Good morning, ladies and gentlemen. Welcome to Group 1 Automotive's 2023 Second Quarter Financial Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the floor 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. 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 that 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 manufacturer production levels due to some component shortages, additions of markets and adverse developments in the global economy and resulting impacts on 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 such non-GAAP financial measures to the most recently comparable GAAP measures on this website. Participating with me on the call today, Daryl Kenningham, our President and Chief Executive Officer, and Daniel McHenry, Senior Vice President and Chief Financial Officer. I'd now like to turn the call over to Daryl.

Thank you, Pete. Good morning, everyone. In the second quarter of 2023, Group 1 Automotive reported $166.1 million in adjusted net income and record total quarterly revenues of $4.6 billion, led by all-time highs in new vehicle, parts, service, and finance and insurance revenues. Our parts and service team continued to deliver record revenue levels for nine consecutive quarters. We also set an all-time record for quarterly total gross profit, supported by an all-time record parts and service growth of $304.1 million. We continued to deploy capital efficiently in the quarter to acquire the highly desirable Beck & Masten stores, further strengthening our strong Texas footprint with an outstanding brand. We also returned capital to our shareholders by repurchasing $31 million in shares during the quarter. Our strong cash flow and leverage position, which Daniel McHenry will cover in a minute, will continue to allow for significant capital deployment flexibility in the remainder of 2023. Now turning to our second quarter results, starting with our US operations. We ended the quarter sequentially flat with 27 days supply of new vehicles and 31 days supply of used vehicles. Consistent with our comments on inventory last quarter, our domestic brands have improved slightly, and import brands have remained very constrained. Approximately, 28% of our US business is Toyota and Lexus, which continues to be very tight at a combined five-day supply. Our new vehicle revenues increased an impressive 19% sequentially and 22% over the second quarter of last year. While we saw a slight moderation in GPUs, new vehicle units sold reached the second highest level in company history, a 19% increase over the first quarter and 16% over the second quarter of last year. 33% of our new vehicle sales in the US were presales, down from 40% in the prior quarter. Used vehicles were challenged in the second quarter with sourcing more difficult from the lack of new vehicle supply. We entered the quarter low on used vehicles. However, we picked up some ground as the quarter progressed, thanks in large part to trade-ins from record new vehicle sales. Source used inventory, we continue to focus on organic sourcing efforts, including acquisitions through AcceleRide, customer trades, and service drive acquisitions. Finance and insurance business has remained strong, with same-store gross profit per unit at $2,379, a sequential quarter improvement. Despite this resiliency, looking forward, we expect pressure on finance penetration rates driven by existing interest rates and slightly tighter lender requirements for some buyers. Now turning to aftersales. Our US performance was outstanding. Aftersales revenues grew double digits and same-store revenues were up over 8%, led by strong customer-pay same-store growth of nearly 12%. Technician headcount grew 10% in the second quarter, and we continue to invest in new ways to reach our customers through one-to-one marketing technology and by using artificial intelligence. We continue to invest in aftersales and believe parts and service will be a strength through the rest of 2023. Our second quarter US adjusted SG&A as a percentage of gross profit was 61.7%, an increase of only 303 basis points from the prior year and a decrease of 1.4% sequentially, down from over 70% in pre-pandemic 2019. We do see some pressure from reduced margins and inflationary costs. We expect that a material portion of our SG&A savings will be permanent. Now to AcceleRide, where our customers continue to vote yes. During the second quarter, we saw deeper engagement through AcceleRide. Over 80% of our customers engaged in some way in their transaction through AcceleRide, and nearly half of our customers engaged in AcceleRide on at least five steps of the car buying process. We experienced significant year-over-year increases in trade-ins, credit applications, F&I attachment, and significantly more sales. 12,200 vehicles sold in the quarter, that was up 78% year-over-year. Turning to the UK. Vehicle demand remains resilient and new vehicle availability is still constrained, keeping vehicle GPU strong. New and used GPUs outpaced the prior year quarter by 7% and 5.4% respectively. We continue to see signs of production improvement by certain manufacturers as demonstrated by the 10% increase in same-store new vehicle units sold. As of June 30, our new vehicle order bank was approximately 19,400 units, a 10% increase over the prior quarter. As a reminder, our UK business mix is predominantly luxury, and those customers are more resilient during times of economic uncertainty. And our aftersales growth in the UK has been outstanding, with same-store revenues and gross profit on a local currency basis increasing 19.8% and 17.2%, respectively. Similar to our efforts in the US, we've worked to grow technician headcount, experiencing an approximate 10% increase over the prior year. We have also invested in improvements to our UK customer contact center, streamlining operations and improving the customer experience. I will now turn the call over to our CFO, Daniel McHenry, to provide a balance sheet and liquidity overview. Daniel?

Thank you, Daryl, and good morning, everyone. As of June 30, we had $23 million of cash on hand and another $268 million invested in our floorplan offset accounts, bringing total cash liquidity to $291 million. We also had $338 million available to borrow on our acquisition line, bringing total immediate available liquidity to $628 million. Through the first half of 2023, we generated $387 million of adjusted operating cash flow and $311 million of free cash flow after backing out $75 million of CapEx. This capital was deployed through a combination of acquisitions, share repurchases, and dividends. During the current quarter, we spent $31 million, repurchasing approximately 141,000 shares at an average price of $221.52. The result of this repurchase activity is just over a 1% reduction in share count over the current quarter. Our share count as of today is down to approximately 14.1 million. Our rent-adjusted leverage ratio as defined by our US syndicated credit facility was 2.1 times at the end of June. Our strong balance sheet will continue to allow for meaningful and balanced capital deployment. Our quarterly floorplan interest of $15.6 million was an increase of $9.7 million from the prior year, entirely due to higher vehicle inventory holdings. We effectively managed our floorplan interest expense by holding excess cash on our floorplan offset accounts, reducing the balance exposed to interest as well as to our portfolio of interest rate swaps, which saved us $4.7 million in interest expense versus the comparable prior year quarter. Non-floorplan interest expense of $25.9 million increased $7.4 million from the prior year. However, our mortgage rate swap portfolio saved us $1 million versus the comparable period. As of June 30, approximately 63% of our $3.4 billion in floorplan and other debt was fixed. Therefore, the annual EPS impact is only about $0.69 for every 100 basis point increase in the secured overnight funding rate, or SOFR, which is the benchmark rate referred to 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 a top capital allocation priority. However, our balance sheet, cash flow generation, and leverage position will continue to support a flexible and efficient capital allocation approach, which will likely include serious consideration of share repurchases in addition to pursuing external growth. This concludes our prepared remarks. I'll now turn the call over to the operator to begin the question-and-answer session. Jamie?

Ladies and gentlemen, we will now begin the question-and-answer session. Our first question today comes from Daniel Imbro from Stephens Incorporated. Please go ahead with your question.

Hey, good morning, guys. Thanks for taking our question. I want to start on the used vehicle side of the house. GPU is slightly better, but the units obviously have been kind of across the industry. Just wanted you guys maybe expand on that, kind of what you're seeing on the ground? Is it more of a supply issue with a lack of late model use coming back? Is it a demand-driven issue because of financing rates? And how do you think that kind of materializes through the back half of this year, given what you're seeing out in the market?

Hi, Daniel, it's Daryl. I don't think what we're seeing is any different than what you've heard from the rest of the industry. We're kind of at the peak of the COVID off-lease return trough. So there's not a lot of inventory coming back into the market off-lease. Also, our fastest-selling and lowest-day supply vehicles continue to be cheaper vehicles, and there's more pressure on those segments for affordability, but those people tend to move down. Our average selling price moved down almost a couple thousand bucks year-over-year. So I think it's more a function of availability of inventory at the lower levels. And I expect that we'll see some of that. We saw during the quarter, we saw it sequentially improve month over month over month. And I expect we'll continue to see that improve a little bit as the year progresses.

Got it. And then, Pete, I want to follow up on the US F&I per unit. It was up over $100 sequentially. Is that driven by higher product attachment? I would think loan size is down. Finance penetration is probably down year-over-year. Can you talk to what the drivers of kind of the sequential growth are and then maybe how sustainable this level could be on a per unit basis?

Sure, Daniel. Thanks. We feel good about the overall performance of F&I. Our product penetrations were either up or held steady year-over-year and sequentially improved. So I think there's been a lot of focus on the finance penetration, which we've seen an improvement in new. Used vehicle still is a headwind clearly. And I think that's as a result of rates. Our rates are up about 250 basis points year-over-year. So we're focusing on the product. And we've had, I think, really good partnerships with our major lenders, which has been helpful.

Our next question comes from John Murphy from Bank of America. Please go ahead with your question.

Good morning, guys. I just wanted to touch on parts and service where you continue to outperform at least our expectations, and it's happening quarter after quarter. I'm just curious how sustainable you think that is, if this is just an issue of getting more techs and you'll be able to continue to grow over time and how you're getting all these techs? I mean adding 10% in the quarter is pretty impressive. I know that the four-day flexible work week is helping to some degree, but it seems like there's some other secret sauce that you guys might be using here to get all those folks. So can you just kind of expand on the parts and service strength and the potential going forward?

John, this is Daryl. We make significant investments in parts and service, especially when we acquire dealerships, as we often encounter underinvestment in these areas. Our priority is to quickly enhance capacity, equipment, staffing, and training at these new locations. With the number of stores we've acquired recently, this has become a crucial element of our strategy. Additionally, we're actively recruiting technicians, and the four-day work week plays a part in this. We also have various programs that assist with tuition, training, uniform sponsorships, and mentoring, alongside established career paths for our technicians. It's a combination of efforts rather than a single solution. Currently, the market has benefited from certain pricing trends, but I believe that phase is ending, and the focus will shift back to throughput in the future. Despite this, we still see strong demand as the vehicle fleet ages, requiring repairs on older cars. I remain optimistic about the outlook for parts and service; it’s promising and full of opportunities.

And just one follow-up on AcceleRide. You mentioned that 50% of your customers were going through five steps of the transaction with AcceleRide. I'm just wondering if you can kind of explain what exactly those five steps are? How many steps there are that you count in a transaction? And when will this ultimately start saving you costs or helping you maybe reduce headcount? And I don't know if you can quantify that, but how do you think about that potential savings over time?

We observed productivity improvements during the quarter. Although we didn't highlight them in the script, our sales teams experienced year-over-year productivity gains, which we attribute to AcceleRide. AcceleRide consists of about 10 steps, and our goal is to engage customers as effectively as possible through this platform. We are currently testing various approaches nationwide. In the last six months, we have focused on how we've implemented AcceleRide while also trying out new strategies in select markets to see how they impact customer engagement, closing rates, and overall customer experience. We believe we are still in the early stages of AcceleRide. I can't provide specific numbers, but I don't expect all our customers to use AcceleRide exclusively. The system is designed to allow customers the flexibility to choose their engagement level. We avoid making it rigid, so if they prefer another route, they can. This is a lengthy answer to your question, John, but we are still in the learning process.

John, just it's Daniel here. And just to add to what Daryl has said. To put it into perspective, salesperson productivity has increased by 32%. That's the average number of units a salesperson would sell versus pre-pandemic. And as Daryl says, we see that continuing to increase.

Our next question comes from David Whiston from Morningstar. Please go ahead with your question.

Thanks. Good morning. Just going back to the service technicians, particularly the UK headcount increase, I know you've got some good initiatives like the four-day work week that went out, but I'm just curious in the UK market what else may have helped there? Are people perhaps more eager to work than they were a year or two ago? Just any other labor market dynamics you can share specific to that market? Thanks.

We're trying out a four-day work week in the UK, but it's not as established there as it is in the US. The retail work schedules in the UK differ, so the benefits of a four-day work week vary from those in the US. We're focused on ensuring our compensation remains competitive and striving to be the employer of choice for our team. Additionally, we've invested significantly in our aftersales team at the corporate level in the UK, which has allowed us to place more emphasis on recruiting technicians.

Thanks. On used vehicles, it seems like it's challenging for everyone, but your metrics appear to show a smaller year-over-year decline compared to some other dealers. I'm curious if you're not reducing prices as aggressively right now while prices are falling, or if you're managing inventory more effectively than before.

Well, I'd love to say we're smarter. I would say we're trying to be disciplined. We implemented some new technology about a year ago that I think is really helping us with one of our partners, and it's helping us stay more disciplined on our pricing. And I believe that's helping us quite a bit. The old days of where a used car manager would go and price their inventory, we're kind of trying to get away from that because we want the technology to help us lead that. And so we implemented some things about a year ago to help us do that, and I believe that's paying some dividends.

Our next question comes from Rajat Gupta from JPMorgan. Please go ahead with your question.

Thank you for the question. I wanted to discuss the overall health of the consumer. You mentioned the impact of interest rates on financing, but it's worth noting that new car volumes have been surprisingly strong year-to-date. I'm interested in your thoughts on what might be influencing this in light of the current pricing and rate environment. Also, how do you think this trend will continue throughout the year? Additionally, can you provide an estimate of how you expect new car gross profit margins to perform in the third and fourth quarters? I have a follow-up question as well. Thank you.

Rajat, in terms of the consumer, we see consumers just looking at the order banks in the UK, looking at the presales in the US. I mean, to us, that indicates a pretty healthy, strong consumer. Looking at the aftersales pull-through, we see evidence of a pretty strong consumer. We're seeing a little pressure in F&I, but it's just a little bit, honestly, I mean it's $100. So from a consumer perspective, we see good things there. And I don't know if that will change. In terms of the gross profit trends you asked about on new cars, I don't believe we will see anything different than what we have seen over the last couple of quarters, three quarters where it's a gradual decline from where it's been, but we don't see any cliffs out there at all.

Got it. That's helpful. And maybe just on capital allocation priorities. Buyback has been a little lighter this year relative to what you did in the last couple of years. Obviously, you've spent a little more on M&A here. Curious how you're thinking about balancing that in the second half? Maybe any comments around just the M&A environment, what kind of deals are flowing into the pipeline? How the multiples are? Just like how the activity is and willingness for deals to close? That’ll be all. Thanks.

We are focused on deploying capital efficiently and pursuing the right types of deals. Our recent transactions, like those in Toyota, North Austin, our significant Chevy deal in Florida, and the Beck & Masten acquisition in Houston and South Texas, reflect the types of acquisitions we seek. These are targeted in growth markets. If we can't find suitable opportunities, we will consider stock buybacks, as demonstrated last year when we repurchased a substantial amount of our company. While we see this as an opportunity, our priority remains on growing the company, but we won't do so at any cost.

Our next question comes from Daniela Haigian from Morgan Stanley. Please go ahead with your question.

Thank you all. So I wanted to ask about rising EV inventory. Do you have any comments around incremental demand for EVs from the start of the year to now? Any sense of change in demand in recent weeks? Or just any commentary on inventory levels rising overall?

Our days supply of electric vehicles is currently at 61 days, which is slightly above average. Our inventory consists of about 11,000 units, with 740 of those being electric vehicles. Due to the limited number, it's challenging to deduce broader trends. The inventory is concentrated among a few brands; some are experiencing stronger sales support while others are facing challenges. This reflects the difference in our electric vehicle and internal combustion engine inventory levels at this time.

Thank you.

And ladies and gentlemen, with that, we will be ending today's question-and-answer session as well as today's presentation. We thank everyone for joining today's conference call. You may now disconnect your lines.