Group 1 Automotive Inc (GPI) Q3 2026 Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to Group 1 Automotive's third quarter of 2026 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 DeLongshaw, Group 1 Senior Vice President, Manufacturer Relations, Financial Services, and Corporate Development. Please go ahead, Mr. DeLongshaw.

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 include reconciliations related to the adjusted results we will refer to on this call for comparison purposes have been posted to Group 1's website. Before we begin, I'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 are forward-looking statements that are made pursuant to the safe harbor visions 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, conditions of markets, successful integration of acquisitions, adverse developments in the global economy, and resulting impacts on demand for new and used vehicles and related services, the timing and proceeds of planned dispositions, and trade policy, tariffs, and manufacturing relationships. Those and other risks are described in the company's filings with the Securities and Exchange Commission. Participating with me on today's call, Daryl Kenningham, our President and Chief Executive Officer, and Daniel McHenry, CEO, UK Operations, and Chief Financial Officer. I'll now hand the call over to Daryl.

Thank you, Pete. Good morning, everyone. There's plenty of narrative these days around headwinds in our sector and in the broader economy. Affordability is certainly an issue. Negative equity, higher interest rates, cost of ownership, finance terms, geopolitical issues, a declining SAR are all getting plenty of airtime. We can't control any of that. We can control how well we execute. Compared to the second quarter in the U.S., Group 1 improved our year-over-year performance in new and used unit sales, new and used PRU, and SG&A leverage. Also, as industry new units declined from Q2 to Q3, our new vehicle sales increased, so we were pleased with our execution as we transitioned into the third quarter. Now turning to after sales. In the third quarter, Group 1 set an all-time record in customer pay revenue and RO count in the U.S. RO count was up over 4% on a same-store basis. We also grew customer pay revenue 3.2%, lapping an 8% quarter last year, and increased gross profit nearly 2%. We achieved that growth in a number of ways. As we discussed last quarter, new vehicle customers who purchased vehicles in the Trost-SAR years of 2020 to 2022 are now returning to the market as after-sales customers. There are fewer of them. Their factory warranties are expiring. They have huge affordability pressures, and they are defecting to the aftermarket. To recapture and keep those customers in Group 1 dealerships, we focused first on affordability. We launched the 1776 oil change campaign in June, and it drove over 36,000 customers into our shops. Also, given that the average vehicle in a Group 1 service drive has over 67,000 miles on it, some customers are facing expensive repair bills. So we emphasized our available financing on large repair bills. As a result, we saw 12,200 customers apply for financing in the quarter, a 7% increase year over year. As an additional retention measure, we expanded OneCare, our discounted maintenance plan at Group 1, beyond Houston, and are now selling it across our U.S. footprint. Our team sold nearly 62,001 care plans so far this year, and we expect to finish the year around 100,000, supporting repeat visits for recommended factory maintenance in the years ahead. We also continued our focus on adding capacity to our shops without additional capital investment. Since 2019, Group 1 has done a great job hiring and retaining technicians, increasing our same-store technician headcount by 23% in that time. Earlier this year, to improve our throughput, we put more focus on technician productivity. Several things can affect tech productivity. One of them is service advisor effectiveness. High service advisor turnover leads to low technician productivity. So we put programs in place to reduce our advisor turnover and were successful in lowering it by 6% year-over-year. We also implemented an updated technician mentoring program to increase the effectiveness of our newer technicians. Through these efforts, we saw a 7.2% increase in tech productivity in the third quarter. We believe there's an unlimited amount of after-sales business available to us, And we're committed to aggressively pursuing every avenue to capture that business in Group 1 workshops. We have more work to do to stay competitive and engage our customers in after sales, and we will be relentless in our efforts. Turning to SG&A, the cost reductions we implemented earlier this year have held. We further leverage compensation in the third quarter, even in a falling gross environment. We intend to stay focused on SG&A and leverage in this environment. Our used vehicle volumes improved sequentially, and our same-store PRU improved year-over-year. To address customers' affordability concerns, we were able to lower our transaction price $300 compared to the second quarter, and we reduced our inventory mix of $40,000-plus vehicles. And in an effort to retain more vehicles for retail, we lessened our reliance on the wholesale channels in the third quarter. Our USU's vehicle same-store sales were down 10% on increased PRU. That's an improvement compared to our performance in the second quarter, but we still have work to do in this area. Now turning to F&I. Virtual F&I is now in 70 stores across the U.S. Our customers love it. They see shorter wait times, and our NPS scores are well above our targets. In our surveys, when customers are asked about their preference for a virtual experience in the future, 9.5 out of 10 of those customers say they prefer it. Virtual F&I is also driving our overall compensation costs lower. F&I comp, as a percentage of gross profit, is down 100 basis points year over year. We've also begun private labeling F&I products under the Group 1 name, which dovetails with a rebranding initiative. Our Group 1 rebranding initiative is showing great progress. In rebranded markets, Group 1 brand awareness now equals the brand awareness of our legacy store names with our existing customers. We are also encouraged by our positive sales results. Our rebranded markets are outperforming our non-branded markets in year-over-year new vehicle sales performance. A unified brand allows Group 1 to present a more professional image, advertise more efficiently, and offer programs such as One Care, our 1776 oil change, and private label F&I products consistently across our stores. Also, and very important in these days of large language model searches, a single brand name is benefited by things such as reputation scores across our entire footprint. Given that Group 1's reputation.com score is approximately 100 points above the automotive retail average, this is another advantage of a singular brand name in today's AI-driven search world. Now, turning to our acquisition of the Hennessy Automotive Companies. We closed on this transaction last week. We're grateful to the Hennessy family for 62 years of stewardship and are proud to welcome their team to the Group 1 family. Hennessy is a well-run business that strengthens our position in the Atlanta market. We now have 15 stores representing outstanding brands in the Atlanta metro, generating nearly $3 billion in annual revenue. The acquisition adds 10 dealerships and approximately $1.7 billion in annualized revenue. Approximately 75% of the portfolio is luxury, serving customers who are generally less effective by affordability pressures. These dealerships generate EBITDA margins of approximately 7% and add substantial after-sales capacity, including 500 service bays and 280 technicians. The Hennessy acquisition alone increased our service bay count by over 10% in the U.S. Additionally, the Atlanta market is extremely attractive. It is the sixth largest MSA in America and is the fastest growing market in the Southeast. Average household income in Hennessy's market is nearly double the U.S. And in the Atlanta Metro, Group 1 now owns three Land Rover, two Lexus, two Porsche, one Mercedes-Benz, two Toyota, two Ford, two Honda, one Lincoln, and one Cadillac store with an average rooftop revenue of $170 million annually. The Hennessy acquisition is a strong strategic fit for GroupOne. It reinforces our focus on investing in high revenue, premium brand dealerships with attractive margins, and SG&A leverage in growing markets where we have an established presence. We've also made very good progress I will now turn the call over to Daniel McHenry, who will provide more specifics on those dispositions, their timing, and an overview of our financial performance. Daniel?

Thank you, and good morning, everyone. In the third quarter of 2026, Group 1 Automotive reported revenues of $5.4 billion, gross profit of $855 million, adjusted net income of $112 million, and adjusted diluted EPS of $9.36 from continuing operations. Almost most operating metrics I will speak to, same-store growth rates. Consolidation growth rates are lower than same-store growth rates, reflecting dispositions as part of our portfolio optimization. Now, starting with our U.S. operations, new vehicle sales declined 4.6% on the same-store New vehicle GPUs decreased sequentially from $3,260 to $3,084, largely reflecting timing of model year changeovers. In used vehicles, gross profit per unit remains stable year over year, despite acquisition cost pressure and sourcing competition, but declined sequentially, Reflecting model year change over timing as well. After sales continue to provide stability to our earnings, as Daryl mentioned, we are executing initiatives to drive RO current growth and believe our customer per pay performance in the quarter was relatively strong in the current environment. Same-store customer pay revenue increased approximately 3%, with over 4% growth in repair order count. Same store warranty was flat, which is solid against a warranty comp that was up 16% from the previous comparable period. We continue to optimize our collision footprint by reallocating capacity towards traditional service work, where we see stronger long-term returns, while also closing centers that do not meet return thresholds. This resulted in a 14% and a 12% Additionally, after-sales gross profit was negatively impacted by lower internal reconditioning work associated with the declines in used units. Shifting to cost. The cost-saving actions implemented earlier this year continue to benefit our expense base. While adjusted SG&A is a percent of gross to increase sequentially to 67.7%, our variable cost structuralizes to quickly to react to micro changes, and we expect additional SG&A leverage from the Hennessy acquisition and associated dispositions, which I will touch on later. Turning to the UK, in my first full quarter leading the UK business, I continue to be encouraged by signs of progress. The UK is progressing against its strategic plan, and we saw same-store increases in new vehicle sales, new and used vehicle PRU, and parts and service. We have refocused the team and growth initiatives to regain our sales momentum and drive our after-sales Despite a difficult macro environment, new vehicle sales increased 8% on the same-store basis, driven by a strong September plate change month. Importantly, same-store gross profit per unit was up 4% year-over-year on a local currency basis. For used vehicles, we focused on reducing inventory prior to the September plate change month. And as a result, same-store gross profit per unit was up 14% year-over-year on a local currency basis, while same-store volumes declined just 5%. We remain focused on balancing volume and profitability as market conditions evolve. After Sales continued to build momentum, with same-store revenue and gross profit year-over-year up 7% and 4% respectively on a local currency basis. F&I PRU held flat year-over-year on a local currency basis in a challenging macro environment. After Sales and F&I remain central to the strategy of improving earnings quality in the UK, and we continue to leverage proven operating practices from our U.S. operations to improve longer-term performance, and we are pleased with the after sales results in the quarter. On expenses, adjusted SG&A as your percent of gross profit on a year-to-day basis was 80.8%. We remain focused on cost control and operating efficiency, And we expect to drive further SG&A leverage as we grow gross profit. We continue to develop relationships with Chinese automakers. In addition to our existing Leap Mortar franchise, we now have two Geely franchises open and a third expected to open by year-end. We've also agreed with Chinese automaker Cherry to open an Amuru Jeku franchise later this year. While Chinese brands are a small part of the business, we remain open to additional opportunities with Chinese OEM partners. Turning to an update on the Hennessy acquisition, dispositions, and capital allocation. We closed the Hennessy acquisition in early in quarter four. Hennessy adds approximately $1.7 billion in revenue and 22,000 units with an adjusted EBITDA margin of 7%. We have also made significant progress on our disposition plans to fund half of the acquisition and optimize our portfolio. We are expecting $360 million of proceeds from closed are under definitive agreement sales to date and are on track to raise approximately $625 million Our plan dispositions are expected to total approximately $1.1 to $1.2 billion of revenue and 22,000 units. Group 1's adjusted EBITDA margin is currently approximately 4%. Taken together, Hennessy and the plan dispositions materially improve the earnings profile and quality of our portfolio. On a pro forma basis, we expect these actions to increase our adjusted EBITDA margin by approximately 30 basis points and reduce SG&A as a percent of gross profit by approximately 100 basis points. Turning to our balance sheet and liquidity. As of September 30th, our liquidity of $2.5 billion was composed of assessable cash of $1 billion and $1.4 billion available to borrow on our acquisition line. Our rent-adjusted leverage ratio, as defined by our U.S. syndicated credit facility, was 3.3 times at the end of September. On a pro forma basis reflecting the Hennessy acquisition and our October closed dispositions, it would have been approximately four times. We plan to return to our target of around three times by mid to late 2027, and we expect to resume Share repurchases as we get closer to that target. While we believe in a balanced capital allocation strategy, our immediate priority is to reduce our leverage. Cash flow generation today, 2026, yielded $350 million of adjusted operating cash flow and $219 million of free cash flow after backing out $131 million of CapEx. For CapEx, we expect to benefit from Portfolio Actions with the Hennessy Acquisition and Disposition Plan, which results in lower capital expenditure requirements. This capital was deployed in the same period through a combination of acquisitions, share repurchases, and dividends, including the acquisition of $340 million in revenues through September 30th, $72.4 million repurchasing 205,190 shares at an average price This is $353.08 and $20 million in dividends to our shareholders. During the third quarter of 2026, we elected to hold cash ahead of the Hennessy acquisition while preserving flexibility to optimize leverage. We currently have $306 million remaining on our board-authorized common share repurchase program. I will now turn the call over to the operator to begin We will begin the question and answer session.

Operator, we will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question, please press star, then two. We ask that you please limit yourself to one question and one follow-up. At this time, we will pause just momentarily to assemble our roster.

And our first question here will come from Glenn Chin with Seaport Research Partners.

Please go ahead.

Oh, wow. Thank you. Thank you, team. And thank you for all the detail around the dispositions. Can you just confirm for me? I just want to make sure I'm not double counting or missing anything. But by mid-2027, can you just confirm that collectively that you will have expected to dispose of almost $2 billion in revenue? Is that the right neighborhood?

Glenn, this is Daniel. The expectation of total revenue that we will dispose of by mid-2027 is $1.1 to $1.2 billion in revenues. Expected proceeds for that $1.1 billion in revenues is somewhere between $625 million to $675 million.

But does that not include, Daniel, all the dispositions you've made today, for example? That's on top of that, correct?

That's inclusive of the dispositions that we've made through quarter three.

We've done about half that number. We've got about half those proceeds with the dispositions we've done to date, Glenn. About $350 million.

Okay. All right. So really all in by mid-2027, you will have expected to have disposed of that 1.1ish?

1.1 to 1.2 billion in revenues. That is correct.

Okay. That's not what I had understood previously.

But that's fine. Thank you again for the detail.

Daryl, you mentioned private label F&I products. Can you just elaborate on that? What type of products you're offering and what it involves? I mean, I'm assuming you're not taking on any risk.

No, Glenn, this is Pete DeLonge. No, we're not taking on any risk, but what we think is important as part of the rebranding effort is that we look at things like maintenance and the OneCare products that we can label under Group 1, but that'll be underwritten by third-party administrators.

Very good. All right, that's it for me. I'll get back in the queue. Thank you.

Our next question will come from Rajat Gupta with J.P. Morgan. Please go ahead.

Great. Thanks for doing the questions. Just wanted to start with parts and services. We've had like two quarters now of, you know, declining same-store profit growth in the U.S. I know, Daryl, you mentioned like, you know, there are obviously areas in the market you cannot control, but I'm curious, like, when do you think, you know, revenue or profit Rajat, I think

part of it is warranties flat, so we're not seeing any of that. Also, as our used car business continues to recover, that will help us with our internal after-sales business. And then, you know, we keep driving customer pay and 4% year-over-year growth. We want to collect customers, which we did well, and I expect we will continue to do that and put that emphasis and focus, and then when we get a little warning tailwind, I think that's just additive to it. So, when you look at the 12 SAR years and those customers, you know, we hope to be coming out of that and start to build UIO again here probably over the next 12 months because 10 million units of SAR came out of the industry, which those customers are now not in our service departments, and then the ones that are there are defecting. So, as we get back into the 2023-2024 customers where there was 15, 16 million units SAR years, you know, that customer base and after sales will start to build again. So, I would expect we will start to see that again within the next 12 months or so.

Got it. It seems like the price per RO is, you know, declining as well. You know, can you confirm that, Matt? And is there like, even if the UIO does recover at some point, do you expect pricing pressure to persist? I don't know from just labor rate perspective, just warranty rate perspective, just curious to get your thoughts there.

Our hours per hour in the U.S. didn't change at all year over year. So I don't think our hours per hour didn't change at all.

I understand, but do you expect any pricing pressure going forward, you know, particularly on labor rates, given, you know, some of the increases you've seen over the last several years?

Well, yeah, I don't think there's room to price. I agree with you there. There's no room to price. I think you've got to stay competitive. We're going to stay on our affordability messaging. You know, the good thing is an average car that comes into our store, our service drives has almost 68,000 miles on it. You can sell a lot of work on a 68,000 mile car. Just as an example of this, you know, our 1776 oil change, you know, we generated 36,000 customers out of that. But the average RO on those 1776 oil changes was $180. So, you know, we're not doing it just to sell cheap oil changes. So our focus is to try to bring in the customers and then, you know, sell what's appropriate. And we feel like we achieved that in a quarter based on where the market was.

Raj, just as a follow-up to your question, it's Daniel here. The number of CPROs increased 4.2% in the quarter. The number of hours per RO decreased by 1.4% of the time for RO. And, you know, the dollars per RO increased by 0.5%. So that was the makeup of the three and a half percent and pay for pay.

I understood. And just, you know, just wanted to ask on SG&A, you know, you've talked about, you know, implementing and getting the benefit of the cost action, you know, from recent quarters. I'm curious, given just some of the choppiness and the overall macro, you know, some of the UIO challenges in Boston service. Are there any, you know, incremental cost actions, you know, that you might look to take, you know, in the near to medium term to do offset some of that?

Rajat, it's Daniel again. You know, one thing, we're all just focused on cost at Group 1. Again, we continue to evaluate any cost actions that we can take as a company, and, you know, should, as and when, the micro change, we will continue to be laser-focused on cost actions.

And our next question will come from Mike Ward with Citigroup.

Please go ahead.

Thanks very much. Good morning, everyone. First off, I want to give a shout-out to whoever put together the slide deck. Incredible detail, and very well done, so thank you. Turning to the slide deck, on page 27, you have a pretty good rundown of the acquisition and dispositions, and I'm just checking my math because it looks like you're getting better prices for the sales than what you paid for the acquisitions, and it sounds like what, Daniel, what you outlined on the margin front, that on a net-net basis, it's incrementally positive to the margin and earnings front. Is that correct?

Well, I think your assumption is not wrong, Mike. We've been pleased with what we've been able to get for the dispositions, and yeah, you're exactly right. We will see accretion in margins with Hennessey and with the disposal of these lower SG&A lever stores.

Okay, and so in about half the cost, is that about half the acquisition cost of Hennessey will be offset with some of these dispositions? Okay. Okay. Secondly, in the U.K., you've made some great progress, and I'm just curious, Daniel, what's your target? Can you get back to the 23, 24-type performance levels? Is that where you're looking?

Mike, you know, great question. One of the things that I've been focused on, I would say, over the last, you know, three, four months since being there is really trying to grow the business. You know, I think that, you know, we've spent time taking costs out of that business and really being focused on cost, sometimes at the expense of growing the business. Over the last, you know, four months, I think what we've seen from the point of view of, you know, new vehicle, same-store sales going by 8%, and, you know, we are not terribly exposed to Chinese OEMs, And when you brand adjust that, I think 8% has been a really good result for new vehicle growth. I think parts and service revenue growth at 7%, you know, against the market that, you know, has similar challenges to the U.S. at the moment in terms of the macro headwinds. Costs are still a little too high, and we're going to continue to focus on that and on getting the cost down to that kind of 80% number that we said for SG&A as a percentage gross. We're just over that at 80.8% year to date. But I do think that there has been significant progress made over the last six months.

And our next question will come from Alex Perry with Bank of America. Please go ahead.

Hi. Thanks for taking our questions here. I guess first, I just wanted to see if we could get a bit more of an update on how the remarketing effort is progressing. I guess any sort of impact to any major KPIs in the quarter and any stats you can share as sort of you move further past the remarketing, what you're seeing in key metrics, and then how much more is there left to do there? Thanks.

Are you referring to our rebranding?

Yes, yes. Sorry, the rebranding.

Well, what we're seeing is our, you know, we measure our customer awareness and consideration, and the awareness on the Group 1 brand is now equal to what our legacy brands were among our existing customers. We're also seeing in the markets that have been rebranded, we're seeing our sales performance year over year is better, about two percentage points better than it is in the non-branded markets.

That's really helpful. And then how much more is left to do on the rebranding?

About a third of the stores. And we're focused on doing it well and not necessarily – I mean, we'll do it fast, but we're doing it well. One of the things that we're really focused on right now is large language model searches. Those are like a third of automotive searches right now are being done through AI bots. And that takes different marketing. It takes setting up your websites very differently. Each different chat bot, whether it's Gemini or Cloud or ChatGPT, rely on different criteria than, say, Google used to. And so we are really putting a lot of focus and energy around how to optimize for those AI bot searches. And one of the comments I made earlier was, you know, one of the things that's really important in those searches is if you have one brand name, your good reputation in other stores of that same brand name can affect your stores where somebody's searching. So if Group 1 Ford customers are searching, our reputation at Group 1 Toyota can help that Group 1 Ford search, and our reputation scores are 100 points higher than the industry average. So, you know, that's a good thing, and that plays into this. You know, rebranding is not something that happens in isolation. The way customers are shopping is changing quite rapidly, and we're focused on that as well.

Alex, there's one stat that I would like just to push out there. Last quarter, there was significant discussion around the Texas market in particular, and that we were having a more difficult time in Texas than some of our other regions. This quarter, we really closed that gap in new vehicles. New vehicle sales in Texas was only down 1.6% in the quarter, which was significantly less than it was done in the prior quarter.

And our next question will come from Brett Jordan with Jefferies.

Please go ahead.

Hey, good morning, guys. When you think about the parts and service business, and I think you sort of mentioned the risk of losing customers to the aftermarket, are you bringing sort of same-skew services down to compete, or are you sort of bringing them in with a discounted oil change as a door buster as opposed to broad pricing?

We price our maintenance items on the aftermarket, Brett. We have been doing that for several years at Group One. So when we compete against the oil change and the rake repair places, we price on them as a matter of practice at Group One shops. So we don't feel like we need to take any wholesale reductions in pricing to achieve that, and we do think affordability is a bigger issue for customers these days, which is why we launched the 1776, and we're just trying to demonstrate there's value in doing business with us, and we can compete with the aftermarket, and at least based on the results we saw from that, we were really pleased with it.

And then I guess question sort of big picture on brand mix and profitability. You know, obviously a lot of headlines around VW, and they're your largest brand in the U.K., but obviously the other side of the coin is great profitability around Toyota Lexus, your largest in the U.S. Are you seeing any sort of either changes or big delta in brand profitability, pros or cons?

Well, I'll let Daniel speak to the UK. I'm thrilled we've got more luxury in the US, and I'm thrilled we're heavy Toyota Lexus in the US. Let me just leave it at that. You do see some separation between some brands that are struggling on profits, and I'm happy with our brand mix, and I think that's helping us.

Regarding the UK, you know, we actually did pretty well in Volkswagen last quarter. Our Volkswagen sales were up over 20% in the quarter, and the margin didn't really suffer in the quarter. You know, you saw that actually we had both a sequential and year-on-year increase in new vehicle margin on average. So, Brett, you know, against what you might expect, I was pretty pleased with our Volkswagen results.

We'll come from Jeff Lick with Stevens.

Please go ahead.

Good morning. Thanks for taking my questions. Daniel, great job in the UK. Those results are looking good. I guess the first question maybe just dovetails on what Glenn was talking about. The 1.1 to 1.2 billion, Daniel, does that include the California divestitures you did in Q1?

That does not include the California divestitures that we did in Q1. That's the divestitures that we would have announced, Brett, at the start of the Hennessy acquisition. So divestitures done through Q3 and into Q4.

Well, Brett's pretty smart, so I won't take offense that you called me Brett, but anyway, yeah. Sorry, sorry, Jeff. I know, I know. But so you've got 450 signed, either signed or done, and subsequent to 3Q ending. I guess how much more of them is left if you take that 550? Is that basically about 660 to get to your 1.2?

Yeah, Jeff, I'd say we're about halfway through in terms of deals that are at either APA

stage or already closed. Question will come from Joe Stack with UBS. Please go ahead.

Thanks, everyone. I'm glad to see the pro forma impact on EBITDA margin as she grows from the Hennessy and Dispositions. I was wondering if you could help us dimensionalize what the portfolio Thank you.

You know, the dispositions that we're making generally are performing stores, sometimes with less profitable brands in terms of GPU. You know, what we're adding in on top, you know, the Land Rover is one of our highest GPUs, as is Porsche. So by pure math, you'd expect the GPUs to go up in terms of profitability. You know, after sales, you know, it tends to be our margin doesn't really diverge much in terms of brand. So I would expect it to be a similar margin as we grow our parts and service business. Now, as Daryl talked about in the call, you know, with 500 service bays added to Hennessy and, you know, approximately 40% of those bays are unutilized. As we continue to utilize those bays, you would expect revenues to go up. But for modeling purposes, I would model the same margin. And Daryl will pick up on the disposition question.

Yeah, there's – the short answer is yes, there's opportunity to dispose of more. And we look at it two ways. We look at it, you know, strategically, does this store fit with us anymore? That's an important part of this. And also, you know, can disposing of something help us lower our leverage? Yeah, that's another point. But I think the strategic piece is the more critical part on those additional stores that you're referring to.

Okay. Thank you for that. And just, you know, affordability, obviously a big topic in the industry. You mentioned it. I was wondering if you could just remind us, like, how big is your CPO business? And is that something you can lean more into as consumers are looking for, you know, affordable options that could also maybe, you know, help use GPU? Because I'm assuming those are more profitable vehicles.

Yeah.

Oh, I'm sorry.

Go ahead, Pete. Okay. So, it's Pete DeLongshaw. I would tell you that 28% of our business is CPO, and actually, on a gross profit basis, they're less profitable because it takes higher reconditioning. So, it's a balance of, you know, front-end gross profit versus long-term retention. So, we're focused on it. It's always been around the 28% to 30% penetration rate, but we're pleased with where we are with CPO.

And our next question will come from Mike Albanese with StoneX. Please go ahead.

Hi, good morning, guys. Thanks for taking my question. Just, I guess, a quick clarifying question on the private label financing. And, you know, you had mentioned that it dovetails with the rebranding initiatives. If you could just kind of explain that, I guess, elaborate a little bit further. And then, you know, where are you seeing the lift? Is this mainly on the front end with conversion or penetration, or is this mainly an after-sales tool for the higher-priced services? Thanks.

It's mainly an after-sales tool, and it's really not that complicated. You know, what we've just done is taken the maintenance that we're already offering and white labeling Group 1 on top of it so that we can further the rebrand. But, you know, for instance, if we're selling a Ford warranty on a new car, we're not rebranding that, but it's about the maintenance piece of it. We want people to be thinking about going back to Group 1. Okay, got it.

And what was the extent of this rollout at this point?

Well, we rolled out the prepaid maintenance, OneCare, across our footprint in the U.S. And then we did talk a little bit about using financing in our after-sales operation, and we saw some success with a little higher take rate on that in the quarter, which we think helps on the affordability piece for after-sales customers.

Got it. And so I guess the crux, I guess really what I'm trying to get at is, you know, I look at the customer pay performance, RO performance, you know, how much of an incremental driver was this on the quarter? Or it's still too much in its infancy to, you know, play a role in the broader numbers?

I think you need intense focus on affordability and capturing customers, and that's what we're trying to do. Because those customers coming out of warranty, there's fewer of them, and they are defecting at a higher rate. And a lot of that is affordability-driven. So, and we'll continue to focus on that until we see the market change. You know, for the past few years, there's been the ability to price, but there's no ability to do that anymore.

Our next question will come from Daniela Hagan with Morgan Stanley.

Please go ahead.

Great. Thanks for taking the question. I think double-clicking on that affordability piece, I want to ask about the used vehicle side. U.S. same-store volumes were down year-on-year, but then PRUs were up. So how are you thinking about the mix? I know, Pete, you talked about this a little bit with certified pre-owned, but anything else on sourcing or, you know, optimizing profitability versus share as you go into 4Q and 27?

Sure. So, you know, clearly affordability is an issue. So we're really focused on trying to drop the acquisition cost and the overall sale price of the pre-owned. Sourcing remains challenging. I was very pleased to see that we were only 10% auctioned because, as you know, those are usually the highest priced and lowest gross profit units that we merchandised. But we were pleased with the progress we're making on acquisition costs and sourcing. You know, 80-plus percent was through trades or purchases. Only 10 percent, I said, was options. So I think sequentially made really great progress, but clearly we're not pleased with the overall volumes, and that is a top priority in the company.

Great. Thank you. And then just thinking about Outlook into the fourth quarter and 2027, the timing of some of these benefits from the Hennessy acquisition and other improvements you're making to the business, such as rebranding. When should we start to see that flow through into SG&A, into parts and service, et cetera?

Well, you know, the Hennessey stores run well today. We see opportunities for improvement, which I expect we'll see over the first half of next year at a Hennessey. Some of the other levers that we discussed, you know, you'll see those, I think, on a regular basis in Q4 and into the first quarter of next year.

Next question will come from John Babcock with Barclays. Please go ahead.

Hey, guys. Thanks for taking my questions. For the first one, it seems like at least there are initial signs that rates may be rising more sustainably here. I just want to, because you have a decent bit of variable rate debt, how are you thinking about your capital structure? Are you still comfortable with that three times target, or does it maybe make sense to get further below that if rates do rise more. Also, if you could just generally talk about your plans with the capital structure overall, that would be helpful.

You know, capital structure overall, you know, clearly we did our bond deal in quarter three. You know, I would say I was pleased with the rate that we came out there, and, you know, it significantly pushes our debt into the The future with those two tranches of $625 million each. The 4% bonds are going to come due in 2028. We'll start to deal with those shortly, I would say, but clearly that rate is still a great rate to have out there, but we'll get those paid off with the liquidity that we have in our balance sheet today. We have about a billion dollars in terms of liquidity today. You know, three times really is our target of leverage. I think if we get down to three times, we would like to get back to buying our stock back. You know, you can see that the stock today is super attractive in terms of its price, both for investors and for Group One. So as soon as we can get down to that three times leverage, that's where we'll be more focused.

Okay, thanks. And then my other question is really just, I was wondering if you could talk about comparing how the consumer generally like how they're reacting both in your new and used vehicle businesses and also just parts and service now relative to how they had been, you know, back last quarter. Just want to get some sense as to whether there's, you know, been any notable weakening or if there's anything else to call out there.

I think in the quarter, it's too early to tell, and I think it's – haven't seen a discernible difference between where we were and where we are. We do know affordability is an issue, and pricing in any place is difficult or impossible, and that's kind of how we're trying to manage the business.

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

Thanks. Good morning. I was just curious on the change with the Jaguar terminations in the U.K., what changed there to have you guys change your mind?

It's Daniel here. You know, whenever I look at our Land Rover Jaguar portfolio that we had in the U.K., I would have said it was a tail of two halves. The stores that we had in the north of England, they really struggled. Generally, the stores that we had in the south of England did quite well, particularly around South London. We had some discussions with Jaguar Land Rover around the dispositions. They were keen for us to remain as a partner, and some of the new models that are coming to that brand, it made it more creative for us to keep those stores and sell those.

You are disposing of the northern ones?

We already have disposed of the Northern stores, and we've already had the proceeds for those at Northern stores, which is about 50 million pounds.

And that concludes our question and answer session.

I'd now like to turn the call back over to Daryl Kenningham for any closing remarks.

In summary, we remain committed to our strategic initiatives, local focus, operating excellence, differentiated after sales, and disciplined capital management. Thank you for your time today. We look forward to discussing our fourth quarter results in January.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.