Group 1 Automotive Inc (GPI) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Group 1 Automotive third quarter 2007 earnings conference call. During today's presentation, all parties will be in a listen-only mode and following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded today, Tuesday, October 30, 2007.

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

Thank you and good morning, everyone. Welcome to Group 1 Automotive's 2007 third 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 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 SEC over the past 12 months. A copy 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'll now turn the call over to our President and Chief Executive Officer, Mr. Earl Hesterberg.

Thank you, Pete. Good morning, everyone, and welcome to the Group 1 Automotive 2007 third quarter conference call. In a minute, I'll turn the call over to John Rickel to present our detailed financial results. After he's finished, I'll address our advised guidance and open up the call for questions.

Before I get into the results, let me tell you what we observed in the third quarter. This was a difficult quarter with our principal challenges, the increasingly soft market conditions for our volume brands, especially Ford, which registered a 20% sales drop in the third quarter, and a softer used truck market. The resulting impacts have put significant downward pressure on new and used vehicle sales and margins. New vehicles experienced pressure, especially in the domestic and Toyota brands, with some offset from strong luxury results.

The lower new vehicle sales volumes also impacted our used vehicle business as we obtained less trade-in business, making it necessary to acquire product at auction, resulting in reduced margins. Additionally, our higher margin used truck business was impacted this quarter by the increased incentives manufacturers offered on new vehicles, driving more used truck customers into new trucks.

On the positive side, we did see some progress from the strategic operating initiatives we've been implementing, which resulted in solid growth in our F&I and Parts and Services businesses during the quarter.

Now, for our third quarter results. On a GAAP basis, net income declined 21.2% to $20.8 million, and EPS fell 18.2% to $0.90 per diluted share from third quarter 2006. We had a $1.6 million pretax charge related to the redemption of our 8.25% Senior Subordinated Notes and a $345,000 pretax charge associated with the domestic franchise disposition. Excluding these charges, EPS would have been $0.95 for the quarter.

On a same-store basis, total revenues were down 3.8% due to the previously mentioned brand and market factors as well as the intended reduction in used vehicle wholesale sales. The new and used vehicle declines more than offset a 2.5% increase in Parts and Service, and a 2.9% increase in our F&I business. Our overall same-store gross margin held steady at 15.6%, reflecting profit improvements in Parts and Service and F&I that were offset by declines in our new and used vehicle businesses. Same-store SG&A expenses increased $1.5 million or 0.8% in the third quarter to $181.6 million. As a result of higher expenses and the lower gross profit, SG&A's percent of gross profit increased 320 basis points to 77.6%.

On a consolidated basis, revenues were up in all four business segments, increasing a total of 3.7%. Compared with the same period a year ago, gross margin declined 10 basis points to 15.5%, reflecting new and used retail vehicle margin weakness. As a partial offset, we had solid margin improvements in our Parts and Service and finance and insurance businesses. In Parts and Service, the initiatives we were implementing led to a 100 basis point margin improvement to 55.7% in the quarter. These initiatives include providing more consistent, although competitive, pricing structure in our service departments, as well as process improvements in our Service and Parts departments.

In F&I we realized $1,048 per retail unit profit; a $90 improvement over the 2006 third quarter. By leveraging our scale to improve the cost structure for many of the Company's vehicle service contract and insurance offerings and insourcing key functions such as training and compliance, we continue to see profit improvements in this business.

Turning to brand mix. During the third quarter, Toyota, Scion and Lexus brands accounted for more than 37% of total new vehicle unit sales. Honda Acura came in second with 12.4%, followed by Ford with 12.3% of unit sales. Rounding out the mix was Nissan Infiniti with 12%, Chrysler with 8.2%, BMW/Mini with 6.6%, GM with 6.4%, and Daimler with 2.7% of new vehicle unit sales. Our import and luxury brands accounted for more than 75% of our new vehicle unit sales in the quarter, as domestic brands were down 480 basis points from the same period last year to less than 25% of our sales.

Speaking of acquisitions and dispositions, I'll now update you on our activities this year. In conjunction with our strategy to dispose of underperforming dealerships, the Company disposed of five additional franchises with trailing 12 month revenues of $54.5 million during the third quarter. Including these, the Company has divested of 15 franchises in 2007 with annual revenues of $154.8 million. We will continue to 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. Year-to-date, the Company has booked $5 million toward this estimate. We did not complete any dealership acquisitions during the second or third quarters. In the first quarter, we acquired nine franchises that are expected to generate an estimated $303.1 million in aggregate annual revenues.

Group 1 has a 2007 full year acquisition target of $600 million in estimated annual revenues. Based on negotiations and progress, it is still possible that this target will be achieved. However, it's our policy not to announce acquisitions until they actually close, and it is possible the closings on some of these potential acquisitions could slip into early 2008.

Now a quick word about inventories. Our total new vehicle inventory as of September 30 [totaled] 55 days from the third quarter of 2006 and decreased three days from the end of last quarter. Import inventory improved to a more normal 47 days supply from 52 days last quarter and from 38 days at the end of third quarter '06. Luxury inventory fell three days to 38 days supply from the second quarter and was two days less than the prior year period.

Our domestic inventory at 85 days supply was up three days from the second quarter but down 15 days from the prior year period. Compared to the second quarter, our GM inventory improved significantly to an 89 days supply from 122 days last quarter and 102 days in 2006 third quarter. Ford inventory was 82 days supply, up from 71 days in the second quarter but down from 84 days in prior-year. Chrysler inventory of 84 days supply was up 13 days from second quarter but down from 119 days supply last year. Our supply of used vehicles at quarter end grew 2 days to 31 days from last year and second quarter.

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

Thank you, Earl. Good morning, everyone. We realized $20.8 million of income for the third quarter of 2007 or $0.90 per diluted share on consolidated revenues of $1.7 billion. During the quarter, we redeemed $36.4 million of our 8.25% Senior Subordinated Notes and recorded a pretax loss of $1.6 million for these redemptions. We also recognized a pretax asset impairment charge of $345,000 associated with exiting one of our domestic franchises. Excluding these charges, net income for the third quarter of 2007 was $0.95 per diluted share.

For the nine months ended September 30, 2007, our net income totaled $62.5 million or $2.63 per diluted share. Excluding the impact of $3.8 million of pretax charges for lease terminations recognized in the first quarter of this year, an $856,000 charge for a lease settlement and an asset impairment charge associated with exiting two domestic franchises in the second quarter, as well as the $1.9 million of charges that I just mentioned, diluted earnings per share was $2.81 for the first nine months of this year. Compared with the third quarter of 2006, our total revenue increased $59.5 million or 3.7%. This increase in consolidated revenue reflects improvements in each of our business segments.

Our total gross profit improved $7.4 million or 3% to $257.3 million in the third quarter of 2007, while our gross margin was down 10 basis points from the same period a year ago to 15.5%. Profitability increased 10.6% in our Parts and Service business to $99.9 million, reflecting improvements in each segment of the business -- parts, service, and collision. Our finance and insurance gross profit per retail unit increased $90 to $1,048 per unit as we continued to realize benefits from our cost reduction initiatives. Improvements in these business segments more than offset declines in the profitability of our new and used vehicle segments.

New vehicle gross profit declined 2.5% to $69.9 million while total used vehicle gross profit shrank 10.1% to $33.1 million. Margins within our business segments mirrored their respective gross profit trends as the Parts and Service gross margin improved 100 basis points to 55.7%, while new vehicle gross margins declined 40 basis points to 6.7%, and total use gross margin decreased 120 basis points to 8.6%.

Our consolidated SG&A expenses increased 5.5% to $198.4 million for the third quarter, which is 77.1% of gross profit compared to 75.3% a year ago. Our consolidated income from operations declined $4.3 million or 7.5% to $53 million in the third quarter of 2007 as the improvements in gross profit were offset by the increases in SG&A and a $1.1 million increase in depreciation and amortization expenses. As a result, our operating margin decreased 40 basis points to 3.2%.

Consolidated floorplan interest expense increased $1.8 million or 17.7% in the third quarter of 2007 compared to 2006, due primarily to the fact that our weighted average borrowings increased $104.1 million as we initially used the proceeds from our 2.25 convertible note offering in June 2006 to temporarily pay down our floorplan line. Other interest expense increased $1 million to $6.4 million as our weighted average borrowings of other debt increased $79 million. As I mentioned earlier, we redeemed $36.4 million of our 8.25% Senior Subordinated Notes during the quarter, reducing the outstanding balance of these notes to $100.2 million. This reduction was more than offset by borrowings from our mortgage facility, which we put in place in March 2007, and as of September 30, had borrowed $113.3 million to purchase real estate associated with our dealerships.

Manufacturers interest assistance for the third quarter of 2007, which we'll record as a reduction of new vehicle cost of sales at the time the vehicles are sold, was 86.7% of total floorplan interest cost; a 16.3 percentage point decline from the third quarter of 2006, primarily as a result of increased interest costs associated with the higher borrowing levels.

Turning to same-store results for the third quarter, our revenues declined 3.8% or $59 million to $1.5 billion as a 2.5% improvement in same-store Parts and Service revenues and 2.9% increase in same-store finance and insurance revenues were more than offset by declines in our new and used vehicle sales. Parts and Service revenue improvements on a same-store basis were driven by increases in customer pay and wholesale parts business, partially offset by declines in warranty related and collision sales.

Same-store F&I revenues increased 1.5 million as we were able to offset the decline in unit sales with improved finance penetration and finance income for contract, as well as the favorable ongoing impact of the improved cost structure of many of our vehicle service contract and insurance offerings. Same-store new vehicle sales declined 4.1%, primarily reflecting increasingly soft market conditions for our volume brands. Partially offsetting this performance, our luxury brands realized 5% sales growth over the prior year. We believe that our results are generally consistent with the industry and the markets that we serve.

Same-store used vehicle sales declined 6.6% overall, made up of a 6.4% decrease in retail sales and a 7.2% decrease in wholesale sales. The decline in used retail is primarily explained by lower sales in our domestic brand markets. Our used retail business was negatively impacted by the weak new vehicle market as manufacturers offered incentives on new vehicles that made used vehicles less attractive, and less new vehicle sales translated into difficulty sourcing sufficient quality trades for our used vehicle business. A partial offset was the continued growth in our certified preowned sales, which increased as a percent of total retail units sold from 15.9% in the third quarter of 2006 to 24.9% in the third quarter of 2007. We continue to experience declines in wholesale revenues in conjunction with our initiatives to better manage used vehicle selection and inventory levels.

Our same-store gross profit declined 3.3% to $234.2 million, as same-store profit improvements of 3.7% in the Parts and Service business, and 2.9% in the finance and insurance business, were more than offset by declines in new and used vehicle gross profit.

Within the new vehicle business, we continue to experience margin pressures as domestic dealers are aggressively pursuing the reductions in inventory levels, and import dealers seek to preserve future allocations. As a result, we realized declines in our gross profit per retail unit in both domestic and import brands, partially offset by improvements in our luxury brands. Declines in used vehicle retail gross profits and margins were partially offset by slight improvements in the used vehicle wholesale segment of the business.

Our same-store gross margin remained flat at 15.6%. The same-store margin decreases in our new and used vehicle segments of the business were offset by a 60 basis point improvement in the margins of our Parts and Service business, continued strong performance in our F&I business, and a favorable increase in business mix. The 60 basis point increase in Parts and Service margin is attributable to improvements that we realized in both our retail and wholesale parts segments as well as the service portions of the business.

Same-store SG&A increased eight-tenths of a percent or $1.5 million to $181.6 million. Declines in personnel and advertising expenses were more than offset by additional legal costs and other outside services that we engage in the execution of our business strategies. Specifically, during the quarter we made investments in our customer service related technology, including tools designed to improve customer retention management, facilitate online service scheduling, and increase service call capacity.

Also impacting our SG&A comparables were several non-recurring gains in the third quarter of 2006, including $1 million gain on the disposition of a franchise. Same-store SG&A as a percent of gross profit was 77.6% compared to 74.4% in the prior year, with the increase primarily explained by the 3.3% decline in same-store gross profits that I mentioned above. Our same-store operating margin decreased 50 basis points to 3.2% from 3.7% in 2006. Same-store floorplan interest expense increased to 11.7% to $10.6 million from the third quarter of 2006 as our weighted average borrowings increased $61.6 million and our weighted average interest rate increased 8 basis points.

Now, turning to liquidity and capital structure. As I mentioned earlier, during the third quarter, we redeemed $36.4 million of our 8.25% bonds and recognized a pretax loss of $1.6 million for these redemptions. Also during the quarter, we repurchased 465,000 shares of our stock to complete our $30 million authorization that was approved in April 2007, and we repurchased an additional 868,000 shares to complete the second authorization granted by the Board of Directors in August of this year. In total, during the third quarter, we repurchased 1.3 million shares of our stock for $47 million and have repurchased a total of 1.7 million shares during 2007.

We continue to strategically purchase real estate associated with our dealerships. During the third quarter, we purchased several dealership facilities and funded these transactions by drawing on our mortgage facility for $39.2 million. As of September 30, we had borrowed $113.3 million under our mortgage facility and had $121.7 million available for future borrowings. In total, we presently hold approximately $247.7 million of land and buildings on the balance sheet. We expect our full year 2007 capital expenditures, excluding dealership acquisitions, to be in the range of $65 million to $70 million; down approximately $10 million from our original 2007 full year projections.

Also during the quarter, we strategically entered into interest rate swaps to fix $175 million of our floating rate debt at a weighted average interest rate of 5.14%. This brings the aggregate amount of our swaps to $425 million at a weighted average rate of 4.96%. As of September 30, 2007, we had $78.6 million of cash on hand. In addition, we had paid $39.7 million down on our floorplan lines of credit and had $332 million of availability on our acquisition line of credit for a total of $450.3 million of funds immediately available for corporate needs including acquisitions as of September 30.

Our total long-term debt to capitalization ratio was 43% at September 30, 2007, up from 38% at December 31, primarily as a result of the borrowings under the mortgage facility. Excluding real estate debt, our total long-term debt to capitalization ratio was 37%.

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'll now turn back over to Earl.

Thanks, John. Now for guidance. We are lowering our 2007 full year earnings guidance to a range of $3.45 to $3.60 per diluted share. We have revised the assumptions underlying our guidance to include industry sales of 16.0 million units; same-store revenue 2% to 3% lower; 100 to 125 basis points of increase in SG&A as a percent of gross profit from 2006 levels, excluding one-time items as lower gross profits offset cost improvements; planned interest rate throughout the year; a tax rate of 36.5%; and an estimated average of 23.4 million diluted shares outstanding. Guidance excludes any future acquisitions, dispositions with related one-time exit charges estimated at $5 million to $10 million and any potential asset impairment charges including those that may result as the Company undertakes its required annual review of goodwill and intangible franchise rights during the fourth quarter.

That concludes our prepared remarks. In a moment we'll open up 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 Operation and Corporate Development; Pete DeLongchamps, our Vice President of Manufacturer Relations and Public Affairs; and Lance Parker, our Vice President and Corporate Controller.

I'll now turn the call over to the Operator to begin the question-and-answer session. Operator?

(OPERATOR INSTRUCTIONS). John Murphy, Merrill Lynch.

If we think about where you are in the disposition process here, I mean, you sold 15 stores year-to-date and it sounds like you're about halfway through your charges. Does that imply that you're halfway through this process and there's a lot of dogs left to work through? Or just where do you stand on that process?

It's Earl. I don't think that implies we're halfway through the process. I think that's just a coincidence that we've used half of the charges we forecast for this year. I believe there were some dispositions that we need to make that we never believed would get accomplished in this year.

So, I would say that we still have a significant number of stores, primarily domestic, that probably are not good returns on investment for our Company, and that we're continuing to review. In most cases, the complications in executing that type of disposition in the near-term are real estate related, lease-related. So we still have some more work to do and it will continue into 2008.

When we think about the guidance and the charges that go along with the dispositions. I mean, you're talking about $5 million to $10 million in charges, and you are isolating those or excluding those from your forward guidance, but we haven't actually really pulled those out for the first three quarters of the year. I mean, it seems like it's being excluded from the forward numbers but not excluded from the trailing numbers. Is that correct?

This is John Rickel. No, when we provided the results, we've kind of pulled those out each of the quarters. And if you look on the press release table, it's one of the reconciliation items on there, and the walk to the 281.

Okay. And then when we think about the used business and the weakness there, that's a relatively fluid market. You have great exchanges going on in these auctions. It just seems odd that there's -- everybody seems to be having problems with their margins on the used side. Is there some player out there that's got really strong demand that's really driving up the prices that everybody else is not realizing? Because that market should normalize fairly quickly. What's going on there in the used market?

This is Randy. I don't think there's a player out there that's distorting the results. I think overall traffic is down, both new and used. And it's affecting our margins both new and used as used relates to new. It's traveling down, not in lockstep, but definitely directionally with the new vehicle business.

Are you seeing anything changing in your sourcing from the auctions as far as pricing goes? Because it sounds like pricing at the auctions is pretty strong, but if demand at retail is weak, it just seems like there's kind of a disconnect there.

I think the pricing at auction is fairly strong. It's not disproportionately strong. What's impacting us is our new car volume is down, thus our trade-ins are down. So we're having to source a higher percent of our inventory from the auctions where you pay somewhat of a premium over what you may be able to trade the vehicle in at.

Then just lastly on share repurchases, you're through all of your authorizations right now. Is it possible that you might be able to get more authorization? Or is there anything in your debt covenants or anything that restrict you from buying back additional shares?

Yes, this is John Rickel. As we've talked about on several of the previous calls, we do have restricted payment covenants. The tightest restrictions are around the 8.25 notes that are out there. And basically at present levels, we've used up most of that restricted payment capacity. I think we're sitting with -- around with the results we've just announced, around about $13 million of capacity there.

John, does that basket grow over time? Is it a percent of net income? What are the parameters there?

Yes, it reloads at 50% of net income each quarter.

Great. Thank you very much.

Rick Nelson, Stephens, Inc.

A question about SG&A. You're tracking through the three quarters up [230] basis points as a percent of gross and the guide is for 100 to 125 basis point widening, which would imply improvement in the fourth quarter. Wondering what is driving that?

This is John Rickel. Part of that is, I think the guidance is pretty clear that it excludes the kind of those one-time costs of some of those lease terminations are in there. You've got to pull that out to get to a comparable run rate.

The guide excludes those?

Yes.

What is the gross margin expectation that goes along with that SG&A target?

This is John. Are you talking about the percentage of gross margin or --? Rick? This is John Rickel. Are you talking about the dollar amount or kind of the percentage amount?

It looks like Mr. Nelson has dropped out of the queue. Edward Yruma, JPMorgan.

Thanks for taking my question. Can you talk about performance on a geographic basis? I know you touched upon some of the weaknesses with Ford and Toyota. How significant was the performance of SAARS ratio in California? And can you put that relative to your tax allocation?

It's Earl. First, let me start with -- basically the only two markets we would say were strong for the quarter were Houston -- which fortunately has been strong for some time -- and the UK, which is a little bit less than 2% of our sales, so that didn't help very much. So I think the point is that some of that economic weakness that started in California and Florida probably is, at least from our experience, is trickling into some other areas of the U.S.

California obviously remains weak. But I'm not sure it was appreciably weaker than it was in the previous quarter. It's been almost a year now that there's been some struggles in the California market. I think it's down to 16% of our sales now or something like that, and it was 20% probably a year ago or so. So it's still a weak market but I think it's somewhat leveled out. And I just think we are experiencing what you see in the SAARS every month, that the auto business is a bit weaker. And it's fairly widespread over the U.S. now with the exception of some parts of Texas -- for us, for the markets we're in.

Got you. And given some of the prolonged weakness in California, how much dealership level SG&A do you still have to cut, particularly in those markets where you think that you might not see near term recovery?

We have a significant amount to cut in California, yes. And we have new leadership out there. And that's what that Regional Vice President is working on every day. So we still have more work to do there probably than anywhere else.

Got you. And if you could give us a quick update. I know you spoke a little bit about the strength in the UK. As you look at acquisition activity going forward, should we expect that to be the preponderance of the new stores? Or how do you think about your acquisition prospects going forward? Thank you.

It's Earl again. Yes, we would continue to look in the UK and we would plan to expand our business there. Wish it was about five or ten times bigger this last quarter. But we don't have anything imminent in the UK. We've obviously, as a new player in the market, get to look at a lot of deals. But we'll continue to try to find something that makes sense for us. But I would think that our near-term acquisitions would continue to be in the U.S. outside the states of Texas and Oklahoma and in the import and luxury brands, that you can well imagine.

Great. Thank you very much.

Scott Stember, Sidoti & Co.

Can you talk about in the Parts and Service what was customer pay business down and -- oh, I mean, actually up -- and warranty and distribution side as well?

This is Randy Callison. Yes. We had a good quarter in fixed operations. Customer pay revenue was up 4.5%. Warranty revenue, consistent with what we've been seeing in prior quarters, was down 5.4%. And if you want to discuss that in terms of manufacturers, this is very consistent with what we've seen now for several quarters. The decrease in warranty revenue, primarily at Mercedes-Benz, because we're still coming off the free service programs of prior years. And the second most impactful was Nissan, where we had some recalls in prior years.

Customer pay, which is up 4.5%, two big line items there -- Toyota was up 9% and BMW is up $2 million over prior-year. So, very big increases in those brands.

Given the initial success that you've had with Toyota and BMW, do you see a lot of low hanging fruit with some of the other brands that you sell, on the customer pay side?

We are very optimistic about the future and sustained growth in our fixed operations. There is low hanging fruit all across the brands in the stores. And we are very actively pursuing those.

And on the acquisition front here in this states, could you talk about the pricing environment, please?

It's Earl. Haven't really seen a significant change in the pricing environment on acquisitions for a long time. I will say there are quite a few more stores on the market, in particular in California. But I think the asking price is always going to start out just as high as they've been in recent years, which -- so I couldn't tell you I've seen a change in the overall pricing yet. But there is some pressure in the system that's bringing more dealerships online.

Okay, and just last question, just some general high level comments about Ford. It's obviously -- you've done a good job of increasing your exposure to that brand but obviously there's some problems there. Could you just give us a game plan for 2008 with divestitures and where do you see Ford exposure getting down to, at some point?

It's Earl again. Well, our Ford exposure continues to drop. It was a little over 12% for the quarter. But I think most of that drop, certainly in the recent quarter, came from just the massive drop in foreign sales. In a universe where the market's down [3%] or 5% for Ford, I think Ford nationally was down 19%. We were down right about the same.

So that's shrinking our Ford contribution just by doing nothing. We have closed a couple of Lincoln Mercury stores this year. And there's some more domestic dispositions we need to make; not likely with just about two months left this year that we're going to get much done, but there's going to be some more work that needs be done next year in that area.

Okay. That's all I have for now. Thank you.

Matt Nemer, Thomas Weisel Partners.

My first question is on F&I, you had a nice improvement there. I'm just wondering, which bucket that's primarily coming from. Is it the finance contract side or the service contract are maybe ancillary revenue?

Matt, this is Randy. That's coming primarily from our revised cost structure that we implemented this year when we renegotiated those service contracts, GAAP and maintenance offerings. It was a very good quarter. $1,048 a unit, up $90 a unit. We continue to work on our preferred lender network, so we saw a $50 increase in our finance income per contract for the quarter. Most impactful, though, was service contract, where we saw a $188 per service contract sold profit increase, which primarily is from the cost side, not from the sales price side.

Got it. And has there been any change in chargeback reserves on the structure of these contracts?

No, sir. Our reserves are pretty consistent quarter to quarter.

Matt, this is John Rickel. For these specific contracts, that's correct.

Okay. And then secondly, just turning to SG&A. Can you provide any additional color on the compensation and ad lines as a percent of gross profit during the quarter?

This is John Rickel. On a dollar basis is the easiest way for me to give it to you. We saw a reduction in ad costs of almost $4 million on a same-store basis. And personnel costs were down about $700,000.

Got it. And then turning to goodwill, I know that you review that annually at the end of the year. I'm just wondering, given the dispositions and some of the charges that you've taken, does that process incorporate that recent transaction data? Or is it more backwards looking in that? In other words, are the accountants looking at multiples over, say, a trailing 12 or 24 month basis? Or does it take into account sort of the mark-to-market?

Matt, this is John Rickel. It really looks more on a forward basis. Basically what you're testing is the carrying value of those intangibles on a going forward basis. And really it's looking at the cash flows that those assets will generate. So it's really a cash flow projection. You're testing two pieces -- you're testing goodwill and you're testing franchise value. Goodwill is spread over a pool of assets. The franchise value is store-by-store specific. And of the two, it tends to be the one that's more volatile, if you will, from period to period, because of any one specific brand's sort of outcomes and the projections that go with that.

Okay, that's helpful. And then lastly, I realize that you haven't provided '08 guidance yet, and perhaps it's a bit early, but given what you're seeing right now in October, how comfortable are you that '08 will be an up year on revenue and earnings? Thank you.

Matt, this is John. You're right. It is, I think, too early right now to comment on '08. So I think we need to take a pass on that one for right now.

Fair enough. Thanks so much.

Deron Kennedy, Goldman Sachs.

Deron Kennedy here with Matt Fasler. First question, you spoke a little bit about California. Could you also comment, as one of your competitor's mentioned that the forest fires are impacting sales more recently than 3Q?

This is Earl. Yes, we only have one store in the San Diego area. And it was basically shut down for a few days, but it's not a big portion of our sales. My understanding is, however, that with Interstate 5 closed, that there was some knock on impact up into Orange County and up into parts of Los Angeles. So, there may have been some minor disruption. I think for the purposes of our Company, though, it wouldn't be very material.

Okay. And on Toyota, you had mentioned, I think, imports showed an improvement in inventory levels. But -- and I guess you're predominantly Toyota. So is that the case, that you saw better inventory year to year days-wise in Toyota?

Yes, that's correct. And that's one of the things we need to improve our new vehicle margins as we move into -- for this quarter and next year. We ended last quarter with 41 days or started this, the third quarter, with 41 days, which has been fairly high for Toyota. But we ended the quarter with 34 days.

Wow. You know I guess your clearing on inventory just -- and it's probably at the expense of margins. I think inventory days for Toyota industry-wide are up around 20% year-to-year. So, do you feel like there's a way to maybe adjust that more appropriately? Or are you going to manage that inventory levels maybe kind of to preserve margin a little bit more?

Well, with Toyota it's probably more difficult than some other brands. And you are on to a pertinent issue. Toyota grosses around the country -- like Toyota inventories -- are different this year than last year. The inventory levels are higher, as you mention, and the grosses are lower. Some of that also is Toyota had some really powerful new product 12 months ago or 18 months ago. The new Camry and FJ Cruiser and things like that.

So, there have been a couple of those challenges in the Toyota business, although it's still a very good business. What you find with Toyota, seven of our Toyota dealers are in California or Boston, which are the two highest marketshare areas in the country for Toyota. The gross margins aren't really dictated that much by individual dealers. They're dictated by the dynamics of the market. There's very large powerful Toyota dealers across Southern California, across Boston, across to Houston, and most major markets. And the dynamics of those dealers selling against each other in the competition determine the gross margin levels.

And the positive factor, I think, is if our Toyota inventories are in better shape at the end of the quarter, it's likely that the other Toyota dealers are getting back to more reasonable levels, and that there is some chance for us in the market to have a little bit better margins.

Okay, great. And I guess -- final question. You had mentioned -- I guess you had mentioned some management teams. I think that California's new leadership is part of the -- your regional structure, correct?

That's correct.

Okay. Have there been any other management changes in the past six months or so that you would characterize as meaningful that weren't part of that?

Well, we did as part of that change, where we moved Marty Collins from the Southeast to the West. We've given -- we've made the East Coast all one region. So, we had a Northeast and Southeast, and now we're running all of the East Coast under David Hall, who had been running the Northeast. So --

Are there specific cost advantage to that? Or is that really just -- I'm just wondering if we can pinpoint any further expense cuts to that effort.

Yes, this is John Rickel. I don't think specifically from the consolidation of the region. I think what you've got, though, is our kind of two top cost guys in the regions where we're focusing on improvements. And certainly with Marty going out to the west, I think you'll see things that come out of there. But it's not a direct compensation thing from collapsing four regions to three regions.

Rich Kwas, Wachovia.

John or Earl, could to comment -- as we think about the next several quarters, what the -- in fourth quarter last year you started to feel the impact of lower import margins and then Ford was a headwind in last year's fourth quarter. When do we start to comp the most material impact from that going forward?

This is John. I really think it is starting fourth quarter is, as you say, where we saw it last year. And I think that's where it should start to show up.

And have they gotten -- have the grosses on that or the competition gotten incrementally worse relative to, say, the first or second quarter of the year?

This is Earl. Yes, I would say so. I would say that the grosses in some of these key brands have deteriorated throughout the year. There's some exceptions to that with some of the brands with new product. And I think the Honda Accord is probably running counter to the flow. But yes, I think just because of the general weakness in the market, I think the grosses have gone down pretty continually through -- and the volume brands, I'm speaking on the volume brands; domestic and import volume brands -- have gone down through the first nine months.

And on the used front, has the American Auto Exchange helped you much in this environment being able to -- I know, I realized trade volume's lower, but do you feel that you have improved your buying process in that on an apples-to-apples comparison; if you didn't have the software, you'd even show worse margins?

Rich, it's absolutely helped us. It hasn't prevented us from being impacted by certain shifts in the market. I think we recognize it more quickly and we can deal with it more factually.

We were damaged significantly beginning in August, the first of August; I believe in both June and July, General Motors truck sales, full-size trucks sales, were very weak. And then they stimulated the market at the first of August pretty significantly -- which really moved the new trucks, by the way, the new General Motors trucks; but that's only about 6% of our business is GM. But then the competition all responded and new truck business got pretty strong in August and September. Well, that killed the used truck business.

And we're a very truck-centric company still; Texas and Oklahoma, also Albuquerque and across some other parts of the South. And we needed to react more quickly than we did, although I'm not sure there was a lot more we could have done in the used truck business.

This is John. The only thing I'd add to that is one of the metrics you can point to is the continued reduction in wholesale sales that we're having to experience. Even in the quarter with the challenges that Earl has talked about, we were still down another 7.2% in wholesale sales revenues. So we are doing a better job of what we are selecting. And year-to-date we're down 13.4%. And if you look at it, the wholesale losses are still holding in at about $100 a unit. In the environment that we're in, I think without America Auto Exchange you could have seen a much bigger wholesale loss and a lot more units that we were having to run through the wholesale process. So, yes, I think it is absolutely helping us.

Okay. And then final question on SG&A. You talked about having to make some further adjustments in California. Where else geographically are you a little heavy?

Well, I think in this current environment, we have more cutting to do everywhere across the board. I wouldn't even exonerate Houston from that just because import grosses are under pressure, even in a good market like Houston. So we've got more work to do across the board. No doubt about it.

Great. Thank you.

Charles LaPorta, [Arptos].

I just wanted you guys to kind of go over the SG&A line again. You talked about lease terminations making that number come up year-over-year, if you look at the nine month periods. Are those lease terminations associated with facilities that you have sold or closed or something like that?

This is John Rickel. The biggest single charge was associated with a lease termination for a domestic store that we sold in the first quarter. It was basically part of the negotiation process to get out of that lease as part of disposing that franchise.

Does that expense continue throughout subsequent quarters as well? How does that work? It persisted into the third quarter.

This is John Rickel again. It depends on really the pace of the disposals. There are one-time charges we've paid to terminate the lease in the first quarter. That's done and dusted and that's behind us. We would do further dispositions that might have a real estate tail to them. Now, there is a potential for further one-time disposal charges which is what we've indicated in the guidance, up to $10 million. We've got $5 million that we have incurred to date.

You had what -- in the current quarter you had --

There is $345,000 in the current quarter.

Okay. All right. And is there a similar reason for D&A expense increasing faster than pretty much every other expense?

Yes, this is John Rickel again. It is basically part of the real estate strategy. We have been buying more of our property, so we've got more assets on the books, which is taking the D&A up.

Oh, so you buy the facilities instead of doing a sale leaseback or anything like that?

Correct.

Jonathan Steinmetz, Morgan Stanley.

A few questions. First, on the used side, if I could just sort of dive a little deeper here. Could you give us the percentage of vehicles that were sourced from trades this quarter versus last quarter? I'm really trying to tease out that impact and maybe what that looks like on a dollar per vehicle basis -- when you do have to switch to an auction versus a trade-in on average -- versus the truck impact and some of the incentives and maybe what you think was the bigger of the two?

This is Randy. I don't have that information with me.

Do you guys have any thought as to which was the bigger problem if we think about $100 per vehicles decline on used gross per unit? Was it more the truck issue or was it more having to go and source at auction?

This is Randy again. I think it is more the truck issue. If you look at our $100 per retail used gross decline and look where it occurred, I think it is more truck related than cost-related.

Maybe for John, could you gave the '07 CapEx guidance number again? I just want to make sure I heard it right. And then can you talk, directionally at least, for '08 and '09 versus '07 where you think this can go? Because it seems like you are almost [4X your] D&A here and guys like Auto Nation are at 1.5 times as they sort of mature. I'm just trying to get a feel for how long you think you're in sort of big spend mode.

Yes. This is John Rickel. Let me address both of those pieces. To be clear, we did take it down to $65 million to $70 million. That is down $10 million from what we had previously talked about, a target of $80 million. So we have pulled that back in a bit. And I think we understand that certainly in the present environment that it's an area that we continue to focus on and, as I say, we're not really prepared to talk about targets for '08 and '09. But I wouldn't anticipate it going up from the levels that we are looking at this year.

As to your specific point on Auto Nation, recognize that they own the preponderance of their real estate and facilities, so their D&A number is going to be substantially higher than ours. So the fact that we are four times their level is just a reflection of apples and oranges to a large degree.

Okay. And I guess some other people have tried to hit at this but maybe I'll try it a different way. When you think about the current selling rate environment -- I guess you'd didn't give your own view of the '08 selling rate versus '07 -- but are there things you think about differently if you think we're in a protracted period of sort of lower from longer on the SAAR from an SG&A perspective that you weren't thinking about doing, say, six months ago because you just thought this was more temporary?

It's Earl. I think we believe today that the market is at a different level than we thought it would be at the beginning of the year. And hence, we've taken our SAAR forecast down by 300,000 units, albeit a bit late. So I think we're in a tougher market than we originally thought. But right now I don't think we see reasons why it is going to get appreciably worse. But we need to size for this current level, which is no better than 16 million as far as we can see right now. So that is why I mentioned it is an answer to a couple of the previous questions, that we think we have some more work to do across the board in expense control.

Matt Nemer, Thomas Weisel Partners.

Just a couple of quick follow-ups. On the used vehicle side, any explanation for why the ASPs were so much stronger given the mix shift away from truck?

Sorry, Matt, this is John Rickel. ASP?

The revenue per vehicle sold. It looks to me like it sort of accelerated this quarter. And I was just curious -- it seems to -- it's curious given the mix shift away from truck, which I thought typically is a sort of a higher dollar per unit transaction than on the car side.

This is Randy. I can't answer that in total, but our CPO sales as a percent of our used car sales continues to rise. Most recent quarter we're at 25%, which is up from about 16% same quarter, prior year. Those vehicles normally are a little better vehicles and a little higher average cost vehicles than what you would traditionally see. So that would have one impact.

And the other impact is we still had the retail (inaudible). So we had to sell the trucks we had in stock, albeit at lower margins. So we do get flushed out after 30 or 45 days, but we were sitting there with used trucks in inventory that we have to start to shift our mix away from. But they do need to be sold.

Got it. That makes sense. And then John, just a follow-up for you. Can you tell us what the occupancy expense, either in dollars or maybe in basis points, did this quarter, given that the real estate buyouts -- in other words, how much of a benefit was reduced occupancy expense in the SG&A line?

Yes. Probably the easiest way to do that is to look at rent expense. And for the quarter on a consolidated basis, rent expense was down $400,000?

Okay. That's all I've got. Thank you.

Jordan Hymowitz, Philadelphia Financial.

I was just wondering, on the number of calls this quarter we're getting different view points of the wholesale market. I mean, AmeriCredit's recovery rate was down from 51 to 49. BB&T spoke of weakness in the used car market. Other people are saying it's -- Manheim is [saying they're] weak and other people are saying it's holding in. I mean, so obviously some parts of the used car market are weakening. Is it just the newer part of the used car market? Is it the older part? Or where do you see the most weakness and where do you see it holding in, in the auction market?

This is Randy Callison. As John mentioned previously, our loss per wholesale unit sold was very reasonable and very consistent with prior quarters. That's the only vision I get on what you're speaking of. Obviously, we've seen the weakness in the retail side because that is primarily where we do our business. But our exposure to the wholesale side is primarily through the vehicles that we wholesale at auction.

Are you getting any -- if the average is the same, how about the outliers? Is there any meaningful weaknesses or strength at different age groups -- see what I'm saying -- under different brands?

Well, I think there's two factors. This is Earl. We've seen now for two years a shift. The risk in the used vehicle market has been with trucks. We had it exacerbated this quarter because of some very strong new truck incentives by GM and Ford and Dodge and so forth. So that put some extra pressure.

But the fuel efficient, particularly import vehicles have been very strong in the secondary market at the auction at retail ever since Hurricane Katrina -- Accords, Ultimas, Corollas, Camrys -- things like that. You have seen some reduction in domestic vehicles going into rental fleets this past year led by GM and then Ford when the Taurus went out of production. So I do think there is a dynamic in the nearly new, or the young used vehicle market; those six, nine month old, 12 month old rental returns where there has to be some type of mix shift there. Because GM and Ford just aren't putting as much in. So that could be firming up some types of prices on the young used vehicles coming out of the rental fleets. I think there is a dynamic there as well.

We have time for one more question. Rich Kwas, Wachovia.

Just a follow-up questions on used vehicles again with the trade-ins. How do we think about the percentage of used units sales that came from trades versus [stuff that] units sales that came from auction? Is there some kind of metric we can think about?

This is Randy Callison. I can't think of one.

Okay, so do you track that information? I assume that you would track that formally, you'd have some kind of numbers in terms of what came from trades versus [what] was bought at auction.

Absolutely. Our operational people evaluate on a daily or weekly basis our gross on our trade-ins versus the outside purchase units. And of course, typically our grosses are better on trade-ins than they are on outside purchase units. But when they use as a metric is what I don't think we have at the top of our head because I'm sure it varies from a luxury brand to an import brand to a domestic brand. But we could probably hook you up with some operational people who could have an intelligent conversation on that subject with you. But I think it's going to vary by brand and/or region.

It is a metric that's tracked by our operational people, that they live with on a daily or weekly basis.

Okay. But it's fair to say on a consolidated basis that the percentage coming from trades declined materially relative to the year-ago period?

Absolutely. That's been true in the business since I've been in it. Trade-ins are your best source of merchandise.

There are no further questions at this time. I would like to turn it back to Mr. Hesterberg for any closing remarks.

Thank you for joining us today. We're looking forward to updating you on our progress on our fourth quarter earnings call in February. Thanks.

Ladies and gentlemen, this concludes the Group 1 Automotive third quarter 2007 earnings conference call. You may now disconnect. Thank you for using ATT teleconferencing.