 1 Automotive's 2017 Second Quarter Financial Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the conference call over to Mr. Lance Parker, Group 1's Vice President and Corporate Controller. Please go ahead, Mr. Parker..

Good morning, everyone, and welcome to today's call. The earnings release we issued this morning and the related slide presentation that include reconciliations related to the adjusted results we will refer to on this call for comparison purposes, have been posted to Group 1's website.

Before we begin, I would like to break -- 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 Securities and Exchange Commission over the last 12 months. Copies of those 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 with me in today's call are Earl Hesterberg, our President and Chief Executive Officer; John Rickel, our Senior Vice President and Chief Financial Officer; and Daryl Kenningham, our President of U.S. Operations. Please note that all comparisons in the prepared remarks are to the same prior year period unless otherwise stated.

I will now hand the call over to Earl..

Thank you, Lance, and good morning, everyone. Group 1 are on $39.8 million of adjusted net income for the second quarter. This equates the second quarter adjusted EPS of $1.87 per diluted share, a decrease of 13% from last year. Although we had another record performance in U.S.

FNI per unit retail and a further rebound in Brazilian profitability, these factors were not enough to offset continued weakness in vehicle sales in our U.S. energy price-impacted markets. Combined new and used retail unit sales dropped 7% in Texas and Oklahoma during the quarter. Our largest market, the U.S.

energy capital of Houston, had an industry new vehicle sales decline of 10% in the first half of the year and a very weak close to the second quarter with June sales down 24% from June 2016 levels. This followed a double-digit year-over-year increase in May and created problems in both inventory levels and volume target achievement at quarter-end.

Turning to our business segments. During the quarter, we retailed over 40,000 new vehicles. Total consolidated new vehicle revenues decreased 5% on a constant currency basis as the average new vehicle selling price increase of 1% was more than offset by 6% fewer unit sales.

As has been the case since the beginning of 2016, per volume weakness was predominantly seen throughout the oil dependent markets in the United States. Same-store new vehicle unit sales also decreased by 1% in the U.K., which I will address shortly.

Consolidated new vehicle gross profit was down 6% on a constant currency basis as gross profit per unit remained flat. Our new unit sales geographic mix was 76% U.S., 19% U.K. and 5% Brazil.

Our new vehicle brand mix was led by Toyota/Lexus which accounted for 25% of our new vehicle unit sales; BMW/MINI represented 13% of our new vehicle unit sales; VW Audi represented 12%; Ford represented 11% of our new vehicle unit sales.

US new vehicle inventory stood at 30,300 units, which equates to a supply of 88 days, essentially flat from first quarter, but still far too high due in some degree to the weak Huston market industry sales in June previously mentioned. Domestic branded inventories remain the biggest challenge with GM, Chrysler and Ford all over 100 days.

We need to adjust some of our production orders further, especially in our Texas and Oklahoma markets. During the quarter, we retailed over 32,000 used retail units.

Total consolidated used vehicle retail revenues decreased 2% on a constant currency basis as the average used vehicle selling price increase of 1% was more than offset by 3% fewer unit sales. This sales result was driven by 8% decline in our Texas and Oklahoma markets.

Used vehicle retail gross profit decreased 6% on a constant currency basis as average gross profit per unit declined 3%. This per unit decline is primarily explained by overall weakness in used sedan industry pricing as well as lower trade-in volumes. Trade-in units generate our highest used vehicle retail margins. U.S.

used vehicle inventory stood at 12,600 units, which at a 32 days supply is consistent with our historical levels. Total consolidated after sales revenue in gross profit both increased 5% on a same-store, constant currency basis, driven by increases in warranty of 16% and collision of 5%, while wholesale parts and customer favor up 2%. U.S.

same-store after sales revenues increased 6% despite some softness in the key energy markets there as well. We maintain our guidance of mid-single-digit same-store revenue growth for the remainder of 2017.

Finance and insurance gross profit was flat on a consolidated constant currency basis as an increase in F&I per retail unit of 5% offset the decline in retail unit sales. U.S. F&I per retail unit delivered yet another quarterly year-over-year increase, up $86 per unit to an all-time record of $1,688. Regarding our geographic segment results, our U.S.

same-store operations saw a total revenue decline of 3%, driven by a 6% decline in new vehicle unit sales. As previously mentioned, sales were once again negatively impacted in the Texas and Oklahoma markets due to weakness in the oil industry.

With decreases of 6% in Texas and 11% in Oklahoma, we remain optimistic that sales in these markets will at least level off by the end of 2017. U.S. same-store total gross profit was flat as the growth in after sales and F&I per retail unit, previously mentioned, offset the new vehicle revenue decline. U.K.

industry sales were down 10% in the second quarter, largely due to a March pull ahead that contributed to record sales in the first quarter. Our U.K. operations outperformed the industry with same-store new vehicle unit sales decline of only 1%.

Total same-store revenue grew 3% on a constant currency basis, as an 11% increase in total used vehicle revenue and an 11% increase in F&I revenue more than offset the decline in new vehicles.

In Brazil, we generated a significant increase in quarterly profit, despite a 9% decline in same-store new vehicle unit sales, which was weaker than the overall industry reflecting both our luxury mix and our focus on increasing margins. Our new vehicle margins increased 7% on a local currency basis, which offset most of the volume decline.

We increased overall profitability by growing same-store used vehicle gross profit 35%, after sales gross profit by 31% and F&I gross profit per unit by 32%, all of which are on a local currency basis. We were also able to leverage the growth in gross profit via continued cost control, as SG&A and gross profit in through 440 basis points to 88.3%.

We're very pleased that our local team has been able to continue to drive profitability growth in an unstable political environment. With our dealership and brand portfolio optimization now complete, we're well positioned to take full advantage of the future recovery in the local market.

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. Good morning, everyone. Second quarter of 2017, our adjusted net income decreased $7.6 million or 16% over a comparable 2016 results to $39.8 million. On a fully diluted per share basis, adjusted earnings decreased 13.4% to $1.87. As Earl mentioned, our earnings were once again negatively impacted by the ongoing weakness in our U.S.

oil markets, as well as exchange rate headwinds related to the British pound that have now lapped heading into the back half of 2017. Starting with the summary of our quarterly consolidated results. For the quarter, we generated $2.7 billion in total revenues, which was a 4% decrease from prior year.

On a constant currency basis, which ignores the change in foreign exchange rates, total revenues decreased 2.4% for the quarter. Our gross profit decreased $5.2 million or 1.3% in the second quarter a year ago, to $404.9 million, which was roughly flat on a constant currency basis.

As a percent of gross profit, adjusted SG&A increased 130 basis points to 73.5%, due largely to pressures in our U.S. oil markets. Floorplan interest expense increased by $1.6 million or 14.1% from prior year to $13.2 million, which is more than explained by higher LIBOR interest rates versus the second quarter last year.

Other interest expense increased $600,000 to $17.3 million, also due to higher interest rates. Our adjusted consolidated effective tax rate for the quarter was 36.4%. We expect our full year tax rate to be between 35% and 36%. Turning now to our geographic segments, starting with the U.S. market on a same-store basis. For the quarter, total U.S.

same-store revenues decreased 2.7% to $2.1 billion, reflecting a decrease of 3.9% in new vehicles; 4.2% in total used vehicles; and 0.8% in F&I, driven by decreases in both our new and used retail unit sales of 5.7% and 4.9% respectively.

These decreases were partially offset by a 5.6% increase in after sales, which consists of increases of 15.8% in warranty; 5% in collision; 2.8% in customer pay; and 2.7% in wholesale parts. We reiterate our guidance for mid-single-digit same-store revenue growth for the remainder of 2017.

The 5.4% decrease in total retail units sold that drove a slight F&I revenue decrease was mostly offset by an F&I PRU increase of $78 or 4.9% to $1,682 per unit. This PRU improvement can be largely attributed to continued improvements and penetration rates for most of our major product offerings and represents an all-time quarterly record course.

Total same-store gross profit decreased 2.7%, driven by decreases of 7.3% in total used and 6.6% in new vehicles, primarily reflecting volume declines, partially offset by a 5% increase in after sales gross profit.

Our after sales gross margin decreased 30 basis points to 53.8% due to less internal reconditioning work, which we report as 100% margin business. As Earl previously mentioned, our used vehicle business in the U.S.

oil markets was negatively impacted by both demand softness and a lack of trade-in supply which forced our dealerships to purchase more expensive inventory at auction, negatively impacting our retail used vehicle gross profit and margin.

Although we have experienced new vehicle volume pressure, it should be noted that the change in year-over-year total U.S. new vehicle gross profit per unit is either been positive our about flat for 6 consecutive quarters.

When combined with our performance in F&I, total new vehicle profit per unit growth is averaged $239 or 7.1% over the last 6 quarters with an increase of $159 or 4.5% this quarter. Our adjusted SG&A, as a percent of gross profit, increased 130 basis points to 71.3%.

In response, we're continuing to work on resizing the business to reflect current market conditions. I would point out, however, that about half of the increase in U.S. costs represent investments in our after sales, personnel and training that we believe will pay dividends in the near future. Related to our U.K.

segment on a same-store basis with percentage change metrics on a constant currency basis. For the quarter, total revenue decreased $39.7 million to $422.7 million, but increased 2.5% on a constant currency basis. Total gross profits of the U.K. segment was up 2.6% from prior year.

After sales gross profit improved 4.2%, and our F&I income increased 10.6%, which was partially offset by decreases in new vehicle gross profit of 2.1% and total used gross profit of 3.1%. The decrease in new vehicle gross profit was caused by 1.4% decline in unit sales, largely due to the pull ahead into the first quarter as Earl mentioned.

With the overall industry declining 10% in the quarter, this represents impressive outperformance by our U.K. team. The 3% decline in total used gross profit was due to an 8% decline in margins, as we worked our way through the unusually high level of trade-ins from March.

In addition, as consumer demand has shifted away from diesel engines, we've begun to reduce our used diesel inventory which has negatively impacted our gross profit and margins this quarter. Related to our Brazil segment on a same-store basis with percentage change metrics on a constant currency basis.

As Earl mentioned, our team did a tremendous job increasing used, after sales and F&I gross profit by double digits to generate total gross profit growth of 18%. This was despite a 2.4% decrease in new vehicle gross profit, which was the result of weak sales in our luxury brands consistent with the overall industry.

Our SG&A as a percent of gross profit also improved, declining 440 basis points to 88.3%, driven by a reduction in headcount, reduced outside service spending and renegotiated lease terms for several of our dealership properties. As Earl mentioned, we are well positioned to take full advantage of the further recovery in this market.

Turning to our consolidated liquidity and capital structure. As of June 30, we had $26.6 million of cash on hand and another $76.6 million that was invested in our floorplan offset accounts, bringing immediately available funds to a total of $103.2 million.

We used $39 million to end the quarter to repurchase roughly 630,000 shares of our common stock at an average price of $62. These repurchases represented 3% of our total outstanding common shares at the end of the first quarter. We have $50.7 million remaining on our board-authorized share repurchase program.

Finally, during the second quarter, we used $5.1 million to pay dividends of $0.24 per share, an increase of 4.3% per share over the second quarter a year ago.

For additional detail regarding our financial condition, please refer to the schedules of additional information attached to the news release as well as investor presentation posted on our website. With that, I'll now turn it back over to Earl..

Thanks, John. Related to our corporate development efforts, we're pleased to announce this week's acquisition of a Land Rover Jaguar dealership in Albuquerque, New Mexico, and a Land Rover dealership in Santa Fe, New Mexico.

These are our first Land Rover and Jaguar dealerships in the U.S., and expands our global network to seven Land Rover and seven Jaguar franchises, with three additional franchise add points having also been awarded in the U.K. These New Mexico dealerships are expected to generate $40 million in annual revenues.

They are the only Land Rover Jaguar dealerships in the entire state. Also, as previously announced in early July, we acquired the Beadles Group in the U.K. consisting of 12 dealerships that are projected to generate $330 million of annualized revenues. This will increase our U.K. annual revenue base to over $2 billion.

Year-to-date, we have acquired $435 million of annualized revenues. This concludes our prepared remarks. I will now turn the call over to the operator to begin the question-and-answer session.

Operator?.

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

This is [Amy Stafon] on for John. Getting into some of the commentary that you made on your inventory levels at the beginning of the call. If we were to look at the inventory levels by automaker, besides GM, some of the supply imbalances appear most acute to the Japanese and the Europeans.

And I know you noted that your domestic inventory remains the biggest problem, but how would you characterize the supply levels through the other brands? And are there any other automakers who are being particularly aggressive and pushing inventory onto you?.

Well, the only three bands that are somewhat reasonable for us at the moment are Mercedes-Benz, which is our lowest and Toyota and Honda. But other than that, we have too much of everything. I don't know that anyone really has been pushing too much inventory, but -- in particular, this June drop in the Houston market caught us by surprise.

Actually at the end of May, we had our inventory levels almost where we wanted them. And so it was June that kind of put us back behind the eight ball. But we have to make some further adjustments and I believe the OEMs will also..

And with respect to the bulleted domestic levels, is this primarily just an oversupply of passenger cars? Or are you also seeing the elevated levels for trucks and SUVs?.

I would say, it's everything. A little more on the car side as you might expect, but it's not just cars. We could not have over 100 days with just cars these days..

And can you talk about the trends you are seeing in off-lease returns and trade-ins? Of your customers that are coming into trade-in their vehicles, are you seeing a notable pickup in those that are coming in with negative equity or underwater? And for those consumers who are coming back off lease to potentially get into another lease, how materially are the monthly payments changing from an old lease to a new lease, especially if used vehicle pricing comes under pressure?.

Okay, I'm going to let Daryl Kenningham, our President of U.S. Operations take the majority of this one, but it is a fact that with lower used car values, there is some increase in negative equity, there is no doubt about that.

Daryl, you want to make some comment?.

Yes. Negative equity is getting to be a larger challenge. And stepping into new models, we stagger between the lease and finance payments between the trade-in and the new models is a challenge in some brands.

There is some of the incentive pressure that is on the new cars is creating some pressure on us trying to trade for more used cars as John indicated earlier..

And our next question comes from Irina Hodakovsky from KeyBanc..

I wanted to ask you a little bit about your SG&A leverage in the U.K. market. You did quite well in your used vehicle side. I would have thought that you would have offset some of the decline in the used side which actually also outperformed your overall market there. So I'm wondering what drove up the SG&A as a percentage of gross profit so much..

There are three factors that come to mind. First one is actually every 5 years, you get your property tax rate evaluated in the U.K. and we got a bit of a property tax hit in the quarter.

I would say the second factor is some increased demo costs, we're running some bigger demo fleets and had to take some actions to hit some of our manufacturer sales targets, which is something we need to work through. And then the third issue I would say, is just overall stepping levels.

As the market has turned down, we're probably going to need to adjust our stepping levels and head count as we move forward. Also, we had a big acquisition last year where we inherited some broken stores that aren't fixed and we probably haven't addressed some of the stepping levels in those stores based on what they are producing at the moment.

So I would say those are the 3 areas and it's fair to say we have some work to do..

A follow up on that. If you were to break them into buckets, the parts of it that you believe you can adjust versus the property tax increase which is clearly going to continue.

How would you break up the impact of that? Is it a third or half of the increase?.

I think property tax is only 10% to 15% of it. The majority of it we should be able to dent, I would say, and address a bit..

Our the next question comes from Rick Nelson from Stephens..

I wanted to follow up on the Houston market and weakness that you side in June.

Is that continuing into July? And your expectations, I guess, as we look at the back half of the year?.

On volumes, I don't see anything different. Yes, Rick, not any worse. Even though we were somewhat surprised by the Houston year-over-year drop in June. I think that might be a bit choppy month-to-month. But I certainly don't have any indication that the energy impacted markets have any lift in sales volume yet, if that's the gist of your question..

What, Earl, are the time - oil prices are higher year-over-year, what segment type you think to - from an auto sales standpoint?.

I think for us, Rick, the key is when the energy companies start to hire people again. And those -- actually markets like Huston have replaced most of the lost jobs. That really is not a net job loss, but the new jobs tend to be in the restaurant, hotel, hospitality industry. The jobs we lost are energy and construction jobs, high paying jobs.

So not only are there fewer customers buying a car, there is a probably a mix issue there too. The new jobs are probably supporting lower mix and more used cars or low end volume brand cars and have probably been hit disproportionately in the midline imports and luxury brands. But I think it's just a function of hiring again in the energy industry..

The inventory, the 88 days' supply, 100-plus with some of the manufacturers, how do you get yourself out from under that inventory?.

Well, we have to cut our orders back further, but as we are nearing the end of the model year, it's also quite likely that we'll get some more aggressive incentive support from some of the OEMs to move the last '17s off the lot. So hopefully we'll have a little more support from the OEMs..

And then at the acquisition front, you've been active. In terms of the U.K., a fairly sizable acquisition with the Beadles Group. If you could discuss your strategies where you say the opportunities as we push forward from an acquisition standpoint. And some of the old payments that you are seeing..

Yes, Rick, actually we're still receptive to expanding in all 3 of our markets. We actually need to get bigger in Brazil. We can also turn that business down to all solid performing businesses, but again we the need to have the support infrastructure we can benefit from growth there.

So we're looking to expand in Brazil if we can find good opportunities. The U.K., we need to digest this last acquisition a bit as well as the previous one, but we have a nice infrastructure in the U.K. and some very good businesses there. So we would also consider further expansion in the U.K.

And in the U.S., I think most of our desires in terms of expansion would be outside the oil patch footprint. As you can tell, we have a heavy enough concentration there right now. I wouldn't say we would turn down a good business in Texas or Oklahoma, but our long-term performance will benefit from more geographic diversification in the U.S.

I do think that there is some adjustment in the acquisition market. It's become clear I would say, for the best part of the year that both near-term sales and profit levels just are not going to be the same as they were from 2014 to '16. And to make any kind of deal, things have to adjust.

So I don't know that the multiples to adjust, but clearly, the price levels can't be the same..

And our next question comes from David Tamberrino from Goldman Sachs..

So I just wanted to dig a little bit further into Brazil. As we think about the market rebounding there.

As we see volumes come back up, how much from a cost perspective have you taken out? Is there further room or how much room for leverage is there as we see volumes rebound? Is there anything from cost being added back into the business?.

No. I would say that there is always more cost we can squeeze out of any business. But generally speaking, the real leverage point for us in Brazil now is the add scale. And we have an infrastructure there that could handle 10, 12, 14 more dealerships in what we operate today..

Then again set back, I mean, is there an opportunity for your add from an acquisition standpoint or multiple cheap within the region? I know you just did another acquisition in the U.K. As far as we look at that market with the Brexit headwinds we might see - we've seen volume come down. Was it just that compelling of a price in the U.K.

relative to the rest of the regions that you're in? Just trying to understand some of the strategic refootprinting or gross in the different regions..

Yes, relative to the U.K., it was no doubt that return on our investment proposition that attracted us to the most recent acquisition as well as the opportunity to become more significant in the Jaguar Land Rover network in the U.K. and to join the Toyota network in the U.K.

And I guess, I should also say, it's our first meaningful foray into the Volkswagen network. We did have commercial vehicles but this puts us into the passenger car network which Volkswagen is quite a strong near-premium brand in the U.K.

So I would say it was a combination of strategic brand expansion and return on investment opportunity on our recent U.K. acquisition. Acquisitions are more difficult in Brazil. You have to be careful in terms of various liabilities that you inherit.

But we are looking at several opportunities both to expand in some of the businesses we have in terms of capacity but also trying to expand some of our key brands down there such as Honda and Toyota..

And just secondly, I think we saw another one of your competitors who had entered into the used market, exit the used market.

As a standalone business, is that something that you've looked at and you've considered? And from your viewpoint, why isn't it a good idea, or what would be the difficulty in China to run a standalone used business side-by-side with your new franchise dealers? And what holds you from going into that market -- holds you back from going into it?.

Yes. So we've looked at it many times over the years and our impression has always been that the critical factors to success is to be the bank also. I think that's the important component in CarMax's success, as being the retailer and the lender. And we haven't been interested in becoming a bank yet.

So there are lots of other ventures into the dedicated used car retail business that we'll watch closely and if somebody else can crack that nut, then maybe we'll take a go at it as well. But right now, those things we just discussed in terms of expansion opportunities within our current business model seem to make a lot more sense for us..

And then just lastly from a customer standpoint on the new side. We talked of Ford Motor credit earlier in the quarter and you see the headlines. There is more folks that are coming back with negative equity from vehicles that they bought 2, 3 years ago.

Are you seeing that coming through your dealerships? Customers again with just not a growing amount of negative equity, but more in a negative equity position.

And then how is that being handled? Is that being rolled into the new loan balance so your LTV starts out a little bit worse off for this next go-around as you refresh the vehicle? Or is it just -- do you have guarantors put on? Or is there more conditioning on the loan? Trying to understand some of those dynamics from a financing prospective and what you are seeing on the ground..

There is - yes, we're seeing pressure on more negative equity from customers coming back. And I would say we deal with that in a combination of all the things you mentioned and we have to rely heavily on our lenders to help us with that. So it's -- we have to get more creative and ask for more cash down and then the way we structure the deals..

Okay.

So more cash down, not more loan to value?.

This is more loan to value. I would say it's not only one thing that we do. Definitely rely on all of the things that you mentioned with -- higher loan to value was one..

Yes. And this is Earl. I have just one more point. I think you'll see the OEMs adjust their incentive tactics a bit.

One of the variables in the marketing mix and the changing market relative to used cars has been a bit less lease support, particularly in the luxury brands because of the residual value impact stemming from the used car market - used car valuations.

So I would think we may see a repackaging of some of the OEM incentives toward types of cash that will help transact those deals as Daryl was describing, typical finance deals..

Interesting.

Was there a pull back on that in the first half of the year or this second quarter?.

In residual value support for leases? I'd let you say general lease support?.

Yes.

What has been the dynamic?.

Absolutely. And that's just financial realism by the captive companies or the sales companies who are involved with these lease programs. They just can't put the same level of support into leasing that they could have a year or two ago..

Our next question comes from David Lim from Wells Fargo..

Just had a couple of questions.

When you talk about resizing of the business, can you give us a little bit more color in what your plans are and what you're specifically referring to?.

Well, it's three things. It's people is our biggest cost. So selling less vehicles, any less people to transact that business. Now of course that does not apply into the parts and service end of the business, that's more of a new and used car showroom of resizing and advertising and inventory.

Those are the 3 big cost buckets and all of them need to be flexed when you're not generating as much gross profit..

So I wanted to follow up on that advertising piece. In this kind of environment, Earl, where you have a lot of inventories, et cetera.

I mean, would you guys prefer -- I think I already know the answer, but would you prefer OEMs providing more ad support? Or is it more like lower frontline incentive support that you guys would be asking for if you had a choice between the two?.

I'll let Daryl take a shot at that one..

Well, I think the OEMs are putting more into lower fund market-based advertising. I see that at several OEMs, it's more deal-based.

In terms of the advertising we do, we're taking a hard look at what is most effective between our digital and our traditional stands, and then within digital, how we can move some of those dollars around to generate as much traffic as possible, as cheaper as possible..

And then finally looking more to 2018, et cetera. I mean, assuming that the SAAR is in the $16 million or so, the upper $16 million. What are the levers, John, that are you guys could pull in order to still generate hopefully a double-digit EPS growth into 2018? If you can dimensionalize that.

And then -- sensitivity, if you would, on maybe every 500 or 1 million units down on the SAAR, how would that impact your earnings?.

Yes, I'll start with the second one last. 1 million unit SAAR sensitivity is somewhere around, I think, $0.50 of EPS. David, I -- we haven't updated it for a while. The last time we looked, it was kind of in netball park. So I think that's still a directional number for you.

Basically, if you talk in high 16s for SAAR, it's probably not going to be too far off where we're going be at the end of this year. We had called $17 million as the market right now is kind of $16.9 million.

So if you are in an environment where you have a flat sales, I would also assume that we're going to start to come into an easier set of comps with the detectives in Oklahoma market that the new vehicle declines ought to be basically behind us if you're in a flat SAAR environment. Then it's executing on the areas that we have always focused on.

It's being good with used cars. We think there is opportunities there and it's continuing to track record in parts and service. They're indicated in my comments. We deliver what looks some cost in this quarter to support and to grow our parts and service capabilities and we think that, that will continue to pay dividends.

So I think on a same-store basis, you could probably get half of your growth out of that. And then the rest of it comes from either acquisitions or share repurchases and that gets you into double-digit EPS for next year..

Our next question comes from David Whiston with Morningstar..

I wanted to start actually by jumping into the future a bit with the U.K.'s proposal on internal combustion was announced this week.

I'm not going to ask you to predict what consumers want in 2040, but could you at least comment on what are your thoughts on maybe the over the next 5 years or so, assuming gas prices stay cheap? Would consumers over there want to increase their purchases of hybrids and pure electrics?.

Yes, actually I am already seeing a little bit of increase in electric vehicles in the U.K., more than I probably expected. Certainly more than we're seeing in the U.S. I was a little surprised with that.

And in the last couple of weeks I was over there and Jaguar introduced the E-Pace to quite a bit of fanfare and Audi has got vehicles coming and BMW, we saw quite a few more vehicles there than we do in the U.S. So it seems to all stem from this diesel publicity crisis and the emissions issues that are now spread across both continents at least.

In March, for example, in the U.K., a high percentage of our trade-ins were diesels and the people were driving an awful lot in petrol engines. And you're seeing the values of used diesel vehicles drop quite a bit in the U.K. So I think it's all emanating from that.

These statements by Volvo by 2025 in the U.K., by 2040, those were just seemed to be statements of strategic intent and very much in tune with the consumer psychology at the moment. It's driven by all this negative press about diesels.

But clearly, things are headed that direction and as there is more offerings from the powerful OEMs, I think it will continue to head toward materiality in our business..

Do you think there is a lot of demand though in the more mass market consumer, because all the brands you mentioned before, Jaguar and BMW are obviously premium?.

I think there is more demand, what?.

Will the mass market consumer want an electric vehicle is what I'm asking..

I would think that will be later in the evolutionary process. You have the discretionary income of these luxury brand customers and you also have some education level differences and so forth. So I think the luxury brands will be the early adopters on that technology..

And moving to Toyota with the new Camry coming.

I was just curious do you think there is a lot of demand for that sedan? Or do you think the Toyota customers are just going to still want a RAV4 or a Highlander?.

Let me let Daryl answer that..

I think Camry is terrific. I saw it yesterday at one of our stores and reactions so far from consumers that have seen it, the inventories are very, very, very low right now. But it is very positive. And -- so we expect that the new Camry will do well. And the sell down from our view-- the sell down of the '17 model year Camry has just going on..

My last question is on F&I in the U.S. I was just curious what's really driving that growth there? This was obviously used to performing well but also up no insurance and warranties..

Yes, this is John Rickel. Basically, the F&I growth in the U.S. has basically been driven by improved product penetration across most of the insurance products..

Yes. Our vehicle service contract and maintenance penetration were noticeably higher last quarter..

[Operator Instructions] Our next question comes from James Albertine from Consumer Edge Research..

This is Derek Glynn on for Jamie. Just a follow-up there on F&I. I mean given used vehicles typically transact at lower prices than new, we understand that could be a negative mixing impact in F&I generally speaking.

But wondering if this increased product penetration more than makes up for that impact? And perhaps that's another, if used sales are growing, do you guys think F&I PVR to remain relatively stable going forward?.

Yes. At the moment, the product penetration particularly on extended service contracts and maintenance does make up for that. And our finance penetration was down a little bit last quarter but not very much. So I think it's still pretty -- I think we're still pretty steady.

I don't -- we've been saying for a long time, we don't think we can grow penetration much higher and we keep making ourselves out to be liars. But this business still seems very stable to us. And a lot of lenders still are competing very aggressively for our business..

Got it. And then for parts and services, so there's differences in mix across your regions between customer pay, warranty wholesale. How do you see mix shift changing over time for the U.K. and Brazil businesses? Would you expect that to become more similar to the U.S.

as you continue to gain scale there?.

Yes, and quite frankly, the ability to grow our parts and service business in the U.K. and Brazil is staggering in my opinion. I -- and our luxury brand businesses in the U.K., they're virtually none of them where if we had a bigger shop or more technicians, we would not be doing more business immediately.

Now land is at much more of a premium in the U.K., particularly around London, where we operate in many instances. But there is huge ability for us to grow parts and service in the long term in both Brazil and the U.K. And we are making some transfer of processes and practices from the U.S. to both those markets..

Our next question comes is a follow-up question from David Lim from Wells Fargo..

Just quickly. More longer term from a dealer development standpoint. The requirements that OEMs are requesting for their dealerships.

As the digital aspect of the business become, it's more and more prevalent and people are, I think, consumers are only going to maybe visit 1, maybe 1.5 dealerships at the most during their shopping process and most of it's done on the Internet.

I mean, does it really require all the brand imaging that's going to be necessary or that they want going forward? And do the OEMs realize that it's actually possibly a financial burden for the dealer body. I just wanted to get your thoughts on that thinking about CapEx going forward..

Well, you're preaching to the choir on that one, David. No, it doesn't require much of the brick-and-mortar we have today.

We actually have one of the top OEM Executives with us last Saturday who toured all of our different brand dealerships in Houston and we made the point to him that the 2 most important things to us today, and I think OEM dealers, are a service bay and a parking space.

Everything else is interesting, but we always need more parking spaces which are very costly when you're in metro areas where the land is expensive. And a service bay, is valuable and generates gross profit. And showroom size and offices and all those things are interesting, but we can sort those out on our own.

So we hope we'll enter an era soon of more realism in that area. But I can't say we're there yet..

And ladies and gentlemen, with that, we'll end today's question-and-answer session. I'd like to turn the conference call back over to management for any closing remarks..

Okay. Thanks everyone for joining us today. We look forward to updating you on our third quarter earnings call in October. Have a good day..

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines..