Group 1 Automotive, Inc.

Good morning, ladies and gentlemen, and welcome to Group 1 Automotive's 2020 fourth quarter and full year financial results conference call. All participants will be in a listen-only mode. Should you need assistance, you may see a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the comments call over to Mr. Pete Belongshaw, Group 1's Senior Vice President of Manufacturer Relations, Financial Services, and Public Affairs. Sir, please go ahead.

Thank you, Jamie. And good morning, everyone, and welcome to today's call. The earnings release we issued this morning and a related presentation that includes Reconciliations related to the adjusted results we will refer to on this call for comparison purposes have been posted to Group 1's website. Before we begin, I'd like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures. Except for historical information mentioned during the conference call, statements made by management of Group 1 Automotive are forward-looking that are made pursuant to the Safe Harbors Provision 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 material from forecast 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. and international authorities and its current restrictions on various commercial and economic activities. And uncertainty regarding the timing, pace, and extent of an economic recovery in the U.S. and elsewhere from the unknown current and future impacts of COVID-19 and unknown future impacts of oil producers and the effects such can have on travel, transportation, and oil prices, which in turn will likely adversely affect demand for our vehicles and services. Those and other risks are described in the company's filings with the Securities and Exchange Commission over the last 12 months. Copies of these filings are available from both the SEC and the company. In addition, certain non-GAAP financial measures, as defined 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 Earl Hesterberg, our President and Chief Executive Officer, Darrell Kenningham, our President of U.S. and Brazilian Operations, Daniel McHenry, Senior Vice President and Chief Financial Officer, and Michael Welch, our Vice President and Corporate Controller. I'd now like to hand the call over to Earl.

Thank you, Pete, and good morning, everyone. The fact that 2020 was a record year for Group 1 Automotive is nothing short of astounding, given the outlook we faced in late March and early April. For the full year, we were able to achieve record adjusted net income of $334 million, an increase of $130 million, which equates to a 64% improvement over our 2019 results. This translates to record adjusted earnings per share of $18.06, an increase of 65%. This profit performance was largely driven by our swift cost cutting actions at the onset of the pandemic and the continued rationalization of our cost structure throughout the year. As a company, we reduce adjusted SG&A by $179 million, reducing our adjusted SG&A as a percent of gross profit by 810 basis points to a record 65.8%. And the U.S. number reached an even more impressive level at 63.4% of gross profits. In the U.S., by the fourth quarter of 2020, we had improved the productivity of our technicians by 25% and the productivity of our salespeople by more than 33%. Looking forward, we expect to retain a material amount of these cost reductions with a leaner operating and support structure, as well as increasing our use of technology. Before turning to our Q4 results, I must thank all of our employees for the hard work and sacrifices this year. We faced ongoing business disruptions throughout the year in all of our markets. In the UK, our showrooms have been required to close on at least three different occasions for a total of well over three months, yet our employees remain resilient and our business remains solid. All Group 1 employees are putting the safety of our customers, and our colleagues first, and we owe them a great deal of thanks. Turning to our fourth quarter results, I'm pleased to report that for the quarter, Group 1 generated adjusted net income of $104 million. This equates to adjusted earnings per share of $5.66 for diluted share, an increase of 88 percent over the prior year. Our adjusted net income results excluded $10.2 million in tangible asset impairment arising from our annual testing procedures, partially offset by a $4 million net gain on dealership and real estate transactions, and a $2.1 million benefit from legal settlements. These results were especially impressive given the fact that our regional U.S. and U.K. lockdowns increased in our markets in the fourth quarter, hampering our vehicle sales, and especially our after-sales traffic. In the U.S., we were able to return to our revenue levels of the prior year, and despite a continued small decline in our overall service business, we were able to actually grow customer-pay gross profit versus the fourth quarter of last year. These are very encouraging signs for continued improvement in 2021. In the U.K., our October results were very strong, and continued the substantial year-over-year growth we realized in the third quarter. However, COVID cases increased rapidly across the UK, especially around London where we operate, and mandatory lockdowns began on November 5th. In total, most of our UK dealership showrooms were closed 41 of the 92 days in the quarter. Yet we were able to remain profitable in the UK in each month of the quarter. This is another example of our flexible cost structure and the resilience of our management team. I should also point out that throughout 2020, we restructured our UK operation in its entirety to centralize more support functions and improve the efficiency of our operations by leveraging more of our skill. This paid off with record UK profits in 2020 and will serve us well in the future. To provide some color on our U.S. and Brazil fourth quarter performance, I'll now turn the call over to General Cunningham.

General Cunningham Thank you, Earl. A number of factors contributed to our outstanding U.S. fourth quarter results, namely new and used vehicle gross profit growth, F&I PRU growth, and strong SG&A discipline, all of which are a continuation from our strong third quarter results. Due to continued tight new and used vehicle supplies, same-store new vehicle unit sales decreased 6% and used vehicle retail unit sales decreased 10% versus the prior year. New vehicle inventory levels finished the year with a 48-day supply, down nearly 8,000 units from December 2019. To compensate for the lower volumes, our team did a fantastic job staying disciplined on gross margins. Our new vehicle margin improvement far outweighed our volume decline as a nearly $900 increase in same store gross profit PRU generated a 36% increase in new vehicle gross profit. Although our new vehicle unit volume was down 6% in the quarter, it improved significantly from the 16% decline in the third quarter. Our used vehicle unit sales improved sequentially as well. and our strong PRU improvement drove a 6% total used vehicle gross profit increase on a same store basis. The second major driver was F&I. Despite a decline in same store total retail units, our same store F&I PRU growth of $190 to $2,027 allowed us to increase same store F&I gross profit by 2%. In the fourth quarter, we saw our after-sales business continue to recover as well. Although gross profit was down 4.9% on a same-store basis, that was due to a decline in warranty and collision. As Earl mentioned earlier, our customer-paid gross profit was up for the quarter. We expect our after-sales business to improve throughout 2022. The third major factor driving our outstanding profit performance was cost discipline. As Earl had mentioned, in the second half of March, we were extremely decisive and took aggressive cost-cutting actions in all three of our markets to protect the company's viability during the unprecedented economic environment. Throughout the remainder of the year, we continued to assess and modify our employee productivity targets, and in the fourth quarter, we generated 100% of the prior year's revenue with only 75% of the headcount. That drove adjusted SG&A as a percentage of gross profit to a fourth quarter record of 61%, an 850 basis point decrease from the prior year. As we've mentioned previously, although we do not expect this level to be sustainable, we do expect there to be significant improvement going forward versus pre-COVID levels. Before I touch on Brazil, I would like to take a moment to update you on Acceleride. our digital retailing platform. We continued our upward trajectory in Q4 by selling 3,500 vehicles through Acceleride, an increase of 65% over the prior year, with a penetration of over 6% of our retail units sold. Customers choosing Acceleride continue to close at a much higher rate than our other sources. Additionally, I'd like to share with you a number of enhancements we have made or will soon make to the Acceleride platform. First, we have now integrated customer down payments into the platform, which streamlines the communication process and eliminates the need for a separate payments workflow. Second, we have successfully piloted instant credit decision making and expect this capability to be fully implemented across all US stores by the end of the first quarter. Third, we've established an electronics payment system using Zelle that will provide near instant payment to customers selling us their used vehicle through Acceleride. And fourth, we've launched an Acceleride app to augmentacceleride.com. This provides our customers with multiple choices on how to interact with us. We're also working through numerous other enhancements and will provide future updates as appropriate. We believe our digital retailing process is second to none. We'll continue to make improvements to remain at the forefront of this transformative technology for our customers. Turning quickly to Brazil, despite a 10% decline in new vehicle industry sales driven by very tight inventories, our team did a tremendous job growing margins and aggressively thinning the cost structure in order to realize a solid quarterly profit. SG&A is a percentage of gross profit of 75% is the best quarterly performance over the entire eight years of Group 1's ownership. And it positions the region nicely for a sales rebound coming out of the pandemic. I will now turn the call over to our CFO, Daniel McHenry, to provide a balance sheet and liquidity overview. Daniel?

Thank you, Darrell, and good morning, everyone. As of December 31, we had 87 million of cash on hand and another 176 million invested in our floor plan offset accounts, bringing total cash liquidity to 263 million. There was also 284 million of additional borrowing capacity on our U.S. syndicated acquisition line, bringing total immediate liquidity to 547 million. We also have roughly 250 million in U.S. and U.K. real estate available to mortgage, which adds another 200 million to our near-term liquidity, increasing the total to well over 700 million. Our cash flow remains very strong, as we generated 145 million of adjusted cash flow in the fourth quarter, which brings our 2020 full-year adjusted operating cash flow to 504 million. and full-year free cash flow to $426 million after backing out $77 million of capital expenditure. This cash flow generation, along with this year's debt restructuring, will save us over $15 million of annual interest expense and has placed our balance sheet in the strongest position in our company's history. The $426 million of free cash generation has been used primarily as follows. 196 million reduction in non-floor plan debt, excluding finance leases. 129 million increase in total cash liquidity on the balance sheet. 80 million used to repurchase 864,000 shares of common stock at an average price of 92.86, which represented roughly 5% of our share float. and 11 million used to pay dividends of 30 cents per share in both the first and fourth quarters. Our US credit rent adjusted leverage ratio reduced to 2.3 times at the end of December, down from 3.3 times at the end of 2019. This gives the company significantly more balance sheet flexibility with its strong leverage position, allowing for plenty of dry powder to grow our company. Going forward, our preference for capital allocation is to add scale to our company through acquisitions. While the U.S. is our preferred market at the moment, we are open to acquisitions in our foreign markets as well, given the right opportunity. Absent suitable acquisition targets, we are certainly open to returning cash to our shareholders, as evidenced by the 31 million spent on repurchasing shares in the fourth quarter. We have $169 million remaining on our share repurchase program. For additional detail regarding our financial condition, please refer to the schedules of additional information attached to news release, as well as the investor presentation posted on our website. I will now turn the call back over to Earl. Thanks, Daniel.

Related to our corporate development efforts, in December we disposed of Buick and GMC franchises in New Orleans, And in January, we disposed of a Cadillac franchise in the Dallas-Fort Worth market, as well as a mini franchise in the El Paso market. Additionally, we expect to close on a limited number of small additional dispositions early this year, but it should be noted that most of our disposition actions are now complete. Also, we have been awarded two Toyota open points in the greater Sao Paulo market area in Brazil. We expect to activate these points in the first half of this year. Our actions to dispose of underperforming assets, combined with our work to improve our operating efficiency over the past two years, reduce our debt load and stabilize the financial condition of our company in the face of the pandemic and Brexit, now puts us in a good position to ramp up our future growth efforts. As Daniel stated, our preferred capital allocation is to invest in external growth via acquisition, as well as further internal investments to continue our strong rates of after-sales and used vehicle growth. The U.S. remains our top priority for expansion, but we expect to consider U.K. opportunities as well as the economic in both markets. In the U.S., we see benefit in further diversifying our geographic footprint beyond the state of Texas. But consider our position here to be a strategic strength given the population growth and very friendly business environment, the latter of which is evidenced by the significant number of corporate relocations to the state, including recent announcements by Tesla, HP, and Oracle. We expect this trend to continue. In summary, we're extremely optimistic about our prospects for future growth and success in 2021. We see several years of new vehicle industry growth ahead of us, an ability to improve our vehicle sales levels with better supply, a meaningful recovery in our service business as lockdowns end, and an ability to leverage our improved cost and debt levels as well as our financial strength. This concludes our prepared remarks. I'll now turn the call over to the operator to begin the question and answer session. Operator?

Ladies and gentlemen, at this time, we will begin the question and answer session. Once again, to ask a question, you may press star and then 1 using a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up the handset before pressing the numbers to ensure the best sound quality. To withdraw your questions, you may press star and 2. Once again, that is star and then 1 to ask a question. We'll pause momentarily to assemble the roster. And our first question today comes from John Murphy from Bank of America. Please go ahead with your question.

Good morning, everybody. Just a first question, Earl. It sounds like there's a definitive change in tone on acquisitions and the potential to be a consolidator. I'm just curious what's shifting in what you're seeing in the industry and if you can maybe share any general targets that you might be thinking about as far as revenue you might acquire per year, where you're going to be going after this stuff. I'm just curious, what's shifted and really what's the focus?

Yeah, sure, John. I understand the rationale for the question. About this time last year, we were about to call in one of two bond issues. And of course, then the pandemic hit. We eventually called in two bond issues. We were trying to decide what to issue in terms of new bonds. We were revising some mortgage debt. There was still a lot of Brexit uncertainty, then the pandemic. So we did not feel we were in a good position to aggressively pursue external growth last year, in the first half of the year. And of course, Everything worked out extremely well, very much to our favor. As Daniel mentioned, we reduced our debt by a good amount, $180, $190 million, got our leverage rate down, got favorable new bond issue out, got some clarity in the UK market, and actually used the pandemic to really retool both our US and our UK businesses. And you can see from our cost numbers throughout this year, we're in a totally different place now. We're leaner. And now we have the kind of financial stability and a lot better clarity on what the next few years are going to bring in the U.S. and the U.K. markets. So we will now try to be much more aggressive in growing externally. We have the financial capacity to add certainly a billion dollars a year in annualized revenue if it works out, maybe a bit more. But what we're not gonna do is relax our financial hurdle rates. We still believe they need to be accretive. It's easy to destroy capital when you get too aggressive in this area. And the other thing we've learned over the years is when you buy these stores, at some point you have to run them. You have to operate them efficiently. And we've learned we can't do that in every single market in the US. And not every single market in the US is going to have a growth profile. So we will be as aggressive as we can be. And we have the financial wherewithal to be much more aggressive in growing via acquisition this year, U.S. and U.K. So that will be our priority in terms of capital allocation.

Okay.

And then just a second question on SG&A. There's obviously a lot of moving parts in the numerator and denominator in SG&A to gross right now. But just curious, you know, as you think about sort of steady state as things settle in, You know, it seems like, you know, sub-70%, somewhere in the 65% to 70% range is probably, you know, achievable, at least from our estimates, and maybe even, you know, a lot better over time. But is that something that you think is a reasonable way to think about it at those levels or how you think about SG&A to gross go forward as the world normalizes and maybe a little bit of cost seeps back in and grosses ease a bit?

Well, for the reasons you state, it's just not possible to give numbers. But we would have wasted a lot of hard work this year retooling our cost structure if we can't be materially better than we've been in the past. And yeah, there'll be some movement upward as new vehicle margins temper a bit. But by the same token, our parts and service business is going to come back, too. I have complete confidence that we'll be a couple hundred basis points better than in terms of a baseline than where we were pre-COVID. We've got to keep this cost out. That's an even greater priority for us than growing via acquisition. Otherwise, we'd just wasted all the hard work.

Okay. And then just lastly, and I know this is also a tough question to answer, But, I mean, you mentioned that your U.K. dealerships were closed for 42 out of 91 days. But my understanding is they were still able to operate on curbside, you know, delivery and the like. So I'm just trying to understand, you know, how much pressure you actually, you know, think you saw in the U.K. in the quarters as a result of these shutdowns. And, you know, it's tough. I mean, is there any way to pro forma – you know, what the UK would have looked like or how we should think about the UK going forward into 2021. A lot of noise there.

Yeah, I can give you some color on what we've experienced in what's now been more than three months of lockdown. I don't think I can help you a lot by quantifying what it might have been able to do without. But let me see if I can at least help a bit. The lockdowns began on November 5th. had to close the showrooms, can continue to sell what they call click and collect, which is basically Acceleride types of sales, which we actually do, are operating Acceleride with at least six new car brands. And we're selling used vehicles through a vendor platform, and it'll shift to Acceleride later this year. So we have pretty much a full online capability to sell vehicles in the UK. But what was different about these lockdowns that began on November 5th is they're very aggressively policing people to stay home. And if you're caught out on the road, at least in these areas around London, which are at the highest lockdown level, I mean, you actually get fined. And now we've been able to keep our shops open, but that has kept, That has kept service traffic depressed a bit too. And when you see the January UK industry numbers come out, which they're just coming out I think today, you're going to see that basically the new vehicle industry is down about 40%. And so that's kind of what these lockdowns do is they're just throttling back the traffic. However, the demand is there. when the UK reopens. Right now, schools are closed until March 8th, and schools being closed is a pretty good proxy for the country being closed. There is a lot of internet lead, inquiry level. There's a lot of pent up service demand, we know, because people have to get these government mandated inspections. I think when it does open up, there'll be a real nice magnitude of pent-up demand. But it's really throttled back. And it is absolutely amazing that we were able to stay profitable all three months of the fourth quarter when two of those months, the showrooms are closed. And when the showrooms are closed, it pretty much looks like you're out of business. So that's kind of where we are. I'm hoping that sometime in March, the customers will be back out. Until then, we've just throttled it back as far as we can throttle back our costs.

John, it's Daniel here. In addition, one thing I'd like to add is I think that with the Brexit clarity that we've got at the end of 2020, that should also help with some of the pent-up demand, especially around companies that were looking to change their vehicles in 2020. That will pull forward now into 2021.

That's very helpful. Thanks, guys.

Our next question comes from Michael Ward from Benchmark.

Please go ahead with your question. Thanks. Good morning, everyone. On the SG&A side, in the U.S., how much of the savings will be ongoing? If I got it right, your SG&A costs were down about $120 million, and if half of that was from personnel and the other half from ad spending and other, how much of that is going to be able to stick?

Well, I'm afraid I can't quantify that for you, Michael, but as I mentioned a few minutes ago, we've got to keep most of it out. Clearly, we'll have to have some people back in as a volume comes, right? And people is a big part of that. But you're not going back to the 2019 levels. No, we can't go back. We can't go back. And as I mentioned, by the fourth quarter, we were 25% more productive with our techs in terms of the gross profit they generate per month. And 33% more productive with our salespeople, meaning how many cars they sell per month. So, you know, we've got to keep that efficiency rate, you know, compared to, let's say, pre-COVID a year ago. We've got to hold on to at least 20% of that productivity gain. That's what we get up and come to work for every day.

Mike, this is Daryl. Just from an operating perspective, one thing that all these – cost reductions taught us is how to manage our business differently. We manage it much closer now from a centralized basis on headcount and on a lot of our bigger variable spends. And we have different processes in place in the company today to manage that than we did a year ago and two years ago. And a year ago and two years ago, we were SG&A leaders in the segment. I believe that, as Earl mentioned, we're going to see good news moving forward with it. We manage the company totally different.

And it's the same thing in the U.K., correct?

Yes. Yes. And we had added a couple of big acquisitions just around the time of Brexit, three years ago, two and a half years ago. And we had never really structured our U.K. business to be a 50 dealership group. We had it structured more like a 20 or 25 dealership group. So we've been able to centralize our call center and after sales support, F&I support, things like that, more along the way we do it in the U.S. And when the pandemic hit in late March, in one week we went from 3,300 employees in the U.K. to 300. And so... Because we were shut down. I mean, we were really shut down. And so when we built back up from 300, then that enabled us to retool the business, which would have been very difficult to do while operating with 3,000 employees or so.

So to tie that into some of your digital efforts, how do the grosses compare if you sell a vehicle through aceleride versus just the normal way. And I think you said 6% in the fourth quarter. It looks like 11,000 units for the year were sold on aceleride. How do the grosses compare on those?

This is Darrell. Front-end grosses are comparable, as is F&I, Mike.

It is, okay.

To an offline sale.

And as far as the digital, I think you've been booking the service side of the business for several years. Do you have any data related to, like, the retention rate in the later years of ownership or repeat customers or that sort of information?

I don't have specific data as it relates to years of ownership. We do know that customers that do business with us digitally tend to be more loyal. So hopefully that helps.

Okay. And do you have the percentage of your service that has gone digitally, the reservations?

In the quarter, it was 30%. 30%.

That's been increasing.

A year ago. So over 100,000 service appointments.

Thank you very much.

And our next question comes from Rajat Gupta from JP Morgan. Please go ahead with your question.

Hey, good morning, everyone. Thanks for taking my questions. You know, just to follow up on a couple of the previous questions, I have a follow-up after that. Just a final point on the SG&A to gross comment. I mean, you mentioned that you would expect to return to 200 basis points or so below. pre-pandemic levels. I mean, obviously 1Q is likely going to be favorable given the new vehicle grosses are so strong, but are we talking about something like under 70% as a normalized run rate once you're back to a more normal sales environment? Or just looking for a more finer point on that number?

Well, I couldn't commit to a specific number, but I can certainly commit that we couldn't live with 70% again. So we have to be below 70%, I think, to be competitive. I think the world's moved on. So, yes, certainly we would expect to be significantly below a 70% level.

Okay, significantly below. Okay, got it. And just to accelerate, obviously some good traction here. you know, from the third quarter to fourth quarter. Could you give us some numbers around, like, just the conversion rate you're seeing on the leads and then any targets that you have in mind with respect to the platform in terms of, you know, units you expect to sell, you know, this year, you know, maybe over the next couple years, you know, over and above what you expect at the stores?

This is Daryl. Our conversion in the fourth quarter was 10.5%, which is almost, it's about 3.5 points higher than what we see from customers that come to us through, you know, an Internet lead of some sort. In terms of a specific target, you know, we don't necessarily have a specific target that, you know, that we would share. What we do know is customers want to do business this way, and they keep proving it to us over and over again. And if at some point all of them want to do business with us this way, we want to be able to enable that. So we've tried to build a model where customers can go on and offline transparently and seamlessly. And what we're seeing and what we believe is is that so far that's been successful for customers and that's kind of our focus, so.

Got it. Got it. And just to follow up on the M&A commentary, I appreciate all the color that you gave earlier that, you know, you are looking to, you know, participate in acquiring more stores going forward. But, I mean, one of your peers, you know, recently, you know, talked about, you know, the need for, you know, the publics to consolidate going forward in order to compete with the online players. And what would be your response to that? And then would you consider participating in some way in a potential combination at some point with another public peer? Or just in order to diversify your regional presence, would you be able, would you be looking to, you know, divest some of the assets and, you know, some of the regions, like in Texas or so, where you have a pretty skewed presence today. That'll be all. Thanks.

Okay, that's a fairly broad question, but let me see if I can help. I think there's a natural consolidation that needs to occur among the U.S. auto retail networks. There are simply too many dealers, and many of the brands, not all of them, many of the brands, to operate an efficient privately owned distribution network, so there's a return on investment. And this trend's been going on for a long time and it's becoming more and more a big player game just because of capital investments and amortizing technology costs and the cost of developing people and things like that. So I think that trend accelerates. And that is the reason that there will be a lot of acquisition opportunities. As there have been in the past few years, I would expect that to accelerate. And I think that will benefit the remaining larger retail groups, and I think it will benefit the OEMs. And so I think we're going to continue to move to an era of bigger partners for the OEMs. So I think that is very much a catalyst for these M&A opportunities. Now, the advantages of scale, you know, it would seem that we're not nearly as big as many other groups, yet we've been able to create a cost structure that's just about as competitive as any. So there is a diminishing point of return on scale, I think. But there is a benefit to diversity of markets and brands that we can continue to benefit from. And there's potentially a widening of the gap between the ability to operate efficiently for a smaller operator compared to a bigger operator. So I think those are all industry trends. that uh that relate to this m a topic i don't know if that helps you or not got it got it but but you would rule out any potential combination with another public uh it seems like that's the that's the answer i am not sure about that that would be the decision of the major oems and that that the ability for some of our larger OEMs to support that is not clear to me. It's not clear to me at all. Possible, but I haven't heard any public support of that concept from any of our major brands.

Got it. Okay, that's true. Thanks so much for the answers. We'll get back into it.

Thanks. And our next question comes from Aram Zaghi from Morgan Stanley. Please go ahead with your question.

Hi. So I've, uh, good morning. I have one question on behalf of, uh, Adam Jonas, um, more so towards the trend we're seeing with these EV startups going more, uh, direct to consumer. So I guess the question is more, you know, why do you think kind of these EV companies are going direct to consumer versus using franchise model? Do you think they're kind of making a mistake by going this route? Thank you.

Yeah, this is Earl. It does appear that most of these startups will enter the market trying to sell direct. And direct clearly has not been a problem for Tesla, although I'm not sure There will be many companies like Tesla in our history. And that model works as long as demand is above supply. But when you look at the evolution of automotive retailing, most companies eventually reach a point where demand plateaus, and they want to continue to be aggressive in expanding their share. And that's when a dealership network becomes an asset. And that relates to both the dealership network's marketing power in the local market and their ability to serve as customers. Because customer satisfaction becomes a critical element to repeat purchases. So Tesla doesn't appear to have reached that yet, but all companies reach that at some point. So it can be also a big capital strain on a company selling direct that can't unload their inventory, their work in process, onto someone else's books, right? In our distribution network, basically the traditional network, at gate out, when the auto manufacturers produce the car, it very quickly flips from their books to our books onto our credit line. And in the automotive industry, that is a large amount of capital and money. And while Tesla may be strong enough at this point to carry that, it is very difficult for startups to carry that for an extended period of time. So I would expect the startups to go direct, but then over time, we'll see what the competitive advantages of an independently funded dealer network might represent for a more mature brand.

Awesome. Thank you.

Our next question comes from Rick Nelson from Stevens. Please go ahead with your question.

Thanks. Good morning. Appreciate the earlier caller up to UK, what you're seeing there in early 2021. If you could speak to the U.S., what you're seeing with units, they're new and used. We're hearing about recovery. Curious if that's something you're seeing.

Hi, Rick. This is Daryl. We're seeing, you know, we're quite inventory constrained right now, as you know, and we expect the new car inventory situation to continue to be constrained for probably the first half of the year. But what we're seeing is an improvement sequentially month over month in both new and used. And that goes into January. We've seen that.

And GPUs, are they holding as well?

Yes.

Great. And to follow up on the acquisition environment, Gary, as If you're seeing a lot of opportunities there, how competitive is it for these deals? Where do you see valuations and how do you win, I guess, on the acquisition front with some of your competitors being quite aggressive?

That's true, Rick, and that's a good question. Yeah, there are a lot of opportunities. And, of course, you have an awful lot of independent dealers who benefited from free capital infusions from the PPP program and that little bubble there, which I think has motivated more and more of them to market their dealerships, and I think that will continue this year. And that's why I mentioned earlier that we can't abandon our hurdle rate discipline. It's easy to get excited about growing. We very much like to grow externally. But there is a certain point where you destroy capital and they need to be accretive. And you're right. There's a lot of competition in the market for high quality acquisitions and I don't expect that to subside this year. Which is one of the reasons that you know, we prefer not to set a target for acquisitions because if you get in a mode where you want to buy at any cost, it may not end up being the best thing for your shareholders. But to me, Rick, you know, the most important thing for us is in the fourth quarter this past year, we increased our earnings per share by 88%. 88%. I mean, you've been at this as long as I have. How many times have you seen quarterly growth at 88%? That was our adjusted earnings per share growth if I'm looking at the right number. And I'm looking at some really good quality companies that purchased a lot of revenue last year and added a lot of dealerships to their universe of profit-generating locations. And I'm not seeing anybody else that grew their earnings per share at 88%. Maybe I got the wrong numbers. I don't know. There's been some great growth by all of us. But it would seem to me the fact that we grew our adjusted EPS by 88% in the fourth quarter with no additional stores. We didn't buy any stores last year. Now we want to buy some this year. 88%. And we were closed half the time in the UK in that quarter. We grew our earnings per share by 88%. I mean, I have to say I'm seldom impressed by what we do, but I was pretty much impressed by it.

88%.

And we were closed half the time in a market that represents 20% of our revenue. So, yeah, I'd like to have some acquisitions. But we did that last year in Q4. And for the full year, I think we're up 64% or 65% with no acquisitions in an industry that was down due to COVID.

Yeah, that's impressive. No question about it. With revenue down 4% to grow EPS like that, it speaks to your ability to navigate. So service and parts, you know, you were down 4.8% in the fourth quarter in the U.S., 4.7% consolidated. I guess, you know, when the virus clears, people get out, miles driven, you know, starts to grow again. Do you think we go back to mid-single-digit type growth, or is there pent-up demand? that would drive faster growth than that to you. Thank you.

Yeah, Rick, I'll make a comment. Maybe Darrell will, too. But, yeah, we were soft on our after-sales volume in Q4 in the U.S., which is quite rare, which, of course, makes that 88% EPS growth even more amazing, doesn't it? And it was simply a function of of a warranty, which we don't control, and that's usually a brand mix issue. And our collision business is extremely weak because, as you say, people are driving less miles. But that will come back. The collision business will come back. Usually the warning business comes back. A lot of that's driven by recalls. But our customer pay business is really holding up well, and it was flat or a bit up. I think Darrell's got some statistics relative to that.

It was up a bit in the quarter. Gross profit was up in customer pay.

Great. Thanks, and good luck.

And, ladies and gentlemen, our next question comes from David Whiston from Morningstar. Please go ahead with your question.

Thanks. Good morning. Sticking on service first, compared with American vehicle owners?

I would actually say they're delaying it more simply because of the pressure coming from the government mandated lockdowns and being told to stay home and you get a fine if you get caught without having a justification and being on the road. And there's these things called an MOT, Ministry of Transport, required inspections for everybody in the UK. And the government's given some leniency on timing of having to get those completed, but as soon as people feel free to go out, we're going to have a rush of people into the dealerships there. In the U.S., you know, there's still a good flow of service business, but the number of Customer behavior seems to vary a bit by area of the country.

So what kept you profitable in the U.K., then? Is it purely cost-cutting? You need the revenue to help those cost cuts, too. Were you just doing a lot of Accelerate-type business in the U.K.?

Yeah, I think in the U.K. we had slightly higher margins in both new vehicles and significantly higher margins in used vehicles. As you say, the parts and service business was pretty good for the quarter. I think that that's something that we probably began about a year ago. We put in much better processes for parts and service. We had both an inbound and outbound call center instituted in the UK. So I think that it was already on a natural growth pattern. And in addition to that, we cut costs to the bone in terms of scaling back our staffing levels. And you're taking out any costs that we could for both the quarter and year-to-date.

Thanks. That's helpful. And then over to the U.S., you talked about the U.S. being your first choice for acquisitions this year, and you want to diversify beyond Texas. So is your first choice to do existing U.S. markets other than Texas, or would you want to be even in a new part of the country? I mean, what region is your first choice in the States?

Well, clearly we want to prioritize the U.S. market because that's where we have the most power. And we really can benefit from diversifying our footprint, you know, outside of Texas and the oil patch in general, which is kind of part, you know, the oil patch is only parts of Texas. And I think it's important for people to understand that, that, you know, we're in Austin and Dallas and places like that. That's not really the oil patch. So we're not afraid of Texas, but I think our company benefits long-term a lot more to the degree we can expand our geographic footprint in the U.S. So that would be our preference.

Okay.

The main drivers were we had a nice increase in finance penetration, and we also really focused on our product sales and had nice lift on vehicle service contracts. So it was a good effort by the team. We also continue to be laser-focused on our compliance and processes, which I think will continue to pay off in the future.

Okay, thanks, guys.

And ladies and gentlemen, at this time, in showing no additional questions, I'd like to turn the conference call back over to management for any closing remarks.

Yeah, thanks to everyone for joining us today. We look forward to updating you on our first quarter earnings call in April. Have a good day.

Yeah, ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for attending. You may now disconnect your lines.