Group 1 Automotive, Inc.

Good morning, ladies and gentlemen, and welcome to Group 1 Automotive 2020 Second 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 DeLongshaw, Group 1 Senior Vice President of Manufacturer Relations, Financial Services, and Public Affairs. Please go ahead, Mr. DeLongshaw.

Thank you, Chuck, and good morning, everyone, and welcome to today's call. The earnings release we issued this morning and a related slide presentation that include reconciliations related to the adjusted results we will refer to on this call for comparison purposes have been posted to Group 1's website. Before we begin, I'd like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures. Except for historical information mentioned during the conference call, statements made by management of Group 1 are forward-looking statements that are made pursuant to the safe harbor 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, 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. Uncertainty regarding the duration and severity of COVID-19 and its impact on U.S. international authorities to ease current restrictions on various commercial and economic activities, and uncertainty regarding the timing, pace, and extent of 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 adverse 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 past 12 months. Copies of these filings are available from both the SEC and the company. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on its website. Participating with me on the call today, Earl Hesterberg, our President and Chief Executive Officer, Daryl Kenningham, our President of U.S. and Brazilian Operations, John Rickle, our Senior Vice President and Chief Financial Officer, also Daniel McHenry, who is our incoming Chief Financial Officer, and Michael Welch, our Vice President and Corporate Controller. I'd like to kind of give the call over to Earl.

Thanks, Pete, and good morning to everyone. The business and personal experiences all of us have been through since early March are difficult to describe. The challenges and uncertainty we have faced in recent months are unprecedented, and I believe that makes our results this quarter extremely impressive. Our original goal was to keep the company afloat and stabilize it financially in the face of an uncertain period of shutdown as we entered April in the second quarter. Therefore, our $69.6 million of adjusted net income and $3.70 of adjusted earnings per share are nothing short of a spectacular performance. These numbers represent 32% and 33% increases respectively over last year's second quarter numbers and were accomplished despite a 29% decrease in total revenues. Clearly, these impressive results demonstrate the resiliency of our business model and the brilliant efforts of our employees. Unfortunately, they also represent extremely decisive and aggressive cost-cutting actions we took across all three of our markets in Lake March when it became clear that many of our businesses would be virtually locked down due to a variety of shelter-in-place orders in all three of our markets. This resulted in many of our employees... nearly 8,000 in total, being furloughed by early April. These were very painful actions to take, but were necessary due to the unknown duration of the business shutdowns. At this point, we've been able to return many of our furloughed workers to a point where our US and UK headcounts are roughly two-thirds of our pre-COVID levels. Additionally, a large number of our remaining employees made sacrifices with reduced compensation and benefits as well. And we are beginning to reverse some of these actions as we see the market further stabilize. Looking at the track of our U.S. and U.K. businesses during the second quarter, we saw sudden dramatic decreases in our U.S. operations in early April. During the first half of April, Both our vehicle sales and service business were down about 50%. Some of our showrooms were completely closed, and although most of our service departments remained open, customer traffic dropped dramatically. In early May, our used vehicle business returned to near normal levels, and our new vehicle sales pace continued to increase steadily throughout the quarter. By the end of the quarter, our new vehicle sales had improved to a level of approximately 15% below last year, but then stalled out due to inventory issues. In the UK, we had a massive financial obstacle to overcome in the second quarter, as our service departments were closed down except for emergency service for the entire quarter until May 18th, and our vehicle showrooms were closed until June 1st. This made it impossible to generate meaningful gross profit in two of the three months this quarter. However, our cost reductions combined with a strong snapback in the sales and service market in June brought us back to a profitable level in June and we have good momentum going into the third quarter. Mitigating our UK losses with a strong June and the great work by our US team in May and June enabled our company to hold our gross profit decline to 21% versus the 29% revenue drop I previously mentioned, and to leverage our business model with a 33% reduction in adjusted SG&A expense. That is something few companies can do. To provide some color on our U.S. performance, I'll turn things over to Daryl Kenningham. Daryl? Thank you, Earl. Our outstanding U.S.

second quarter results were due in large part to our team's ability to move quickly to reduce our cost structure. Adjusted SG&A as a percentage of gross profit decreased to a record 59.3%. Our new and used vehicle gross margin improvements certainly helped this performance, but it's important to note that while our gross profit declined by 15%, or $57 million from the prior year, we reduced our SG&A by 28% or $74 million. Our second quarter new vehicle volumes declined 28% and used vehicle volumes were down 14%, the latter of which was caused by inventory shortages. However, gross margin was extremely strong. New vehicle gross profit per unit was up 40% in a quarter. And after a decline in April used margins, they improved dramatically as well, finishing with a 62% increase in the month of June. Our after-sales business accelerated throughout the quarter. While we were down 19% in total, we saw dramatic increases as the quarter progressed. June total after-sales revenue was down less than 2%, while our June customer pay gross profit was up over June 2019. And more customers than ever scheduled their appointments with us online, over 30% of them. Acceleride was a great story for us during the second quarter. Our new branding and a more streamlined process are already creating a better customer experience. Nearly 3,000 customers used our digital retailing tool to purchase a car online, up 48% from the first quarter and nearly triple our levels from a year ago. Our teams and our customers have embraced Acceleride, and we will continue to build on that success. Over the past few months, we've also added the ability to buy cars from customers through Acceleride, and 100% of our locations now offer a full suite of finance and insurance products through the platform. In the months ahead, we will add more flexible customer financing options, and this fall we are launching Acceleride.com, which will offer customers an additional way to access Acceleride. Finally, we plan to launch Acceleride in our UK market by the end of the year as well. Turning to Brazil, we realized a small loss during the quarter, but turned profitable in June as the macro environment improved. As with the UK, our team did a fantastic job of cutting costs, reducing working capital, and generating positive cash flow in an environment with much stricter shelter in place orders compared to what we experienced here in our U.S. markets. Before I turn the call over to our CFO, John Rickle, to provide a balance sheet and liquidity review, it should be emphasized that we expect to continue to leverage our leaner cost structure and should be able to meaningfully lower SG&A as a percentage of gross profit going forward versus our pre-COVID historical notice. John?

Thank you, Darrell, and good morning, everyone. First, I will cover the adjustments for our non-core items in more detail. The adjustments made to second quarter gap net income total $39.4 million, or $2.14 per diluted share. These net income adjustments consist of non-cash asset impairments of $20.6 million, an out-of-period adjustment to accelerate stock-based compensation expense for retirement-eligible employees of $9.7 million, a loss on the redemption of our 5.25% bonds of $8.1 million, and U.K. severance costs of $1 million. The $20.6 million of impairments relate to U.K. and Brazil intangible asset valuations that have been negatively impacted by the COVID-19 pandemic. Turning to our balance sheet and liquidity positions, As of June 30th, we had $73 million of cash on hand and another $108 million that was invested in our floor plan offset accounts, bringing total cash liquidity to $181 million. There was also $193 million of additional borrowing capacity on our U.S. syndicated acquisition line, bringing total immediate liquidity to $374 million as of June 30th. Our cash flow remained strong as we generated $186 million of adjusted operating cash flow in the second quarter. Each one of our three regions generated positive cash flow in the quarter despite varying degrees of business closures. One of the most important strengths of this business model is the ability to generate strong cash flow even in the difficult macro environments we experienced this quarter as well as back in 2008-2009. This cash generation was partially used to reduce our non-floor plan debt by $77 million during the quarter, and another roughly $80 million of our acquisition line borrowings has been repaid in July. Our U.S. credit facility rent-adjusted leverage ratio was reduced to 2.99 times at the end of June, down from 3.31 times at the end of March. We do not have any material debt maturities before our 5% bonds are due in June of 22. For additional detail regarding our financial condition, please refer to the schedules of additional information attached to the news release, as well as the investor presentation posted on our website. Before I turn it back over to Earl, I would like to go off script for a moment and make a few closing comments. This is scheduled to be my last earning call with Group 1, so before I relinquish the podium, there are a number of folks I would like to acknowledge and thank. It is entirely appropriate that first on the list is Earl Hesterberg. Earl and I go back over 20 years, which is longer than a lot of marriages last, and I've learned a great deal from him. I've enjoyed working with you, Earl, and very much appreciate the opportunity, support, and coaching you've given me. You're one of the best business leaders I've ever known. Thank you for everything. To my friends and colleagues on the operating team, it has been an honor and a privilege to work with this group. I appreciate the teamwork, professionalism, and camaraderie we've shared. We've spent a lot of hours together, and you've become like a second family to me. I would specifically like to thank my longtime road warrior partner, Pete DeLongshaw. Pete and I spent many long hours on the investor relations circuit, and his support, advice, and good humor made those hours more than bearable. Thank you, Pete. I also want to acknowledge and thank my good friend, our general counsel, Daryl Berman, Darrell was an important sounding board and also a key advisor whose input and advice I value greatly. Darrell, thanks for always being willing to listen. And I'd be remiss not to mention the best after sales leader in the automotive space, Mike Jones. Mike always made my day a little brighter with his visits and with his infectious spirit of optimism and energy. Frank Grease has to be my candidate for most brilliant personnel selection ever. Your handling of HR has been inspiring. And to our president, Darrell Cunningham. You stepped into some big shoes when you took over U.S. Ops from Earl, but you didn't miss a beat and you took us to the next level. I depart knowing the operations have never been in a better place. If you can only align yourself with a better football team. I also want to thank the finest team of accounting, finance, audit, tax, and IT professionals in the auto space. I couldn't be more proud of my team here at Group 1. We have built a very talented organization with the best in class processes that are second to none. None of that would have been possible without the efforts of many of you. Thank you for your outstanding efforts, hard work, and friendship. Thanks as well to our colleagues in the UK and Brazil. You've been generous with your patience in dealing with the brash Americans. I'm proud of the teams we've assembled in both markets. I also want to thank our banking partners for their support, relationships, and advice and friendships. I've been privileged to work with a large number of talented folks over my 15 years, and their support has been a critical factor in the company's success. For our covering equity analyst and our investors, I've enjoyed working with you and having the opportunity to tell the Group 1 story. Thanks for all the time you've invested learning about us. Finally, I want to acknowledge and thank my wonderful wife, Roxanna, and our four children, Catherine, David, Jacob, and Emily. It sounds cliche, but it's true. None of what I've accomplished over my entire career would have been possible without their patience, sacrifice, love, support, and advice. They've been my partners in all that I've done. So, since I'm getting the signal that they give long-winded Oscar recipients, time to wrap this up. I leave knowing the company has never been in better hands and is well-positioned operationally and financially for continued success going forward. I also could not be more pleased that my replacement was selected from our internal team. I depart easing the knowledge on passing the baton along to a most talented individual in Daniel McHenry. Congratulations, Daniel, and best of luck. I'll now turn back over to Earl.

Thanks, John. I suppose this is an appropriate time for me and the management team to thank John for his many contributions to Group 1 over the past 15 years. John was responsible for the establishment of most of our operating infrastructure and our financial controls. I think most of our investors have come to appreciate John's detailed understanding of the automotive business, as well as his sincere and straightforward style of communications. I can assure you that John will be sorely missed by myself and our team. We're indeed fortunate to have someone like Daniel McHenry standing by to fill John's large shoes. There will be a minimum learning curve for Daniel as he is very familiar with the industry as well as our company and systems. Daniel will officially assume the CFO position on August 15th. Additionally, we have a highly experienced global automotive financial executive to replace Daniel in the U.K., Roberto Fajada has served as the financial director of our Brazilian operation since 2014 and has experience with global companies such as Delphi and Siemens prior to joining Group 1. So again, we are fortunate to make use of our experience management bench to backfill John's retirement from Group 1. As we move into the second half of the year, we intend to continue to remain flexible and responsive to market conditions. Sales and service traffic continues to fluctuate in some markets where COVID-19 continues to spread. New vehicle production, inventory and incentive levels remain quite uncertain in both the U.S. and the U.K. markets. Clearly, these factors both impact volume and margins. Our team has proven the ability to control and adjust cost levels quickly and effectively. That skill will remain important in the second half of the year. This concludes our prepared remarks. I'll now turn the call over to the operator to begin the question and answer session. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our roster. And our first question will come from John Murphy with Bank of America. Please go ahead.

All right. Good morning, everybody. You know, first and foremost, I just want to congratulate John on a fantastic career and thank him for all of his insights over the years because we've learned a tremendous amount from him, not just on Group 1, but from the industry. So thank you, John. Thanks, John. Just a first question here, Earl, maybe sort of big picture and kind of strategic. You know, the opportunity in the U.S. seems to be opening up based on the strategy of some of your competitors. And they're getting much more aggressive on building, you know, quote, unquote, national networks and heading towards larger, larger sizes here in the U.S. I'm just curious, as you look at that and juxtapose it versus your strategy of going international to the U.K. and Brazil, And if you see anything changing here in the landscape in the U.S. between the relationship between the distribution channel dealers and the automakers, it might provide better opportunity than there has been in the past. And you may rethink getting bigger internationally and see a greater opportunity here in the U.S.

No, John, this is Earl. And I think the U.S. is still the market of preference. And I think that's true for auto manufacturers as well. I think the real shifts in recent years have been toward strengthening the used car market and the service market. And it's difficult to justify big capital expenditures to buy a lot of land and get a good return on that just to have them dedicated used car operations. unless you want to be the bank, right, which has been the key differentiating factor for CarMax. And we continue to reinforce to ourselves that we have a lot of upside in the used vehicle and service business, which is where the market is headed, within our existing physical plant. Now, we do expand some of those physical plants, but we continue to operate most of our physical plants with multiple – revenue and gross profit streams. And that seems to provide the best return on capital. We went to the UK originally to have another expansion opportunity at a higher return on investment because the purchase of new vehicle franchises there is much lower. And that continues to be the case. Unfortunately, in recent years, the UK market has really declined because of primarily done certainly relating to Brexit. We seem to be coming near the end of that timeline. And we continue to like the potential of those businesses. And we've used this complete shutdown period to retool our UK businesses. And I don't think I've ever been more excited about them. And, you know, we're going to come out of this more efficient than we've ever been in the U.K. And the U.K. is going to remain a good auto market for a long time. And we have a nice brand mix there and a good management team. And we're going to be much more efficient there than we are as we sit here today. I don't know if that answered your question, but that's kind of our overview of how we look at things.

Okay, and then just two quick follow-ups to that answer. I mean, when you look at what went on with SG&A here, 59.3% in the U.S., I mean, that's remarkable and should be applauded because it really is quite amazing in a disastrous time like this to execute like that. I'm just curious, if you think about going forward, how much of the cost is sticky? And to be a little bit tough on you in the industry, I mean, it always seems like there's this opportunity to flex SG&A down. It takes kind of a crisis, you know, period to kind of illustrate that you might be able to get, you know, down much lower than you're traditionally run at. You know, is there sort of this discipline that may be, you know, enforced by this, you know, the disaster that we're all going through, where this opportunity may need to really persist to keep SG&A significantly lower structurally going forward?

Absolutely, John. And We actually did the same thing in the U.S. business, or I should say Darrell and his team did, that we did in the U.K. We used this crisis to rebuild our operations from the ground up, and we're going to be materially more efficient, as you would measure it by SG&A, permanently. And the lasting part of this, is the efficiency in terms of what we can produce in selling units and servicing cars per head. And I'm quite sure, and we can already confirm it, that we'll, on a headcount basis, we'll be at least 20% more efficient in the U.S. and maybe more than that in the U.K. in terms of the number of cars we can sell per person and the number of cars we can service per person. And that comes from more productive revenue-generating people, technicians and salespeople, and less support people. And we've rebuilt that from the ground up, and we can handle volumes that will come back up all the way to pre-COVID levels. So we're very confident in that.

Okay, that's incredibly helpful. And then just lastly, just kind of in dovetailing with that, is the Acceleride opportunity, you're kind of alluding to it, You know, it seems like it's sort of an all, you know, hands on deck interface with the consumer. But obviously, you know, maybe the bigger opportunities are, I mean, beyond just typical CRM is the used vehicle opportunity and the parts and service opportunity. And it seems like you are going through, you know, strategy or approaching a strategy that is much more, let's use this as the interface to grow the business and leverage our existing bricks and mortar where some folks are, you know, thinking that they have to go out and build even more bricks and mortar along with this interface. So I'm just curious, you know, as you think about, you know, Acceleride, you know, how much more productive can you make your traditional brick and mortar, you know, footprint? And would there be any point in time where you might break from this and say, hey, listen, I need to build some used car standalone, you know, super stores and or maybe even, you know, service based, you know, service app over time?

John, this is Darrell Kenningham. You know, what our customers are demonstrating to us is they love the interface with Acceleride. And what we're seeing is it provides us the ability to be more productive and faster and more efficient and provide a better customer experience. And it's with that focus that we are moving forward with Acceleride in our existing footprint. And I believe that's where our focus will be. moving forward. Earl may want to add something to that.

No, and in particular, we've expanded our service capacity significantly in the last decade, and we continue to look for opportunities to do that. But in almost every case, we can do that within our existing facility footprints. And that's not to say we wouldn't build a standalone used vehicle operation or service operation if we thought it could provide a good return on our investment. But clearly we haven't had that belief to date.

Okay, great. Thank you very much, guys.

The next question will come from Michael Ward with Benchmark. Please go ahead.

Thanks very much. Thanks very much. Just to clarify a few things on the solar ride. First off, it's been in place for several years. Is that correct?

It's been fully in place, Mike. We've had all of our stores on it for a little over a year now. And we rolled it out for probably a year before that. So probably I would say two years now, two and a half years.

And that's for all across the business model, but it's been scheduling service for several years. Is that right?

We've been scheduling service online for several years, yes. Okay. And we've got our customer contact center in place for six or seven years, which is a combination of digital and telephonic customer interface.

Okay. And so on the digital side, on selling a new vehicle, you can basically go through the entire process up until the wet signature? Yes. Okay. So when you think about it going forward, Is this a productivity tool that allows you to reduce headcount in the store selling new vehicles? Is that the way to think of it from our perspective? So you have the combination which John was talking about there with the used vehicle side. You have the service scheduling, which is clearly more efficient. And then it also can enhance the store profitability. Am I thinking about it correctly?

We can sell new and used through Acceleride. And, yes, it makes our sales teams more productive. And we see that even today, yes.

Okay. So as we think about just simplistically, SG&A's percentage of gross, if you've been looking at 74% historically, we're going down a bit. We're going down under 70%, or we could.

Well, it's hard for me to give you a number, but, yes, we're going down. There's no doubt about that. But just with all the, you know, half that – half of that metric being driven by gross profit, you know, industry volume and margins and such. It's hard to calculate a number, but on the cost end of it, yes, we're going down.

Appreciate it. Thanks, Warren. And, John, thank you very much, and good luck with everything.

Thanks, Mike. The next question will come from Rajit Gupta with J.P. Morgan. Please go ahead.

Hey, good morning, everyone. Thanks for taking my questions. And John, thanks a lot for all the help over the last couple years and best of luck going forward. I just had a first question, you know, on, you know, the Omnichannel, you know, Acceleride. The units that you gave us on the slide on the online sales, you know, the 2,700 units, I think, in Is that a fully online transaction where, you know, everything is done online? Or just curious as to when you define it that way, like, what exactly it means? And just curious as to what the unit economics were for those particular units in terms of GPU or, you know, just SG&A or et cetera.

Let me start with the economics. This is Daryl Kenningham, Rajat. Let me start with the economics. The gross profits are very similar to our terrestrial sort of vehicle deliveries in front end and F&I profits. In terms of the SG&A side of it, you know, it's no secret that there's less human involvement in an Acceleride sale. And we expect that will continue. And as we add more capability, to Acceleride, we expect that to continue. On how many were fully Acceleride, our customers, what they have demonstrated to us is they will go in and out of Acceleride in a true omni-channel fashion very easily. And we've tried to set our tool up to be able to enable that. If we don't want them to start over if they decide to come into the dealership to look at two or three different cars in person, we don't want them to have to go start the process over digitally, and we want them to be able to pick up where they left off. So some customers will go online and, you know, get a payment that they like and select a car, come in and test drive it, and then maybe get us to value their trade there. Then they may go back online and upload their insurance information, upload their driver's license, and finalize things. So what we've tried to focus on is enabling customers to be able to do it how they want to do it. And what our customers are telling us is they like going in and out of Acceleride. And we have the same capabilities that our Carvana does or our CarMax does with our digital retailing tool. And we'll continue to offer that.

Got it. That's helpful. And any update on, you know, how you're seeing trends here, you know, early in the quarter, you know, just across the different business lines, you know, both in the U.S. and U.K.? And U.S. specifically, I mean, how is Texas evolving here, you know, versus the June trends that you've seen into July? And, you know, just what your expectations are, you know, more like in the near term, you know, into August and into the fall? Thanks.

Yeah, this is Earl. I'll let Darrell add what he would like here in a moment. But the trend into July is very much as it was in June, which is quite strong in both the U.S. and the U.K. markets. In fact, I would say the U.K. market is gaining strength, particularly in used vehicles and service. Obviously, there was more pent-up demand in the U.K. because of the closure periods, and they were very, very complete closure periods. We're much longer in the UK. New vehicles clearly can't snap back so much in the UK because so many of the vehicles have to be produced at the factory. There's not big inventories kept at dealerships and such. The US, we're also continuing to see that strong momentum from June, but probably with a little more headwind from inventory shortages. And let me let Darrell kind of pick up there.

Yeah, that's exactly right. And we are seeing a bit of an inventory strain in new and used, and especially on the new side with some hot models that are typically our volume sellers. And in after sales, we're seeing a good July. We'll continue like June did, and with a shot at our customer paving up again, so. That's what we're seeing.

Got it. And then, you know, just to follow up on the SG&A question, you know, just to ask it differently, I mean, you talked about, you know, 200 to 300 basis points permanent reduction in the U.S. UK, you know, demand has been pretty weak there for, you know, like almost a couple years now. So it looks like a lot of pent-up demand in the region. You know, you've taken out a lot of costs during that period. So, just ask me a different way. Like, if you're back to a similar level of gross profit for the company, say, what you had in 2019, I mean, how much lower could the SG&A to gross be? I mean, I think you finished 2019 at around 73.9%. So, is it fair to assume that that number is probably sub-70 at that kind of gross profit level, or... You know, just wondering how to think about this as we, you know, model our 2021-2022.

Yeah, well, there's too many variables these days to give you that number, but I do think you know that headcount is personnel expenses are generally about 60% of our total cost, and we expect to be at least 20% more efficient in that area. Yeah. I would also expect there'll be some marketing efficiencies as we continue to develop and move more into nontraditional media and digital media.

And our next question will come from Rick Nelson with Stevens. Please go ahead.

Thanks. Good morning. And my congratulations to John. He's been awesome over the last 15 years. I wish him all the best. So I'd like to follow up on the applied constraints that Daryl had talked about earlier. when you think those are going to start to ease, and how long you think you're going to be able to hang on to these GPUs?

You know, Earl, I'm sorry, Rick, on the new car side, I believe we'll start to see them ease towards the end of this quarter, and then I think in the fourth quarter we'll start to see more normal inventories through the end of the quarter, probably. On the use side, I would expect that we'll be able to, you know, the pricing environment is driving a lot of that right now. And I expect that that will probably normalize a bit over the next 90 days or so, 60 to 90 days. And that's what we're seeing anyway, based on our acquisitions and training.

Great, thanks for that. So dealers are talking about a big step change in profitability in June. You know, Kerry, if you could talk about the total contribution to the quarter that you saw in June, you know, from a full quarter profit standpoint, or maybe SG&A, what the exit is, rate was in June from an SG&A standpoint.

Yeah, Rick, this is John Rickle. I don't want to get into kind of month-by-month details because we've never done that. But clearly, you know, June was the best of the three months. And the exit rate on SG&A's percent of growth was better than what we averaged for the quarter. Kind of makes sense. I mean, April was, you know, shut down and pretty weak. So the combination of really strong margins in June and the cost reductions meant that June was kind of the best month of the quarter. And SG&A definitely exited at a lower rate than the average for the quarter.

And I think I can make one statement, Rick. that again reinforces the business model. And you know that we never lost money on an operating basis in 08 and 09 in terms of a quarter. But actually, even in this quarter where April was pretty much a disaster with the UK completely shut down and US volume down 50%, we didn't even lose money in April as a company. So we were even able to overcome a pretty significant U.K. loss with the U.S. strength, which is because we cut costs abruptly in the last week of March.

That's a great color. Also, service imparts. You discussed some of the sequential trends there. It sounds like things are getting better. any reason why we shouldn't be able to get back on that mid single-digit comp growth in that segment?

In the near term, Rick, the drags on that part of the business are warranty, which has to do with, you know, to some degree whether people are comfortable coming out for elective things like recalls, but also our collision business. There's just been people driving, less mileage. And so our collision business, which isn't a massive part of our business overall, but it's probably the weakest when you look at it year over year. As Daryl mentioned, the customer paid business is pretty much, you know, back to previous levels. I don't know if you want to add anything.

No, I think that's right. I think, you know, the things that has – As markets open more and miles driven goes up, the service business will come back to a degree, and the age of the car park is like the oldest it's ever been, which is generally good for service business.

Great. Thanks a lot, and good luck.

Thanks. Our next question will come from Armentas Sinkvicious with Morgan Stanley. Please go ahead.

Great. Good morning. Thank you for taking the question. And as everyone else, congratulations to you, John. It's been a pleasure. Thanks. I guess, you know, it's hard to know what the rest of the year looks like, but, you know, the flavor of the day seems to be five-year targets. So maybe you can talk about how you envision the business looking in five years, you know, touch on capital allocation and your outlook for digital, the U.K., Brazil, et cetera.

So, yeah, let me start. This is John. I mean, clearly, we think there will continue to be opportunities to grow through acquisition. You know, we have always shied away from putting a specific number out there because, you know, if we give the acquisition team a specific target, they can go get the target. But you want to make sure that you're, you know, getting appropriate returns on invested capital and you're buying the right asset. So, you know, we want to continue to be opportunistic. Clearly, the balance sheet is in great shape, you know, the cash levels. So, you know, we're positioned, but we're going to be disciplined about it. You know, we're going to look for good opportunities that offer appropriate returns on capital instead of just trying to hit arbitrary numbers that are thrown out there to get the, you know, the Wall Street investors excited. So, you know, that'll be, I think, still the longer term plan is we think there are plenty of opportunities to grow through acquisition. If you look at what we've done with the scale, right, it really does matter, whether it's, you know, the ability to do Acceleride, whether it's our inbound service call center, whether it's the back office efficiencies that we have in place. You know, it's getting tougher and tougher for smaller independent dealers to be competitive in a world where, you know, the omni-channel and scale really matters so much. So we do think if we're disciplined and patient, there will be opportunities to grow and grow significantly. But, you know, we're going to do it in a way that makes sense for the shareholders and for return on invested capital.

And this is Darrell. In terms of digital, we'll certainly be more digital five years from now. You know, in addition to things like Acceleride and online service scheduling and online bill pay and things like that, artificial intelligence, we're starting to work with that in our call centers and, you know, with some of our back-end support with our websites and things like that. So all of that will become, you know, more a bigger part of who we are. And we will look for ways to continue that trend. And if it helps customers, it helps us lower our costs, we will certainly take advantage of it. So it's hard to say exactly where that will go. will be in five years, but I certainly bet that it's a much bigger part of who we are.

Yeah, Armin, a feeling that I would add as well is, you know, we will continue to be focused on parts and service. You know, that organic part of the business has been key to the model. We've done a fabulous job. We've got great leadership in that area. You know, the stuff that we've done on our four-day work week, the inbound service call center, You know, there just continues to be huge amounts of opportunities in parts and service. So that will continue to be our internal focus for growing the organic part of the business.

Okay. Great. Appreciate you taking the question.

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

Thanks for the morning, and, John, congratulations on a great career. First question is on Acceleride. Home delivery, just overall, how many customers are doing home delivery and do Acceleride customers still prefer to come into the store right at the end of the process, or do they want home delivery?

Most prefer coming into the store, David. We were up to about 20% at one point during the quarter. We give that option to everybody, and most still prefer to come into the store.

The home delivery then was 20%? Is that what you meant?

At one point during the quarter, yes.

And in Brazil, I hear the automakers are talking about how they need to and are able to put price increases through because of the foreign currency headwinds they have. You guys are on the ground with the consumer there. Can the Brazilian consumer absorb these price increases?

You know, yeah, we've heard from the OEMs on that issue and it all depends on how much the price increases are. The Brazilian market is smaller today than it was a few years ago, so massive price increases won't help.

Historically, we've seen a lot of price increases because of the deterioration of the real versus euro, dollar, yen, whatever in the last four or five years. And It doesn't impact Honda and Toyota, which are volume businesses, because they now make most of their vehicles there. They're very localized now. The prices go up on BMW and Land Rover quite a bit, but the upper-income customer who buys those cars seems less impacted by increases in prices on luxury goods like that. I'm sure another round's coming, but it hasn't been a material headwind there. The spread of the virus has been the big issue there in the last month or two.

Okay, that's helpful. And then finally, I was just curious if you heard any early feedback from your Texas and Oklahoma customers on the next generation F-150s.

Very positive feedback on the next generation F-150, and the new Bronco is a hit. It is going to be an absolute home run.

Yeah, I agree. I think that's smart enough for it to get back into that niche. All right. Thanks, guys. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Earl Hesterberg for any closing remarks. Please go ahead, sir.

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

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