Group 1 Automotive Inc (GPI) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the Group 1 Automotive 1st Quarter 2006 Earnings 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 the conference, please press the *, followed by the 0. As a reminder, the call is being recorded today, Tuesday May 2nd, 2006.

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

Thank you, Eric, and good morning, everyone. And welcome to the Group 1 Automotive 2006 1st quarter conference call.

Before we begin, I'd like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures.

Except for historical information mentioned during the conference call, statements made by management of Group 1 Automotive are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve both known and unknown risks and uncertainties, which may cause the Company’s actual results in future periods to differ materially from forecasted results. Those risks include but are not limited to risks associated with pricing, volume and the conditions of markets. Those and other risks are described in the Company’s filings with the Securities & Exchange Commission over the last 12 months. Copies of these filings are available from both the SEC and the Company.

In addition, certain non-GAAP financial measures – as defined under SEC rules – may be discussed on this call. As required by applicable SEC rules, the Company provides reconciliation of any such non-GAAP financial measures to the most-directly comparable GAAP measures on its website.

I’ll now turn the call over to the President and Chief Executive Officer of Group 1 Automotive, Earl Hesterberg.

Thanks, Pete.

Good morning, everyone. And welcome to the Group 1 Automotive 2006 1st Quarter Conference Call. Joining me on the call today are John Rickel, our Chief Financial Officer – Wade Stubblefield, our Vice President and Corporate Controller, and Pete DeLongchamps, whom you just heard from – our Vice President overseeing manufacturer and public relations.

In a minute, I’ll turn the call over to John, to present our financial results. After John is finished, I’ll discuss our revised full-year earnings guidance, and then open up the call for questions.

We are pleased with our financial results for the 1st quarter. They exceeded the high end of our expectations, in achieving net income of $22.3 million. Excluding the cumulative effect of a change in accounting principle in the 1st quarter of last year, that’s a 54.9% year-over-year increase. This equates to $0.91 per diluted share, which is a 51.7% year-over-year increase, before taking into account the change in accounting principle last year.

These outstanding results come from across-the-board improvements in new vehicles, retail used vehicles, parts and service, and finance and insurance. Each of these businesses showed top line growth and profit improvement. Of particular note is our improved performance in retail used-vehicle sales, which delivered a 40-basis point improvement in gross margin. Improvement in this area is important, because we identify our used-car business along with parts-and-service as a key area of strategic focus for our Company.

Increased management focus on used vehicles, led by our regional vice presidents, combined with Company-wide usage of our new American Auto Chain software, drove our performance improvements. Installation of the software was completed by the end of the 1st quarter. These is undoubtedly more training and learning required, to maximize the impact of this powerful tool. But the real-time data and management oversight capabilities already have generated a quick dividend for our company.

As you will see later, better management of our used-vehicle inventory has dramatically reduced the number of used vehicles we need to wholesale. It also is a factor in helping us achieve a wholesale profit figure for the quarter. Perhaps the most-significant aspect of our 1st-quarter results was the significant decrease in our SG&A expense. Our operating team managed a 500-basis point reduction – to 76.2% of gross profit, compared with 81.2% in the 1st quarter, last year.

This decrease was driven by reductions in compensation expense – as we reduced our field management structure, increased operating efficiency, re-indexed certain key job-incentive pay levels more closely to market levels, and began achieving some back-office economies. I'm pleased with the progress we've made, and believe it has a direct correlation to the experienced management team we have running our field operations.

We also improvements in total revenues and gross margins. Finance-and-insurance revenues were up 5.2%, while parts-and-service increased 2.9%. Retail used-vehicle revenues grew 1.9%, with a gross margin increase of 60 basis points. And new vehicles had a 40-basis point gross margin improvement on 1.6% higher revenues.

Above all, our results showed that the strategic initiatives that we implemented late last year are delivering results. Our streamlined operating structure is helping us to work smarter, and to place accountability and responsibility within our Company in the right places.

On the acquisition front, we did not make any significant new acquisitions, other than the previously announced Toyota Lexus of Manchester, in January. To date, we've added 3 franchises, with approximately $130.1 million in annual revenues, toward our full-year $300 million goal. We continue to believe that we can achieve that $300 million goal. We also disposed of 4 franchises with $35 million in annual revenue, and are on-track to achieve our planned level of at least $110 million in disposals.

Turning to brand mix. During the 1st quarter, Toyota [Sign] and Lexus brands continued to be our top-sellers, accounting for more than 1/3 of total new-vehicle sales – followed by Ford, at 17.1%. In total, for the quarter, import and luxury brands increased to 67% of our mix – with domestics declining to 33%.

Now, a quick word about inventories.

Our total new-vehicle inventory at March 31st was at 62-day supply – up 6 days from the end of 2005, but down 7 days from the same period a year ago. Though we were making progress on reducing our domestic inventory, we still believe we have more work to do in this area. As we have discussed previously, the nature of the domestic-incentive programs makes this more challenging.

Our supply of used vehicles at quarter-end was 28 days – still short of our 37 date target.

I will now ask John to go over our financial results in more detail. John?

Thank you, Earl. Good morning, everyone.

As Earl noted, 1st-quarter net income increased 54.9% from the same period a year ago, to $22.3 million, or $0.91 per diluted share, on revenues of $1.4 billion. On an overall basis, gross profit for the quarter increased 5.5% from the prior year, to $236.8 million – reflecting an improvement in all 4 areas of our business – New- and used-vehicles, parts-and-service, and finance-and-insurance.

These increases, along with a 500-basis point reduction as a percentage of gross profit, and our SG&A expense, contributed to a 110-basis point increase in our operating margin, to 3.7%, and a 90-basis point increase in our pre-tax margin, to 2.5%.

I'd like to now discuss some of our specific same-store results. Before getting into the details, though, we've been asked numerous times in recent works to address our approach in discontinued operations accounting.

To start, I would point out that our same-store comparison excludes the results from our 2 New Orleans, Louisiana dealerships that remain closed – as well as the 5 dealerships that we have disposed of over the last past year.

Our policy is to not exclude stores that might be under consideration for disposal from the calculation of our key metrics. We only adjust same-store comparisons after a sale is completed.

As such, when calculating our same-store results, it is important to understand that we have not excluded any stores which have not sold. This may represent a different approach from other companies, and therefore, comparisons with others may be more difficult. We, along with our independent auditors, believe this is consistent with the optical literature on accounting for discontinued operations.

Given this context, let me now discuss our same-store results for the quarter. New-vehicle revenues were up 1.6% on a 7/10 point decline in retail unit sales – reflecting, primarily, continued weakness in most of the domestic brands. However, increases in sales of import and luxury brands, along with our ability to retain more gross profit from our sales of domestic nameplates, resulted in a 40-basis point improvement in new-vehicle gross margin, to 7.5%.

Used-vehicle retail revenues were up 1.9% -- and gross margin expanded by 60 basis points, to 13.3% on a 4.6% decline in retail unit sales. In addition, we generated wholesale profits of $94 per unit, and our total used-vehicle gross margin therefore improved by 120 basis points, to 10.5%.

As Earl mentioned, operational improvements drove a 16.8% decline in wholesale revenues on a 14.4% decline in unit sales. It should be noted that our retail used-vehicle inventory increased by 778 units, in preparation of the spring selling [inaudible].

Parts-and-service revenue increased 2.9%, while gross profit increased 2.8% over the prior year, as our gross margin remained consistent, at 54.1%. We saw increases in both our parts-and-service business, while our warranty revenue decreased slightly, as we benefited last year from some specific manufacturing quality issues that were remedied during late 2005.

Finance and insurance gross profit was 5.2% higher on the new- and used-vehicle retail unit sales decline of 2.1% -- resulting in gross profit for retail unit increasing 7.6% -- to $1,068 from $993 in the prior year. This increase was primarily attributable to higher retroactive performance payments received from certain of our extended service contract providers, as well as a reduction in chargeback expense related to finance contracts sold in prior periods.

The retroactive vehicle service contract payments are received twice a year, and we therefore expect our per-unit revenue to be closer to our normal range of $950-1,000 per unit in future periods.

On a consolidated basis, SG&A declined 500 basis points, to 76.2% -- led by a 440-basis point decline in same-store results, as a positive impact of stores we disposed of since last year. The primary drivers of our same-store decrease were changes in variable compensation pay plans and personnel reductions.

We did incur approximately $900,000 in additional compensation expense as a result of our adoption of SFAS123 – the new stock compensation accounting standard. We expect the full-year impact to be approximately $3 million, or about $0.10 a share, as we had previously estimated. In addition, we saw decreases in our level of advertising spend, as we continued to closely scrutinize our level of expenditure in this area.

Same-store rent expense for the quarter was $15.2 million – an increase of 9.7% over prior-year, as a result of 2005 sale lease-back transactions, and rent on facilities-under-construction – which, under prior accounting guidance, was permitted to be capitalized.

For the quarter, we only recognized approximately $300,000 of business-interruption proceeds as a reduction of SG&A expense. We have made total business interruption claims of $9.1 million, of which we have been able to recognize only $2.4 million to date. We're still waiting on final approval of all of our BI claims submitted before recognizing the remaining $6.7 million benefit. We expect to obtain these approvals during the 2nd quarter of 2006.

Finally, we previously announced our intention to move to a sole-source provider for our dealer management system software – ADP. Although we are unable to recognize the potential related exit costs until we cease using the existing software, we have estimated the future charge to Group 1 from exiting the contracts could be in the range of $3-4.5 million, with the majority of these costs likely to be incurred in the 3rd and 4th quarters of this year.

Same-store depreciation expense decreased 16.9% for the quarter – primarily due to a million-dollar charge we took in the 1st quarter of 2005, to adjust the depreciable lives of certain of our lease-hold improvements. Same-store floor plan interest expense increased by $3.2 million for the quarter, to $11.5 million. The 38.6% increase was attributed to floor plan interest rates that were 204 basis points higher – partially offset by average floor plan debt balances that were $65.5 million lower.

Manufacturer floor plan assistance – which we record as a reduction to new-vehicle cost-of-sales at the time of sale – totaled $8.2 million – providing 71.5% coverage of our total floor plan interest expense for the quarter. This level of coverage was down from 95.9% in the first quarter of 2005.

Partially offsetting our increased floor plan interest expense is a $1.1 million decline in consolidated "other" interest expense for the quarter, to $4 million. This 22.2% decline was primarily attributable to average debt balances under the Company’s acquisitional line-of-credit that were $86.8 million lower than in the prior-year period.

The Company’s effective tax rate for the quarter was 38%, as compared to 36.8% for 2005. Approximately 70 basis points of this increase was due to the impact of adopting SFAS123, and the remainder to the change-in-mix in our taxable state jurisdictions.

Now, turning to liquidity and capital structure. As of March 31, we had $586.4 million of total availability under our credit facilities for floor plan financing – and an additional $186.9 million for acquisitions, working capital and general corporate purposes.

Our availability has decreased by about $61 million since December 31 as a result of increased floor plan borrowings associated with higher inventory levels, which occur every year at this time as we move into the spring selling season.

As a reminder – in this environment of rising interest rates during December 2005 and early January 2006 – we entered into 3 interest-rate swaps for total notional value of $250 million, effectively fixing our rate on this portion of our floor plan borrowings, at approximately 5.8%.

As of March 31, our total long-term debt to capitalization ratio was 19% -- down from 20% at December 31. At this fairly modest level of leverage, we have significant capacity to fund additional growth. We expect full-year 2006 capital expenditures to be about $80 million on a gross basis, about $35 million on a net basis – after considering sales and lease-back transactions.

Finally, we made no repurchases under our Board of Director’s approved $42 million share-repurchase plan. For additional detail regarding our financial condition, please refer to the schedules of additional information attached in the news release, as well as the investor presentation posted on our website.

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

Thanks, John.

As I mentioned earlier, our outstanding results show that the strategic initiatives we announced late last year are gaining traction and making a meaningful difference. But it’s important to remember that strategic initiatives don’t implement themselves. Successful execution of the strategies requires diligent and capable people working together to make things happen. That’s what’s most-gratifying about our 1st-quarter results. They’re a testament to the hard work of all Group 1 employees, from corporate officers and regional vice presidents, down to local general managers and service technicians.

Based on our 1st-quarter results, we are increasing our full-year earnings guidance to $3.40-$3.70 per diluted share. That’s up from the $3.15-3.45 we announced in February. With respect to the assumptions underlying our revised guidance, we expect an additional 50 basis-point increase in interest rates during the remainder of 2006, and believe the full-year negative impact of SFAS123 to be approximately $0.10 per share. We are also still forecasting approximately 24.5 million diluted shares outstanding.

We have not included our expected benefits in the final settlements of all 2005 business-interruption insurance claims, as we anticipate these to be partially offset by DMS system-conversion costs during 2006, as well as some potential costs related to the resolution of two of our closed-facility issues in New Orleans.

Finally, the range we have given reflects industry selling rates of between 16.8 to 17 million units, this year.

Group 1 Automotive is off to a great start for 2006, and I'm convinced that the best is yet to come. We've done a lot of work, but plenty of work remains to be done, and there's still a lot of opportunity for us in the market.

That concludes our prepared remarks. I’ll now turn the call over to the operator, to begin the question-and-answer session.

Thank you, sir.

Ladies and gentlemen, at this time we will begin the question-and-answer. If you have a question, please press the *, followed by the 1, on your pushbutton phone. If you'd like to decline from the polling process, press the * followed by the 2. You’ll hear a 3-tone prompt acknowledging your selection, and your questions will be polled in the order they are received. If you are using a speakerphone, you will need to lift the handset before pressing the numbers.

One moment, please, for the first question.

Rick Nelson, with Stephens, Incorporated. Please go ahead with your question.

Thank you. Good morning, and congratulations on a great quarter.

[inaudible] comp, actually lagged. The peer group had reported this quarter, and I know some of it is accounting, that you alluded to. But I'm wondering if you can comment on market shares that you see in your market. Then, the tradeoff. We saw very nice improvement on the gross margin side. I guess how sustainable do you think that is?

So, first let me address… I think when you mentioned the comp lagging – I assume you meant sales performance?

Yes.

We had a bit of a mixed performance, but by brand, our Toyota stores were very strong. We were above the Toyota increase nationally, with our Toyota performance. The same with Lexus. We actually outperformed the Ford retail performance in the quarter. So we had a very strong BMW month. It differed by brand.

Where we were weak, in terms of sales in the 1st quarter, was primarily in Chevrolet and also Nissan. Most of that, particularly in the case of Nissan, the ball’s in our court. We need to fix that. So we had some pretty big variations by brand.

We don’t really see any big short-term issues other than Nissan. We had all of our Nissan general managers in here recently, and we just need to do a better job, there.

But our core brands – particularly the two big ones – such as Toyota [Style] and Lexus and Ford, we had excellent – excellent first quarter.

And the margin improvement. You're one of the few dealers where we saw nice increases in the gross margin percent, as well as gross profit-per-unit. What is driving that?

Well, I think it’s more of the consistent processes. And I guess a little more management oversight from the regional vice president level. We had some stores – and several of them were General Motors stores – that had gotten into some very bad habits in terms of gross profit in their systems. And basically, giving away vehicles. Which is just not a good structural way to do business.

We all get put in a position, at times, where we need to move some metal. And there are closeouts and so forth. But we've had some stores that basically we've had to fix, such that we have a process where… We're in business to make profit. And that’s helped our gross, I think, by being more disciplined in how we operate. Particularly in a new- and used-vehicles sales department.

It may have had a little bit of sales impact short-term, but I think we're starting to have more discipline in our processes. John wants to add something.

Yes, Rick. This is John Rickel.

The other thing I would add is in the first quarter, we probably also benefited a bit from domestic incentives. I don’t know why that wouldn't have shown up with some of the others, but we were certainly able to – I think partially as a result of the processes that Earl’s just described – able to retain maybe more of that than what we'd been able to do historically. But certainly, some of it which was aimed at dealer cash, we were able to do a better job of retaining those incentives.

And the SG&A improvement… 500 basis points. How sustainable do you think that level is? And what should we be looking for in terms of future SG&A narrowing?

Well, clearly, that was a remarkable and significant improvement in the 1st quarter. As we looked at our guidance for the remainder of the year, our goal is to try to maintain as much of that as possible.

We aren’t nearly where we need to go over the next year or two, and I can project that quarter-to-quarter it will move around. Because there are some moving parts to it. But our goal now is to try to make that structural – that current level. And then start to work beyond that.

So we're generally assuming in our earnings guidance, that we're plus-or-minus now closer to this level than the level we were when we began the year.

And employee turnover. I'm wondering what you've experienced at Corporate, and out there on the platforms, in terms of turnover with your new strategies.

Well, we've had some turnover, but I'd have to say it’s less than what I've expected, so far. And we lost some people we didn’t want to lose. But we have such a depth of talent. Which is one of the advantages of the way that Group 1 was put together over the years.

These stores were bought as groups of stores. And basically, the management came intact. So we have a wealth of automotive talent. So we've had absolutely no problem replacing the people we've lost. I won’t be surprised if we lose some more. We actually have some that we planned to lose, based on contracts that expire over the next couple years, of people that came in as original platform presidents.

But thus far, we haven't seen anything that’s not manageable. It is our people who have generated this performance for us, and I'm pretty pleased with the bench strength we have.

Thank you.

Our next question comes from Scott [Stember] with [Zodi &] Company. Please go ahead.

Could we talk about sales in the quarter? How things progressed month-by-month, and maybe talk about April? What you guys are seeing? Particularly in light with fuel costs going up so dramatically.

I can’t really speak about April, but clearly I can speak about January through March.

Actually, on the domestic front, the last 6 months from October through March were not particularly strong. Although there were some signs of life in March. So it wasn’t great. Obviously, the new General Motors sports utilities had helped a little bit. But certainly not enough to drive General Motors sales numbers up in the 1st quarter.

There was some pretty strong activity on Ford F series in the 2nd half of February and March, that related to a stair-step incentive they had. The new Dodge Caliber is just starting to hit the market. But overall, there's not a lot of strength in the domestic brands. So that’s something that we had to overcome with our 1st-quarter performance.

The imports, on the other hand – as I'm sure you've seen corroborated by other data, is very strong. Toyota had a great 1st quarter. Our Lexus business was above the national average in the 1st quarter. Honda is very strong. BMW and Mercedes, both, had great 1st quarters. We participated in all of that. So again, it’s the import and luxury brands are driving our business – just like they appear to be driving the total market.

John – you made a comment about the gross margin on new. Referring to how you guys were able to capture more gross profits. Is this pointing back to what Earl said regarding some of the underperforming stores doing a better job of just not giving the product away?

Yes. Absolutely. It’s basically tied into that process. I think the evidence of that is that as the question alluded to – we're one of the few that were able to move that up. I mean the same incentives were in place for all the companies, and I think it is the processes and the disciplines that [inaudible] stores that allowed us to keep more of that.

And Earl – you made a comment about 2 focuses here, going forward, on sales, at least, will be used and parts-and-services. Could you talk about the parts-and-service, now that you have a new manager of that process? Some of the things that we could look for, for increased sales, there?

Well, I can’t be too specific. And I have to admit, Scott, that this is an area that I would say our performance – at best – has been mediocre. And we've put a disproportionate amount of time in the last 6 months or so into used cars, as well as this restructuring.

What I'm asking Wade Hubbard to do – those of you who don’t know… We hired a vice president of parts-and-service. Wade Hubbard, who has experience at Nissan, Toyota and Daimler-Chrysler. Both here in the US and in the UK. So one of the advantages that Wade brings to our team… One of the talents he brings is the ability to look across brands.

We do want to start to have him drive where we make our investments. There's frequently a lot of discussion in our sector about, "Well, should you be adding service stalls? Or should you be working harder to extend shifts and hours and so forth?"

We have not had a lot of planning and discipline in that area. And I'm asking Wade to bring that to us -- as well as to help us focus more specifically on metrics and targets to drive our business. And although we're not very sophisticated – or as sophisticated as I would like to see us today… That’s the type of thing I'm asking Wade to do. And we should be able to give you a little more color on that by the time of our next conference call.

Could you just talk about some of the penetration rates on the ?&I side of the business, with regards to extended warranty?

Yes. We actually have that here. John’s flipping through the page. In warranty, we're somewhere around 35%, I think, on extended warranty. And I believe our overall F&I penetration was a little bit above 70%.

Yes. For 1st quarter, we were at 72%. New-vehicle penetration. Service contract was at 34%.

How does that compare to last year?

Last year on service contracts, we were at 35.5. And on new-vehicle finance, 76.7.

That’s all I have. Thanks.

Our next question comes from John Murphy, with Merrill-Lynch. Please go ahead.

I was just wondering on the SG&A front – if… The improvement. If you could bucket it between the major savings… I mean you're talking about comp being down, getting some economies of scale. You clearly have one less layer of management. I was wondering if you could sort of break it down generally. I'm just trying to understand how much of the comp reduction really drove the SG&A performance.

Comp was 220 basis points. Advertising was over 700 basis points. And there was an offset with the increased rent-related expenses for the big chunks. I’ll see if my financial wizards want to elucidate.

Yes. Those are the big chunks. Comp was the biggest piece of it. Advertising was down about a million dollars. Then there was partial offset on higher rent for the quarter.

This is more of a theoretical question. There tends to be or seems to be a divergent view among at least the public groups, in an effort to reduce this comp number. Was your comp number particularly high, relative to your peers? Or do you feel that you're now more in line? Or are you just being more focused on the comp number?

I personally believe our comp was out of line. But I don’t want people to interpret that that was just as simple as, "Oh, you know, you're paying your people too much." A lot of it has to do with we've had a lot of management structure in our company – from operating out of 15 field locations. We still have a lot of work to do in back-office efficiencies. So I think it’s a multitude of things that we've begun to attack pretty aggressively, led by these 5 regional vice presidents. And I still think we have a long way we can go. But I do believe that we weren’t competitive with some of the better companies in our sector.

When we think of turnover sort of as the flip-side of the coin, there… Is there… Clearly, zero percent turnover is non-efficient. Is there a level of turnover that’s generally acceptable? Even in reducing comp and maybe even in generating a little bit more turnover? That might be the most-efficient way to run the business. Are you thinking about that as you're running through these numbers?

Oh, sure. We think of turnover every day. But there's really two types of turnover that are involved, here. One is, there's an inherent amount of turnover that’s in the automobile retailing business, and always has been. And that’s a bit different by brand and region of the country.

For example, it’s harder to retain sales people these days in domestic brands, where the volume is shrinking, than it might be in a luxury or an import brand. Just a function of these – our commissioned – people. If they can’t earn enough money, you tend to turn over a certain percentage of the sales force that just never quite builds up enough referral business or core business to stay there. So that’s just part of the automotive retail business.

I think what many of you continue to ask is, "Well, as you make various changes in operations, you have more management oversight, you re-index certain pay plans, are you going to have people leave for greener grass?"

That’s a consideration, when we do this. We intentionally did not sever a significant number of our managers when we went from 15 platforms to 5 regions. We believe our talent is very valuable, and we will do our best to keep our automotive talent with Group 1.

That said, it’s inevitable when you have a lot of talented people, and you have fewer chiefs, that you're going to lose some. Thus far, it’s not been surprising and it’s not been unmanageable.

Then if you just think about the opportunity here, if we back out about 6% out of our SG&A for rent… I mean you're pretty much at a rate… a class-leading SG&A as a percent of gross. Is there a lot more opportunity here in the future?

Well, personally, I believe there is a lot more opportunity, because I look at it every day. Now, I didn’t know we were at class-leading levels. That happened awful quickly. So I don’t think one quarter makes a football game or a year. So I'm pleased that we're making some progress, but until we do this on a sustained basis, I don’t think anybody should refer to us as "class-leading."

But I know we can do a lot better. I mean I see opportunity everywhere. My regional vice presidents educate me on some of the opportunities. So we can do – over the next 2 or 3 years – we are going to do a lot better. We have to!

Then if we think about the ADP conversion through the course of the year – mostly in the 2nd half… Maybe costs are a couple million dollars. And what’s the payback on that? I mean is that a pretty quick payback?

Yes. John, this is John Rickel. What we talked about on the press release was the direct systems savings. What we pay for the computer system is worth $3 million at least on an annual basis. So that does pay back fairly quickly. Obviously, it ran itself as you make the conversion. Plus, it’s also the enabler to further improvements that Earl was alluding to on what more we can do on SG&A.

Does that new system dovetail with your new used-car systems that you're putting in place?

Absolutely.

There's tremendous economy of scale, putting those two systems together.

They run off of each other. They're compatible. The used-car system is basically already out there, in place. We finished installation at the end of the 1st quarter. So it's up and running. It’s not dependent on the DMS system that it runs off of. It can run off of all 3 of them that are out there.

How much of the improvement in use in the 1st quarter did you see from that new system being put in place? Or is it too early to tell?

I don’t think I could really apportion the various parts of our improvement to the system or to management, and of course there's a certain amount of upturn you get in the market in the spring season, too. There's a strong used-car market.

But there's no doubt in my mind, the fact that we are wholesaling so many fewer vehicles and being able to retail much more of what we have on the ground – has to be in some part due to this capability and more management attention.

So I believe it’s a significant amount. I don’t want to pretend that the used-car market also isn’t strong, now. But I believe we're better managing our used-car business, and we have some numbers to support that contention.

Thanks a lot, guys.

Our next question comes from Joe Amaturo, with Calyon Securities. Please go ahead.

Good morning. I was just wondering if you could quantify how much better the cost-improvement could get, going forward, as we progress through '06 and then a little longer-term?

Well, the way we had tried to frame it before the results of this quarter, was we believed that we were about every bit of 500 basis points behind the leader of the class, in total SG&A. So if we were 80-ish, we believed that over the next 3 years… And we started saying this a half-year ago… So let’s say over the next 2.5 years, we need to get 75-ish.

That’s clearly… We're making some progress, that way. That’s assuming that competition stands still – and I don’t think they are going to stand still. That’s one of the reasons I answered the question earlier where not only do we see opportunity will improve over the next couple of years… We have to improve more.

This is a nice first step, but we have some more work to do, to assume that probably 150-200-plus basis points.

It appears that you didn’t repurchase that many shares during the 1st quarter. Could you just comment on your approach to repurchasing the stock? I think if my memory serves me correct, you have about a $42 million authorization out there. So I mean is it going to be an opportunistic approach or a systematic approach?

Well, you are correct. First of all, we repurchased zero. None. And I believe our authorization and announcement wasn’t until March 13th. So we really only had about 2 weeks or a little more than 2 weeks before the quarter ended, and we were a little bit preoccupied with several other things.

So we still would intend to execute that $42 million repurchase. I think it will be more opportunistic than systematic, just because we're in a dynamic market. Every aspect of the market’s dynamic – not just the investment part, but also our needs for cash and capital on any point in time.

Have you repurchased any stock during the 2nd quarter?

We're in the quiet period, Joe. So the answer is no.

Okay. Thank you.

Our next question comes from Matthew Nemer with Thomas Weisel Partners. Please go ahead.

Congratulations, guys. Great quarter.

My first question is, can you shed any light on regional differences in sales and margin performance?

I can speak to sales. I'm not sure I've got the margin data in my head. Clearly the Houston market remains very strong for us, as does New Orleans. Surprisingly, Oklahoma is not as strong. You would think, with high energy prices, that Oklahoma might be stronger. But Oklahoma’s not one of our stronger markets, right now.

New England is very strong for us. We're a very strong and growing group up in that part of the world, centered in Boston. So I think those were the highlights I can remember. I don’t have any regional margin data in my head, so I can’t help you with that, right now.

That’s okay. And then turning to the SG&A issue – I'm wondering… Can you give us any more detail on what comp is, as a percent of revenue, or a percent of total SG&A? And kind of how that compares to industry norms?

I would make John Rickel answer that question.

Yes. Let me just do a little bit of math, here. Basically, I can give you the dollar millions, Matt. Then we’ll calculate the percents.

Personal expenses for us in the 1st quarter were 108.6 million, out of a kind of total SG&A expense of 180.5 million. So basically, whatever that percentage – it would be around 60 [inaudible]

Is there a benchmark in the industry for where you typically want to be?

Yes. There are benchmarks, Matt. By brand. We know what those are, through various [20] groups and years of history and so forth. We look at the comp as a percent of gross profit by brand. So a Ford store is different from a BMW store, and so forth. And each company that you all look at is going to have different brand and geographic mixes.

But yes, clearly, we have the ability to manage those types of benchmarks, and that is what our regional vice presidents have been doing, every day, with their various brands of stores.

Yes. For us, comp as a percent of gross profits – 45.8%.

Okay. And about what inning are you in, in terms of getting that toward kind of the brand benchmarks, in your mind?

Well, I'm afraid the numbers that we've put out this quarter might put us in a later inning than I'd personally put us in. But we certainly haven’t pitched enough innings to get credit for the win, yet. So we're certainly in the first 5 innings, still.

Then just to dig a little deeper on the advertising side… Can you give us a sense for what your advertising is per-vehicle-sold, and kind of what the target might be, there?

Well, again, we could provide that. But that might require more math and more data than we have [inaudible] [crossing]

I can give you the dollar millions, Matt. 15.4 million is what we spent on advertising, in the quarter.

And a total of about 29,000 new and about 16,000 used vehicles.

And the decline… Where is the decline coming from? Is it a change in mix? Or just absolute number of impressions? Or give us a little more detail, there.

Well, I don’t have a lot of specifics other than a lot of it’s media shipped, and a lot more synergies we're doing, in terms of these 5 regional vice presidents looking into how we can get a lot more economy. Of course, there's a lot of advertising in parts and service.

So I can assure you that there's a lot of movement out of some of the mass media into more electronic media – which is indicative of the entire industry, right now. And we're doing a lot of that, ourselves.

Okay. That’s all I've got. Great quarter. Thank you.

Our next question comes from Jonathan Steinmetz with Morgan Stanley. Please go ahead.

Thanks. Good morning, everyone.

A few questions. You spoke about the potential for further reduction in SG&A – the gross, in the future – from some folks who maybe have agreed to leave the Company down the line. Do you have any dollar figure as to what that might save you, going forward? And how the timing on that would look?

No. And in fact, I don’t know some of these people. I was merely referring to the fact they have some contracts that expire that were part of the various acquisitions Group 1 made in recent years. In some cases, we may choose to extend those contracts, or continue to employ those people. So I don’t have any number to put with that.

John, the D&A was down year-over-year. Can you just talk about why that was the case? I remember some write-ups on some Mitsubishi stores and that kind of thing. Was there anything involved in that that caused it to be down?

No. First quarter '05 we had some write-offs. Basically, some catch-up for lease-hold improvements write-offs that obviously didn’t repeat. It was basically a one-time catch-up in 1st quarter '05.

So you expect this to be an ongoing run-rate type of thing?

Yes, sir.

And out of the 80 million in capex on a gross basis, how much of that is sort of image-enhancement type programs? How much of that is growth or any new points you'd be getting, or anything like that? Can you just break that down a little?

I can’t exactly break it down, but the majority of it is growth. Either new facilities or service-expansion, relocations and so forth. So I couldn’t put a percentage on it. But well over half of that’s growth.

Thank you very much.

Our next question comes from Jordan Hymowitz with Philadelphia Financial. Please go ahead.

Jordan Hymowitz with Philadelphia Financial – your line is open.

Next question comes from [Rich Cross] with Wachovia Securities. Please go ahead.

Parts and service. Wanted to check in. Now with Wade in the fold here, how soon do you kind of expect same-store to pick up, as we look out at the rest of '06 and into '07?

Well, unfortunately, the nature of the parts-and-service business is a slower, more ongoing business. It’s not something that you can impact as quickly as we've been able to do in used cars, for example. It’s very, very systemic. Very process-driven. So I couldn't necessarily forecast that over the next few quarters, you're going to see a big jump.

But part of that issue also – as it relates to all of our same-store performance data – is underperforming stores that are still in our stable.

So to the degree that we're able to either dispose of underperformers or fix them, that will probably have a quicker impact than starting to implement – say – some better processes and operating discipline.

Then on the used-vehicle front. ATPs were up pretty nicely, year-over-year. Are you selling a greater percentage of CPOs than normal?

Yes. We have been growing our CPO business – particularly with Toyota. But I'd have to say that we are not among the leaders in that. We believe there's a lot of upside for us. We only do about 15% of our business in CPOs. And of course, that’s a bit of a brand-mix issue. There are dramatically different competitive levels in the CPO programs in various brands. BMW has a wonderful one. Toyota has a wonderful one. Some brands aren’t quite that good. But overall, that’s an area that we need to mine, to get our used-vehicle volumes up.

Then, John – you talked about the training. You've implemented the used-vehicle software. But the training’s not… it sounds like it’s nowhere near completed. How do you think the cadence of the training rolls out for this portfolio of stores?

Yes. Basically, we got the installations completed by the end of the 1st quarter. But there was training that happened while that was going on. We think it’s 3-6 months of time to really get up to speed on this. I continue to come back to – I think – the best analogy – Excel. When you first get the product, you can begin to make some improvements in your analysis or your spreadsheet capabilities. But the more you use it, the better you get.

So there's ongoing training that we’ll continue to do with this product. We really think it’s 3-6 months before we see the full benefits.

Thanks! Nice job.

Our next question comes from Jerry Marks with AutoRetailStocks.com. Please go ahead.

John, I just wanted to follow up on Jonathan’s questions about G&A. When you said the word, "Catch-up," did you have a [true up] in the quarter? Because maybe you were balancing too much and then had to adjust that up? Or did you just really get a tough comparison, as to say, "Now this is more of a normalized rate?"

What we meant, Jerry, was actually at an easy comparison… We had taken additional write-offs a year ago, 1st-quarter 2005, to catch up on some lease-hold write-offs. So we had an easy comparison with the same period a year ago. The level that we have in 1st-quarter this year, we believe is more reflective of the run rate.

Did I hear you mention something about there being a [round expense] you used to capitalize and now you're expensing it?

Yes. The accounting guidance basically changed, Jerry. So that previously, when you were under construction, you could capitalize some of those costs. That now gets expensed.

How much does that impact you guys by?

About half a million.

Two last questions. Why was R&D so strong? I think that’s what you kind of alluded to, but I believe you got a new regional manager in there. There may be some different initiatives going on in the Northeast versus what’s going on in some of your other markets. Or is it just that the actual overall market conditions are stronger?

No. I don’t think it’s the market conditions as much as it is some of the investment in the stores. And we do have excellent management, there. We actually have David Rosenberg as our regional vice president, there. He was running our Boston market, and now he handles all the Northeast – which includes New Jersey and Long Island. We've invested in a new BMW store that’s coming on very strong in Long Island. And we've made some other investments in Boston and in Southern New Hampshire.

So it’s almost all import brands, in that region. BMW and Mercedes… Four Toyota stores. Two Lexus stores. So we've got the right brands and the right management.

Last question. We've heard some talk about Daimler Chrysler, I guess. The way that they're doing their floor plan [inaudible] on this program – it’s kind of retroactive, based on prior sales but on future orders. Is this kind of like on some accounting disability for you guys? Or are you having to defer those revenues? Or how are you handling those bonus programs coming out of Chrysler?

Yes, Jerry – this is John Rickels. We had a look at that, and the primary performance under the programs is based on the sale of the unit. So we've continued to recognize the incentives when the sale is completed. The way I think about the programs is, basically, what Daimler’s trying to do is to give incentives to blow out existing inventory – to free up the pipeline – to continue to get orders in.

And as we've looked at it – as we've talked to our external auditors – this is really not that different from a normal sales incentive. I mean they're all intended to blow out stock.

Chrysler has put kind of a contingent performance on there that you have to basically take your normal allocation order to qualify for those. But that’s really no different than, "business-as-usual." At the end of the day for us, it really wasn’t material. But we did have a good look at it.

Thanks. That’s all I had.

This does conclude our question-and-answer session. Mr. Hesterberg, you can continue with your closing remarks.

Well, thanks to all of you for joining us, today. We're looking forward to updating you on our continuing progress on our 2nd-quarter earnings call, scheduled for August 1st. Thank you very much.

Ladies and gentlemen, this does conclude the Group 1 Automotive 1st Quarter 2006 Earnings Conference Call. You may now disconnect, and thank you for your using ACT Teleconferencing.