Group 1 Automotive, Inc. (GPI)

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Group 1 Automotive Inc. (GPI)

Q1 2009 Earnings Call

April 28, 2009, 10:00 am ET

Executives

Pete DeLongchamps - Vice President of Manufacture Relations and Public Affairs

Earl Hesterberg - President and CEO

John Rickel - SVP and CFO

Lance Parker - Vice President and Corporate Controller

Analysts

John Murphy - Merrill Lynch

Rick Nelson - Stevens Company

Scott Stember - Sidoti & Company

Richard Kwas - Wachovia

Matthew Fassler - Goldman Sachs

Jordan Hymowitz - Philadelphia Financial

Matt Nemer - Thomas Weisel Partners

Presentation

Operator

Please standby. Good morning, ladies and gentlemen. Welcome to the Group 1 Automotive Incorporated first quarter 2009 earning results call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Pete DeLongchamps, Vice President of Manufacturer Relations and Public Affairs. Please go ahead.

Pete DeLongchamps

Well, thank you, [Kella]. Good morning, everyone and welcome to Group 1 Automotive’s 2009 first quarter Earnings Call. Before we begin, I would like to 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 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 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.

I’m now going to turn the call over to our president and CEO, Mr. Earl Hesterberg. Earl?

Earl Hesterberg

Thank you, Pete, and good morning everyone. Before I turn the call over to our CFO, John Rickel, who will provide details on Group 1’s financial results, I’ll provide an overview of what we experienced in the first quarter. First there has been no appreciable change in the factors impacting new vehicle sales. Despite this unprecedented drop in new vehicle sales, we were able to remain solidly profitable in the first quarter, and actually improved our operating profit from the fourth quarter.

Although, headline [star] numbers have bounced around in the 9 million to 10 million unit range during the first three months, as the levels of fleet deliveries have been impacted by the OEM’s prediction schedules, the underlying retail sales space did not varied much since last October.

Traffic is still by far the biggest issue impacting us accounting for the biggest single factor in our business decline. Consumers faced with uncertainly regarding the economy and their own jobs are postponing vehicle purchases. We need to see some stability and then improvement in consumer confidence, before we can anticipate significant improvements in vehicles sales rates.

Retail credit remains an issue as well with more conservative lending practices keeping a significant number of customers out of the market. For most of the quarter, the vast majority of the US auto dealers were buried with excessive new vehicle inventory. This put further pressure on new vehicle margins and used vehicle unit sales.

In January, we announced that we had a goal of cutting $100 million in annual expenses. We targeted having those cost cutting measures in place by March 31st. Based on the hard work of our entire team, we were able to get a significant portion of those reductions in place earlier in the quarter than we had anticipated, as well as being able to take out more cost than we had targeted.

Present tracking now indicates a full year reduction of $120 million in SG&A based on a $10 million SAR level. I am proud of everyone of our employees for contributing to this effort.

Although we’ve made great progress in this area, our original $100 million cost reduction target was based on a $10.5 million SAR assumption, which now looks optimistic. At a $10 million SAR level, annual cost cuts approximating $120 million will be required.

The second target we issued was reduction of new vehicle inventory by $150 million from the 2008 year-end level. I am happy to report that we also exceeded this target, as we successfully reduced our inventory by $209 million to $484 million as of March 31st.

We reduced our inventory by approximately 7,000 units versus our target of 6,000 units, leaving about 16,000 new vehicles remaining on our lots. We are about where we would like to be on new vehicle inventories in total, but still higher than we would like with domestic brands.

The fierce price competition driven by dealers trying to reduce inventory levels resulted in our same-store new vehicle margin declining to 5.4% in the quarter. It appears that imported luxury brand inventories have been reduced in the market and the industry should see margin slowly rebound from these abnormally low levels.

Used vehicle demand has held up much better than new. Our use vehicle retail unit sales were down 23.5%. As the new vehicle sales decline constrained our supplier trade-ins and it was more difficult to source the vehicles at auction, as all dealers were scrambling to supplementary inventory. The decline in unit sales resulted in our 26.5% decline in used vehicle retail revenues in the first quarter.

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