Group 1 Automotive, Inc. (GPI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Group 1 Automotive's Fourth Quarter and Full Year 2025 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, Manufacturer Relations and Financial Services. Please go ahead, Mr. DeLongchamps.

Thank you, Nick, and good morning, everyone, and welcome to today's call. The earnings release we issued this morning and a related slide presentation that include reconciliations related to the adjusted results we will refer to on this call for comparison purposes have been posted to Group 1's website. Before we begin, I'd like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures. Except for historical information mentioned during the conference call, statements made by management of Group 1 are forward-looking statements and 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, inventory supply, conditions of markets, successful integration of acquisitions and adverse developments in the global economy and resulting impacts on demand for new and used vehicles and related services. Those and other risks are described in the company's filings with the Securities and Exchange Commission. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on its website. Participating with me on today's call, Daryl Kenningham, our President and Chief Executive Officer; and Daniel McHenry, Senior Vice President and Chief Financial Officer. I'd now like to hand the call over to Daryl.

Thank you, Pete, and good morning, everyone. In 2025, Group 1 achieved record revenues across all major business lines and record gross profits in parts and service and F&I, underscoring the strength and resilience of our diversified business model and our relentless focus on operational excellence. During the quarter, we delivered impressive parts and service results and strong F&I performance in both the U.S. and the U.K. Parts and service continues to be a differentiator for Group 1, providing both growth and stability while we leverage our scale and execution flexibility to further build out our used vehicle business. Our F&I teams have done an outstanding job maintaining gross profit discipline while driving higher product penetrations across nearly all categories. For the full year, we generated an all-time high gross profit of more than $3.6 billion, including record parts and service gross profit of nearly $1.6 billion. We sold 459,000 new and used vehicles in 2025, another record. In the U.S., new vehicle PRUs moderated by just $62 sequentially, reflecting a slower pace of normalization. Throughout the year, we remain focused on deploying capital toward the highest and best use for our shareholders. 2025 was a great example of that strategy. In the U.S., we acquired outstanding brands in growth markets, Lexus and Acura Fort Myers, Florida; and Mercedes-Benz dealerships in Austin, Texas and Atlanta, Georgia. In the U.K., we acquired 3 Toyota and 1 Lexus dealership. We expect these acquisitions to generate approximately $640 million in annual revenue. At the same time, we disposed of 13 dealerships comprising 32 franchises, which have generated approximately $775 million in annualized revenue. In addition, we repurchased more than 10% of our outstanding shares in 2025. In the U.K., the macroeconomic environment remains challenging with weak economic growth, persistent inflation, increased competition from new entrants and margin pressure from the BEV mandate. In response, we reduced headcount by an additional 537 positions in 2025. And during the quarter, we continued to execute on our previously announced restructuring initiatives, including working with a number of interested parties on the exit of the JLR brand. We also completed our U.K. systems integration, which we expect will improve visibility, operational consistency and data-driven decision-making across the business. In addition, we consolidated 10 customer contact centers into 2 and fully onshored our transactional accounting operations. We continue to focus on opportunities to further shape our U.K. portfolio and improve operations, consistent with the playbook we have successfully executed in the U.S. We are seeing positive impact of our U.S. operating practices in the U.K., particularly in aftersales. On a same-store basis, we increased our technician headcount by 9.5% in the U.K., reducing customer wait times and driving a nearly 6 percentage point increase in customer pay mix and higher fixed absorption. We've made changes to our service pricing to move more closely to the aftermarket. At the same time, we've eliminated diagnosis fees in many brands. Daniel McHenry will speak to the positive results that these initiatives are having on our RO counts. In F&I, PRU increased 13% in the U.K. or $123, largely through better adoption of all of our products. Our focus in the U.K. remains on driving this type of operational improvement across the entire business, and we realize there is still more work to do. In the U.S., the macro environment remains dynamic with volumes and GPUs continuing to normalize from post-pandemic highs, particularly in the luxury segment. While the policy and trade uncertainty we saw last year has largely subsided, we remain vigilant and focused on staying nimble as macroeconomic conditions evolve. In response, our teams remain disciplined and agile, sharpening execution at the dealership level, managing our costs and prioritizing the areas of the business that generate the most durable returns. We believe this focus on controlling what we can control from inventory and pricing discipline to aftersales performance, capital allocation and costs positions Group 1 to navigate near-term challenges while continuing to build a stronger, more resilient platform for the long term. I'll now turn the call over to our CFO, Daniel McHenry, for an operating and financial overview.

Thank you, Daryl, and good morning, everyone. In the fourth quarter of 2025, Group 1 Automotive reported revenues of $5.6 billion, gross profit of $874 million, adjusted net income of $105 million and adjusted diluted EPS of $8.49 from continuing operations. Starting with our U.S. operations. Fourth quarter performance was strong across all lines of business with a slight decline in new vehicle sales. New vehicle unit sales declined both on a reported and same-store basis. Average selling prices continue to increase and consumers are increasingly concerned about affordability. While new vehicle GPUs continue to moderate from the highs of the past few years, we have maintained strong operational discipline through effective cost management and process consistency. Our used vehicle operations performed well, holding volumes basically flat versus the comparable year quarter while increasing revenues approximately 4% and 1% on an as-reported and same-store basis. GPUs declined approximately 8% on a same-store basis, reflecting higher costs to acquire used inventory. We continue to leverage our scale and operational flexibility to strengthen used vehicle acquisition while executing disciplined sourcing and pricing in an increasingly competitive market. Our fourth quarter F&I GPUs grew nearly 3% or $67 and $65 on a reported and a same-store basis versus prior year comparable period, respectively. The disciplined performance by our F&I professionals and improvements to our virtual finance operations has helped grow GPUs while driving higher product penetration across nearly all product categories. Aftersales again stood out as a major contributor. Gross profit continues to benefit from our efforts to optimize our collision footprint, shifting collision space opportunistically to additional traditional service capacity and closing collision centers where the returns do not meet our requirements. Revenues from customer pay and warranty increased approximately 5% and 11%, respectively, and gross profits from customer pay and warranty increased over 8% and 13%, respectively. Our technician recruiting and retention efforts continue to pay off with same-store technicians up 2.3% year-over-year. Overall, our U.S. business continues to perform exceptionally well, demonstrating both resiliency of customer demand and the effectiveness of our disciplined process-driven operating model. Wrapping up the U.S., let's shift to SG&A. While U.S. adjusted SG&A as a percent of gross profit increased 200 basis points sequentially to 67.8%. Higher employee expense was the primary driver. We continue to focus heavily on resource management and technology investments to try to maintain SG&A as a percent of gross profit below pre-COVID levels, as vehicle GPUs continue to normalize. Turning to the U.K. Results reflected the ongoing challenge of the U.K. operating environment. However, same-store revenues grew almost across every business line. New vehicle same-store volumes declined 8.2% and local currency GPUs moderated 3.2% versus the prior year quarter, leading to an 11% decline in local currency same-store new vehicle revenues. Used vehicle same-store revenues were up over 9% on a local currency basis with volumes up nearly 8%. Same-store GPUs declined almost 19% on a local currency basis, leading to a decline in used vehicle GP, reflecting the ongoing challenging used market in the U.K. Aftersales and F&I delivered year-over-year growth in both revenue and gross profit on an as-reported and same-store basis. The aftersales business remains an important stabilizer within U.K. operations and along with F&I is a key area of focus as we work to enhance profitability. We saw an outsized uplift in RO count of nearly 36% year-over-year as we bring best practices from the U.S. Same-store technicians are up 9.5%, reflecting significant capacity to our shops. Customer pay revenue was up 9% year-over-year. Same-store F&I PRU reached $1,060 with an as-reported and same-store PRU increasing over 13% year-over-year. On expenses, SG&A declined from prior year, reflecting cost improvements despite significant headwinds from inflation and cost increases, some of which is government-imposed through payroll tax and related charges. While we've executed targeting restructuring initiatives to improve efficiency and return the business to more sustainable cost levels, the environment remains difficult. During the quarter, we incurred modest nonrecurring restructuring costs tied to our restructuring efforts. We are executing additional restructuring plans in the future periods as we exit select OEM sites. We are continuously taking decisive actions in the U.K. to control costs, strengthen operational efficiency and position the business for improved returns as market conditions stabilize. Turning to our balance sheet and liquidity. Our strong balance sheet, cash flow generation and leverage position continue to support flexible capital allocation approach. As of December 31, our liquidity of $883 million was comprised of accessible cash of $537 million and $346 million available to borrow on our acquisition line. Our rent-adjusted leverage as defined by our U.S. credit facility was 3.1x at the end of December. Cash flow generation year-to-date 2025 yielded $699 million of adjusted operating cash flow and $494 million of free cash flow after backing out $205 million of CapEx. This capital was deployed in the same period through a combination of acquisitions, share repurchases and dividends, including the acquisition of $640 million of revenues through December 31, $555 million repurchasing approximately 1.3 million shares at an average price of $413.05 and $26 million in dividends to our shareholders. Subsequent to the fourth quarter, we repurchased an additional 71,750 shares under a Rule 10b5-1 trading plan at an average price per common share of $394.20 for a total cost of $28.3 million, resulting in an approximate 0.6% reduction in our share count since January 1. We currently have $350 million remaining on our Board authorized common share repurchase plan. For additional detail regarding our financial condition, please refer to the schedules of additional information attached to our news release as well as our investor presentation posted on our website. I will now turn the call over to the operator to begin the question-and-answer session.

[Operator Instructions] And the first question today will come from Rajat Gupta with JPMorgan.

Just one clarification. Could you give us a sense of what the impairments were tied to this quarter? I know we had a large one last quarter. But were there any significant assets or brands that the impairment was tied to this quarter? And I have a follow-up.

Rajat, it's Daniel. We do an annual impairment for all of our assets within quarter 4 on an annual basis. The impairments related virtually totally to the U.S. business as the impairments in quarter 3 were related to the U.K. business. The principal brand, I guess, that we had impairments within was within the Audi brand. And we've had various discussions on that on previous calls. Other impairments, the Maryland stroke DC market has been a difficult market, I think, for both us and the other consolidators this year, and there was an impairment taken within that market.

Understood. That's very clear. Maybe a bit of a broader question as we go into 2026 around SG&A. I know you've talked about a lot of initiatives in the U.K., just both on the productivity side and some of the cost actions. But curious, are there any specific productivity type actions that you might be undertaking in the U.S. today that could meaningfully move the needle, especially with more and more AI tools likely to get deployed. I'm curious like where do you see the opportunity? Are you already working on some? And how should we think about the impact to the SG&A to gross?

Rajat, we are using AI in every part of our business, both customer interface as well as in our back office. And we're also deploying productivity tools in a number of areas. Like as an example, when you look at our aftersales growth this quarter, it was 6% up, 5% up on a same-store basis on customer pay and 9% on warranty. We only added 2.5% to our technician base. So our technicians are more productive now. One of the reasons is because our turnover is down 10 points in our technician population, which we've been working on. We've talked to you about the investments in things like air conditioning and things like that in our shops. And so we're seeing tangible results, which is resulting in less turnover and more productivity and takes some pressure off of all the hiring we do on technicians. So that's a productivity gain for us. Initiatives like virtual F&I, which we've got in a ton of stores now. We're rolling that out nationwide. We're seeing lower cost per transaction on virtual F&I across our footprint and wide adoption there. And we are using AI in our sales operations with lead management and CRM control. We're using it in parts and service and in marketing and reaching out to customers and using more predictive analytics in that area. And so as we've made investments, especially in marketing, where we're now owning our own data, managing our own customer data, it's going to allow us to be much more efficient with how we reach customers and what our costs are and we hope in a more productive way than in the past. So short answer is yes, we're using it and we're using it in a number of areas. And offline, I'd be happy to talk to you more specifically about that.

The next question will come from Bret Jordan with Jefferies.

This is Patrick Buckley on for Bret. As we look at the U.K. restructuring plan, you spoke a bit about recent progress there. Could you talk a bit more about what inning that's in? And how long of a process do you expect that to be? And I guess, is there a lot of front-loaded progress there? Or is there more of a steady schedule work to be done?

There's more work to do. We don't see -- it's a dynamic environment, especially Europe. And so we adjust every quarter with our expectations. And we will get cost to a place where it has to be to make that business at an acceptable profit level for us. So I would say we're in the earlier innings, not the later innings, and Daniel has some thoughts.

Brett, the one thing that I would add was the costs came out in 2024 over the year. It wasn't all really front-loaded into quarter 1, let's say, of 2025. So as we roll into 2026, we should see the benefit of those costs that have been taken out throughout the year fully baked in for the year in 2026.

Got it. That's helpful. And I guess staying on the U.K. here, could you talk a bit more about the dynamics between the broader economy headwinds versus increased penetration from Chinese OEMs? Any way to quantify the headwinds between the two?

Well, the Chinese OEMs are the Q4 share leveled off at around a little under 12%. They had a big spike from Q4 '24 to Q4 '25, it leveled off a bit. They're not slowing down. I don't mean to make that sound that way, but -- and we're not expecting they will. But it appears that it's leveled off. When we look at the brands we're in, we feel like we're well positioned because we're heavy luxury, which typically the Chinese aren't in at this point. And so it's something we're continuing to watch, and I expect we'll continue to make moves to try to offset their impact. What that specific impact is, I mean, their market share, I think, speaks the most. And they're using a dealer model, which is, I think, good news for dealers. So as long as there's a viable model there, we're looking at that business.

The next question will come from John Saager with Evercore ISI.

Obviously, a lot of focus on the portfolio management in the U.K. Can you give us a sense of the magnitude of restructuring as you see it today? Or are we talking anywhere near the $28 million that we saw this quarter?

It's Daniel. I don't see it being anything like that this quarter or this year, 2026. We've done significant work. Daryl talked about it in the call earlier today around what we've done around our DMS, what we've done around our property portfolio, the JLR, the decision that we took to dispose of those stores over the next period. A lot of that heavy lifting and cost has gone effectively in terms of restructuring costs that were taken in 2025.

Okay. Makes sense. And then post restructuring, what's a good trend or range going forward for used GPUs and also SG&A as a percent of GP? Could you give us a sense of a range there and then the timing that it will take to get there?

Is that the U.K. Pacific or U.S?

Both. But I guess, primarily, I was focused on the U.K. here.

Our used GPUs in the U.S. are higher today than they were pre-COVID. They're lower than they were a year ago. We'd like to see some improvement in the U.S. And we definitely know we have some upside in U.K. GPUs in preowned. We're trying to instill a different level of discipline in our pre-owned business in the U.K. and we expect the output of that to be better GPU performance. On SG&A, what we've talked about historically in the U.K. is 80% on a long-range basis. It will be higher than that in the non-plate change quarters and it will be hopefully a little lower than that in the plate change quarters. So those are kind of round numbers what we've targeted.

In terms of U.S., you would think mid- to high 60% for U.S. on an annualized basis. So somewhere below 70%.

The next question will come from David Whiston with Morningstar.

Just looking at your store disposal activity last year. I mean, by definition, there's always going to be, say, a bottom 10% or bottom quartile. But by divesting these stores, you are raising the low end of the bar, so to speak, higher and higher. So do you see the need to do a lot of divestitures perhaps every year? Or do you think '25 was more of an outlier year?

I think '25 was more of an outlier year, David. much of our disposition work was in the U.K. around underperforming stores, around consolidation efforts in concert with our OEM partners. There will be some more of that in '26. But on a long-term basis, it won't be nearly that active. In the U.S., we're still -- we still dispose of some stores that are in markets that aren't favorable for us or are underperforming. We had relatively few in 2025 in the U.S. But we will always want to have that discipline to review our portfolio and stores that don't help us on SG&A leverage or don't help us on EPS contribution are subject to us disposing.

All right. And on capital allocation for this year, any strong preference between acquisitions, buybacks or perhaps reducing leverage below 3?

Let's go from the leverage first. Our preference is to keep our leverage below 3x, and we're going to continue to work to that. In terms of capital allocation, we really want to grow the company and continue to grow the company through acquisition. We are not going to, however, buy stores that aren't instantly accretive to us as a company in terms of EPS, and we're not going to overpay for acquisitions whenever you look at the valuation of our company in terms of where it's currently sitting. We were very active in terms of buybacks last year, buying back over 10% of the company. You can see in the first quarter so far, we've bought back 0.6% of the company in circa 20 days, and we will continue to be aggressive in both terms of acquisitions and buybacks as and when the time is right.

The next question will come from Jeff Lick with Stephens Inc.

Daryl and team, I was wondering if you just take 2025 as your baseline year, obviously, there was an awful lot that went on this year with tariffs, the EV tax credit expiration, the U.K. and whether it was the road tax, Chinese OEMs. If you look at 2025 as your base year and you think about working through 2026, maybe you just talk about how you see the year progressing in terms of GPU lapping the EV tax credit. Where do you see kind of the easier part of the year versus the harder part of the year?

Well, I think on the EV question. Last quarter, our EV mix was 1.3%. That's down a little -- I mean, we were 3-ish percent before that. So for us, the EV impact, just given our footprint in the United States anyway is not that big. The margins on EVs are not bad now compared to where they were a year ago when they were disaster. So hopefully, that is a tailwind a little bit. It's on a very small part of our volume, though. On the rest of it, yes, plenty of uncertainty out there, obviously. And what we try to focus our teams on is stay focused on what we can control because there's plenty of distractions and plenty of things that can lead you to focus on things outside of what we can affect. What we're hoping for is to build on 2025 to try to get to your question, Jeff. We want to build on 2025. We want to grow. If that's organically grow, we feel like there's opportunity at Group 1 to organically grow, especially in the U.K. But we still have opportunities in our business in the U.S., too, as well as we perform in aftersales and F&I, there's still opportunities in our used car business. So we -- and in our cost structure. So we're continuing to feel like there's opportunity in 2026 on those in the U.S.

And then just a quick follow-up. This year, we're going to see a lot of lease returns. Actually, percentages could be pretty big as we get into the back half. I'm curious, Daryl, in your career, if you've seen anything similar to this, I mean, we're going to be talking about lease returns in excess of 30%, 40%. What that's going to mean for your business, both in terms of ups and also in terms of potential used car supply. How big of a deal do you view this? Am I thinking about it maybe in 2 grandiosa terms? And if any kind of historical context would be very helpful.

Well, I think 2 things will happen this year, which will help the used car business. One is the uptick in lease returns, which a good solid controlled source of premium used cars is really great. If you look at the kind of used cars we sell today compared to what we sold pre-COVID, we're selling a much richer mix of preowned cars. And the profits are good on those cars. So I hope and expect that, that will help us later in the year. Another thing is there's a lot of discussion around the tax returns and tax refunds in the first and second quarter and what kind of impact will that have on the used car business. And we're hopeful it buoys it. And how much, I don't know, but there's plenty of optimism around that. So we'll see how that affects us. We continue to focus heavily on sourcing, especially organic sourcing out of our service drives and out of our trade processes with appraisals and capture, and we continue to put a ton of focus on that using technology to try to increase that as well.

The next question will come from John Babcock with Barclays.

Just firstly on the used vehicle market in the U.S., at least the indicators that we've seen seem to show that volumes have been pretty good to start the year. But I'm just kind of curious, what are you guys seeing? And what are your expectations for the year? And particularly as we -- as you remember, like last year, there was the tariffs that impacted timing in March and April. And just kind of curious how you're thinking about the cadence of that demand and whether you think it's sustainable from current levels?

Sure. John, this is Pete DeLongchamps. I'll take that question. So we're certainly bullish on the used car opportunity this coming year. And you're correct, January traditionally does start off well because you get the nice trades from November and December that you can work with. And then you're ready for the spring selling season, which kicks off about President's Day through March. So we think the volumes are sustainable. And I think that what we're really focusing on is disciplined acquisition, whether that's service sales coming out of the plane. We've got to be smarter this year, and we're using AI to know exactly what cars to buy from the auction, not just based on personal preference. So there's things that we've put in place that we think that will continue to help our used business grow. But all in all, you always have to remember, this is a 38 million to 40 million car market, and we talk about SAAR at 16 million and retail at 13 million for new, but the used car market is continually a great source for our company's revenue and gross profits.

Okay. And then just my last question, just on GPUs. They were down in 4Q. And I think at least most of the people I talked to expected a recovery in the quarter. Obviously, luxury demand was a little bit soft, and I had heard that there was some increased competition, at least among dealers just given the broadly softer volumes. But I'm just kind of curious, were there any other factors that we're missing that maybe we should be paying attention to? And what should we be mindful of in terms of thinking about GPUs in 1Q and '26 more broadly?

Is your question on new car GPUs or used car?

Sorry, new car specifically.

We saw some softening on the luxuries in the fourth quarter, GPUs, and that was affected us more than normal. I would think that we'll see some moderation of that. I don't know that they'll stay where they were. And the Mercedes of the world, their inventory is in much better shape today than it was a year ago, and BMW's inventory is in really good shape with some new products coming out this year. So I believe that we'll see firming of the -- but the mass market GPUs are holding up pretty well. I mean our big brand is Toyota held up pretty well.

This will conclude our question-and-answer session. I would like to hand the call back over to Mr. Daryl Kenningham for any closing remarks.

Thank you. In summary, we remain committed to our strategic initiatives. We focus on our local customers, operating excellence, differentiated aftersales and disciplined capital management. We'll continue to build on the strong operating results in the U.S. U.K. remains a priority as we execute on restructuring initiatives, improving operating discipline and shaping the portfolio to drive better returns. We believe consistent execution against these priorities positions Group 1 to navigate near-term challenges while continuing to build long-term value for our shareholders. Thank you all for joining the call.

This will conclude our -- pardon me, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.