Good morning, ladies and gentlemen. And welcome to Group 1 Automotive's 2022 Fourth Quarter and Full Year Financial Results Conference Call. Please be advised today's conference call is being recorded. At this time, I'd like to turn the conference 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, Jamie. 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. Forward-looking statements involve both known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Those risks include, but are not limited to, risks associated with pricing, volume, inventory supply due to increased customer demand and reduced manufacturing production levels due to component shortages, conditions of markets and adverse developments in the global economy and resulting impacts on the demand for new and used vehicles and related services. Those and other risks are described in the company's filings with the Securities and Exchange Commission. In addition, certain non-GAAP financial measures, as defined under SEC rules, may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any non-GAAP financial measures to the most directly comparable GAAP measures on its website. Participating with me today on the call is Daryl Kenningham, our President and Chief Executive Officer, and Daniel McHenry, Senior Vice President and Chief Financial Officer. I'll now hand the call over to Daryl.

Thank you, Pete. Good morning, everyone. 2022 was a record year for Group 1 Automotive, driven by outstanding aftersales growth, strong margins, all-time record profitability in our UK operation and disciplined expense control. Adjusted net income grew 15% to a record $729 million. Adjusted EPS grew 32% to an all-time high of $45.71. 2022 was also another strong year of external growth for Group 1. We acquired nearly $1 billion of revenue in 2022 and have now acquired over $3 billion in revenues over the past 15 months. We also returned meaningful capital to our shareholders by repurchasing $521 million in shares during the calendar year. Over the past 15 months, we've now repurchased over 22% of the company's outstanding shares. Our strong cash flow and leverage position, which Daniel will cover in a moment, will continue to allow for significant capital allocation flexibility in 2023. Turning to our fourth quarter results. I'm pleased to report that, for the quarter, Group 1 generated adjusted net income from continuing operations of $158 million or $10.86 per diluted share in EPS, an increase of 15% over the fourth quarter last year. Our adjusted results exclude non-core items totaling $1.7 million of after-tax losses, which primarily resulted from the pending disposition of two U.S. franchise points. Starting with our U.S. operations. As of December 31, we had 8,000 new vehicles in inventory, representing a 21-day supply, up 6 days from September. This inventory increase was primarily in our domestic brands as import brands remained very constrained. 30% of our US business is Toyota and Lexus, which continues to be very tight at a combined 4 days' supply. We expect a gradual decline in new vehicle margins over the course of 2023 as inventory continues to recover. We do, however, expect normalized new vehicle margins to eventually settle above our pre-pandemic levels. One of the continued challenges we faced in the quarter was a decline in industry used vehicle pricing, which results in a used vehicle sequential margin decline of $235 to roughly $1,350. Partially offsetting this was an 8% increase in same store used vehicle unit sales. Our organic sourcing efforts, including the acquisition of over 10,300 vehicles from individuals through AcceleRide continued to minimize our reliance on public auctions. We maintained our discipline with a 28 day supply of used inventory, which is within our target of 30 days. And the F&I business has remained strong at $2,369 per unit, showing only a minimal sequential decline. Looking forward, we do expect some modest headwinds due to pressure on finance penetration rates. Turning to aftersales, our US performance was outstanding once again, generating double-digits same store revenue growth, following high teen growth comps a year ago. Our customer pay business generated 13% same store growth. Collision increased 14%, warranty 8% and wholesale parts 3%. Through our technician recruiting and retention efforts, we increased our same store technician headcount by 16% in 2022. We foresee after sales continuing to be a strength over the course of 2023 for Group 1. We continued to maintain cost discipline, despite the decline in new and used vehicle markets. Our fourth quarter US adjusted SG&A as a percentage of gross profit was 61%, an increase of only 1 percentage point from the prior year and down from 71% in pre-pandemic 2019. A material portion of these cost savings will be permanent as we continue to leverage technology to drive customer and employee efficiencies. In the fourth quarter, we sold an all-time record 10,100 vehicles through AcceleRide, 15% of our total US retail sales, also an all-time record. Over 75% of our customers used AcceleRide in their transaction in some way in the fourth quarter, a percentage that continues to increase. We're also looking to our full integration of AcceleRide with our DMS, CRM and credit software. We continue to test it in several dealerships and expect a full rollout this year. Our early results are very positive, and we expect this will provide faster and more transparent transactions for our customers. Now turning to the UK. Vehicle demand remains steady and new vehicle availability is still constrained. Our new vehicle order bank at year-end was approximately 16,000 units, over six months' worth of sales, which remained fairly consistent with the prior quarter. As a reminder, our UK business mix is predominantly luxury. And those consumers are more resilient during times of economic uncertainty. We continue to believe that pent up demand built over the past several years due to both Brexit and very strict pandemic lockdowns will help drive strong UK vehicle demand throughout 2023. Our aftersales growth in the UK has been just as strong as the US, with same store gross profit growth on a local currency base of 13% for both the fourth quarter and the full year of 2022. And finally, we expect the AcceleRide platform in the UK to be fully integrated in the second quarter of this year.

Thank you, Daryl. And good morning, everyone. As of December 31, we had $48 million of cash on hand and another $154 million invested in our floorplan offset accounts, bringing total cash liquidity to $202 million. We also had $437 million available to borrow on our acquisition line, bringing total immediate available liquidity to $639 million. In 2022, we generated $916 million of adjusted operating cash flow and $803 million of free cash flow after backing out $113 million of CapEx. This capital was deployed through a combination of acquisitions, share repurchases and dividends. In 2022, we spent $521 million, repurchasing approximately 3 million shares at an average price of $172.54. And in the month, we spent an additional $13.7 million, repurchasing 76,300 shares. The result of this repurchase activity is just over a 22% reduction in our share count over the last 15 months. Our share count as of today is down to approximately 14.2 million. Our rent adjusted leverage ratio as defined by our US syndicated credit facility was 1.9 times at the end of December. Our strong balance sheet will continue to allow for meaningful and balanced capital deployment. Our quarterly floorplan interest of $9.6 million was an increase of $2.4 million from the prior year due entirely to higher vehicle inventory holdings. Non-floorplan interest expense of $22 million increased by $6 million from the prior year, both due to the debt rates in conjunction with the prime acquisition as well as higher interest rates. As a reminder, the majority of our debt has been fixed through interest rate swaps. As of December 31, approximately 70% of our $3.1 billion in floorplan and other debt was fixed. Therefore, an annual EPS impact is only about $0.50 for every 100 basis point increase in the secured overnight funding rate, which is the benchmark rate referenced in our floorplan and mortgage debt instruments. For additional detail regarding our financial condition, please refer to the schedules of additional information attached to the news release, as well as the investor presentation posted on our website. I will now turn the call back over to Daryl.

Thank you, Daniel. Related to our corporate development efforts, we expect to find additional growth opportunities in 2023. Growing our US and UK businesses remains our top capital allocation priority. However, our balance sheet, cash flow generation and leverage position will continue to support a flexible capital allocation approach, which will likely also include serious consideration of share purchases. This concludes our prepared remarks. I will now turn the call over to the operator to begin the question-and-answer session. Operator?

And our first question today comes from John Murphy from Bank of America.

I have to ask one core question and one follow-up. Just on new GPUs, Daryl, you mentioned you expect them to normalize over time, but still be higher than they were pre-pandemic. I'm just curious, what timeframe do you think that happens in? I know that's a tough question, but if you could give us sort of some idea of your thought process there. And then also just the corollary savings on SG&A that fall out as grosses come down, meaning what part of that goes out to sales comp? So, is there sort of just a natural sort of hedge or savings as those GPUs come down?

John, this is Daryl. I can't tell you with any specificity when we think it will normalize, other than what we've seen is a real steady glide path really since the middle of last year, the gross profits decline, and we expect we'll see something similar through this year. In some brands, our grosses are holding up quite well because they're still very tight. Inventories are still very tight. In a couple of brands, we saw the gross increase during the quarter. And then, in a couple of brands that we got quite a bit of inventory. In our domestics, we saw the most erosion. But I can't give you a specific time, other than as the inventories and total come back, we expect it to be a gradual change. I'll ask Daniel to address the SG&A question.

On SG&A, or our infills expense in particular, John, which I think you're referring to, I think there's a couple of things out there that's really going to help us going forward. And, clearly, the reduction in profitability drives SG&A as a percent of growth, but I think our use of the AcceleRide platform, how we've integrated that into our dealerships, and I think, importantly, the integration that we're going through, integrating AcceleRide with our DMS, CRM and credit software, that's going to help us further increase the utilization of our sales executives going forward. And I think some of that will help reduce that SG&A impact going forward.

Just one follow up on parts and service. You said 16% growth in techs in 2022. Am I correct to read the gating factor on same store sales growth in parts and service is those techs and what was sort of the cadence of the hiring of those techs through the course of the year? Because if you kind of assume they happen during the course of the year, you might, on a same store basis, have 8% more techs in 2023 versus 2022, right, assuming half were hired smoothly through the year. Just kind of understand that cadence so we can think about where even capacity sits right now.

We picked up more in the second half of the year than we did in the first half, John. And I expect, as they get assimilated – our belief is adding capacity in aftersales drives our ability to service more customers when they want to do business with us. And so, I expect we'll see that ability with these technicians we've added in 2023. And we're continuing to press to hire more techs beyond the number that you see there as well.

Your next question comes from Michael Ward from Benchmark.

Daniel, I wonder if you can walk me through that slide 11 that you have in your handout, just on what you're doing as far as the floorplan swap, the layers and the impact of higher interest rates? Because I think that's unique relative to the rest of the group.

It's Daniel. Let me just pull up slide 11. You're correct. We've got layers of interest rate swaps all the way out to 2031. What that's enabled us to do is to fix a big proportion of our interest. You can see the layers in the deck and the rates that we've fixed them in at. And the rate out to 2031 is at 0.67%. So I think that's going to help with – a differentiator for us versus our competitors.

As interest rates go up on the floor plan, the number that we see, the 9.6%, whatever it was in the quarter, we won't see that increase at the same rate that we see others? Do these swap costs offset or the benefits?

That is correct, Mike. 70% of our debt is at a fixed rate. So, we will not see the same increase as our competitors.

Our next question comes from David Whiston from Morningstar.

You mentioned the really tight Toyota Lexus supply. And I'm just curious if you think that the worst of their production stoppages from either COVID absenteeism or more like more easier to predict maybe the chip shortage, but is there still – are you much more confident about 2023 product allocation from them? Or is there still little to no visibility from the factory on that?

We're more optimistic, David, with Toyota. They're telling us they have more optimism in their plans. I think the thing that Toyota is really fighting is they have such a pent up demand for their brand with customers. And if you look at our presales, typically, presales and pipeline orders are typically kind of luxury brand kind of things, except for our Toyota stores. And we have significant numbers of presales even in our Toyota stores. So I expect they'll have a higher production this year, but I also expect much of that'll get soaked up by some of these presales that are still out there.

On new vehicle affordability, there's a lot of attention given to poor used vehicle affordability, but all the automakers CEOs don't seem too concerned about the high price of new vehicles. What about you guys at the consumer level? Are you at all concerned?

When you bundle everything, interest rates plus the average selling price, I think it's certainly something to think about. The cost of vehicle ownership is probably down a bit, given the gas prices are down versus a year ago, quite a bit in some parts of the country. And we're seeing a little more support in terms of incentives from the OEMs. So I think maybe publicly some of them are saying they're not worried about it. But internally, we're seeing more support. I saw an announcement this morning from one of the OEMs on some interest rate support, as a matter of fact, on some of their vehicles. And I would expect you would continue to see that, especially in those brands that have built inventory.

Our next question comes from Rajat Gupta from J.P. Morgan.

Can you give us a bit of a view into January and how that started, particularly on both new and used GPUs? And anything you've seen in terms of impact on demand for your brands from the fairly sizable price cuts on Teslas? And I have a follow-up.

On January, tough for us to comment on January, Rajat. What was the second half of your question? You cut out on our speaker.

Any impact of demand for your brand from the sizeable price cuts on the Teslas?

Not that we can tell.

Maybe on the used car business, execution was pretty strong. GPUs are still above pre-pandemic levels. Inventory under 30 days. Can you give us a sense of how you're managing the current pricing environment? Maybe any comment on your approach on GPUs versus volumes? And do you see GPUs falling below pre-pandemic levels temporarily during this pricing transition period at all?

Well, the trade off on volume in GPUs, we want to err on the side of volume. Not that it's volume at all costs. That's never something we want to do. We price based on market value of those vehicles and we reprice constantly, more often than daily in many cases. And we want to be at the market or better all the time. And then we want the volume because of the F&I attachment, which is a real strength for us. Also, that puts more units in operation out there for our stores and another opportunity for us to do parts and service business with those customers. So, philosophically, we like that volume versus GPU trade-off for that reason. Moving forward, if you look at it on a macro basis over the next couple of years, what firms like Cox are saying, which I tend to agree with them is I believe we're going to see somewhat of a shortage on used cars because of the pandemic-related SAR declines that we saw for three years. And that will take some used cars out of the market for the coming three or four – couple of years anyway. And I believe that could support PRUs over the next couple of years. So, that's something we think is probably going to happen, is the way we see it.

And our next question comes from Daniel Imbro from Stephens Inc.

This is Joe Enderlin on for Daniel. Just looking at the UK vehicle backlog, it sounds like that took a slight step down this quarter. Just wondering, do you think demand remains relatively consistent there? Have you seen any noticeable changes in the consumer backdrop from last quarter?

No, we haven't seen any material change at all. And we've seen strength in that backlog and just minor changes. I wouldn't take the changes quarter-over-quarter as anything meaningful or anything indicative of a different trend than what we've seen.

As a follow-up, looking at the slides, it looks like customer retention has increased from about 70% to 88% using AcceleRide over the course of this year. Could you maybe provide some color on how sure you think that platform is, how much optimization you have left, and then if you have any goals for next year?

We believe we're in the first couple of innings of the AcceleRide baseball game. And we feel like it's a customer platform that will help us drive retention and drive value and transparency for customers in a number of areas of our business. Not just in buying new cars or used cars, but in buying – but in them selling their used cars to us, transacting with us, digitally payments, we believe there's so much more we can do with AcceleRide to make that customer experience even better. And we believe that retention number you're looking at is just indicative of how much customers value that experience of AcceleRide. We continue to see the usage go up every month, almost just every single month that's going up. 75% of our customers use AcceleRide now in their transaction in some way. So, we believe there's still a long way to run with AcceleRide. We're really happy with where we are.

And our next question comes from Adam Jonas from Morgan Stanley.

Just a couple of questions. First, Tesla, those price cuts, I don't remember anyone cutting price like 20%. That's kind of a, maybe you'd agree, pretty unusual situation. And while it doesn't necessarily compete directly with all the nameplates that you guys are selling, some of the stores, you might have a little more head-to-head with that type of product. I'm curious, if this wasn't already covered whether you saw any real time impact after those cuts? And a follow up.

This is Daryl. We looked at our used Teslas in inventory immediately after their announcement and we repriced. We didn't have very many honestly. But we did reprice. And so, I would say there was an impact from that perspective, but the numbers are like less than 100 for us across the country. And then, in the segments where we do sell EVs or we sell luxury cars and there's some cross shop between Teslas and luxury ICE vehicles, and we haven't seen a material impact yet on that per se, but it was a bold move they made. That's for sure. And we're watching it every day with what they're doing.

Just a couple of little housekeeping ones then for me. Any comments on interest expense either on the floorplan side or other interest expense, just kind of seeing where we are today versus pre-COVID and given the rate environment. I'm not asking you to guide specifically, but something directional or particularly on floor plan, as you kind of get the units rebuilt with the rates kind of creeping up.

Adam, it's Daniel. At the moment, we have 70% of our debt swapped out. That's fixed mortgages as well as floorplan. As the inventory continues to rebuild, we will see some increase in interest expense. But at the current rate, we see that at $0.50 of EPS per 100 bps increase in interest.

Our next question comes from Glenn Chin from Seaport Research Partners.

Just more follow-up on pricing. Understood that fourth quarter is before Tesla price cuts came in, but some third party providers suggest that ASPs continued to increase through the quarter. Can you confirm that they continued to reach new highs through December? And then, is that a function of price, mix or both?

I assume you're talking about new cars?

Correct.

We didn't necessarily see an increase through the quarter on new car pricing.

Just on parts and service, margins ticked down slightly. Is that a function of mix? Sequentially.

I'd have to look at it more to see if parts drove some of that, which it probably did, but we can take a look at that and get back to you.

And our next question comes from John Murphy from Bank of America.

I just had one follow-up on leverage, Daniel. You mentioned 1.9 times as your current leverage. I'm just curious if you saw a good acquisition either in the UK, in the US where you could potentially take that up to and what kind of capacity you think you have to do, potentially a small, mid or even large acquisition?

For us, I think what we set out is that we would be prepared to go to 3.5 times levered. Our credit facility allows us to go to 5.75. If it was a really big acquisition or something that we were really interested in doing, we would be prepared to go to 4 times, but that would be on the proviso that we would reduce that back down again to 3 or under 3 times pretty quickly.

But you're comfortable with 3 – so you can jump to 3.5 to 4 on an acquisition, you would want to grind that back to 3, but you're very comfortable 3, meaning there's a turn of leverage here that's just up for grabs, depending on – the best way to go.

Absolutely, John. We would be happy to go to 3. Clearly, pre-pandemic, we were above those levels and we were okay at those levels as well.

Our next question comes from Rajat Gupta from J.P. Morgan.

Are you going to comment at all, if the consumer backdrop does remain weak, be it higher interest rates, seeing some delinquency defaults picking up and you don't see improvement in new and used car supply, are you able to comment on what you would see as trough earnings for the company based on today's revenue base and the new share count or any puts and takes or guardrails around that if you could provide?

Rajat, we don't. As you know, we don't give guidance. I guess you have modeled it within your model, and I think the model that you have put out there effectively goes back to 2019 levels, but that's as far as we would be prepared to comment on that.

And our next question comes from David Whiston from Morningstar.

I wanted to go back to the 16% increase in tech headcounts. You talked a couple of years ago about how you were – if I remember right, it was doing some new initiatives to get more talent, like a four day work week. Could you just briefly summarize what are the main things you've been doing to have success in getting people? And then also, of the things you're doing, what has been the most top one or two things that candidates are saying they like the best and why they chose to work at Group 1?

We pay at market or above market is a real key thing for us. We keep our technicians full of work, busy. Because philosophically we keep our schedules wide open for our customers. We don't make our customers do business with us when it's convenient for us. We do it when it's convenient for the customers, which usually means they want to do business right now, which puts pressure on our stores because that creates a lot of traffic in the stores. And then, the four day workweek, we continue to work that. We're in 80 stores today, which is about half of our rooftop count in the US. That's an important thing. We are looking at different compensation schemes in – I say schemes, compensation plans across our footprint to determine ways to make it an even better place to work. And we're not ready to comment on those specifically. But that's something that is front and center in our thinking right now as well. Also, we have mentoring programs that we have in a number of markets and a number of stores across the country and relationships with a number of technical schools and training schools that help us help feed techs to us. So, we have a number of different things that we do, a number of different things. It's never-ending.

You said the four day workweek is in about half of the stores. Do you see that getting drastically higher over time?

Yes, we continue to find ways to put that in more and more stores over time. And we invest. We brought $3 billion in revenue in the last year-and-a-half. Inevitably, what we find when we buy a store is there's underinvestment in aftersales. And that usually means equipment. That means training. That means staffing and facilities. And as one of the very first things we do when we integrate a new dealership is we invest in aftersales in all of those areas and we think that pays off for us in tech recruitment, tech retention as well.

And ladies and gentlemen, in showing no further questions, we'll be ending today's question-and-answer session as well as today's presentation. The conference has now concluded. We do thank you for attending. You may now disconnect your lines.