Good morning, ladies and gentlemen and welcome to Group 1 Automotive 2020 Third Quarter Financial Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the call over to Mr. Pete DeLongchamps, Group 1's Senior Vice President of Manufacturer Relations, Financial Services and Public Affairs. Please go ahead, Mr. DeLongchamps.

Thank you, Christie, 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 will refer to on this call for comparison purposes have been posted to Group 1's website. Before we begin, I'd like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures. Except for historical information mentioned during the conference call, statements made by management of Group 1 Automotive are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The 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, conditions of markets, adverse developments in the global economy, as well as the public health crisis related to the COVID-19 virus and resulting impacts on demand for new and used vehicles and related services. Uncertainty regarding the duration and severity of COVID-19 and its impact on U.S. and international authorities using current restrictions on various commercial and economic activities while also considering the timing, pace, and extent of an economic recovery in the U.S. and elsewhere from the unknown current and future impacts of COVID-19. Additionally, there are unknown future impacts of oil producers and the effects this can have on travel, transportation, and oil prices, which in turn will likely adversely affect demand for our vehicles and services. Those and other risks are described in the company's filings with the Securities and Exchange Commission over the last 12 months. Copies of these filings are available from both the SEC and the company. In addition, certain non-GAAP financial measures, as defined in our SEC rules, may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on its website. Participating with me on the call today are Earl Hesterberg, our President and Chief Executive Officer, Daryl Kenningham, our President of U.S. and Brazilian Operations, Daniel Mchenry, Senior Vice President and Chief Financial Officer, and Michael Welch, our Vice President and Corporate Controller. I'd like to now give the call over to Earl.

Thanks, Pete. Good morning, everyone. I'm pleased to report that for the quarter, Group 1 generated an all-time record adjusted net income of $129 million. This equates to adjusted earnings per share of $6.97 per diluted share, an increase of 131% over the prior year's adjusted earnings per share. As mentioned in our pre-release earlier this month, our adjusted profit results exclude a $3.3 million pre-tax loss related to the redemption of our previously issued 5% notes due in 2022. Daniel will cover this transaction along with our balance sheet and liquidity position later on the call. These results were a continuation of the very strong profits we generated in May and June after the lockdowns began being lifted, and once again demonstrated the resiliency of our business model and the brilliant efforts of our employees. The major factors driving our profit improvement are large new and used vehicle margin improvements and substantial cost leverage across our company. For the first time since the UK voted to leave the EU, our UK operations made a significant contribution to our quarterly financial results. I am very optimistic that this level of performance will continue as we have implemented a major restructuring of our UK operations that began even before the pandemic. The extreme shelter-in-place orders beginning in late March in both the UK and U.S. markets required us to reduce headcount by 90% and 50%, respectively. During this time of dramatically lower business levels, we restructured both operations with a goal of improving our sales and service efficiency by at least 20%. We believe we're well on the way to achieving this. Current headcount levels in the UK and U.S. are both approximately 25% below pre-pandemic levels. As Daryl will detail shortly, vehicle sales volumes in the U.S. remain well below last year's levels, primarily due to low inventory levels. However, same-store UK new vehicle sales increased 11%, and used vehicle sales were up 14%. Our new vehicle sales improvement was influenced by below-average sales in the prior year's quarter due to shortages associated with the change in new vehicle emissions regulations. But overall, the UK market has recovered nicely throughout the summer. This can be evidenced by our same-store used vehicle sales increase of 14% and our parts and service revenue increase of 4% in local currency during the third quarter. The volume improvements, as well as large increases in vehicle sales margin, drove a 26% increase in UK same-store gross profit on a local currency basis. New vehicle margins per unit improved 14%, while used vehicle margins were up 90%. This powerful gross profit growth of 26% was achieved while actually reducing SG&A expenses by 12%, resulting in an SG&A percent of gross profit metric of less than 61%, by far the best performance since Group 1 entered the UK in 2007. To provide some color on our U.S. and Brazil performance, I'll now turn the call over to Daryl Kenningham.

Thank you, Earl. A number of factors contributed to our outstanding U.S. third quarter results, mainly new and used vehicle gross profit growth, F&I PRU growth, and strong SG&A discipline. Due to tight new and used vehicle supply, same-store new vehicle unit sales decreased 16%, and used vehicle unit sales decreased 13% versus the prior year. New vehicle inventories finished the quarter nearly identical to the second quarter at roughly 17,000 units, a 52-day supply. Our team did a fantastic job staying disciplined on gross margin. Our new vehicle improvement far outweighed our volume decline. As a more than $1,000 increase in same-store gross profit PRU generated a 34% increase in new vehicle gross profit. Although our new vehicle unit volume was down 16% in the quarter, it improved significantly throughout the period. As September sales were down only 3% from the prior year and up sequentially versus August. Our used vehicle cadence was nearly identical with new, and our PRU improvement drove a 27% total used vehicle gross profit increase on a same-store basis. Our used car PRU performance was enabled by improved sourcing as well. Our sales sourced through trades and individuals were up 16%, and vehicles purchased from individuals were up 93%, both a record for us, and we expect to build on this improvement going forward. The second major driver in the quarter was F&I. Despite the decline in same-store unit sales, our record same-store F&I performance of $2,041 allowed us to maintain prior year F&I gross profit levels. The record PRU performance was driven by higher penetrations and income per contract in basically all of our product offerings. The third major factor driving our outstanding profit performance was cost discipline. As discussed on last quarter's call in the second half of March, we were extremely decisive and took aggressive cost-cutting actions in all three of our markets to protect our company's viability during an unprecedented economic environment. Throughout the second and third quarters, we witnessed how resilient and productive our employees could be in this very challenging environment. We've modified our productivity targets in the third quarter, and we generated 93% of prior year's revenue with 75% of the headcount. This drove adjusted SG&A as a percentage of gross profit to a record 59.0%. While we don't expect this level to be sustainable, we do expect there to be meaningful improvement going forward compared to 2019. Also, we are encouraged by our after-sales gross profit performance. While the quarter was down 4%, this was due primarily to declines in the collision business. For the quarter, our customer pay gross profit was up, and warranty was flat. We saw very strong sequential growth of 23% from the second quarter, and we're very pleased with our exit rate as our total after-sales business was up in September over the prior year. We expect to return closer to 2019 levels as we move into 2021. Before I touch on Brazil, I'd like to take a minute to update you on Accelerate. Our digital retailing initiatives continued our upward trajectory and reached the third quarter by selling over 3,100 vehicles to Accelerate customers choosing accelerated close at a much higher rate than other customers. Additionally, to allow customers to access Group 1's digital retailing platform whenever they would like, we've now launched accelerate.com. This platform includes, among its many features, the ability for customers to sell us their vehicles remotely. Customers taking advantage of this feature receive a live bid on their vehicle and will soon have the option to receive a quick electronic payment. Now turning quickly to Brazil. Despite a 22% decline in new vehicle industry sales, our team did an admirable job growing margins and aggressively thinning the cost structure in order to realize a solid quarterly profit. SG&A as a percentage of gross was 80%, which is the second-best quarterly performance over the 7.5 years that the group has been in ownership, and it positions the region nicely for a sales rebound coming out of the pandemic. I will now turn the call over to our CFO, Daniel Mchenry, to provide a balance sheet and liquidity review. Daniel?

Thank you, Daryl, and good morning everyone. As Earl previously mentioned, during the quarter, we redeemed all $550 million of our outstanding 5% notes due 2022. This redemption was funded with $550 million of newly issued 4.00% notes due 2028. Along with the April redemption of the 5.25% notes due 2023, we now have no material debt maturities before our U.S. credit facility matures in June of 2024. Additionally, the debt restructuring undertaken this year will save us over $15 million in annual interest expense. We are very proud of the fact that our company is in such a strong balance sheet position given the economic challenges the world faced in 2020. Turning to liquidity and cash flow, as of September 30th, we had $66 million of cash on hand, and another $127 million that was invested in our floorplan offset accounts, bringing total cash liquidity to $193 million. There was also $273 million of additional borrowing capacity on our U.S. syndicated acquisition line, bringing total immediate liquidity to $466 million as of September 30th. We also have roughly $175 million in U.S. and UK real estate available to mortgage, which brings another $140 million of near-term liquidity, increasing the total to over $600 million. Our cash flow remains very strong as we generated $121 million of operating cash flow in the third quarter. This brings our year-to-date adjusted operating cash flow to $358 million. This cash generation has been partially used to reduce our non-floorplan debt by $159 million since the end of 2019. Also, our U.S. credit facility rent-adjusted leverage ratio was reduced to 2.5 times at the end of September, down from 3.3 times at the end of 2019. Going forward, our preference for capital allocation is to add scale to our company through M&A. While the U.S. is our preferred market at the moment, we are open to acquisitions in our foreign markets as well, given the right opportunity. For additional detail regarding our financial condition, please refer to the schedule of additional information attached to the news release, as well as the investor presentation posted on our website. I will now turn the call back over to Earl.

Thanks, Daniel. Related to our corporate development efforts, earlier this month we disposed of a Nissan franchise in Mississippi. This is our first buy-sell activity of 2020 as we've been much more focused on our organic operations, given the pandemic. As Daniel mentioned, however, we're now once again looking forward to growing our company through M&A. We've seen increased activity and potential deal flow recently, which is an encouraging sign. This concludes our prepared remarks. I will now turn the call over to the operator to begin the question-and-answer session.

Thank you. Our first question comes from Michael Ward with Benchmark. Please go ahead.

Thanks. Good morning, everyone. Pushing on the variable gross on the new vehicle variable gross. Can you talk about maybe the gives and takes of what happens on profitability when inventory is tight? The carrying costs go down in a positive price. But are there what are the gives and takes you lose some sales?

Well, when inventory is tight, yes, we obviously lose sales, and in the case of the quarter, Toyota is our largest brand and happened to be our tightest inventory as well. So yes, certainly that can cost you some business when we operated about a 30-day supply during the quarter for many of our brands.

Okay. Now, you kind of allude to that in the press release as it relates to SG&A costs as a percentage of gross. That's one of the things holding it down. So if inventory doesn't get replenished until well into the second quarter, does that mean that we could pay you see that type of thing where you kind of continue this type or close to this type of performance in the success, as we head into the first half and possibly even to the second half? Is that what we're looking at?

Mike, this is Earl. Directionally, that's correct. Operators are very savvy; when they cannot replace a vehicle, they don't sell it as cheaply. I mean, that's the simple thing. They know whether they can trade with another dealer, and if they can replace it. So that's driving these high margins throughout the industry. The ramp-up in supply from the OEMs has been far below what anyone in our sector would have expected. We're just now starting to receive a few more vehicles and retailing every month. But our new vehicle inventory year-over-year has dropped something like 12,000 units. So we are still nowhere near back to normal levels. And I'm sure we're not the only ones. So while the reduction in margins going forward will be proportionate to the increase in inventory, there still appears to be a long way to go before the industry is back to normal new vehicle inventory levels.

On the service side that chart on Page 12 that kind of goes through with these alternative energy type vehicles on the service side. It sounds like it's a chance for particularly the big well-capitalized dealers to gain share on the service side as the market moves towards more of these vehicles. Any idea? I guess it's too early to tell. But could you basically have the service on those vehicles for the life of the vehicle rather than seeing the dramatic drop-off in years three and four?

Potentially yes, I mean, that's certainly true. What's definitely true is that those vehicles take more investment from franchise dealers, and they are much better positioned to do that whether that's training or equipment.

Yes, Mike, this is Earl again. And I think we've seen that same thing with luxury brand vehicles over the last decade, as they got more complex electronically. The retention levels and the customer loyalty levels on those brands have been much higher than volume brands. And so, the electronic complexity, which will now extend into the battery-powered world, just gives us a much stronger competitive position to maintain a higher percentage of the customer service business regardless of the age of the vehicle.

Thank you. I really appreciate it.

And our next question comes from John Murphy with Bank of America. Please go ahead.

Good morning, everyone. My first question is about SG&A. You mentioned a 20% improvement in sales efficiency, and it seems that 25% of the workers who were brought back are still not working. Could those people remain out even if sales improve? Is that part of your strategy for achieving that efficiency? What specifically do you mean by the 20% sales efficiency? Does it imply that those 25% of workers will not return?

Yes, John, this is Earl. I believe we'll have to bring a few more people back because, as you can see, our volumes are a bit more depressed just because we are short on inventory. But the way we have structured the business now is toward a certain efficiency level for both salespeople and technicians. We believe we're in a materially different place, and we have been before. The way we've structured our support functions, and our salesperson and technician efficiency is going to be more than 20% greater than what we had in the past. So yeah, I would expect some people to come back to be strictly volume-related, not support-related.

Okay, that's very helpful. And then second question. I mean, it looks like the October sales rate is going to be high 16. It might actually breach 17, we'll see, business recovery in the U.S. is very remarkable, particularly given that fleet is a waning component of it. So early, I mean, how do you think about the durability of this recovery, and how much of a pent-up demand from the depressed months of March, April, May, June, July that are coming back here? And how do you think about this point because it's going to matter a lot for how you shape your business in the coming quarters?

Well, the durability isn't surprising to me, John, and as time goes on, I have more and more confidence that it is going to be sustained. And you've heard some chatter in the last week or so. It does seem that people like the safe cocoon of their car. In the UK, we see it even more, as people are shying away from trains and the Tube for commuting to work. Interest rates are still low; incredibly low. So affordability is good, and I don't see anything on the horizon that is going to disrupt this current situation where we have supply behind the band and solid demand. So we've got a pretty good runway it seems, at least through the winter into the spring for sure.

Yeah, it's a remarkable backdrop. It's great. And then just lastly or early, M&A had not been a key focus, certainly not off the table in the past. But it sounds like you're turning the tap back on what seems like a fairly material way. So I'm just curious what's changed in the business or in the opportunity set of acquisitions that's really driven this shift back towards M&A?

Well, I think it's the financial strength of our company again and the stability in our operations. I think we've gotten that laid down to a large degree, and we can now integrate more quickly. We can get more leverage from expanding our company and buying dealerships, particularly that may not necessarily be performing at the same level we are.

Okay, that's very helpful. Thank you very much.

And our next question comes from Rick Nelson with Stephen. Please go ahead.

Thanks, and good morning. Nice quarter guys. I'm curious about being very careful about supplies. When you then, the timing is those normalizing and the implications for GPUs, do you think we go back to pre-COVID levels or do we normalize at higher levels? And can you grow EPS in 2021 absent acquisitions or stock buybacks?

Rick, this is Daryl. I'll answer the first part and then I'll ask Earl to address the EPS part, but on the inventory growth, we may see a little bit of growth in the fourth quarter, but it'll be modest. I really expect we won't see our inventories materially improve until the first quarter of next year. Everything that we see on the new vehicle side suggests that the gross margins are very stable right now, and I would expect that to continue until the inventory situation materially changes.

Rick, this is Earl. Relative to growing EPS, I mean, we all know that's going to be a huge challenge, given what's happened this year. So we've got three mitigating factors that we can lean on. One is, as we've discussed, we can do more volume than we've been doing in these market conditions because we've been constrained on new and used. To some degree, I think we can mitigate any tempering of margins with more volume. Our service businesses still have not quite returned to previous year levels and that's been a strength of our company, so I think we can get more out of service next year. The third thing we have is I believe we're going to continue to get more out of our UK operation. The UK market is stable, and we've had a chance now to really rationalize our UK operation. We had added about three different dealer groups to our company at the time of the Brexit election a couple of years ago, and we never really got properly integrated and structured, which we have done now. So those are the three things that we're going to lean on to see if we can keep the company moving forward.

That makes sense. We've got buyback and some acquisition opportunities. In the UK, you saw significant growth compared to the market. I noticed many comparisons, which were relatively simple. But what were the drivers there? What are you observing in October as the restrictions appear to have been lifted?

Yeah, the pace in the UK is still strong. Now it's a more seasonal market than the U.S. So, after the September plate change month, you don't have quite the volume, particularly in November and December that you would have in the U.S., but it's still a healthy market. And I would say the order take rates have decreased a little bit, but no more than we would normally expect from the seasonality. So it's still a market that can produce for us at these levels.

And finally, I tied to bring people into the commerce section, which leads this out the sector. How much opportunity do you see from here, and how important do you think these low-interest rates have been in driving that number? And if freight starts to rise, is that in fact vulnerable?

So, Rick, thanks for the question and thanks for noticing, it was a record quarter for us. Interest rates are clearly a tailwind. What it helps us do is, we had really terrific traction, as Daryl mentioned, with selling service contracts and maintenance agreements. Just about every product that we offer was up for the quarter. Going forward from a modeling standpoint, $2,000 is a pretty admirable number. I'm hoping not to go backwards next year, but we've had an upward trajectory for the last seven to eight years. So I think we can keep it steady for now and continue to do everything we can to provide these services for our customers.

Great. Thanks a lot and good luck.

And our last question comes from David Whiston with Morningstar. Please go ahead.

Thanks. Good morning. On the UK, you said it's recovering nicely. And I'm just wondering if the worst case no-deal Brexit does play out and it causes some havoc in the UK next year, do you think there's such a massive still pent-up COVID-related demand in the UK that it could perhaps offset a lot of that Brexit headwind?

Well, it’s difficult for me to say that. This is Earl, by the way. There could be some disruption at the end of the year, with the potential for around a 10% decline. In the past, we’ve found that a lot of marketing in the UK has faced challenges. A significant part of the strength in the UK comes from used cars and service, which we believe will remain steady, while the new car segment could experience some disruption. Although this situation isn't ideal, the UK market has historically been very strong and adaptable. One of the advantages of both the UK and U.S. markets is that distribution channels no longer become overly congested. Over time, these channels in both regions tend to fill up with excess cars, and it is when they clear out that we truly see the strength of the used car business. This is why our margins in the UK have improved so significantly. Any disruption to the new car market in the UK, which may arise depending on the trade situation between the EU and the UK, is likely to enhance the used car market further.

Okay. In terms of headcount and global aid for you guys, have there been any permanent eliminations of service technicians?

When we started this, we made a strategic decision that we were going to transition from hourly technicians to flat-rate technicians in the spirit of trying to put as much productive workforce in our dealerships as we could. So we did reduce the headcount of technicians, and it was hourly technicians. We're in the process right now of replacing them with flat-rate technicians.

So you're saying maybe, in aggregate, you wouldn't have a net reduction in technicians?

Certainly over time, that's true. Yes.

I'm interested in hearing, especially from you guys being Texas-based, about the premium EV pickup segment that now includes a GMC version along with various startup manufacturers. Are Texas customers excited about the GMC version, or do they still prefer an ICE truck? Do you see this market primarily appealing to wealthy consumers?

Right now, we have some GMC stores in Texas; the reaction from those customers on the first version of the GMC version has been very positive. They're going to roll that truck out over a three-year period with four different grade levels. I think the true test will come when we get out of the $120,000 truck and down into the ones that transact in the $60,000 to $70,000 range. So the early responses we've received were very positive.

Are you worried at all about any cannibalization with the Denali model?

Not at this point. It's too early to tell.

Okay. And just real quick on service, is that really just a function that people aren't driving many miles because of the pandemic? And once the miles pick up, do you expect business to come back, or do you think that consumers are still staying away from your stores for service because of the pandemic?

This is Daryl. What we saw was our customer pay business has returned basically to where it was a year ago. Warranty is basically where it was a year ago. So, I think it was miles driven. As these trends continue, we'll see that momentum we had previously come back.

And we have an additional question from Rajat Gupta with JPMorgan. Please go ahead.

Hi, good morning. Thanks for taking my questions. There was a lot of discussion about the new supply side. Could you give us a sense of where the supply is on the used side and how that's coming back? Do you expect tightness to continue similar to the new side of things, or does that come back faster? And then relatedly, how does that influence our volumes and GPU going forward?

Rajat, this is Daryl. On the new side, I think we've been clear that we expect those to really not see any material improvement until the first quarter. On the used side, our inventories have been lighter than what we would like. Because once the auctions did open, we tried to be very judicious with auction purchases, having limited our auction purchases. You saw in a quarter that we increased the number of vehicles we're purchasing from individuals, as well as increased the number of vehicles trading for. So that may have had an effect on our total used car inventory, but we feel like that's the right trade-off. We feel like sourcing vehicles at auction is the worst place we can go, and even right now that's certainly the case. So some of that is a conscious purposeful change that we've made.

Got it. Has the supply situation improved, or is it expected to improve for the rest of the year, or is it likely to remain the same as what you're currently observing?

I think it improves. As you've seen, the new car volumes improve, you saw the SAAR in October is going to be very good. What you can assume from that is that we're going to get more trades. And that's our highest and best used car inventory. So yes, we expect that would improve.

Got it. And just as a follow-up on AcceleRide. I mean, clearly, a strong growth rate there, and while the volumes show a nice pickup, it's still a pretty small part of your business. Can you give us a sense of if you've been able to dissect or if you have any data around how many incremental customers you are able to capture with that platform versus what is just your existing customers doing the transaction online, instead of coming to the store? Any color around that would be helpful. And then just how you're expecting AcceleRide to drive maybe incremental growth versus what you've done historically, both year-on-year going forward. Thanks.

Rajat, this is Daryl again. With AcceleRide, our goal has always been to simplify the process for our customers. We notice that AcceleRide customers convert at about a 50% higher rate than those who come to us through other channels. This suggests there could be additional growth potential tied to that; we believe the digital tool itself is strong, user-friendly, and effective. It's challenging to pinpoint exactly how much of the growth is incremental. We view AcceleRide as a continuously evolving aspect of our business, focusing on gradual improvements to enhance the customer experience. We anticipate it will play a larger role in our operations a year from now compared to today. At this moment, I can't specify what that trajectory will look like, but we have observed growth over several quarters.

Understood. Fair enough. Thanks so much and good luck.

And with that, I'd like to turn the call back over to Earl for any closing remarks.

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

And that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time and have a great day.