Group 1 Automotive Inc (GPI) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Group 1 Automotive first quarter earnings conference call.

[Operator Instructions].

As a remainder, this conference is being recorded, Wednesday, May 4, 2005. I would like to turn the conference over to Mr. Russell Johnson from Fleishman-Hillard. Please go ahead, sir.

Thank you, Jeff. Good morning, everyone and welcome to the Group 1 Automotive2005 first quarter conference call. Before we begin, I would like to make a brief remark about forward-looking statements.

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 that 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 in markets. Those and other risks are described in the company's filings with the SEC over the last 12 months. Copies of these filings are available from both the SEC and the company.

I'll now turn the call over to Mr. Earl Hesterberg, President and Chief Executive Officer of Group 1 Automotive. Mr. Hesterberg, please go ahead.

Thanks, Russell and good morning, everyone. Welcome to our first quarter conference call. Here with me this morning is Robert Ray, our Chief Financial Officer and John Turner, our Executive Vice President and one of the Founding Members of the Group 1 Automotive management team.

In a moment, I will turn the call over to Robert for a review of our financial results. But first, I want to make a few personal comments. Some of you may know that I joined Group 1 about two weeks ago, after 30 years with Ford, Nissan and Toyota. I worked in virtually every area of the customer-facing business on both sides of the Atlantic ocean, and I personally visited over 4,000 different dealerships, and my jobs have included responsibility for operating retail dealerships, mostly at Nissan and Ford in a variety of markets in Europe. I've known many of the original founders of Group1 Automotive for a long time. Including Ben Hollingsworth. So I am well aware of many of the great dealerships and great people within my new organization.

However, having only been on the job for two weeks, I can't add much value to the presentation and discussion of our first quarter performance. Therefore, I will leave that to Robert and John. Let's get started with a review of our first quarter financial results from Robert Ray, our Chief Financial Officer.

Robert?

Thank you, Earl and good morning, everyone.

Let me begin by providing an overview of the first quarter results that we announced this morning. As reported in our news release, first quarter income before the cumulative effect of a change in accounting principles was $14.4 million or $0.60 per diluted share. This compares with $0.45 per diluted share in the first quarter of 2004 on an as-reported basis, or $0.62 per diluted share on an as-adjusted basis, which excludes a $4 million after-tax charge associated with the redemption of certain of the company's senior subordinated notes.

Our first quarter results included an after-tax charge of $16 million, $0.67 per diluted share resulting from a required change in the accounting method by which the company values its intangible franchise rights. This resulted in a bottom line loss of $0.07 per diluted share.

Now let me take a minute and explain this charge. First, a bit of background. As you may know, our only significant intangible assets other than goodwill are the rights under our franchise agreements with manufacturers.

As you also may know, last fall the SEC staff issued a statement, specifically staff announcement number D-108, that mandated the use of a close, direct method to determine the value of all intangible assets other than goodwill, that were either, a, acquired after the date of the announcement, which was September 29, '04, Or b, acquired previously, but recorded on the books at a value determined based on a, "Residual method" or any other method that does not qualify the direct method.

The SEC provided little, if any specific guidance, to assist companies in determining what constitutes a direct versus a residual method. Nevertheless, during the first quarter, we developed evaluation methodology that meets the SEC's requirements. This new methodology is based on a discounted cash flow model that specifically identifies and values those cash flow streams, and only those cash flow streams, that we deem to be directly attributable to the rights granted under a dealership's franchise agreements.

For some of our dealerships this new methodology resulted in an estimated fair value that was less than the carrying value of their intangible franchise rights. As a result, we recorded a non-cash after-tax charge of $16 million in the first quarter, as a cumulative effect of this change in accounting principle. To put the charge in perspective, note that it is a non-cash item, and as such, is of no real economic impact. In other words, we do not believe that the underlying value of our dealership operations has changed.

Had this new evaluation method been used at the time of acquisition of our dealership franchise rights, then the balance sheet today would simply reflect higher goodwill, and lower intangible assets.

However, the accounting rule does not permit us to reallocate the underlying value between goodwill and intangible franchise rights. Instead, we are required to write down the carrying value of the franchise rights, which is what we did. The write down is reflected - also reflected on the balance sheet as reduction in the intangible franchise rights asset account, which was $187 million at year-end and $163 million at March 31.

Now let's turn to geographic and brand mix for a minute. Based on first quarter 2005 new vehicle unit sales, our top five platforms were located in the following geographic market areas, Massachusetts, Houston, Los Angeles, Oklahoma, and central Texas. And together accounted for about 56% of our total new vehicle unit sales. For a detailed listing of all our platform market areas, please see the schedule of additional information attached to the news release. Our brand mixed, again based on first quarter 2005 new vehicle unit sales, continues to be led by Toyota/Scion/Lexus at 28.4%, followed by Ford at 18.4%, for a total exposure to these top two brands of about 47%.

Our next four largest brand exposures, in order, were Daimler Chrysler, Nissan Infinity, GM and Honda/Acura, which together comprised another 46% of our new vehicle unit sales. Lastly, domestic brands represented about 38% of our first quarter new vehicle unit sales, while import and luxury brands comprised about 62%. This contribution from our import and luxury brands has increased steadily over the past few years.

Now let me provide more detailed review of our operating and financial results for the first quarter. All my comments will be on a same-store basis unless otherwise noted. During the quarter, we retailed about 39,000 new and used vehicles. Down about 3% from last year. We believe this decline generally reflects the current demand for our specific mix of brands and vehicles in the markets in which we operate. As a result, new and used vehicle retail sales revenues were down by 0.01% and 3% respectively.

However, these revenue declines were offset by a 3.7% increase in parts and service revenues. F&I revenues were essentially flat and this resulted in total revenues that were virtually unchanged quarter-over-quarter.

Gross profit for the quarter increased 1.7% over the prior year to $186.5 million. Gross margin increased by 20 basis points from 16.0% to 16.2%. On the new vehicle side, gross profit from new vehicle retail sales increased slightly, despite a 1.4% decline in unit sales. This increase in gross profit was due to a 1.7% increase in gross profit per retail unit sold to just shy of $2,000. Gross margin from new vehicle retail sales was flat, a 7.1%. Profitability of this business continues to be influenced by the absolute level of manufacturer incentive.

On the used vehicle side, gross profit from used vehicle retail sales also increased slightly, despite a 6.0% decline in retail unit sales. This increase in gross profit was due to a 6.6% increase in gross profit per retail units sold to $1,882. As previously noted, we believe the decline in retail unit sales was consistent with the overall trend in the markets in which we operate. We also did a better job managing our inventories, which resulted in a slight wholesale profit in the quarter as compared to a loss in the prior year of almost a $1 million.

As a result, our total used vehicle gross profit increased by 4.4%, resulting in total used vehicle gross margins that were up 50 basis points to 9.5%. Although used vehicle pricing seems to have stabilized, the profitability of this business continues to be influenced by new vehicle incentives, the number and quality of trade-ins, leasing activity and the availability of consumer credit.

Parts and service gross profit was up 2.7% over the prior year, even though gross margin was down 50 basis points to 54.1%. This decline in gross margin largely reflects a change in our mix of business among parts service and collision services. As the lower margin wholesale parts business now accounts for a larger percentage of revenue than our retail parts, service and collision businesses. Specifically, wholesale parts revenue as a percent of total parts, service and collision revenues, increased from about 21% in the first quarter of 2004 to about 23% in the current period. We remained pleased with the position and performance of our parts and service business.

F&I gross profit was essentially flat versus the prior year, as higher vehicle service contract revenues were offset by lower revenues from retail finance contracts. Although gross profit was essentially flat, revenues per retail unit were up 3.2% to $1,021 versus $989 in the prior year. We continue to work on the F&I performance of our recently required stores. These largely luxury franchises had F&I revenues per retail unit of $804 in the first quarter, which served to bring down our total F&I revenues per retail unit to $989 which was flat versus the prior year.

On the cost side, our SG&A increased by $4.3 million, or 2.9% from the prior year. This equals to a 90 basis-point increase on percent a gross profit basis from 80% to 80.9%. This increase was largely attributable to increased corporate costs, including higher personnel expenses related to additional head count required to manage our growing operations, higher professional fees associated with the assessment and testing of our internal control environment, higher losses from the retained risk portion of our property and casualty program related to a Hale storm at one of our Texas dealerships. And increased legal fees and expenses. We continue to focus on SG&A across the entire company, including at our recently acquired stores where SG&A as a gross profit was 82.5% in the first quarter.

In summary, we are generally pleased with the 20 basis-point improvement in our gross margin, which increased to 16.2%. However, we're not content with our cost structure, most notably SG&A, which increased by 40 basis points on a percent of revenue basis from 12.8% to 13.2%. More than offsetting our gross margin improvement. As a result, operating margin declined by 20 basis points from 2.9% to 2.7%. After combining these same-store results with those of our recently acquired stores, our consolidated operating margin for the quarter was 2.6% versus 2.9% in the prior year. The remainder of my comments will now be made on a consolidated basis unless noted otherwise, starting with floor plan interest.

Total floor plan interest expense increased by $3.8 million for the quarter to $8.7 million. This large increase of about 78% was attributable to both higher average floor plan interest rates and higher floor plan debt balances resulting from acquisitions and the general re-leveraging of our balance sheet, which occurred since the beginning of last year. On a same-store basis, floor plan interest rates in the first quarter were150 basis points higher than in the prior year, and average floor plan debt balances were about $100 million higher. It should be noted that our 2005 earnings guidance, which I will address in a minute, assumes the short-term interest rate increased by about 120 basis points during the year. We are still comfortable with this assumption.

Our manufacturer floor plan assistance, which we record as reduction of new vehicle cost of sales at the time of sales totaled $8.2 million for the quarter. This provided 94% coverage of our total floor plan interest expense for the quarter, down from 114% coverage in the fourth quarter of 04, and 137% in the first quarter 04. These declines largely reflect the fact that, a, only certain of our manufacturers offer assistance that varies with rates, and b, manufacturers may not change, I.E. increase, their interest assistant as quickly as the change in the underlying interest rates, now a quick word about inventories.

Our total new vehicle inventory of March 31 was at 59-day supply. Imports were at 49 days and domestics were at 98 days. Although this current level of 69 days is slightly above our target of 60 days, it compares favorably with our position at both year end 2004, which was70 days, and March 31 of last year, which was 76 days. Our used vehicle inventory March 31 was 26 days supply, or slightly below our target of 30 days.

Turning briefly to liquidity and capital structure from liquidity standpoint, the company maintains $1.2 billion in committed credit facilities; as of March 31 we had about 315 million of total availability under these credit facilities. This availability can be used as needed to fund our floor plan, working capital acquisition, and general corporate needs.

Also as of March 31, our long-term debt to capitalization ratio was 29%, down slightly from 30% as of December 31. At this fairly modest level of leverage, we ha ve significant capacity to fund additional growth, now a few words about cash flow and capital expenditures.

Cash flow from operations for the three months ended March 31 was $19.3 million compared with $16.7 million in the prior year. Growth capital expenditures for the quarter were $12.1 million, $9.4 million of which was for the purchase of land and the construction of new or expanded operations.

We expect growth capital expenditures to be about $69 million in 2005. Of this, about $55 million will be used to construct new facilities and expand, or upgrade existing facilities. We also plan to complete about $16 million in sale-leaseback transactions, resulting in net capital expenditures for 2005 of about $53 million. For additional detail regarding our financial condition, as well as our consolidated and same-store operating results, brand and geographic mix, and other financial metrics, please refer to the schedule of additional information attached to the news release, now a quick note on acquisitions.

Our 2005 acquisition target is $300 million of revenues acquired. To date, we have closed one transaction consisting of Dodge and Chrysler franchises in Tulsa, Oklahoma. These two franchises are expected to generate about $46 million in aggregate annual revenues.

Finally, a quick note on our earnings guidance, our 2005 earnings guidance is $2.95 to $3.05 per diluted share. Although the range of our guidance is unchanged on an absolute basis from that provided on February 24, the components of our guidance have changed somewhat. Specifically, as a result of the SEC's recent decision to delay the implementation of SFAS123, or our guidance now excludes any costs associated with the expensing of stock-based compensation in the second half of the year.

We have previously estimated this negative impact to be about $0.07 per share. Obviously, this one change by itself, calling all other factors constant, might have led us to an increase in our guidance.

However, after considering certain other factors, including our less than expected performance in the first quarter, we are providing guidance at $2.95 to $3.05 per diluted share. This guidance is based on 24.1 million shares outstanding, and excludes acquisitions and the cumulative effect of any change in accounting principles.

That concludes our prepared remarks. With that I will now ask the operator to open the call for questions.

Operator?

Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session.

[Operator Instructions].

Our first question comes from Scott Stember with Sidoti & Company. Please go ahead.

Good morning, gentlemen. Can you talk about domestic versus foreign and luxury sales, if you had to segregate the two in the quarter?

In terms of new vehicle unit sales?

Yes, in new. Or just anecdotally about the conditions you faced in the quarter?

Well, ok. To set the stage on that, and in advance of the next question in terms of inventory levels, we mentioned domestic was 49 days --sorry import was 49 days, domestic was 98 days. In terms of sales, there hasn't been anything abnormal. I mean our mix is similar to what it's kind of always been at 61% imports, and 39% domestic as shown in the attachments to the press release. And 15% of which is luxury.

Okay. Just shifting over to parts and service. Can you talk about some of the growth? Was it emanating from warranty work and can you talk about the customer pace out of the business?

Yeah. The dynamic in parts and services is really multi related to wholesale parts. For our wholesale parts activity has increased relative to the rest of our business, so with lower margin in that business, it changes the mix such that our gross margin declined by 50 basis points as reported. But the only other really kind of dynamic going on there is that warranty work on imports has increased a little bit, but the parts and service business is healthy, and we continue to be very pleased with that part of the business. A lot of our CapEx that we are employing this year is focused and will end up benefiting that business.

To that end, could you talk about where you are as far as capacity wise with service space? If you had to quantify a percentage increase or number in service space that you think you will add this year in '05?

Well, we've announced that we are going to add 177 days over the next two years. And a lot of our capital, is as I mentioned, is in that regard. We have also have in addition to those 177 days we have 324 flat stalls, which are empty stalls that need to, in order to be activated, just require us to add a little. So we've got plenty of capacity there, and we are taking steps to enhance that business.

Okay. One last question. Could you just quantify if you had to lump all your debt together, what percentage is fixed now, factoring in any swaps if you had any?

Well, you can do that right off the balance sheet. In general, we've got all our bank debt is generally floating, which includes the acquisition line that is shown on our balance sheet of $76 million. $158 million of long term of debt is fixed, and all of our floor plan is floating.

Thank you.

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

Thank you, good morning. Robert, this intangible write down, I guess I'm not understanding, what you guys did here. Was this across all dealerships or done by a region?

Yeah. Good question Jerry. It was across all dealerships that had previously had franchise right value assigned to them. So in our case, that generally meant for all of our acquisitions after July 2001 that was the pool of candidates, if you will.

Okay.

And so, it literally was, you know, they were all subject to the test and all of the values all the values hen pursuant to this changed. For all the dealerships evaluated. Some one up, some one down, we were required to take a write down of the effective cumulative effect of all those that went down. Obviously, we weren't able to write anything of them up.

So does this, from what I understand in the past, you had to do a regional test by region.

No Jerry on that, at the franchise level, franchise valuation is done at the dealership level. In our case, you may be thinking about the goodwill valuation, which in our case is done at the platform level. Some others who have more centralize structures do their goodwill test at the regional level. We don't do any regional level testing.

Okay. So that's the difference. So this new change still won't evade any possibilities of like another Atlanta happening? If you have another plat form that goes bad you would still have to do a write down there?

Correct. The dynamics around our requirements to evaluate our goodwill and the general impairment concept has not changed at all. All that changed was the method by which we evaluated our franchise rights for about 40 of our dealerships that were required after July 2001.

Okay. Just a question on, Earl will comment it all during this call, but I was just in the press release you indicated that you were going to reexamine some of the operational aspects of the business. If could you give us any insights from your experience of dealing with dealerships over all these years what areas you might start at in terms of reexamining and what process improvements you might be able to look at in generating the system?

No I think after two weeks I wouldn't have much credibility if I got very specific. There is no mystery as to how dealerships run. I think some of our numbers would probably indicate that we have some room for improvement on abroad front, and I think everybody on the team here believed that before I ever arrived. So I don't really I think it would be productive for me to get too specific.

Last question. And I think John turner is on the line, as well. Are you guys focusing very much on debt acquisition front and even meeting that kind of $300million target or is it more platform brings the dealership that's in the market, then you'll go and take a look at it? How are you approaching your acquisition strategy at this point given all the changes going on in the company?

Jerry, This is John. It's the latter. We are looking at strategic dealership acquisition opportunities. We are pursuing any platform acquisitions this year. We will do an acquisition if it makes sense, and if it's priced right. If not, we're focusing on integrating what we acquired last year and improving the performance of this company.

Great. Thanks.

Thank you. Our next question comes from Rick Nelson with Stephens. Please go ahead.

Thank you and good morning. Earl, I am wondering if you could share your view that apartment centralized business model, do you see more centralization being adopted at group one?

That is a trap I am not going to fall onto today. I think it's more a matter of balance. I understand that we've been very localized, and I think there is a lot of strength because we have some very strong local operators in our system. I know some of our competitors have gone the exact opposite. I would expect there are needs to be little judgment balance supplied and I'll just leave it at that for today.

Rick, we will and everybody, we are certainly going to get Earl out on the road and meet our key constituents and certainly after we have, Earl and we have more well-developed thoughts to share, we will certainly do that. That is high on the list.

Your guidance, you talked about stable revenues, you talked about margin pressures, and yet higher EPS, which implies lower SG&A. I am wondering, how you do affect that those SG&A changes?

Well, the guidance, we are certainly forecasting we haven't stated what our SG&A target is as it relates to the guidance, but make no mistake, we are highly focused on SG&A. We've got our deal guys focused on that intently. I'll ask John to maybe give a little color on that.

Rick, the SG&A group one has been high relative to gross, or at least the last 18 months. You will see an improvement next quarter.

Year over year improvement or sequential? And if you could comment at time inventories in trucks and SUVs?

Well, trucks versus cars I can give you. Trucks were 78 days, and cars were 58 days. I don't think we have I don't have anything handy on SUVs and the component of trucks.

Very good. Thank you.

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

Good morning. I would like to ask dig a little bit deeper into the SG&A question. Is this a function of compensation models in the field is? It function of centralized SG&A, which I wouldn't imagine would be the case. What are the line items? That are leading to the walls because assume like you know its not a question of the denominator need to press sales are fine, your gross are held up reasonably well and gets last year. If you are looking at kind of line items where you are seeing that, that coverage would be helpful?

Lively that has been, it's been the corporate side. There were lots of -- I won't say one-time, but there's been lot's of increased activity at the corporate level. As you saw in our 10-K and will see in our 10-Q when we file it shortly, at the field level our advertising costs were down, and our personnel costs actually have-- although they are going to be up slightly this quarter, they are up in parallel to gross profit increases. The field is not, at least lately, although it's still high, the field is not out of control or anything. The patterns we are seeing in the field makes sense. It's a matter lately of just getting kind of our corporate side right-sized and normalized. That is not to say we are not spending time looking at SG&A in the field, because that's where all the dollars are.

Robert, are you talking about your office necessary Houston because, Rick's point, you still operate centrally? You don't have a tremendous amount of head count. Is it just a question of a few people, some of the personnel changes that you had at the top and costs associated with that?

It's all of that. We added $1 billion of revenues last year so we added 10 or so people at the corporate level. We had Sarbanes last year. We had the big insurance costs last year related to Hail. We had litigation accrual last year. So that's really getting that kind of normalized, that's where these, these increment is mostly coming from.

So that, I would imagine, is relatively controllable and shouldn't impact your execution of the sales?

Well, you know, Hailstorms I would argue are not controllable. It's something that we at least, a certainly going to know about. Litigation, is that controllable? I don't know. We certainly didn't include it in our reconciliation we've begin -- as a one-time event. Some of it is going to be a function of having a larger scale here that we have to manage. We are not --I think, the good message is that the field side, the fourth quarter or even last year when sales, margin was down, personnel costs were down. This year advertising is down and personnel costs are up slightly, but margin is up slightly. We are not getting out of whack there.

Understood. Thanks so much.

Okay.

Thank you. Our next question comes from Matt Nemer Thomas Weisel Partners. Please go ahead.

Good morning, everyone. First question on used vehicle sales, your inventories seem to be leaner than most in the industry and you are actually showing a small wholesale profit there, but your cops are negative. I am wondering if may be you think you are running that business too lean?

Matt, we are looking at that right now. I think we probably are. A small profit in wholesale is not a bad thing. I would like to think that we could break even on the wholesale side. There are some that would contend that we should have a small profit on the wholesale side. The swing in used cars this quarter was two-fold. One about half of it was contributed by better pricing. The other half was just doing a better job on the wholesale side as far as those losses are concerned. We had big losses first quarter last year, basically break-even first quarter this year. That contributed half of the improvement in margins on the used car side. Does that make sense?

It does. I forget, have you guys implemented any inventory management software on the used car side?

No. We have not.

Is that something you are considering?

We are considering it. That's not to say that our individual operations don't software that they used to assist in the control of there used car inventories. We don't have a company wide used car inventory control system.

Okay and then my next question is given you re-exposure to Ford what do you think the impact-what impact might you see on the disappearing of the blue oval program later this year? When does that happen?

It's already happened.

Okay.

It happened in April. Blue oval disappeared. Ford replaced it with a number of incentives, some directly related to replacing that source of income for the Ford dealerships. Others were indirectly related, but we are going to manage our way through that, and the pluses and minuses, we think, will balance out during the rest of the year.

Okay. And then lastly, what are you seeing -- have you seen a rebound in local economic conditions in Houston and in the Gulf States? Could you just comment on that?

We are seeing an improvement in vehicle sales in the Houston market. It's not back to where it was in the early 2000's but things are looking up in Houston. Our Houston platform is doing just fine.

Okay. Actually, I might tack one more on, and this might be for Earl. But given the announcement of the news on General Motors this morning, is there any language in your master franchise agreements that relates to a change in control at the OEM level? How might that impact you if there is a change in control at a major OEM?

There is no language in the service agreement or the framework agreements dealing with changing of control of an OEM. And we don't think that a change of control at an OEM will affect us unless it results in improvements that will make that franchise better, and therefore, make our dealerships better. The GM recall should do the same thing to us that the Ford tire issue did several years ago. We are looking forward to fixing a lot of GM vehicles that show up in our shops.

Great. Thanks very much.

Thanks, Matt.

Thank you. Our next question comes from John Murphy with Merrill Lynch. Please go ahead.

Good morning. I missed the early part of the call. I wanted to get into the shift in brand mix here. I know it wasn't that drastic fourth quarter to first quarter, but I mean, is the shift we are seeing year-over-year, how much of this is being actively done through the sale and acquisition of dealerships, and how much is really coming about by the change in sales in the market itself?

It's a little of the latter and a lot of the former, John. We have intentionally targeted import and high line the last 18 months or so, and you are seeing the effects of that. First quarter last year, domestic accounted for 44%, 44.6%, to be exact, of our new vehicle sales this past quarter it was 38.4%. And I think you will continue to see that trend.

But it's more a function of acquisitions as opposed to (indiscernible)?

Yes it is and as I say slight portion of it is due to just take for example Ford sales flat, Toyota sales increasing, that's going to drive it sound or when you have a balance mix like we do, it's not going to account for the trend that you are seeing.

But considering your brand mix, you'll take Toyota gains all day long and that's a good thing.

Absolutely.

Real quick on Atlanta. There is any update on how that is progressing, how you are dealing with the stores there, what shape are in right now?

Our new management team is making progress. They aren't out of the woods yet. They had a tremendous challenge in front of them when they took over in December. First quarter last year, fourth quarter last year, Atlanta lost big money. They are still in a slight loss position, but we are making progress.

So you would imagine sort of the balance of the year that will turn positive there?

Yes.

One last question on the acquisitions in Tulsa. Is your intention to develop an Alfa store there? Is that why we are seeing those ?

Yes.

Thank you very much.

Our next questions from Peter Sirus(ph) with Gorilla Capital(ph).

Two questions. First, I have a question for Earl. Earl, I know you've been there for two weeks and you don't want to get onto any of the hard details. When I talked to your competitors, everybody says great things about you. All your competitors say that you are really super guy and a great executive in the other places, so I would like to just hear what your philosophy is about running a dealer. And without getting into specifics of particular stores, what type of changes would you make or how would you run the business?

My philosophy is more about people. In that respect, and I found it the same everywhere I've been, every country, every brand, is it's about great people and letting them run. Clearly, clearly that frightens a lot of people particularly in a far-flung business that is in a lot of geographic markets. I think that's been the general philosophy of Group 1. I think there's been some management changes here, I think you know that, not just me, but some of the other key people. We've grown pretty quickly. I think there is more than enough talent here for us to get this thing together and start to use some of our size and scale to be more efficient. I think there's a lot of different types of efficiency in addition to just having everybody do things the same way from Boston to Los Angeles. My job is to get the most out of the talent we have and I think there is a lot of talent here. I always found that the difference between the mediocre store and a great store is usually one leader in that store, every brand, every market. I am excited about our brands. I am excited about our talent.

Well, we are excited about having a chance to meet you. The second question, I guess, is for Robert is a financial question. When you look at your stock price and your free cash flow here and your earnings, and then you talk about acquisitions, how do you decide where it's smart to make acquisitions? Or on the other hand why wouldn't it be smarter to aggressively buy -- you have very low debt level, aggressively buy back your stock or pay a large dividend? How you do reach those kind of decisions?

They all are equal-weighted. Especially, now when we don't have a big acquisition and program in front of us. Last year the answer to that question was, well our capital is better spent on high-returning acquisitions. But as I sit here today, I tell you there may be even more so than before, all kind of -- they are all viewed against each other and therefore, certainly I can make the case as well for, as I know you can, for stock buyback. So that's something we always talk about. At every board meeting we talk about dividends, stock buybacks, capital deployment in general. Right now I would say, although our acquisitions activity looks like it's going to slow down this year, we still incurred debt in order to fund some of those acquisitions and we have repaid a little bit of that debt. But the short answer is we have the authorization to do it of about $19 million at board authorization. Any other limitations we would otherwise have in our bank or other indenture type of agreements as well north of $19 million. So we've got the ability to do it, and we will make the right economic decision.

I would think it would be well north of $190 million, not 19 you have very low debt level, right?

No, I am talking about just technical -

No I understand that. But your competitors all have twice a debt level you do right?

Right. For us to -- from our leverage level now of 29% to, if you call normal 40%, you know, that's a lot of debt capacity between where we're and that number that could be employed.

But I guess, my question is, with the low debt level and the low stock price, why wouldn't you move aggressively?

Yes, well the answer is we might.

Okay. I don't need to put you on the spot. But now I appreciate your answers. Thank you both very much.

Thank you. At this time I show no further questions. I would like to turn the conference back over for any concluding comments.

Okay all. I'll take it. This is Earl. And thanks to all of you for joining us and for your questions and for trying to make me comment when I didn't want to comment. I am not sure if I did or didn't.

As I mentioned earlier, I'd know many of the Group 1 stores people for a long time. I watched this company grow and I am really excited to be here and lead this great team. I already mentioned I see great potential when I look at our stable of great bands and all the talent experience we have within our country. And many of these people I worked with before in my other roles with the variety of manufacturers I mentioned earlier. You've also mentioned that we have a solid balance sheet. We have a strong company and we all believe here, as some of you implied we have great potential for further growth in operating efficiency.

And I look forward to leading that progress in the months and year ahead. So, thank you very much for joining us.

Have a good day.

Thank you. Ladies and gentlemen, this concludes the Group 1 Automotive first quarter earnings conference call.

[Operator Instructions]

At this time you may disconnect.