Group 1 Automotive Inc (GPI) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Group 1 Automotive first quarter earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded Tuesday, April 29, 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, Eric. And good morning, everyone, and welcome to the Group 1 Automotive 2008 first quarter conference call. Before we begin I would like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures. Except for historical information mentioned during the conference call statements made by management of Group 1 Automotive are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve both known and unknown risks and uncertainties, which may cause the Company's actual results in future periods to differ materially from forecasted results. Those risks include, but are not limited to risks associated with pricing, volume and the conditions of markets. Those and other risks are described in the Company's filings with the Securities and Exchange Commission over the past 12 months. Copies of these filings are available from both the SEC and the Company.

In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, the Company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on its website. I will now turn the call over to our President and Chief Executive Officer of Group Automotive, Mr. Earl Hesterberg.

Thank you, Pete. Good morning, everyone, and welcome to Group 1 Automotive's 2008 first quarter conference call. In a minute I will turn the call over to John Rickel to give you detailed financial results for the first quarter. After he is finished I will provide a brief summary and then open up the call for questions. Let me begin by telling you what we observed during the quarter. As we anticipated, the new vehicle sales environment remained challenging during the first quarter. The macroeconomic conditions including high gasoline prices and issues surrounding the housing market continued to negatively impact consumer confidence. This is translating into less consumer traffic on our dealerships' lots, particularly as related to our truck sales.

The total market slowdown was felt more at our dealerships in California and Florida while overall traffic remained stronger in our Texas stores where the oil and gas industry is doing very well. We have continued to see a significant shift in customer preferences from trucks to cars with our car mix increasing three full percentage points from the first quarter of last year to just under 55% of our sales this quarter. As a result, we have seen larger sales declines in the brands that are more dependent on truck sales such as Chevrolet, Dodge and Ford.

The acceleration of this shift negatively impacted our inventory levels, which I will cover in more detail in a moment. The resale value of trucks also continued to decline throughout the quarter, which made it difficult for truck customers to trade out for any type of vehicle, car or truck, new or used. On the used vehicle side we continue to reduce our low margin wholesale business as planned, while increasing our retail unit sales and revenues. We are pleased that we were able to improve our volume although our overall used vehicle margins were down due to the current used vehicle market conditions.

We continue to see the higher margin used truck sales impacted due to some of the same macroeconomic conditions affecting the new vehicle market, including high gasoline prices and housing slowdowns. In addition, we also started to see some tightening on used vehicle financing terms. Our lenders have been increasing their stipulations, requiring larger down payments and more importantly, have reduced loan to value levels. That reduction has been most impactful on customers trading in units who are in negative equity positions, as it limits some of our flexibility. We are still able to get these customers financed, but in some instances it is affecting our margins.

In the businesses where we have more control, Parts and Service and Finance and Insurance, our focus coupled with the strategic initiatives we've implemented, have continued to deliver improved results. Through the first quarter of 2008 net income was $16.4 million or $0.73 per diluted share compared with net income of $17.4 million or $0.72 per diluted share in the prior year period. As we reported last year, the 2007 first quarter results included a $0.10 per diluted share charge associated with lease termination charges incurred primarily in conjunction with the disposal of an under performing dealership.

On a same-store basis total revenues were down 3.8% due to the previously mentioned brand and macroeconomic factors, as well as the intended reductions in used vehicle wholesale sales. New vehicle and wholesale used vehicle revenues declined 7% and 13.5% respectively. These declines are partially offset by revenue increases in our retail used vehicle business of 2.3%. Parts and service of 4.6% and Finance and Insurance where revenues were up 4.9%. Of special note, our customer based service business was up 7.8% on a same-store basis.

The improvements we made during the last few quarters in our Finance and Insurance business continued into the first quarter of 2008, where we realized a $117 improvement to $1165 per retail unit on a same-store basis. Our overall same-store gross margin increased 40 basis points to 16.6%, reflecting the 120 basis point gross margin improvement in our parts and service business, and the previously mentioned profit improvements in F&I that were partially offset by the declines in our new and used vehicle business margins.

Same-store SG&A expenses fell $900,000 or 0.5% in the first quarter to $187.8 million, reflecting improvements in advertising and personnel costs. This improvement in expense was more than offset by the gross profit decline resulting in a 90 basis point increase in SG&A as a percent of gross profit to 79%.

Turning to brand mix, during the first quarter Toyota, Scion and Lexus continued to lead with new vehicle unit sales of 34.4%. Nissan/Infiniti moved into second with 13%, bumping Honda/Acura into third with 12.8% of unit sales. Ford remained in fourth at 11.7%, down 160 basis points from the prior year period. Rounding out the mix was Chrysler with 7.3%, BMW Mini with 7.1%, GM with 5.6% and Mercedes with 5.4% of new vehicle unit sales.

BMW Mini and Mercedes had the largest year-over-year growth with 150 and 220 basis point increases, respectively. Our import luxury brands grew to account for 77.7% of our new vehicle unit sales, up from 74.2% in the first quarter of 2007. On the acquisition and disposition front, as we announced earlier in the year, we anticipated acquiring approximately $300 million in estimated annual revenues during 2008. Toward this target we opened our Smart Car dealership in Beverly Hills with $9.5 million of estimated annual revenues in January. We did not dispose of any franchises during the first quarter. 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.

Now a word about inventories. Overall, our inventories were adversely impacted as sales continued to weaken in the first quarter and the mix shifted further from trucks to cars. The slowdown in the industry significantly impacted our domestic new vehicle inventory to levels well above our 75 day target. While our Ford inventory improved by 11 days to 94 days supply from the previous quarter, our GM and Chrysler inventories grew to 122 and 111 days supply from the fourth quarter levels of 99 and 78 day supply, respectively. These levels contributed to our domestic inventory growing 15 days from the fourth quarter of 2007 and 42 days from the prior year quarter to 111 days supply.

The slowdown also affected the inventories of our import and luxury brands. Import inventory grew four days from the fourth quarter and five days from the first quarter of 2007 to a 63 day supply. Luxury inventory at 51 days was up 12 days from the fourth quarter and 11 days from the prior year quarter. Of note, our Toyota inventory grew to 57 days from 44 days last quarter, and Mercedes-Benz inventory were up 18 days from fourth quarter. As a result, our total new vehicle inventory at March 31 increased 8 days from the fourth quarter and 14 days from the first quarter of 2007 to a 71 day supply.

A major factor contributing to this increase was our car truck mix in domestic, import and luxury brands alike. Our overall new truck inventory grew 20 days from the fourth quarter and 31 days from the prior year period while our new car inventory held at 57 days from the fourth quarter and was up only one day from the first quarter of 2007. Clearly we need to significantly reduce our truck inventory in the second quarter.

Noting our used vehicle inventory, our supply of used vehicles at quarter end decreased six days to 29 days from the first quarter of 2007 and increased one day from the first quarter of 2007. Even though we ended up a bit below our 37 day supply target we are satisfied at this level given the current environment. I will now ask John to go over our financial results in more detail.

Thank you, Earl. And good morning, everyone. For the first quarter of 2008 our net income was $16.4 million or $0.73 per diluted share. Our 2007 results included $2.5 million or $0.10 of diluted share of after-tax charges related to lease terminations. So on a comparable basis our net income for the first quarter of 2008 declined $3.5 million or 17.8% from the same period in 2007 and earnings per diluted share declined 11%. Our first quarter consolidated total revenue of $1.53 billion improved $6.7 million compared to the same period a year ago. This overall improvement reflects increases of 7.5% in our retail used vehicle business; 10.1% in our parts and service business; and 6.4% in our Finance and Insurance business.

Partially offsetting these improvements were declines in our new vehicle and wholesale used vehicle businesses of 3.2% and 8.1%, respectively. Our consolidated gross margin of 16.5% improved 30 basis points from the first quarter of 2007 as a result of the shift in revenue mix on a year-over-year basis toward our higher margin segments. In addition, our parts and service margins improved 120 basis points while lower margins in our new and used vehicle businesses of 50 and 130 basis points, respectively, were a partial offset.

On a consolidated basis our SG&A expense as a percent of gross profit declined 100 basis points from 80.2% in the first quarter of 2007 to 79.2% in 2008, primarily as a result of the nonrepeating lease termination charges in 2007, and decreases in our consolidated advertising costs. Consolidated floor plan interest expense increased 4/10 of a percent in the first quarter of 2008 as compared with the same period a year ago. This increase was primarily attributable to a $93.8 million increase on our weighted average borrowings, reflecting the higher inventory levels that Earl previously discussed. 174 basis point decline in our weighted average floor plan interest rate provided a substantial offset.

Other interest expense increased $3.2 million to $8.4 million for the first quarter of 2008 as our weighted average borrowings of other debt increased $247.1 million from the same period a year ago. This primarily reflects the remaining $65 million balance if outstanding under the acquisition line of our credit facility after we paid down $70 million of borrowings during the quarter, and the $177.5 million outstanding under our mortgage facility as of March 31, 2008.

The increase in interest expense from the mortgage facility and acquisition line was partially offset by the impact of the lower outstanding balance on our 8.25% senior subordinated notes as we have regained 55.1 million of these notes since the third quarter of 2007. The outstanding balance due on our 8.25% senior subordinated notes as of March 31, 2008 was $82.1 million.

Manufacturers' interest assistance, which we record as a reduction of new vehicle cost of sales at the time the vehicles are sold, was 64.8% of total floor plan interest cost for the first quarter of 2008, a 940 basis point decline from the first quarter a year ago. This decline stems primarily from the impact of our $500 million of fixed rate swaps that we had in place at March 31 at a weighted average interest rate of 4.8%. We reflect the monthly contract settlement of these swaps as a component of floor plan interest expense.

Turning now to same-store results; in the first quarter we had revenues of $1.4 billion which was a 3.8% decline from the same period a year ago. Same-store new vehicle sales declined 7% in the first quarter of 2008, partially offset by improvements in retail used vehicle sales of 2.3%, strong growth on our parts and service revenues of 4.6% and higher F&I revenues of 4.9%. Our same-store new vehicle sales declined $63.9 million as continued soft economic conditions in our California and Florida markets were coupled with lower demand for truck and other less fuel efficient vehicles. Overall our same-store unit sales of trucks declined 13% from the first quarter of 2007, while our car sales declined 5%. As a result the truck heavy domestic lines were down 15.3% in the first quarter of 2008 while our import and luxury brand sales decreased 4.8% and 3.2%, respectively.

We believe that our results are generally consistent with the retail performance of the brands that we represent in the markets that we serve. We continue to focus on improving our used vehicle business, utilizing technology to enhance our selling and inventory management processes. As a result, our used vehicle business mix continues to shift toward used retail sales away from less profitable wholesale sales. For the quarter our retail used vehicle sales improved 2.3% or $6.6 million while wholesale used vehicle sales declined $9.8 million or 13.5%. Our focus on fixed operations has begun to pay dividends with revenues increasing $7.2 million or 4.6% in the first quarter of 2008. The increase was made up of a 7.8% increase in customer paid parts and service business and a 3.3% increase in our wholesale parts business while our warranty related sales were consistent with 2007 levels.

Despite a tougher financing environment and lower volumes, our same-store F&I revenues increased $2.4 million to $52.3 million in the first quarter of 2008. We experienced higher penetration rates in each segment of this business and our vehicle service contract and insurance offerings, continued to reap the benefit of an improved cost structure. Our F&I gross profit for retail unit improved $117 per unit in the first quarter of 2008 to $1165 per unit, an increase of 11.7%.

Overall our same-store gross margins improved 40 basis points to 16.6%, reflecting a favorable business mix and 120 basis point increase in our parts and service margin partially offset by declines of 50 and 110 basis points in our same-store new and used businesses, respectively.

On the new vehicle side the decline in our higher margin new truck sales has negatively impacted our same-store new vehicle margins. Same-store margins improved in our luxury lines but declines in domestic and import margins more than offset this improvement. The margin pressure felt in our new vehicle business was also felt in our used vehicle business. In addition to the impact of the shift in customer preference away from trucks that I just covered in new vehicle sales, a tougher financing environment with reduced loan to value ratios negatively impacted our used vehicle margins. This is particularly true with customers trading in full-size trucks and SUVs that were upside down on their loans.

Our overall parts and services gross margins improved 120 basis points as our initiatives for growing the higher margin portions of our parts and service business have started to gain traction. We realized an increase in our customer paid parts and service margin as key initiatives including the negotiation of a national oil contract to improve the cost structure of this segment of business.

Same-store SG&A declined 0.5% to $187.8 million in the first quarter of 2008 while we continued to make progress on rightsizing our company in a declining sales environment as well as continuing to take advantage of our size and negotiating leverage, we did not fully offset the decline in gross profit that we experienced this quarter. As a percent of gross profit same-store SG&A increased 90 basis points in the first quarter of 2008 to 79%, reflecting the 1.7% decrease in gross profit. Same-store floor plan interest expense declined 2.8% or $333,000 to $11.5 million in the quarter as the savings from the 192 basis point decline in floor plan weighted average interest rates was partially offset by an increase in our weighted average borrowings of $113.1 million reflecting the higher inventory levels previously mentioned.

Now turning to liquidity and capital structure; we continue to execute on our strategy of owning the real estate associated with our dealership operations. As a result, we purchased real estate associated with several dealership facilities late in the fourth quarter of 2007 and through the first quarter of 2008. From these purchases we drew an additional $47.8 million down on our mortgage facility during the first quarter. Borrowings on this facility as of March 31, 2008 totaled $177.5 million with $57.5 million available for future borrowings. In addition, we borrowed $18.7 million through a separate financing arrangement to fund the purchase of other dealership related real estate. In total we owned approximately $341.1 million of land and buildings at the end of the quarter. We expect to continue to strategically acquire real estate associated with our dealerships.

We added $20.4 million of cash on the end as of March 31, 2008. In addition to our cash on hand we used our floor plan offset account to temporarily invest excess cash. These immediately available funds totaled $52.3 million as of quarter end. As anticipated we repaid $70 million of the outstanding borrowings on our $350 million acquisition line during the quarter, leaving the outstanding borrowings of $65 million at March 31, 2008. This gives us $285 million of available borrowing capacity under this facility.

Our total long-term debt to capitalization ratio excluding real estate debt, totaled 41% at March 31, 2008. This was down from 45% at December 31, 2007 primarily as a result of the $70 million of paydowns on the acquisition line that I mentioned earlier, and the repurchase of $18.6 million of our 8.25% senior subordinated notes. This debt to cap ratio continues to be slightly higher than our target level of approximately 40%. However, we anticipate the ratio will continue to decline over the next few quarters as we further pay down our acquisition line borrowings.

The amount available for restricted payments under our 8.25% senior subordinated notes covenants increased to $18.2 million at quarter end. As our mortgage debt continues to increase, we have continued to fix our floating-rate debt during the quarter, entering into an additional four-year interest rate swap for $25 million. This brings the aggregate amount of our swaps to $500 million at a weighted average rate of 4.8%. With regards to our capital expenditures for the quarter we used $11.3 million to purchase property and equipment. This amount excludes the purchase of land and existing buildings. We continue to expect that our capital expenditures, excluding the purchase of land and existing buildings, will be approximately $60 million for 2008.

For additional detail regarding our financial condition please refer to the schedules of additional information attached to the news release as well as the investor presentation posted on our website. With that I will now turn back over to Earl.

We are not changing our outlook for guidance for the balance of 2008 at this time. Although we executed reasonably well in the first quarter, new vehicle sales continue to weaken throughout the first quarter and key economic barometers such as consumer confidence continued to deteriorate. Given this background we are reaffirming our 2008 full year earnings guidance in the range of $2.95 to $3.25 per diluted share. Guidance continues to be 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 one time items as lower sales revenues are expected to offset cost improvements.

LIBOR interest rates at 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 a potential related one-time cost 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 Manufacturer 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 INSTRUCTIONS) John Murphy, Merrill Lynch.

Just wondering on SG&A, you guys seem to be catching up to the weakening sales environment on the new vehicle Scion on SG&A. Just wondering how far along you think you are in cutting those costs, if there is more opportunities in the near-term on the variable side or even on the fixed side; just really where you stand on that.

There is more opportunity for us. Obviously the concern is can we realize that opportunity faster than sales or margins drop? New vehicle margins being around 6.4% is lower than we would have anticipated a short time ago. I am hoping we are getting near the bottom on margins, but as we look at the inventory pressure, our inventories are too high, but I don't think we are the only one that has inventory too high. That continues to put pressure on margins; but clearly there is more cost we have to get after, and we are working to do that. We are not finished with the cost.

Then just a follow-up on the new vehicle margins. With these supply numbers going through -- not through the roof, but actually fairly high -- are you seeing pricing discipline erode among the manufacturers? I mean, for a while we started to see a little bit of relative discipline. But is that starting to reverse course? And if there is any automakers that are specifically getting out of hand, if you could call them out that would be great.

I'm sorry, John. Was your question about discipline on incentives or discipline on manufacturing levels, production levels?

On the actual incentives, on the pricing themselves.

There are some manufacturers that I think have held back so much. I'm thinking of General Motors right off the top of my head, that is actually I think put them in a competitive disadvantage in a weak market. Whereas Ford, I think a year ago we were concerned Ford wasn't playing hard. Ford is playing hard now, and relatively speaking at least particularly in Texas, Oklahoma, our markets, I'm not saying Ford is doing great, but they are certainly on a competitive viewpoint. They are fighting harder for their share of a weak market than their other two domestic counterparts at the moment. So there is a difference right now in how some of the manufacturers are attacking the market with incentives.

And is that what is eating into the new vehicle margins, or are you seeing just increased competition in your local market areas?

To me the new vehicle margins -- and I'm going to let Randy add his viewpoint here when I finish -- is just the lack of traffic and the inventory pressure, a combination of those two things. There is less people out in the showroom, and dealers particularly big strong dealers like us, and the other companies you follow, we need to keep moving metal. And for us and for the manufacturer. So it is just less customers and plenty of units on the ground that need to be sold. That is driving the margins down. Randy, do you want to add anything?

Yes, this is Randy. I think it is primarily a traffic issue, but also as people come in with trades and those trades aren't worth quite what they were a couple months ago. And probably not quite what the customer thinks they are worth, that puts a lot of pressure on new car markets.

And lastly, John, just on the mortgage facility it looks like you are doing a pretty good job of utilizing that and using it up at this point. Is there any potential to upsize that, and is there room -- are you finding availability to potential upsize that if you need to or would like to?

Yes, we are pleased with how we've been able to put that facility in place and how we are using it. I don't know if there is specific capacity around that facility but we are in discussions about increasing capacity through other means and confident that we will be able to continue to find funding sources for real estate that makes sense.

Then just lastly on the variability of the range of the 2.95 to $3.25, is that really just the range in your sales estimates or is there any other major factors, swing factors we should be thinking about there from the top to the bottom of the range?

I would say the biggest single factor is the sales environment. Obviously we've got some other ranges within there, but a lot of that trickles down with what happens with the top line.

Great. Thank you very much.

Edward Yruma, JPMorgan.

I wanted to ask a little bit around the inventory levels and your ability to work those down without significant discounts. Have you slowed up your ordering with the OEMs, and how centralized is your inventory management now versus maybe this time last year?

Your first questions answer is yes. We are becoming very conservative on our inventory ordering. We are still not centralized in Houston. But we do participate strongly, and the ordering of inventory. We clearly have some work to do primarily in the truck area. But we are very focused on it.

And as you look at the strong increases in F&I PVR I know that at some point this year you are going to [lap] more difficult comparisons particularly with the new contracts. When do you lap those comparisons and how sustainable is this level of growth?

Basically we started to run into the lap in the third quarter. We made most of those changes starting kind of June, July. So it really shows up third quarter. We think the absolute levels are certainly sustainable and maybe even still some further upside to it. But yes, the comparisons certainly get a little bit more difficult in the second half.

The final question around credit availability I know you talked about maybe more stringent terms offering consumers. Have you been able to expand your lender base to try to service those more marginal consumers, or is credit availability just not there? Thank you.

We've got plenty of lenders that we deal with. As a matter-of-fact, we've been going a bit the other way of trying to concentrate volume and really concentrate on relationships. One of the things in this environment that really is important is a good deep relationships with your lenders. To the extent they've only got a certain amount of credit to pass out, you want to be one of their primary customers and somebody that they are really stepping up to support. So we are comfortable that we've got appropriate spread of lenders. The relationships that we have are good. And really are not having problems getting the customers bought. The conditions, or stipulations may be a little tighter but the overall ability to get them financed is still very much in place.

Great. Thank you very much.

Scott Stember, Sidoti & Co.

Let's talk about the parts and service. Obviously customer bases out of the business is something definitely helping you. Could you talk about how far along we are, how many of your dealerships are using these new processes, and are we just at the tip of the iceberg here?

We are maybe halfway through it. This is a slower moving business, as most of you know, then the new and used vehicles where you can quickly implement changes. One of the reasons we continue to shift our brand mix, obviously, is because of the growing units in operation that they've had for a decade or more, the import luxury brands. But also just -- we've expanded our capacity. We have tried to become more process oriented. We've probably marketed more aggressively trying to use more of the electronic marketing media available to us because we know who our potential customers are in service.

We've invested some money also in our parts wholesaling operation in Oklahoma City. So we are only a year or so into this mission of really putting a lot of focus and more professional talent against it. So there is a lot more upside for us in this. But I think this is the first time that we've really seen some of the numbers show through, and I think the weak sales environment kind of spotlights that a bit more.

Were there any particular brands which you excelled on the customer base side or is it starting to feather out amongst all brands now?

No, but clearly by being 35% Toyota we are -- and then you take Nissan and Honda, that is over half of our business. That is where the huge units in operation are. And so that is where we will get the most leverage.

Okay, and on the acquisition front with the market continuing to weaken on the new car side, are you starting to finally see the asking prices for some of these dealerships come down, or are we still in an irrational level?

No, we have not seen prices come down. Still what I would consider to be an irrational level generally speaking. And I think companies like ours will have to be much more careful in this type of environment until we see how things play out. But no, still your valuable import luxury franchises have unrealistic asking prices generally speaking.

Last question on California. Are we at the point here where we are starting to see the comps get a little bit easier or going forward from here or are we still looking at some difficult times ahead?

Quite frankly, Scott, I was shocked. I had thought that the California market had stabilized during the second half of last year, not necessarily at a good level, but it seemed it had found a level. And then in the first quarter this year and I think you publicly heard about this from some of our competitors who do a lot of business in California, at least the other companies in our sector, the bottom fell out again in the first quarter. I saw some data yesterday from one of the manufacturers that showed Honda sales down around 10% in the first quarter, Toyota between 13% and 14% and Nissan down 20% in the first quarter in California. And those three brands are the California market, as far as we are concerned, anyway. And so something happened in California in the first quarter that was of a different magnitude than what we saw during much of last year. And much of last year wasn't that good so I think we still have to be cautious about California.

Just a follow-up to that. Is it fair to characterize that you outperformed the market in California in the quarter?

I wouldn't say we necessarily outperformed the market because we have three Toyota dealerships in California, two Nissan/Infiniti and two Honda. So I don't know that we necessarily outperformed the market. We may have in parts and service and F&I, but it was no better for us in the first quarter than it was for anyone else, I don't think, generally speaking.

All right. Thank you for taking my questions.

[Darren Kennedy], Goldman Sachs.

I'm here with Matt Fassler. How are you? I am calling -- I'm actually asking about March trends. I don't know if there was any distinctive difference through the quarter. I don't think any of your competitors really had anything encouraging to say about April. I was wondering if you could comment.

The only thing that I would say is that on the new vehicle side, and that is 62% of our revenue, each succeeding month this year the new vehicle market has gotten noticeably weaker. I don't have April data for our company yet. I obviously have some mid month data and such, but I have looked at some of the April forecasts from analysts who are probably on the phone here, and they certainly aren't predicting anything better in April. And we just didn't see anything but weakening new vehicle trends in February, and in March. So I don't think that we -- at best we probably hope to stay flat right now in the new vehicle market.

And the other things about (technical difficulty) I'm wondering if things are getting incrementally tighter or think that this is where the lenders have found a new comfortable level in terms of all these new restrictions, value reductions et cetera.

I think this may be starting to get to a level that they are comfortable with. We haven't seen a whole lot of additional tightening over the kind of the last month or so. So maybe knock on wood a bit, but we think maybe this is starting to get to a level they are comfortable with.

My final question has to do with truck demand as being really weak and (inaudible) with inventory. The OEMs, are they overstocked in truck and pushing that on you? And how are you addressing that?

We are definitely overstocked on trucks, so they can push all they want to. We have plenty. They are a little high, obviously.

Are they adjusting incentives in anyway?

I'm sorry?

Are they using the incentives or planning to? What do you think their strategy is for that?

I think they are going to have to. Earl mentioned General Motors previously. And I think they are going to have to move the market somehow on these trucks. And I think incentives would be a great way to do that.

Thank you for taking my questions.

Rich Kwas, Wachovia.

Good morning, gentlemen. Earl could you discuss the outlook for the luxury market for the remainder of the year, luxury sales were down in the first quarter. And I would suspect that you had some pressure on grosses there as well. What is baked into the guidance for the rest of the year?

That is correct, Rich. We've seen this year in the first quarter, it was the first time we've seen kind of a notch down in the luxury business even in the strong markets like Houston. I don't want to overstate it and say it's bad or anything like that because it's not. But I think even if you look at luxury goods outside of automotive you have read that even luxury products in general have started to be impacted by the economy in the US. I think it is exacerbated particularly for the two German manufacturers, the exchange rate. They are under an awful lot of pressure from that because that got worse again in the first quarter certainly for the Germans. And of course the yen has been an issue, too. We started to see inventories build of these luxury brands. Sales are down a notch. It is still a very good business. It is still the best business within our business. So I don't want to complain because that wouldn't be valid. But it is down a notch, too, and I think it is going to -- there is going to be pressure on that which puts pressure on their margins and pressure on their volume a little bit. The other thing that happens with these luxury brands when you go into this market or you have been a year or so with declining used car values is you see eventually lending institutions take hits on the residual values. This has happened in history before, but there is an awful lot of vehicles out on lease, not as many as there might have been in the mid-90s or whatever. But the entire breadth of our business gets hit, and it has now seeped into the luxury car market volume grosses, lending, meaning leasing for a lot of these people. They are going to have to be more careful about residual values on leases and things like that. It is now across the board with all the brands. So we would expect year-over-year performance data on luxury brands this year, volume growth and so forth; not to be quite as good as last year. That is inherent in our forecasting and guidance.

And John's comment earlier about the lending environment seemingly stabilizing a bit; John, do you think that is the lease, the residual impact, luxury has been factored into the lending institutions? Or do you kind of view that as a potential risk as we proceed through the year?

That could well be a risk as you go forward. If Earl is right and they start to take some residual hits the kind of normal characteristic is that they will react to that. That is, I guess, potential risk.

It looks like the Boston market, at least as a percent of revenue was up a little bit year-over-year. I know that was a worry point for you heading into the year. What are the trends in that market, and how do you feel about your cost structure there?

Well, the Northeast overall, as you know, is higher cost than much of the US and starts with rents and what you have to pay people and so forth. We are very powerful as a dealer group within that market, so we are able to hold our volume. But there is as much or more margin pressure there as there is just about anywhere other than perhaps California. So it is a huge Toyota market. We have four Toyota dealerships. So we are holding our sales up, but we are under margin and cost pressure there, I can assure you.

Finally on used vehicles with the Manheim index coming in, what are you doing? Are you offering less on trades, and is that reducing the inventory that you get at retail and is that forcing you to go to the auction more? And then how are you adjusting the truck car mix on the used side?

That is one of the hardest parts of the business equation right now; I think Randy brought it up earlier, is particularly in Texas and Oklahoma if you don't trade for trucks and SUVs, you don't sell new cars. So we are still having to take them. It is a lot of deals aren't getting done because the owners are upside down or they can't believe what their appraised values of their trades are. But no, we still take them, and that's a lot of the retail margin pressure you are seeing certainly from us, is our dealerships want to retail those used vehicles after they take them on trade. Before they have to take them to the auction in 60 days and take a hit on them there. So we are probably the retailing out of some trucks and SUV's more quickly than we might have a year ago to -- because of fear of what will happen if we wait another month and have to take a wholesale hit at the auction. So that is all part of the dynamic, and that is also the dynamic of why the domestic manufacturers or Toyota were trying to sell big trucks, full-size pickups and SUVs need incentives in the market. It is not to reprice their vehicles as it as much as it is to help get some of these trade-ins done. And frequently the people trying to trade-in and particularly with the domestics are brand loyal. They are bringing a Ford truck back to a Ford dealer, a Dodge truck back to a Dodge dealer trying to get into something new, maybe a crossover, maybe something more fuel efficient. Maybe it is just a new truck, but there is just the economics don't work without incentive help from the manufacturer.

And lastly on the used vehicle side are you overweight trucks right now and do you expect -- if you are how soon do you think you can get, rightsize the inventory mix?

We are overweight trucks just because that is the -- that's what is being traded in across the country. And if you're doing new car business, you know you've got plenty of trucks. And in terms of what we like to stock for retailing, what we would buy to retail, we'd like to have cars. So and Randy has got some data but the trucks are going to keep coming in. The idea is we will liquidate the trucks more quickly than the cars.

Our day supply of trucks at the end of the quarter actually was only 32 days, and that is down four days from the fourth quarter where we are at 36 days and only up two days from the first quarter of '07 where we were at 30 days. On a day supply basis we are in pretty good shape with used trucks.

Thanks so much.

Rick Nelson, Stevens.

Wanted to follow up on SG&A. The same-store SG&A was up 90 basis points, and yet the consolidated SG&A was down 100 basis points. What accounts for the difference?

As I mentioned in my prepared remarks the consolidated includes the lease termination charge from first quarter 2007. So if you pull that out from the consolidated levels, consolidated SG&A would also be up.

And how about rent expense on a consolidated basis in each period? Do you have that number? As a percent of gross?

I think we do have it.

We are trying to find it, Rick. Hang on.

Rick, this is Lance Parker. The rent number for the first quarter of '08 was rent facility cost was $23.3 million, which was about flat from the first quarter last year.

Got it.

That was on a same-store basis.

Okay. And the CapEx programs at the OEMs, particularly some of the foreign name plates, are requiring of the dealers given the weak environment, how do you view that? Is there an opportunity to push back some of those programs?

There is certainly -- it has certainly become more problematic this year than it was last year. None of them seem to have recognized the economic situation or have any less desire for a new facility than they had last month or last year, so that continues to be a pressure point for some brands in some places for us. We still have a projection of about $60 million of CapEx this year, which is a lot of money. And we still have some projects we need to carry through. In many cases they will give us additional service capacity, which is part of our strategy and is a critical part of the business now. But that pressure mounts as we continue in a soft market, and I wouldn't say that is insignificant.

On the acquisition front you talked a bit about multiples in the US not really changing. Is there any changes occurring in the UK in terms of candidates?

No, Rick, saying their multiples are not as high there as they are here, but there hasn't been any softening. The UK market, of course, overall has held up better than the US, although experts continue to predict it is going to turn down. It is probably a little more flat. It is not really strong, but compared to the US it is certainly remaining stronger. There is a lot of caution there that it could get a little softer as we go through the second half of the year. But in terms of multiples, there has been no change there either.

What is your acquisition target for 2008 in terms of revenue, and does the debt level of 49% debt to cap provide any limitations?

The target remains unchanged at $300 million of acquired revenues in the year, and we prefer to look at it really as excluding the real estate debt. And on that basis we are at 41%, made good improvements during the quarter. So no, the balance sheet continues to have plenty of capacity to deliver at least that level of acquisition, if not more.

Great. Thank you. Good luck.

Matt Nemer, Thomas Weisel Partners.

My first question is given the inventory situation that we are in, should we expect gross profit dollars per unit to have a sharper decline in the second quarter based on trying to exit out some of that extra inventory?

You stumped the band there, Matt. We are looking at each other. Well, I guess I will take the first step, Matt. We have to fight awful hard to keep our new car margins from going any lower than the 6.4 they were the first quarter. Now the market is going to put pressure on us. I am hoping manufacturers will help us with a little more retailing support in terms of incentives. But we certainly have to do our best to resist these margins getting any lower.

And I was just wondering if you've done the math on the impact of lease buyouts on the SG&A to gross profit ratio on a consolidated basis.

You are looking for what, compared with last year?

Yes, just the year-over-year SG&A to gross profit assuming that you did not do any lease buyouts during the year.

I don't have that in front of me. That's something I can get back to you with.

And I guess on that same topic do you have -- I may have missed this if you mentioned it, but do you have personnel and ad expense, the change in those lines during the quarter?

Personnel on a same-store basis was down about $3.7 million quarter-over-quarter. Advertising was down $1.8 million.

Great. And then lastly, in the UK environment, is the plan -- should we expect anything big there or are you still trying to sort of assess that market, develop a plan?

We are continuing to look at acquisitions there Matt. I don't think you can expect anything big because whatever it is we would consider there would still be within the $300 million of annualized revenue guidance we gave. So we are continuing to look at deals there, and we continue to intend to expand our presence there, but not in terms of any blockbuster acquisition at this moment.

Just to go back to expenses, given the sharp decline that was a little bit unexpected in California, and maybe some of your other markets, does that change your game plan here in the second quarter? Are there any actions that you are taking in Q2, given what you've seen in Q1 that you can share with us on the expense side?

Generally I would say no, Matt. We are still executing the exact same plan we laid out in November of '05 or whenever that was. Now there are some tactical things like our truck inventory getting out of balance that needs to be handled in the second quarter. But all these things, the F&I, the used cars, the parts and service efforts, this is all still just executing what we intended to do for quite some time. I think we need to do more faster because of the pressure on revenues and gross profit. There isn't any big resteering of the ship required here.

That's all I've got. Thanks very much.

[Doug Carson], Banc of America.

Just had a quick question on the $18 million of bonds you bought back. In Q3 I think you also bought some of those 8.25% bonds, so you only have 80 million left. Can you just maybe walk me through what some of the decisions were that you made to why you are buying those bonds back? And within the credit agreement does it give you more flexibility to increase your purchases if you chose to?

Basically what we've taken a look at it is the right balance on the balance sheet and where the opportunities are in the cost of capital involved. We saw some prices in the first quarter when the credit markets really started to get dislocated that were very attractive on the bonds and made the decision to grab them when they became available. Really nothing more specific than that. The other factor that we look at is our most restricted covenants on restricted payments are tied up on those 8.25% bonds. So certainly being able to take some of those out at attractive prices gives us potentially more flexibility as we go forward on that aspect.

So on the credit agreement allows you to buy back more of those bonds if you needed to or wanted to?

Yes, there is no limitations on what we could buy in the market on the bonds.

Great, thanks. That was it for me.

Jonathan Steinmetz, Morgan Stanley.

Just a few follow-ups here especially on the used side with your inventory. Could you just comment on the 32 days -- I'm sorry -- 29 days of used on the truck side; do you feel like -- not all trucks are created equal here, so is it extremely tilted towards full-size pickup trucks and large SUVs. And is there a big increase if you just looked at those two categories, or is it more representative overall?

I don't think we are that granular at least at our level here, Jonathan, on being able to tell you by model what we have. Now we could go to our computers and in a half hour or so dig it up but by being in Texas Oklahoma centric company a lot of our trucks are always going to be full-size pickups and SUV's. And that is what runs those markets. But being able to comment on two or three or four days on used vehicles out of a 29, 30-day supply, I don't think we could give you any meaningful feel right now.

That would be interesting data to get if you are able to. And I don't know if you have a feel for this or if your GMs talk about it, but it seems like your overall level is fairly in line but do you have a sense on some of the private cap guys you compete with on the used side -- do you feel as if they are extremely over-inventoried on those products because we only get sort of a [decile] stuff trying to go through the auction channel.

I think we are all facing the same challenges. We have, as you know, we have very aggressive day supply policy and time periods when we have to either retail a car or wholesale it. I don't know that all private caps have those same policies. They could be longer. I don't really know.

Okay, John, just a housekeeping item. I may have missed this but did you comment on what the other income amount, or not the amount, but what constituted that amount in the quarter?

Yes, within the other income probably the largest single one item within there Jonathan, was a small gain on the repurchase of those bonds that we talked about. It was about $350,000.

And the other $400,000 or so would be what?

Just nits and nats.

Okay, and I guess the last question, maybe strategically Earl, is there anything on the SG&A side as you're going through a difficult environment now that you've learned from when we come out on the other side of this mess of some expenses that you think don't need to sort of proportionally come back? Either on the advertising side or some other line items; just anything you've learned by going through a tough period that you wouldn't have to layer back as you get into better times?

Let me take a first stab at that, and Earl can throw something at me. I think some of the stuff we've done on advertising about getting smarter about where we are placing it, about moving it to electronic to email, I don't think that shifts back. I don't think that is necessarily volume driven. Certainly the purchasing initiatives that we are putting into place, that leverage should only get better as we go forward. So I think there is a number of the expense actions that we are taking that hopefully stay with us when things turn up. And it's actually potentially one of the big bright side is when the volumes and the revenue comes back, the expense doesn't have to come back in at the same pace.

Okay, terrific. Thank you.

Mr. Hesterberg, there are no further questions at this time. Please continue.

Thanks to all of you for joining us today. We look forward to updating you on our progress on our second quarter earnings call in July. Thanks, and have a nice day.

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