Group 1 Automotive 2Q17 Earnings Call Notes

Earl Hesterberg – CEO, President & Executive Director

Poor performance in energy impacted markets

“Although we had another record performance in U.S. FNI per unit retail and a further rebound in Brazilian profitability, these factors were not enough to offset continued weakness in vehicle sales in our U.S. energy price-impacted markets. Combined new and used retail unit sales dropped 7% 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 10% in the first half of the year and a very weak close to the second quarter with June sales down 24% from June 2016 levels. T”

A lot of high paying jobs were lost in Houston

“I think for us, Rick, the key is when the energy companies start to hire people again. And those — actually markets like Huston have replaced most of the lost jobs. That really is not a net job loss, but the new jobs tend to be in the restaurant, hotel, hospitality industry. The jobs we lost are energy and construction jobs, high paying jobs.

So not only are there fewer customers buying a car, there is a probably a mix issue there too. The new jobs are probably supporting lower mix and more used cars or low end volume brand cars and have probably been hit disproportionately in the midline imports and luxury brands. But I think it’s just a function of hiring again in the energy industry.”

I think the market will continue to head toward electric

“These statements by Volvo by 2025 in the U.K., by 2040, those were just seemed to be statements of strategic intent and very much in tune with the consumer psychology at the moment. It’s driven by all this negative press about diesels. But clearly, things are headed that direction and as there is more offerings from the powerful OEMs, I think it will continue to head toward materiality in our business.”

John Rickel

Opportunity to downsize dealerships

“Well, you’re preaching to the choir on that one, David. No, it doesn’t require much of the brick-and-mortar we have today. We actually have one of the top OEM Executives with us last Saturday who toured all of our different brand dealerships in Houston and we made the point to him that the 2 most important things to us today, and I think OEM dealers, are a service bay and a parking space. Everything else is interesting, but we always need more parking spaces which are very costly when you’re in metro areas where the land is expensive. And a service bay, is valuable and generates gross profit. And showroom size and offices and all those things are interesting, but we can sort those out on our own. So we hope we’ll enter an era soon of more realism in that area. But I can’t say we’re there yet.”