Good morning, ladies and gentlemen. Welcome to Group 1 Automotive’s Second Quarter of 2024 Financial Results Conference Call. Please be advised that this call is being recorded today. 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, Joe 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 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 and 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, successful integration of our pending Inchcape acquisition, 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 directly comparable GAAP measures on its website. Participating with me on today’s call, Daryl Kenningham, our President and Chief Executive Officer; and Daniel McHenry, Senior Vice President and Chief Financial Officer. I’d now like to hand the call over to Daryl.

Thank you, Pete. Good morning, everyone. Despite a number of challenges, we are very pleased with our results this quarter. Our U.S. team persevered through extreme weather events and the CDK outage. We witnessed unprecedented teamwork focused on caring for our customers, communities and our team members. The CDK outage most significantly affected our U.S. operations from June 19 to June 26. The company’s businesses in the UK were not impacted as we use a different dealership management system there. During the disruption, all Group 1 U.S. dealerships continued to serve our customers using alternative processes until CDK systems were again made available. We do believe that we could have sold more vehicles and performed additional service and repair work in the June quarter, had we been operating at full capacity with our CDK dealer management systems. Once we were able to gain access to CDK on June 26, we mobilized our operations personnel to enter thousands of transactions performed during the outage into the CDK DMS, all of which were completed prior to June 30. The superior efforts by our field employees, our accounting shared services center in Houston and our investments in technology for transactional processing all paid tremendous dividends that enabled us to recover quickly from the outage. For example, we used our technology to process car deals, complete inventory stock ends and post factory, vendor and bank statements in an expeditious manner. This phenomenal display of teamwork and unity by our U.S. team allowed us to maintain our financial close timeline for the June quarter and shift our focus toward the future. We believe these actions are a key reason that we were able to minimize the financial impact of the CDK event on our profit performance. We estimate the pre-tax income impact of the CDK incident to be approximately $17 million or $0.97 in diluted earnings per share. Additionally, we made $5.9 million in one-time pre-tax compensation payments to employees or approximately $0.34 in earnings per diluted share. This impact is prior to any insurance or other recoveries we expect to receive in future periods. Now I’d like to spend a few minutes discussing what we feel differentiates Group 1. Prior to the CDK cyberattack, our disciplined execution led to great after-sales and used car performance in the second quarter and our F&I performance and front-end gross margin retention performed well throughout the entire quarter. Our SG&A leverage was outstanding as we continue to keep our primary cost drivers, like headcount in check. Daniel McHenry will outline several specific examples of this disciplined execution in his upcoming comments. Another differentiator for Group 1 is our capital allocation strategy. We are a pure-play new vehicle dealership group. While we regularly evaluate other business adjacencies, we believe, in this environment, the best use of our shareholders’ capital is investing in new vehicle franchise dealerships. We believe that entering other business verticals not only hurts returns, but also dilutes our focus. This year, we have acquired dealerships with expected revenues of $1.1 billion. Our ability to integrate these businesses into our existing portfolio allowed these transactions to be accretive from day one. As previously announced, we recently completed the purchase of four Mercedes-Benz dealerships north of London. We also look forward to closing the Inchcape acquisition in the third quarter. As a reminder, we anticipate that the 54 Inchcape dealerships will add $2.7 billion in revenue to Group 1, doubling our size in the UK. The brand and geographic mix is outstanding and gives us significant scale and reach and will improve our SG&A leverage. This is a transformative acquisition for Group 1 and we look forward to welcoming nearly 4,000 new teammates to the company. An important part of our capital allocation focus is what we don’t buy. While we routinely discuss acquisitions that are pending or have closed, what’s also important are the acquisitions that don’t fit strategically or meet our investment hurdles. Some of those are in great markets with great brands. However, we will not chase revenue just for the sake of growing. Our portfolio optimization efforts are based on returns and strategic fit. Another important element of our capital allocation strategy is evaluating share buybacks as an alternative to purchasing revenue. We continue to balance acquisitions and dispositions with repurchasing our shares. This year, we’ve bought another 2.6% of the company back for $100 million. Over the past 30 months, we’ve bought back 25% of our stock. Lastly, we believe close partnerships with our OEM partners has never been more important, and this is certainly a differentiator for Group 1. OEMs need great retail partners now more than ever. The good ones admit that and execute against that. They need our capital, professionalism and execution to win in this ultra-competitive environment. Our high performance on OEM scorecard metrics enables Group 1 to stay eligible to purchase more stores, something our team has done an outstanding job with the last two years. Our ability to respond to disruptive events quickly and effectively, like the CDK outage and catastrophic weather events, makes us more valuable partners as well. Our willingness and ability to invest in world-class facilities, professional management and the community makes us more valuable partners. Our breadth across two major markets gives us and our OEM partners competitive leverage and performance advantages. As a new vehicle dealer, a strong relationship with our OEM partners is more critical than ever and we don’t see that changing in the future. We actually see that OEM relationship growing in importance. We believe the Inchcape acquisition allows Group 1 another outstanding opportunity to demonstrate that. And we believe that Group 1 being a great partner to our OEMs gives us significant advantages that tie directly to our capital allocation priorities. Now, I’ll turn the call over to our CFO, Daniel McHenry, for an operating and financial overview. Daniel?

Thank you, Daryl and good morning everyone. In the second quarter of 2024, Group 1 Automotive reported adjusted net income of $133.1 million, quarterly adjusted diluted EPS from continuing operations of $9.80, current quarter total revenues of $4.7 billion, a second quarter record and all-time records in new vehicle sales of $2.4 billion on F&I of $200 million. Starting with our U.S. operations, we achieved an all-time record in new vehicle revenues of $2 billion, driven by record new vehicle sales units sold, up 7% on a reported basis. This reflects the resiliency of demand and our continued emphasis on driving volume. New vehicle GPUs were essentially flat sequentially, down only $33. Used cars experienced a volume increase both sequentially and year-over-year with only slight declines in GPUs. We were pleased with our ability to hold margin and increase volume despite fluctuations in pricing between the periods. We believe this is a testament to our process, discipline and use of technology with the pricing of used vehicles. Our F&I revenues of $184 million were also a quarterly record for the U.S. Our F&I GPUs of $2,393 increased on a same-store basis sequentially and negligibly declined year-over-year. The performance by our F&I professionals has been outstanding to maintain GPU discipline. Shifting gears to after-sales. Despite the CDK challenges and weather events, after-sales second quarter revenues and gross profit were all-time quarterly highs, outperforming sequentially and year-over-year. Same-store customer paying warranty revenues for May quarter-to-date period were up 6% and 12.5%, respectively. These gains against two tough double-digit growth comparative prior year periods demonstrate our ability to add after-sales capacity on a same-store basis. While our overall same-store U.S. head count has declined 5% from 2019, our technician head count is nearly up 5% in the same period. Wrapping up the U.S., let’s shift to the SG&A. U.S. adjusted SG&A as a percentage of gross profit decreased 130 basis points sequentially to 64.4%, demonstrating our continued focus on managing costs at below pre-COVID levels as new vehicle margins continue to normalize. Turning to the UK, top line revenues grew 2.1% year-over-year, driven by higher new vehicle and parts and service revenues of 8.2% and 9%, respectively. While down from the prior year, new vehicle gross profit per unit slightly improved sequentially at the same time, prices declined over the same period. Used vehicles remain challenged, however, we did experience a slight improvement in GPU sequentially. Wholesale losses per unit remained flat compared to the sequential quarter. Regarding the UK adjusted SG&A as a percentage of gross profit, we recognize we still have some challenges to overcome. And we will continue to focus on cost control and business process efficiency as we expand our business in the UK. Turning to our balance sheet and liquidity. Our strong balance sheet, cash flow generation and leverage position will continue to support a flexible capital allocation approach. As of June 30, our liquidity of $644 million was comprised of accessible cash of $159 million and $486 million available to borrow on our acquisition line. Our rent-adjusted leverage as defined by our U.S. syndicated credit facility was 2.44x at the end of June. Cash flow generation through the first half of 2024 yielded $302 million of adjusted operating cash flow, and $223 million of free cash flow after backing out $79 million of CapEx. This capital was deployed in the same period through a combination of acquisitions, share repurchases and dividends, including the acquisition of $1 billion in revenues through the 30th of June, $100 million repurchasing approximately 353,000 shares at an average price of $282.81 resulting in a 2.6% reduction in our share count since January 1 and $12.8 million in dividends to our shareholders. As of June 30, approximately 53% of our $4.6 billion in floorplan and other debt was fixed resulting in an annual EPS of about $1.23 for every 100 basis points increase in secured overnight funding rate. For additional detail regarding our financial condition, please refer to the schedules of additional information to the news release as well as our investor presentation posted on our website. I will now turn the call over to the operator to begin the question-and-answer session.

And our first question will come from Rajat Gupta with JPMorgan. Please go ahead.

Great. Thanks for taking the question. Hi, and congrats on a strong execution this quarter. I wanted to just follow-up on just the CDK impact in the second quarter. And how should we think about the run rate of certain components of the P&L into July or the third quarter, if you could give us? And really, the focus was more on SG&A to growth. And clearly, not very strong execution sequentially despite some of the deleveraging you might have seen from lost sales and lost service. So could you help like frame for us, how should we think about the SG&A to gross level into the third quarter? And any color you could give us around how the service business is doing so far in July and your expectation for the third quarter and anything else that you might want to highlight? And I have a quick follow-up, thanks.

Rajat, Daryl. One clarification in our script. We had mentioned that our head count was down 5% from 2019, but our technician head count is up actually 20% since that time period. So I wanted to clarify that point. And that’s one reason our SG&A as a percentage of gross has been good as we’ve done a really good job managing our overall head count and only adding where it drives capacity and after-sales effectively. So that’s allowed us to maintain our after-sales growth over a period of time and control SG&A at the same time. So I think in terms of the – and I’ll ask Daniel to speak to some more SG&A issues. But I think in terms of the CDK impact, I think, largely, most of the impact is behind us. The CRM came up a little later than the DMS did. So there’s still some work being done to try to recover the information on those customers as we move forward. But we’ve seen the recovery, I would say, much of it is behind us, and I don’t expect a material impact in the third quarter. Daniel, what would you add?

Clearly, in terms of SG&A, there was that one-timer of additional pay that we made to our employees, that $5.9 million. Clearly, we missed out on a chunk of growth in June that would have really helped us dilute some of our expenses and help drive some further SG&A deleverage in the quarter. Clearly, there’s work still to be done in the UK either taking on the Inchcape stores in this quarter. That should help us de-lever in the UK certainly going into 2025.

Got it. And just on SG&A growth in the U.S., I mean, because you give us this helpful breakout of U.S. versus UK. Given the U.S. was still hurt from deleveraging, is it fair to assume that the 64.4% that you saw in the U.S. should continue to move lower from here because of some catch-up in July and just because ex-CDK, that number would have actually been better than the 64.4% reported? And just like any color on like services into July that you can give us as well, thanks.

Tough to predict on the 64.4%. We saw our front-end margins on new vehicles stay relatively flat sequentially year-over-year – or I’m sorry, quarter-over-quarter. So that certainly helped us. And we’re obviously watching that margin and that obviously impacts the SG&A number – percentage of gross numbers. So tough to predict if it will move lower in the near term, Rajat. We’re seeing our service business. You saw it in – through May, our CP was up 6% year-over-year same-store. Our warranty was up 12% year-over-year same-store. We’re really happy with that. We continue to be able to add technician capacity, which is driving that. And we expect we’ll be able to continue that here into the rest of the year as well.

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

Good morning, guys. I know you do some public call, but remarkable execution, very good, very impressive quarter. Just – a first question. When we think, Daniel, about that parts and service that may have been lost during the CDK outage, is that the kind of revenue that you think could get picked back up or got picked back up? Or is that kind of just lost in the wind and we should see a normalization but not necessarily a catch back up in the third quarter?

John, it’s Daniel here. It’s kind of hard to judge so early in the quarter. We had some pretty severe weather in Houston in the first week, two weeks, of the quarter. It’s harder to pick up parts and service business because that’s more of a definitive or effectively our time slot that you’ve sold to the technician. So it’s harder to pick that up, but I would expect there to be some pickup from that. However, I think the vehicle pickup, that does well to be out there as well because clearly, I think a lot of those sales could have just been delayed sales with too many stores and too many operators under the CDK platform.

One thing, John, to note is our average miles driven increased again this quarter for cars coming through our service department. And – excuse me, the average dollars per RO continue to rise, mainly, I believe as a result of that the age of the vehicle population. So that – I think that is just good things – means good things for parts and service in the future.

Yes. That’s helpful. Just a second follow-up on – excuse me, interest rates. I mean, Daniel, you mentioned the impact if rates go up, but God forbid rates go back down, which hopefully they will sometime soon. Is that impact sort of linear on the downside? And then also, if we think about sort of the flow-through of rates, I mean the whole industry has faced about a 400 basis point increase in borrowing rates at the consumer level the last 2.5 years, but pricing has been very resilient. Grosses have come down a little bit from the peak. But how do you think about what could happen on the demand side and the pricing side as that massive surge in interest rate and expense backs off and the consumer can maybe put a little bit more money not to interest expense, but to the price of the vehicle and maybe grosses. I mean, it just seems like there is a misunderstanding of how big a headwind this interest burden is and to the consumer and it might actually be relieved sometime soon.

Hi John, this is Pete DeLongchamps. Yes, I think you are absolutely correct. One of the things that we are fortunate to have is a terrific financial services company attached to the OEMs that have been able to sub-vent the rates. You look at our attachment rates now, up to 75% penetration on new F&I, so that’s a positive. And I think where we could also really pick up some business through lower rates on the used side because those penetration rates are 62%, 63%. So, I think you are spot on. With lower rates, it’s going to certainly help our used car business and make the new car affordability, I think better for the consumer.

John, this is Daryl. Our data says that average selling price of the new car in the third quarter was down $1,000. So, if you combine that with some lower interest rates, that should take some pressure off the consumer and hopefully drive some more volume.

Our next question will come from David Whiston with Morningstar. Please go ahead.

Thanks. Good morning. Just first, a clarification on CDK and a follow-up with that is, did you say losses was $0.97 plus, it’s $0.34 for the comp, so it’s $1.31 total?

David, this is Daniel. $1.31 total, but the disaster pay in our mind was already adjusted out of the $9.80. So, the difference in the $9.80 and what you deem to be the losses, about $1.

Okay. And is it just luck that you guys got your service back – core service back in about a week, or were you able to work the CDK that somehow in the scenes...

Absolutely, no luck at all, David. Come on.

The harder you work, David, the luckier you will get.

David, it’s hard to say why. I mean we – one, we think our systems are architected in a way that helped us move faster, we felt comfortable being able to move with less risk. I think our team has a very good relationship with CDK. And honestly, we tried to work with all the public dealers to try to help the industry get back, honestly. I don’t know how much it helped us get back faster. But those were all things. And I think a lot of the technology on our back office really helped us get things back once we did have CDK access.

And just on capital allocation, with buybacks, very long-term, even in the next decade, should we think about you guys kind of doing what AutoNation has done for a very long time where you are just trying to get that share count as low as you possibly can?

No, we don’t think about it in terms of share count necessarily. What we look at is, when we are faced with an acquisition, we want to do the math on a buyback, using that capital for a buyback or using that capital for an acquisition. And if it’s close, we will do the acquisition because we want to grow the company, and we think scale is important and growing new clusters is important and things like that. But we think about it in the context of just other uses of capital. We don’t necessarily think about the share count. Daniel, you might have something to add to that.

I don’t have anything further at the moment.

Our next question will come from Michael Ward with Freedom Capital. Please go ahead.

Thanks. Good morning everyone.

Good morning, Mike.

Just to clarify – I just want to try to clarify the CDK impact, right? So, you had new and used unit sales lost, service business lost, in total, that was a $17 million hit pre-tax. And you had the one-time comp charges of $5.9 million, and that’s included in the SG&A number we see. Is that the right way to think about it?

That’s correct. It’s a one-timer charge in our SG&A.

And it’s included. But you didn’t call that out. The $9 million called out for catastrophic events was the weather-related impact you had.

That was weather and…

And the CDK, so that – let’s say ballpark, two-thirds CDK adjustment, a third weather.

Okay. And Daniel, I think you said something like the service in April and May in the U.S. was running up 5% or 6% same-store, is that correct?

Customer pay was up 6% through the end of May, second quarter, April, May, it was up 6%. Warranty was up 12%.

Okay. And so then in total, so that suggests somewhere around a $20 million or $30 million hit from the CDK on the service revenue somewhere in that one-week or two-week period in June. Is that the ballpark?

It’s probably.

I think that’s a fair assessment. Mike, it’s Daniel. It just took longer to process every transaction, and it took longer to process every transaction back into the system than normally it would. It was just very inefficient.

Okay. And from your performance coming out of it relative to the rest of the dealer group was much better. And so it sounds like it was the call center and a filler rider that really contributed, is that right?

Well, I think there was a number of things that contributed. I think the technology, both at our customer contact center as well as our digital retailing solution and our back office processes, I think all of that helped, plus we had some alternative technology we could use in the service drive that helped us as well. So, I think a lot of the technology really did help us, yes.

And our next question here will come from Ron Jewsikow with Guggenheim Securities. Please go ahead.

Yes. Good morning and congrats on the quarter, team. It’s really impressive. On inventory levels, you called out, you expect it to normalize post, I think the June number that looks like it was pretty heavily impacted by CDK in terms of the new day supply. Is that the right way to think about that? And should we assume if it goes back towards like 45 days, that is the right way to estimate the new vehicle sales impact as well that you have...?

Ron, it’s Daniel here. In our investor deck in Page 5, we have laid it out pretty easily. I think end of March, we had 43 day supply, end of April we had 46 day supply, end of May we had 45 day supply. And assuming that we would have had a normal sales rate – run rate in June, I wouldn’t have imagined that would have increased significantly over that ballpark. Now to put the total thing into perspective and absolute unit inventories, at the end of March, we had 19,896 vehicles in inventory. At the end of June, we had 23,412 vehicles in inventory and about 1,000 vehicles are currently on stop sale of that 23,400. That’s an 18% increase quarter-on-quarter. So, my expectation is with an increased sales run rate that we will see the day supply come down pretty quickly.

Okay. That’s super helpful. And then on new profit per unit was really impressive this quarter in terms of the pretty much stabilization versus the first quarter. How much of that do you think is attributable to either your internal efforts or brand mix where I think you really do probably have the best brand mix in the industry in terms of what consumers want today. But how much is that, and how much do you think is reflective of the industry as a whole, seeing more stabilization?

Well, I think – this is Daryl. I think our brand mix helps. Toyota is performing well. Their hybrid mix helps. Hybrid is, in total, our most profitable vehicle to sell. So, I think that certainly helps. But I do think there is some moderation across the board on the decline. And so I believe we will see that. And we saw some improvement in things like EV gross margin. Even though it’s a very small part of our mix, we did see some strengthening in EV margins this quarter, and that was good to see because they were really tough in the first quarter. I think there seems to be a sort of leveling which I think is probably a bit of an indication on the health of the consumer as well. Anything you guys would add onto that?

No.

And our next question will come from Glenn Chin with Seaport Research Partners. Please go ahead.

Thank you. Congrats team. Daryl, maybe just a follow-on to that, just around the consumer. We have been getting a lot of mixed signals out of the consumer. We are seeing it in restaurants, consumer discretionary, especially higher dollar. Are you guys detecting any change in consumer strength or consumer behavior?

We haven’t – Glenn, we haven’t seen a shift – a material shift in, like, brand mix as a result of resistance. I would look at our used car performance was we were pleased with it, and the gross has held up. And usually, that’s where you will see pressure. The mix versus – the used car mix versus 2019 is still changing quite a bit. People aren’t buying cheap cars, but that’s not a new thing. So, I didn’t – I don’t – I can’t look to get our data for Group 1 and say that we saw – are seeing any changes in the consumer, any material changes in the consumer.

Also maybe just a follow-on to that, Daryl, so no change in for I guess, evidence of consumers maybe downsizing or trading down trim levels or de-contenting or otherwise?

Well, we saw a $1,000 decline in average selling price versus the last quarter. We went to like $52,000 to $51,000. $51,169 as our average selling price in the quarter, and we were over $52,000 last year. So, we see that. Now, there is more OEM subvention on rates this year than it was last year. So, I am sure that probably maybe holds that up a little bit. But – so that’s what we are seeing. I don’t know that we have seen a material change from high trim level to mid trim level or low trim level that we have been able to see. There is – the pickup truck mix is down a little bit, and that’s through the industry. I know some people have opined that that’s due to pricing pressure. But the SUV mix is still as strong as ever and SUVs are not cheap as we know, so.

Glenn, it’s Daniel here. There is only one thing that I would add to all of that is I think part of our capital allocation strategy and the geographies that we currently operate in, they tend to be fairly demographically strong, and I think that’s really helped with our GPUs and just our total operations.

And with no remaining questions, we will conclude today’s question-and-answer session in addition to today’s call. Thank you very much for attending today’s presentation and you may now disconnect your lines.