Good morning, ladies and gentlemen, and welcome to Group 1 Automotive's Second Quarter Earnings Conference Call. Please be advised that this call is being recorded. I would now like to turn the conference call over to Mr. Pete Delongchamps, Vice President of Financial Services and Manufacturer Relations. Please go ahead, Mr. Delongchamps.

Thank you, Jamie, and good morning, everyone, and welcome to today's 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 markets. Those and other risks are described in the company's filings with the Securities and 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. Participating with me today on today's call, Mr. 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 our prepared remarks are to the same prior period unless otherwise stated. I will now hand the call over to Earl.

Thank you, Pete, and good morning, everyone. I'm delighted to announce that earlier today, Group 1 reported its best ever quarter in revenues, gross profit, adjusted net income and adjusted diluted earnings per common share. Second quarter 2012 revenues increased 29% to $1.9 billion, which drove a 17% increase in gross profit to $285.3 million. Adjusted diluted earnings per common share were $1.25 on adjusted net income of $29.7 million. John will provide more detail on the adjustment shortly. Clearly, the U.S. auto industry is continuing a robust recovery from the depths of the recession in 2008 and 2009, with industry retail new vehicle sales up 15.2% for the second quarter according to J.D. Power. Our same-store sales increases of almost 25% on new vehicles and almost 19% on used vehicles seems to be well above market averages. Our strong Japanese brand mix certainly helped in the quarter, but our sales strength extended beyond those brands into brands like Ford, where our sales increased 22% versus a national average of 6%. We needed this strong sales performance to mitigate the gross margin pressure prevalent in the industry today as a result of higher levels of supply and competition this year versus last. On a consolidated basis, we sold 32,924 new vehicles in the second quarter, a 37% increase that significantly outpaced the overall industry results. Our average sales price decreased 2% to $32,824 reflecting a mix shift away from luxury brands and back to imports, hence a 150 basis point shift from trucks to cars. The increased volume drove a 33% increase in new vehicle revenues and an 18% increase in new vehicle gross profit. Even against tough comps, used vehicle unit retail sales were strong in the quarter, increasing 28% to 22,004 vehicles. Used retail gross profit grew 12%…

Thank you, Earl, and good morning, everyone. My following comments will be on a year-over-year basis unless otherwise noted. Our adjusted net income for the second quarter of 2012 rose $5 million or 20.1% to [ph] $29.7 million, which is the best quarter in our company's history. This result excludes $115,000 of after-tax, noncash asset impairment charges related to real estate holdings; a $659,000 after-tax net gain on real estate transactions; and a $1.7 million after-tax charge for insurance deductibles related to the previously announced hailstorm in Oklahoma City. Earnings per diluted common share improved 21.4% to $1.25 per share, which is also the best quarter in our company's history. In comparison, the previous best quarter results were achieved in a SAAR environment of 16.6 million units versus this quarter's 14.1 million SAAR. This result continues to highlight significant improvements we've made to our processes and cost structure and demonstrates the leverage those improvements are delivering as new vehicle sales volumes continue to increase. On a consolidated basis, we delivered record revenues in the second quarter of $1.9 billion, which were up $421.7 million or 28.6%. This record reflects increases in each of our business segments. New vehicle revenues increased 33.4% to $1.08 billion on 36.6% more units sold. Our Used Vehicle retail revenues improved 29.2% to $456.2 million on 27.9% more units. Used Vehicle wholesale revenues grew 20.7% to $73.1 million while our F&I revenues rose 40.7% to $65.4 million or $1,191 per retail unit sold, which is the company's best ever quarterly F&I performance. And for the 10th straight quarter, we've reported year-over-year revenue growth from the core of our business, the Parts & Service segment. Revenues from our Parts & Service business improved $16.2 million or 7.9% to $220.3 million. Our gross profit increased $41.1 million or…

Thanks, John. To summarize, we delivered a record-setting quarter with all-time high revenues and profits even against some tough comps and a very challenging weather-related event that impacted our results this quarter. I want to thank our 436 team members in Oklahoma City where we had 7 of our dealerships impacted by a significant hailstorm in late May that severely damaged virtually all of the new and used inventory at these stores. Damage to the vehicles and buildings totaled more than $22 million. Our team members pulled together, and in conjunction with outstanding support from our OEM partners and our insurance company, we were able to clean up and get back in business by the end of the quarter. This would not have been possible without many long hours and tremendous hard work by the team, so I want to recognize and thank them. That concludes our prepared remarks. I'll now turn the call over to the operator to begin the question-and-answer session. Operator?

[Operator Instructions] And our first question comes from John Murphy from Bank of America Merrill Lynch.

This is Liz Lane on for John. We've heard a couple of dealers comment recently that they've seen consumers who are shopping for a late model used vehicle end up buying a new vehicle because the incentives have picked up and the price differential is getting a bit smaller, but others have said that they aren't seeing that. Can you just comment on what you're seeing in your markets in terms of consumers trading up from late-model used to new vehicles?

I think that's a valid observation. That very typically happens when new car prices start to sit down a little bit, which you can see by the pressure on gross margins on new vehicles this quarter across the industry. And I think Kelley Blue Book stated that new vehicles are selling for $400 or $500 less. And I think that just has new car prices sitting down a little bit on used cars, and when they get a little closer together, relatively, with the good financing on new cars, it's quite typical to see a little bit of movement from the used car market to the new car market. There's always some overlap there. And I would say we've seen that also.

Okay, great. And I was hoping you could comment a bit on manufacturer stair-step programs and which brands are doing them now. And what impact is it having on your volumes and margins?

Well, it always has a negative impact on margins and a negative impact on customer satisfaction. Nissan has always been one of the worst in that regard, but Chrysler does it. There's even a program on Honda Accord that's volume-related at the moment. So, it has spread more across the industry, and it's not healthy either for dealers or customers, but it's something we just have to live with at the moment.

Okay, great. And I'll just sneak in one more, which is, you mentioned that your Ford stores significantly outpaced Ford's overall U.S. growth. And was that mainly a function of the markets in which you operate, like Texas, or do you think you gained share within those strong markets as well?

I think Texas is a large part of that because we do have quite a few Ford dealerships in Texas, but we've also done extremely well at virtually all of our Ford dealerships. That would include places like Louisiana and the Panhandle of Florida, and so forth. So I would say it's a little more than Texas, but Texas is clearly a factor.

Our next question comes from Adi Oberoi from Goldman Sachs.

Two questions here. First, on the P&S side, I know the comps were really difficult in the some second quarter of last year. Can you remind when these, the comps start to ease off? My presumption is that, by next quarter, you will -- or by the third quarter itself, you should see some relief. Is that the correct understanding, or can you just refresh our memory on that?

Yes, it is the correct understanding ,and they started to ease a little bit at the end of the second quarter. Our warranty sales decreased by 5% in the second quarter and a lot of that, of course, was recall work in the previous year. But I think we're starting to get away from some of those challenging comparisons now.

Got it. And another question on M&A, actually 2 questions on that. First, on, specific to GPI, you guys have been pretty aggressive on the M&A front since the beginning of the year. What are your -- what is your thought process for the back half? Are you going to take a pause and consolidate what you have done so far or you will continue to look for more opportunities? And the second, more industry-wide, of late, we have been hearing that there has been a, again, a gap between what the sellers expect and what the buyers want to pay, just because sellers are now seeing a SAAR recovery and they want to wait until you get the 15 [ph] handle and thus, command a better price. Just wanted to hear your thoughts on that.

Well, we are taking an unintentional pause for the reason you just mentioned. There is a gap from what we see, at least in terms of brands and markets that we're interested in. There is a big gap between the prices being asked by sellers and what would enable us to make a fair return on our investment. So at the moment, it would seem that we're not going to run at a significant acquisition level in the second half, but we would continue to prefer to invest our available capital to grow the company, but there don't appear to be any substantial opportunities in the near term.

Got it. So is it fair to say that the focus of cash deployment are building more towards buybacks than acquisitions in the near term?

Well, the buybacks we execute are generally opportunistic, so that depends on market situation. But yes, we will -- it's dynamic, but when there are not acquisition opportunities available, we work hard to try to return capital to shareholders, either through the buyback or dividend.

Our next question comes from Rick Nelson from Stephens.

I'm curious how July is tracking. And I may have missed it, but did you update your SAAR forecast for the year?

No, we're going to stick with $14.5 million. I think J.D. Power's reaffirmed that quite recently, yesterday or today perhaps even. And that's a little bit on the high side of what we've seen in the last couple of months, but we still think the driving forces in the market are still pretty solid, and we still think that's as good assumption as any. So $14.5 million is still our assumption.

And July, do you feel that, that's tracking somewhere to the year-to-date experience? Are you seeing any uptick or fall off?

Well, July would be forward-looking for us at this moment since we're just -- we just have good data through June, but I follow the press and the independent prognosticators like you do, and there doesn't seem to be any factors that would make July significantly different than recent months that I have seen in the press or my contacts. But it's hard to judge those things. So much of the business is now done in the last week or weekend or few days of the month. It's hard to get a feel for these things until you have full-month data.

And the new car margin's below $2,000 this quarter. I realize a lot of the pressure is due to the mix and inventories normalizing, but where do you think we go from here?

Well, unfortunately, most of that is dictated by the competitive dynamics in the market, so I don't have any great hope that it's going to dramatically improve in the months ahead. They're lower than I would like to see them. But with the volume increases that we've been able to generate, we're getting a good amount of money to the bottom line. But I don't really like the grosses at this level, and I don't really see any factor that's going to drive them much higher in the quarters ahead, last 2 quarters of this year.

Got you. And the SG&A, given, of course,[ph] gross pressure, 74.6%, that's the lowest, I think on record, for any quarter. Do you see more opportunity there, or have we sort of reached an inflection point, do you think?

Yes, Rick, this is John Rickel. I think, as long as we are able to continue to grow the gross profit dollars, we ought to be able to continue to leverage that. So we think that there is more to come there. So, yes.

Got you. And finally, if I could ask you one more. I know it's a small piece of your business, but if you can tell us how the U.K. performed during the quarter and your expectations for the balance of the year there.

Yes, the U.K. market, in my opinion, and bear in mind we only have 5 BMW and 5 MINI dealerships and then 2 months ago added 6 Audi dealerships. The U.K. business, certainly in the luxury market where we compete, has held up much better than I would have expected. It's not spectacular, but it's achieved our budget target. So I would say it's been pretty good. There was some more negative info that came out of U.K. on their GDP yesterday or today, but the luxury business seems to have held up recently well. So we feel that we're steady as she goes there, and we're still happy with our investments there.

Our next question comes from Ravi Shanker from Morgan Stanley.

This is Yejay in for Ravi. Can we dig a bit deeper into used pricing? I think you guys saw a 20 basis point increase there when Manheim would indicate the quarter was down about 200 bps. What drove that, especially given that you faced tough comps with the impact of the tsunami last year?

Well, our margins were down though versus last year. And I don't really have a factor for you that would explain our pricing change year-over-year. I will tell you that we had dramatic volume increases which have basically been driven by better supply as our Japanese import brand, new vehicles, sales business recovered, we were able to supply a lot more trade-ins, and so our used car business is very good. But relative to any significant factor driving the pricing, I don't have anything I could tell you.

And as a follow-up to that, just talking about the used supply. Beyond the increase in trade-ins, are you guys still seeing any difficulties in acquiring these vehicles, perhaps off the auctions on wholesale?

Yes, yes. Yes, I think that's going to continue. The difficulty is finding a good supply of high-quality used cars. There are lots of used cars now on the market, but many of them are very high mileage. I think you know there's a lot of pent-up demand, and many people are buying new and used vehicles now because they can't drive their car any further, so there's a lot of poor quality trades in the market. So finding good used cars is still a big challenge for our company and I expect for most dealers. And I think that's going to continue.

All right. If I could sneak in one more. What are you seeing in terms of credit availability? One of your competitors went so far to recently classify it as back to pre-2007 levels. So I just wanted to get your thoughts on that.

I'll let Pete take that one. Pete, he runs that business for us.

The credit availability is robust. The relationship that we have with our key lenders is probably at an all-time high, and accessing credit at our dealerships is not an issue.

Our next question comes from Scott Stember from Sidoti & Company.

Can you talk about BMW, how it performed for you in the quarter, and maybe talk about how you expect the supply to improve as the model year changeovers, specifically for the 3-Series, is complete?

Yes. For us, BMW, was a flat line, been up 2% or something. I think all the BMW dealers in the U.S., and in particular, in the northern half of the U.S., are struggling with supply. The new 3-Series, they're selling so well, they've never really been able to build up much inventory. And the all-wheel drive version is not available yet, so your dealerships in the northern half of the country tend to sell -- or their customers tend to want the all-wheel drive version, which hasn't been available. And I also don't think they've ever caught up on their X3, and to a certain degree, X5. So BMW dealers, I think have -- could've sold more this year if they had 10 [ph] more. We've been told by the factory that the second half of the year will have better availability. But it's still a great business. It's just they have demand, they had [ph] the supply, which isn't the worst problem for a dealer, believe me. But they've been supply-constrained.

Okay. And circling back to the F&I side. You continue to see a very strong growth there. Could you just maybe just quantify how much of it is coming from better credit markets, or is there something else that you guys are doing to help you increase your penetration rates?

Scott, this is Pete. I will tell you that certainly, low interest rates are a tailwind for the F&I business. There's no question about that. But now, we continue to work on our processes, we redoubled our efforts on training. We're really paying closely attention to the non-performing stores. And we've got 7 regional finance directors that are executing on the plan, and it's just a lot of hard work and basic fundamentals on doing business the right way.

Okay. And last question, and it's probably difficult to give, but you alluded to the fact that the stores are back up and running in Oklahoma. Can you basically talk about how much was lost in the quarter, from a sales perspective?

Yes. Scott, this is John Rickel. That's really kind of tough to quantify, so we didn't really try to get into that. Because the sales are up across the board in the markets, we did see a sales increase in Oklahoma, but could it have been better if we had not had the storm, I think the answer is yes. But it's very difficult to quantify what that would've been.

But you're back up and running now?

Yes.

Our next question comes from Jamie Albertine from Stifel, Nicolaus.

I wanted to ask very quickly on any sort of feedback from your stores in the Northeast.

Well, actually, that was probably our weakest area in the quarter from New York and New Jersey. We certainly -- our sales increase levels were below the average for the company.

Okay. And sort of your outlook for the back half with respect to model refreshes across the different brands and sort of your expected flow-through to the P&L into sales.

Well, I would expect that on the luxury front -- now, we don't have the biggest luxury mix in the world, but a substantial part of our business, particularly BMW and Lexus, I would expect the luxury business will accelerate in the second half of the year. We talked about BMW on a previous question, but I think you know that Mercedes is quite strong in the market and there's a bit of a contest going on for the top selling brand, and Lexus will have the new ES 350 available here within a month or 2 and you can see they're coming back quite strongly. So I think the luxury brand business is going to improve as we move into the second half of the year. And Honda seems to be building some strength. Obviously, they are working to move out the current model Accord in preparation for the new one.

So is it fair to say that your experience with model refreshes has been positive to-date, but you expect, maybe in absolute terms, more refreshes in the back half versus the first half?

Yes, I think -- I guess, we should probably have somebody study the data on the model introductions for the second half. But my perception is that there's going to be some model-driven activity in the second half.

Yes, because -- yes, this is John Rickel. I mean, a lot of what has launched so far, they're still building up to speed, so you're still going to get a run rate impact, I think in the second half. If you think about things like the Ford Escape and the Ford Fusion, we're still getting up to speed on those. And yet, on top of that, you've got Accord and Civic. In the second half, you've got an Avalon refresh late in the year. You've got the Lexus stuff coming on. So I actually, I do think it'll gain pace as the year progresses.

Very good. And then a quick housekeeping item. Just wanted to confirm where the adjustments, with respect to the real estate and hailstorm adjustments you noted, hit your P&L?

Primarily, in SG&A.

And our next question comes from Matt Nemer from Wells Fargo Securities.

So quick question for you, Earl, which is, given some of the disruptive forces that we might see in the back half in terms of the election and what's going on in Europe, how are you thinking about planning for the back half in terms of new vehicle orders, expenses and capital spending?

Well, that's a good question. And clearly, there's been a lot of these global storm clouds over the last month or so. I think we need to be a little more vigilant on the inventory levels. That's one of my big concerns. We're now back to normal on new. We always run very tight, 31 days on used. But we need to watch inventory as we start to move toward the winter, and that's one of the things that we do have to have some discipline on. So, you normally of course, will see used car prices. They tempered a little bit over the last 6 months or 9 months, but there's always a seasonal factor there as well. And we certainly don't need to continue to build new vehicle inventories, particularly on the domestic front as we go into the winter. So, we'll be more vigilant.

And what about advertising and other sort of capital-type expenses as well?

Yes, our capital expenditures are pretty well set for the year. You can't turn those on and off and we've been pretty prudent on that, and we're kind of at a $55 million run rate on that. That's kind of been our plan, so that's pretty well committed. Any changes we would make to that would have to be in the first half of next year if there's some economic disruption. We calendarize our advertising very carefully both on a cost per unit sold and a percent in gross profit, so we've already adjusted our plans and budgets for particularly, November and December. Those are lower selling months anyways. So we're very cognizant of that.

Okay. And then second question is, I'm just wondering if you can comment on the multiples that you're paying for the acquisitions that you've announced. Particularly interested in, I'm sure you're not going to give exact numbers, but I'm interested in the spread between what you're paying and sort of where your stock is trading here at about 10x earnings.

Yes, Matt, this is John Rickel. That's a discussion that we just don't get into for a lot of reasons. Primarily, we don't want to kind of set the bar for what expectations are. The other issue is, they're very subjective. Is it a multiple on what the store was earning, when we looked at it, is it based on pro formas. So I just don't think it's very value-added to get into that.

I guess to rephrase it, do you feel like the spread between what you're paying and your stock price is, where your stock is trading, is wider or narrower than the normal?

Well, I would say that our acquisitions over the last year have been incredibly good values for our shareholders.

Okay. Fair enough. And then last...

Already. Already.

That's helpful. And then lastly, it looks like your personnel expense was up a little bit as a percent of gross. Is that -- do you expect to be able to leverage that line going forward, or do you think that, that sort of stays about flat as a percentage of gross?

Well, we need to try to continue to leverage that. We look at our efficiencies, but the biggest issue we have at the moment is the gross, the new vehicle gross margins. But if you look at the first half of this year on a consolidated basis, we're selling about 30% more vehicles, new and used, that's consolidated, not same-store. And we increased our headcount 5.2%, I think. So we think, on the personnel front, we're being highly efficient. And if we look at our SG&A as a percent of revenue, it's quite good, 11.2% or 11.3%. That's a very lean number, particularly for a company our size. The best way we can leverage that is to generate some more gross. I'd have to say the new vehicle gross has come in a little lighter than what we'd like to see, but I think we've all discussed that and it's the nature of the market at the moment.

Yes, and Matt, I would add -- this is John Rickel, that really, on a year-over-year basis, that's the bigger issue, is the comparison of the grosses versus the expense, and I think if you look at it sequentially, we are leveraging it, and I would think if the model holds true as it has, that you should be able to see us continue to leverage it as we go forward.

And that concludes today's question-and-answer session. At this time, I would like to turn the conference call back over to Mr. Hesterberg for any closing remarks.

Thank you for joining us today. We look forward to updating you on our third quarter results in October. Have a good day.

Ladies and gentlemen, that concludes today's conference call. We do thank you for attending. You may now disconnect your telephone lines.