Group 1 Automotive, Inc. (GPI)

GPI 
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Industry: Consumer Durables
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Group 1 Automotive, Inc. (GPI)

Q4 2009 Earnings Call

February 11, 2010 10:00 AM EST

Executives

Pete DeLongchamps – VP, Manufacture Relations and Public Affairs

Earl Hesterberg – President and CEO

John Rickel – SVP and CFO

Analysts

Elizabeth Lane – Bank of America/Merrill Lynch

Matthew Fassler – Goldman Sachs

Rick Nelson – Stephens

Derrick Wenger – Jefferies & Co.

Matt Nemer – Wells Fargo Securities

Scott Stember – Sidoti & Company

Charles Vetter [ph] – KeyBanc

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Group 1 Automotive Incorporated fourth quarter 2009 earnings call. Please be advised that this call is being recorded.

I would now like to turn the conference call over to Mr. DeLongchamps, Vice President of Manufacture Relations and Public Affairs. Please go ahead, sir.

Pete DeLongchamps

Thank you, Karen, and good morning, everyone, and welcome to today's call. Before we start, I would like to make some brief comments and 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 markets. 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 on today’s call Earl Hesterberg, our President and Chief Executive Officer; John Rickel, our Senior Vice President and Chief Financial Officer; Lance Parker, our Vice President and Corporate Controller; and myself.

I would now like to hand the call over to Earl. Thank you very much.

Earl Hesterberg

Thanks, Pete, and good morning, everyone. Let me start with some comments on the full year. This past year was one of the most challenging in recent memory for the automotive industry. At Group 1, we saw a 20% decrease in total revenues versus the prior year, including a 25% drop in new vehicle revenues and a 15% decline in used vehicle revenues.

One of the strengths of our operating model was shown through the relative stability of our high-margin parts and service business where revenues were only down 3.8%. The second strength of our model was highlighted by our ability to quickly adjust our cost base. In late 2008, we began lowering our cost base in preparation for this extremely challenging business environment.

Thanks to the hard work of our field management team and effort and sacrifices made by every employee in our company, we were able to reduce cost by over $118 million. This exceeded our goal which was a $120 million target based on a 10-million unit industry. But the final industry sales number at 10.4 million, a $118 million plus cost reduction, exceeded our objectives and was the key factor to remaining solidly profitable in 2009.

We believe that many of our cost reduction and efficiency improvement actions have made us a more streamlined efficient company that is ready to reap the benefit of improving volumes going forward. These actions should allow us to deliver results above historical levels as volumes return.

One benefit from this recession is the opportunity to prove the strength of the automotive retailing model. This is the first recession that has affected the automotive retailing industry since the automotive retailing groups went public more than 10 years ago. And it’s given us the opportunity to prove what we have been saying for years about the stability, flexibility, and resiliency of our business model.

During this past year of economic turmoil, we improved our gross margin by 90 basis points as a relative stability in the parts and service business delivered an improved revenue mix. We decreased SG&A as a percent of gross profit by 80 basis points as the flexibility of the cost structure was demonstrated. We remained profitable on an operating basis in each quarter, and we generated a positive cash flow from operations, and strengthened our balance sheet by paying down more than $110 million of non-core plant related debt. In short, we have now proven that our business model works across a wide range of economic conditions.

Turning to the fourth quarter, new vehicle sales were slightly stronger than expected. According to J.D. Powers, the full-year SAAR came in at 10.4 million units, which was more than the 10.2-million level we predicted in October. We believe that part of the stronger fourth quarter new car demand was a result of customers switching from late model used vehicles to new as price relativities change due to used vehicle evaluations increasing significantly during the course of the year.

The monthly payment difference between new and used vehicle purchases was further reduced in the quarter as a number of manufacturers introduced aggressive lease incentives. Some of the new vehicle strength came at the expense of our used vehicle business as opposed through a significant uplift in retail traffic.

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