Group 1 Automotive Inc (GPI) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Group 1 Automotive 1Q results conference call. At this time, all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. If anyone needs assistance at any time during today's conference, please press the star followed by the zero. As a reminder, today's conference is being recorded Thursday, May 1st, 2003.

I would now like to turn the conference over to Mr. [Russell Johnson].

Thank you, Jeff. Good morning, everyone, and welcome to the Group 1 Automotive 1Q conference call. Before we get started, I would like to make a brief remark about forward-looking statements. Except for historical information mentioned during the call, statements made by management of Group One 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 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 SEC over the last 12 months, copies of which are available from the SEC or may be obtained from the company.

Representing Group 1 this morning are Mr. B.B. Hollingsworth, Jr., Chairman, President and CEO; and Mr. Scott L. Thompson, EVP, CFO and Treasurer. Without further delay I would like to turn the call over to Mr. Ben Hollingsworth. Mr. Hollingsworth, you may continue.

Thank you. Good morning, all, and welcome to our conference call. This morning we will discuss operating results for the 1Q of 2003. First, for the highlights, first quarter revenues topped $1b, an 8.8% increase. Diluted earnings per share at 64 cents matched 2002's record performance. With solid 1Q results, we are confirming 2003 guidance. Gross margins expanded to 16.5% versus 16% and parts and service and finance and insurance revenues experienced double-digit growth.

This quarter's performance demonstrates the flexibility of our business model. We dealt with the uncertainty of the marketplace and delivered solid financial performance. This performance, during a less vigorous economic period, keeps us on track to achieve our goal of growing earnings per share for the sixth consecutive year. From a brand standpoint, Toyota Lexus and Honda were among the strongest performers, and we had an outstanding performance from our Los Angeles platform acquired in the third quarter last year.

I will now ask Scott Thompson to go over the details of our financial results as well as our brand and geographic mix. Scott?

Thank you, Ben. Starting with the operating results for the three months ended March 31st, 2003, the company's revenues totaled $1b for the quarter. We retailed over 38,000 vehicles and serviced over 280,000 vehicles. The positive impact of our investments and acquisitions and stock buy back combined with solid parts and service growth and record F&I revenues per retail unit offset same-store revenue decline in vehicle sales, heavy SG&A and floor plan expense. The result was consistent diluted earnings per share for the quarter during a time when the market was somewhat unfavorable.

From a trend standpoint, January was soft after a very robust December. February, which was negatively impacted by unfavorable weather in several of our markets and accordingly was also soft, in March, was strong. From a geographic standpoint, we had outstanding performances in California, Beaumont, Texas, and Boston offset by Atlanta and Dallas. Our geographic mix for the quarter was as follows. Houston, 13.2% for our business; Oklahoma, 12.9; Boston, 12.3; California, 12.2; Florida, 8.2; Austin, Texas, 7.7; West Texas, 7.4; New Orleans, 6.5; Atlanta, 6%; Dallas, 5.9; Beaumont, Texas, 3.3; New Mexico, 3.1; and Denver, 1.2% of our business.

From a brand standpoint, we experienced very strong performances in Toyota, Lexus and Honda, offset somewhat by Daimler Chrysler's performance. For the 1Q, domestically badged vehicles represented 46% of our sales, and import badged vehicles represented 54%. Luxury brand represented 11.2% of our business, up from 10.7 in the same period last year. This is due primarily to the addition of Infiniti, which was acquired in the Miller acquisition in the third quarter of 2002. From a brand mix standpoint for the quarter, Ford represented 26.6% of our business; Toyota, Lexus, 25.3; Daimler Chrysler, 11.6; Honda Acura, 10.8; Nissan, 9.9; GM, 9.6; and the balance is an array of brands.

The truck market continues to be healthy. Trucks and crossover vehicles represent 57% of our sales, and cars were 43. Gross margin for the quarter increased 60 bp to a record 16.5%. The increase was a result of favorable merchandising mix as higher-margin businesses, parts and service and F&I income expanded. Gross margin was positively impacted by record results in F&I revenue for retail units sold, offset by a 50 bp decline in retail new vehicle margin.

Our F&I revenues grew 17.8%. This was driven by fees for arranging finance and vehicle service contracts. Profit per retail unit sold was $1,006 per quarter, up from $890 the same period last year. We benefited from reduced volume of 0% financing in the marketplace and the addition of the Miller Group, whose F&I income is slightly higher than the average. We anticipate $950 to $1,000 per retail unit sold for the 2Q of 2003.

Individual profit margins for the quarter are as follows. New vehicles were 7.2 % this quarter versus 7.7 last year's 1Q, a 50 bp decline. Retail used vehicle margin was 11.7 % as compared to 11.5 % 1Q of 2002, up 20 bp. Parts and service margin was consistent at 55.5 % this quarter versus last 1Q. And again, gross margins, 16.5% versus 16%, a 50 bp increase.

For the 2Q of 2003, we expect new vehicle margins of 7.0 to 7.5% and we expect used vehicle retail margins of 10.5 to 11.5%. Parts and service margins should be approximately 55 to 56%.

Income from operations for the quarter reached $31.4m or 3% of revenue. The 3% operating margin is down from 3.4% 1Q of 2002. During the 1Q of 2003, our SG&A was heavy at 79.6% of gross profit as Dallas and Atlanta platforms underperformed. SG&A would have been 77.7% excluding Dallas and Atlanta. We are comfortable with the 3.2 to 3.4% operating margin the 2Q of 2003.

As discussed on our year-end earnings conference call, we entered the 1Q long on inventory. This resulted in our new vehicle inventory turn for the quarter being slower than target. Our new vehicle inventory supply at the end of the quarter is above plan and is about 83 days. Our targeted supply is 60 days. The vast majority of the excess inventory is concentrated in our Ford dealerships which have 127 days in inventory. Our used vehicle inventory turn for the quarter was right on target at 29 days. We accelerated our wholesale activity, mitigating the impact of increased depreciation rates in the used vehicle market. Our used vehicle inventory at the end of the quarter is in great shape.

Floor plan interest expense increased $1m due to increased inventory levels driven by acquisition growth and slower inventory turn. Additionally, we increased the leverage on our inventory. Leverage increased on inventory as we spent the $100m on proceeds from our October, 2001, common stock offering, which during the 1Q of 2002 has been temporarily financing inventories. The combination of these items resulted in our average floor plan debt outstanding for the quarter increasing $268m.

Interest rates were down about 50 bp for the quarter, partially mitigating the impact of increased floor plan debt. In modeling the second half of the year, you should note that we have a $100m interest rate swap maturing in July of 2003 which negatively affected this quarter by $750,000. So if the rate environment remains unchanged we should realize floor plan interest savings of about $1.5m in the second half of the year.

For the quarter, floor plan assistance, which is recorded as a reduction of new vehicle cost of sales and only realized when the vehicle is sold, totaled $5.9m. For the quarter, floor plan assistance covered 10.7% of the company's total floor plan interest expense. The company's effective tax rate was 37%. We expect our tax rate in the future will vary between 37 and 38%, depending on which state contributes the most income.

For the quarter, the company made $14.8m or 65 cents per share on a diluted basis. For the quarter, return on average equity was 13.2 %, but remember, the 1Q on a seasonality basis is generally weaker than the second and third quarter of the year. Return on average equity over the last 12 months is 15.2 %, even with our conservative financial leverage.

Turning to same-store data now, same-store information for the 1Q of 2003 new vehicle revenues on a same-store basis were down 10.3%. Retail used vehicle revenues were down 8.9%. We believe the overall used retail market was down around 12% in the industry and our markets may have been down slightly more. Wholesale used vehicles were up 3% as we maintained our 30-day turn through wholesaling vehicles. Parts and service revenue were up on a same-store basis 3.5%. Finance and insurance were down 5.9% and total revenues on a same-store basis were down 7.8%.

The new vehicle market was very competitive during the quarter as dealers dealt with falling consumer confidence and excess inventories. Almost 60% of our same-store revenue decline came from two markets Oklahoma and Houston. The used vehicle market continues to be less vigorous than last year. This is evidenced by the following three negative items incurred this quarter. An 8.9% downdraft in same-store retail used vehicle revenues; a 3% increase in the wholesale used vehicle revenues; and a 17% increase in the average wholesale loss per unit.

Two positives in the used vehicle market for the quarter were the average gross profit per retail unit sold on a same-store basis was up $88 to $1,646 and the average wholesale loss per unit improved 40% from the 4Q of 2002. Bottom line is the used vehicle market shows some improvement but continues to be volatile and visibility is limited.

What we are expecting in our 2003 guidance is based on retail used vehicle same stores declining 3 to 5% for the year. Overall, parts and service, same-store revenues were up 3.5%. Domestic warranty work was down 16.2% while import warranty work was up 22.8 %, resulting in total warranty work being down just 3.7% for the quarter. We were able to offset this slight overall decline in warranty work with other parts and service revenue and are pleased with the tone of business in parts and service. Our absorption rate improved to 72.2% from 71.6 last year.

Turning to capital items, total capital expenditures for the quarter were $12.2m of which $9.8m was for new or expanded operations. We expect total cap ex for 2003 to approximate $37m including $11m of recurring maintenance cap ex. We expect weighted average diluted shares outstanding for the 2Q to approximate $23.3m before any repurchase activity.

As of quarter end, the company had $105m in working capital. The company's long-term debt to cap is 15%, the lowest financial leverage since March of 1998. As we have stated previously, we'd be comfortable with long-term debt to cap of 40 to 42%, although I don't see us getting there within the next 12 months. Our $198m acquisition working capital line of credit is totally undrawn as of year end and as of today. We estimate sitting on a cash/stock mix, that we have financial resources to buy close to $2m to $3m of revenue and maintain 3Q $2b to $3b of revenue, and maintain a long-term debt to cap under 40%. It is clear that we are positioned for significant growth without reliance on any future capital transaction.

Lastly, overall it was an interesting quarter. We experienced some softness in our core markets resulting in unit volume decline and incurred higher SG&A and inventory costs, but our prudent disciplined investments in acquisitions, stock and bond repurchases offset this softness and we delivered a reasonable return to our shareholders during an unsettling time in the U.S. economy. As I mentioned before, the last 12 months return on equity has been 15%, even with conservative leverage. Additionally, return on invested capital continues to be strong.

Ben will now update you on the rest of the quarter and on management's guidance for the rest of 2003.

Thanks, Scott. We expect a solid vehicle market in 2003, although [inaudible] at times and probably less robust than 2002. Based on our financial performance this quarter, we are comfortable confirming the range of our diluted earnings per share guidance for 2003 of $3.10 to $3.30. Earnings growth is expected to emanate from a combination of acquisitions and improved dealership performance as well as common stock repurchases as warranted. During the 1Q of 2003, the company repurchased 117,000 shares of its common stock at an average price of $21.35. As of March 31, 2003; we have remaining board of directors authorization to repurchase $22.5m of our common stock.

We continue to seek strategic tuck-in acquisitions to augment our current markets as well as platform acquisitions [inaudible] markets, targeting to add dealerships with aggregate annual revenues of approximately $800m. Year to date, we have acquired three franchises with $131.2m in annual revenues, and disposed of one franchise with $47.4m in annual revenues in Oklahoma City, Oklahoma. In addition a previously announced [inaudible] Ford dealership was opened in Pensacola, Florida, with $40m in anticipated annual revenues.

Group 1's stable cash flow from operations combined with one of the strongest balance sheets in the industry allows us to take advantage of opportunities to make investments that enhance shareholder value. Our top five sellers for the quarter, number one, again, the Ford F Series pickup; number two, the Toyota Camry; number three, the Dodge Ram pickup; number four, the Ford Explorer; and number five, the Honda Accord.

Group 1 today owns 74 automotive dealerships comprised of 114 franchises, 29 different brands and 25 collision service centers located in California, Colorado, Florida, Georgia, Louisiana, Massachusetts, New Mexico, Oklahoma, and Texas. Through our dealerships and Internet sites, the company sells new and used cars and light trucks, arranges related financing, vehicle service and insurance contracts, and provides maintenance and repair services and sells replacement parts.

We will now be happy to take your questions.

Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press the star followed by the one on your pushbutton phone. If you would like to decline from the polling process, please press the star followed by the two. You will hear a three-tone prompt acknowledging your selection and your questions will be polled in the order they are received. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. Our first question comes from Rick Nelson with Stephens Incorporated. Please go ahead.

Good morning, guys.

Good morning, Rick.

Good morning, Rick.

Ben or Scott, can you talk about inventory new vehicles, where you're heavy and how you go about pruning those?

Sure. As I mentioned on the call, where we're heavy is Ford. We're 127 days in our Ford dealerships. If you take Ford out of the mix, the balance of the portfolio is about 68 days. And considering we're going into the heavy selling season, that wouldn't even hit the radar screen. That would be fine. Ford, we're heavy. And some of that has to do with the Ford build out in the F150. Did you want to speak to that, Ben?

Yeah. As you probably know, Rick, Ford is going to do a scaled build out on the new F150 which we should be getting late this summer producing the current 150 along with the new '04 model. So what we're having to do and what we are doing is ordering 150s through the summer right now. So we're long on the F150 model, which is our best seller. We want to have adequate inventory for the summer selling season in those trucks and then prepare for the launch of the new F150 which we'll sell side by side for a year or so as they ramp up production of that new model. So in looking at that, while on the surface it looks like well, we are long. Because of the time of the year, you know, we're not particularly concerned about it.

A couple of things, Rick, I want to point out. If you look at our inventory turn and if we'd been on an ideal 60-day turn, our floor plan debt would have been on average down a 200 m. But because interest rates are so low, we think it's a good risk to go ahead and order up for the summer we're expecting a good car market. The excess inventory, if you run through the interest rates and what it costs us, it costs us about $1.3m to carry the extra inventory in the 1Q and be set up for a very robust summer. It was a planned business decision to be aggressive and I think based on recent consumer confidence and stuff we're seeing in the marketplace I think it's going to end up being a good bet.

Well, what are you seeing kind of in terms of April sales on the new side as well as the used side?

In the marketing data that we see, you know, April is 3Q and obviously it's still early 3Q looks like it's going to come in very similar to last year's April which is a fairly good, you know, retail market for new. As I mentioned on my prepared notes, the used market continues to be volatile. At times, very good, and at times very challenging. And we haven't got a clear direction of the used car market.

Used cars still being especially late model used cars very much affected by incentives as they come on and off. And just kind of in summary, to tag on to Scott's you know, April, you know, for us, looks kind of similar to March and I think Scott described it pretty good. But essentially, you know, based on our performance in the 1Q I think it's fair to say that we feel pretty good about the rest of the year and that's why we positioned ourselves where we are inventory-wise and are anxious to enter into the strong summer selling season.

And I guess I'll tie onto this question a little bit because I know it's probably your next question, Rick, because I know your questions in order SG&A is also high and it is high for similar reasons. As we've taken a conservative approach in dealing with our associates because we see a good car market in front of us and our people have been with us a long time and it's hard to get good talent. And so we also have not been extremely aggressive on the SG&A side because of what we see in the near term.

If the market changes or we're wrong, obviously we'll make some changes. But I think you can see how we're positioned and I think you can see how we performed in the 1Q, even leaving ourselves to be positioned very aggressively for the summer.

Thanks. Your same-store service and parts growth was better than several of your peers. What is driving that? And I was surprised at the warranty repair on the imports, that growth there. And what brands is that primarily?

To answer your second question first, you are right that the domestic warranty work is down, and all of us in the sector have been dealing with it. And in fact Ford domestic you know, that warranty work is down 22% , if you want to look just at Ford. But if you look at Honda and Nissan and Toyota, their warranty work is up significantly. And if you average them, and I'm not going to go through each particular brand for obvious reasons, in total it's up 22 %. So the imports helped mitigate that some of the Ford decline. And you're going to have that at different times with different brands.

I think Ben talked about on the year-end conference call how we've gotten particularly focused on parts and service and are aggressively benchmarking our operations in parts and service and have several initiatives in place, and they're beginning to get some traction. And this is the 1Q that you can probably see that traction. And of course we've also cycled through the Ford-Firestone issue that we had to cycle through all of last year.

That's the one area we see as a really great opportunity for us going forward. We think there's a even on the domestic side we see the warranty work dropping, which is really good. We've got, you know, higher quality across the board. But it's an opportunity for us to increase our customer pay business which we are aggressively focusing on. Quick lube lanes in all our service departments. I would venture to say we have a training program going on today somewhere in one of our service departments with our associates. And I talked about on the last call our recruiting that we're doing in the technical colleges.

So I think we'll kind of wrap it up with that, Rick. Thank you. We'll take the next question now.

Thank you.

Thank you. Our next question comes from Matthew Fassler with Goldman Sachs. Please go ahead.

Thanks a lot. Good morning. A couple questions, first of all, clearly the cost of carrying the additional inventory is minimal given where interest rates are today. But what are the margin implications of sitting on four months' worth of Ford inventory, twice as much as you want? What's the risk that you're going to have to make cost adjustments or pricing adjustments and take a hit on the gross margin to the extent that you need to clear some of that product?

If we were wrong on the summer car season and ended up being long at the end of the third quarter or in the middle of the third quarter, Matt, I think you would see some margin compression because you wouldn't want to go into model changeover with your inventory long. As far as the 2Q, I don't think you have margin risk in the 2Q. But if you don't clear out the inventory or the car market were to stumble, you would feel some margin pressure if you were long in inventory in the third quarter.

Right. If we were at this point in November, with our primarily Ford inventory where it is, we wouldn't be there in November because we wouldn't be careful with that.

But I don't think you've got a lot of margin risk and, you know, you can see in the 1Q a lot of the dealerships, not just ours but everybody's dealerships, were generally long in the 1Q, and new car margins are down slightly, but not down a lot. And probably half that decline in margin compression that you're seeing is really a result of reduced floor plan assistance because of the decline in interest rates. So I think you ought to think about the business more as a volume risk business really as opposed to a margin risk business in the new car area.

It a related question, and, Ben, you kind of alluded to this when you talked about your buy-in on some of the trucks, but it just seemed a little odd that you did not highlight Ford as a soft selling brand for you, yet your inventory is above plan. So to the extent that you did want to ramp up but sales were in line, I guess there's a bit of disconnect for me as to why it would be above plan if the sell through was not below plan.

Well, the sales were slightly below plan. But you're right. Your overall point is right. What Ben was saying is because of the build out of several models, in the F150 particularly, we believe it might be difficult to get inventory during the summer and so we have stocked up to make sure that we don't run short.

Yep. Yep, OK. And the robust car market that you're talking about to the extent that in the 1Q we saw light vehicles SAR of 16m are your assumptions more aggressive than that for the 2Q?

We said that we thought for the year the SAR would be, you know, 16.2, 16.3 for the year. So when we say "robust" it's probably too strong a word for it would be in the car market. I guess we'd say more like a "solid" new car market.

And a final question. On the expense side I mean clearly, you have made some decisions to not ratchet down your cost structure. And my sense is that it's influenced by your ability to achieve Street expectations by other means. But I guess one of the tenets of auto retailers existing in the public markets and trading the public markets is, you know, a company's ability to limit the impact of soft new car sales on the business, and one way to do that is to keep the cost structure truly variable. And, you know, at what point because the car market hasn't been … might be OK; it certainly has not been flying and there's still a lot of macro noise in the world, at what point would you see fit to take your cost structure down?

Well, first of all I mean let's look at our cost structure. And we have two platforms which I told you in my openings notes, Dallas and Atlanta, the cost structures are out of line. And we are aggressively managing those areas. So after you take, you know, those areas out, we're at a 77.7% SG&A gross profit, and if you go back and look in 1Q comparisons you find that's very close to on target. It might be 100bp off. So we don't think we've got a huge systemic problem, you know, in that area. We've got two rifle shots we need to take and we need to be very aggressive in managing those situations.

So would it be fair to say and this is my question would it be fair to say that you are aggressively addressing those markets while leaving the others more or less unchanged, and in doing so you could try you know, you're certainly trying to take the overall cost structure down albeit in a targeted fashion.

Yeah, we are very aggressively managing platforms and cost structure get out of line. And then obviously we always watch our costs. That's just part of the business you have to do every quarter. But I guess I would ask when you measure us from a cost control standpoint, don't measure us off a 1Q performance. You know, look at a trailing 12 months and look at a broader period. And then I think we'll see whether we're right or wrong and how well we've managed the cost structure.

Fair enough. Thanks a lot.

And let me make one little correction, Matt, on your description. The way I describe where we think we are is we expect a solid vehicle market in 2003...

Fair enough.

...although volatile at times and less robust than 2002, just to clarify.

Fair enough. Thank you.

Thank you, Matt.

Thank you. Our next question comes from Scott Stember with Sidoti and Company. Please go ahead.

Good morning, gentlemen.

Good morning.

Guys, some of your competitors have come out and made a reclassification due to this emerging task force issue having to do with vendor rebates and credits and so forth. The fact that you did not issue any such reclassifications should we assume that you were booking it the way that the emerging task force suggested it should be done to begin with?

Yeah. When we formed the company in 1996, we looked at the accounting principles, and one of the areas we looked at was how we accounted for manufacturer incentives and rebates. And in '96 we made the determination that we shouldn't book those revenues and those cash payments until the vehicle sold. And so that's been consistently applied at Group 1 since the formation of the company. I mean EITF in the 4Q just kind of clarifies a preference, because you could have gone either way. Either accounting was correct. And ended up preferring the way that we've always booked and kept ours.

OK. And as for the balance sheet, including the swap, can you just maybe quantify what % age of your total debt now is fixed versus variable? And also maybe just give some metrics, where you stand right now, where a 50 or 100bp increase in short-term rates would affect you.

If you look at the balance sheet, all of the debt is variable except for the senior subordinated notes which is about $75m, and then we have two $100m interest rate swaps that obviously mitigate the variability of the debt, one of which runs off on July first of this year.

As far as a 100bp change in interest rates, it's about 6 cents per share, give or take, on EPS. I think probably we perceive the rate environment will be fairly flat over the next 12 months. So we really expect to get some benefit from the interest rate swap rolling off.

OK. And, Scott, would you have any cash flow data as far as, like, operating cash flow including working capital changes and so forth?

Yes. If you look at what I would expect when we file the Q, net cash provided by operating activities that number last year was $11.6m and I would expect this quarter that number will be about $10.7m, net cash provided by operating activities.

And that does not net down for capital expenditures.

Correct.

OK. That's all. Thanks.

Thank you.

Thank you.

Thank you. Our next question comes from Gerry Marks with Raymond James. Please go ahead.

Good morning.

Good morning, Gerry.

Good morning, Gerry.

How are you guys?

Good.

Just a couple quick questions. Sorry to harp on the inventories. But, Scott, I just wanted to clarify, were you saying that the $100m in terms of the balance that you guys had initially applied from the equity offering a little bit over a year ago is that no longer in the floor plan?

Last year, as you remember, in the 4Q of 2001, we did an equity offering and raised around $100m. The use of that proceeds was to be in acquisitions over time. So during the 1Q of 2002 we had $100m and we had to have a home for it and so we used it to pay off temporarily our floor plan debt. And so our leverage on our inventory was very, very low in the 1Q of 2002. So what we did during 2002 we spent the money on acquisitions, releveraged the inventory to a proper level. And so when you look between 1Q, 2003, and 1Q, 2002, a large of the portion of the increase in floor plan expense is really just the releveraging of the inventory.

OK. That so, I mean, you guys had already taken a lot of that out in the 4Q as well, right? I mean...

Right. If you're comparing it to the 4Q you don't need this item. It's really only from a 1Q to 1Q comparison.

OK. Because it just seemed like your floor plan per debt didn't really change all that much in the 4Q, even though...

Right. Well, going from year end to the end of the 1Q, this would be a non issue.

OK. Then just two quick questions on parts and service. Ben, you had that nice article when you were quoted last month in "Automotive News." Can you guys discuss a little bit in terms of capacity expansion and why we might be seeing some of this favorable comp growth?

Well, as I said, we one of the things in our study and one of the things in our industry, we're always short of technicians. And with the very robust last three or four years, let's say, of new car sales overall, it's created, you know, more units in operation and more service opportunities for our dealerships. And so we've taken strategic opportunities to expand those service departments where appropriate, but what that means is you've got to have technicians to staff those bays, those service bays.

And so one of the things that I talked about in that interview is we are recruiting aggressively at technical colleges and are offering scholarships. We are paying off students' debt. You know, they come to work for us and stay with us for a proscribed period of time, we are actually paying for their first toolbox, which is a very important item and that's theirs, again, if they stay with us a certain period of time. There's a vesting period. We're investing in the training of these new techs.

But if you look at I believe I said we had something like 1,600 service bays and about 1,200 technicians so there's a great opportunity and there's been very little done in this area as far as trying to grow your own, or to recruit, as we are, quite aggressively, with a major HR effort to bring in these new techs. We do an interview process at a college and they pick the part of the country where they want to go, as we're located in nine states.

We're excited about that and that, along with our training programs that we have ongoing in those departments, and then, you know, more units in operation, more complex vehicles we're, you know, you really need to bring those vehicles, especially if they're under warranty to your certified technicians at our franchised new car dealerships. I think all of those things are really helping to drive our parts and service area which is, you know…, a large area for us, our most profitable area and some great opportunities.

I think in the industry we've been losing customers when they come off of the primary warranty. We're aggressively trying to change that. We're selling extended warranties which helps us retain that customer. I mentioned we're doing the quick lube lanes in all of our service departments to, again, attract and retain customers. All of those initiatives, I think, are an important part of this area.

I also might add that the declining warranty work, particularly on the domestic side, is a great opportunity for us to go out and increase that customer pay side. I think generally in the industry, dealers have gotten a little lazy over the last several years in relying on that warranty work. We've just been taking orders basically.

OK. And then just a final question, have you noticed any changes in the collision and repair market trends? And how big of a part of your business is that in your parts and service numbers?

Let me see if I have that in front of me, Gerry. I can give you some information on it. You know, it's a minor part of the overall business and I would say a reasonable sized part of the overall parts and service business. On a same-store basis, which I think is really the guts of your question, the collision repair revenues are up on a same-store basis, but up slightly. You know, low-low single digits, but positive.

It's up, though. OK.

Yeah.

And do you guys notice any changes in the trends in that business?

No. It's been slightly down before and it's been and this quarter, it's slightly up.

OK, thank you.

Thank you.

Thank you. Our next question comes from [Rob Schwartz] with JL Advisors. Please go ahead.

Guys, congratulations on a great quarter.

Thank you.

Just a little more detail on the balance sheet. With you guys bought back over 100,000 shares last quarter at around $21.00. Your stock here is at $27.00 now, still very cheap compared to the market, your peers. What are your priorities with the balance sheet right now?

Like we've always said, it is a capital allocation issue and benchmark, you know, stock repurchases against our other opportunities, whether that be in expanded facilities or in acquisitions. And we make that decision, you know, quarterly, with the support of the board of directors. We have a stock buyback authorization from the board in place and we bought aggressively, I'd say, in the 4Q, and we bought some in the 1Q.

Great. What was the cost in the 4Q?

I don't have that right in front of me, but I want to say it's off the top of my head I believe it's around $24.00 a share, but that's off the top of my head.

Great. And then can you briefly discuss your outlook for the product cycle for both the imports and domestic cars over the next six months or so?

Well, one of the critical ones we have talked about probably enough is the Ford 150.

Right.

A very important launch for Ford and for us. And as I said, they're going to side-by-side produce those, the old model and the new model for, oh, a year or so, as they ramp up production of a very high-selling model. So, you know, that's I think kind of a really important launch. Probably the most important for anyone to really be watching. And you can see how we position ourselves. We've talked about that.

You know, I think that, as Scott mentioned, our kind of import branded and domestic branded mix going forward you know, I don't see that changing much. We've seen, you know, really strong performance in our import branded stores. As we mentioned, Toyota and Lexus and Honda are really our strongest brands for Q1. But I would say that definitely that F150 is the big launch to look for coming out this summer.

Yeah, the F150 was almost 8% of our business this quarter. So clearly, that would be the most significant product launch we've got coming up.

Right. And do you expect, besides the F150, expect Toyota, Lexus and Honda to be the strongest brands in the next quarter or two as well?

Yeah.

Probably so.

I would probably say so.

Yeah. I'd say probably so. Just to, you know, some you know, we've got new products coming for our Nissan also that are pretty attractive, the new Titan we'll be getting and then the full-size SUV coming out later. A hot product right now is the Infiniti 235. So I think that will continue, fairly small for us, but with Toyota Lexus being such a big brand for us, those stores and all of those products are very important. But most of those we have the Lexus products, the GX and the new RX330 are very hot sellers for us right now in our Lexus stores. And then of course Camry continues to be very successful.

And really, the only thing I'd throw out there is it's a little bit of a wildcard to guess which brand is going to be hot because of the incentive environment. And clearly, any manufacturer can with incentives drive that brand for, you know, some period of time. And we continue to see that in the marketplace.

Great. Thanks again, guys, and congratulations.

Thank you.

Thank you. Our next question comes from [Jeff Black] with Lehman Brothers. Please go ahead.

Hi, guys.

Hi, Jeff.

Hi, Jeff.

A couple of quick questions. One relates to the service and parts gross margin. I mean if we're getting more customer pays, would we not expect to see that gross margin trending up over the next few quarters? I believe your guidance is for a downtick in the 2Q?

No. The customer pay and warranty work, you know, on the labor rates are very similar to identical. The warranty parts can be slightly less than the retail parts, but that we haven't see enough change in those businesses that I would expect the margins to actually change. The important component really is the labor rate between warranty work and retail customer pay is almost identical.

OK. And the second question relates to the F&I number, which was really impressive. What do you think, looking beyond the 2Q, is a normalized rate as I mean is this sort of being affected by lower incentives in the market? You know, what's driving, you know, the big drive for this quarter and where do you expect that to go beyond the 2Q?

You know, one thing when we're benchmarking remember that last year, the 1Q of 2002, 0% financing was still very new and very aggressive in the marketplace. And as I've mentioned before, when 0’s are in the marketplace, we make less money arranging a 0% financing for our customer than we do on a traditional financing. And so last year 1Q of 2002, the F&I as far as for arranging retail finance was down a little bit because of the 0’s.

This year in the 1Q, the 0’s were not quite as aggressive and so we picked up quite a big of profit in our traditional financing. That's recurring. That's core business. It should be there. We, as I said in my prepared remarks, we would expect $950 to $1,000 per retail unit in the 2Q.

The reason I see it down a little bit from this quarter has to do with the 0’s, and GM and some of the other domestics are very aggressive right now and so I expect it to be down. But we're comfortable with what I'll call the $950 to $1,100 range in the F&I area. It's being driven based on increased penetrations and arranging retail finance and better pricing in service contracts and selling other products at the F&I desk like gap insurance and some other products we didn't have in prior years.

Let me just add to that quickly. We're also planning in some of our platforms that the 0% financing option is maybe not the preferred one and that the cash rebate has been a bigger driver in being able to get some of our customers financed in their cars. So which also, of course, is good for our F&I departments.

And how much of this would be product related? You know, just new products added onto the mix?

As far as the increase?

Yeah.

Of the $116 increase, new products would be about $30 of the increase. Now, this is an area that early on Group 1 focused on. If you went back and looked at our historical numbers, F&I, you know, per retail unit in the 1Q of '98 was $581 per retail unit. We've got a great VP who's in charge of this area at corporate who has been driving preferred provider programs and helping the guys in the field.

Training programs.

Training programs. And, you know, since, you know, that 1Q of '98 at $581 till today of $1,000. So I think it's clearly an area where we've gotten the right people in the area at corporate and we've clearly added value and it's one of the major synergies that I think we add to the business.

Great. Thank you very much.

Thank you.

Thank you. Our next question comes from [Carl Zacharia] with UBS Paine Webber. Please go ahead.

Good morning, gentlemen.

Good morning.

Good morning.

Regarding your acquisition strategy, which clearly is something that must be on your minds all the time, can you share with us what you look for in acquisitions? Do you leave management in place? And what sort of multiples of net income do you pay as opposed to EBITDA?

Yeah, I'll take that. We have a two-pronged approach. First, for tuck-in acquisitions where we add a franchise to an existing platform, we do that for brand augmentation, kind of round out our offering, also to spread costs. Those are typically cash transitions. They're typically exit strategies for the owners, and we have a little better return on those because we have management in place and we're paying basically four to seven times after-tax earnings for those tuck-ins. We're always looking for those opportunities. We just added a great tuck-in, as I mentioned, to our Bob Howard platform in Oklahoma with three new franchises in that operation which we're always looking for that.

At the same time, we're looking for platform acquisitions and that's a little bit different model. The Miller acquisition we did last year in the third quarter would be a good example. A platform we define as a large, profitable, well-established mega dealer, superior management in place, committed, willing to be our partners. So those, that management group staying, fitting culturally with Group 1 is a very important part of our strategy. They should be leaders in their market.

We're paying seven to nine times after-tax earnings for those platforms. And by the way, we haven't seen prices change in this area since we went public. You'll hear some people talk about, "Oh, prices are up; prices are down." We don't see that. It's been right here in this range since we went public. We, depending on the stock multiple, we use both stock and cash in these platform acquisitions. But because of our model and the management staying and committing to us is so important, we attract that type of seller, where their management group is interested in staying and continuing to grow with that platform, doesn't want to leave the business, just wants other opportunities. We tend to be the kind of dealer of choice, if you will, for that type of acquisition.

So we're looking for both of those. We expect to do around $800m in revenues acquired this year and that will, of course, depend on market conditions. And as Scott mentioned, we benchmark those acquisitions against other investment opportunities all the time. But brand is important. We look for leading brands in a market and we look for leading retailers.

Thank you.

Thank you. Our next question comes from [Maurice Degan] with Janus Capital. Please go ahead.

Thank you very much. Gentlemen, if you exclude the extra inventory you're carrying for the Ford150 change over, do you have a number for the day supply that you're carrying now?

I don't have that exact number, but let me give you the trend. We would still be long. I mean our Ford inventory, [inaudible] Ford inventory is not all, you know, F150, and I don't want to leave that impression. We are long in Ford inventory. The majority of that is F150 but we're still long in Ford and it would be 80, 90, it would be long.

Got it. OK. Could you repeat the number, the new car, same-store sales?

Sure, 10.3% down.

Right, OK.

Now, as I mentioned before, most of that, 60% of it, is in two markets, Oklahoma and Dallas. Excuse me, Oklahoma and Houston.

OK. And used car prices. I mean you mentioned that you thought you saw some improvement on those volatiles the Manheim Index, I think was still down year over year. When you say "improvement" you're saying sequentially, of course.

If you look at it on a first-quarter-to-first-quarter basis, our profit, what we make on the used vehicle is up $88. And then on a sequential basis if you look at the loss on what we lose in wholesaling vehicles, it has improved 40% in the 1Q as compared to the 4Q of 2002. Some of that's seasonality. It's normal to have an improvement there. But 40% is a pretty big improvement.

But there are some negative trends in the used car market and there are some positive trends in the used car market. I think what we're really saying is that we've seen some improvement but it continues to be volatile, and our visibility is just not real good in the used car market right now.

When you say "improvement" are you referring to profits or are you referring to retail prices?

Our profits and our reduced losses on wholesaling.

OK. And so retail selling price is still low, but maybe you're buying a little bit sharper now.

Right.

OK. And last thing, and it was addressed a little bit earlier on, but you mentioned that you're carrying extra inventory and holding onto people because you want to be ready for a strong summer, but at the same time I heard you say that the market lacks clear direction. So I don't know. It sounds like you're not sure it's going to be a strong summer but you're hopeful it's going to be a strong summer?

You're never sure. I think obviously we live in dynamic times right now. You saw the jump in consumer confidence. I mean just as an indicator, you know, we went from 61 on consumer confidence to 81, one of the largest increases in one month after a four-month slide. So, yeah. I would say visibility is not wonderful going forward, but you're certainly not going to cut into muscle into your company with associates that have been with you a long time, that are trained. And they need to be focused on their job and not worried about their job. But, yeah. Visibility is not as good as it's been in prior years. But there are certainly some positive trends out there and we're very comfortable with our position.

OK.

By the way, we wouldn't be where we are if we didn't feel pretty good about it.

OK. The trends are positive enough that it gives you the confidence that the risk-reward ratio is in your favor.

Yes. Now, if interest rates were you know, if interest rates were different than they were right now, you know, we'd probably maybe have a different position. But interest rates our carry costs on inventory, all in, is about 2.5%. We can afford this is a good risk-reward relationship for our company at this point.

Let me mention one other thing about used cars and the volatility of used cars. That's really it's the volatility that's the risk. So you have to be quick. But the key to that is keeping your inventory lean. And our target is 30 days supply in used-car inventory. We're at or slightly under that target. That's the key, so you don't get stuck long with used inventory, which depreciates daily.

Right. Thank you very much.

Thank you.

Thank you.

Thank you. Ladies and gentlemen, if you have an additional question, please press the star followed by the one. And if you are using speaker equipment, we do ask that you lift the handset before pressing the numbers.

Gentlemen, we have no further questions at this time. You may continue with your closing comments.

Thank you and thank all of you for your time and your interest. In closing, again, in order to accomplish our vision we need the continued commitment of our dedicated 7,200 co-workers and the support of our 29 manufacturer partners. We thank them for their contribution and look forward to the successes their efforts will continue to produce this year and in the future. We are indeed [inaudible] the future of automotive retailing. Thank you and goodbye.

Thank you, gentlemen. Ladies and gentlemen, this concludes the Group 1 Automotive 1Q results teleconference. If you would like to listen to the replay of today's conference, please dial 303-590-3000 or 1-800-405-2236 and you will need to enter the pass code of 534649 followed by the pound sign. Thank you for participating in today's conference. You may now disconnect.