Group 1 Automotive Inc (GPI) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Group 1 Automotive, Incorporated, first-quarter 2009 earning results call. Today's conference is being recorded. At this time I'd like to turn the conference over to Mr. Pete DeLongchamps, Vice President of Manufacturer Relations and Public Affairs. Please go ahead.

Thank you, Kayla. Good morning, everyone, and welcome to Group 1 Automotive's 2009 first-quarter earnings conference call. Before we begin, I'd like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures.

Except for historical information mentioned during the conference call, statements made by management of Group 1 Automotive are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve both known and unknown risks and uncertainties which may cause the Company's actual results in future periods to differ materially from forecasted results. Those risks include but are not limited to risks associated with pricing, volume, and the conditions of market.

Those and other risks are described in the Company's filings with the Securities & Exchange Commission over the last 12 months. Copies of these filings are available from both the SEC and the Company. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, the Company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on its website.

I'm now going to turn the call over to our President and CEO, Mr. Earl Hesterberg. Earl?

Thank you, Pete, and good morning, everyone. Before I turn the call over to our CFO, John Rickel, who will provide details on Group 1's financial results, I'll provide an overview of what we experienced in the first quarter.

First, there's been no appreciable change in the factors impacting new-vehicle sales. Despite this unprecedented drop in new-vehicle sales, we were able to remain solidly profitable in the first quarter and actually improved our operating profits from the fourth quarter.

Although headline SAAR numbers have bounced around in the 9 million to 10 million unit range during the first three months, as the levels of fleet deliveries have been impacted by the OEM's production schedules, the underlying retail sales pace has not varied much since last October.

Traffic is still by far the biggest issue impacting us, accounting for the biggest single factor in our business decline. Consumers, faced with uncertainty regarding the economy and their own jobs, are postponing vehicle purchases. We need to see some stability and then improvement in consumer confidence before we can anticipate significant improvements in vehicle sales rates. Retail credit remains an issue as well, with more conservative lending practices keeping a significant number of customers out of the market.

For most of the quarter, the vast majority of US auto dealers were buried with excessive new-vehicle inventory. This put further pressure on new-vehicle margins and used-vehicle unit sales.

In January we announced that we had a goal of cutting $100 million in annual expenses. We targeted having those cost-cutting measures in place by March 31. Based on the hard work of our entire team, we were able to get a significant portion of those reductions in place earlier in the quarter than we had anticipated, as well as being able to take out more costs than we had targeted.

Present tracking now indicates a full-year reduction of $120 million in SG&A, based on a 10 million SAAR level. I'm proud of every one of our employees for contributing to this effort.

Although we've made great progress in this area, our original $100 million cost reduction target was based on a 10.5 million SAAR assumption, which now looks optimistic. At a 10 million SAAR level, annual cost cuts approximating $120 million will be required.

The second target we issued was reduction of new-vehicle inventory by $150 million from the 2008 year-end level. I'm happy to report that we also exceeded this target, as we successfully reduced our inventory by $209 million, to $484 million as of March 31. We reduced our inventory by approximately 7,000 units, versus our target of 6,000 units, leaving about 16,000 new vehicles remaining on our lots.

We're about where we would like to be on new-vehicle inventories in total, but still higher than we would like with domestic brands.

The fierce price competition driven by dealers trying to reduce inventory levels resulted in our same-store new-vehicle margin declining to 5.4% in the quarter. It appears that import and luxury-brand inventories have been reduced in the market, and the industry should see margins slowly rebound from these abnormally low levels.

Used-vehicle demand has held up much better than new. Our used-vehicle retail unit sales were down 23.5%, as the new vehicle sales decline constrained our supply of trade-ins, and it was more difficult to source vehicles at auction, as all dealers were scrambling to supplement their inventory. The decline in unit sales resulted in our 26.5% decline in used-vehicle retail revenues in the first quarter.

We believe that some used-vehicle customers were switched from used to new vehicles as we worked hard to reduce new-vehicle inventory during the quarter. In addition, as demand has pushed auction prices higher, we have remained cautious about buying vehicles above book values due to the difficulty in getting customers financed for more than book value.

We remain short of where we would like to be on used-vehicle inventory, with our inventory at quarter-end at a 27-day supply. Used-vehicle sourcing is still challenging, but we are being prudent with our vehicle acquisitions, both internally and externally, while we work to get the inventory built back up to our targeted 37-day supply.

One bright spot from the current used-vehicle dynamics is higher margins. Same-store gross margin improved significantly from fourth-quarter levels to return to a more normal rate of 10.9% for retail used sales. Wholesale results also improved significantly, with gross profit per wholesale unit increasing $145, to $153 profit per vehicle.

Parts and service same-store revenues fell 5.6%, and gross margin contracted 190 basis points. The revenue decrease was primarily the result of declines in our wholesale parts and domestic-brand customer-pay business partially offset by higher warranty business.

In our finance and insurance business, same-store gross profit per retail unit has been consistently more than $1,000 since we implemented both efficiency and cost-improvement initiatives. During the first quarter, gross profit per unit decreased $119, to $1,035 per retail unit, as financing penetration rates and loan amounts declined. The 39% decrease in finance and insurance same-store revenues was driven by the retail new and used-vehicle sales declines we experienced during the quarter.

Turning to first-quarter brand mix, Toyota, Scion, and Lexus accounted for 35% of our new-vehicle unit sales, trailed by Honda/Acura with 14%, Nissan with 12%, Ford and BMW following with 9% each of the Company's unit sales. The balance of the mix with was Chrysler with 7%, Mercedes with 6%, and GM accounting for 4% of new-vehicle unit sales.

25% of our new-vehicle unit sales were from our luxury brands, reflecting a 200-basis-point increase from the prior-year period. Our import brands accounted for 56% of unit sales, while our domestic brands contributed the remaining 19%. Our current truck sales mix was relatively consistent, with last year's cars accounting for 56% of unit sales, and trucks remaining 44% of sales.

Now let me give you a recap of this quarter's corporate development activities. As previously announced, we acquired a Hyundai franchise to augment our Houston portfolio earlier this month. We were able to purchase the franchise rights, as well as the new-vehicle and parts inventories, and move it into an existing facility. The franchise is expected to generate $37 million in estimated annual revenues.

We do not expect to acquire any franchises this year. However, the opportunity was presented to us, and we felt it was a good addition, with little capital required. We do not anticipate completing any further acquisitions in 2009.

We also announced that we sold the franchise and property of a Ford dealership in the Miami area at the end of the first quarter. The store generated $39 million of revenues during the last 12 months.

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

Thank you, Earl. Good morning, everyone. For the first quarter of 2009, our adjusted net income for continuing operations was $5.7 million, or $0.24 per diluted share. This excludes the impact of the newly adopted Accounting Principles Bulletin 14-1, as well as $9.6 million after-tax gain on debt redemptions and a $0.5 million after-tax loss on the disposal of one of our Miami-area Ford dealerships realized during the first quarter.

On a comparable basis, net income from continuing operations decreased $11.2 million from $16.9 million in the first quarter of 2008. These results reflect our continuing operations, which include all of our stores.

While we are currently marketing several of our dealership operations for sale, we do not believe that these components of our Company meet the criteria for reporting as discontinued operation, which requires the sale be considered probable of incurring within 12 months. Particularly in the current economic environment, we do not consider such an assumption to be reasonable. Therefore, we have elected to not separately the results of these components as discontinued operations.

On January 1, 2009, we were required to retroactively implement APB 14-1, which significantly alters the historical accounting for our 2.25% convertible notes. As a result, reported interest expense associated with these notes increases to an effective rate of approximately 7.5%. For the first quarter of 2009, our consolidated interest included $1.6 million of additional non-cash interest expense related to APB 14-1.

In addition, the accounting under APB 14-1 reduces the gains recognized on the redemption of these notes. In the first quarter of this year, we repurchased $30 million in aggregate face value of our 2.25% convertible notes, and we realized a gain on redemption of $16 million. But under APB 14-1, this gain is reduced to $7.4 million.

We believe that the accounting required under APB 14-1 does not reflect the true economic reality of our debt arrangement. Therefore, we have, and will continue, to separately report the impact of APB 14-1 in our earnings releases in order to provide a consistent, more appropriate basis for evaluating our current results compared to historically reported results.

One final point on APB 14-1 -- our Company calculations all exclude the impact of this change.

Turning back to the business. Our top-line results continue to reflect the negative impact of external factors such as the deterioration in consumer confidence, the decline in dealership traffic, and a tougher lending environment. However, our bottom-line results for the first quarter positively reflect the efforts of our team's cost-reduction efforts.

As Earl just mentioned, we were able to get our cost savings measures in place faster than we'd anticipated and are on pace to exceed our $100 million reduction target. We're now targeting $120 million reduction in full-year 2009 SG&A cost as compared with 2008. The more rapid implementation of our cost actions contributed significantly to our first-quarter results and allowed us to operate profitably in each month of the quarter.

Our consolidated revenues in the first quarter of 2009 declined $483.4 million, or 32.2%, to $1 billion, compared to the same period a year ago, primarily driven by a decline in our new-vehicle sales of $341.5 million, or 38.4%, on 37.1% less new retail units. In addition, our retail used-vehicle revenues declined $79.1 million on 23.5% less retail units, and our wholesale used-vehicle business decreased $32.5 million on 35.4% less units.

Revenues from our finance and insurance business decreased $20.4 million, reflecting the impact of lower new and used retail volumes.

Finally, our parts and service business declined $10 million, or 5.2%, in the first quarter of 2009 compared to 2008.

Our consolidated gross margin for the first quarter of 2009 increased 140 basis points to 17.9% as a result of improvement in used-vehicle margins and the shift in revenue mix toward our higher-margin parts and service business.

For the first quarter of 2009, total used-vehicle margins increased 70 basis points to 9.8%. Included in these results, used retail margins were basically flat at 11%, while used wholesale margins improved 260 basis points to 2.7%.

Offsetting the used-vehicle trends, consolidated new-vehicle margins declined 100 basis points in the first quarter of 2009 to 5.4%, while margins in our parts and service business declined 190 basis points to 52.8%.

Our consolidated SG&A expenses were $41.8 million lower than the first quarter of 2008, reflecting the cumulative cost savings initiatives that were completed by first quarter 2009.

Unfortunately, because our consolidated gross profit declined $64.9 million, or 26.2%, SG&A expense as percent of gross profit increased 510 basis points, from 78.8% in the first quarter of 2008 to 83.9% in 2009. However, compared to fourth quarter of 2008, our SG&A expenses as a percent of gross profit for the first quarter of 2009 improved 155 basis points.

Consolidated floorplan interest expense decreased 25.4%, or $3 million in the first quarter of 2009, to $9 million, as compared to the same period a year ago. This decrease was the result of $128.6 million in reduction in our weighted-average borrowing, reflecting the significant reduction in our new-vehicle inventory that Earl discussed, as well as a 68-basis-point decline in our weighted-average floorplan interest rate, which includes the impact of our interest rate swaps.

Other interest expense, before the impact of APB 14-1, decreased $2.4 million, or 30.3%, to $5.4 million for the first quarter of 2009, as our weighted-average borrowings of other debt declined $92.3 million and our weighted-average interest rate decreased 88 basis points.

The decline in weighted-average borrowings primarily reflects the buyback of $63 million of our 2.25% convertible notes that we executed in the fourth quarter of 2008, and the additional $30 million of buybacks that we executed in the first quarter of 2009.

Manufacturers' interest assistance, which we record as a reduction of new-vehicle cost of sales at the time the vehicles were sold, was 50.6% of total floorplan interest cost for the first quarter of 2009, down from the 64.3% level of coverage experienced in the first quarter a year ago.

The decline stems primarily from the impact of our $550 million of fixed-rate swaps that we had in place at March 31, 2009, at a weighted-average interest rate of 4.7%. We reflect substantially all of the monthly contract settlement of these swaps as a component of floorplan interest expense.

Now turning to same-store results. In the first quarter, we had revenues of $1 billion, which was a 32.4% decline from the prior-year period. As the economy continued to contract and consumer confidence continued to decline, automotive sales dropped nationwide.

Similar to the national results, our same-store new-vehicle unit sales declined 37.1%, with a revenue decline of $339.2 million, or 38.6%. We experienced unit sales decreases in each of the major brands that we represent, spread somewhat evenly between cars and trucks.

We believe that our new-vehicle results are at least consistent with the retail performance of the brands that we represent and the markets that we serve.

In our retail used-vehicle business, same-store revenues slipped 26.5%, to $220.9 million in the first quarter of 2009, on 23.5% fewer units. A partial offset was the continued growth in our certified pre-owned business, with the mix growing from 31% in the first quarter of 2008 to 35% this quarter. We anticipate continued strength in this area as more budget-conscious consumers substitute certified pre-owned units for new vehicles.

Our wholesale used-vehicle sales were down $32.3 million, or 48.6%, compared with the same period a year ago, as the limited availability of used vehicles meant more units being sold as retail units and as we continued to do a better job selecting units.

Our same-store parts and service revenue dipped 5.6% in the first quarter of 2009, primarily driven by a 6.7% decline in customer-pay parts and service revenues and a 9.6% decrease in wholesale parts sales, while our warranty parts and service revenues were about flat. The decline in customer-pay business is primarily at our domestic-brand dealerships.

With respect to the wholesale parts segment of the business, the decline in revenues is primarily attributable to the negative impact of the economy on many of the second-tier collision centers which we do business with and our decision to tighten our credit standards in this area.

We should bear in mind that the comparisons for this quarter and the next are the toughest for our parts and service business. We had some extremely strong results in the first half of 2008 before the economy started to slow that make for difficult comps this quarter and next.

Our same-store F&I revenues were $31.7 million in the first quarter of 2009, down $20.3 million, or 39%, compared to the same period a year ago. This decline reflects the decrease in new and used-vehicle sales volumes, as well as a decline in our income per contract for the arranging of customer financing.

The income-per-contract decline was primarily related to subsidized financing offers by the manufacturers, which pay a flat amount, and tighter lending standards. The tighter lending standards, coupled with requirements for more money down, are also negatively impacting our penetration rate and amount financed per unit.

In the aggregate, our same-store gross margin improved 140 basis points to 17.9%, reflecting the 90-basis-point increase in our total used-vehicle margin to 9.9% and a favorable shift in our business mix to the more profitable parts and service business segment. A partial offset was the 110-basis-point decline in our same-store new-vehicle margin, and 190-basis-point dip in our parts and service margin to 52.8%.

On the new-vehicle side of the business, gross margin declined primarily as a result of the excess inventory throughout the market, which resulted in an extremely competitive selling environment. As a result, our gross profit per new retail unit declined $364, or 18.1%, to $1,647 per unit.

Within the 90-basis-point improvement in total-use vehicle margins, our 10.9% used retail margin was substantially consistent with what we experienced in the first quarter of 2008, while used wholesale margins improved 270 basis points, to 2.8%, in the first quarter of 2009.

Overall, our gross profit per used unit improved $60, to $1,304, in the first quarter of 2009, with retail gross profit down $92 per unit and wholesale gross profit more than offsetting this decline, with $145-per-unit increase.

The positive results in used-vehicle profits for the quarter are reflective of a general stabilization in used-vehicle values after the roller-coaster ride that we experienced during 2008, as well as an overall rebound in used-vehicle values in recent months, particularly used-truck values. Assuming that the stabilization in used-vehicle values continues, we would expect the wholesale gross profit per unit to return to more normal levels, closer to break even.

Within our same-store parts and service margin of 52.8%, our margins in the warranty parts and service segment were consistent with the prior year, though we experienced a margin decline in both our customer-pay parts and service and our wholesale parts segments.

As I mentioned earlier, we successfully implemented our cost reduction plans in the first quarter of 2009, which are now expected to save us $120 million in 2009. As a result, our same-store SG&A expenses declined $42 million, or 21.8%, to $150.2 million.

Our personnel-related expenses declined $26 million, while our advertising expenses decreased $5.1 million. Other SG&A expenses decreased $10.9 million, primarily related to reduction in vehicle delivering expenses, legal and professional fees, and outside services.

Unfortunately, the progress that we made in expense reductions was not enough to fully offset the decline in same-store gross profit that we experienced in the first quarter. And as a result, same-store SG&A as a percent of gross profit increased 490 basis points, to 83.4%.

Now turning to liquidity and capital structure. We had $21.6 million of cash on hand as of March 31, 2009. In addition to our cash on hand, we use our floorplan offset account to temporarily invest excess cash. These funds totaled $62.3 million, bringing immediately available funds to a total of $83.9 million at quarter-end.

Further, we had an additional $97.8 million available on our acquisition line, bringing total liquidity to $181.7 million at March 31, 2009.

As a reminder about our capital structure, we do not have any near-term liquidity pressures. Except for the Ford floorplan facility, we face no significant debt refinancing decisions until March 2012, when our revolving credit and real estate facilities expire. Our Ford floorplan facility is an evergreen arrangement that was just renewed in December for 2009. Further, our 8.25% senior subordinated notes mature in 2013, and our 2.25% convertible notes are first putable in 2016.

Our top priority continues to be centered around cash generation to further strengthen our balance sheet. We believe our present financing arrangements are valuable assets that we intend to protect. During the first quarter, we used available cash to repurchase $30 million of our 2.25% convertible notes.

We have updated the financial covenant calculations within each of our debt agreements, and as of March 31, 2009, we were in compliance with all such covenants. In fact, many of the ratios improved from fourth-quarter levels, reflecting the positive operating results and debt repurchases during the first quarter.

With regards to our real estate investment portfolio, we owned $378.8 million of land and buildings at March 31, 2009. To finance these holdings, we have utilized our mortgage facility and executed borrowings under other real estate-specific debt agreements.

As of March 31, 2009, we had borrowings outstanding of $165.3 million under our mortgage facility, with $69.7 million available for future borrowings. In addition, we had $51.8 million of borrowings outstanding under other real estate-related debt agreements, excluding capital leases.

On March 31, 2009, we sold one of our Ford franchises in Florida, along with the associated real estate. This real estate was financed through our mortgage facility, and as such, we used a portion of the sales proceeds to repay $10.4 million of the mortgage facility in the first quarter.

With regards to our capital expenditures for the first quarter, we used $7 million to construct new facilities, purchase equipment, and improve existing facilities. We continue to critically evaluate all planned future capital spending, working closely with our manufacturer partners to maximize the return on our investments.

We anticipate our 2009 capital spending will be less than $30 million. We also do not plan any additional real estate purchases in 2009.

For additional details regarding our financial conditions, including the specifics regarding our covenant calculations, please refer to the schedules with additional information attached to the news release, as well as the investor presentation posted on our website.

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

Thanks, John. Before I go over our key modeling assumptions, I wanted to speak briefly about the situation surrounding GM and Chrysler.

The latest restructuring deadlines are coming up quickly for each of these companies. Chrysler's outcome appears to be dependent on a deal with Fiat, while GM is working diligently on its own restructuring plan.

We're not certain what will be the ultimate outcome for either of these manufacturers. However, we are preparing for the various scenarios we potentially see playing out.

Neither company represents a significant part of our business. Chrysler-related sales comprise less than 7% of our new-vehicle unit sales, and GM-related sales account for less than 4%. We have 15 stores between the two OEMS -- seven with GM, which are five Chevy and two Pontiac/Buick/GMC; and eight with Chrysler.

We feel confident that our stores can remain viable automotive sales and service operations regardless of the ultimate path to restructuring by these two companies.

Our largest exposure with either manufacturer is our new-vehicle inventory. With the government already stating it would back the warranties on the new vehicles, we believe some of that risk is already mitigated. Beyond that, we're working diligently to further reduce our new-vehicle inventories with those brands.

We may also be at risk for the receivables owed us from the manufacturers for advertising, warranty work, etc. At quarter-end, we had approximately $2 million of receivables on the books for each of the two manufacturers.

In summary, we're confident that we will be able to manage through these challenging times.

I will now review the key assumptions we use for modeling purposes -- industry seasonally adjusted annual sales rate, or SAAR, of 10 million to 10.3 million vehicles; SG&A expenses as a percent of gross profit, at 80% to 83.5%, excluding any one-time items, as lower sales revenues are expected to offset cost improvements; total year-over-year reduction in SG&A expenses of $120 million at a 10 million SAAR level; a tax rate of 40%; estimated average diluted shares outstanding of 23.2 million; and capital expenditures of $30 million or less.

On a same-store basis -- new and used-vehicle margins consistent with 2008 fourth-quarter levels; parts and service revenues 3% to 5% lower; finance and insurance gross profit at $1,000 to $1,025 per retail unit.

That concludes our prepared remarks. In a moment we'll open up the call for Q&A. Joining me on the call today are John Rickel, our Senior Vice President and Chief Financial Officer; Pete DeLongchamps, our Vice President of Manufacturer Relations and Public Affairs; and Lance Parker, our Vice President and Corporate Controller.

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

Thanks. Today's question-and-answer session will be conducted electronically. (Operator Instructions) And we'll take our first question from John Murphy with Merrill Lynch.

Good morning, guys.

Morning, John.

This quarter is probably one of the cleanest we've seen in a long time really just from the disc ops perspective. I think it's probably the first time I remember there being no disc ops included in the numbers. Obviously, the market's tough, so you're probably pulling back a little bit on the sale of some of your underperformers. But it is a reflection, given the pretty good results here, there's just not a lot of dogs left in the portfolio?

John, this is Earl. Now, our Company has only used discontinued ops, at least in the four years I've been here, one quarter, and that was when we exited the Albuquerque market. So we have not used discontinued ops on any kind of ongoing or regular basis.

And to answer your kind of qualitative question, no, I think if we were in a good market we would still be trying to enhance our portfolio a bit more, particularly with some of the domestic brands. But realistically, in this market there are not very many buyers.

Okay, so it's a function of both sides of the equation.

Yes, that's correct.

Okay. Then when we look at the cost savings and the ramp-up from $100 million to $120 million, is that sort of an all-else-equal number as if last year had been a 10-million-unit market and this year were a 10-million-unit market? Or should we be thinking of last year's levels essentially minus the 120?

John, this is John Rickel. It's basically last year's absolute levels less 120.

Okay, and the reason you're focusing on the 120 is that you're expecting closer with 10-million-unit SAAR?

Correct.

Got you. Then also, in the liquidation and the pricing pressure you're seeing in the market of inventory by some dealers, is that a lot more aggressive from some Chrysler and GM dealerships that you're facing in competition in your dealerships? Or is it kind of just really across the board?

Surprisingly, John -- and this is Earl -- it was across the board. In fact, some of the most aggressive selling in the first quarter were Japanese import brands. Many of these dealers have never had such high inventory levels before, and now we're getting to the point in Q2 where at least our excess inventory now is centered on the domestic brands. So depending on what happens here in the near term, that situation could unfold that you mentioned, that there be more pressure on Chrysler/GM in particular. But in the first quarter, it was virtually every brand.

And when we think about that new-vehicle business that's coming under pretty significant pressure, you often highlight underwater consumers, as they come back into the showroom, as a big problem in getting them financed and into new vehicles and getting a new deal done. When do you think that starts to ease, or is that a problem that the industry is going to face and you're going to face for years to come?

John, I think we're going to face it at least for the next year or two. There's been a little improvement simply in the four or five-month consecutive improvements in the guidebooks on used vehicle values, particularly on trucks and SUVs. So we are seeing some of those values increase, which reduces a bit the upside-down amount that some of these people are trying to trade in vehicles they purchased in the last couple years.

But the big issue is the more restrictive lending practices of retail lenders on the new vehicles just not advancing the amount on the new vehicle that they did in previous years. So you just can't flip or bury as much of the negative equity as you could in previous years. I don't know when that returns. It doesn't appear to be any time soon.

Moving on to our next question from Rick Nelson with Stephens.

Thank you. Good morning, and nice job navigating a tough environment.

Thanks, Rick.

Question about how the business tracked during the quarter. We're hearing about sequential improvement, particularly late March, or I guess less negative, late March. Any feel for how April is tracking would be helpful. Thanks.

Rick, this is Earl. Generally speaking, I haven't seen any retail demand on new vehicles anywhere in the quarter or thus far in April. And the expert projections that we all get to read together still seem to point toward nothing above a 10 million SAAR for April.

I think the sequential improvement that we saw in the first quarter in our business was that the cost cuts ramped up. We got a little bit stronger and healthier in terms of our profitability throughout the quarter as the cost cuts ramped in. And unfortunately, right now, what we've been able to accomplish with the business has all been on the cost side.

On the cost cuts, how much of the cuts do you think are structural or permanent, and how much was just flexing of the business?

It's a little bit hard to say. We've taken a look at it. I think a conservative number would be 25% is structural, maybe a little bit more. We've asked our employees, and they've been wonderful, to make sacrifices during this time, like a 401(k) match. And in some parts of our organization, people have taken across-the-board pay reductions, and clearly we would intend to reverse those as soon as the business is healthy again and growing, when automotive demand gets back up to more acceptable levels.

So some of that's going to go back in automatically, and some of it, we need to reverse some of the sacrifices our people made. But I would say somewhere -- 25%, maybe a little more. I'll let John add his comments.

Yes, this is John. Rick, I agree with that. I think probably 25% to 30% of it are kind of structural improvements that stay out when things start to turn back up, so I think Earl's got it right.

Thank you for that. Also wondering if I could get the inventory data supply for new and used, and if you had it for domestic and foreign nameplates on the new side, that'd be great.

Rick, this is John. Yes, we've got that. Once again, caution that because of the way selling rates kind of bounce around, I'm not sure how terribly meaningful those numbers are. But for used vehicles, as Earl indicated, we're light. We're at 27 days versus -- our target's 37. And it's split basically evenly between car and truck on used.

On new-vehicle, total day supply was 72 and, once again, split pretty evenly between car and truck. Domestics would've been at the higher end of that, and import and luxury a little bit less.

And how much inventory do you think we should be looking to come out? Are you targeting a 60-day supply?

Rick, this is Earl. Yes, we actually kind of target by brand -- 75 domestic, 60 days import, and 45 days luxury. At this moment, we may -- we're probably still 1,000 units high on the domestic, but we're going into what you would hope would be a seasonally better time of year. I think we're all a little more cautious that normally May, June, through August, you need more units. So I don't know if we'll be able -- we'll get too much more out. I would prefer that we sell a little more, but we'll have to see what the market gets us. But inventory is no longer our biggest issue, other than those domestic issues, which are pretty obvious, with GM and Chrysler.

In March on new cars, the pressures that we saw in the first quarter -- given the inventory declines, should those pressures moderate as --?

I believe so. On new vehicles, I believe so.

Thanks a lot. Good luck.

Thanks.

Moving on to our next question from Scott Stember with Sidoti & Company.

Good morning.

Morning, Scott.

Talk about on the used side of the business -- John, you already talked about it on the wholesale side. I expect gross profits to go back down to flat. Maybe on the retail side, you can talk about how much you benefited from the significant swing up and then down, or down then up, on the valuation side? And what could we expect for the total gross margin for used going forward?

Yes, Scott, this is John. I don't think we got a huge amount of benefit. I mean, what we saw the first quarter was, the retail used margins basically came back to kind of the historical tracking levels. We were in 10.9%, 11%, kind of, on the used retail in the quarter, and that's kind of the historical levels for used retail, so I don't think there was a big benefit.

Where I think we did pick up some benefit from the stronger auction values was more on the wholesale, which is what we talked about. We think that that probably does come back to flat going forward.

Got you. And I don't know if you talked about parts and service, what the customer-pay number was on a same-store basis.

Yes. Customer pay was down 6.7%, I believe.

And that explains the rather large decline, I guess, in the gross year-over-year?

Well, that's certainly a portion of it, yes.

Okay. And also, what was warranty?

Warranty was about flat.

Okay. And as far as the convertibles -- I think, John, previous calls or last year, six months ago, you had said that you were looking for about $0.30 worth of charges related to these new convertible rules, I guess just for the amortization of the discount. It looks like now we're on a $0.16 rate for the year. Is that $0.04 that you had this quarter a good barometer to use for the rest of the year?

This is John. Yes, it is. We had previously indicated something on the order of $0.20 to $0.25. The biggest difference is we repurchased 90 million of those bonds since we last talked about those numbers. So yes, $0.16 is the right kind of full-year number, $0.04 a quarter.

Okay. That's all I have now. Thanks.

Thanks.

(Operator Instructions). And we'll move on to Rich Kwas with Wachovia.

Hi. Good morning, everyone.

Morning, Rich.

John, do you have any absolute dollar amounts for General Motors and Chrysler in terms of inventory at the end of the quarter?

Not at hand, Rich. I can give them to you later.

Okay. All right. And then on the floorplan notes as a percentage of total inventory, that seemed to decline a little bit versus the recent run rate. I know that that's -- it's not at the real low level that it was a couple years ago, but any -- what's the explanation for that coming down?

Rich, this is John again. I think it's primarily the fact that we had a significant amount of excess cash that we generated that we parked against the floorplan notes. That's our best place to invest excess cash. We had $60 million of basically equity, if you will, in the floorplan line.

Okay. Okay. And then when you look at -- what was operating cash flow and CapEx for the quarter?

CapEx was $7 million.

And then operating cash flow -- this is Lance Parker -- operating cash flow was about $25 million.

Okay. And then I assume the use of cash going forward would be to repurchase that opportunistically? Is that still the case?

Well, that's certainly one of the things we continue to look at is that we think that there's a number of opportunities out there, and we continue to look at the various debt tranches.

Right. And then Earl, a bigger-picture question. If any of these scrappage programs take effect, what's your view on how much that would help the market and how you could potentially benefit specifically?

Yes, and there has been a lot of conversation about that, and clearly it's a positive. I've seen estimates of about 750,000 units in terms of total industry uptick, which kind of seems about right to me -- 0.75 million or 1 million.

These types of programs, which clearly are common in Europe, tend to benefit manufacturers who are strongest in smaller cars. So I would expect it to be very good for the Japanese import brands, which would be good for our Company, and cars like Ford has with the Focus and Fusion, maybe the Malibu with Chevrolet and so forth.

So I am optimistic that there's a chance something will happen this year. The last I've looked -- I think you actually follow it more closely than we do, but there were three bills at point in Congress in some form. And so I think that's one of the potential positives on the horizon, and I am sure it would help our business on the top line.

And I guess last question. If one of these programs goes through and there is a disproportionate number of cars sold, how do we think about the impact on new-vehicle margin overall? Is it meaningful or not?

Well, normally it wouldn't enhance your new-vehicle margins any. These scrappage programs normally require a contribution from not just the government but the manufacturer and the dealer. So they're normally a little bit of a pushback on new-vehicle margin. But given the fact that we're about as low as any of us ever thought we could go on new-vehicle margin, I don't think there would be much margin impact. I just think it would be incremental volume.

Your risk is that at the tail end of a scrappage program, if the economy is not picking up, there'll be some payback, because a lot of that scrappage program volume ends up being pull-ahead. So if you could time it right, just prior to some kind of economic recovery, it would be a great thing for our industry right now.

Great. Thank you.

Moving on to Matt Fassler with Goldman Sachs.

Thanks a lot, and good morning to you. Just a couple questions left to ask here. First of all, if you could give us a little more color on activity by market, what you saw on the West Coast, Texas, etc., and were there any significant changes in regional trends?

Yes, Matt. This is Earl. The only real change in regional trends through the first quarter is that Texas in particular has gotten progressively weaker. Over time, I believe the energy business is a primary driver in Texas and also Oklahoma. Natural gas and oil. And as that business has been a bit softer, we've seen new-vehicle volumes drop more dramatically in kind of our home markets, so Texas and Oklahoma, this year.

California has flattened out, for us anyway. It's at a very low level, but it's not declining anymore. Boston and the Northeast, where we have a concentration, is down, but it's probably held up better than we would've expected. And as you would expect, New York and New Jersey have taken quite a hit, presumably because of all the financial-related businesses there. Southeast has been fairly flat. It's been down for some time.

Great. Second question. As you think about cost cuts, you have the $100 million, now down to $120 million. I know that it's sort of hard to break this out perhaps, but looking at the so-called structural reduction versus the additional reduction associated with variable cost, any update on what your thought process is there?

Matt, as Earl had indicated -- this is John -- we still think probably 25% to 30% of that are structural, longer-term saves that will stuck with us when things start to turn back up.

Got it. And then finally, you've commented a lot on the new-car markets in particular, which is where my focus is. I know that the tone of business from a sales perspective doesn't seem to have improved. Have you seen any abatement in some of the promotional pricing that's put some pressure on new-car margins? And how long do you think that this new-car margin situation can continue, particularly if you do have some fallout associated with OEM restructuring?

Yes, Matt, this is John. I mean, those are good questions, but tough. Our view is that with -- the biggest driver of the promotional pricing was the fact that everybody got caught with way too much inventory coming out of the end of fourth quarter, and I think there's been good progress across the industry. I mean, we clearly brought a lot down. One of our competitors that announced last week -- looked like they made good progress. If you look at what is going on with the manufacturers' schedules, they've shut a lot of plants. They've been pretty responsive.

And our sense is that inventory levels are beginning to move back to more normalized levels, which really should help. If there is something that goes on with Chrysler/GM, I mean, clearly that could throw some disarray around the domestics for a period of time. But absent that, our sense is that if the inventory levels start to sort out, you should see a slow rebuild in those new-vehicle margins going forward.

Got it. Thank you so much.

You're welcome. Thanks.

(Operator Instructions). And we'll move on to Jordan Hymowitz with Philadelphia Financial.

Hey, guys. Two quick questions. One is, you just mentioned that the Texas environment was slowing a lot. And it's funny, I was just listening to Meritage press release, and they said that Texas was actually strengthening. So I'm just trying to correlate the two, that usually auto and home sales in the same market generally correlate. Is there a region in Texas that's doing better for you, or worse?

Not really. In Texas, our new-vehicle sales volume -- and, of course, we're very strong in Houston, as I expect you know -- is dramatically down year-over-year. Now the used-vehicle business is relatively strong in Texas. But no, including Dallas, Austin, Lubbock, our new-vehicle sales are down more year-over-year in Texas than they are in our other markets, so that has been a change this year. But I'm just speaking about our dealerships in new vehicles when I say that.

Okay. Second question [regards the] Cash for Clunkers bill. Do you know if a car is turned in under that, whether it would have to have salvage title or whether or not it could be resold by you again?

That's a great question, and it's one I hear everyone debating every day. I do not know the answer. In Europe, when they have these programs, the vehicles have to be scrapped, and there is a recycling and disposal mechanism and infrastructure in Europe to handle that.

In the US, we don't believe we have that infrastructure, and we're not exactly sure how that type of program would be executed to make sure those cars just aren't flipped back out in the secondary market again. So that's one of the real unknowns on these proposed programs. So, unfortunately, we don't know the answer to your question, Jordan.

The different bills propose different things, or it's just not addressed at this point?

I'm not knowledgeable enough to tell you that, Jordan. I don't know if --

Jordan, this is John Rickel. I haven't seen the details. It's been a question that I've been looking at. And so far, with what's been released so far in the legislation, I haven't seen the details on that.

The vehicles in Europe typically have to be nine or ten years old, but they have a dismantler infrastructure in Europe, so it works easily there. I don't really know -- that's a really hard thing to execute here, to actually scrap these vehicles and have proof and the administration required.

Okay, final question is, in a bankruptcy, do your GM dealers -- can they just close them as opposed to -- I know there's specific buyout provisions if it's non-bankruptcy, but what happens in a bankruptcy to your GM dealers, let's just say, for example? Well, Pontiac, if they just closed Pontiac?

Well, Pontiac's not a big issue, because that's part of Pontiac/Buick/GMC distribution network, and the two dealerships we have, the primary volume comes from selling GMC trucks and then, to a lesser degree, Buick.

But the way it actually would work in bankruptcy is whether or not the manufacturer decides to continue to acknowledge and accept your sales and service agreement, and that's up to the manufacturer. We believe our dealerships are in key metro locations on freeways. Things like Chevrolet would have a lot of value to a reorganized GM when they come out of bankruptcy, if they go into bankruptcy. That's the general concept, if you follow my meaning.

Actually, I apologize; I don't. Could they just say to you "We don't want that dealership anymore; we're not going to support it?"

Yes, they could. That's my understanding is, under bankruptcy, dealership sales and service agreements are not necessarily valid into the future. It's at the manufacturer's discretion.

So they could just terminate it without a payment, and in the case of Pontiac, since it's Pontiac/Buick/GMC, would there be a payment received by you because there is --?

Under bankruptcy, no, it's not likely.

Okay. So objectively, you'd prefer these companies not go into bankruptcy, because then at the very least there's a greater chance of the dealerships having value, as opposed to up to their discretion?

Yes, for a variety of reasons, we definitely would prefer that these companies do not go into bankruptcy. The continuation of the sales and service agreement is foremost, but there's also receivables and the value of the inventory in the interim and so forth. We definitely would prefer they don't go into bankruptcy.

Okay, thank you very much for answering my questions.

You're welcome.

And we'll take our final question from Matt Nemer with Thomas Weisel Partners.

Hi, good morning, everyone.

Morning, Matt.

Morning, Matt.

Just turning to the General Motors/Chrysler discussion again. In terms of the inventory, if there is a loss of value on that inventory and there's some risk to the floor planning of that inventory, what's the contingency plan? Are you able to potentially have another OEM floorplan company pick that up? It seems like you have enough cash to cover it, but just wondering what your plan would be.

Matt, this is John Rickel. Yes, we basically floor all of our inventory, other than the new Ford, through our credit facility, so it's a consortium of banks and OEMs. And it's our view that there's not a provision within the credit facility that would allow them to curtail the lending on those specific units.

Got it. Okay. And then just turning to the topic of SG&A, we should -- should we assume that you exited the quarter at about $120 million of reductions? And then is there any chance that that number moves higher in the current quarter? Is there another $20 million or, say, $30 million that you can potentially get out, or are you done?

Matt, this is John. The way we're trying to couch this is basically once again looking at what is the reduction in SG&A on a full-year basis. So the target that we've given, $120 million, is a full-year reduction in 2009 SG&A as compared with 2008. And that's why we moved the number up to $120 million is we think that the pace that we're on will get us $120 million out in the full year.

Okay. And then looking at the cost structure, after these cuts, can you give us some indication of where you think your fixed-to-variable ratio is on expenses?

Yes.

A lot of gray area there, but just general guidelines.

Yes, I can say -- this is John. I mean, it's clear that I think we've moved the ratio up. So it used to be we tell you it's kind of 50/50 fixed variable. Given the progress that we've made, it's probably close to 60/40 at this point.

Got it. And then my last question -- it's kind of a bigger-picture question. But just looking at the potential decline in the number of dealer points in the US, do you feel like a lot of these points that are coming off the system are mostly rural rather than urban? Or what's the mix in terms of the decline of sales points? And will these -- do you expect that many of these will just shut down, or do you think these dealers will potentially just run a service and used-car operation or potentially bring in another brand?

That's a good question, Matt. To date, I think a lot of the points that have gone out of business or been intentionally consolidated by the manufacturers have either been rural or kind of fringe outside metro areas. But we're starting to see that change recently with more dealers going out in Los Angeles. We've even had some close down here in Metro Houston. So I think we're now entering the stage of the cycle where some metro dealers are -- because they have high costs, obviously, particularly rent and so forth, we're starting to see that change.

The number of dealers projected to be eliminated by General Motors is such a staggering number, I think from 6,200 to 3,600. I honestly don't know how they can accomplish that, dealing with the going concern in state franchise laws. So that would -- you would have to reduce across the board in all markets, major, middle, and rural, to get that kind of number up.

Are you seeing any significant closings for import brands or luxury brands?

No, I can't say I've seen a lot. There's been some in California, some Nissan dealerships in particular, but the Japanese import number and the major luxury brand number is holding up quite well.

Okay, that's all I've got. Thank you.

Thanks, Matt.

There are no further questions at this time. I'll turn the conference call over back to Mr. Earl Hesterberg for closing remarks.

Thanks, all of you, for joining us today. We're looking forward to updating you on our 2009 second-quarter earnings call in July. Have a good day.

Ladies and gentlemen, that concludes today's conference. Thank you for joining, and have a wonderful day.