Pete DeLongchamps - VP Financial Services and Manufacturer Relations Earl Hesterberg - CEO John Rickel - CFO Lance Parker - VP & Corporate Controller.

Rick Nelson - Stephens Pat Archambault - Goldman Sachs David Lim - Wells Fargo Securities Brad Hoselton - KeyBanc James Albertine - Stifel Bill Armstrong - C.L. King and Associates John Murphy - Bank of America Merrill Lynch Paresh Jain - Morgan Stanley Michael Montani - Evercore ISI Steve McManus - Sidoti & Company David Whiston - Morningstar.

Good morning, ladies and gentlemen. Welcome to Group 1 Automotive 2016 First Quarter Financial Results 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, Group 1's Vice President of Manufacturer Relations, Financial Services and Public Affairs.

Please go ahead, Mr. DeLongchamps..

Thank you, Jamie and good morning everyone. And welcome to today's call. The earnings release we issued this morning and a 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 Web site.

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 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 Web site.

Participating today with me on the call are 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 in the same prior year period, unless otherwise stated.

I'll now hand the call over to Earl..

Thank you, Pete, and good morning, everyone. I'm pleased to report Group 1 achieved record first quarter adjusted net income of $37.1 million. This equates to record first quarter adjusted earnings per share of $1.59 per diluted share, an increase of 8.2% over last year.

For the quarter total revenue increased approximately $176 million or 7.2% to our first quarter record of over $2.6 billion. On a constant-currency basis revenue grew nearly 10% for the quarter. Our growth was particularly strong and you’ll see it for retail sales and parts and service, which I'll cover in more detail in just a moment.

Turning to our business segment, during the quarter we retailed over 40,000 new vehicles, total consolidated new vehicle revenues grew 5.8% as we retailed 3.9% more units and the average new vehicle selling price increased $607 to $34,571, importantly new vehicle margins stabilized this quarter.

New vehicle gross profit increased 2.9% as gross profit per unit decreased by $18 to $1,759 due to foreign exchange rate headwinds. In the U.S. new vehicle margins actually increased $50 per unit to 1758. Our unit sales geographic mix was 75.6% U.S., 18% UK and 6.4% Brazil.

Our new vehicle brand mix was led by Toyota/Lexus sales which accounted for 24% of our new vehicle unit sales. BMW/MINI, Ford, Honda/Acura and VW, Audi, Porsche each represented over 10% of our new vehicle unit sales. Nissan and GM each accounted to roughly 8% of our unit sales. The U.S.

new vehicle inventories stood at 31,400 units which equates to an 85 day supply compared to a 69 day supply for the first quarter of 2015. Luxury brand inventories drove much of the year-over-year increase. We have adjusted orders and expect to bring inventory closer to our target level of 60 days by the end of the second quarter.

Total consolidated used vehicle retail revenues grew 10.4% as we retailed 9.4% more units and the average used vehicle selling price increased $202 to $29,987. Used vehicle retail gross profit increased 6.7% as gross profit per unit decreased $38 to $1,500, roughly half of this decrease can be explained by changes in foreign exchange rates.

In the U.S. retail used margins increased $7 to $1,620 per unit. During the quarter we retailed nearly 33,000 used retail units. U.S. used vehicle inventory stood at 13,100 units which equates to a 30 day supply compared to a 32 day supply for the first quarter of 2015.

Total consolidated parts and services revenue increased 9.4% while consolidated parts and services gross profit rose 10.5%. With slight exchange rate headwinds, same store parts and service gross profit grew 6.5% on 5.4% higher revenues. U.S. same-store gross profit increased 8.6% on 7.3% higher revenues.

Finance and insurance gross profit increased 5.9% on a consolidated basis. This growth was driven by vehicle unit sales as our consolidated F&I for retail unit was essentially flat at $1,361 reflecting the negative impact from foreign exchange rates. We delivered an all-time quarterly F&I per unit referred in the U.S.

of $1,564, an increase of $26 over the first quarter of 2015. Regarding our geographic segment results, our U.S. operations grew total revenue by 4.2%. The revenue growth was driven by our parts and service, used vehicle and F&I performance. This growth was tempered by a 2% decrease in new vehicle unit sales.

Sales were impacted in the Texas, Gulf Coast and Oklahoma markets due to the weakness in the oil industry. Same-store new vehicle unit sales decreased in these three markets by 3%, 5% and 2% respectively. We were able to mitigate the volume decline however with the improved new vehicle gross profit per unit that I mentioned earlier.

Used retail unit sales were a highlight with same-store sales up another 5.6% after increasing 6% in the first quarter of 2015.

Our UK operations had another strong quarter, the total same-store revenue growth on a local currency basis of 13.3%, driven by a 13.6% increase in new vehicle unit sales, a 6.9% increase in used retail unit sales, a 6.5% increase in parts and service revenues and a 15.6% increase in F&I per unit to $742.

In Brazil while the overall first quarter industry sales were down 28%, our same-store total revenues remained roughly flat on a local currency basis versus prior year, an amazing performance by our local team.

Our strategy of aligning with growing brands is working and in conjunction with the significant portfolio adjustments that I will detail later we remain confident that we have positioned ourselves to be profitable for the remainder of 2016.

I'll now turn the call over to our CFO, John Rickel to go over our first quarter financial results in more detail.

John?.

Thank you, Earl and good morning everyone. For the first quarter of 2016 our adjusted net income increased $1.2 million or 3.5% over our profitable 2015 results to an all-time first quarter record of $37.1 million. On a fully diluted per share basis, adjusted earnings increased 8.2% to an all-time first quarter record $1.59.

These quarterly results for 2016 exclude $2.8 million of net after tax adjustment consisting primarily of $1.7 million of losses due to hail damage in the U.S. and $800,000 of charges related to the decision to divest the four dealerships in Brazil. There are no adjustments made to the prior year's first quarter GAAP earnings.

I would also point out we have incurred additional losses thus far in the second quarter in the recent flooding in Houston and a large hailstorm in San Antonio that have combined to caused approximately $3 million in inventory damage. These additional pre-tax losses will be reflected in our second quarter GAAP results.

Starting with the summary of our quarterly consolidated results, for the quarter we generated an all-time first quarter record of $2.6 billion in total revenues. This was an improvement of $176 million or 7.2% over the same period a year ago and reflects increases in each of our business units.

On a local currency basis, which ignores the change in foreign exchange rates, total revenues increased 9.7% for the quarter. Our gross profit increased $25.2 million or 6.9% from the first quarter a year ago to $389.1 million.

For the quarter adjusted SG&A as a percent of gross profit increased 20 basis points to 74.8% and operating margin remained flat at 3.3%. Floorplan interest expense increased by $1.7 million or 17.8% from prior year to $11 million. This increase is primarily attributed to higher U.S. inventory levels.

Other interest expense increased $3 million or 21.7% to $16.9 million reflecting new issuance of $300 million of 5.25% bonds in December 2015. Our adjusted consolidated effective tax rate for the quarter was 35.8%, which is lower than our historical tax rate. Primarily due to the increased profitability from our UK region.

With the Spire acquisition, the UK will comprise a larger part of our results going forward and therefore, we forecast our full year tax rate to be approximately 37%. Turning now to our geographic segment, starting with the U.S. market on a same-store basis. For the quarter, total U.S.

same-store revenues grew 2.3% to $2 billion, driven by increases of 7.3% in used retail, 7.3% in parts and service and 1.7% in finance and insurance. These increases were partially offset by 0.007% [ph] decrease in new vehicle revenues.

With 7.3% increase in same-store parts and service revenue consisted of increases of 11.5% in collision 8.5% in warranty, 7% and wholesale parts and 5.3% in customer pay. To support continued growth in parts and services, we’ve grown our same-store net technician headcount by 8.4% from March 2015.

Total same-store gross profit improved 4.1% driven by increases of 8.6% in parts and services and 4.5% in used retail as well as the F&I increase that I just mentioned.

These increases were partially offset by a decrease in new vehicle gross profit of 1.5% with a profit for vehicle increase of $28 to $1,730 partially offset a 3.1% unit sales decrease primarily attributable to our oil affected markets of Texas, Oklahoma and Gulf Coast. Our adjusted SG&A as a percent of gross profit increased 50 basis points to 73.1%.

The cost increases primarily explain by significantly higher loan or vehicle costs as we continue to service a large amount of customers affected by recalled vehicles who are awaiting repairs and by higher insurance costs associated with the increased new vehicle inventory levels in larger loan fleet.

For the quarter, our adjusted operating margin remains flat at 3.8%. Related to our UK segment on a same-store basis with the percentage changed metrics on a local currency basis. For the quarter, total revenue increased $21.8 million to $321.3 million, an increase of 13.3%. Gross profit for the UK segment was up 11.4% from prior year.

New vehicle gross profit grew 8.9% as a unit sales increase of 13.6% was partially offset by 4.1% decrease in gross profit per unit. Total used vehicle gross profit increased 7.3% as a 5.4% increase in unit sales combined with 1.8% increase in gross profit per unit.

Parts and services gross profit improved 8.2% and our F&I income increased 27.8%, which is attributable to both a 15.6% increase in gross profit PRU to $742 and a 10.6% increase in total retail units.

For the quarter, our adjusted SG&A as a percent of gross profit improved 370 basis points to 74.6% and operating margin increased 40 basis points to 2.5%. Both improvements represent the impact of leverage from our growing scale in the UK as we continue to fully integrate acquisition s from prior years and capitalize on efficiencies in our processes.

Relating to our Brazil segment on a same-store basis. As Earl mentioned, the total industry new unit volume decrease roughly 28% from the first quarter of 2015.

Despite this our total revenues remain roughly flat on a local currency basis and we only recognized a small adjusted loss for the quarter, which is seasonally the weakest for the year in Brazil.

Despite the continued local economic challenges that we expect will persist throughout 2016, we still project our Brazil segment to generate a small pre-tax profit for the year. Turning to our consolidated liquidity and capital structure.

As of March 31, we had $22.4 million of cash on hand and another $134.1 million that is invested in our floorplan offset accounts, bringing immediately available funds to a total of $156.5 million.

With regards to our real estate investment portfolio, as of March 31st, we owned roughly $810 million of land and buildings, which represents 46% of our dealership locations. To finance these holdings, we have a total of $389 million of real estate debt outstanding, excluding capital leases.

Year-to-date, we have repurchased approximately 1.5 million shares of our outstanding stock at an average price of roughly $55 per share for a total of $81.9 million. These repurchases equate to a 6.6% reduction from our year-end diluted share count of 22.6 million shares.

As of April 27th, we have approximately 21.3 million diluted shares outstanding and $68.1 million remaining on our Board authorized share repurchase program. While we will continue to look for acquisitions, we still believe that our current share price offers a very attractive alternative for capital allocation.

Therefore any potential acquisitions would need to offer a very attractive return on investment opportunity for us. Also during the first quarter, we used $5.1 million to pay dividends of $0.22 per share, an increase of 10% per share over the first quarter a year ago.

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 Web site. With that, I'll now turn back over to Earl..

Thanks, John. Related to our corporate development efforts, as previously announced, the company acquired the Spire Group in the U.K., at the beginning of February. This group consists of 15 franchises and is expected to generate $575 million in annual revenues. The company has also added four franchises in Brazil during the month of April.

First BMW have a joint deal in the state of Santa Catarina represents our fifth BMW franchise in Brazil. And the first in the state of Santa Catarina, which is just south of our existing dealership base. The dealership is located adjacent to the recently opened BMW factory.

Second, we opened Land Rover and Jaguar franchises that were granted to us last year by the manufacturer. This franchises are located in the city of Maringa in the state of Paraná. Lastly we opened the new Toyota location in the city of Capote in the state of Sao Paulo.

These three dealerships are expected to generate approximately 20 million in annual revenues bringing total acquired revenues in 2016 to $595 million.

During the quarter the company also disposed the two Nissan franchises in one Piaggio franchise in the state of Sao Paulo and started the termination process on our one remaining Piaggio franchise in Brazil. These four franchises combined in during the rate roughly $35 million in trailing 12 months revenues.

These disposition activity combined with the previously announced disposal of the VW dealership in New Jersey and Toyota dealership in Massachusetts brings our total 2016 disposed revenues to $110 million. We will continue to adjust our dealership portfolio to ensure we are generating appropriate returns for our shareholders.

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

Operator?.

[Operator Instructions] And our first question today comes from Rick Nelson from Stephens. Please go ahead with your question..

I just wanted to follow up on the commentary on the new car margins which is stable and actually improved a bit in the U.S. If you could provide some color around what's happening in premium luxury mid-line and domestic as it relates to the March..

Yes, Rick. This is John Rickel. We were happy to see actually a bit of an increase in our margins for the quarter. The improvements basis that came out of import and we saw some continued pressure in luxury and in domestic..

And the inventory, 85 days, called to get back to 60 days, if you could provide some color where you’re heavy, where you might be light and how the stock sale has effected those numbers?.

Yes, Rick. This is Earl. The inventory excess correlates exactly what the margin information that John just gave you. We basically have too much inventory on everything except Toyota and Honda. So because we don’t have as much inventory pressure on the Japanese imports we've been able to arrest the margin decline, I think that's the biggest factor.

And there maybe another factor that says that couldn’t go any lower, but we've been trying to arrest that margin decline for probably a year, so we finally had a little bit of success. But we have far too much inventory in virtually every brand other than Toyota and Honda.

These stock sale and recall things are not really material to the inventory situation and I think Pete they have some numbers on that..

We did the analysis on U.S. stock sale and 1% of our new vehicle inventories on the stock sale which equates to about 360 total units and as far as the used business it's about 6%. So 743 total units in stock sale, so that's -- these numbers don’t equate to the day supply shift..

The industry seems to be heavy across the board and especially in the premium luxury segment, any signs at all that would mean OEMs cannot scale back on production..

Well just anecdotally Rick I actually talked with top four executives yesterday. They are very well aware of it and they told me they are taking action to adjust, which made me feel good, the other conversation I've had has been with Audi and I know they are very concerned about it.

But those are the only two direct conversations I have had, but I think the numbers are fairly clear, and somewhat overwhelming.

I think it's a little more difficult perhaps on our company because we're so concentrated in these oil impacted areas -- oil price impacted areas and so at the same time some of our retail markets have softened up a bit while, while the production has kept coming.

So, I have to believe that that there'll be some adjustments made on a fairly broad basis..

And finally, speaking of the oil markets, Houston has had quite a bit of flooding there, do you -- it's got to be a near term negative, but do you see that as actually a positive relation to the [indiscernible] for some insurance, reimburse driving new and used car sales?.

No doubt you get -- that we're already seeing a big wave of flood cars come into our services repair shops and we probably lost a couple of days of service business last week because people just weren’t out and about even though we were open, actually by the end of the day Monday which was the day of the floods.

But I also remember vividly we had similar floods last year in the second quarter because I got stuck in my car for eight hours overnight on Memorial Day.

So we actually had a big wave of flood business late May, early June last year, so I expect that is likely to kind of cancel out in the second quarter but yes we -- our shops are filling up quickly with some of these flood vehicles at the moment..

Our next question comes from Pat Archambault from Goldman Sachs. Please go ahead with your question..

A couple of questions just to build up that, for the -- I guess I'll start with the Texas impacts, I think if I'm remembering well you said down 3% collectively, that may have been the oil patch number, can we separate what was the kind of the weather impacts, strike from hail and stuff like that which is also an issue versus just the overall weakness that you saw excluding that event, and then you just -- curious to understand what your view is of how long that overhang could last, I mean the oil prices have comeback somewhat, but I think they're still down quite a bit year-on-year, so since you guys are so close to it, curious to get your perspective there?.

I'll just talk about the kind of the energy price impact in markets which we live in. And that the issue that's hitting these sales in Texas and Oklahoma is simply the restructuring of all these oil and gas companies.

And as they lay people off which continues every day and people don't get raises, they don't get bonuses, the person next to them loses their job, it’s just a massive economic and consumer confidence issue.

Now that said our new vehicle sales in Houston, we held a 1% decrease for the quarter, so we're fighting it pretty well, but I attend a lot of meetings and I'm various Boards with these oil company executives and they still have quite a way to go in restructuring their balance sheet and that's what happening now.

So, I think the general consensus at the moment is that we might start to see some light late this year. Now that assumes that the oil price doesn't crater back to 30 or something, but the real issue is they're restructuring their companies and there is job losses and consumer confident issues during this process.

So, we are not at the end in that yet, they're still unfolding every day, it’s in the newspapers everyday throughout Texas and Oklahoma. Now that said it does appear that at least in some markets people still need cars because the average age of the car park is quite old, there is -- some of this business is shifting into the used car market.

And actually some of these energy markets are used car businesses up significantly..

On your other question is, they're really -- the weather it was kind of, at in point of time I wouldn't point to any of our sales issues being weather related at this point in time..

Just building on that, yes I mean I was bit surprised to hear you when you said, when you were describing the inventory issues by brand, that there were issues pretty much everywhere except for Toyota and Honda as you said.

If you look at some of the data, it seems like at least until recently trucks have also been in pretty good shape inventory wise, so this seems to be a little bit of a change right, we're all used to thinking that pickup trucks and SUVs -- full-fledged SUVs are kind of healthy and tighten those plants are over utilized, but it seems that that has changed, that maybe kind of related to the oil patch or is there something broader there and maybe a little more troubling about that segment as well?.

I think this has been progressive, but our truck bay supply is still probably a full 20 days below our car day supply. So relatively speaking, the truck business from a sales aspect is still stronger and our inventories are still significantly lower on truck. So the lower fuel prices are continuing to strengthen the truck part of the business..

Got it. Okay. I’ll leave it there and just get back in the queue at this time..

Our next question comes from David Lim from Wells Fargo Securities. Please go ahead with your question..

Just wanted to dive a little bit more on the Honda and Toyota.

Is there some sort of strategy that maybe Honda and Toyota is partaking in order to make sure that their inventory levels are whittled down? Is there something that you guys could dimensionalize if it had to do with maybe some incentive actions or production cuts? Just a little bit more detail there would be helpful..

David, its Earl. I can’t really speak exactly to what their strategy is, but over history both of those brands have always been sensitive to making a supreme effort to balancing supply and demand. So I think that’s in their DNA. And so I think that, I just what I would expect from those brands..

Outside of the energy states and I’m just going to ask bluntly, are you seeing any kind of weakness on the fringes with the consumer perhaps retail sales in Q1 was really, really weak it seems like most of the solid gain year-over-year in the quarter was due to fleet deliveries, but I wanted to get an idea outside of Texas, because it has some cost transfer, because of energy if you are seeing anything?.

No, I don’t really see weakness outside of the energy belt. David I’d say people are reacting to the fact just not growing as significantly as it had been in recent years. So when it’s flat without it only grow 1% or 2% or 3%, I think it feels for a lot of people like it’s just very slow.

But I wouldn’t say I have seen any big consumer confidence crisis anywhere outside of the energy impacted market. .

Got you. And then my final question, if you would is, assuming its flattish environment. Can you sort of bucket areas where you could achieve EPS growth on a year-over-year basis where it be new used parts and service F&I SG&A to growth.

If you could sort of bucket that probably in an order of what have the greatest impact versus the least impact, if you would..

Certainly David, I would think that the best example is our performance this quarter. We have known for about a year that we were going to some point have some pretty severe oil price headwinds in our key markets. And so we’ve been trying to pull on those used car and service level for quite a while and we’re starting to get some traction on that.

So servicing used cars is the best way for us to do that. And I still believe there is a bit of upside for us and F&I but clearly not to the same degree that we’ve been continue to exploit parts and services and used car part of our business.

And now I think there is another obvious area that’s financially damaging us and that’s the high levels of inventory. So we’ve got it to a lot of work on that immediately with that cost us millions of dollars. .

Thank you so much..

Our next question comes from Brad Hoselton from KeyBanc. Please go ahead with your question..

First of all, just want to look at, I mean your used car improvement obviously outpaced your new car improvements on a same-store basis and so just unit sales.

I’m wondering what’s driving that, is there something taking place within the company that you’re changing something to allow you to perform better on the used car side?.

Probably three factors in that and we’ve had, we’ve been outpacing the market on used vehicle sales growth or probably more than a year. So I would say there is an operational improvement component within that, which is primarily I think some management changes we made in recent years.

But the other issues I would say are supply, there is a lot more used cars available to us in the market. As I think all of know from offlead sources and so forth. And the third component, I think is that there is some price elasticity and I think when there is some economic pressure on consumers and they need a car due to the age of the car whatever.

That used vehicle tends to be a good alternative for them just based on a lower costs and a better cost value equation for some people. So I think those are the three components..

And then April sales wise. Can you kind of and I think you might have answer this in previous question, I apologize if you did. But how are sales trending in April just kind of broadly across your business.

Have you see any material uptake or decrease in kind of pace of like vehicle sales and specifically the U.S.?.

In terms of the U.S. I really haven’t seen any material change in the market.

I think there was a lot of consternation in March because of the Easter shift when you look at it year-over-year and now there is more days in April, so maybe the numbers will be a little more favorable when we look at them in April and I haven’t seen any movement in terms of strength or weakness. .

And then kind of more actually kind of more longer term broad strategic question, you are obviously growing your presence in Brazil, I've been in this industry for 20 years and Brazil kind of always seems to be the emerging market that never quite mergers.

Certainly from a parts supplier standpoint many of them are kind of retracting a bit from their operations in South America.

The dealership model I think lend itself to maybe more flexibility and more opportunity than does the part supply models, so my question is, how are you thinking about Brazil? Obviously you are growing there, do you -- why is it that you think it may be a very good opportunity for you?.

Well that three years in goal Brazil was our marker was bigger than Germany, almost 4 million units per year and now at the moment it’s more like 2.2 million. So it's kind of cuts almost in half, but there is no doubt that the market will get back to 4 million and then probably head north.

It’s just a function of math with a population of over 200 million people, no public transportation and a very low density of car ownership. We’re just handling that business quite deliberately like we built the UK business over the years, and we are not injecting any significant amount of money down there, we are rebalancing what we do have.

And we believe that -- and part of our strategy wise to be known as the most attractive Auto Retailer in Brazil we think we are on the way to doing that. BMW requested us to be the dealer adjacent to their factory, Mercedes has made the same request of us.

So we are just going to strength in the core business we have this business is about brands and people so as we make these adjustments to the brands moving from Piaggio and expanding with BMW and Toyota and Jaguar, Land Rover we’re building a stronger core business so we’ll be able to take advantage of when the market does recover.

It is an incredibly around this political situation which has to be solved before the economic situation can be address. But history tells us these markets go up just as fast as they go down..

Fair enough. Thank you very much. I appreciate that..

And our next question comes from James Albertine from Stifel. Please go ahead with your question..

Wanted to ask on the used side, I know the questions come up the few times, you provided some good detail, we appreciate that.

Just what percentage of your used business right now would you say is running in terms of the certified pre-owned percentage and if you give us sort of either a sequential or a year-over-year trend there that would be helpful. .

It's actually drops a bit, it's about 28% now. It has been running 30% to 33% and I think that's a function of just increased supply in the market, supply of cars available..

As it relates to that off lease supply you alluded to earlier, just looking at Manhattan using a blunt instrument arguably, it does seem like truck prices are still quite high and probably doing well with respect to residuals, cars, the opposite.

Could you share with us of the off lease vehicle that come back to your dealer, how many on a percentage basis you end up retaining for sale versus those that you would just elect to push back to the OEM or ultimately the auction..

Well most the OEMs at least in the luxury brand world have targets for us and incentives for us to take a certain percent of our off lease vehicles and we generally achieve those.

So I would say we accept the vast majority of them for now but our footprint is not one that's in big leasing areas, we lease about 16% of our total sales, and Texas and Oklahoma are not trajectory big lease markets.

So I would expect if you are in the north east you might have trouble taking all the off lease vehicles back because leasing is so prevalent there, as big in California, as big in Florida. So it's not a big issue for us, we tend to take a very high percentage of these vehicles they’re good for us in terms of being able to retail. .

So, if I could paraphrase your response it sounds like you are going to source more than sort of the average dealer outside of Texas, from either trades or auctions or some combination there off is that fair?.

Yeah that too, we get about two-thirds of our used vehicle supply from trading and it's a little bit below that right now, but that's pretty consistent for us and there probably will be more lease vehicles available, so that may go up a little bit but it's not anything that we would anticipate materially impacting our business. .

Okay, great thanks.

And if I may sneak one more on the credit side, if Pete could give us maybe a view of, if you think about the non-prime and below segments of the auto lending universe, any shifting that’s going on there, more or less aggressive on trying to attract customers or as it relates to conversions, just sort of any incremental update there on the fourth quarter would be -- and if you can share on for the year-to-date trends in 2016 that would be helpful?.

So, Jamie as you know we've had a strategy to consolidate our lender base, I think we've done a great job with in the name of leverage. The opportunities with our lenders and we haven't seen any changes sequentially or year-over-year, it continues to be a favorable credit market for us and our consumers, our banks are performing very well.

John and I met with the majority of them at NADA [ph] over the last -- at the end of February. So, as far as we can tell that the lending situation continues to remain very favorable..

And our next question comes from Bill Armstrong from C.L. King and Associates. Please go ahead with your question..

On the U.S.

gross profit per unit improvements, sounds like most of it came from the import, could you guys maybe quantify what the improvement was in import versus the presumed decrease in luxury and domestic and could you also maybe discuss the stair step programs that you saw in the domestics during the quarter?.

I'll talk through the stair steps, while John is trying to see if can find some data on your gross profit question. As the stair steps are -- the stair step programs are everywhere across the Board now and they've grown, they've even grown in the last year or so, which is not helpful to anyone when you're trying to fight this margin compression.

And of course a high inventory doesn't contribute to arresting the margin compression either, but I would say the prevalence of these stair step programs is greater than ever and not something that most retailers are going to tell you is beneficial..

Bill this is John, on your question on the gross profit as we said the biggest change we saw was on import, it actually improved about a 136 bucks a unit and the offset was basically in domestic was down about a 100 and luxury was down about 80. And since we're obviously heavier on imports, there's a mix among ends up favorable in total..

Back to the CPL question, you're presumably -- I know a lot of your business Texas and other markets, you don't do -- you don't have a heavy lease component, but in the markets where you do a lot of leases, I guess on the Coast, presumably you're going to get a lot more lease returns coming in if you have and already and those units normally tend to be good candidates to certify and turn around CPL, do you see that CPL business growing maybe as we move through this year and next?.

I think it is possible then it will grow again for that exact reason, yes that's a very valid point. And I think it's true..

So, you're not seeing that yet though?.

No, we haven't seen in this quarter and of course it's also skewed towards luxury brands, because you lease more of the luxury brands and the higher percentage of your used vehicle sales in the luxury brand business are CPL. so some of it is brands makes as well..

And our next question comes from John Murphy from Bank of America Merrill Lynch. Please go ahead with your question..

Do you think -- first question on strength of parts and service in the U.S.

and what do you think is driving that and if that'll continue for some time to come and it looks like -- in your commentary you said you had hired 8.4% more tax, will you have to go out and hire a lot more techs, so you have to build more service base, trying to understand the capacity utilization there and what we might need to respond to respond to the strength in parts and service?.

As we remodel and build new facilities, it generally includes capacity expansion but it's not really a capacity issue in terms of growing our service business.

And we measure our service productivity and we have some that are full up and some that are 80% or 85%, but it's quite easy to do it in shift and half or two shifts, if you have more business and you can run through in a normal day, so very seldom is the physical capacity in terms of number of service base going to put a lid on our business, it's much more human element and now that it's also part availability element in many of these recalls, we have work waiting to be done if we can get parts as well..

And then just second question on SG&A in UK came down a lot in the quarter, I'm just curious as you build further scale over there, what do you think the SG&A and the gross could get to in UK because it's obviously a little bit higher than the U.S.?.

I'm not sure, I can give you a good target on SG&A, but our goal has always been John to get to an operating margin of 3% in the UK and we're 2.5. This is best we've ever done, so maybe if we did some math we could kind of tell you what the SG&A would be if we got to 3% operating margin.

But clearly it’s a couple of hundred basis points lower than what we achieved at 74.5 or there about this quarter. So the scale will certainly benefit us. But that’s kind of how we’ve been looking at is trying to get 3% operating margin..

Okay. But --..

John Rickel here, I just add, there are some few structural impairment to get all the way to U.S. levels. It tends to be less of the F&I income, which is obviously we’ve got a 100% margin stuff, which is really helpful, there is less of that over there for a variety of reasons.

Your rent tends to be a bit more expensive and we tend to be just a little less overall gross margin. But I think Earl is right that something in the low-70s is probably not a bad overall target overtime..

Okay. And then just lastly, I mean if you look at the repurchases year-to-date and you’ll be more aggressive and you have been sort of traditionally obviously the stock is a huge opportunity where it sits right now.

How much more aggressive you think you can get on buybacks and how much more room you have on the balance sheet? I relates you might need to get incremental authorization, but given where the stock it that sounds like almost giving just curious on the balance sheet side that where you think capacity is potentially to a lot more chunky buybacks or?.

John, this is John Rickel. I mean the target we’ve said out there that we want to try to leave with our total ramp adjusted leverage that’s kind of four times or less. We were under that at the end of the quarter were 3.86. So they’re still room on the balance sheet.

As you say the stock we thought was an incredible values in the first quarter and we stepped up the repurchase we got 68 million left on the repurchase authorization. And certainly have balance sheet capacity can to do all of that and then some. So let us work on that piece and then when we get you that we’ll give you an update..

Great. Thank you very much..

And our next question comes from Paresh Jain from Morgan Stanley. Please go ahead with your question..

First question on UK, really good volume strength there.

Any color on what is driving share gain despite tougher comps and how much more room do you have still throughput?.

Still throughout this is John Rickel. I think I gets back to the question that John Murphy was asking. We think there is a bit more if we’re going to get to that 3% longer term goal on operating margin, some of that going to come out of SG&A.

As for basically the volume gains, I think it just continues to be great execution by our management team there..

Got it. And just little more color on Texas and going beyond new vehicle sales. First, any color on gross profit and net profit performance in that region and when you think about used vehicle demand.

Is that being driven by consumers trading down or more driven by share gains?.

Relative to the color on the profit impact on the energy market. It’s actually all across the board. Although our sales are only down about 1% in Houston, our profits there down almost 10%. But we have markets like Oklahoma where we’re continuing to slightly grow our profit due to strong used vehicle performance.

So the profit to kind of all over the Board, but probably the most pressures is on the Houston market which is nearing double-digit profit drop. And I’m sorry, what was the other part of the question..

Used vehicle demand is that being driven by consumers trading down, you just seeing more share gains?.

Well, will you say trading down, I think these, I’m not sure, if exactly what that means. But my interpretation would be there are some customers who maybe a year or two ago had entered the market whether it had been shopping and buy new and in this situation they are buying used that the way I kind of see it..

Right. Thanks for the additional color. And finally one last if I may and I’m sorry are probably hopped on the call a little bit late. In light of the tiered performance and exposure to Texas, as unit performance in U.S. was very, very impressive.

Any big buckets to highlight?.

No, I think things are actually very consistent, but with the emerging markets with being sticky and outside it still a good U.S. Auto market. So we’re doing quite well in the Northeastern U.S. and California and outside of the Gulf Coast in the Southeast.

So I think the market still generally strong on an absolute basis, but there is a lot of reactions to the fact that it’s not growing like it has in the last four years. I think there is a lot of strength outside the energy market..

Let me add to that kind of specific on the SG&A, I think we made good progress on the advertising costs. Done a good job controlling there.

The areas of opportunity for us as Earl alluded to is there is a lot of ancillary costs that come with having too much inventory and you kind of -- the big thing we’ve got our flow through, normally we would have expected 40%-ish flow through, and we clearly didn’t deliver that this quarter is a lot of higher insurance costs that go with that much inventory and there’s a lot of additional costs right now around loner vehicles, because everybody we’ve got out at loners as we are waiting some of these parts coming on the safety recall.

So we think they’re actually continues to be more opportunities leverage and SG&A as we go forward in the year but those are kind of the two headwinds if you will for this quarter..

And our next question comes from Michael Montani from Evercore ISI. Please go ahead with your question..

Well just wondering if you can give some additional color about what happen with days inventory during the quarter how did January and February progress if you could and then also in the comments that you could get to 60 days by the end of next quarter.

What kind of sales through rate does that kind of assume and also what kind of GPU trends would you anticipate in order to do that?.

Mike. This is John Rickel. Basically we saw a similar pattern on the inventory this year as you would from the last year. Traditionally you are going to build a bid of inventory in January and February as you come into this spring selling season, so days’ supply at the end of February ’16 was at 94 days’ supply, same as we were in February of 2015.

We just didn’t sell down quite as much in March as we did in March of last year. So some of that was I think maybe this Easter weekend shift was maybe a piece of it and some orders there has just been some extra supply as Earl has explained so. I think that's really kind of the story on days’ supply.

Our assumption on margins is I think we’ve got a good job of fine stability and we’re thinking kind of that 17 to 50 level is the assumption about the use for rest of the year on new margins..

Okay, great. That's certainly helps for context there. I guess if I could just follow up John on cash flow on the deck you provide a 135 million or less I think of CapEx for the year. Can you give any corresponding cash flow I had been more like 80 million or 90 million, but that was a little bit less on CapEx than I was looking for to..

I can't give you full year cash flow because that would imply a profit forecast which we are not going to do, happy to work with you on the CapEx piece, but in overall cash flow is going to have a profitability assumption and we’re not going to get into that game..

Our next question comes from Steve McManus from Sidoti & Company. Please go ahead with your question..

As to the first one very strong growth in the UK, I just wanted to see where are you seeing a lot of that growth and maybe how much was acquisition related during the quarter?.

Well, the key growth metrics we gave you were same-store and just kind of 13% and it seems that it takes us quite of that longer to integrate and improves the performance of our acquisitions in the UK, so we are continuing to get leverage from Audi dealerships we bought several years ago and then about 15 or 16 months ago we bought three BMW dealerships up around the Cambridge area and those are starting to produce much better now.

So it's really harvesting some of the previous investments we made.

This new acquisition is only 60 days old and it has a lot of potential and probably half the stores already performed very well and that's can take us a year or two to get the other ones up to the level that we will be able to achieve, but we are basically continuing to improve the existing businesses we've had and some of them we've had for one or two years and they are still staring to pay dividends..

Okay. And then looking at the apartment service margins in the UK bit lower than the U.S.

should we expect room for improvement there, is there anything worth noting causing the difference between the UK and the U.S.?.

This is John Rickel. I think those levels are kind of what I would continue to model. We will continue to focus on growing same-store revenue, but there are some structural differences, reimbursement rates on warranty, things like that that just make it a bit of a different business in the UK then the U.S..

And one thing I guess I failed to mention as we actually have four Ford businesses in the UK and they have continually performed better and better and even though most of our businesses are luxury brand in the UK I believe we had a record first quarter with those Ford business.

They continue to improve also and there is -- that by nature it's a lower margin business, but it's actually ended up being a very, very valuable business for our company..

Okay. And then as a last one just looking at the some of the FNI penetration chart in the presentation. It seems like a few of the programs offered in the U.S., not currently offered in the UK, even more so in Brazil.

Any plans for a push to roll out some of those new projects in either a region?.

So this is Pete DeLongchamps. In the UK, Mark [Indiscernible] has done a marvelous job of trying to integrate some of our programs.

Not every product is applicable in the UK and as far as Brazil it's certainly an areas of opportunity for us and it's something that we know we can improve on and there is measures in place to get that done with the operating team there..

Okay, great. Thanks a lot guys. I appreciate it..

And our final question today comes from David Whiston from Morningstar. Please go ahead with your question..

Couple of things on each area of the company. First earlier in the Q&A you were talking about how there are customers in the oil market who few years ago would have bought new, are now buying used.

Do you think it’s also specifically true for the full size pickup truck customer?.

Sure, yes, and in fact one of the best business is in our markets are used pickup trucks.

In fact the biggest issue there is they are always in a short supply, you don't see a lot of leases on pickup trucks, pickup trucks don't give pumping into rental car companies, people who buy trucks keep them long time, so the used truck business is always good and very price sensitive in Texas and Oklahoma..

And in Brazil you talked about good parts and service business offsetting a lot of the severe headwind in new, how difficult is it to get a Brazilian consumer to go the dealer for service versus an American?.

I would say very difficult in the volume brands, but we're somewhat fortunate, our brands tend to be luxury brands and so that loyalty is good and there's not a lot of aftermarket expertise in repairing BMWs and Land Rover's and such. And then our volume brands are more and more tending to be Toyota and Honda and just like the U.S.

those customers are quite loyal in terms of service retention and brands loyalties to the dealership. So, if we were selling the big Ford volume brands which were not Fiat, Volkswagen, Ford and General Motors, I believe service retention would be a much more challenging proposition in Brazil..

And the last question is on the UK, with the acquisition volume was up a lot. GPU was down double digit percentages, that possibly is something you think you can improve as you integrate the large acquisition or are you all about just getting volume to increase new IO..

No, some of that is the form of the exchange rate impact and some of that is the mix piece that are all alluded to the growth in the Ford stores. There is some margin pressure on the luxury brands, you got a similar issue going on in the UK that you have in the U.S., there's over supply.

It’s one of the areas where BMW and Audi have kind of diverted some of their production that was headed for either China or Russia. So there's a piece of that, but I don't think this as severe as what the U.S. dollar impact will look like because of the FX impact..

And ladies and gentlemen, this concludes our question-and-answer session. This time I'd like to turn the conference over to Mr. Hesterberg for any closing remarks..

Thanks everyone for joining us for the day. We look forward to updating you on our second quarter earnings call in July. Have a good day..

And ladies and gentlemen, the conference is now concluded. We do thank you for attending today's presentation. You may now disconnect your telephone lines..