Group 1 Automotive Inc (GPI) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Group 1 Automotive second quarter earnings conference call. (Operator instructions) At this time, I would like to turn the conference over to Russell Johnson of Fleishman-Hillard. Please go ahead, sir.

Thank you, Andrew. Good morning, everyone and welcome to the Group 1 Automotive 2005 second quarter conference call. Before we begin, I would 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 associated with pricing, volume and the conditions of markets. Those and other risks are described in the Company’s filings with the Securities and Exchange Commission over the last 12 months. Copies of these filings are available from both the SEC and the Company.

In addition, certain non-GAAP financial measures, as defined under SEC rules, may be discussed on this call. As required by applicable SEC rules, the Company has provided reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures in this morning’s press release.

Joining us on the call today are Earl Hesterberg, President and Chief Executive Officer of Group 1 Automotive; Robert Ray, Senior Vice President, Chief Financial Officer and Treasurer; John Turner, Executive Vice President; and Joe Herman; Senior Vice President, Operations. I will now turn the call over to Mr. Hesterberg. Please go ahead, sir.

Thank you, Russell. Good morning, everyone and welcome to our second quarter conference call. In a minute, I will provide an overview of our results for both the second quarter and the first half of the year. I will then turn the call over to Robert to provide some additional color.

First, let me update you on my first three months with the Company. Since arriving at Group 1 in late April, I have spent the majority of my time visiting our dealerships and meeting the very talented local management teams on which this organization has been built. As of last week, I have now visited all 95 of our dealership locations. These visits have continued to fuel my enthusiasm for our Company. I am very pleased with our brands and dealerships, and am extremely impressed with the wealth of experienced and talented people we have managing our dealership operations.

These visits have also enabled me to begin formulating a strategic plan for Group 1 as we move forward, but I will need another month or two to finalize it and review it with our board of directors.

During my first three months, we have continued to focus on integrating acquisitions made over the past year or so, streamlining our overall operations and reducing costs. Our second quarter results show some progress in these areas.

During the second quarter, revenues increased 20% year over year to $1.6 billion, which drove a 15.1% increase in net income to $18.1 million or $0.75 per diluted share. New vehicle revenues were up 20.5% on unit sales growth of 14.5%. Used vehicle retail revenues grew 15.5% on a 6.2% increase in unit sales, while parts and service and F&I revenues increased 24.2% and 17.2% respectively.

Total gross margin grew 10 basis points to 15.2% and our total gross profit increased 20.9%. Although these increases in revenue and gross profit are largely attributable to our 2004 acquisitions, we saw increases on a same-store basis as well. During the second quarter on a same-store basis, total revenues grew 3.9% highlighted by a 5.6% increase in parts and service sales. Same-store new vehicle and retail used vehicle revenues were up 3.3% and 2.7% respectively, while same-store finance and insurance revenues were 6.9% higher.

Turning to our year-to-date results, we retailed more than 97,000 new and used vehicles in the first six months, an increase of 12.4% from the prior year period. New vehicle unit sales were up 16.1% and used vehicle retail unit sales were up 6.4%.

Revenues for the six months increased 20.8% to $3 billion as we experienced increases in all four of our businesses. Specifically, new vehicle revenues increased 21.8% and used vehicle retail revenues increased 14.5% while parts and service grew 26.3% and F&I increased 15.3%. On a same-store basis for the first half, revenues increased 2.1% with new vehicle revenues up 1.7%, parts and service up 4.7% and F&I up 3.4%.

Used vehicle retail was relatively flat, down one-tenth of a percent. This is an area of opportunity for our Company. Our used vehicle retail unit sales decreased by 4.3% for the first six months, while our gross margin per retail unit increased by 8.7% to 1,925 per vehicle.

Turning to geographic and brand mixed, based on new vehicle unit sales for the year-to-date period, our top four geographic markets were Massachusetts, Houston, Oklahoma and Los Angeles, which together accounted for almost half of our total new vehicle unit sales.

Our brand mixed, again based on year-to-date new vehicle unit sales, continues to be led by Toyota, Scion, Lexus at 28.7%, followed by Ford at 18.3% for a total exposure to these top two brands of 47%. This represents a 130 basis point increase for Toyota, and a 370 basis point decrease for Ford versus the first half of 2004.

Our next four largest brand exposures in rank order were DaimlerChrysler, Nissan Infinity, GM and Honda Acura which together accounted for another 46.1% of our new vehicle unit sales.

Lastly, domestic brands represented about 38% of our year-to-date new vehicle unit sales, while import and luxury brands comprised about 46% and 16% respectively. Luxury brands as a percentage of our total business have increased by 360 basis points over the same period last year.

Now a quick word about inventories. Our total new vehicle inventory at June 30th was a 62-day supply. This represents a seven day reduction from first quarter levels, and a 16-day reduction from the second quarter of last year. Imports were at 46-day supply, luxury brands at 47 days and domestics at 83 days.

Our supply of used vehicles at June 30th was 29 days, which is a bit tighter than we would like it to be. As a result, we have recently increased our target from 30 days to 37 days. We think this new target effectively balanced the increased risk from recent used car value reductions with our desire to increase our used car sales.

All in all, we had a solid quarter marked by increases in same-store revenue and profitability. We also saw evidence that some of our more recent acquisitions are beginning to become productive. You will also see we made some progress in improving our SG&A metrics.

I will now ask Robert Ray to go over the details of our financial results. Robert.

Thank you, Earl and good morning everyone. Let me begin by providing a bit more color on the second quarter results we announced this morning. As reported in our news release, second quarter net income was $18.1 million or $0.75 per diluted share. These results include approximately $1 million in after-tax charges associated with the compensation, relocation and other costs we incurred in connection with our recent CEO transition. Excluding these charges, our results for the quarter were $0.79 per diluted share. This compares with $0.67 per diluted share in the second quarter of 2004, an increase of 17.9%. For more detail on the reconciliation or as reported and as adjusted results for the quarter and year-to-date periods, please refer to the schedule attached to the news release.

One additional comment here. As you may recall, our 2004 results of $0.67 per diluted share included an $0.08 charge related to a severe hailstorm. We highlighted this item last year in order to make the 2004 period comparable to 2003, however we do not consider it a reconciling item this year due to the fact that our 2005 results also include weather-related losses.

Now let me provide a little more detailed review of our operating and financial results for the second quarter. All of my comments will be on a same-store basis unless noted otherwise.

During the second quarter we retailed 45,900 new and used vehicles, which was about flat versus last year. Our average sales price per unit increased by 3% over the prior year, resulting in a similar 3% increase in new and used retail sales revenues. As Earl mentioned previously, revenues in our other businesses were also up, with parts and service up 5.6% and F&I up 6.9%. Total same-store revenues were up 3.9% quarter over quarter.

Total gross profit for the quarter increased 4.5% from the prior year to $207.3 million. Gross margin increased by 10 basis points from 15.1% to 15.2%. Gross profit from new vehicle retail sales was down slightly, about half a percent, despite a 1.7% increase in unit sales. This was due to a 2.2% decline in gross profit per retail unit sold to $1,908 resulting in a 30 basis point decline in gross margin per retail unit sold to 6.8%.

In the second quarter and most notably in June, new vehicle unit sales were positively impacted by the most recent round of manufacturer incentives, specifically unit sales at our GM stores increased by 13.7% on a quarter-over-quarter basis. Compared to May, the increase was even more dramatic at about 52.3%. Unit sales at our Toyota, Nissan and Chrysler stores were also strong versus the prior year, while our unit sales at Ford and Dodge stores were weaker than last year.

Gross profit from used vehicle retail sales increased 7.6% despite a 2.7% decline in retail unit sales. The increase in gross profit was due to a 10.6% increase in gross profit for retail units sold to $1,965 exceeding our new vehicle gross profit per retail unit. We believe the decline in retail unit sales was consistent with the overall trend in the markets in which we operate and were directly impacted by the continuing new vehicle incentives.

That said, we did a better job managing our inventories which resulted in a lower wholesale loss for the quarter. As a result, our total used vehicle gross profit increased by 11.4% resulting in total used vehicle gross margins that were up 60 basis points to 9.0%. We expect that the profitability of this business will continue 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 4.3% over the prior year, even though gross margin was down 70 basis points to 54.4%. This decline in gross margin largely reflects a change in our mix of business among parts, service and collision services as the lower gross margin wholesale parts business continues to represent a larger percentage of revenue than our retail parts and service and collision businesses.

Specifically, wholesale parts of parts revenues as a percentage of total parts, service and collision revenues increased from 24.2% in the second quarter of ’04 to 25.2% in the current period. We remain pleased with the position and performance of our parts and service business.

F&I gross profit increased 6.9% versus the prior year, as fee income increased across the board on flat retail unit sales. As a result, same-store revenues per retail unit were up 6.8% to $960 from $899 in the prior year.

We continue to work on the F&I performance of our recently acquired stores. These largely luxury franchises had F&I revenues per retail unit of $808 in the second quarter, which served to bring down our total F&I revenues per retail unit to $945, but still up 5.1% versus the prior year.

On the cost side, we continue to focus on SG&A across the entire Company. In the second quarter, same-store SG&A as a percent of revenue was 12.2% and as a percent of gross profit, was 80.2%, a reduction of 40 basis points from the prior year. Contributing to the decrease was a decline in advertising expenses of about 9% and excluding the previously mentioned costs associated with our CEO transition, SG&A as a percentage of gross profit was 79.4% or 120 basis points lower than the prior years.

Finally, same-store operating margin of 2.7% was unchanged from the prior year. After combining these same-store results with those of our recently acquired stores, our consolidated operating margin for the quarter was 2.8% versus 2.7% in the prior year.

Now the remainder of my comments will be on a consolidated basis unless noted otherwise, starting with floor plan interest. Total floor plan interest expense increased by $4.1 million for the quarter to $10.1 million. This large increase of about 69% is attributable to both higher floor plan interest rates as well as higher average floor plan balances. Specifically, floor plan interest rates for the second quarter were about 190 basis points higher than in the prior year, and average floor plan debt balances were about $107 million higher.

These higher floor plan balances were due to acquisitions made in ’04, offset by reductions in same-store inventories in ’05. It should be noted that our 2005 earnings guidance includes about – assumes about 120 basis point increase during the year. We are still comfortable with this assumption. Manufacturer floor plan assistance, which we report as a reduction to new vehicle cost of sales at the time of sale totaled $9.7 million, covering 96% of our total floor plan interest expense for the quarter. This coverage was up slightly from 94% in the first quarter, but down from 114% in the fourth quarter of ’04.

Other non-floor plan interest expense increased about $900,000 for the quarter to $4.7 million. This 24.1% increase was primarily attributable to higher average debt balances, partially offset by lower average interest rates. Specifically, average debt balances in the second quarter were about $57 million higher than in the prior year period and this was largely due to acquisition-related bank borrowings made during the second half of ’04, of which a balance of $50 million remained as of June 30th.

Average interest rates in the second quarter on this non-floor plan debt were 70 basis points lower than in the prior year, due to the weighting effect of our LIBOR-based bank borrowings.

Now turning to liquidity and capital structure. From a liquidity standpoint, the Company maintained $1.2 billion in committed credit facilities. As of June 30 we had about $380 million of availability under these facilities. Portions of this availability can be used to fund our floor plan, working capital, acquisitions, and general corporate needs.

Also as of June 30, our total long-term debt to capitalization ratio was 26%, down from 29% as of March 31st. Although floor plan obligations are not considered as long-term debt for purposes of this calculation, we had included $50 million of short-term borrowings under our bank revolver. These bank borrowings are classified as short-term as of June 30 because the underlying bank facility matures within one year, or June of 2006. At this fairly modest level of leverage, 26%, we have significant capacity to fund addition growth.

Now a few words about cash flow and capital expenditures. Cash from operations for the six months ended June 30 was $54.1 million compared with $54.4 million in the prior year. Gross capital expenditures for the six months ended June 30 totaled $28.3 million, $22.1 million of which was for the purchase of land and the construction of new or expanded operations. We continue to expect 2005 capital expenditures to be about $69 million on a gross basis and about $53 million on a net basis after considering sale leaseback transactions.

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 schedules of additional information attached to the news release.

With that, I will now turn it back over to Earl.

We will open up the call for your questions in just a moment, but first let me update you on our recent acquisition and platform activities. In May, we acquired a BMW dealership in Stratum, New Hampshire. The dealership is our first in New Hampshire and is operating under our Boston-based Ira platform. We anticipate annual revenues of about $53 million for that store.

Also in May, we acquired new Chrysler and Jeep franchises to augment our existing Dodge dealership in Rockwall, Texas outside of Dallas. These franchises are expected to generate about $10 million in annual revenues.

Year to date, Group 1 has acquired five franchises with estimated revenues of about $109 million. Our 2005 full year target for acquired revenues remains at $300 million.

Moving on to platform activities, effective July 1st we consolidated our Smith platform located in Beaumont, Texas with our Houston-based Metro platform. In addition, effective August 1st, we consolidated our Rocky Mountain platform which has dealerships in New Mexico and Colorado, with our Messer platform which has operations located primarily in West Texas.

The Smith and Rocky Mountain platforms accounted for about 6% of our total new vehicle unit sales for the year-to-date period. The consolidation should result in improved economies of scale and operating efficiencies, and we would expect similar actions to consolidate some of our smaller platforms in the future.

Finally, a quick update on our earnings guidance. Our second quarter performance demonstrated some improvements in key areas. However, our low inventory position in used vehicles as well as some shortages in our top-selling new vehicle brands and models may temper our ability to sustain this level of performance in the coming months.

Additionally, we tend to agree with the industry experts who are projecting some degree of payback in total market volume during the months ahead. Considering these factors, we are tightening our full year earnings per share guidance to $2.95 to $3.02 per diluted share. It was previously $2.95 to $3.05 per diluted share.

This new guidance is based on 24 million shares outstanding and excludes future acquisitions and the cumulative effect of any change in accounting principle. That concludes our prepared remarks. I will now turn the call over to the operator to begin the question and answer session. Operator.

Thank you, sir. (Operator instructions) John Murphy with Merrill Lynch. Please go ahead.

Good morning.

Good morning, John.

I just had a question on the ad spending. That seems to be something that a lot of dealers have been able to pull back on in the past couple of months. I was wondering if that is something that you can continue to do or if there is something going on with the GM program, or the other programs, that helped out with that?

John, this is Joe Herman, good morning. How are you?

Good morning.

Two fronts. One of them is that there was some pullback with the GM program, because General Motors was advertising so aggressively that I think a lot of us rode their coattails. But secondly, starting earlier this year, we had our platform management and our dealership general managers together a few times and ad spend is one of the things that we have been reviewing to frankly have the people who have been spending at the high end of the scale use the practices of people spending at the lower end of the scale. So it is a little bit of both.

Okay, and then just on the Atlanta platform. Can you give us a quick update on how you are progressing down there, because it sounds like it is getting better?

John, can you repeat that? Which platform?

I am sorry, the Atlanta platform where you were having some trouble. It sounds like it is getting better down there. I wonder if you can give us an update on how that is progressing.

It is progressing well. As we said last quarter, we remain cautiously optimistic. It is doing significantly better than it did during the comparable period last year, but I would not say we are out of the woods yet but we are on our way.

And then another question just on acquisition values. You guys seem to have done quite a few in the quarter and there are a lot of other groups that have been – it seemed like they had been out of the market, at least as far as execution. What are you seeing as far as values? It seems like you have some great dealerships in the quarter?

This is John again. We aren’t seeing values change much one way or another. I would say over the past 18-24 months the values of the stores that we bought have been fairly consistent.

Okay, great. Thank you very much.

Thank you. The next question is from Adrienne Dale, CIBC World Markets. Please go ahead.

Hi, thanks. A few things. First, I am just following up on that last question. What kind of multiples are you seeing these days?

This is John, still. We don’t focus as much on multiples as we do return on investment. Our acquisition guideline has always been around 20%, a little lower for imports and high lines, maybe a little higher for our domestics. But we are still tracking in that same range, maybe a little below 20% because most of our emphasis lately has been high lines and imports.

So is it just that you are able to take more costs out of the business now, or you are really not seeing values change very much?

I am not seeing values change very much.

Okay, great. And then your domestic inventory still seems a little bit high, or it did at quarter end, anyway. What is it standing at now?

I am sorry, domestic inventory?

Yes.

It is at 83 days.

That was at the end of the quarter, or that is where it is right now?

I am sorry, that was end of the quarter.

And where is it now?

We don’t know specifically – this is John again – but with Ford and Chrysler jumping on board with employee pricing we expect the domestic has continued to come down. General Motors, for example, at the end of the quarter was at 50 days whereas overall domestic was 83, Robert? So Ford and Chrysler drove that higher rate at the end of the quarter, and I would expect they are coming down as we speak.

Okay, great. And then you also said that you were seeing shortages in certain of your top selling models. Which ones specifically would you highlight there?

This is Joe. We are seeing shortages in Toyota and some of our European luxury brands, particularly BMW, some models of Mercedes Benz, Mini would be another.

Okay. And is that something that you can rectify pretty quickly or is there just short supply overall?

In the luxury vehicles there is some supply coming in but it is generally short, either very – these are very hot franchises. Toyota is in a solid period right now where they are starting to fill the pipeline again, so we hope to start seeing that improve by September.

Then lastly, this is more broadly, Earl spoke about needing another month or so to finalize the strategic plan. Should we expect to see any major changes there, or strategy shifts or anything going forward?

No, this is Earl. I don’t think you will see anything too revolutionary because the fact is these are still 95 automobile dealerships and I think the playing field is one that most of your colleagues can articulate as well as I can. I think it is a matter of how we prioritize our resources and how we try to increase our operational efficiency and reduce our costs. I need to share some of those ideas with our board before I would make any public statements. I think you probably can predict the general areas, as you can see it. You have seen where we need to improve in the data.

Okay, great. Thank you.

Thank you. The next question is from Scott Stember with Sidoti. Please go ahead with your question.

Yes, can you maybe talk a little further on the inventories? How you stand with some of the hot-selling domestic brands now that we continue to see the employee pricing on ’05 products? What are you seeing going into the third quarter?

In General Motors we are short, so we are lighter than we would like to be in GM. We have seen some early results this morning from Ford that would indicate they had a very robust July, but I don’t think we are going to be short in Ford because we went into the month of July a little bit longer in Ford than we went into June with General Motors. I haven’t seen the Chrysler numbers yet.

So I would say that General Motors is going to be short in August, Ford should be all right for August and DaimlerChrysler should be okay for August.

Would you be concerned then that you might have to go to some other means on the GM products, if you had to, to compete? Meaning on a pricing basis?

Well it is going to give us a great used car opportunity for the third quarter and going into the fourth. The pipeline is a little shy right now.

Okay. And on the parts and service side, can you talk about what the ultimate goal is? It seems like you are moving away towards the parts and service, percentage-wise, moving more towards the collision side of the wholesale. Where do you expect that to end up at the end of the day?

This is Earl. I think that is just the way the numbers worked out for the most recent quarter. We have very powerful wholesale parts operations in places like Oklahoma and Boston and one of the things that we have been able to do is by adding a variety of brands in a given market, we have been able to be very efficient in wholesale by offering body shops, independent body shops and other independent repair shops a variety of brands of parts with one delivery service, one selling and support service.

So that is pretty good business for us in some of our platforms. But I think longer term you will see that we will shift back to some better margin mechanical repair and service business because we are investing in some additional service capacity in some of our big dealerships and some brands like Toyota, Honda, BMW and Mercedes. So as we move through the next year to 18 months, I would think we will also have some strength in the high margin, traditional dealership service business.

Okay, and that is circling back to the gross margin. Can you talk about the effect that the GM employee pricing plan had on gross margin in the quarter?

We had some drop in General Motors, but we also had a drop in DaimlerChrysler which is a result of DaimlerChrysler raising the VPA targets during the year. So it was not as much of a drop in GM as people would have thought it would have been.

Also, the way the dealership business works is that the dealerships are a little light on the front end of the deal, represents more of an opportunity to do a more thorough job on the F&I side. So I think we were able to retain some of it there.

Okay, and last question, can you talk about customer paid versus warranty work?

Yes. We are seeing – this is Joe again – we are seeing an increase in our import business driven by our luxury business in warranty. SO our mix is changing as we add import franchises and luxury franchises. Luxury franchises have a higher experience of warranty repair, let’s say than mainline imports or even domestics. So it is a mix question.

Okay, that is all. Thanks.

Thank you. The next question is from Matthew Nemer with Thomas Weisel Partners. Please go ahead.

Good morning, everyone.

Hi, Matt.

The first question is – I guess this is for Earl – but given the decentralized pitch that Group 1 has given to former dealer principals, how tough do you think it will be to change the structure of the Company from a cultural standpoint?

Well, Matt, I think that is more a psychological matter than a matter of reality. Our goal is going to be to continue to get the most out of these incredibly experienced, talented people we have out in the local markets, but at the same time not continue with 15 different ways of doing the same thing. And actually, I find some of the biggest proponents for increasing our efficiency, some of the – most material recommendations are coming from those people who have been with Group 1 a long time and who are operating our stores out there.

So those are the things that we are going to discuss over the next month or so, because a lot of this input is coming from those people. We all have the same goal, to drive our costs down and drive our efficiency up. So I think we can continue to use those talented people we have that drive our business in local markets. And of course, markets like Boston and Long Island that are quite different from West Texas and Houston and Los Angeles, so I am really happy that we have these talented people who understand these local markets.

Then, it is our job here to find a way to squeeze cost out of the system and support them to continue to make the local decisions they need without having any extra costs in our system. And that is what I am working on right now with the team here in Houston. I am completely confident that we can find the best of both worlds.

And I don’t like the decentralized word. I think a lot of the semantics here get people thinking with inaccurate impressions.

Okay, and then next, given your experience at an OEM, where do you think inventory should be in a more normalized interest rate environment, particularly on the domestic side? Do you subscribe to the NADA’s 60-day target, or do you think that is outdated?

Yes, I like 60 days. I mean, first we are going to try to get to 75 with our domestics. The domestics are a bit more challenging because of the super duty truck business, in particular Ford, Chevrolet, Dodge trucks have a lot of configurations of super duty trucks and those tend to be very profitable units. We also tend to operate a lot of dealerships in Texas, Oklahoma and places that are big truck markets. So we may not have a typical profile.

But I do think that we do have a lot of experience in how to operate dealerships with lower days supply because we, I think, have some of the best Toyota dealerships in the country, some of the best Honda dealerships. And while their model line doesn’t proliferate quite as much as the domestics do, we do believe we can operate with leaner inventories than what we are, even at this moment.

So we are going to continue to try to drive that domestic inventory number down and for now, we are going to try for 75 and then we are going to work our way towards 60.

Okay, and then two quick follow-ups, I guess these are for Robert. On SG&A, were there any other components, notable components, to the decline other than ad spending? Like rent or anything like that?

No, that was the only thing of note on an absolute basis and then the SG&A as a percent of gross profit declined, that of course was assisted by the fact that our gross profit increased. So the only notable decline was advertising.

Of course, personnel costs increased as gross margin increased just due to the commission-based structure that we have. In terms of an absolute decrease, advertising was by far the largest.

This is Earl. Just another comment on the advertising, I think there has been some visibility of some of the larger acquisitions we made over the last year or 18 months and how we are trying to integrate those into our operations. Some of those big acquisitions have been in Southern California, in Los Angeles in particular, here in Houston in particular. One thing we are able to do is when we can bring a new store into a market where we have a lot of power, like Houston or Los Angeles is we buy advertising very efficiently in those markets.

So that is very cost-effective for us when we can buy media in our areas of concentration. Boston would be another one. It is not just newspaper, even direct mails and things like our business development centers and Internet operations. So there are some significant efficiency in those advertising numbers.

That was my next question, was there a change in mix in the type of advertising or is that more of an absolute decline?

It is Joe. It was an absolute decline and it would be different by individual platform and in some cases by dealership based on what is most efficient in a given market. It is just an absolute decline.

Okay, and then last question for Robert. On the platform consolidation, can you quantify the cost of that in the third quarter and any annualized cost savings?

Matt, this is – I call it… you can tell by the scope of these we are just wrapping kind of a small operation into a larger operation. There will be uplift due to the fact that there are things like advertising and just your normal – I call them tuck-in type synergies, but it is not – we have not quantified it. I would not consider them initially to be material.

Okay, great. Thanks very much.

Thank you. The next question is from Rick Nelson with Stephens. Please go ahead.

Hi guys, this is Joe Franger for Rick.

Hi, Joe.

Most of my questions have been answered. The tax rate for the second quarter, can we expect that rate going forward?

Yes, it will pick up a little bit, Joe, but it is going to be around 37% going forward.

Okay. Can you comment on the impact that lower new vehicle sticker prices might have on the new and used vehicle segments?

Joe, this is Joe. It is to be determined. Certainly if you lower the transaction cost to the consumer, for the consumer, that should equate to a lower monthly payment. However, if you lower the sticker price of a vehicle and you are not able to provide similar levels of incentives that you have in the past, there could be a problem because these incentives, in a way, wind up becoming down payments for the consumer to help you finance a transaction.

So we are hopeful that the sales get a lift from the lower prices; we are concerned that the strategy doesn’t provide enough incentive to get people financed into cars. So the jury is out.

Okay, that is all I have. Thank you.

Thank you. The next question is from Matthew Fassler with Goldman Sachs. Please go ahead.

It is not Fassler, it is Mark Irizarry here. We have a couple of follow-ups, I guess, at this point. First of all you talked about just now the impact of lower prices, perhaps on demand. As you have all of the big three pile into the friends and family deals in July, and it looks like GM is certainly continuing through August, what do you expect to see happen on the new car gross margin line and if in fact – taking that one step further – there is some sustainable structural change in the way the Big Three come to market, what does that mean for the underlying profitability for the dealer?

This is Earl. First of all, we were all very excited about the impact in the market that these programs had in terms of driving increased traffic and incremental sales. And then, in particular, clearing out our ’05 model inventory.

However, if you look at the individual programs, the margins were reasonable predetermined on the front end. I would say that you couldn’t negotiate them, but they range from 5-6.5% for GM, Chrysler and Ford. That is a little bit below what our normal new car gross profit per unit would be. As you can tell, our average new car margin tends to be closer to 7% or thereabouts in the segment.

That was fine for a couple of months to move out inventory, and because there was significant incrementality versus our previous travel rate, but if that ever got to the point where those types of margins became structural and there was no longer incrementality then that would be of concern to us.

And Earl, what is your understanding as the Big Three sort of muse over how to come to market going forward, they are obviously excited by these results. They like the cleanliness of the deal and of the transaction, but can you see them trying to implement some permanent nature of this kind of approach to market?

I think what they would like to do on a more permanent basis is get away from such large discounts and large rebates or incentives. Much of that is driven by an imbalance in supply and demand. I also believe that the Big Three manufacturers also recognize what the front-end gross profit per unit needs to be for their dealers. They have been doing this for a long time, and despite occasionally showing evidence to the contrary, they really do try to support dealer profitability to the best of their ability.

I think what they are trying to do and what you hear from this value pricing discussion is they would like to trade off a little bit of MSRP or sticker price for an offsetting amount of incentives to make the retail prices a little bit more meaningful again.

Okay, but it sounds like they would participate in some of the hit that you might take there from a dealer gross profit perspective.

Well I would hope so. I do believe that the Big Three do recognize and in particular I think Ford and General Motors are under a little more pressure, or have been the last six months or 12 months. They understand that dealer profitability for their dealer body as a whole is not where anyone would like it to be.

Right, fair enough. Second question I would like to ask, just thinking about the used car gross profit results that you are able to generate. You saw better results both in the retail and on the wholesale front. If you could just talk about the used car environment and what that should do for margins going forward, including presumably the impact of more trade-ins on supply at auction?

Matt, this is Joe. Good morning.

How are you?

I will answer it on a couple of fronts. First of all, what we have seen so far this year is we have seen an increase in our vehicle selling price and that has been driven somewhat by the fact that we have more luxury in our mix than we used to have. Having said that, we are also seeing an increase in margin in many of our mainline stores. We believe that we want to put a little bit more pressure on our own system, so we are raising our internal guidance for supply to 37 days from 30, because we believe there is a larger opportunity out there.

The larger opportunity probably or should come from a lower end of the price spectrum on a per car basis, it could be a little bit lower than what we have been currently experiencing. So the margin may go down, but hopefully the volume will go up.

Now what we are seeing from an inventory standpoint, we have gotten a lot of trade-ins on the General Motors and the Ford programs, and I think a lot of our platform management would say that they have seen a lot of this business come in towards the last 10 days of the month where the consumer is trying to get in on the program before it ends.

We are seeing a lot of – I have been seeing a lot of SUVs and trucks being traded in. We are going to have a great used car opportunity for the balance of the year. Our people in this organization, in Group 1, we have got a strong used car bent in the organization. Lots of used car experience. They have been to these kinds of dances before and we are looking to take advantage of the opportunity.

Got you. And then finally, I just have one quick financial clean-up question. If you look at the hailstorm hit from a year ago, I guess it was in the neighborhood of $0.08 and in my notes I have 37 basis points of EBITDA. First of all, correct me if I am wrong, Robert if you would. Secondly, where on the P&L did that really show up if you were to look at gross and SG&A, just to get more of an apples-to-apples rendering? And, if weather was a big factor this quarter, where did that show up?

Well it will all be going through SG&A, and you may recall last year the $0.08 was a big, single event. We have incurred about $0.08 this year, it has just been spread over the first two quarters as opposed to all in one fell swoop as it was last year, that is why we didn’t consider it as a reconciling item in that sense.

Is it $0.08 measured in terms of the kind of write downs that you had a year ago or is it more --?

It is the exact same type of activity. We are self-insured up to a point and it just – so we incur the first X million worth of exposure and then above that, we are protected. So it is just that we are at that point where we are right at that max, we have achieved that maximum amount of our exposure that we are obligated for.

And had you had that kind of activity in prior years, that kind of weather activity, or is it really unique to the past two?

Prior to last year it was – the last two years have seemingly been the anomaly, but I don’t know that two years does a trend make, but it has happened the last two years.

Understood, thanks so much.

Okay.

Thank you. The next question is from Jonathan Steinmetz with Morgan Stanley. Please go ahead.

Thanks, good morning everybody.

Hi, Jonathan.

A number of them have been answered, but I just wanted to ask you, Earl, on the SG&A, I know you don’t want to give a comprehensive plan, but it looks like you chipped away a little bit in the quarter. Can you just talk about the two or three biggest buckets where you think there is the most opportunity?

Well clearly we were able to attack the inventory bucket, and I don’t think we are done there yet. I just want to flip the equation around a little bit, because sometimes we forget that there are two parts to SG&A and part of it is the gross profit margin that we have. That, as you can see from the data, we have some upside in our used car sales potential. I also think our operations get more efficient as we sell more.

While we have a lot of experienced people who have sold used cars, I think we might have been restricting them with the used car inventory policy. So I think we can sell more used cars and create more gross. I think there is still some room for us to better manage, including the mix within our absolute levels of our new car inventory.

And then clearly, at some point you have to get into the compensation element of your operation. That is one of the areas where efficiency becomes important. I am sure you all know the concepts, even with these small tuck-ins Robert mentioned, that there is nothing really significant in the short term. But when we tuck in these stores to bigger operations we frequently only need one accounting activity instead of multiple; one leader, a platform president instead of two; frequently on chief financial person for the platform, not two. Those things start to add up in your compensation percentages over time.

I think you probably know the drill. So I think compensation and inventory. I don’t think we have hit the bottom on advertising. So those are the three big cost areas. And then we need to sell more. Mr. Turner is here to my left and he is my SG&A expert, I am sure he has something more intelligent to add.

Well, I don’t have much more to add than that. I guess a couple of observations, though. When you get the 10-Q and are able to compare first quarter ’05 to second quarter ’05 we talk about advertising being down significantly. Well that is from second quarter ’04. If you look at the last quarter as compared to this quarter, the advertising spend was just about flat. And if you make that same comparison on the compensation side, the spend as compared to gross was down about 50 basis points.

Okay. When you talk on comp you talked a little bit about the management side of things. If the pricing plans become simpler, does that change the equation at all from the sales manager or sales person standpoint?

Yes, that will change it. I don’t think you are going to see that change in a quarter or in six months, but it will change over time.

Okay. And finally, you talked about shortages on popular models and mentioned some Toyota and European luxury. If I want to buy a domestic large pick-up or large SUV or something like that, at one of your dealerships, am I going to have a problem finding supply?

Not if you want to buy Ford or Chrysler products?

But GM I would?

GM is a little short.

Okay, thank you very much.

Thank you. Our next question is a follow-up question from Matthew Nemer with Thomas Weisel Partners. Please go ahead.

Hi, just one follow up on the used car side of the business, it sounds like you’ve increased your focus there. Some of your peers have adopted a centralized approach using inventory management software and I am wondering if that is in the cards or if you think you will still use the approach where it is run by the local used car manager?

Matt, this is Joe. We are using one of the applications in two of our platforms right now and we are getting ready to test another one of the applications in another platform, so we are taking a look at it.

Can you tell us which product you are using?

There are only two, and we are using Auto Exchange in two platforms and we have First Look coming into one of our platforms very shortly.

Got it. Great, thank you.

Thank you. Management, at this time we have no participants to ask additional questions. If you would like to conclude your comments, please do so at this time.

Well thanks to everyone for joining us. I think we all know here that we still have a lot of work to do, but our second quarter results show that we are starting to make some progress. Thanks to our sales growth, lower inventories, strong used car F&I and parts and service margins, and the start of a downward trend on SG&A is a foundation for us to build on as we move forward. Once again, thanks for joining us and we will look forward to visiting with you again in the future.

Thank you, management. Ladies and gentlemen, at this time we will conclude today’s teleconference presentation for Group 1 Automotive second quarter earnings conference call. If you would like to listen to a replay of the presentation, please dial 1-800-405-2236 or 303-590-3000 with an access code of 11034607.