Group 1 Automotive Inc (GPI) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Group 1 Automotive first-quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded Thursday, April 26, 2007.

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 thank you for joining Group 1 Automotive's 2007 first-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 the 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 the market. 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 provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on its website.

I'd now like to turn the call over to the President and CEO of Group 1, Mr. Earl Hesterberg.

Thanks, Pete. Good morning, everyone, and welcome to the Group 1 Automotive 2007 first-quarter conference call. In a minute, I will turn the call over to John Rickel to present our financial results. After John is finished, I will review our revised full-year earnings guidance and then open up the call for questions.

With that, let's turn to our first-quarter 2007 results. Consistent with the fourth quarter, we are continuing to see softness in the new vehicle sales environment, especially with our domestic franchises and in the full-size truck segment. Our Ford F-series new vehicle sales continued to suffer, declining 25% from the 2006 first-quarter period.

In addition, the weakness we began experiencing in California during the fourth quarter continued this quarter, although we did see improvements as the quarter progressed. Although disappointed in our new vehicle sales results this quarter, our data indicates that our retail performance was better than the national average for virtually all of the brands we represent.

With that as a context, let me now cover our first-quarter results. On a GAAP basis, net income decreased 22% to $17.4 million, and earnings per share decreased 21% to $0.72 per diluted share from first-quarter 2006. Excluding charges resulting from lease terminations on the Atlanta Ford store that we sold and on a domestic store planned for disposition, diluted earnings per share would have been $0.82 for the first quarter, down 10% from the same period a year ago.

On a consolidated basis, revenues were up in all four business segments, increasing a total of 7.4%. Compared with the same period a year ago, gross margin declined 50 basis points to 16.2%, primarily reflecting weakness in new vehicle margins. Versus fourth-quarter 2006 results, however, we have seen a rebound with margins improving 60 basis points from 15.6% to 16.2%, as continued improvements in our used vehicle processes and better F&I results more than offset flat new vehicle margins and slightly lower parts and service margins.

Our total same-store revenues were down 1.9% as weakness in the domestic brand stores and reductions in used vehicle wholesales offset a 2.6% increase in our parts and service business. Our overall same-store gross margin declined slightly to 16.5%, reflecting weakness in new vehicle margins. We saw a 9.8% increase in our consolidated SG&A expenses in the first quarter that included a $3.8 million of lease termination costs, as well as $2.3 million of expense due to the standardization and associated accrual for the Company's employee vacation policies that went into effect January 1st of this year.

Including these costs and the impact of the lower gross margins, SG&A as a percentage of gross profit increased 400 basis points from the same period a year ago to 80.2%. Although a large part of this increase is associated with these onetime events as well as the beneficial effect that strong results from New Orleans provided last year, we clearly have more work to do in this area.

During the first quarter Toyota, Scion, and Lexus brands continued to be our top sellers, accounting for 35% of total new vehicle unit sales. Ford and Nissan brands were tied for second with 13.3% of unit sales, although I would point out that Nissan is up 280 basis points, while Ford is down 380 basis points from the same period last year. Next in line was Honda and Acura with 11.8% of our unit sales.

Our import and luxury brands mix is at 74% of our unit sales, and our domestic brand mix at 26%. Compared with the first quarter of 2006, we have grown our import and luxury mix by 780 basis points. Consistent with our strategic initiative to further grow our import and luxury brand mix, we are targeting increasing this mix to at least 80% of our new vehicle unit sales by the end of 2007.

Now an update on the acquisitions and dispositions we have made this year. In January we announced that we purchased BMW, Mini and Volkswagen franchises in Kansas City, and in March we announced that we expanded our operations into the United Kingdom by acquiring three BMW and 3 Mini franchises. These acquisitions are expected to generate an estimated $303.1 million in aggregate annual revenues toward Group 1's full-year acquisition target of $600 million. The Company will focus on import and luxury brands outside of Texas and Oklahoma, with the goal of growing our import and luxury offerings.

In conjunction with Group 1's strategy to dispose of its underperforming dealerships, the Company has divested of six franchises with trailing 12-month revenues of $62.7 million in 2007. The latest disposition was the closure of a Lincoln-Mercury dealership in Atlanta, Georgia on March 31, 2007. We will continue to elevate -- excuse me -- evaluate our dealership portfolio and dispose of underperforming stores. The Company anticipates incurring approximately $5 million to $10 million in associated disposition charges, which includes costs associated with the disposition actions previously announced in 2007.

Now a quick word about inventories. Our total new vehicle inventory at March 31st decreased six days from the end of last quarter and five days from last year to 57 days supply. We saw slight increases in our import and luxury inventory days supply from the fourth quarter. Import inventory stood at 58 days, up from 57 days in the fourth quarter, and 50 days at the end of the first quarter in 2006; while luxury inventory held steady at 40 days from the prior year period, and increased slightly from 37 days at the end of the fourth quarter.

However, I am very pleased to report that our domestic inventory decreased to 69 days supply from 99 days in the fourth quarter and 91 days in last year's first quarter. During the first quarter, our Ford inventory fell 43 days, GM dropped by 20 days, and Daimler Chrysler fell 9 days. This brings our domestic inventory in line with our 75-day target. We will continue to closely monitor our new vehicle inventory management processes to ensure that we keep our inventories under control.

Our supply of used vehicles at quarter-end held steady at 28 days from the first quarter last year and decreased 3 days compared with the fourth quarter.

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

Thank you, Earl. Good morning, everyone. First quarter of 2007, our consolidated net income declined from the same period a year ago to $17.4 million or $0.72 per diluted share on revenues of $1.5 billion. Our net income was negatively impacted by $2.5 million of after-tax lease termination costs we incurred in the quarter, consisting of payments we made in conjunction with the sale and lease termination for the Atlanta Ford store that we announced in February, as well as a lease buyout this quarter for another domestic store that should assist with our disposal efforts for that location.

Excluding the $0.10 per diluted share associated with these charges, our net income would have been $0.82 per diluted share. Compared with the first quarter of 2006, our total revenue increased $105.2 million or 7.4%, and our total gross profit improved $10.3 million or 4.4% to $247.2 million. The increase in consolidated revenue reflects improvements in all of our retail operations, including an 8.4% increase in new vehicle retail sales, an 8.9% increase in used vehicle retail sales, an 8% increase in parts and service revenue, and a 5.2% increase in finance and insurance revenue. Consistent with our strategy and the pattern over the past several quarters, we did see a reduction in used wholesale revenues which declined 7.5% as we continue to improve our used car operations.

Our gross margin at 16.2% was down 50 basis points from the same period a year ago. The reduction is primarily explained by lower new vehicle margins, which at 6.9% were down 60 basis points from the same period a year ago. We continued to see pressure on our margins in California, although they did improve as the quarter progressed, as well as further reductions in F-series sales which carried better than average margins.

Chrysler margins were also lower as the mix of incentives had a lower level of dealer cash this quarter. In addition, a strong performance from our wholesale parts business outpaced improvements in the retail side of the business, resulting in a 60 basis point decline in parts and service margin, reflecting the mix effect of the lower margin business growing faster. As Earl mentioned, our consolidated SG&A expenses increased 9.8% to $198.2 million for the quarter. Included in these costs are $3.8 million, the pretax amount, for the lease termination charges I mentioned previously, as well as a $2.3 million accrual we made as a result of implementing a standardized vacation policy across all of our US stores.

In addition, we recorded a $1.3 million gain for the sale of a franchise in the first quarter 2006 that reduced SG&A costs in that period. Adjusting for these one-time events, SG&A as a percent of gross margin would have been at 77.7%, up 90 basis points from the same period a year ago. As a result of the lower gross margins and higher SG&A, our operating margin declined 80 basis points to 2.9%, while our pretax margin dipped 70 basis points to 1.8%.

Turning to same-store results, our revenues for the first quarter of 2007 declined $26 million or 1.9% to $1.35 billion, more than explained by weakness in our domestic brand new vehicle sales, as well as a further $13.8 million reduction in used vehicle wholesales consistent with our strategy. Improved parts and service revenues of 2.6% and higher used vehicle retail revenues were partial offsets.

We would also note that the first quarter 2006 results benefited from very strong demand in New Orleans following Hurricane Katrina. Excluding the effects of New Orleans, our same-store sales comparisons would have been about flat in the quarter. Compared with first-quarter 2006, our same-store gross margins declined 10 basis points to 16.5%. Similar to the consolidated results we just discussed, the decrease was more than explained by lower new vehicle margins and reduced parts and service margins.

Continued improvement in our total used vehicle gross margin, which increased 30 basis points to 10.7%, reflecting an improved mix of retail used versus wholesale as we continue to reduce the amount of used vehicles that we send to auction, was a partial offset. Consistent with the discussion of our total results, we also saw increases in our same-store SG&A which increased 2.7% over first-quarter 2006 levels. Included in same-store results are $525,000 for one of the previously mentioned lease termination charges, $2.3 million accrual associated with standardizing our vacation policies, and a franchise gain of $1.3 million in the first quarter 2006.

Adjusting for these one-time events, SG&A as a percent of gross margin would be 78.1%, up 230 basis points from the same period a year ago. As we discussed last quarter, we are progressing on our conversion to a sole-source provider for our DMS software. As of April 15, 2007, we had approximately 95% of our stores on ADP. We recognized the related exit costs when we ceased using the existing software.

We incurred approximately $100,000 of exit costs in the first quarter of 2007 for conversions we completed. Additional charges expected to range from $750,000 to $1 million will be incurred in the second quarter of 2007, as we complete the conversion of the remainder of our stores. These charges are included in our 2007 guidance.

Operating margin decreased 70 basis points to 3.1% from 3.8% in 2006. As Earl mentioned, our new inventory days supply improved from 62 days at March 31, 2006 to 57 days at March 31, 2007, offsetting a 72 basis point increase in weighted average interest rates and resulting in a 3.8% decline in our same-store floorplan interest expense for first-quarter 2006.

Now turning to liquidity and capital structure. Our various credit facilities are used to finance the purchase of inventory, provide acquisition funding, and provide working capital for general corporate purposes. On February 28, 2007, we chose to allow our floorplan credit facility with DaimlerChrysler to expire without renewing. This facility allowed for up to $300 million for financing of our Chrysler Jeep and Mercedes-Benz new vehicle inventory. We refinanced all outstanding balances under this facility with available borrowing capacity under our revolving credit facility.

By way of reminder, we classify all floorplan borrowings with vehicle manufacturers as an operating activity in our statement of cash flows. Therefore, the replacement of the DCS facility with our available credit facility resulted in a $112 million reduction in our cash flows from operations for the first quarter, with a corresponding increase in our cash flows from financing activities.

In order to provide additional capacity for expansion, we amended our revolving credit facility on March 19th to provide a total of $1.35 billion of financing, consisting of a $1 billion tranche for floorplan financing and $350 million for acquisitions, capital expenditures, and general corporate purposes. The amended revolving credit facility matures in March 2012.

Also on March 30, 2007, we entered into a lending agreement with Bank of America to provide up to $75 million of financing for the purchase of real estate. This real estate facility matures in March 2012. Commensurate with the execution of this agreement, we borrowed $63.7 million which remained outstanding at March 31, 2007. As of March 31, 2007, we had paid $116.1 million down on our floorplan lines of credit and had $332 million of availability on our acquisition line of credit, for a total of $448.1 million of funds immediately available for corporate needs, including acquisitions.

Our total long-term debt to capitalization ratio was 41%, up from 38% at December 31, more than explained by the new mortgage facility. We expect our full-year 2007 capital expenditures excluding dealership and real estate acquisitions to be about $80 million. Reported by our new real estate facility, we will continue our approach to acquire real estate, land and buildings, in conjunction with our dealership acquisitions, existing facility improvements and expansion actions, as well as through the selective exercise of lease buyout options.

In total, we presently hold approximately $162.3 million of land and buildings on the balance sheet. For additional detail regarding our financial condition, please refer to the schedules of additional information attached to the news release as well as the investor presentation posted on our website. With that, I will now turn back over to Earl.

Thanks, John. Before I address our revised 2007 full-year earnings guidance, I want to mention an important action by our company to further enhance shareholder value. I am pleased to announce today that our board has authorized a new $30 million share repurchase program. The repurchases will be funded out of operating cash flow and reflects our ongoing efforts to continue rewarding our shareholders. Looking forward, given the ongoing challenges we are seeing with our domestic brand stores, we are revising or 2007 full-year earnings guidance range downward to $3.75 to $4.05 per diluted share from the previously issued guidance of $4.00 to $4.25 per share.

With respect to the assumptions underlying our guidance, we anticipate industry sales of 16.3 million units, flat total revenue in 2007, an additional 75 basis point improvement in SG&A as a percent of gross profit from 2006 levels, flat interest rates throughout the year, a tax rate of 37.5%, and we are forecasting approximately 24.2 million diluted shares outstanding. Guidance excludes any future acquisitions as well as any dispositions, including potential one-time exit charges estimated at $5 million to $10 million.

That concludes our prepared remarks. In a moment, we will open the call for Q&A. Joining me on the call today are John Rickel, our Senior Vice President and Chief Financial Officer; Randy Callison, our Senior Vice President of Operations and Corporate Development; Pete DeLongchamps, our Vice President overseeing Manufacturing and Public Relations; and Lance Parker, our Vice President and Corporate Controller. I will now turn the call over to the operator to begin the question-and-answer session. Operator?

(OPERATOR INSTRUCTIONS). John Murphy, Merrill Lynch.

Good morning, guys.

Good morning, John.

I apologize, I got on the call a little bit late here, so I don't know if you covered this. But I mean, if we think about your Ford dealerships and where sales have slowed down, particularly in Texas and Oklahoma, what is your ability in those dealerships to work down costs, meaning how much is fixed and how much is variable, and can you get the costs in line at those specific dealerships with Ford?

Yes, John, this is Randy Callison. The answer to that is yes. As you know in automotive, you have a lot of variable cost structure, plus you have the ability to shift from new vehicles to used vehicles when the new vehicle sales activity isn't as brisk as it sometimes is. So a number of our Ford stores have done just that. They have shifted to used car focus and also have really focused on their fixed operations and driving profits from that side of the business.

So as you look at improving that cost structure of the dealership, I mean it sounds largely by focus on cost and mix, I mean is that something you can fix in a number of months or a number of quarters, or is it more structural over time?

This is Earl, John. I think the first step we already took, and I don't know if you were on the call, we reduced our Ford inventory by 43 days in the most recent quarter. Now, it was completely out of control. In fact, I think it was over 100 days. So we a lot of -- we had our inventories out of line with our sales rates.

And the next issue and the one that we are slower to adjust to is if you really think the level of activity, revenue and gross profit, is going to stay at these more recent lower levels, you have to get into some people. You have to get into some people issues, and that is the last one that we generally address because we don't want to be stepping down and up knee-jerking. But we have taken the first step with inventory.

Now it's a matter of advertising and people. So I would say generally, you can work your inventory and advertising in kind of 90-day periods, but your people are kind of 6 to 9 months. If you are going to make decisions on that, you know, you have to move a little slower.

Okay. And then is there also -- I mean, as you look to improve your brand mix and your dealerships, is the potential to divest, you know, further Ford stores? Or I don't know if you can get into that kind of detail, but I mean would you actively consider just generically divesting underperforming stores more aggressively and repurchasing performing stores?

Yes, I can't specifically answer that you are correct, but we have more stores that we would plan to divest of. They would be domestic stores, so it is likely there could still be Ford or Ford Lincoln-Mercury stores in our underperforming basket that we are going to address. But I also have to tell you we have some great Ford stores that I wouldn't foresee divesting of under any condition; that they are really solid long-term players in the market and are going to come back.

John, as we look at the mortgage facility that you have put in place, what kind of cost saves could you ultimately see from owning the real estate versus doing the sale -- having your sale-leaseback set up, and how quick will that portfolio or sort of what is the cadence of that real estate portfolio changing over?

Yes, John. This is John Rickel. What we have said is that kind of on an interest rate basis, you know, 150 to 200 basis points is the sort of range of savings that we're seeing for the mortgage facility. We have got, as I mentioned, $163 million of land and buildings that we own. That is probably about 15% of our portfolio at this point. It will be slow. It is an evolutionary sort of thing.

Clearly, as we do new acquisitions, we are going to try to pick up the real estate as part of the acquisitions. The rest of it depends on basically if we can buy out existing leases. In some cases, we have got land owners that are coming to us, now that they know we are interested in offering us the capability, but it will take time. Basically, a lot of our stuff is already under kind of long-term leases, and it is just going to have to be opportunistic as we go forward.

Okay. And then just on the acquisition front, I mean, what are you guys seeing out there and what kind of multiples is there sort of things, you know, tighter or looser than they have been recently?

Yes, John, this is Randy. Much the same as we have seen for the last several quarters.

Okay. Thanks a lot, guys.

Edward Yruma, JPMorgan.

Hi, good morning and thanks for taking my questions. While I know it is still early, do you have any initial observations from your UK acquisition and how do you view that acquisition market going forward?

This is Earl. We have been very pleased with the acquisition. We have had it just about two months, and it has completely met our expectations. It is a very -- the one we made, the acquisition, we made just happens to be one of the best brands in one of the best markets in the UK.

We are not in a hurry going forward. We're looking for other acquisitions but -- in the UK, because over time you do need more scale than what we have with those three stores and six franchises. But I would just say so far so good, and we are going to keep our eyes out, but don't feel any sense of urgency to jump on anything just to be trying to create scale in the near term.

Great. Can you provide a little bit more color on the intra-quarter acceleration that you saw? I mean what degree of magnitude was it and did that trend persist into April?

Well, it is a little hard to do that, but I guess suffice it to say, Edward, that January was pretty much a disaster, and February got better and March was quite a bit better. And that is a pretty generic description of it, but the year just started out very, very poorly and got better every month. I don't know that any of that applies to April. I think we will just have to see. That is kind of forward-looking and we will have to see next week when the manufacturers report results, but the difference between January and March was substantial for our company in terms of the level of activity, sales activity across all brands, all markets.

My final question, do you still have difficult Katrina comparisons in the second quarter, or have you largely lapped that? Thank you.

Ed, this is We still have quite a bit of benefit in the second quarter. There will be a little bit in the third quarter, and then basically, it's behind us.

Great, Thank you very much.

Rick Nelson, Stephens Inc.

Thank you and good morning. Can you discuss the margin pressures on new and used cars, and specifically the brands where the margin pressures are the greatest? I know you said at Chrysler and probably the domestics. And the other side, what brands are the margins holding up the best and what's happening with margins in the mid-line imports?

Rick, the Ford margins had a lot of downward pressure. The Chrysler margins had a lot of downward pressure. In California, the imports had a lot of downward pressure, which you see in our overall results. As you get outside of California, the imports didn't have as much downward pressure as you come back across the country.

And are the luxury side of the house, are the margins the best there?

I would say about the same.

Okay. And it looks like you are making a lot of progress with domestic inventories. In the import side, the mid lines especially, we saw a little bit of build there. Is that something to be concerned about or is that helping your fill rates and sales and actually a positive?

Rick, this is Earl. I think basically that build on import inventories is kind of an industry phenomenon. I think generally speaking, we still take every vehicle we can get from our major import suppliers. And with the overall industry being a little bit soft this year, at least in certain pockets, that you just end up with a few more cars on the lot. The turn velocity just isn't quite what it was on some of these brands last year.

That doesn't mean it's bad. It just means it wasn't as good as it was last year, so you end up with a few more days of inventory. So I don't know if we were particularly blessed in the previous quarters and years or not, but I think we are going to have to assume we are going to have a few more days of import inventory this year, and that is just the nature of the market.

I have a question on the guidance. Is that based on a $0.72 first quarter or an $0.82 first quarter?

Rick, this is John Rickel. It is based on the $0.82. We have said all along that the guidance excludes the lease termination costs.

Okay. I guess just one more, on the subprime used-car market are you doing much there, and is that a strategy?

Rick, this is John Rickel. You know, we do probably about 20% of our sales that are subprime. It is not an area that we are specifically targeting. It is kind of the nature of the beast. We are not seeing really any impact on that from the sub prime mess in housing, if that is kind of the question.

Did you see a step-up in sales, that 20%, is that a change in the first quarter as compared to the fourth?

No, it has been about that level for at least about a year.

Okay. Thank you.

Scott Stember, Sidoti.

Good morning.

Good morning, Scott.

Could you guys talk about Ford sales as far as OEM incentives, what you saw in the first quarter versus the fourth quarter, particularly with the F-series and maybe talk about what you expect going forward? And also just talk about what you are hearing, positive or negative, about the new F-series, the heavy-duty trucks.

This is Earl. It is always dangerous for me to answer Ford questions for some reason. But what we saw through the first quarter was the marketing activity for Ford -- I don't recall what it was in January and February -- but in March they were in the market very strongly in the F-Series. I think they called it truck month. They were on television, leases. A lot of support, noticeably different than, at least from my viewpoint, than what it was early in the quarter.

But they were out there like you would expect them to be in March. I haven't seen the impact of the super-duty in our numbers yet. There was a supply interruption. There was some kind of technical problem in recall on 20,000 or 30,000 vehicles, but that is a big part of the Ford business and it is certainly a positive for Ford and Ford dealers like us as we move into the second and the third quarter.

That vehicle should sell, particularly when it is early in its lifecycle, and that has always been one of your best dealer profit units. It has got a real place in the tradesmen market in the commercial market. So I think that is the foremost positive part of the Ford business as we move into the next quarter or two, and I don't think any of that has shown up in our results yet.

Okay. And just going back when you talked about seeing incentive activity pick up in March, did you notice that the F-Series, you know, was noticeably better in March versus January and February?

I wish I could say we did notice it, but no, our F-Series performance was not -- it was still very bad in March. That is about all I can say.

Again, the F-150 is about what, two-thirds of your truck sales?

No, it is about --.

Well, two-thirds of truck sales.

Of Ford truck.

That could be. We look at it more as -- F-Series is 47% of our total Ford retail business. So when you split car and truck out, you might be right. I don't really -- can't do that math in my head.

Over half.

Okay. Then on the used-car side, can you talk about any advances on the certified preowned, what percentage of your used vehicles this year versus last year and how that is progressing?

Yes, that is one of our priorities. We are up to 18% of our business in the first quarter this year from 14% last year, and we are starting to push that. And we in the past have been very strong in Toyota certified. We are now starting to expand that effort into Honda and into some of the domestic brands. It is always a big part of the luxury car business. BMW and Lexus have great programs. So we are going to continue to push that forward, and we are starting to see some results there in our numbers.

Okay. And last question on the parts and service business. You have brought in some new people to kind of jumpstart that business. And could you talk about any early things that you have seen, any early decisions that you guys could make, whether it is increase stall utilization or increase the number of stalls; and maybe just give us a little bit more flavor on that and the timing of it?

Yes, this is Randy. We are very focused on that. We have had some excellent meetings with our new field structure, the five fixed ops directors that report to the regional vice presidents, and also here in the Houston. They are very focused on a number of things. I won't go into all of them, but two in particular is expansion of our customer pay business, which we are not expanding historically as quickly as we should. They're very focused on that.

And they are also looking at our 28 collision centers. We have some inconsistency in performance between those 28 centers, and they are diving -- deep diving into that.

Okay. And just a quick follow-up, what was customer pay this quarter?

Total customer pay was up 2.1% for the quarter.

Okay. Thank you, guys.

Thanks.

Deron Kennedy, Goldman Sachs.

Hi there. It is Deron Kennedy with Matt Fassler. I guess one of the first questions I have is regarding your guidance or rather your miss for the quarter, and how much of it could you quantify is related to some of those one-time items you went through; and could you just itemize them again for me, please?

Yes, this is John Rickel. The first big one, obviously, was the lease termination costs which --.

I'm sorry. I meant, actually, I guess outside of lease termination costs and the other things you've talked about with regards to vacation days, insurance, etc.

Yes, the vacation accrual was $2.3 million. These are -- what I'm giving you are pretax numbers.

Okay.

In addition, we had -- give me just one second -- yes, basically it was the vacation accrual and then the lease termination, are really the two one-timers.

Okay. And so if I just back them out, I can kind of see what was left and compare that to my estimates. Okay. And then I guess you've itemized many of the things in your guidance, but if you could just let us know what kind of gross margin you are assuming in there as well. You talked about flat revenues.

Yes, this is John Rickel. The assumption is basically flat gross margins as well.

Okay. Then I guess one of the questions I had about your midline imports, and I know you have spoken a little bit about this, but we have heard about incentives from Honda and Nissan from a competitor, and we haven't heard much about Toyota. I don't know, it doesn't sound like you're actually exactly concerned about your inventory situation with midline imports. Is the picture very different in California than it is in many of your other markets? Are you still dealing with overages there in particular?

Yes, this is Earl. I think the situation in California is quite different, and if you look at the market share for Toyota in Southern California, for example, and the size of the dealerships and their -- I believe Toyota does have a unique situation there, and I do believe that they do unique marketing actions in Southern California, which means they may be more aggressive on some models. They have been more aggressive in incentives there than they might be in the rest of the country.

Okay. The final question, you have talked about how -- your last guidance did not include the UK, and your new guidance doesn't include unannounced acquisitions, but is it safe to assume your new lower guidance does include UK?

Yes, this is John Rickel. Yes, that is correct.

What do you assume for that for the first year, as far as contribution to earnings?

We don't disclose specific area contribution.

But it was accretive?

Yes.

Okay. Thank you.

You're welcome.

Matt Nemer, Thomas Weisel.

Good morning, everyone.

Good morning, Matt.

First question, I would like to focus on new vehicle margins. Is it possible, John, to split out the impact of New Orleans or Katrina comparisons versus market pressures? In terms of the new vehicle per unit, I am trying to get a sense of what is coming from what bucket.

Yes, there was obviously some benefit from New Orleans. It wasn't so much on margin percent as kind of just absolute dollars generated, though.

Okay.

Most of the margin pressures are really the things that we have talked about, Matt, you know the lower F-Series, the mix shift in incentives from Chrysler away from dealer cash which helps margins, as well as kind of the overall California pressures.

Got it, and if we look out -- if we look back to the second quarter of last year at new vehicle profit per unit, do you have a guesstimate that you can provide in terms of how much benefit there is from New Orleans? What is a more normalized level on that line?

No, I really don't have a shot at that, not on a new vehicle per unit. As I say, it is more kind of the dollar million just because of the volume and the volume leverage that it generated. Once again, I don't think there was a huge per-unit impact.

Got it. Okay. Then turning to the service and parts business, I understand that you are generating incremental margin dollars from being in the wholesale parts business, but can you give us kind of your strategy there and whether you think you're getting a higher return on capital than you would kind of allocating those dollars elsewhere, those resources elsewhere?

Yes, this is Earl, Matt. We have two big wholesale parts operations, the biggest being in Oklahoma, the other one being in the Northeast. And we actually have a parts distribution center there that handles all of the brands we represent. And just from a shareholder viewpoint, we recently did a return on investment analysis to see if that was a business that we wanted to continue to expand and keep and so forth. And it turns out that it is on a return on investment basis equal or better to these types of dealership acquisitions we make, our hurdle rates for those, and we think that there is some upside to it.

Now the gross margin percentage on that business as it relates to retail parts is probably just half or a little better, but it is incremental dollars and it is a good return on the capital we invest in that operation. And that business expanded significantly in Q1, and we are going to try to expand it more.

I will tell you we don't have plans to add additional businesses like that in our other geographic areas at the moment, but we own that one. We are committed to it and it turns out it is an attractive use of our invested funds.

Yes, Matt, this is John Rickel. Bear in mind, I mean we talk about lower margins, it is only lower margins in the context of everything else is so high in this category; it is one of the few areas where you'd view 20% margin business as low margin.

Right. It's just a rate issue.

Exactly. It's a mix a month.

And then two just housekeeping questions. The first is on the guidance, does that -- it doesn't appear to assume any share repurchase, but I am wondering kind of what is built into that full-year share number.

Yes, Matt, that is basically correct. The share repurchases, as the press release said, will be spread over potentially 12 months and be time to time and as conditions warrant. So we didn't bake a lot of that into the guidance.

Okay. And then lastly on the change in the vacation policy accrual, does that have any impact on P&L SG&A expense, either positive or negative on an ongoing basis?

There might be some slight -- this is John Rickel again -- there might be some slight impact going forward. Basically, we have standardized the policy and a few select cases, it is maybe a little bit generous for some stores than what it had been previously. So there might be some slight negative run rate impact.

That is all I have got, thanks so much.

Rich Kwas, Wachovia Securities.

Good morning. John, with the new guidance you lowered your expectation for SG&A to gross profit for this year in terms of improving it. And is that more just lower -- it sounds like it is more just lower gross profit expectations, and then if that is true, then have you been able to accelerate any of the SG&A cost reduction initiatives in terms of absolute dollars?

Rich, that is what it is, lower gross profit expectation and a poor result in the first quarter. But yes, obviously since the fourth quarter last year, we have been working to accelerate a number of actions. We have to size our cost structure for reality today, and one of the reasons we had these inventory issues was we continued to be too optimistic about future month domestic brand sales. And I think we have now -- I think we're now being a lot more realistic about what the current level of business is with some of these domestic brands and in California, and we've got to get the cost lined up. So we have more work to do, and we didn't just start it today.

Even though you didn't change the full-year industry outlook for sales, the 16.3 number, did you internally adjust your mix in terms of type of vehicles, trucks versus cars?

This is John Rickel. Actually, I think probably more importantly what we have adjusted a little bit internally is the fleet retail view of that. Even though the industry levels seem to be holding up, there seems to be just a bit more overall fleet activity. I know there is a lot of press about the big three in particular kind of backing down on fleet sales, but we are also seeing that their retails are under pressure. And if you actually look at the mix, it is probably just a little heavier retail mix. The retail continues to be a bit soft, so I would say it's probably more that than the vehicle mix.

Just finally on the Katrina, you mentioned you did get some meaningful benefit in the second quarter last year, but is that less benefit relative to the first quarter last year? So basically, the comparison, does it get easier relative to first quarter?

Yes, Rich, this is John Rickel. Yes, the strongest benefit was really fourth and first, a little bit less in the second, drops down again in the third and then kind of gone by the fourth.

Okay, great. Thanks, John and Earl.

Jonathan Steinmetz, Morgan Stanley.

Good morning. Just a little bit of a question, you kept your guidance or you took your guidance to revenue for the year, I should say, to flat, and I assume that is total company; is that correct?

That is same-store.

Okay, I just wanted to make sure because I didn't quite --.

That's same-store.

Never mind, that makes --.

You saw we had 7 or 8% kind of level of total revenue growth. But no, we had originally hoped that we would be able to generate some same-store positive growth, but again after the first quarter reality, we are just trying to be more credible with that assumption.

Just wanted to make sure because with $700 million of acquisition, that is --?

Good clarity.

We should have clarified that in our remarks.

And the pressure on the gross profit side, was there a number of instances when you were reducing this domestic brand inventory where any kind of blowout sale type activity would have hurt the grosses per vehicle retailed, or was a lot of this your inventory came down because you just stopped ordering?

That is a good question. This is Earl. I would say most of it is just a gradual reduction in margins, which you get into when you have these overstock situations. There were some pockets of '06 Chryslers that probably got close to blowout proportions, but generally speaking, it is just the nature of the business when you're trying to work your inventory down you're ordering less, but you're also taking lower gross on those units you are moving out. So it was more systematic than a lot of distressed merchandising.

Lastly, just housekeeping. I was listening to your old friends at Ford, so I jumped on a bit late, so I apologize if you've mentioned this. But on the vacation accrual side, can you just walk briefly through the expense side, and was there a near-term cash implication to that where money went out of the Company, or does this wind out over time as people take more vacation?

This is John Rickel. There was basically no cash. It was basically the accounting accrual to match our accruals up with the standardized policy that we put in effect January 1. Basically, over time you see maybe a piece of that pay out, but it is basically bringing the accruals up to the appropriate levels to match the new policy.

Okay, thanks, guys.

Derrick Wenger, Jefferies & Co.

Could you just tell me what depreciation and amortization and capital expenditures were for the first quarter, and the outlook for the year?

D&A -- this is John Rickel -- was about $4.8 million. The outlook would be somewhere around probably $20 million on D&A. Capital expenditures, we have targeted $80 million of CapEx for the year gross, and we spent just under $23 million for the quarter.

And divestitures planned or -- what was it for the quarter and what it might be for the year?

Just give him year-to-date. We don't have a whole --.

For year-to-date, we have disposed of about $60 million of revenue. We really don't disclose how much we got from the sales.

Okay, thank you. When are the Q filed?

The Q will be filed middle of next week.

Thank you very much.

Ildiko Hildreth, Waterstone Capital.

Thank you for taking my question. Just a couple questions. On the vacation accrual, it sounds like that was a onetime catch-up; is that correct or is this a continuing charge?

No, it is basically onetime. This is John Rickel. It is basically onetime to recognize the new policy, the standardized policy we have put in.

Okay. Then the $0.10 change from the GAAP to the adjusted first-quarter EPS, does that include I think the $1.3 million gain?

No.

Or have you subtracted that?

No, this is John Rickel. The gain was incurred in the first quarter of 2006, so it was only for the year-over-year comparison.

Okay. And then lastly, it seems like your debt has gone up more than inventory has gone up. Is there any kind of big picture explanation of what is going on from the fourth quarter to the first quarter?

Yes, the only change -- once again, this is John Rickel -- is that we have put in place a real estate mortgage facility that we drew $63 million against in the quarter, and it's part of our strategy of owning more real estate.

So you already implemented that much in real estate deals?

Yes.

Wow. Okay, thank you.

[Eric Gold] of BlackRock.

Two questions along the lines of cash flow and from a longer-term point of view. CapEx, and I understand why, is running higher than depreciation. Over what period of time do you think that starts to come down and you can start to harvest some of that free cash flow, whether it is for dividends or stock repurchases?

That is somewhat dependent upon how we continue to travel on acquisitions. As I think we have talked about before in some of our investor presentations, oftentimes what triggers somebody to decide that they want to sell a store as a private cap guy is they are up against the next reinvestment decision, whether it is more service capacity or he has got a Toyota store that because of the brand growth, we have to go find a new location. So that is really one of the big drivers in our CapEx.

So it is somewhat a function of how long we continue at this acquisition pace and kind of the results of those acquisitions. That is really driving the vast majority of the CapEx that we are seeing.

Okay. Also I notice if you look at cash taxes versus kind of book reported taxes, there is a decent amount of cash savings in between the two. How long do you think that gap remains? And it's something that's sustainable as long as you grow, what is the driver of that?

Certainly, one of the benefits in there is the tax shields that we got from the convertible bond that we put in place. There is basically some deductibility on the call spread that goes for another four or five years. Beyond that, I don't have a real good answer for you, Eric.

Okay, thanks.

Greg Wilcox, Wachovia Securities.

Most of my questions have been answered, but just a couple of follow-ups. Your debt to cap ratio creeped up a little bit in the quarter sequentially to 41%. Can you talk briefly just kind of a target debt to cap ratio for '07?

This is John Rickel. One of the things to bear in mind is that was more than explained by the real estate facility, which basically think about it this way, it is a financing decision. That is replacing what would have been a sale leaseback, which while it is off-balance sheet, most of the folks that are looking at our debt are adjusting for that anyway. So it is showing up as on balance sheet because it is in the mortgage facility, but it is just a replacement of what would have been a sale leaseback transaction otherwise.

Clearly, as we continue to add real estate and draw against that, you will see that published number probably continue to float up a bit, but once again, we will continue to provide a split between what is the real estate piece and the rest of the debt. On an all-up basis including the real estate, you'll probably see us in the mid-40s.

So that is a target for you guys, kind of low to mid-40s?

Including the real estate debt for '07, I think that is appropriate for modeling purposes, sure.

And then just on your guidance, the flat revenue same-store sales for the year, can you talk briefly or categorize the used versus new performance in that guidance?

I think just directionally, Greg -- this is Earl -- that we would expect some growth in used and some downward pressure from the domestic brands and full-size trucks in California in new. So I think directionally, a couple points up in used and a couple points down in new.

Okay. And then lastly American Auto Exchange, any update on how that is going anecdotally in the quarter for you guys?

Greg, it is going very well and our field people are getting better and better at using it. The best-practice approach is working extremely well with American Auto Exchange.

From a metric point of view, Greg, you could see we again took less vehicles to auction, lower wholesales in the first quarter, and that is what I like to see. Those wholesale transactions generally aren't productive. Even though you may make a little profit now and then on them, it is good for me to continue to see wholesale sales reduce.

So that used vehicle 28 days, that is a good level for you guys right now? It's kind of a comfortable level?

Quite frankly, Greg, I think it is too low. We have been trying to get it up. We are willing to take 37 days when you figure the vehicles that are in process to get titles cleared or reconditioning, particularly on these certified used vehicles. We are willing to take more. It has actually been a struggle to find good quality retail pieces, particularly import used cars, Civics and Accords and Camrys and Corollas and Ultimas. So we would be willing to accept higher on that, higher level of days supply.

Thanks for those answers.

Jerry Marks, AutoRetailStocks.com.

Good morning. Maybe I'm looking for more detail than you guys give out, but could you just say how much the sales were down or up in the Gulf Coast region year-over-year?

Yes, Jerry, this is John Rickel. We really don't disclose by region.

Okay. Can I ask this, though, can you at least kind of rank from your five regions who was the best performer all the way -- obviously, probably down to the bottom would be California then?

I think we can do that. First of all, the generic answer to your first question is there has been substantial payback all the way from the Gulf, the Panhandle Florida through New Orleans, over the last half-year or more from these various hurricanes. I can't remember all their names. There was Wilma and Rita and Katrina, and so those markets are down substantially, but they are down for everybody. Now we went into a couple of new ones last year in Mobile and Gulfport, but that is the nature of the beast. But yes, there is big payback along that Gulf Coast.

Houston and Oklahoma are very strong for us. They are holding up very well, those markets. You know California's down. I would say the Northeast has been stable. It is not up a lot and it is not down a lot, but it is very stable. And that is kind of the -- we don't have a lot in Florida per se. We have Ford stores. So that is kind of how I would try to describe it to you, Jerry.

Okay, thanks. That is all I had.

Scott Stember.

My question was answered already. Thank you.

I just -- one second. I've misplaced it. Thank you.

Asked and answered. Thank you.

Sorry, yes. If you could just review the total amount of lines that are outstanding and what is available?

Give us just one second. We have total availability, there is $1 billion available on the floor plan, there is $350 million available on the acquisition line. We have a separate silo with FMCC, Ford Motor Credit, for $300 million, and a mortgage facility for $75 million. So total availability of 1.725 billion. Against that, we have outstandings of just under $775 million. So almost $1 billion of available credit.

That is available, okay.

Yes.

Thank you.

At this time, there are no further questions in the queue. I would like to turn the call back over to Mr. Hesterberg for his closing remarks.

Thanks to everyone for joining us today. We appreciate your interest in our company, and we will look forward to updating you on our progress on our second-quarter earnings call. Thank you.

Ladies and gentlemen, this does conclude the Group 1 Automotive first-quarter earnings conference call. You may now disconnect, and we thank you for using ATT Teleconferencing.