Good morning, ladies and gentlemen and welcome to Group 1 Automotive 2020 Third Quarter 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 DeLongchamps, Group 1's Senior Vice President of Manufacturer Relations, Financial Services and Public Affairs. Please go ahead, Mr. DeLongchamps.

Thank you, Christie, 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 Automotive are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The 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, conditions of markets, adverse developments in the global economy as well as the public health crisis related to the COVID-19 virus and resulting impacts on demand for new and used vehicles and related services. Uncertainly regarding the duration, severity of COVID-19 and its impact on U.S. international authorities use current restrictions on various commercial and economic activities. And uncertainty regarding the timing, pace and extent of an economic recovery in the U.S. and elsewhere from the unknown current and future impacts of COVID-19 and the unknown future impacts of oil producers and the effects such that can have on travel, transportation and oil prices, which in turn will likely adversely affect demand for our vehicles and service. Those and other risks are described in the company's filings with the Securities and Exchange Commission over the last 12 months. Copies of these filings are available from both the SEC and the company. In addition, certain non-GAAP financial measures, as defined in our 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 the call today, Earl Hesterberg, our President and Chief Executive Officer, Daryl Kenningham, our President of U.S. and Brazilian Operations, Daniel Mchenry, Senior Vice President and Chief Financial Officer and Michael Welch, our Vice President and Corporate Controller. I'd like to now give the call over to Earl.

Thanks, Pete. Good morning, everyone. I'm pleased to report that for the quarter Group 1 generated all time record adjusted net income $129 million. This equates to adjusted earnings per share of $6.97 per diluted share an increase of 131% over the prior year's adjusted earnings per share. As mentioned in our pre-release earlier this month, our adjusted profit results exclude a $3.3 million pre-tax loss related to the redemption of our previously issued 5% notes due in 2022. Daniel will cover this transaction along with our balance sheet and liquidity position later on the call. These results were a continuation of the very strong profits we generated in May and June after the lockdowns began being lifted, and once again demonstrated the resiliency of our business model the brilliant efforts of our employees. The major factors driving our major profit improvement or large new and used vehicle margin improvements and substantial cost leverage across our company. The first time since the UK voted to leave the EU, our UK operations made a significant contribution to our quarterly financial results. Very optimistic that this level of performance will continue as we have implemented a major restructuring of our UK operations that began even before the pandemic. The extreme shelter in place orders beginning in late March in both the UK and U.S. markets required us to reduce headcount by 90% and 50%, respectively. During this time of dramatically lower business levels. We restructured both operations with a goal of improving our sales and service efficiency by at least 20%. We believe, we're well on the way to achieving this. Current headcount levels in the UK and U.S. are both approximately 25% below pre-pandemic levels. As Daryl will detail shortly, vehicle sales volumes in the U.S. remain well below last year's levels, primarily due to low inventory levels. However, same-store UK new vehicle sales increased 11% and used vehicle sales were up 14%. Our new vehicle sales improvement was influenced by below average sales in the prior year's quarter due to shortages associated with the change in new vehicle emissions regulations. But overall, the UK market has recovered nicely throughout the summer. This can be evidenced by our same-store used vehicle sales increase of 14% and our parts and service revenue increase of 4% in local currency during the third quarter. The volume improvements as well as large increases in vehicle sales margin drove a 26% increase in UK same-store gross profit on a local currency basis. New vehicle margins per unit improved 14%, while used vehicle margins were up 90%. This powerful gross profit growth of 26% was achieved while actually reducing SG&A expenses by 12%. Resolving an SG&A percent of gross profit metric of less than 61%. By far the best performance since Group 1 entered the UK in 2007. To provide some color on our U.S. and Brazil performance. I'll now turn the call over to Daryl Kenningham.

Thank you, Earl. A number of factors contributed to our outstanding U.S. third quarter results, mainly new and used vehicle gross profit growth, F&I PRU growth and strong SG&A discipline. Due to tight new and use vehicle supply, same-store new vehicle unit sales decreased 16% and used vehicle unit sales decreased 13% versus the prior year. New vehicle inventories finished the quarter nearly identical to the second quarter at roughly 17,000 units a 52-day supply. Our team did a fantastic job staying disciplined on gross margin. Our new vehicle improvement far outweighed our volume decline. As a more than $1,000 increase in same-store gross profit PR you generated a 34% increase in new vehicle gross profit. Although our new vehicle unit volume was down 16% in the quarter, it improved significantly throughout the period. As September sales were down only 3% from the prior year and up sequentially versus August. Our used vehicle cadence was nearly identical with new and our PRU improvement drove a 27% total used vehicle gross profit increase on a same-store basis. Our used car PRU performance was enabled by improved sourcing as well. Our sales source through trades and individuals were up 16% and vehicles purchase from individuals was up 93%. Both a record for us and we expect to build on this improvement going forward. The second major driver in the quarter was F&I. Despite the decline in same-store unit sales. Our record same store F&I performance of $2,041 allowed us to maintain prior year F&I gross profit levels. The record PRU performance was driven by higher penetrations and income per contract, and basically all of our product offerings. The third major factor driving our outstanding profit performance was cost discipline. As discussed on last quarter's call in the second half of March, we…

Thank you, Daryl and good morning everyone. As Earl previously mentioned, during the quarter, we redeemed all $550 million of our outstanding 5% notes due 2022. This redemption was funded with $550 million of newly issued 4.00% notes due 2028. Along with the April redemption of the 5.25% notes due 2023, we now has no material debt maturities before our U.S. credit facility matures in June of 2024. Also the debt restructuring undertaken this year will save us over $15 million in annual interest expense. We are very proud of the fact our company is in such a strong balance sheet position given the economic challenges the world is faced in 2020. Turning to liquidity and cash flow. As of September 30th, we had $66 million of cash on hand, and another $127 million that was invested in our floorplan offset accounts. Bringing total cash liquidity to $193 million. There was also $273 million of additional borrowing capacity on our U.S. syndicated acquisition line, bringing total immediate liquidity to $466 million as of September 30th. We also have roughly $175 million in U.S. and UK real estate available to mortgage, which brings another $140 million of near-term liquidity, increasing the total to over $600 million. Our cash flow remains very strong as we generated $121 million of operating cash flow in the third quarter. This brings our year-to-date adjusted operating cash flow to $358 million. This cash generation has been party used to reduce our non floorplan debt by $159 million since the end of 2019. Also, our U.S. credit facility rent adjusted leverage ratio was reduced to 2.5 times at the end of September, down from 3.3 times at the end of 2019. Going forward, our preference for capital allocation is to add scale to our company through M&A. While the U.S. is our preferred market at the moment, we are open to acquisitions in our foreign markets as well given the right opportunity. Often suitable acquisition targets, we are certainly open to returning cash to our shareholders, as evidenced in our recent announcement of $200 million share repurchase program and the intention of reinstating our dividend in the fourth quarter. For additional detail regarding our financial condition. Please refer to the scheduled of additional information attached to the news release, as well as the investor presentation posted on our website. I will now turn the call back over to Earl.

Thanks, Daniel. Related to our corporate development efforts earlier this month we disposed of a Nissan franchise in Mississippi. This is our first buy sell activity of 2020 as we've been much more focused on our organic operations, given the pandemic. As Daniel mentioned, however, we're now once again looking forward to growing our company through M&A. We've seen increased activity and potential deal flow recently, which is an encouraging sign. This concludes our prepared remarks. I will now turn the call over to the operator to begin the question-and-answer session. Operator?

Thank you. [Operator Instructions] And our first question comes from Michael Ward with Benchmark. Please go ahead.

Thanks. Good morning, everyone. Pushing on the variable gross on the new vehicle variable gross. Can you talk about maybe that gives and takes of what happens on profitability when inventory is tight? The carrying costs go down in a positive price. But are there what are the gives and takes you lose some sales?

Well, an inventory is tight. Yes, we obviously lose sales and in the case of the quarter. Toyota is our largest brand and then also happened to be our tightest inventory, as well. So yes, certainly that can cost you some business, when we operated about a 30-day supply during the quarter and most -- many of our brands.

Okay. Now, you kind of allude to that in the press release as it relates to SG&A costs as percentage of gross. That's one of the things holding it down. So if inventory doesn't get replenished until well into the second quarter. Does that mean that we could pay you see that type of thing where you kind of continue this type or close to this type of performance in the success, as we head into the first half and possibly even to the second half? Is that what we're looking at?

Mike, this is Ear. Directionally, that's correct. Operators are very savvy, when they cannot replace a vehicle. They don't sell it as cheaply. I mean, that's the simple thing. They know whether they can trade with another dealer, and if they can replace it. So that's driving these high margins throughout the industry. And the ramp up in supply from the OEMs has been far below what anyone in our sector would have expected. We're just now starting to receive a few more vehicles and we're retailing every month. But our new vehicle inventory year-over-year, one point drop something like 12,000 units. So we were still nowhere near back to normal levels. And I'm sure, we're not the only one. So while the reduction in margins going forward will be proportionate to the increase in inventory, there still appears to be a long way to go before the industry is back to normal move vehicle and inventory levels.

On the service side that chart on Page 12 that kind of goes through with these alternate energy type vehicles on the service side. It sounds like it's a chance for particularly the big well capitalized dealers to gain share on the service side as the market moves towards more of these vehicles. Any idea? I guess it's too early to tell. But could you basically have the service on those vehicles for the life of the vehicle rather than seeing the dramatic drop off in years three and four?

Potentially yes, I mean, that's certainly true. What's definitely true is those vehicles take more investment from and franchise dealers are in a much better positioned to do that whether that's training or equipment.

Yes, Mike, this is Earl again. And I think we've seen that same thing with luxury brand vehicles over the last decade, as they got more complex electronically. The retention levels and the customer loyalty levels on those brands has been much higher than volume brands. And so, the electronic complexity, which will now kind of extend into the battery powered world, just gives us a much stronger competitive position to maintain a higher percentage of the customer service business regardless of the age of the vehicle.

Thank you. I really appreciate it.

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

Good morning, guys. First question on the SG&A. I mean how you're talking about -- this is really a 20% improvement in sales efficiency means I mean, as we look at the workers that have been brought back, it looks like you're talking about 25% are still out. Could those folks stay out even if sales recover? And that's kind of how you're thinking about getting that efficiency? I mean, what exactly do you mean by that 20% sales efficiency? And is it really just mean to that those 25% of workers don't come back?

Yes, John, this is this is Earl. I believe we'll have to bring a few more people back, because as you can see, our volumes are a bit more depressed, just because we were short on inventory. But the way we have structured the business now is toward a certain efficiency level for both salespeople and tech. And we believe we're in a materially different place. And we have been before the way we've structured our support functions, and that our salesperson and tech efficiency is going to be more than 20% greater than what we had in the past. So yeah, I would I would expect some people to come back to be strictly volume related, not support related.

Okay, that's very helpful. And then second question. I mean, it looks like the October sales rate is going to be high 16. It might actually breach 17, we'll see, business recovery in the U.S. is very remarkable, particularly given that fleet as a waning component of it. So early I mean -- how do you think about the durability of this recovery, and how much of a pent up demand from the depressed months of March, April, May, June, July that are coming back here. And how do you think about this point, because it's going to matter a lot for how you shape your business in the coming quarters?

Well the durability isn't surprising to me, John, and as time goes on, I have more and more confidence so it is going to be sustained. And you've heard some chat in the last week or so. It does seem that people like their safe cocoon of their car. And in the UK, we see it even more, as people are shying away from trains and the tube and so forth for commuting to work. And interest rates are still low, incredibly low. So affordability is good. And so I don't see anything on the horizon that is going to disrupt this current situation where we have, supply behind the band and solid demand. So we've got a pretty good runway, it would seem, at least through the winter into the spring for sure.

Yeah, it's a remarkable backdrop. It's great. And then just lastly or early, M&A had not been a key focus, certainly not off the table in the past. But it sounds like you're turning the tap back on what seems like a fairly material way. So I'm just curious what's changed in the business or in the opportunity set of acquisitions it's really? Do you created this shift back towards M&A?

Well, I think it's the financial strength of our company again, and the stability in our operations. I think we've got them laying down to a very large degree, and we can now integrate more quickly. And we can get more leverage from expanding our company and buying dealerships, particularly that that may not necessarily be performing at the same level we are.

Okay, that's very helpful. Thank you very much.

And our next question comes from Rick Nelson with Stephen. Please go ahead.

Thanks, and good morning. Nice quarter guys. I'm curious [indiscernible] very careful about supplies. When you then, the timing is those normalizing and the implications for GPUs, do you think we go back to pre-COVID levels or do we normal as at higher levels? And can you grow EPS in 2021 absent acquisitions or stock buybacks?

Rick this is Daryl. I'll answer the first part and then I'll ask Earl to address the EPS part, but on the inventory growth, we may see a little bit of growth in the fourth quarter, but it'll be modest. I really expect. We won't see our inventories materially improve until the first quarter of next year. And everything that we see is on the new vehicle side that the gross margins are very stable right now. And I would expect that to continue until the inventory situation materially changes.

Rick, this is Earl. Relative to growing EPS, I mean, we all know that's going to be a huge challenge, given what's happened this year. So we've got three -- we've got three mitigating factors that we can -- that we can lean on. One is, as we've discussed, we can do more volume than we've been doing in these market conditions, because we've been constrained on new and used. So to some degree, I think we can mitigate any tempering of margins with more volume. Our service businesses still not quite back up the previous year levels and that's been a strength of our company. So I think we can get more out of service next year. And the third thing we have is I believe we're going to get continued to get more out of our UK operation. The UK market is stable and we've had a chance now to really rationalize our UK operation. We had added about three different dealer groups to our company at about the time of the Brexit election couple years ago, and we never really got properly integrated and structured, which we have done now. So those are the three things that we're going to lean on to see if we can keep the company moving forward.

That make sense. And of course, we got buyback some acquisition opportunities. To UK, you saw outsized growth there relative to the market. I read a lot of -- compares, were relatively easy. But if -- what -- were the drivers there? What are you seeing in October, here is a restriction seem to have been elevated over there?

Yeah, the pace in the UK is still strong. Now it's a more seasonal market than the U.S. So after the September plate change month, you don't have quite the volume, particularly in November, December that you would have in the U.S., but it's still a healthy market. And I would say it's -- the order take rates have decreased a little bit, but no more than we would normally expect from the seasonality. So it's still a market that can produce for us at these levels.

And finally, I tide can bring people into the commerce section [indiscernible] per unit last $2,000 lead this out the sector. How much opportunity do you see from here and how important do you think these low interest rates have been in driving that number and if freight start to rise? Is that in fact vulnerable?

So, Rick, thanks for the question and thanks for noticing, it was a record quarter for us. And clearly interest rates are a tailwind. And what it helps us do is, we had really terrific traction, as Daryl mentioned with selling service contracts and maintenance agreements. So just about every product that we offer was up for the quarter. Going forward from a modeling standpoint, $2,000 is a pretty admirable number. And I'm hoping not to go backwards next year, but we've been able to have upward trajectory for the last seven to eight years. So I think, kind of keep it steady for now and we'll continue to keep doing everything we can to provide these services for our customers.

Great. Thanks a lot and good luck.

And our last question comes from David Whiston with Morningstar. Please go ahead.

Thanks. Good morning. On the UK, you said it's recovering nicely. And I'm just wondering if the worst case no deal Brexit does play out and it causes some havoc in the UK next year, do you think there's such a massive still pent-up COVID-related demand in the UK that it could perhaps offset a lot of that Brexit headwind?

Well, it's hard for me to say that. This is Earl, by the way. There could be some disruption at the end of the year. There's just potential that there could be something like 10% [technical difficulty] coming into the [technical difficulty]. What we have found in the past is lot of marketing in UK is [technical difficulty]. And a big part of the strength in the UK remains used cars and service. And we would see that as being steady and the new car bit is what could be disrupted. Well, which isn't ideal, but again, there's -- that the UK market has been very, very strong over time, and has shown itself to be very, very flexible. The beauty of the UK market and the U.S. is the channels no longer stuff, right. The distribution channels in the U.S. and the UK tend to get stuffed over time with excess cars and when they lean out, is when you can really see the power of the used car business. And that's why our margins have gone up so much in the UK. And I think any disruption to the new car business in the UK which could occur, whatever the trade situation is between the EU and the UK is likely to only make the used car market better.

Okay. And in terms of headcount, and global aid for you guys, have there been eliminations -- from permanent eliminations of any service technicians?

When we started this, we made a -- I guess I call it a strategic decision that we were going to transition from hourly technicians to flat rate technicians in the spirit of trying to put as much productive workforce in our dealerships as we could. So, we did reduce the headcount of technicians, and it was hourly technicians. And we're in the process right now replacing them with flat rate technicians.

So you're saying maybe, in aggregate, you wouldn't have a net reduction in technicians?

Certainly over time, that's true. Yes.

Okay. And I guess -- I'm interested in hearing especially from you guys being Texas based about the premium EV [ph] pickup segment that now has a GMC humor and in addition to a lot of startup manufacturers, and if there's the Texas pickup from customer, are they are they really excited about something like the humor? Do they still want an ICE truck? And do you just see this being the domain of wealthy consumers?

Right now we have some GMC stores in Texas, the reaction from those customers on the first version of the humor has been very positive. They're going to roll that that truck out over a three year period with four different grade levels. So I think the true test will come when we get out of the $120,000 truck and down into the one that transacts into the $60,000, $70,000 range. So the early ones we received were very positive thing.

Are you worried at all about any cannibalization with the Denali Triumph [ph]?

Not at this point. Not at this point. It's early to -- too early to tell.

Okay. And just real quick on service, is that really just a function that people aren't driving many miles because of the pandemic? And once the miles take up you have expect business come back, or you think that consumers are still staying away from your stores for service because of the pandemic?

This is Daryl. What we saw was our customer pay business has returned basically to where it was a year ago. Warranty is basically where it was a year ago. So, I think it was miles driven. And I think as these trends continue, we'll see that -- we'll see the momentum that we had previously come back.

And we have an additional question from Rajat Gupta with JPMorgan. Please go ahead.

Hi, good morning. Thanks for taking my questions. There was a lot of discussion of the new -- on the new supply side. Could you give us a sense of you know, where the supply is on the used side and how that's coming back? Do you expect tightness to continue similar to the new side of things or does that come back faster? And then relatedly how does that influence our volumes and GPU going forward?

Rajat this is Daryl. The new side, I think we've been clear on that, we expect those to really not see any material improvement till the first quarter. On the used side, our inventories have been lighter than what we would like. Because once the auctions did open, we tried to be very judicious with auction purchases, we've tried to limit our auction purchases. You saw in a quarter that we increase the number of vehicles we're purchasing from individuals, as well as increased the number of vehicles are trading for. And so that may have had an effect on our total used car inventory, but we feel like that's the right trade off. We feel like sourcing vehicles at auction is the worst place we can go. And even right now, that's certainly the case. So some of that is a conscious purposeful change that we've made.

Got it. And is that like -- but is the supplies tuition, has it gotten better or is it like -- is it likely to get better you're -- the rest of the year or is that pretty similar to what you're seeing?

I think it improves. As you've seen, the new car volumes improve, you saw the SAAR and October is going to be very good. And, what you can assume from that is that we're going to get more trades. And that's our highest and best used car inventory. And so yes, we expect that would improve.

Got it. And just as a follow-up one AcceleRide. I mean, clearly a strong growth rate there, when the volumes nice pick up all those still a pretty small part of your business. Can you give us a sense you know if you've been able to dissect or if you have any data around? How many incremental customers are you able to capture with that platform versus what is just -- your existing customer just doing the transaction online, instead of coming to the store? Any color around that would be helpful. And then just how you're expecting AcceleRide to drive maybe incremental growth versus what you've done historically, on both year-on-year going forward. Thanks.

Rajat, this is Daryl again. With AcceleRide, our focus has always been to make it as easy as possible for our customers to do business with us. Things that we see is our AcceleRide customers close at about 50% higher rate than customers that come to us through a different avenue. So potentially, there's some incrementality because of that, the retailing -- the digital tool itself, we think is very good and robust and easy to use. It's hard for us to put a number on how much is incremental or not. We tend to look at AcceleRide as an iterative part of our business. How do we improve it little by little so that our customers have a better and better experience and we expect it will continue to be a bigger piece of who we are a year from today than it is today? What that what that line exactly looks like I am not sure I can tell you at this point. But we see several quarters now where it's increased.

Understood. Fair enough. Thanks so much and good luck.

And with that, I'd like to turn the call back over to Earl for any closing remarks.

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

And that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time and have a great day.