Group 1 Automotive, Inc. (GPI)

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

Q2 2008 Earnings Call

July 29, 2008 10:00 am ET

Executives

Earl J. Hesterberg - President and Chief Executive Officer

John C. Rickel - Senior Vice President and Chief Financial Officer

Randy L. Callison - Senior Vice President of Operations and Corporate Development

Peter C. DeLongchamps - Vice President of Manufacturer Relations and Public Affairs

Lance A. Parker - Vice President and Corporate Controller

Analysts

John Murphy - Merrill Lynch

Rick Nelson - Stephens Inc

Matthew Fassler - Goldman Sachs

Scott Stemper [ph] - Sedody & Company

Matt Nemer - Thomas Weisel Partners

Richard Kwas - Wachovia Securities

Mark Warnsman - Calyon Securities (USA) Inc

Joe Amaturo - Buckingham Research

Vick Gindell [ph] - MSP Investors

Presentation

Operator

Welcome to the Group 1 Automotive second quarter 2008 earnings conference call (Operator Instructions). I would now like to turn the conference over to Pete DeLongchamps, Vice President of Manufacturer Relations and Public Affairs.

Peter DeLongchamps

Good morning everyone and welcome to the Group 1 Automotive 2008 Second Quarter Conference Call.

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 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 associate 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 past 12 months. Copies of these filings are available from both the SEC and the company. In addition, certain non-GAAP financial measures are defined under SEC rules and 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’d now like to turn the call over to our President and CEO, Mr. Earl Hesterberg.

Earl Hesterberg

In a moment I will turn the call over to our CFO John Rickel, who will provide Group 1 financial results. After he is finished I will go over our updated guidance and then open up the call for questions.

Before I turn the call over to John, I will begin by telling you what we observed during the quarter. The overall selling environment certainly got more challenging during the second quarter. Beginning with Memorial Day weekend, the market took another significant step down. Customer traffic declined further as consumer confidence was again shaken due to the higher gasoline prices and issues surrounding the financial markets.

The major shift in car versus truck sales that has resulted from higher gas prices is unprecedented in terms of the magnitude and speed of the mix shift. For the second quarter, 62% of our new vehicle unit sales were cars. This was nearly 7 percentage points more than in the same period last year. Conversely, truck sales fell from 45% of unit sales to 48% for the period. The result of this rapid switch in customer preference is significant declines in secondary market valuations for trucks and large SUVs and a large imbalance between supply and demand for both new and used units.

On the new vehicle side, beginning in June, we’ve seen a number of the manufacturers respond with higher incentives to try to address some of this imbalance.

These changes are creating many challenges in our business for perfectly sizing our operations, determining inventory stocking and helping customers with residual value issues. Any one who has financed a large truck or SUV in the past several years is almost certainly upside down on their loan. As a result, we’ve seen our volume in margins for new and used vehicles impacted adversely.

The mixed shift coupled with general slow down meant that dealerships that are more dependent on truck sales, Ford, Dodge, Chevrolet, were particularly hard hit. Geographically California remains weak, but does not appear to be slowing further while Florida and the Southeast deteriorated again this quarter. Our business in Texas and the Northeast held up better, but no region of the country was immune to the slow down.

In the midst of these challenges we did have several bright spots. We have continued to be profitable and grow in our more controllable parts and service and financing insurance businesses. The parts and services business has historically been relatively stable during sales downturns and we believe that this business should remain solid through this current decline.

Parts and service profits covered approximately 70% to 80% of our total fixed costs and is therefore the core of our business. Our total parts and service sales increased 9.2% for the quarter with a 4.8% increase on a same store basis. Gross profits in this area were up 7.7% for the quarter as we experience improvements in all areas of this business. In addition with our continued focus on strategic improvements in the finance and insurance business, we continue to grow our profit per retail unit, which at $1,078.00 per unit was up $74.00 from the same period a year ago.

Now let us turn to inventories. Our new vehicle inventory improves 4 days to 66-day supply from the end of the first quarter and increased 8 days from the prior year period. Cars accounted for 37% while trucks made up 63% of the inventory. Although we saw improvements in our new vehicle day’s supply we clearly need to continue shifting our mix to match consumer demand.

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