Group 1 Automotive 1Q17 Earnings Call Notes

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Earl J. Hesterberg – President and CEO

Sales down 11% in TX and OK

“Combined new and used sales dropped 11% in Texas and Oklahoma during the quarter. Our largest market, the U.S. energy capital, of Houston, had an industry new vehicle sales decline of 16% for the quarter. Group 1 new vehicle sales in Houston were down 13% for the quarter. So we outperformed the market, but still need to make further adjustments to our business.”

Inventory still far too high

“U.S. new vehicle inventory stood at 29,800 units, which equates to a supply of 86 days, consistent with a year ago but far too high. While first quarter inventories tend to be elevated due to preparation for the spring selling season, we must adjust our inventory level downward in the second quarter. Domestic branded inventories remain the biggest challenge with GM, Chrysler and Ford, all over 100 days. We need to adjust some of our production orders further, especially in our impacted Texas and Oklahoma markets.”

Inventories need to keep coming down in the oil patch

“I don’t know that I can apply any across the board summary of what’s happening, but we’re not the only dealers in these oil patch markets who have found themselves with too much inventory based on a further slowdown of sales. So, these OEMs are quite well managed these days. They understand as well as we do that there needs to be some further production cuts, at least in these pockets, at least in these geographic pockets. They’ve all been working to shift the mix more toward trucks than cars. So, I think that generally speaking, adjustments were made quite well last year. We were actually in this same situation early last year, and by the end of the year I believe much of the industry, and certainly our Company, had the inventory levels under control again. And now with this more recent decline in the oil patch sales, there needs to be another adjustment made, and I’m confident that we’ll work together to make that happen.”

Rig counts are up but haven’t seen much hiring

“We also perceive some of the increased activity by the energy companies. I think if we look at the rig count every week, I think it’s up 300 rigs across the country from the low point, and a lot of the activity is out in the Permian Basin. And capital budgets for most of the energy companies are up this year. So there is increased activity, no doubt. What we have not yet seen is any significant hiring, but we expect that that must occur. So, we are somewhat optimistic about the future, but for the near term we have to deal with the reality of the present. But yes, we’re optimistic that the energy industry is going to start to slowly recover now.”