Group 1 Automotive Inc (GPI) 2015 Q2 法說會逐字稿

Good morning, and welcome to Group 1 Automotive Inc's 2015 second-quarter financial results conference call. Please be advised that this call is been recorded. I would now like to turn the call over to Pete DeLongchamps, Group 1's Vice President of Manufacture Relations, Financial Services and Public Affairs. Please go ahead, Mr. DeLongchamps.

Thank you, Amy. Good morning, everyone, and welcome to today's call. The earnings release we issued this morning, and the related slide presentation that include reconciliations related to the adjusted results we will refer to on this call for comparison purposes, have been posted to the Group 1's website.

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 markets. Those and other risks are described in the Company's filings with the Securities and Exchange Commissions 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.

Participating with me today, Earl Hesterberg, our President and Chief Executive Officer; John Rickel, our Senior Vice President and Chief Financial Officer; and Lance Parker, our Vice President and Corporate Controller. Please note that all comparisons in the prepared remarks are the same prior-year period unless otherwise stated. I'd now like to hand the call over to Earl.

Thank you, Pete, and good morning everyone. Today Group 1 reported record quarterly results, including best ever results for adjusted net income, which at $47.9 million, was up 19.9% over the prior-year period; adjusted diluted earnings per share of $1.98, which was up 34.7% over the same period; and total revenue which increased approximately $215 million, or 8.6% for another all-time quarterly record of over $2.7 billion. On a local currency basis, revenue was up even more at 11.7% for the quarter, as both the British pound and the Brazilian real have weakened significantly against the dollar over the past year.

Turning to our business segments, total consolidated new vehicle revenues grew 4.7% as we retailed 5.4% more units. Average new vehicle selling price decreased $257 to $34,274 with currency exchange rates more than explaining the decrease. New vehicle gross profit decreased 5.8% as gross profit per unit decreased by $203 to $1701. The decrease in new vehicle gross profit is more than explained by lower margins in the US and exchange rate headwinds. In the US competitive conditions amongst volume import brands explained most of the deterioration. During the quarter we retailed nearly 45,000 new vehicles, with the unit sales geographic mix of 82.4% US, 10.5% UK, and 7.1% Brazil. Our new vehicle brand mix was led by Toyota/Lexus sales, which accounted for roughly 27% of our new vehicle unit sales. BMW/MINI, Honda/Acura and Ford each represented roughly 11% of our new vehicle unit sales. Nissan was at 8.2%, Volkswagen/Audi, GM, Chrysler, and Hyundai/Kia each increased their share of Group 1's new vehicle unit sales during the quarter. US new vehicle inventory stood at roughly 29,200 units, which equates to a 69-day supply, compared to a 77-day supply for the second quarter of 2014.

The second quarter was one of the strongest used vehicle sales quarters in our history, with US same-store sales increasing 14.2% and UK sales up 14.1%. Some of this strong sales performance was accomplished at the expense of lower per-unit margins, but capitalized on our ongoing F&I performance strength. Our important US certified pre-owned business was also a highlight, with 23.2% growth during the quarter. Total consolidated used vehicle retail revenues grew 18.2% as we retailed 17.7% more units, and the average used vehicle selling price increased $99 to $21,702. Used vehicle retail gross profit increased roughly 1%, as the unit growth was largely offset by gross profit for unit decrease of $244 to $1465. During the quarter we retailed over 31,000 used retail units. US used vehicle inventory stood at roughly 13,800 units, which equates to a 32-day supply, compared to a 36-day supply for the second quarter of 2014.

Total consolidated parts and service revenue increased 7.1%, while consolidated parts and service gross profit rose 9.2%. On a local currency basis, same-store parts and service gross profit grew 9.4% on 8.2% higher revenues. US same-store gross profit increased 9.3% on 8% higher revenues. US growth has been supported by the progress we're making in adding service technicians. Since June of 2014, we've added 115 net technicians with plans to add more over the coming year.

Within finance and insurance, a combination of increased profitability for retail unit and higher volumes drove total gross profit increase of 16.7% on a consolidated basis. Total consolidated F&I per retail unit increased $78 to $1381. US F&I increased $93 to $1535 per unit.

Relative to our cost performance, on an overall consolidated basis, adjusted selling, general and administrative expenses as a percentage of gross profit improved 170 basis points to 71.4%, driven by a strong cross-control in the US and significant restructuring actions in Brazil. Regarding our geographic segment results, our US operations performed very well with total revenue increasing 11%. Oil prices continue to be a topic of concern in several of our key markets. We are pleased to report that there have not been any significant negative impacts on our overall sales. We have seen the most notable impact in our Oklahoma market, where our vehicle sales were down 2.3% for the quarter. Our total Texas same-store new unit sales improved over 7% for the quarter. And while total Houston market industry sales were up 7.1% in the second quarter, Group 1 Houston sales were up double digits, so we see no effect from lower oil prices in our largest market.

Our US team did an excellent job of leveraging the growth and gross profit, with adjusted SG&A as a percent of growth profit, improving 150 basis points to an all-time quarterly record of 69.8%. Our UK operations delivered another solid quarter with total revenue growth on a local currency basis of 34.7%, supported by double-digit growth across all business segments. In Brazil, despite overall second quarter industry sales being down 23.2%, our team produced positive gross profit growth on a same-store local currency basis. This was due to double-digit gross profit growth and fixed operations and positive new vehicle gross profit growth on a local currency basis, despite a 15.7% decrease in new unit sales.

Our continued out-performance of the industry selling rate is a testament to our strong brand mix and operating team. In a very weak macro environment our team was able to increased gross profit, cut expenses, and generate an adjusted pretax operating profit. We continue to believe that we will deliver a pretax operating profit in Brazil for the full year of 2015. I will now turn the call over to our CFO, John Rickel, to go over our second quarter financial results in more detail. John?

Thank you, Earl, good morning, everyone. Our adjusted net income for the second quarter of 2015 rose $7.9 million, or 19.9%, over our comparable 2014 results to $47.9 million. On a fully diluted per-share basis, adjusted earnings increased 34.7% to $1.98, an all-time quarterly record. These results for 2015 exclude $1.6 million of net after-tax adjustments, including $850,000 of charges related to non-cash asset impairments, a $600,000 charge for resolution of a prior period legal matter, and $600,000 of losses related to flood damage. These adjustments were partially offset by $600,000 net after-tax gain on a dealership disposition. The comparable results for the second quarter of 2014 excluded $23.1 million of net after-tax adjustments, including $20.8 million charge related to the partial redemption of our 3% convertible notes; $1.1 million of asset impairments, mainly attributed to the relocation of a dealership onto owned real estate; and $1 million related to hailstorms in Kansas and South Carolina.

Starting with a summary of our quarterly consolidated results, for the quarter we generated over $2.7 billion in total revenues. This is an improvement of $214.8 million, or 8.6%, over the same period a year ago, and reflects healthy increases in each of our business units in the US and UK. Weaker exchange rates and the impact of a slowing economy in Brazil were partial offsets. Our gross profit increased $22.4 million, or 6.1%, from the second quarter a year ago, to $391.6 million. For the quarter, adjusted SG&A as a percent of gross profit improved 170 basis points to 71.4%, and adjusted operating margin was 3.7%, an increase of 20 basis points from the same period a year ago.

Floorplan interest expense decreased roughly $300,000, or 3% from the prior year, to $10 million, explained by lower floorplan borrowings in Brazil due to both inventory management, and the procurement of lower-cost alternative financing options that are now reported under other interest expense. Other interest expense increased $1.7 million, or 13.2%, to $14.2 million. This increase is primarily attributable to an increase in weighted average debt outstanding related to our issuance of $550 million, 5% bonds used to retire our 2.25% and 3% convertible notes during the second and third quarters of 2014, as well as the shift in Brazil inventory financing that I just mentioned. Our consolidated adjusted effective tax rate for the quarter was 36.9%. We expect our effective tax rate for the remainder of the year to be in the low 37% range as we continue to benefit from an increased mix from lower tax jurisdictions.

Now turning to the second quarter consolidated same-store results. For the quarter, we reported revenues of over $2.5 billion, which was $104.2 million, or 4.3% increase, from the comparable 2014 period. On a local currency basis, which ignores the change in foreign exchange rates, total revenues increased 7.4%. Within this 7.4% total, new vehicle revenue was up 4.6% and used vehicle retail revenues improved 14.3%. Both finance and insurance, and parts and service delivered another strong quarter growing revenues 12.6% and 8.2% respectively. Please note that starting with the previous quarter we've modified our press release and posted investor presentation to include year-over-year percentage change metrics on both a US dollar and local currency basis. My remaining same-store comments will be on a local currency basis unless otherwise noted.

New vehicle revenues increased 4.6% on a 3.3% increase in unit sales and a 1.3% increase in our average new vehicle sales price. By country, same-store new unit sales increased 4.5% in the US, increased 11% in the UK, and decreased 15.7% in Brazil. In each case we outperformed the local market. Our used retail revenues improved 14.3% on a 12.6% increase in unit sales as US CPO unit growth of 23.2% helped drive revenues. By country, same-store used retail unit sales increased 14.2% in the US, increased 14.1% in the UK, and decreased 19.9% in Brazil. F&I per retail unit rose 5.4%, driven by increases in both income per contract and penetration rates for most of our major product offerings. Parts and service revenue grew 8.2% explained by increases of 17% in collision, 13.3% in warranty, 6.2% in wholesale parts, and 4.7% in customer pay. In aggregate, our same-store gross profit grew 4.8% on a local currency basis.

Our same-store new vehicle gross profit dollars decreased 6.4%, reflecting a 9.4% decrease in gross profit per unit, which was partially offset by the 3.3% increase in unit sales mentioned previously. New vehicle margin pressure was most notably seen in our volume import brands. Our used vehicle retail gross profit decreased 3% as the 12.6% increase in unit sales was more than offset by a gross profit per unit decrease of 13.9%. Our F&I gross profit grew 12.6%, reflecting a 5.4% increase in PRU and a 6.9% increase in total retail unit sales. Finally, same-store parts and service gross profit grew 9.4%, reflecting the strong revenue growth mentioned previously, as well is an 80 basis point increase in margins to 54.3%. By country, same-store parts and service gross profit improved 9.3% in the US, 10.1% in the UK, and 10.7% in Brazil.

Turning now to our geographic segments starting with US market on an actual basis. For the quarter, total US revenues grew 11% to $2.3 billion, driven by increases of 19% in total used vehicles, 18.2% in F&I, 8.2% in parts and service, and 7.4% in new vehicles. The increase in our parts and service revenues reflects growth in all areas of the business, and our F&I revenue growth reflects an 11% increase in retail vehicle sales volume, coupled with improved profitability for retail units, which grew $93, or 6.4%, to $1535. Total gross profit improved 8%, driven by increases of 10% in parts and service, and 3.5% in used retail vehicles, as well as the F&I increase that I just mentioned. The second quarter we grew gross profit by $25.4 million, while adjusted SG&A expenses increased just $13.1 million. As a result, our adjusted SG&A as a percent of gross profit improved 150 basis points to a record 69.8%. Our same-store gross profit flow-through in the US was 47%, which is near the top end of our targeted range of 40% to 50%. Adjusted operating margin for the US business segment increased ten basis points to 4.1%.

Related to our UK segment on a local currency actual basis. For the quarter, total revenue increased 34.7%, roughly 2/3 of this increase is due to the December 2014 acquisition of three BMW/MINI dealerships. Gross profit for the UK segment was up 26.1% from the prior year. New vehicle gross profit grew 18.7% as an increase of 29.2% in unit sales was partially offset by a decrease in gross profit per unit of 8.2%. Used retail vehicle gross profit increased 9.2%, as a 33.8% increase in unit sales was partially offset by a decrease of 18.4% in gross profit per unit. Parts and service gross profit improved 36.4% and F&I income increased 41.3%, which is attributable to a 7.7% increase in gross profit per retail unit and a 31.2% increase in total retail units. During the second quarter our adjusted SG&A as a percentage of gross profit increased 230 basis points to 77.9% and operating margin was 2.1%.

Related to our Brazil segment on a local currency same-store basis. As Earl mentioned, the total industry new unit volume decreased roughly 23% from the second quarter of 2014. Despite this, our total gross profit increased slightly by 0.3%. New vehicle gross profit increased 3.1% as the decline of 15.7% in unit sales was more than offset by an increase in gross profit per unit of 22.2%. Parts and service gross profit also increased by 10.7%. These increases were partially offset by used vehicle and F&I gross profit decreases. Used vehicle gross profit decreased 30.6% as a 17.8% decrease in total used unit sales combined with a decrease of 15.6% in gross profit per unit. F&I income decreased by 14.3% as a 2.9% increase in gross profit per retail unit was more than offset by a 16.7% decrease in total unit sales. Adjusted SG&A as a percentage of gross profit improved 230 basis points to 90.4%, and adjusted operating margin increased 20 basis points to 0.7%. Despite the local economic challenges, our Brazil segment generated a pretax profit for the second quarter, and as Earl indicated, we continue to expect that we will achieve an operating profit for the full-year.

Turning to our consolidated liquidity and capital structure. As of June 30, 2015, we had $24.2 million of cash on hand and another $45.8 million that was invested in our floorplan offset accounts, bringing immediately available funds to a total of $70 million. In addition, we had $183.6 million available on our acquisition line that can also be used for general corporate purposes. As such our total liquidity at quarter-end was $253.6 million. With regards to our real estate investment portfolio, as of June 30, we owned roughly $760 million of land and buildings, which represents 47% of our dealership locations. To finance these holdings, we've utilized our mortgage facility and executed borrowings under other real estate specific debt agreements. As of June 30, we had $56.3 million outstanding under our mortgage facility, and $352 million of other real estate debt excluding capital leases.

During the second quarter we repurchased approximately 208,000 shares of our outstanding stock for an average price of $81.30, for a total of $16.9 million. This brings our year-to-date repurchases to 407,000 shares at an average price of $81.46, for a total of $33.1 million. As of June 30, we had $66.3 million of share repurchase authorization remaining. In the second quarter we used $4.8 million to pay dividends of $0.20 per share, an increase of $0.03 per share, or 17.6% over the prior year. For additional detail regarding our financial condition please refer to the schedules of additional information attached to the news release, as well as the investor presentation posted on our website. With that, I'll now turn back over to Earl.

Thanks, John. Related to our corporate efforts, during the quarter the Company disposed of three small dealerships - one Audi dealership in South Carolina and two Peugeot franchises in Brazil. Year-to-date the Company has acquired two dealerships which are expected to generate approximately $240 million in annual revenues and disposed of four dealerships which generated approximately $30 million in trailing 12 month revenues. We continue to adjust our dealership portfolio to ensure we are generating appropriate returns for our shareholders.

This concludes our prepared remarks. I'll now turn the call over to the operator to begin the question-and-answer session. Operator?

(Operator Instructions)

Jamie Albertine at Stifel Nicolaus.

Thanks, and good morning, everyone. I wanted to focus -- and maybe apologies in advance because I know it's been a point that's sort of belabored all week -- but on the margin side, specifically for used, and understanding that you're gross profit throughput for the US business was actually quite good again in the second quarter, it was a little bit more degradation on a per-unit basis than we were modeling. So maybe could you help us understand the pushes and pull on the used business as supply is ramping, you're doing a better job of F&I attachment rates and penetration on your product side, how should we really think about modeling some of the used gross margin business going forward?

Jamie, this is Earl. Not exactly sure how you should model it, but I do think it was one of our weaker areas of performance in the quarter, I don't think we did a good job. We've had 23 days to work on this, so we've spent a lot of time on it, and my impression is that with the improved availability of used vehicles that we bought a little heavy, and also, that in some of our oil-challenged markets, that there may have been a little bit of shift from new to used, and I think we had too many cars for the quarter. You'll note from our inventory level, 32-day supply, we don't hold on to these things. We have a discipline that encourages our people to liquidate these things one way or another and keep our inventory in line. So we retailed far too many cars at a low margin during the quarter compared to what we would normally do, but it leverages our F&I business, gets money to the bottom line, and you can see that we had some pretty powerful throughput. So that's something we're going to work to move up a bit. I've learned not to try to forecast margins because I'm not very good at that, the market dictates a lot of that, but I think we can do a better job there. I wasn't particularly impressed with our margin results. I was impressed with our volume results.

Great, so it does sound like you withstood maybe a temporary under performance and you still had a great result, so we should see some -- perhaps some better margins in the back-half. And then if I could sneak one in on the F&I side, just give us maybe your take on what we're hearing from the settlements discussions that are out there, Honda and elsewhere, and how you see this playing out from your portfolio perspective over time? Thanks.

Let's let Pete comment on that, he's deeply involved in that everyday.

Jamie, I appreciate the question. I will tell you, Jamie, based on our understanding of the program and input from a variety of different sources, we still believe that the revised program well either be neutral or, quite frankly, positive to our business overall. So it's something we continue to monitor, but we think from a business standpoint we'll be fine.

Okay, thanks, and congratulations on a great result, Pete, on the US F&I PBR. Take care.

Thank you.

Rick Nelson at Stephens.

Thanks. I think Tulsa, Oklahoma is starting to see impact from lower oil prices, Houston has not. Why do you think that might be? And do you think there's a lag potential here?

Rick, this is Earl. We were very much braced and took quite a few actions assuming that we were going to get hit pretty hard. I'm now starting to think that the Houston economy is diverse enough that we probably won't see anything substantial in Houston. But to be fair, Houston is very diverse, Oklahoma, we felt it. They're really -- the Oklahoma economy, and we're the biggest retailer in Oklahoma of autos, it's not that diverse, it's very energy dependent. And we weren't able to get Oklahoma State data, but looking at the major OEM reports, it seems that the Oklahoma market may have been down even double digits in the quarter, we were only down 2% or 3%, so we have a pretty strong position there, but there was a little headwind for us in Oklahoma.

There were a couple of other small oil-related markets. Beaumont is quite small, but we have most of the franchises there, and we were likely down 5% or 6% there, there's big oil refineries in Beaumont. Lubbock isn't necessarily directly an oil town, I don't think they consider it to be in the Permian Basin, but it appears a lot of trucks are sold in Lubbock that make their way into the Permian Basin, so we had a little headwind and Lubbock. We saw a little bit of that, but Houston seems to have some power beyond just the energy business, so we believe we've gained quite a bit of share in the first two quarters of the year in Houston, which is our strongest market.

It sounds that way with double-digit growth. Do you think the flooding in Houston was a net positive or negative for your business in the quarter?

I think it was a net positive, Rick. Actually, the data I had on the Houston market through May, the market was down, and in June was really strong. So I think in June there were some flood car replacements in the Houston industry. Now we were up double digits before June so -- but I think there were some incremental flood replacement sales, and I think there was also some decent service business that came from the flood. So I think it was positive.

Thanks a lot and good luck.

Thanks.

David Camareno at Goldman Sachs.

Thanks for taking our questions this morning. Just want to center around your SG&A leverage for a couple of questions here, in the three different regions. Obviously in the US it sounds like you braced yourself in the Houston market and really set up, maybe by shedding some employees, I'm not really sure what you've done, but you've under-performed -- outperformed, excuse me, what we've been thinking for your leverages. Want you to walk us through what you have done and if you see that continuing through the back-half of the year, or if you have to rehire anyone at least in the Texas market?

Yes, this is John Rickel. It actually really was not employment comp driven. Employment comp was actually up a little bit, and we were able to more than offset that with cost reductions in other areas. We continue to be very focused on advertising cost control, and then just the other cost elements, we think that that is sustainable in the US.

Okay. And then further, in Brazil you've been positive, at least on SG&A flow through for the first two quarters of the year, you again reiterated that you should be profit positive for the year. Is there anything in the back-half of the year that would make it more difficult than what we've seen, kind of the low-90%s more recently, for the first half of this year versus last half of 2014, if you will, when you are in the high-80%s?

No, there's really nothing in the comps, and the team down there has done a great job on cost control and they continue to be very focused on it. We would anticipate that we'll continue to be able to keep costs in-hand down there. They have done a good job of adjusting to the lower market conditions, and they work on it an everyday.

That's fair. And just lastly on the M&A environment, have you seen multiples contract at all more recently? Have they been inflating a little bit higher, or how is the environment been for you?

I haven't seen any meaningful change in the M&A environment. I think you probably heard that there are quite a few dealerships for sale on the market in the US, but I think all of the -- all of the asking prices are pretty stout, so I haven't really seen any change. There's a lot of potential deals out there if buyer and seller can get together, I guess.

Do you expect any change in the asking price in a rising interest rate environment?

Well, that's hard for me to judge on asking price, but I do -- these deals have to make sense for the buyer, and I think in a 17 million unit industry, it's a different proposition than buying in a 13 million or 14 million unit industry. Higher interest rates are certainly going to temper any projected returns for the future, so they have to be factored into that to be a good return for the buyer. So yes, I think that there are some issues that people have to be concerned with for acquisitions looking forward.

Okay, sorry, the only reason I ask is the thought process if you had a rising interest-rate environment, you might be seeing a potential slowdown in auto sales and sellers might get a little easier to rein in their expectations.

I guess that will remain to be seen.

This is John Rickel. Normally rising interest rates would imply that the economy is getting stronger, so in the ranges that are being talked about, we'd only anticipate that that's going to materially crimp auto sales. We continue to look for $17 million this year, and there's still plenty of room to run if you look at replacement demand. I think the bigger issue is on things about - does it impact the dealer's floorplan expense; does it impact their ability to do F&I? I don't think there's a big risk that will materially slow auto sales.

Thanks for your thoughts.

Bill Armstrong at CL King & Associates.

Good morning, gentlemen. Similar to many of your peers, your parts and service margins were up pretty nicely year-over-year. Can you talk about what the drivers were there? And maybe what you see going forward in terms of parts and service margin?

Yes, Bill, this is John Rickel. Most of that growth is really driven by how we account for the internal reconditioning work. If you strip out the benefit of the 100% gross from the internal work, margins have been pretty stable. As we continue to grow our used vehicle business, we continue to expect that those parts and service margins will continue to rise a bit, but the underlying margins for customer pay, collision, wholesale parts are all really steady.

And it looks like warranty was -- led the way in terms of comps, maybe not as much as some of the other public company's. What were you seeing in terms of warranty work, and particularly recalls?

There's just a steady flow of recalls and I think you have visibility into that as well, and it's not predictable. And also there is a time lag because, frequently when these recalls are announced, the parts aren't available and such. There's a steady flow of recall work in the shops, which is generally a good thing, although I would say that it does have the ability to displace some customer paid business.

Actually, the strongest part of our business in the quarter was our collision repair business. I had to look at that number about three times to make sure that it was accurate, but we have a huge growth trend in our collision repair business based on quite a few new insurance companies doing business with us.

I saw that, that was a very big number, and then finally --

That's a margin-friendly business also.

Yes.

And then finally on gross profit per new unit, you guys have a lot of midline import brands, we hear that, obviously there's a lot of margin pressure there, maybe can you talk about what you guys are seeing in the market? Is that driving margin pressure, and maybe also perhaps a shift in customer demand towards the larger vehicles that may favor the domestic brands more than the imports, and the demand away from sedans?

Yes, that's exactly what we are seeing, as well. We're very heavy with Toyota, Honda, and Nissan, and they're more car brands than truck brands, and there's a little but more supply than demand on cars these days. OEMs are pushing, they're pushing us, we're pushing metal. Summertime, everybody's trying to take share from each other, and so that's a big part of the dynamic that's hammered those margins quite a bit. I don't it, but you either sell the car or you don't,

Right, okay, thank you.

John Murphy, Bank of America Merrill Lynch.

Hi, this is actually Liz Suzuki on for John. I just wanted to follow-up quickly on the question about the Honda settlement with CFPB, and you mentioned that you didn't think it would have a negative impact, it might actually be a positive. Can you disclose what your average mark-up is that you're getting now? It seems like most of the public companies are already pretty close to that 100 to 125 BPS range that the Honda settlement laid out, so I wanted to get confirmation of that.

Yes, Liz, this is John Rickel I don't want to get into the specific number. I will just reiterate what Pete said, that we are comfortable that with what we've been told from Honda, this is supported, we've had rate caps in place for quite some time, and this fits within the bandwidth of how we have been operating.

Okay great, thanks.

Irina Hodakovsky at KeyBanc.

Good morning, everyone.

Good morning, Irina.

Just to follow-up a little bit on the new vehicle gross profit for unit pressures. It sounds like you are pulling out industry headwinds and not so much Company specific headwinds.

I would think its both, actually. I mentioned a moment ago that we're very heavy in the Japanese brand mix, and they tend to be more car driven brands then trucks brands, and there is an imbalance of supply and demand on cars in the market right now, because so much of it is vans, SUVs and trucks, so there's a lot of pressure to move those cars, and both the OEMs and the dealers are pushing hard and taking lower margins to do that.

Would you expect that to changes we go forward? Would you expect the OEMs to adjust the mix in their production to meet the market demand?

I think they will, over time, to the degree possible. I don't know how quickly they can do that. I know that brands that don't have SUVs, like Volkswagen and the Koreans maybe that aren't as truck heavy, they have new products planned that are in the truck, or at least the crossover and SUV end of the business. And so over time, I think there will be some balance there, because they're trying to manage their profitability as well. Pushing cars with heavy marketing emphasis isn't good for their profit either. I am sure they will try to adjust that to a degree possible, probably not in the near-term, no.

Not in the near-term. Thank you. And then on the F&I you did mention that part of the increase was due to income per contract. What you mean by that? Is that your finance reserve?

Yes.

So your finance reserve is increasing. What are the drivers of that increase? Is it higher selling prices, or higher loan amounts, or are you actually maybe increasing your spread a little bit?

Irina, this is John. It is primarily the dollars-per-contract is the pricing on new vehicles that needs to go up. The average amount financed to creep up along with that.

All right, thank you very much, guys. Congratulations on a good quarter.

Thank you.

Paresh Jain at Morgan Stanley.

Good morning, everyone, and thank you for the slides, they ar really helpful. I wanted to go back to slide 15 and look beyond Q2. It seems like the new and used GPU excess (inaudible) have consistently declined since 2011, but more than offset by a 50% or so jump in new F&I and a 25% jump in used F&I. And, again, this is not specific to Group 1, it's pretty much industry-wide. What in your opinion explains this continuous decline in GPU despite SAR being really strong over the years, and do you see them recover from these levels at, all or just have F&I offset it going forward?

Well, I think the factor, in addition to the SAR recovering, is that that makes the auto manufacturers stronger, it makes the dealer network stronger, and there is a big fight for market share. So I think it's a competitive dynamic. I also think, as you get into some oversupply situations, where supply gets out of balance with demand, which is more in these car areas of the moment, but that's another factor that helps drive these margins down. But I think this is one of the most competitive industries in the world, and I think you're seeing a lot of healthy, powerful companies, both at the manufacturer level and at the retail level, fighting. It's a competition.

This is John Rickel. Some of this is the fact that with the F&I as lucrative as it is, you really don't want to miss that opportunity for the sale, because if you don't sell the new or used unit you don't get the shot at that F&I. So that certainly plays into it. As Earl indicated, we think that there are probably some opportunities on used vehicle margins. There's some things that we're working on internally, but on new vehicle, it's competitive and for the time being, we anticipate it's going to stay competitive.

Understood, thanks. And on UK, a really strong performance there ex-currency, but GPU there saw a sharp decline as well, which perhaps hurt your unit gross. Does the cost structure there need any adjustment? Is there any room for that, or was this just a one-off issue in Q2?

No there actually is a more simplistic explanation for the UK, and again, it relates to the balance of supply and demand. As the euro has weakened, against the dollar, it's also weakened against the British pound. So auto manufacturers who manufacturer in euro, and sell in pounds, have a nice windfall. And so most of your major auto manufacturers do manufacture vehicles on the continent of Europe. They can't ship as many to China as they once did, so there is some oversupply, or some increased shipments of vehicles into the UK these days, which is making things just a little but stickier on the margin side.

That said, the demand has stayed very strong and steady in the UK, and there's also increasing units in operation. So, again, we have to adjust our business model in the UK like we have in the US by working the cost structure, working our parts and service growth, working the used car business and the finance business. So it's a dynamic market and we adjust these things as we see them happening, and that's kind of the same thing we've had to do in the US as we've had this margin pressure on new vehicles.

This is John Rickel. The other item that's impacting, at least on a consolidated basis, is obviously we brought the three Elms BMW stores in the fourth quarter last year, and we're still integrating those in. It takes little longer to take cost out in the UK when you do an acquisition because of the labor laws, so we would anticipate that there's additional costs that will come out as we fully integrate those stores.

That's good color. Thank you.

(Operator Instructions)

David Lim at Wells Fargo.

Hi, good morning.

Good morning, David.

Morning. SG&A to gross profit, I just wanted to get a little bit more color. If you guys could give some sort of description on maybe the glide path for the UK and Brazil as it relates to the US? I think in the past you mentioned that it probably can't get to the US level, but I'm wondering if you guys could provide some detail on how close can it come to the US SG&A to GP levels?

Yes, that's not real easy, David, I will take a little bit of a shot at it. UK, we don't own as much of the real estate there, and you also don't have some of the higher-margin things like the F&I is not quite as lucrative, so it's a little harder to leverage. I think if we can run that in that mid- 75% range, I think they're doing a pretty good job. So there's probably a couple more points, but it's not going to get sub-70% like what we are able to run in the US. Brazil, it's still kind of too early to tell, we're obviously continuing to take out more costs, but ultimately we need to get back to generating more gross down there to be able to leverage. So I'll take a save on giving you any sort of shot right now at Brazil until we see a little more normalization the market.

Understood.

I think we also would benefit, David, in both of those markets for more scale. Obviously, we're going to be careful about adding to much scale too quickly in Brazil until things settle down, but we're continuing to look to grow our businesses in both those markets because we have a pretty nicely established platform and infrastructure, and being able to leverage some of that fixed cost will help our company in the years ahead.

And a question for Pete. AutoNation is dabbling with, or they've actually announced, that they're going to do a private label maintenance program, and obviously that's going to probably likely boost the F&I per unit. Has Group 1 considered something similar to that strategy on the private-label front?

Yes, we've looked at that several times. Pete, do you want to make some comments?

Sure. We have looked at it, and we took the position that, from a penetration standpoint, it's better for our consumer and our shareholder for us to utilize the factory-endorsed, OEM-endorsed maintenance program. So we've aligned ourselves with each of the manufacturers, whether it is Toyota with the Toyota Care Wrap, or Honda, to utilize the maintenance program offered by the OEM.

Yes, David, just to add something to that, I think you'll appreciate this. When we looked at doing it and selling free maintenance, and there are some smaller companies that sell free oil changes, if you will. A lot of our customers, particularly in the Japanese brands and the luxury brands, when you say you're going to provide free maintenance, it's not just an oil change. And trying to keep up with these detailed maintenance schedules of the auto manufacturers and what they include our various intervals, 15,000 miles, 30,000 miles, it becomes a cottage industry to keep up with those things, and you want to make sure that you can afford to do all of those different maintenance items at each interval, and it's different from brand to brand and it's awful hard to keep up with.

Thanks for that. The other question I had was, truck mix has been really favorable over the last several months, and I personally thought it would be a tailwind to gross profit per unit. I was wondering if you guys could dive on that a little bit more? And also, how is the F-series launch going, as well as the availability on the new truck?

Well we actually didn't get as much truck mix benefit as we should have in the quarter. We were up pretty strongly in Ram and General Motors, but we were down and Toyota and we're a pretty big Toyota company, we just couldn't get enough Toyota trucks, there in very short supply, at least in our markets. And Ford, we went backwards a little but. Again, I think most of that is supply, but I think that you've also seen Ford has become more aggressive on their marketing support here in the last three weeks for the F-series. So I think we'll get some truck mix benefit in the second half of the year, and we'll do our best to translate some of that into a little better margin, also. And some of the new products should give us a little chance of that, I would think, so that should be a positive.

And my final question is, obviously Ferrari filed their IPO papers today, would you guys be interested in a Ferrari franchise going forward? Thanks.

John wants a demo Ferrari. I actually have trouble fitting into some of those cars. That's generally -- you never say never, because if it's a good business opportunity, we're in that business, but we have stayed away from those super-luxury or exotic brands or whatever you call them.

In general, there too many people that do like those that demo so they take too much from the dealership. (Laughter)

Thank you guys, good luck.

Thanks.

This concludes our question-and-answer session. Would you like to make any closing remarks?

Thanks everyone for joining us today. We look forward to updating you on our third quarter earnings call in October. Have a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.