Group 1 Automotive, Inc. (GPI)

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Group 1 Automotive Inc. (GPI)

Q4 2008 Earnings Call

February 19, 2009 10:00 am ET


Earl Hesterberg – President and Chief Executive Officer

John Rickel – Senior Vice President and Chief Financial Officer

Pete DeLongchamps – Vice President of Manufacture Relations and Public Affairs

Lance Parker – Vice President and Corporate Controller


Matt Nemer – Thomas Weisel Partners

David Lim – Wachovia

John Murphy – BAS-ML

Scott Stember – Sidoti & Company

Rick Nelson – Stevens Company

Joe Amaturo – Buckingham Research

[Charles Sutter] – Keybanc Capital Markets



Welcome to the Group 1 Automotive, Incorporated fourth quarter 2008 earnings results call. Today’s conference is being recorded. Now I’d like to turn the conference over to Mr. Pete DeLongchamps, Vice President of Manufacture Relations. Please go ahead.

Pete DeLongchamps

Welcome to Group 1 Automotive’s 2008 fourth quarter conference call. Before we begin, I’d like t 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 the management of Group 1 Automotive are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve both known and unknown risks and uncertainties, which may cause the company’s actual results in future periods to differ materially from forecasted results. Those risks include but are not limited to risks associated with pricing, volume and the conditions of the market. Those and other risks are described 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 the SEC rules may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any such non-GAAP measures to the most directly comparable GAAP measures on its website.

I’d now like to turn the call over to our president and CEO, Mr. Earl Hesterberg.

Earl Hesterberg

After I cover what we observed during the fourth quarter, I’ll turn the call over to our CFO, John Rickel who will provide details on Group 1’s financial results, including the asset impairment charges reported for the quarter. Then I will address guidance and open up the call for questions.

First, let me begin by telling you what we observed during the last three months of 2008. As we reported on our third quarter earnings call, we were hesitant to predict where our sales were headed in the fourth quarter. We knew things had gotten significantly worse starting with the Lehman Brothers bankruptcy in mid-September, but had hoped that similar to earlier financial blowups this would be a somewhat temporary reaction.

By the end of October, we realized that the quarter was in a much steeper decline than we had anticipated. Seasonally adjusted selling rates for October, November and December were each down more than 35% for the industry on a whole. In looking back at history in prior recessions, we don’t believe anyone could have realistically predicted the rapid decline to the levels we saw in the fourth quarter.

As the extent of the declines became clear, it led us to revisit the $35 million cost cutting measures we began implementing in October. In doing so we determined that we needed to cut costs more aggressively, and on January 14th we announced that we were putting additional measures in place. We will reduce our 2009 SG&A expenses by a total of $100 million from 2008 levels.

These actions include pay reductions for everyone in our corporate office, as well as our regional vice presidents and our board of directors. We have defined plans in place to achieve these savings and are making good progress on implementing them.

I’ll let John update you on the details of the additional cost cutting measures we’re taking. None of us are enjoying what we have to do, but all of us realize that these actions are necessary and will take the efforts of the entire organization to successfully manage through this challenging environment.

The biggest issue continuing to impact us is reduced traffic in our dealerships. As consumers are faced with uncertainty regarding the country’s financial situation, concerns about their own employment security and significant wealth reductions in the form of lower 401(k) balances and reductions in the value of their homes, it’s no surprise that consumer confidence has dropped at historical lows and that customers are staying away from auto dealer showrooms.

This sharp falloff in vehicle demand, coupled with a shift in customer preference [inaudible] from small cars and hybrids as gas prices rapidly fell left most dealers in the country with too much inventory in total, as well as an imbalance with too few trucks and too many cars. The result was margin pressure across the board as dealers everywhere scrambled to unload and rebalance both new and used inventory.

Although used vehicle inventories have adjusted, it is likely to take most of the first quarter for new vehicle inventories to adjust to current market conditions. Additionally, both used and new vehicle sales continue to be hampered by the restrictive practices of both captive and independent auto retail lenders. Forty-six percent of our new vehicle unit sales were trucks in the fourth quarter up from 44% in the third quarter, and down slightly from 47% in the fourth quarter of 2007.

Our parts and service business remains solid. Same store revenues fell 2.4% and gross margin contracted 100 basis points, but this business remains stable. The revenue decrease was a result of declines in our wholesale parts and domestic brand customer pay business. However, our warranty business was up for the quarter and our collision repair business grew significantly.

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