Group 1 Automotive Inc (GPI) 2015 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to Group 1 Automotive's 2015 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 Vice President of Manufacturer Relations, Financial Services and Public Affairs. Please go ahead, Mr. DeLongchamps.

Thank you, Dan 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'll refer to on this call for comparison purposes have been posted to the Group 1 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 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 last 12 months. Copies of these filings are available with 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 the website.

Participating with me today on the call Earl Hesterberg, our President and Chief Executive Officer; John Rickel, our Senior Vice President and Chief Financial Officer; and Lance Parker, our Vice President and Corporate Controller.

Please note that all comparisons in the prepared remarks are to the same prior year period, unless otherwise stated. I would now like to hand the call over to Earl.

Thank you, Pete and good morning everyone. I am pleased to report Group 1 achieved record adjusted third quarter net income of $46 million. This equates to record third quarter EPS of $1.91 per diluted share an increase of 21.7% over the prior year. For the quarter total revenue increased approximately $174 million or 6.6% to an all time quarterly record of $2.8 billion. On a constant currency basis revenue grew 10.2% for the quarter.

Turning to our business segments, total consolidated new vehicle revenues grew 5.3% or 9.4% on a constant currency basis as we retailed 5.9% more units at an average new vehicle selling price of $33,977. New vehicle gross margin decreased 30 basis points as conditions remain competitive in all three of our markets. During the quarter we retail over 37,000 new vehicle.

On a same-store sales by market new unit sales increased 4.4% in the U.S. The U.K. had an outstanding quarter with new unit sales up 19.1%. And almost as impressive was Brazil with a 1.3% increase in unit sold in a market where the industry was down more than 25%. Our new vehicle unit sales geographic mix was 81.3% U.S., 11.1% U.K. and 7.6% Brazil. Our new vehicle brand mix was lead by Toyota Lexus sells which accounted for 27% of our new vehicle unit sales. Ford, Lincoln, BMW Mini and Honda Acura each represented over 11% of our new vehicle unit sales and Nissan was at 8%. U.S. new vehicle inventory stood at 28,518 units at the end of the quarter which equates to a 72 day supply compared to a 75 day supplied for the third quarter 2014.

Total consolidated used vehicle retail revenue grew 11.6% or 14.6% on a constant currency basis as we resell 12.9% more units with an average used vehicle selling price of $21,164. Used vehicle retail gross profit increased 5.1% as lower gross margins down 40 basis points to 6.8% were a partial offset to the strong volume growth. During the quarter we retailed over 32,000 used retail units. On a same-store basis used vehicle retail unit growth was double-digits across the board. With a 10.3% increase in the U.S., an impressive in 19% increase in the U.K., and 15.3% increase in Brazil. U.S. used vehicle inventory stood at 13,239 units at the end of the quarter which equates to a 32 day supply compared to a 30 day supply for the third quarter 2014.

Total consolidated parts and service revenue increased 4%, while consolidated parts and service gross profit rose 7.8%. On a constant currency basis same-store parts and service gross profit grew 8.9% on 6.3% higher revenues.

Within finance and insurance a combination of increased profitability for retail unit and higher volumes drove a total gross profit increase of 10.9% on a consolidated basis. Total consolidated F&I per retail unit increased $27 to $1,352. U.S. F&I increased $65 to a third quarter record of $1,515 per unit.

Regarding our geographic segment results, our U.S. operations delivered solid growth with total revenue increasing 7.7%. Our used retail growth was a highlight with revenue increasing 11.9%. Higher retail volumes and a further expansion in our income per unit drove a 12% increase in F&I revenue. And finally parts and service continue to grow with revenue up 6.1%.

Our U.K. operations had an outstanding quarter with total revenue growth on a constant currency basis of 39.6% driven by double-digit growth across all segments of new vehicle, used vehicle, parts and service and finance and insurance. For Brazil while the overall industry sales for the quarter were down more than 25%, reflecting the difficult macro environment, our new vehicle unit sales were up 1.3% on a same-store basis. Our strategy of aligning with growing brand is working and in conjunction with aggressive cost cuts allowed us to once again deliver a small operating profit this quarter. We remain confident that the improved actions our team has implemented over the last year will allow us to be profitable on a full year basis.

Relative to our cost performance on an overall consolidated basis adjusted selling, general and administrative expenses as a percent of gross profit improved 140 basis points to 72.5%.

I will now turn the call over to our CFO John Rickel to go over our third quarter financial results in more detail. John?

Thank you, Earl, and good morning everyone. Our adjusted net income for the third quarter of 2015 rose $6.3 million or 15.7% over our comparable 2014 results to $46 million. On a fully diluted per share basis adjusted earnings increased 21.7% to $1.91. These results for 2015 exclude approximately $800,000 of net after tax adjustments related to it noncash asset impairments. The comparable results for the third quarter of 2014 excluded $13.6 million of net after tax adjustments including $17.9 million of charges related to the repurchase of all our 2.25% as well as the remainder of our 3% convertible notes and $6.6 million of asset impairments primarily associated with the pending disposition of vacated U.S. dealership real estate and three (Inaudible) franchises in Brazil. These charges were partially offset by a net after tax gain of $8.6 million resulting from the sale of several U.S. dealership in the associated real estate combined with a $3.4 million favorable foreign income tax change.

Starting with a summary of our quarterly consolidated results. For the quarter we generated $2.8 billion in total revenues. This was an improvement of $174.1 million or 6.6% over the same period a year ago and reflects healthy increases in each of our business units in the U.S. and the U.K. Weaker exchange rates in the U.K. and Brazil were partial offsets. Our gross profit increased $23.7 million or 6.3% from the third quarter a year ago to $398.4 million. For the quarter adjusted SG&A as a percent of gross profit improved 140 basis points to 72.5% and adjusted operating margin was 3.5% an increase of 20 basis points from the same period a year ago.

Floorplan interest expense decreased by over $700,000 or 7.3% from the prior year to $9.7 million explained by lower floorplan borrowings in Brazil due to improved inventory management. Other interest expense increased by roughly $700,000 or 5.1% to $13.9 million. This increase is primarily attributable to an increase in weighted average debt outstanding related to our issuance of $550 million, 5% bonds used to retire our 2.25% and 3% convertible notes during the second and third quarters of 2014. Our consolidated adjusted effective tax rate for the quarter was 37.8%.

Now turning to third quarter consolidated same-store result. For the quarter we reported revenues of over $2.6 billion which was a $114.3 million or 4.5% increase from the comparable 2014 period. On a local currency basis which ignores the change in foreign exchange rates total same-store revenues increased 8%. Within this 8% total new vehicle revenue was up 7.5% and used vehicle retail revenues improved 12.1% Both finance and insurance and parts and service delivered another strong quarter growing revenues 10.5% and 6.3% respectively.

Please note that earlier this year we modified our press release and posted investor presentation to include year-over-year percentage change metrics on an U.S. dollar and local currency basis. My remaining same-store comments will be on a local currency basis unless otherwise noted.

New vehicle revenues increased 7.5% on a 5.4% increase in unit sales and a 2% increase in our average new vehicle sales price. By country same-store new unit sales increased 4.4% in the U.S., 19.1% in the U.K. and 1.3% in Brazil. Our used retail revenues improved 12.1% on an 11.3% increase in unit sales. By country same-store used retail unit sales increased 10.3% in the U.S., 19% in the U.K. and 15.3% in Brazil. F&I income for retail unit rose 2.5%, driven by increases in both income for contract and penetration rate for most of our major product offerings.

Parts and service revenue grew 6.3% explained by increases of 12.1% in collision, 10.4% in warranty, 6% in wholesale parts and 3% in customer pay. We continue to make progress hiring additional service technicians. On the year to date same-store basis we have increased our U.S. technician headcount by 143 an increase of over 7% from December 2014. In aggregate our same-store gross profit grew 7.1% on a local currency basis. Our same-store sales new vehicle gross profit dollars increased 1%, reflecting the 5.4% increase in unit sales mentioned previously which was partially offset by a 4.2% decrease in gross profit per unit.

New vehicle margin pressure was most notably seen in our volume import brands. Our used vehicle retail gross profit increased 4.8% as the 11.3% increase in unit sales was partially offset by a gross profit per unit decrease of 5.8%. Our F&I gross profit grew 10.5% reflecting a 2.5% increase in PRU and 7.8% increase in total retail unit sales. Finally same-store parts and service gross profit grew 8.9%, reflecting the strong revenue growth mentioned previously as well as a 160 basis point increase in margins to 54.7%. By country same-store parts and service gross profit improved 9.4% in the U.S. and 9.1% in the U.K. while Brazil was basically flat.

Turning now to our geographic segments starting with the U.S. market on an actual basis. For the quarter total U.S. revenues grew 7.7% to over $2.3 billion driven by increases of 12% in F&I, 10.2% in used vehicle, 6.6% in new vehicles and 6.1% in parts and service. The increase in our parts and service revenues reflects growth in all areas of the business and our F&I revenue growth reflects a 7.2% increase in retail vehicle sales volume coupled with improved profitability for retail unit which grew $65 to $1,515. Total gross profit improved 8.2% driven by increases of 9.6% in parts and service and 6.5% in used vehicles as well as the 12% F&I increase that I just mentioned.

For the third quarter we grew gross profit by $26.4 million while adjusted SG&A expenses increased just $13.9 million. As a result our adjusted SG&A as a percent of gross profit improved 150 basis points to 71.4%. Adjusted operating margin for the U.S. business segment increased 20 basis points to 3.8%.

Related to our U.K. segment on a local currency actual basis for the quarter total revenues increased 39.6%. Roughly two-thirds of this increase is due to the December 2014 acquisition of three BMW and Mini dealership. Gross profit for the U.K. segment was up 30.5% from the prior year. New vehicle gross profit grew 27% as an increase of 38.2% in unit sales was partially offset by a decrease in gross profit per unit of 8.1%. Used retail vehicle gross profit increased 19.5%, as a 35.2% increase in unit sales was partially offset by a decrease of 11.6% in gross profit per unit. Parts and service gross profit improved 33.5% and F&I income increased 36.6%.

During the third quarter our adjusted SG&A as a percent of gross profit increased 290 basis points to 77.6% primarily reflecting the acquired stores and operating margin of 2.2%. Related to our Brazil segment on a local currency same-store basis as Earl mentioned the total industry new unit volume decreased roughly 25% from the third quarter of 2014. Despite this our total gross profit decreased only slightly by 1.3%. New vehicle gross profit increased 6.2% reflecting an increase of 1.3% in unit sales combined with the 4.8% increase in gross profit per unit. Parts and service gross profit also increased by two-tenths of a percent. These increases were offset by used vehicle and F&I gross profit decreases. Used vehicle gross profit decreased 22.4% with a 7.2% increase in total used unit sales was more than offset by a decrease of 27.6% in gross profit per unit. F&I income decreased by 12.4% as a 4.6% increase in total retail unit sales was more than offset by a 16.2% decrease in gross profit PRU. Despite the local economic challenges our Brazil segment generated a small pre tax profit for the third quarter and as Earl indicated we continue to expect we will achieve a pre tax operating profit for the full year.

Turning to our consolidated liquidity and capital structure. As of September 30, 2015, we had $22 million of cash on hand and another $48 million that was invested in our floorplan offset accounts. Bringing the immediately available funds to a total of $70 million. In addition, we had $122 million available on our acquisition line that can also be used for general corporate purposes. As such, our total liquidity at quarter end was $192 million.

With regards to our real estate investment portfolio as of September 30th we owned roughly $775 million of land and buildings which represents 46% of our 153 dealership locations. To finance these holdings we have utilized our mortgage facility and executed borrowings under other real estate specific debt agreements. As of September 30th we had $55.5 million outstanding under our mortgage facility and $343.7 million of other real estate debt excluding capital leases.

During the third quarter we repurchased approximately 443,000 shares of our outstanding stock at an average price of $85.69 for a total of $38 million. This brings our year-to-date repurchases to 850,000 shares at an average price of $83.67 for a total of $71.1 million . As of September 30th we had $28.3 million of share repurchase authorization remaining. In the third quarter we used $5 million to pay dividends of $0.21 per share an increase of $0.04 per share or 23.5% over the prior year.

Finally I want to mention a key point relative to the normal seasonality of our business. Historically our business has been stronger in terms of sales and profit in Q3 than Q4. We expect this year to be no different. I would highlight that last year was an exception due to the extinguishment of our convertible debt which created an unusual pattern of our Q4 earnings per share exceeding our Q3 levels due to the dramatic reduction in our share count. I just want to remind everyone of this anomaly to the calenderization of our EPS trend in 2014 to avoid any confusion. For additional detail regarding our financial position, please refer to the schedules of additional information attached to the new s release as well as the investor presentation posted on out website.

With that, I'll now turn it back to Earl.

Thanks, John. Related to our corporate development effort as previously announced during the quarter the Company Mercedes-Benz, Sprinter and Smart franchises in central Texas near Austin which are expected to generate approximation $100 million in annual revenues. Year-to-date the Company has acquired five franchises that are expected to generate approximately $340 million in annual revenues and disposed of four franchise that generated approximately $30 million in trailing 12-month revenues. We continue to adjust our dealership portfolio to ensure we are generating appropriate returns for our shareholders.

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 John Murphy Bank of America Merrill Lynch. Please go ahead.

Good morning. This is Liz Suzuki on for John. It looks like on a same-store basis for the consolidated Company parts and service grew about 6.3% excluding foreign exchange. Were there any headwinds year-over-year in the parts and service channel that we should make a note of? Because we have been seeing some stronger results of some other dealer groups and even your U.S. operations were only up about 6.6%. SO just wondering if there is potentially some stronger growth ahead in that segment.

Now I'm not aware of any headwinds at all. In fact, I would say overall our repair shops are quite full in both the U.S. and U.K. in particular. So I think that is probably just a normal variation depending on to a large degree the recall and warranty work and the nature of that work by month and by quarter. But I would say the parts and service business remains very, very strong.

Great, thanks. It looks like on the slides you had Texas is up 7.2% year-over-year same-store which is up more than the 4.4% growth for the overall U.S. So it seems like the numbers kind of speak for themselves and you dedicated a section of the slide to this. But could you just mention if you are seeing any negative impact at all in any of your Texas stores due to the weak energy market?

There is very slight negative impact in a certain Texas markets. For example, we have a BMW dealership in downtown Houston that services the energy company headquarters in downtown Houston that dealership has been impacted. But 8 miles a way our Toyota store is red hot selling everything we can get. Our Chevrolet dealership is up way year-over-year. Our overall Houston business was up 6% plus for the quarter. So there are a few spots where you can see it. The main issue for us relative to energy impacting our sells would be our new vehicle sales in the state of Oklahoma that's about 8% of the Company's sales and our new vehicle sales were down 5% for the quarter there. That's probably the drag that you were look for. But our used vehicle sales in the state of Oklahoma are up well in to double-digit. So it is possible there is some shift from new to used there. It would seem the Oklahoma economy is not as diverse as the Texas economy. It is much more impacted by this latest drop from $60 a barrel oil to $45 or whatever it dropped to. But Texas for us I would say is probably at least up the national industry average or better in new vehicle sales.

Okay, thanks very much.

And our next question comes from Rick Nelson at Stephens. Please go ahead.

Thanks, good morning. To ask about the acquisition environment. You have acquired $340 million revs year-to-date, $100 million in the quarter. If you could discuss the multiples that you're seeing out there.

Well, I can't really speak to multiples, Rick, because we look at it on return to investment basis. But I think the gist of your question is that there is a lot of activity in terms of sellers in the market. I also think the prices are probably at near record levels because of the trailing couple of years of earnings as you know have been pretty strong. I would say there is a lot of activity in the buy/sale market, but I would say it is probably more towards expensive than reasonable in terms of pricing.

And the premium luxury stores you bought this quarter Mercedes we're hearing about some big tickets there in that segment.

I would say that would be true, Rick. The luxury brands in the U.S. are certainly bringing the highest prices. It is probably the highest prices every that would be a valid observation.

Any comment on October sales and what you are seeing thus far? I know there's been a lot of rain in Texas. Do you view that as a headwind or is that an opportunity, potential flood damage, et cetera?

Well, the overall pattern of sales in October beginning the quarter was probably quite consistent with the previous quarter. But we were wiped out in terms of weekend business last weekend. Obviously you could see that rain coming so there was a lot of media attention to it on Friday and Thursday. It was a pretty dreadful sales weekend across Texas, Oklahoma and then I guess spreading around the gulf coast here the last day or two. But we have a lot of the quarter to go and sometimes when you miss a weekend of sales you catch that up with people staying for a few days and come back later. We'll have to see how that goes. People were better prepared. There was some flooding certainly in parts of Texas, so you do get a little parts and service kick from that, so maybe we will see that. There was quite a bit of flooding in Texas.

And finally a question for Pete on the side F&I side. This is regular phenomena because it records recorder 1515 in the U.S.

Thank you, Rick.

How much more opportunity do you see and are there risks out there that we should be thinking about F&I as we move forward?

I can't speak to specific risks. I'll stick with my consistent message Rick that we are very pleased with where we are and we work every day to improve the under performing stores and increase our product penetrations. So that has been a lot of hard work by the team and we're delighted with the results.

Great. Thanks a lot and good luck.

Thanks.

And our next question comes from Bill Armstrong of CL King & Associates. Please go ahead.

Good morning gentlemen. A couple of questions starting with Brazil. You outperformed the overall market by a mile both in the new and used. I was wondering -- you mentioned brand mix I was wondering if maybe you could drill down a little bit in talking about your out performance and what the outlook for Brazil is for the rest of the year and into the new year?

I think the overall outlook for the market is certainly still negative. I guess when your President is under threat of impeachment there is not much hope that you are going to have a stable political environment in the near term. And in September three of the four big brands, I believe it was Fiat, Volkswagen and General Motors were down between 40% and 45%. So overall the current automotive sales environment is about as bad as you would ever see. Those are the levels that put two auto manufacturers into bankruptcy in the U.S. in 2008. But our strength is that our brands Toyota, Honda, BMW, Land Rover have moved toward local production and have some new products that are quite popular. So they have much smaller markets share but they're gaining market share in this environment that is really hammering the big brands. So that has helped us stay around flat in sales in a market that is down probably 25%. So we're pretty proud of our Brazil operating team and we do have a couple of brands that struggle (Inaudible) and Nissan at least to make profit. We keep making that business stronger. We keep strengthening our management team which I think is a brilliant management team. So we are just going to continue to deliberately build a strong business so we'll have some leverage when the market does eventually recover. And that is the same way we approach the U.K. business which we built from an original acquisition of three dealerships. We slowly and deliberately built that business and it was very powerful for us in this past quarter.

And in Brazil your used unit comps were up 15% too which was much better performance than we've seen over the last few quarters. So I was wondering if you could give us some color there, you know, what happened there?

I'll give you some color but I will admit to you that we don't believe that we're particularly proficient used car operators in Brazil yet. I will tell you we were coming off a low base that is probably the majority of it. The other part is that with floorplan rates near 18% we liquidated quite a few cars just to keep the inventory in line. Actually we're in pretty solid position with our brands relative to sales in Brazil compared to others as I just mentioned. But the floorplan rates were the biggest challenge in Brazil which probably somewhere in the border of magnitude of 18% so trying to keep the inventories lean.

So should we take that as maybe had some unusual liquidation activity and maybe we get back to maybe a more normalized trend going forward?

Yes, I think that is true. And I think we can grow that business simply because we're starting from a low level. The used car business in Brazil through franchised dealers is still somewhat undeveloped so we believe that to be a big long-term opportunity for our Company. But I think the growth was a bit overstated last quarter.

Bill, this is John Rickel. I would add you see that really show up and we discounted the gross profits pretty heavily that's why you saw the extreme pressure on gross profits per unit was a trade off the operating team made to clear that inventory out.

Right, I saw that. Okay. And then last question back in the U.S. parts and service margins were up very nicely. What were the drivers there?

I think it is mostly our mix among our business. One of our strongest businesses in Group 1 for quite some time is our collision business and it has been up double digits quarter after quarter this year. So I believe that helps our margin mix to a certain degree.

That was a piece of it. The other thing Bill is it looked like we had a little bit of improvement in our customer pay margins as well and some of that is probably just mixed among the actual customer pay business. And the final piece is with the strength in new and used obviously the internal work contributed as well.

Got it. Okay. Thank you very much.

And our next question comes from Jaime Albertine of Stifel. Please go ahead.

Great. Thanks for taking the question, and good morning, everyone.

Good morning, Jamie.

If I may ask on the used retail side another it appears a very strong quarter in the U.S., units up double-digits. Can you help us understand some of the ancillary opportunities though as you are driving more customers through your used business. And we talked about internal work, I think John just referenced it in the margin question a minute ago. But I'm thinking more along the lines of attachment rates for extended service plans or the need for financing and thinking about it more holistically. How does the incremental used unit hit every vertical within the business?

Jamie, obviously being a good used vehicle operator is key to being a good new vehicle operator as well. So it supports the new car business by being able to take the trade and turn it into retail, so it supports that. Clearly it helps parts and service. The attachment rates on parts and service are not the same as new especially as we continue to grow the CPO business. The CPO business does have a pretty good attachment rate and we are running about a 30% CPO mix. And the final piece is in Pete's world. You really can't tell the F&I unless you sell that used retail unit. So we continue to drive a lot of volume through F&I which the industry leading levels that we're running generate a lot of gross profit through F&I for us.

Is it about the same level of penetration for financing that consumers are looking for in an used vehicle relative to new?

Yes, it is Jamie. And we also as John mentioned CPO, and then it also gives us a nice attachment rate on vehicle service contracts at a level above 40%. As John mentioned, the best used car dealers have the ability to retail the new cars because they have the ability to put more in to the trade. So that is a critical piece of the business we have really been spending a lot of time on.

Thank you for that data point over 40% service contract penetration. And then the last not to beat a dead horse here but it seems to me just looking at the results on the used retail sale side there is an acceleration going on. And otherwise the concerns people are sharing in the new vehicle sale cycle do not seem to be manifesting themselves on the used side of the business. You even said I think, Earl, double-digit growth in used sales if I heard you correctly in Oklahoma. So there is, in fact, offsets from some other pressures you're seeing on the new vehicle side. Would you agree in general with we are on an maybe earlier curve of the used retail unit acceleration call?

I believe a big part of that acceleration is increase supply. We have been starved for used vehicle and quite frankly we still are in many segments of the markets. Such as a little bit older cars that are still high quality maybe in the three to four year old range. But there has been a lot better supply of used cars this year, and I think that is one of the factors. And I also think that we're a lot more proficient than we once were in the used car business and systems and things like that and discipline I think made us better used car retailers.

That's it for me for the moment. I appreciate. John, we'll follow up offline. Have a great fourth quarter and we'll talk soon.

Thanks.

And our next question comes from Steve McManus of Sidoti & Company. Please go ahead.

Good morning everyone. Thanks for taking my questions.

Good morning.

So my first question you guys have really been ramping up the technician hiring so far this year. Where within the P&S segment are you focused on adding capacity? And do you guys have a ballpark internal target for headcount additions for the year and maybe in to next year?

We have been actually for a couple of years trying to ramp up our productive capacity our manpower capacity and service and we still are. We still basically have needs for technicians and service advisers across the board in every geography and every brand. I would say we made some progress this year maybe we have gotten some technical people back from the oil field in some of our markets. But we still have great needs and it is still a Company wide effort. I don't think anything has changed there. As I mentioned earlier, our shops are still quite full.

Okay. And the next one just with respect to the ongoing shift towards real estate ownership versus leasing can you talk about some of the benefits and savings you guys have been realizing as a result of the transition is anything starting to materialize yet, any commentary there would be great.

Yes, Steve. This is John Rickel. This has been an ongoing strategy really since Earl and I came on board. The Company in 2005 really was a 100% sale lease back. So at this point we're about to a half. We see certainly benefit in lower cost sale lease back tends to run 200 to 300 basis points higher cost versus what we are able to do with a mortgage to support it. Plus it is also I think strategic for us. You're controlling an important part of the business, your location. A lot of these places like on Highway 59 here in Houston you couldn't replace one of these if you ever lost them. So being able to own that underlying asset we think is important. So it is a lower cost for us and also I think gives us control over our future.

Okay, great. Thanks a lot, guys. I appreciate it.

Thanks.

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

It is actually Pat here from Goldman. Good morning. Just a couple of questions or follow-ups I should say. Just on the parts and service side on your slide 13 in the deck that you provided you kind of went back in to negative territories with customer pay same-store comps and just wanted to understand why that was. Clearly other areas are doing very well like collision and warranty. Is this going back to the issue of capacity squeezing out customer pay growth or what's going on there?

Pat, this is John Rickel. That is on an U.S. dollar basis. If you look at it on a constant currency basis we actually grew customer pay. So what you are really see there is the impact of FX.

And I do think we just have a natural flow of customers in to the shops and with some of the recall activity and it varies by brand sometimes I would say it possible we're displacing some customer pay business. For example, a couple of the brands that have the highest recall activity at this moment are Honda and Chrysler. We are not very big with Chrysler. And Honda is maybe 11% of our business, but those are the airbag recalls and we tend to priorities those. And it is possible on some of these recalls that customer pay business gets displaced. We try not to do that but by brand it is somewhat situational.

Pat, let me just so you have the number. On a constant currency basis we grew customer pay 3.7% in total parts and service on a constant currency basis consolidated same-store was up 6.6%. So it is really just the currency that's getting it.

Got it. That is helpful. Just to follow-up on that in terms of the Takata recall how much of the way through are we on that one?

Well, I don't have hard data to give you a definitive answer, but I don't think we're anywhere near halfway that's for sure.

Got it. And then one other one from me. VW can you just give us an over-view of what the impact has been there on your U.S. business just given the headlines that have been announced since diesel gate? Is this something that is impacting the brand in a general way or is it only some of these diesel cars that are being effect what are you seeing on the ground?

We spent a lot of time on it but it is not a material amount of business. We have seven dealership I would say three of them are quite small. I would say it is clearly the top public relations item in the industry these day. I think we have 120 new cars in our inventory on stop sale and maybe 60 used cars across the Company on stop sale. But the Volkswagen factory people have been really magnificent in supporting these types of costs. They have been much more aggressive at retailing the remaining 80% of their inventory that is not on stop sale which I guess is primarily petro engines. So it hasn't been a big deal. I think in September our Volkswagen sales were still up 6%. I think we are projecting this month it will probably be down about 10% maybe a little more. So it is not pleasant, but the number of cars it impacts in Group 1 just isn't material.

Okay. Appreciate the color. Thanks a lot.

Pat, let me correct one number I gave you. The customer pay on a consolidated local currency basis was 3% not 3.7%. That is still up.

Thanks John.

And our next question comes from Michael Montani of Evercore ISI. Please go ahead.

Good morning. Wanted to ask first on the retail used unit side 10% comp in the U.S. quite strong. Can you give any incremental color there on how CPO has grown year-over-year and then obviously how the non-CPO business is tracking?

It is strange how consistent our CPO mix has been for many years kind of from 27% to 33%. So it is growing in concert with our overall double-digit increase. We normally figure it is about a third of our business and it stays pretty close to that. Actually one of the bigger issues on those cars these days is it takes a while to get them through the shop and again we worry about displacing warranty and customer pay business. But it is very much a stable part of that business and seems to grow about the same rate and many of these off lease cars that are coming from the OEM are two or three year old which makes them perfect CPO cars so that part of the business is still quite strong.

Okay, great. Thanks. And then just to follow-up on gross profit. One of your competitors cited some incremental pressure on the luxury side and that could continue into the fourth quarter. I guess what I wanted to understand and to be clear with your outlook in the fourth quarter are you thinking of more normal seasonality trends where GPU could increase quarter over the quarter, and could you give incremental color in terms of domestic versus import versus luxury GPU trend?

No, I can't remember when there wasn't this margin pressure and it seems to be quite across the board now in brands. My recollection is that sometimes in the fourth quarter you get a little overall margin lift because December is a big luxury brand sales month and the end of the year tends to be very strong with a lot of leases expiring for Mercedes and Lexus and BMW and such. So December in particular generally has a strong luxury mix. Depending upon I guess on what the luxury margins are I'm still going to believe that even under pressure they are higher than the volume brands so there may be, there may be a little statistical lift in the fourth quarter. But I don't think there is anything that is changing in terms of the competitive nature of the market for luxury brands, Japanese brands or domestic brands.

Okay, great. Thank you.

And our next question comes from Brett Hoselton of KeyBanc. Please go ahead.

Good morning everyone. This is Irina Hodakovsky on for Brett Hoselton. How are you?

Good. Good morning, Irina.

Good morning. I wanted to ask you guys a little bit in terms of industry dynamics on the used vehicle side you have seen an increase in supply are you seeing an impact on pricing in that vehicle segment the two to three year old car, or is it impacting older vehicle pricing? Is there any impact on gross profit per unit as a result of that, or is gross profit per unit simply a competitive factor?

My impression this year is that the pressure on used margins has been more competitive matter much as it is on the new car side. You have very powerful retailing entities fighting for market share and move units and my impression is a factor of competition more so than this increase supply.

Got you. And is it effecting pricing on the used vehicle side?

I would say not significantly.

If you look at the Manheim index it is continuing to hold in so it doesn't appear to be an issue with pricing. It is more, Irina, as Earl indicated just a competitive set that is out there.

On that as a follow-up on that in speaking with Tom Webb of Manheim he is a little bit surprised of how well the pricing is holding. What do you think is this just demand holding prices above where one would anticipate in this level of supply, or is it just the cars are better? These two, three year old cars are coming back with better technology than before and they are just naturally more expensive?

I think the continued ability of the manufacturers to increase new vehicle prices is kind of creating a vacuum to the upside that helps a bit. It is possible that over time with this extended increase supply that there will be some slight downward pressure on used vehicle but at the moment it seems that the dynamics of everything considered are holding used car prices better than I would have expected with the increase supply.

Got you. Question for you guys on the parts and service gross profit margins. Very strong trend here. We are actually back to pre recession levels when you had some pretty high numbers then. Even as a franchise dealers are competing for the lower margin business. Your margins are very strong and you mentioned some of the drivers behind it like recall activity and reconditioning work. How do we think about this going forward? Is there additional upside? I think in the past your highest number you have ever hit was 56%, do we ever get back to that? How should we think about this going into 2016 and beyond?

I think the margin fluctuation you see in our business is just somewhat normal based ore on mix more than anything. Our general margin position should be fairly consistent because there isn't a need to discount much when you are running at full capacity and our shops are full. So in quarters where we have a different warranty mix or different collision repair mix or wholesale parts mix we'll have some fluctuation. I think we're now operating in a range that is fairly consistent and predictable.

Thank you very much for that. Congratulation, solid quarter with Brazil and everything.

Thank you.

(Operator Instructions). And our next question comes from Paresh Jain of Morgan Stanley. Please go ahead.

Good morning everyone.

Good morning.

A couple of questions starting with U.K. You mentioned about increase supply last quarter and perhaps some of that was originally destined for China and was redirected to U.K. which kind of hurt your GPUs in that market. How has that supply environment trended since 2Q because GPU is still looking pressured in that region?

And I think that is correct and that is the proper observation. The U.K. market is still very strong on demand and retail side, but it has continued to be over supplied this year for most manufacturers and that has put a bit of downward pressure on the new vehicle margins. The good news is the volume is there. The volume increases are there. But most brands are over supplied in the U.K. at the moment.

Got it. And a question for you again I wanted to go beyond the next few quarters here. We are increasingly hearing about new entrance in the Silicon Valley potentially making cars one day. And while it is too early to say if these cars would be available for consumer purchase or part of (Inaudible) fleet and even if they are available for consumer purchase would it be it sold at dealers or through independent stores we don't know all that yet. But wanted to get your thoughts on how you see that space evolving and if the entrants do end up as fleet managers how do you see Group 1 and other dealers fit within that ecosystem?

I don't think I am a real good prognosticator. There's a probably lot of people on this call that are a lot better at that than I am. What we have found over the decades is that the automotive retail distribution system is quite flexible and basically retailing is a local business and we see that time and time again. And these are big pieces of merchandise regardless of who buys them or how much in terms of electronics are inside of them. There is technical problems that occur and you can have the highest level of service when you are located in the marketplace. And I think the U.S. retail distribution system has stood the test of time. And I think in the near-term it is not likely to go any where or see any dramatic changes. Maybe a decade or two from now we will see if things change. But these are big pieces of merchandise that weigh several thousand pounds and have quite a few moving parts and somebody has got to handle them, deliver them and fix them.

In most cases the customer also has an used vehicle they have to trade to do as part of the transaction which also has to be handled.

Got it. And, John one last if I may. A question for you on the Honda solution for dealer reserve. Has there been an update on the additional fee beyond the 100 to 125 bps spread?

This is Pete DeLongchamps. There has not been and our business has remained static with Honda through this.

Is there a timeline when we can see a more structured solution?

I think the solution is in place.

Okay. Got it. Thanks.

And our next question comes from David Lim of Wells Fargo. Please go ahead.

Good morning everyone. Sorry I missed the first part of the call here. But the question I wanted to ask this morning was speaking with industry personnel it appears that maybe a majority of the OEMs are anticipating either 2016 or 2017 TIV to start a flattish trajectory. Now if this is true, on that assumption what can GPI do to sustain both top and bottom line growth?

I think we're still in a pretty strong growth mode in our used car and parts and service business, David and I think that is key. And I would probably agree even in an optimistic scenario for new vehicle sales growth next year is only going to be 1%, 2%, or 3% or something like that. We are starting to get to pretty high levels. But there is also a lot of work we can do on truck mix. We are very short of trucks as we speak, and I think you know the low fuel prices have really pushed the market that way towards truck and SUVs. Our Ford truck sales were up 20% last quarter, our General Motors truck sales I think were up 16%. We have absolutely no Toyota trucks. I still think there is some mix to work. I think our used car momentum is strong. I think our parts and service momentum is strong. Our shops are full. I think we still have a lot to work with. I think we are still in a very strong point in the business model.

So, Earl, to follow-up on that. I know that maybe capacity over at the OEMs when it comes to truck are being maxed out running on multiple shifts. Does that mean maybe on the OEM side in order to fulfil consumer demand that additional capacity would need to be added?

Well, I believe F&M. I think Ford has not really had a very long period of time up and running both their F series plans --

True.

-- at maximum capacity. I think that is still a fairly new occurrence. I'm not quite as up to speed where GM is on their production. Toyota is launching its new Tacoma which seems to be taking away some Tundra production and we could sell a lot more of both of those. We're a big Toyota company as you know.

Got you.

So it is somewhat surprising in such a competitive market that we still at this moment don't have enough trucks in most of our key brands.

Now on the -- can you also couch for us how flexible are these frame work agreements? I mean valuation can vary due to dealer location and other factors but which franchises would you quote, unquote pay up for given what you know about future product introductions? And among the Detroit 3 which brands would Group 1 add to your portfolio?

David, I'm not going to let him answer one of those questions.

He just gagged me, David.

I got you. I know it can be a little sensitive in nature.

I just wonder if you are starting to think about becoming a broker?

I would say though in this environment there is still a wide range of brands that can be attractive to us domestic, Japanese import and luxury. And I just think we're probably as wide open on brand as we've ever been and it just kind of depends on the return on investment and where it is locate if it makes sense for us.

Got you. Got you. And then I do have a question on margins and maybe somebody already asked this. New vehicle gross margins continue to be on the (Inaudible) even though the industry seems pretty healthy and OEM is obviously doing well. Can you sort of explain the disconnect on how the dealer groups are feeling in general about this where you're seeing gross margin compression but again industry is healthy, OEM making money? What are some of the levers that you could pull where new vehicle gross could become better?

This is primarily a function of supply and demand as it always is. And as OEMs push for more share they get a little aggressive. But we're finally starting to really hear from some OEMs that they are starting to be concerned about it too. Because the first step is the dealer margins get put under pressure. The second step is the OEMs start to cut their prices with incentives.

Sure.

And I think they are probably more sensitive to that now than they might have been one cycle ago. So we are starting to have that discussion with some of these top executives at a couple of the brands. Let's hope we get a healthier balance on supply and demand on some of these model lines as we move forward.

Great, excellent. And just a comment for Pete. I know that his Baylor team went through a little bit of a hiccup with the QB but I think Jarrett Stidham is a four star quarterback so he should do fine.

Well, I suppose Mr. Trojan it is better to have a hiccup with your quarterback than your coach.

Absolutely. Maybe we'll go after Art Briles post the season.

Please don't.

Thank you, gentlemen.

This concludes our question and answer session. I like to turn the conference back over to Mr. Hesterberg for any closing remarks.

Thank you for joining us today. We look forward to updating you on our fourth quarter earnings call in February. Have a good day.

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