Group 1 Automotive Inc (GPI) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Group 1 Automotive fourth-quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today, Tuesday, February 26, 2008.

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, Brandy, and good morning everyone and welcome to Group 1 Automotive's 2007 fourth-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 and are 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 period to differ materially from forecasted results. Those risks include but are not limited to risks associated with pricing, volume and the conditions of the markets. Those and other risks are described in the Company's filings with the Securities and Exchange Commission over the last 12 months. Copies of these filings are available from both the SEC and the Company.

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

Now, I'll turn the call over to President and Chief Executive Officer of Group 1, Mr. Earl Hesterberg. Earl?

Thank you, Pete. Good morning, everyone, and welcome to Group 1 Automotive's 2007 fourth-quarter conference call. In a minute I'll turn the call over to John Rickel to present our detailed financial results. After he is finished, I'll address our 2008 outlook and guidance and then open up the call for questions.

Before I get into the results, let me tell you what we observed during the fourth quarter. During the quarter, we continued to see both new and used vehicle market conditions deteriorate in most areas of the country reflecting the macroeconomic conditions we are all hearing about. Higher gasoline prices, home heating costs, increased home interest rates and tighter credit availability made be average consumer across the country more cautious in purchasing big-ticket items.

We continued to see ongoing weakness in California and Florida and a more difficult environment in the Northeast and Gulf Coast. As a result we experienced new vehicle sales declines in our midline import and domestic brands with the largest declines in our Ford dealerships. F-Series truck sales fell consistently throughout 2007 ending the year with a 22% decline in December. Our used vehicle business was also impacted as we saw declines in used truck sales and declines in both our retail and wholesale profit margins.

On the positive side, we had a double-digit increase in luxury brand sales. We also had continued solid improvements in our F&I and parts and service businesses during the quarter as a result of the initiatives we're putting in place.

Now for some comments on our fourth-quarter financial results before turning it over to John for more (inaudible) details. We had a $16.1 million pretax charge related to asset impairments in the quarter that John will cover shortly. Excluding this charge, adjusted net income was $15.7 million or $0.70 per diluted share for the quarter, up from an adjusted $0.67 in the year-ago period. On a GAAP basis, the net income was $5.5 million or $0.24 per diluted share.

On a same-store basis, total revenues were down 1.9% due to the previously mentioned brand and macroeconomic factors as well as the intended reduction in used vehicle wholesale sales. While wholesale used vehicle revenues decreased 14.9%, retail used vehicle revenues remained basically flat. The new and wholesale used vehicle declines more than offset a 2% increase in parts and service and an 8.1% increase in our F&I business.

The continued quarter-over-quarter improvements in F&I demonstrates the ongoing impact of the initiatives we began implementing in early 2007. These initiatives focused on bringing key F&I functions in-house under Lee Mitchell, our newest Vice President, as well as leveraging our scale with selected key F&I product suppliers.

Our overall same-store gross margin declined 10 basis points to 15.4% reflecting the profit improvements in parts and service and F&I that were offset by the declines in our new and used vehicle businesses. Same-store SG&A expenses fell $6 million or 3.3% in the fourth quarter to $174.1 million reflecting improvements in advertising and personnel costs. The improvement in expense more than offset the gross profit decline resulting in a 40 basis point reduction in SG&A as a percent of gross profit to 78.9%.

Turning to brand mix. During the fourth quarter, Toyota, Scion, and Lexus continued to lead with new vehicle unit sales of more than 35%. Honda Acura remained in second with 12.4%; Nissan Infiniti took over third accounting for 12.3%, dropping Ford out of the top three with 11.4% of unit sales. Rounding out the mix was Chrysler with 8.3%; BMW Mini with 7.5%; GM with 6.3%; and Daimler with 4.3%. BMW Mini and Daimler had the largest sequential quarter growth with 90 and 160 basis point increases respectively.

Our import luxury brands grew to account for 76% of our new vehicle unit sales, up from 73.7% in the prior year fourth quarter. And within that total, our luxury mix has increased to 23% of our sales, up from 19% in the fourth quarter of 2006.

I'll now give you a summary of our 2007 acquisition and disposition transactions and our 2008 acquisition target. During 2007, Group 1 disposed of 15 franchises with 12 month revenues of $154.8 million. We will continue to evaluate our dealership portfolio and dispose of underperforming stores. In conjunction with this strategy, we anticipate incurring between $10 million to $15 million in potential exit charges and related costs in 2008.

In 2007, Group 1 expanded its geographic footprint by acquiring 14 import and luxury brand franchises in the United States and the United Kingdom. These acquisitions included five BMW, four Mini and three Mercedes-Benz franchises. In total, the 14 franchises are expected to generate approximately $702.4 million in annual revenues.

In 2008, Group 1 estimates that it will acquire $300 million in estimated annual revenues. Toward this started in January, we began selling the newest brand to hit the U.S. market, the Smart Car. This new franchise, Smart Center Beverly Hills, will operate out of our existing Mercedes-Benz of Beverly Hills complex and is expected to generate approximately $9.5 million in annual revenues.

Now a word about inventories. Overall, December sales were weaker than anticipated which adversely impacted our inventories in the quarter. Of note, Ford sales declined nationally and as mentioned earlier, the F-Series was down 22% in December. There were similar declines for GM with its large SUV sales declining 24% and its midsize SUV sales falling 14%. On the midline import side, Nissan's truck and SUV industry sales were also down double-digit in December. As a result, our total new vehicle inventory at December 31 increased eight days from the third quarter to 63 days. This is equal to where it stood in the year-ago quarter.

Import inventory grew 12 days from the third quarter and two days from the fourth quarter of 2006 to a 59 supply. Luxury inventory at 39 days was up one day from the third quarter and two days from the prior year quarter. Our domestic inventory was down three days from the fourth quarter of 2006 but grew 11 days from the third quarter to 96 days supply. Overall, our domestic inventory is well above the levels we target and will be an area of focus in the coming months. Our supply of used vehicles at quarter end increased four days to 35 days from both the third quarter of 2007 and the fourth quarter of 2006.

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

Thank you, Earl, and good morning, everyone. For the fourth quarter of 2007, our net income was $5.5 million or $0.24 per diluted share. Results for the quarter included a $9.2 million pretax charge for the impairment of capitalized intangible franchise rights on six of our dealerships as well as a $6.9 million pretax charge for the impairment of long-lived assets. After adjusting for the combined total of $16.1 million of pretax asset impairment charges, we realized net income of $15.7 million or $0.70 per diluted share.

Adjusted for asset impairments in both periods, our diluted earnings per share for the fourth quarter of 2007 improved 4.5% from 2006. For the year ended December 31, 2007, our net income totaled $68 million or $2.90 per diluted share. During the year, we experienced several onetime charges including $4.3 million for lease terminations, $7.6 million for asset impairments, $9.2 million for intangible franchise rights impairments, and $1.6 million for the reduction of a portion of our senior subordinated notes. Excluding the impact of these pretax charges, we realized net income of $82.5 million or $3.52 per diluted share.

Adjusted for similar type items in 2006, our net income for the year ended December 31, 2007, declined 8.4% and our earnings per diluted share decreased 4.3%. Our total revenue improved $22.3 million or 1.5% to $1.53 billion in the fourth quarter of 2007 compared to 2006 reflecting increases in each line of our business except our used wholesale business. Our consolidated gross margin of 15.3% was down 30 basis points in the fourth quarter of 2007 from the same period a year ago. The 30 basis point improvement in parts and service margins was more than offset by declines in new and used vehicle margins which I'll cover in more detail shortly.

On a consolidated basis, our SG&A expenses decreased 1.9% or $3.5 million to $184.8 million for the fourth quarter of 2007. SG&A expenses as a percent of gross profit were 79% for the fourth quarter of 2007 compared to 80.3% a year ago. The decrease primarily reflects lower advertising and personnel costs. Excluding the impact of asset impairments in both periods, our consolidated income from operations improved 6% to $43.9 million in the fourth quarter of 2007 as compared to the same period a year ago. The increase is primarily explained by the reduction in SG&A costs for the quarter.

Consolidated floor plan expense increased $500,000 or 4.2% in the fourth quarter of 2007 compared to 2006. Our weighted average floor plan interest rate for the period decreased 99 basis points but was offset by an increase in our weighted average borrowings of $113.7 million. The increase in weighted average borrowings was due primarily to the decline in our floor plan offset account balance from 2006 to 2007 as we initially used the proceeds from our 2.25 convertible note offering in June 2006 to temporarily pay down our floor plan line.

Other interest expense increased $1.6 million to $7.1 million for the fourth quarter of 2007 as our weighted average borrowings of other debt increased $132.5 million. This increase was primarily attributable to our mortgage facility that we put in place in March 2007. As of December 31, 2007, we had borrowed $131.3 million to purchase real estate associated with our dealerships. The increase in interest expense from the mortgage facility was partially offset by the impact of a lower outstanding balance on our 8.25 senior subordinated notes as we redeemed $36.4 million of these notes during the third quarter of 2007. This redemption resulted in an outstanding notes balance of $100.3 million as of December 31, 2007.

Manufacturer's interest assistance for the fourth quarter of 2007 which we report as a reduction of new vehicle cost of sales at the time the vehicles are sold was 72.6% of total floor plan interest cost. This 920 basis point decline from the fourth quarter of 2006 was primarily a result of the increased interest cost associated with the higher borrowing levels.

Turning now to same-store results. In the fourth quarter, we had revenues of $1.4 billion which was a 1.9% decline from the same period a year ago. Our same-store parts and service revenues improved 2% or $3.3 million to $166.1 million. The $3.3 million increase in same-store parts and service revenue was driven by a 6.3% increase in customer paid business which was partially offset by a 5.7% decline in warranty related sales.

Our same-store F&I revenues increased 8.1% to $3.7 million to $49.2 million in the fourth quarter as we continued to realize the favorable impact of the improved cost structure of many of our vehicle service contract and insurance offerings. Included in this result was the impact of a settlement with two of our largest credit insurance providers for our portion of unearned commissions on canceled policies. We realized a charge for approximately $500,000 relative to the settlement in the fourth quarter.

The increases in these two business segments were more than offset by revenue declines of 2.4% in our new vehicle sales and 3.8% in our used vehicle sales. Our new vehicle sales declined $22.6 million as soft market conditions spread from California and Florida to parts of the Northeast. 5.3% increase in the sales of our luxury brands was offset by a 6% decrease in our domestic brand sales and a 5.5% decline in our import brand sales. We believe that our results are generally consistent with the retail performance of the brands that we represent and the markets that we serve.

Soft economic conditions in many markets that we serve not only had a detrimental impact on our new vehicle business, but also negatively affected our used vehicle results as we experienced a deterioration in the number and quality of trade-ins and lease turn-ins. In addition, we continue to see pressure on used vehicle sales especially on full-sized trucks from aggressive new vehicle incentives. A 3.8% decline in same-store used vehicle revenues also reflected a 14.9% decrease in wholesale sales as we continue to emphasize the use of software and other management tools to better manage our used vehicle inventory and reduce these lossmaking sales.

We did see an increase in our wholesale loss per unit in the quarter as overall used vehicle values softened as we retailed more of our previously profitmaking wholesale vehicles. Increases in gross profit per unit and gross margin in certain of our luxury brands were more than offset by declines in our domestic and import brands. Overall, our same-store new vehicle gross profit for retail units declined 3.5% and our margin decreased 50 basis points.

We also had pressure on our used vehicle profits per retail unit which were down 15.7% in the fourth quarter and our overall used vehicle margins which were down 170 basis points. We made progress on reducing expenses in the quarter as demonstrated by a 3.3% decrease in same-store SG&A to $174.1 million in the fourth quarter of 2007. We realized a 2% decline in personnel and a 23.3% decline in advertising expenses in the period.

As a percent of gross profit, SG&A declined 40 basis points in the fourth quarter of 2007 to 78.9%. Same-store floor plan interest expense increased 3.7% or $400,000 to $11.5 million in the quarter as our weighted average borrowings increased $94 million which was substantially offset by a decline in our weighted average interest rate of 91 basis points.

Now turning to liquidity and capital structure. We continue to strategically purchase real estate associated with our dealerships. During the fourth quarter, we purchased several dealership facilities and funded these transactions by drawing on our mortgage facility. Borrowings on this facility in the fourth quarter of 2007 totaled $19.4 million. As of December 31, 2007, we had borrowed $131.3 million under our mortgage facility and had $103.7 million available for future borrowings. In total, we owned approximately $278.7 million of land and buildings at year end. He would anticipate moving additional amounts into the mortgage facility as the year progresses.

During the fourth quarter of this year as we have borrowed more on the mortgage facility, we have continued to fix our floating rate debt by entering into two additional five-year interest rate swaps for $25 million each. This brings the aggregate amount of our swaps to $475 million at a weighted average rate of 4.89%. We had $33.7 million of cash on hand as of December 31, 2007. In addition to our cash on hand, we use our floor plan offset account to temperately invest excess cash. These immediately available funds totaled $64.5 million as of year end.

Also we had $197 million of availability on the acquisition line of our credit facility as of December 31 after borrowing $135 million to fund the acquisition of four luxury dealerships in December.

With regards to our capital expenditures for the year, we used to $70.4 million to purchase property and equipment. This amount excludes the purchase of land and existing buildings that totaled $76.3 million for 2007 of which $66.6 million was financed through our mortgage facility. For 2008, we expect our capital expenditures excluding the purchase of land and existing buildings to decrease to approximately $60 million.

Our total long-term debt to capitalization ratio was 50% at December 31, 2007, up from 38% last year primarily as a result of borrowings under the mortgage facility and the acquisition line of our credit facility. Excluding real estate debt, our total long-term debt to capitalization ratio was 45%. This is higher than our target level of approximately 40%. We would anticipate that the ratio will come done over the next few quarters as we pay down our acquisition line borrowings.

For additional detail regarding our financial condition, please refer to the schedules of additional information attached in the news release as well as the investor presentation posted on our website.

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

Thanks, John. Now for guidance. Looking forward to 2008, we are forecasting overall weakness in the industry with the first half weaker than the second half of the year. The recent interest rate cuts by the Federal Reserve and the stimulus package from the government should be positives but the unknown is the lead time required for these actions to impact the economy. As a result, we enter the year with a level of uncertainty that causes us to provide a range based on potential industry volumes of 15 million to 15.5 million units.

With a 16% decline in retail sales that has already occurred this cycle, we believe that additional downside risk below this level is limited. Given this outlook, we are setting our 2008 full-year earnings guidance to a range of $2.95 to $3.25 per diluted share. Guidance is based on the following assumptions, industry sales of 15 million to 15.5 million units; same-store revenues 3% to 5% lower; SG&A expense as a percent of gross profit at 78% to 79% excluding any onetime items as lower sales revenues are expected to offset cost improvements; LIBOR interest rates of 3.5% throughout 2008; a tax rate of 38%; and an estimated average of 22.5 million diluted shares outstanding.

Guidance excludes any future acquisitions and dispositions as well as the potential related onetime costs estimated at $10 million to $15 million.

That concludes our prepared remarks. In a moment, we will open the call up 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 of Manufacture Relations and Public Affairs; 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?

Thank you, sir. (OPERATOR INSTRUCTIONS) Edward Yruma, JPMorgan.

Thanks for taking my question. Have you guys seen any impact in credit availability to your consumers? Is it much tougher to get subprime consumers financed and have rates ticked up?

Ed, this is John Rickel. As we've continued to monitor since August, we are still able to get those customers financed. In the last two months or so, it has probably become a little more difficult in that banks are looking for maybe a few more stipulations, more proof of employment and in some cases, we are seeing advance rates coming down a little bit. But by and large still not lose any sales over this and basically are able to get the customers by it.

Got you. And on your used performance, I know that you mentioned obviously the weaker SUV sales. Some of your competitors have been able to remerchandise or add more software to help drive some of the used performance. Do you view some of your weakness during the quarter as kind of execution issue or is it really just related to the brands and the geographies that you are in?

Ed, this is Earl. I always think there is an execution issue. I always think we can do a better job and I saw some of that in the fourth quarter. Although by being a very truck-centric company because of our base of business in Texas and Oklahoma, I think we have a little more pressure maybe than some other companies do. You saw in the fourth quarter the Mannheim data that showed truck and SUV prices at auctions declining by if not double digits close to double digits.

The way the business works is a lot of our trade-ins if they come to a high percentage of our stores are full-size trucks and SUVs, and you know those things are worth less at the auction, but you want to make a new car deal. When you do make that trade, now you have the pressure when you have that used vehicle on your lot, you know there is pressure if you take it to the auction where the values are declining. You also know the clock is running with our procedures that you eventually have to write it down. So you retail that vehicle out for a lower gross margin.

So it does become a bit of the vicious circle. That said, we do have market data that tells us when these things are turning down at the auction and I do believe in some of our operations, not just in our truck areas but across the country, that we could have reacted more quickly in wholesale in some of these vehicles before the market dropped as far as it eventually dropped. So I would not tell you that everything was beyond our control. We could have done a better job.

Two final housekeeping questions. First, if you could give me the amount of revenue that you are projecting for that 2008 divestiture that's represented I think by that 10 million to 15 million in onetime exit costs? And then the final element, your tax rate guidance is a bit higher than this year. If you could talk about the drivers there. Thank you.

Ed, this is John Rickel. We haven't actually provided a revenue number to go with the potential dispositions. It is basically is going to depend somewhat on timing as these things come together. And as we obviously would make the disposals, we will announce it. But right now we don't really have a revenue projection. Tax rate at 38% basically reflects a couple things. One, you will have a full-year of the new Texas margin tax which is probably a percentage point and the rest of it is basically the mix of the states that we are doing business in.

Great, thank you.

Rick Nelson, Stephens Inc.

Thank you and good morning. I wanted to follow up on the increase in F&I. I'm calculating 13.8% growth in F&I per unit with more luxury stores coming into the mix which I would think would have lower F&I per unit. What are the drivers there?

Rick, this is Randy Callison. The primary drivers on the cost side still particularly on our vehicle service contracts, we spoke to that in prior quarters and we saw the impact in prior quarters. But we have a significant cost savings on VSC contracts which we sell a lot of. So that is the primary driver. Our F&I penetrations are up but just a little. We're up to 70% F&I penetration or finance reserve penetration in the quarter which was up about 2% over the prior quarter of last year. But primarily it is still a cost side equation.

Okay, thank you for that. A question also on the balance sheet, the 50% debt to cap. How does that affect your ability to do more real estate deals and acquisitions and buybacks? And are the OEMs, do they have debt restrictions on approving acquisitions?

Rick, this is John Rickel. No, not that I'm aware of. If the rating agencies in particular kind of set the mortgage debt aside because it's either that or an operating lease, most of them capitalize operating leases and put it back on the balance sheet anyway which is why I think the more relevant measure is long-term debt excluding that mortgage facility. Now at 45%, that's above where we want to be on a going basis, but it's basically driven by the timing of the four acquisitions in December and we do anticipate that coming back down to more normal 40% over the next couple of quarters.

Okay. And Earl, you are halfway through the current quarter. I'm wondering what you are seeing in terms of the overall operating environment, much change from the fourth-quarter pace?

Rick, I think if we comment specifically about our company in the first quarter this year, that becomes forward-looking since we are dealing with the fourth-quarter results here. But I can -- I think we saw 15.2 million was the SAAR in the industry in January about -- that was a 4% decline from the previous year and the remainder of that drop was a change in the seasonal factors and how they calculate the SAAR. But anyway you cut it, 15.2 million wasn't a very good January for the industry. And then you probably saw the Wall Street Journal article last week that projected the first half of February sales that were down more than double-digit, as I recall.

And so I don't think there is any public indication that we all look at that things have upturned here in the first whatever it is 45, 50, 55 days of the new year. And clearly every piece of economic information that you get, gasoline prices and number of people upside-down in their houses and things like that, there hasn't been any positive information in a while.

I guess one positive would be the interest rates and the decline in LIBOR. How does that affect EPS in terms of guidance?

That is a valid point, Rick. I think we calculated what 100 basis point movement in LIBOR does for us, $0.12 or $0.13 a share, generally speaking?

Yes.

About half of our debt at least as we calculated it at the end of the year, Rick, is really floating and most of that I guess floats with LIBOR because we do have some interest rate swaps in place and 8.25 bonds and so forth. I think generally speaking, you could assume about half of our debt floats with that LIBOR as a basis.

Thank you and good luck.

Scott Stember, Sidoti & Company.

Good morning. Could you maybe talk about on the parts and service, it's obvious on the customer pace side that you are really starting to have some success here. Last quarter you indicated that you primarily noticed some benefits from some brands like Honda and so forth. Can you talk about some other brands? And maybe talk about what inning you think you are in as far as bringing parts and service up to where it needs to be?

I will let Randy give you the details but I think this is the untapped area of the business for companies like ours. So I don't think we are much past the third inning and what happened last year which kind of muted I think some of the good work we are doing is some pretty big warranty decreases. I think for the full year our customer pay I believe was up over 6%. In the fourth quarter it was up in the high 4% but the warranty was down just a couple tenths less -- I think 5.7% full year and 4.2% or something in the fourth quarter.

So the warranty muted a lot of our great customer pay gains last year but we are very early into that. Randy does this day to day. I'm going to let him add a few comments.

I would have said we're in the first inning but somewhere between the first and the third. Our customer pay revenues as a percent of our total fixed revenues grew to 48%. That is up from 46% same quarter prior year. That is very exciting for us. Warranty revenues are down to about 18% of total revenues; collision and wholesale parts have remained about the same as prior quarter. Earl mentioned the 6.3% increase in customer pay revenue offset partially by the 5.7 decrease in warranty.

We continue to see a decrease in warranty revenues and the two biggest impacts for us continue to be Mercedes-Benz which came off of the free service program in 2005 and then to a lesser degree, Nissan. On customer pay, which we can control, we don't have much control over warranty, as you know, we were up in all three lines domestic, import and luxury are all up. Domestic was up 4.6%, import 5.6%, and luxury 8.9%. So that is very, very healthy. The biggest driver there is Toyota which was up a full 10% with BMW second, which BMW impacted us by a $1.5 million increase in the quarter.

Okay. And maybe talk about Ford, what we are seeing right now so far and your expectations within your guidance? Obviously there have been some issues with truck sales and we've seen how they have fallen off. Are we still assuming that things will continue to fall at the rates they've been following?

Yes, Scott, this is Earl. We've had a full year of weak F-Series Ford truck sales. So the comparisons should start to get a little better and of course I think the hope that we have as a big Ford retailer is that when the new F-Series comes out in the second half of this year that maybe we will get a little bounce. At NADA apparently, Ford also was fairly -- the new Ford leadership in the sales end of the business apparently told the dealers that they are going to be more aggressive in protecting their share in F-Series and that is what we want to hear as a big Ford retailer particularly one with a lot of representation in Oklahoma and Texas and Louisiana.

So my hope is that we are getting kind of near a bottom on the Ford business. The other issue with Ford is, we are selling some of these newer vehicles, Edges and Fusions and they are great products but they just don't gross like the old Expeditions, Explorers and F-Series did. So there have been the same kind of mix shift for us in terms of gross profit that they are probably experiencing at the factory. But hopefully we are near the bottom on the Ford business and by the end of this year, it will bounce up.

One last question on the expense side. If I heard you correctly, you said that advertising costs down 22% in the quarter. Can you just maybe talk about that and also talk about what we can expect as far as cost cutting for 2008?

Yes. This is Randy. We did have a decrease in advertising costs. That is looked at and determined on a store by store basis. We don't drive that specifically here with an absolute number. There could be some further savings but again, that is a store-level analysis. I don't want to imply that we are driving that specifically to a target here. It's very dependent on each store.

All right, that is all I have. Thank you.

Rick Kwas, Wachovia.

Good morning, everyone. Earl, could you comment on import grosses? If I recall, last year at this time Q4 '06, you started to see some significant pressure on import margins or import grosses. You've now pretty much fully anniversaried that. What do you expect for 2008 and how do you see the mainline imports playing out on the gross side in '08?

That is a good comment because that was one of the most damaging financial factors in our year-over-year financial performance and I just looked at the year-end gross by manufacturer. And there were substantial decreases even in the strongest brands -- you know the midline imports and it was damaging to our performance last year. Kind of like the Ford situation, I think as you say, we've now had a year of that. If they can hold their current inventory levels and not increase them any and start to work them back down a little bit -- the midline Japanese imports are the ones I'm speaking of primarily -- my hope is that they won't deteriorate further.

But they deteriorated a great deal from '06 to '07 and it has been a big factor. We keep those units moving reasonably well but we didn't bring in nearly the gross profit in the midline Japanese imports in '07 as we did in '06. And my hope is it will stabilize, I think there is a good chance of that.

In the guidance, do you factor in stabilization in those grosses or do you expect some more deterioration?

I would say overall that we expect there to be a little more downward pressure in the entire market on new and used vehicle grosses just because the macroeconomic factors seem to be still putting pressure on consumer confidence and traffic. And as -- when traffic stabilizes then you have a better chance of stabilizing the grosses.

Okay, and then following up on that on the used side. Do you expect the used market in terms of margins and grosses to stabilize as the year progresses or do you expect kind of first half to be under pressure and that continues into the second half?

I think that is a good assumption. I think that is all part of the macro first half tougher than the second half. I think there is still pressure on volume and grosses in new and used in the first half and that should get mitigated we believe as we get into the second half. By the second half there will have been 18 months of pressure or more. Even California maybe 21 months. And so that is when I would think things would come off the bottom.

Okay and then in terms of Boston and the Northeast, you made a comment about that things have been trending a little bit softer there. Any more color on that front?

We saw that in the second half of the big year. We are pretty big in the Northeast in particular in Boston. And I don't know if it's because of the financial centers in Boston that are very much like New York with the financial businesses there being under some of this pressure. I looked at data -- we have four decent sized -- in fact fairly big Toyota dealerships in the general New England area and through November, 11 months of last year, three of those primary market areas were down 6% in total industry sales within those primary market areas. And the one in New Hampshire, Manchester, New Hampshire was down 13%.

So -- and that was -- I'm not talking about Toyota sales. Toyota gained market share in that region but that was total industry volumes. So 6% to 13% declines in the industry through 11 months of '06 would be a rate much greater than what the U.S. experienced last year in total in terms of total industry decrease.

Would that be new and used or just new?

Those were just new registrations I was looking at. But you can pretty much assume that used would be coupled closely to it.

And then finally, John, on F&I, you show nice growth here on the same-store sales basis for the last several quarters. When do you kind of start to comp the benefits or the first stages of the benefits that you realized last year? Is that a first-half phenomenon or should we expect that things continue to move at a nice or grow at a nice rate throughout the year?

Yes, Rich, this is John. Yes, basically a lot of the changes we started putting in place in the second half of '07. So I'd say certainly we've got the first half to run and then you start to come up against those comps in the second half of the year.

Thanks, very helpful.

Jonathan Steinmetz, Morgan Stanley.

Thanks, good morning, everyone. A few follow-ups here. First of all, on the used side with 35 days of inventory, could you talk a little bit about the composition of that used inventory and specifically is it any more heavy towards large pickup and large SUV than it would normally be?

Jonathan, this is Randy. We break that up between car and truck, the 35 days in total. Car is 34 days, which is up from 31 days third quarter of '07, and up from 32 days fourth quarter prior year. Truck is at 36 days current quarter, up from 33 days prior quarter and 30 days fourth quarter of '06. And all those numbers are still below our target of 37 days across car and truck.

Okay. So I guess you are saying you're not especially concerned that your super full-size pickup truck heavy and facing some difficult some inventory that may be worth a little less than it was before.

No, Jonathan, this is Earl. I think we took a lot of those hits. Our policy, which I'm sure it is not completely unique, is leaving those things sit on the lot. You keep cleansing those things through every 60 days or 90 and they go to the auction, and you take your hit if you have a hit.

The other thing that is going to push inventories up a few days, which is why we're willing to take a 37-day supply of used vehicle inventory, is for about a year and a half now we've been pushing more certified CPO business. And it takes a few more days to get those cars reconditioned and certified. So you have a few more in the pipeline that aren't front-line ready yet.

And I think for the quarter, we were up to 28% of our business certified and for the year 24%, and that is way up from where we were in prior year. So we are still getting more and more into that business, and so you get some cars stuck in the pipeline there.

Okay. John, on the $60 million of CapEx here, do you see that as we look forward into '09 and '10 and you get past some of these larger projects, can that continue to go down and begin to converge towards that maintenance type level, or is it going to continue to run at this rate?

Jonathan, this is John Rickel. It depends somewhat on the pace of acquisitions and the type of stores that we are buying. If the pace of acquisitions slows, yes, I think over time you can see it continuing to come down. But a lot of the spend is really driven by the acquisition activities. So that is kind of the wild-card in it.

Okay. And on the F&I you talked a little bit about some of the drivers here, but was there anything in terms of either recognition of favorable loss experience on service contracts that flowed into that, or preferred lender fee or anything like that that would have been bumping it up?

Jonathan, this is John Rickel. Actually, it's the opposite. We did take the charge I mentioned in my script of about $500,000 for some settlements with the credit life companies on basically commission refunds that they owed customers. So no, other than that, there was nothing really unusual in the F&I area.

Okay. And less question. Earl, I think you mentioned 96 days of domestic brand new inventory. Are you guys still ordering aggressively or have you turned off the spigot in terms of orders coming in?

I sure hope not. I sure hope we've turned off the spigot. We've been out reviewing this with our domestic stores, and we have to cut back on the orders. Because at the moment, I don't think anyone is seeing a big spurt in domestic sales. So yes, we have to adjust our ordering, and I'm confident we're doing so.

Matt Nemer, Thomas Weisel Partners.

Good morning, everyone. My first question is on the used business. The ASPs, the revenue per unit was a good bit higher than I expected, which is somewhat counterintuitive with truck down and wholesale down. Can you explain that?

Well, Matt, I don't know that I can give you a great explanation. But again, I think CPO figures into some part of that. I know we are selling more certified vehicles every month and every quarter. So even on the car side, that is going to take your transaction price up. But that is the only thought I have right off the cuff that would address it. And I did notice the average transaction selling prices went up on new and used.

And ten turning to SG&A. Can you give us some outlook for the first-half in terms of what you are thinking on comp expense and ad expense within that full-year assumption?

I don't think we can get you a specific number in terms of 70 this or 70 that. But I think one of the important points of the discussion about a weak industry and our forecast of 15 million to 15.5 million is I don't think we've quite caught up in terms of having our business sized properly yet. Maybe we did a little better in the recent quarter than we had in previous quarters but I still don't think we are there. We haven't stopped. We haven't stopped working on getting our cost structure more aligned for this lower industry sales level.

We are going to assume it stays at this lower industry sales level until one of you call us and tell us that the recession is over.

Let me try asking that a different way. Do you think the fourth quarter -- do you think the impact of reduced expenses was fully baked into the fourth quarter or could we actually see some even better expense control in the first quarter on those two lines of comp and advertising?

Well, the biggest worry to me -- I will probably not answer your question another way -- is what we are fighting is these lower gross profit levels. We are going to continue, there is more room for us to continue to cut expenses. But the fear is there is still more downside in the new and used gross profit into the business. And so we have more work to do, just say that. So we haven't let up and we haven't finished.

And then my last question is I noticed that your floor plan assistance was down a little bit more than the unit decline. I'm just wondering if there had been any changes in those formulas?

Matt, this is John. No, I mean really what's going on there as much as anything is the mix shift that's more import and more luxury and less domestic, and domestics tend to be a bit more generous on the floor plan assistance.

Makes sense, thank you.

Jordan Hymowitz, Philadelphia Financial.

Hey, guys. Good morning. My question is first of all, follow-up on Rick's question that the debt levels in no way hamper an ability to do acquisitions with Toyota or anybody else?

Jordan, this is John Rickel. No, with the OEMs specifically, not anything that I am aware of. We've disclosed where we're at on the acquisition line and how much is available so there is still plenty of dry powder if we find attractive deals.

Okay. Second question is I just want to make sure that it's only Lexus at this point that you guys are either on acquisition hold with or maxed out every other manufacturer from what you said a couple weeks ago you are still able to do acquisitions with?

This is Earl. Actually we are not maxed out with a number of Lexus points we can have nationally. I think there are two Toyota regions where we have the maximum number and I don't know if they had 10 or 12 regions or something like that. So there's two of the 12 Toyota regions where we have our maximum number. That is the only place we've hit a maximum.

And have you been turned down by any manufacturer in the past three to six months in making in acquisition?

No, we have not.

Okay so basically then just the slowdown in the acquisition target is purely a function of rationalizing what you have now?

Rationalizing what we have now in the overall economic uncertainty. I think we just need to be a little more careful in these choppy, choppy markets.

Okay. And the guidance of 295 below, it implies a 15 million SAAR?

Yes.

Yes.

And is there a ballpark rule of thumb or is it exacerbated like if the SAAR is 16 million, could I assume it is then a 350 number? And if it's -- I'm getting at is there like a $0.25 to $0.30 swing for each $500,000 or is not really --?

I don't think it can be really linear just because you don't know the composition of any level of industry volume whether it's 15.5 or 16. You don't know if there's a lot of fleet in there, you don't know if there if there's a lot of distressed merchandise and huge incentives or pushing metal into the market or what the brand mix is. So it's not completely linear, to answer your question.

And final question, I apologize. But the industry SAAR off 16.5% in February, is that on the overall 16.2 SAAR from last year or is it just on the retail SAAR?

That would be I think on the total industry SAAR. I think that is normally the way they look at it.

Okay. Thank you very much, guys. I appreciate it.

[Brad Hathaway], J. Goldman & Company.

J. Goldman & Company. Hey guys. I just wanted to ask about the debt levels, because even if I remove the impact of the acquisition in the mortgage lines, it looks like net debt increased roughly $60 million from quarter to quarter from Q3 to Q4. And since we don't have a cash flow statement, I was just wondering if you could walk us though some of the major factors in that change? Thanks.

Okay, this is John Rickel. The mortgage piece we've talked about, I guess you are excluding that from your comment, but mortgages we did draw about $20 million more on the mortgage line. The other big change would have been drawing on the acquisition line to fund the four dealership purchases in December. We drew $135 million down on our acquisition line.

To some degree we were a bit conservative on the level that we drew there. There was a lot of noise in the market in December, a lot of concern about actual short-term availability in the cash in the last couple of weeks so we actually drew more on the acquisition line than was required and you can see that by the fact that we had $65 million of pay down on our floor plan line. We actually had excess cash on the end and it was a deliberate strategy that we took during the quarter. So that was really the two big changes in debt in the fourth quarter.

I mean -- I'm not sure if I entirely follow you. The cash decline from roughly $79 million to $34 million and then you have the other long-term debt increasing from $20 million to $33 million. I mean those are the two kind of things I'm most curious about is what drove that move?

Right. Well the cash was basically, at the end of the third quarter we had started to put in place a new banking structure. And as a result, we actually had a bit more cash in the banks at the end of the third quarter than our normal process would have. Our best use for short-term cash when we have excess cash on hand is to pay down our floor plan borrowings. We basically get a return of LIBOR plus 87.5 basis points by paying that down. So that is our normal investment vehicle for short-term cash.

Because of the banking shift at the end of the third quarter, we had more cash on hand and less paid down than we would normally have. Our normal run rate is about $30 million of cash in the cash cash account and then the rest of it we would use as we did at the end of the fourth quarter to pay down the floor plan lines. So I think the differential between third and fourth is we had less plan floor plan paid down than we normally would. We moved that back up as we went into the fourth.

Okay. I mean I'm sorry to keep harping on this but it looks like the floor plan increased roughly $100 million and the inventory also increased about $100 million. I mean is there something I'm missing here about why the floor plan change would really account for this?

We had four acquisitions in December.

Okay.

And they were all luxury stores so I would say that it was primarily acquisition driven.

Okay. I mean -- I guess it just doesn't seem to explain the decline from 79 to 34.

Well, the 79 to 34, once again, that was the --

Yes.

(multiple speakers) basically that we used it to pay down some of the floor plan.

All right. I guess maybe I'll follow-up with you afterwards. Thanks, John.

There are no further questions at this time. I would like to turn the conference back over to Earl Hesterberg, President and CEO, for any closing remarks.

Thank you for joining us today. We are looking forward to updating you on our progress on our first-quarter earnings call in April. Thanks, and have a nice day.

Ladies and gentlemen, this concludes the Group 1 Automotive fourth-quarter earnings conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3000 or 800-405-2236 and enter pass code 11108789. ACT would like to thank you for your participation. You may now disconnect.