Good afternoon, ladies and gentlemen. Welcome to Group 1 Automotive’s 2017 Third Quarter Financial Results Conference Call. Please be advised that this call is being recorded. [Operator Instructions] I would now like to turn the call over to Mr. Pete DeLongchamps, Group 1’s Vice President of Manufacture Relations, Financial Services and Public Affairs. Please go ahead, Mr. DeLongchamps.

Thank you, Andrew, and good afternoon everyone, and welcome to today’s call. The earnings release we issued this morning and 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 the Group 1’s website. Before we begin, I would 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 and the conditions of markets. Those and other risks are described in the Company’s filings with the Securities and Exchange Commission over the past 12 months. Copies of those filings are available from both the SEC and the Company. 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 today are Earl Hesterberg, our President and Chief Executive Officer; John Rickel, our Senior Vice President and Chief Financial Officer; and Daryl Kenningham, our President of U.S. Operations; and Lance Parker, our Vice President & Corporate Controller. Please note that all comparisons in the prepared remarks are to the same period prior year unless otherwise stated. I will now hand the call over to Earl.

Thank you, Pete, and good morning everyone. Group 1 are on $46.6 million of adjusted net income for the third quarter. This equates the third quarter adjusted earnings per share of $2.23 per diluted share, an increase of 14% over the last year. This increase was largely driven by a 16% increase in new vehicle unit sales and our hurricane impacted Houston and Beaumont’s markets, a very strong performance by our UK operations and continued recovery in Brazil. Before I make further comments about our quarterly results, I would like to express our heartfelt appreciation to our directors, management team, employees and business partners, who combined to donate $600,000 to assist our employees affected by hurricanes Harvey and Irma. Group 1 matched every donation dollar for dollar brining much needed relief to nearly 300 employees, victimized by hurricanes Harvey and Irma. Some of our employees lost everything. The kindness shown by everyone associated with Group 1 was overwhelming. As you know, hurricane Harvey had a massive impact on our business, while hurricane Irma was very minor in comparison. We had approximately a dozen stores in the Southeast which lost 7 to 10 days of business due to power outages and other storm-related problems since the result of Irma. But the impact on our third quarter results was minimal compared to hurricane Harvey. As we’ve previously announced, we incurred $15 million of one-time charges, 14.7 million to be exact, associated with things such as lost new vehicle, inventory, employee pay during our closure periods and so on. This does not include lost profit from our Houston and Beaumont dealerships during the week the storm hit, which is normally one of the busiest selling weeks of the year in Texas. That is a summary of the negative side of the ledger. On…

Thank you, Earl, and good afternoon everyone. For the third quarter of 2017, our adjusted net income increased $4.7 million or 11.1% over a comparable 2016 results to a record $46.6 million. These 2017 adjusted quarterly results exclude $16.8 million of net after tax charges primarily consisting of $9 million of cost directly associated with hurricane Harvey and 5.9 million of franchise rate impairments. On a fully diluted per share basis, adjusted earnings increased 13.7% to a record $2.23. Starting with the summary of our quarterly consolidated results. For the quarter, we generated $3 billion in adjusted total revenues, which was a 6.9% increase from prior year. Our adjusted gross profit increased $31.3 million or 7.7% from the third quarter a year ago to $438 million. As a percent of gross profit, adjusted SG&A decreased 80 basis points to 72.8%, this gross profit flow through equaled 49% in the quarter. Floorplan interest expense increased by $2.4 million or 21.2% from prior year to $13.5 million, which is primarily explained by higher LIBOR interest rates versus last year. Other interest expense increased $800,000 to $17.9 million, also due to higher interest rates. Our adjusted consolidated effective tax rate for the quarter was 36%. We expect our 2017 and 2018 full year tax rates to be between 35% and 36%. Turning now to our geographic segments, starting with the US market on a same-store basis. For the quarter, total adjusted U.S. same-store revenues increased 1.8% to $2.3 billion, reflecting an increase of 3.6% in new vehicles, 4.7% in after sales and 5.2% in F&I. These increases were partially offset by a 3.4% decline in total used revenues. As Earl mentioned, this used revenue decline was partially caused by a lag in used vehicle replacement demand in our hurricane impacted markets. The 4.7%…

Thanks, John. Related to our corporate development efforts, as previously announced we acquired 15 dealerships in the quarter, totaling $425 million in annualized revenues. Three of the dealerships are located in US consisting of an Audi dealership in Fort Worth, Texas as well as two Land Rover Jaguar dealerships in New Mexico. These are our first Land Rover and Jaguar dealerships in the US and expand our global network to seven Land Rover and seven Jaguar franchises with three additional franchise add points having also have been awarded in the UK. The other 12 dealerships acquired were the Beadles Group in the UK and we have been very pleased with early performance by these stores. The Beadles Group will increase our UK and our revenue based over $2 billion. Also in early October, we terminated a SEAT sales operation in the UK which generated $10 million in revenue over the previous 12 months. This concludes our prepared remarks. I will now turn the call over to the operator to begin the question-and-answer session. Operator?

[Operator Instructions] The first question comes from John Murphy of Bank of America. Please go ahead.

A first question on the replacement demand buyers you’re seeing in Houston and in Beaumont. I was just curious if you can tell what they owned previously and what they’re replacing. And really what I am getting at is trying to understand how deep in the ownership cycle some of these people are stepping up, meaning is somebody who owned a six-year old car that got scrapped stepping up or that somebody just owned a two-year old car is stepping up and replacing it?

Let me allow Daryl Kenningham to try to answer that for you, John.

It’s hard to draw any consistent conclusions, John. What we saw most was people replacing their vehicles with either similar or same brand vehicles and same type. So, if they were in a car, replace it with a car; if they’re in an SUV or truck, replace it with an SUV or truck. And we saw that generally they would stay within the brand that they lost.

Okay. And then, to follow up on that. I mean it sounds there is a lot of folks waiting for their insurance checks. Any gauge on what that will impact, used or new more or is that sort of have you’ll have both news, ready to sell them?

This is Daryl again. I believe that you will see new, some side, you will see a little bit more used but those are sort of subtle.

Okay. And then, the second question in the US, I mean it was a big step up in F&I PVR, this keeps going up. Is there any view that you have that you might be reaching sort of an asymptotic limit or is there still room to go as average transaction prices go up? And also as you think about…

John, it’s Pete. Thank you for the question. We did have a terrific quarter, so nice increases in product penetration but we think that we’ve maximized all of our opportunities in F&I.

Okay. And then, just lastly, it looks like GPUs have reshaped a relative floor and are starting to maybe bounce a little bit on the new vehicle side. Any commentary there on what you are able to achieve and what you think that will be going forward and also what kind of incentive activity you see from the automakers? IT might be somewhat of an offset or complicate the situation going forward?

John, this is Earl. Obviously margins are difficult to predict. But, just to remind everyone, we significantly increased our new vehicle front-end gross margins, five of the last six quarters. We have been working on that for a long time, which was somewhat necessary because we had sales contracting because of our heavy concentration in the energy impacted markets. So, margin had actually been at the top of our agenda for a probably a year and a half or more. So, it’s kind of now flowing around the similar level. Whether or not we will be able to maintain that, we’ll have to see how supply and demand is balanced out as we go into the winter. I think you know some of the OEMs are making some concentrated efforts to reduce production and get supply and demand lined up. But I think that will be a bigger factor as we move forward than that it has been in the past. We’ve made that our priority over the last year and a half.

Just one last question, John, on tax rates. I mean, how directed benefit would you get if U.S. tax rates on the corporate basis were caught?

It is very significant, John. As you know, we pay all the taxes. We don’t have any things where we can now move stuff through Ireland and take plenty of deductions like some of the tech companies. So, if there was a 10 or 15-point cut in the corporate rate, that will fall through the bottom line for us. And basically our cash taxes bear a pretty strong resemblance to the profit taxes. So, you’d also have a nice cash benefit.

The next question comes from Rick Nelson of Stephens. Please go ahead.

I’d like to follow up on hurricane impacts. And if you could quantify the lift that you saw in September and how October might be tracking and what sort of payout you think you see on this?

Yes. Rick, those -- as I mentioned in my script, there is three weeks or three weeks plus at the end of September and maybe the first few days of October, we’ve never seen anything like that before, and I don’t think we will ever see anything like that again. Our Houston stores on new vehicles basically doubled what they normally do. And bear in mind, these are some pretty big stores. Used vehicles were not up to that degree; they were probably up depending on the stores 30, 40 or 50%, probably more like 50%. But, that tapered off I would say as we moved into the second week of October, but it’s still significant. And I would say that through yesterday, most of our stores in these storm impacted markets are well into double-digit increases over what we would have expected them to sell at this time of year. Obviously, the seasonality, as you get into October and November, isn’t as good as August and September in any year. But, there is still significant lift in new and used vehicle sales. And I would expect that to continue well beyond the fourth quarter. Now, it will probably taper off from where it is now. But, I think this will last for quite some time.

Also the UK bucked the industry trends, curious what the drivers. I think you mentioned brand mix but even if we look at your weighted brand mix, you still outpaced the industry.

Sure. Rick, I will be happy to answer that. We are in an emerging company in the UK and we are quite a strong emerging company. And yes, we have a pretty good brand mix. The power in the third quarter came from our Audi business and our Ford business. And we are now broadening our brand exposure a bit. The most recent acquisition has put us into the Volkswagen network, the Toyota network, and we’re becoming reasonably significant Jaguar-Land Rover dealers -- dealerships. So, we are getting some scale now. We have some power. And this always has been a good business for us. But over the last two years, we have made two acquisitions of about a dozen stores each. So, now, we’ve got some muscle, and we’ve got a very capable team. And I think that’s how we’re able to outperform the market. I will tell you that I personally took over operating the UK last November 1st and by putting Daryl Kenningham in charge of the US operations and he clearly did some pretty job, particularly navigating through things like this hurricane. I have been able to spend a lot of time over there. And we now have 3,000 employees, 43 dealerships and $2 billion a year in annual revenues. So, it’s not a small business anymore. And I think we can continue to outperform the market there. We have some stores that don’t perform well and we’ve got to improve those or get rid of them. So, I think that UK is a very positive story for Group 1 and I don’t think it’s a one quarter phenomenon.

Thanks for that. finally, if I could ask a question for John here. The F&I adjustment, there was an add-back to revenues, $6.5 million?

Yes. Rick, this is John. That basically represents a reserve that we’ve put up to take into account that we’re going to see elevated charge backs, probably for the next several months. When you’re selling F&I product or a contract and something happens to the vehicle, the customer has the ability to basically get a refund. And what we’ve put up was a reserve for that extra amount that we expect to come in over the next few months.

Rick and just to make sure we want to understand that. The vast majority of these flooded vehicles from Hurricane Harvey are totaled. And so, they are going to be taken off the road. So, those customers will have the ability to cancel their vehicle service contract and have some degree of refund and some of the profit commission we made on those products would be charged back.

The net question comes from Brett Hoselton of KeyBanc. Please go ahead.

I wanted to ask you a little bit about Brazil and kind of two thoughts there. One, structurally, what are your current -- what’s your current thinking on Brazil simply -- early, you talked about spending more time over in UK, building out your UK presence and so forth. So structurally, you are building that out. What’s your thinking in Brazil at this point in time? Are you kind of on holding pattern or are you going to spend more time and effort there? And then, secondly, can you kind of talk about the economy, which has been struggling but it looks like it may be picking up here a bit?

Okay. Let me talk about the strategy and then I’ll try it to John, because we just got some new economic data on Brazil, and I’ll let him make a couple of comments there. Yes, through the economic downturn in Brazil, which is what probably been since the first day we went there, we have downsized that business to get the weak parts and the bad parts out. And we know have a very strong core of business. We’re the largest Honda retailer in the country, good Toyota business and I think we are the second largest Land Rover and BMW group in Brazil. So, we have 16 dealerships. We also have Mercedes dealership there, I should mention, but we’re too small. Our headquarter size is disproportionate to our operational revenue and gross profit. So, we would intend to now selectively grow that business. We would benefit a significantly from more scale there. We have an incredible management team there that we have developed, good local team, and we’ve got great brand mix but we could use some more muscle amount, some more scale. So, I’m going to work on that; John has been doing some work this year; I’m going to spend more time there next year as well, actually had our management team in this week from Brazil. And it is true that -- although the political situation is always entertaining and not necessarily stable, the economic situation is much more promising. So, let me ask John to give you a little color on that.

Yes. Last night, the Brazilian central bank cut their central -- basically their version of their central rates, again another 75 basis points, so that brings them to 7.5%. I think if you’re keeping score, about 700 basis points of reductions in about a 12-month period. So, that’s a pretty stimulative sort of step. Inflation is well under control; latest readings were under 3%. So, they appear to have the foundation in place. The congress there has also passed a number of important labor reforms and they also have declined to pursue basically impeachment actions against the President. So, it appears that their President is going to be in place through kind of the end of this term. So with that stability, I think there is room for them to continue to pursue some additional reform matters. All of that said, it appears that the foundation now is laid for a recovery. And that’s why both Earl and I have been spending time with the local team down there really looking at some additional acquisition opportunities because we really do need some scale at this point.

[Operator Instructions] The next question comes from James Albertine of Consumer Edge Research. Please go ahead.

Hi. This is Derek Glynn on for Jamie. Thanks for taking the questions. Given you guys lost some days in parts and service sales due to Hurricane, what drove the strength in that comp in the U.S.; can you just go into more detail on that?

Well, we were probably on track to have about a 7% gain for the quarter until we lost those selling [ph] days. So, if we’ve had a lot of effort in parts and service for many years, probably since the recession. So, we were really on track. We had a good summer going and did a lot of marketing actually in parts and service. So, yes, we would have done a point or two more on the comps probably, if we hadn’t missed that time from both the hurricanes.

Yes. We saw strength around the country in after sales including some decent growth in also parts and -- but we put a lot of emphasis and focus on a lot of additional marketing and making Saturdays a normal day for our dealerships and for customers, and we’re seeing that down.

Okay, got it. Thanks that’s helpful. And secondly, what are the priorities now just from the CapEx and capital allocation perspective? I mean, given past investments you’ve made in the business, is this time when you think free cash to meaningfully expand and growth accelerate from here?

Certainly, we continue to target. We think acquisitions is our first best use of cash. You have seen that we have pulled the trigger on a few recently. We added a Jag-Land Rover store, actually two in New Mexico where we are the only Jag-Land Rover dealers. We bought another Audi store in Fort Worth, so we are excited about that and then of course the big Beadles acquisition in the UK that Earl talked about. So, we continue to look for acquisition opportunities in all three markets. That’s the first best use and then from there, we basically are opportunistic between share repurchases and dividends.

The next question comes from David Lim with Wells Fargo. Please go ahead.

Just quickly, with the accelerated demand, do you think that the OEMs -- or are you guys in need of additional inventory and do you think the OEMs either produce more to fill back the lots?

David, this is Daryl. Some -- yes, some. We are happy with our inventory in total and we’re happy in a lot of brands. We are tight in Toyota, Honda, Lexus specifically. And that’s not necessarily just hurricane impact, that’s in several of our markets. But we are happy generally with the rest of them and we are heavier in one or two. But generally, we are happy with rest of them but Toyota, Honda, Lexus are quite largest opportunities for us.

Got you. And then, when I look at your same-store sales units sold, obviously it’s went up about 2% to 3% versus last year in the U.S. Can you sort of dimensionalize? And you may have already done so already. It looks like you had the hurricane impact and then you had some more in order to finish -- across the finish line ahead of last year. What was the add from the hurricane situation on the new? And then, can you sort of dimensionalize that also for the retail used units as well?

I think the simplistic way to look at it David is, we have been traveling in recent quarters at kind of 5% back on same-store sales, new and used haven’t been that far off. And we are up 2.5% in new and down 2.5% in used. The vast majority of the difference in those numbers is coming from the hurricane impact. That’s because these oil-impacted markets, particularly Oklahoma and Houston in recent quarters, have been down almost 10% in new vehicle sales. So that’s kind of simplistically the positive impact we had from markets like Houston and Beaumont. And we did have a little benefit from New England and some other markets, but it is primarily driven by Hurricane Harvey.

The next question comes from Andrew Fung of Berenberg Capital Markets. Please go ahead.

I wanted to talk I guess a little bit more about the Houston area and underlying demand ex-replacement from the hurricanes. You mentioned it was -- it’s been down 10% last few quarters. Do you have a sense of how that’s trending outside of the hurricane replacement and maybe how we should be thinking about that after the temporary lift?

It’s really hard right now to kind of separate the hurricane from underlying demand. As Earl indicated, we were probably travelling something like downsize before. But what the hurricane has done is not the replacement demand but there is also a lot of stimulus money kind of coming into the market now, whether it is construction work on people replacing homes or the federal government pouring a bunch of money in for basically flood infrastructure projects. We think it just changes the fundamental underlying trend going forward that will no longer just be the hurricane, it will also be those stimulus effects as you go forward.

The other thing you might want to add as well is that as oil stabilize $50 plus, there is a kind of different level of consumer confidence than what we saw when oil prices were plummeting into the 30 and 40. So, I think that’s also the positive impact in the Houston community.

And as a quick follow-up, could you remind us which OEMs you are most exposed to in the UK?

Yes, certainly, Audi, BMW and Ford are our three big OEMs in the UK.

The next question comes from David Tamberrino of Goldman Sachs. Please go ahead.

Just following up on the questions on the Houston area further, demand that you’ve been seeing, can you kind of give us a sense of the mix? Is it more pickup trucks, is it kind of along the same lines of new CUVs or crossovers or has there been some passenger car demand because those are at a lower line heights than what have been flooded faster?

We saw some significant sales of Accord and Camry. Remember that those cars are building out as well as new models coming this fall, and we did see that. But we didn’t really necessarily see across the board a change in our mix between car, truck and SUV from a normal mix.

Got it, that’s helpful. And then, I guess following up from that. It doesn’t sound like you are offside on any inventory for any dealer but are you finding it harder to get pickups or crossovers or is kind of the availability still there from the OEMs?

We’re happy with our inventory and we’re pleased with where are the OEMs are generally.

And following along the lines from earlier, talking about the UK, lot of opportunity there, Brazil as well, SG&A continue to improve. How much further in each region do you think you have to go in order to -- leveraging your fixed cost and kind of taking some of the shared best practices and putting it throughout your networks?

I’ll address that. In Brazil, I don’t think we have a lot more costs we can cut. We have been aggressively doing that during the downturn because that’s what you do during a downturn. Now, our leverage will come from adding gross profit and volume. So, I would say, we are lean in Brazil, need to be bigger. In the UK, we still have a lot of room to work on cost, primarily because we’ve had two fairly large acquisitions in the last 20 months or so, certainly within the last two years. There is a lot of work to integrate those. And we still -- one of the reasons I am running the UK business of last year is to get it structured properly. We don’t have the headquarters. We now have some efficiency from some shared support operations. And as you do that over time, there is some cost efficiency. So, I think we have a lot of runway for cost improvement in the UK and we are in the middle of working on that.

And in the US? I am sorry, I might have missed it.

In the US, I think there is always more room because we have a big operation. And we had to do that as a company because we have been in these oil-impacted markets where we had some contraction on sales volumes. So, we’ve been working that pretty well for a year and a half but there’s certainly significantly more cost room to improve our business equation in the US, no doubt.

This concludes our question-and-answer session. I would like to turn the conference back over to Earl Hesterberg, President and Chief Executive Officer, for any closing remarks.

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

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