Group 1 Q2 profit tumbles 55% on Brazilian problems

Group 1 Automotive Inc. today said its second-quarter net income tumbled 55 percent from a year earlier to $16.9 million, dragged down by a struggling economy in Brazil which accounts for 8 percent of its revenue.

Group 1 remains bullish on Brazil in the long term despite few signs that the country will see an economic rebound before elections there in October, CEO Earl Hesterberg said in a conference call.

Hesterberg ruled out exiting from Brazil, but said Group 1 will adjust its portfolio there over the next six to nine months.

Group 1 also saw weakness in its gross profit per unit on new and used cars in the quarter.

“Our second quarter earnings were significantly impacted by several major factors,” said Hesterberg in a statement. “The Brazilian market deteriorated significantly during the quarter due to political and economic uncertainty, as well as major business disruption from the World Cup event.”

In contrast, he said, “Our U.S. business continues to grow nicely,” with revenue up 10 percent “and increases across all of our major business segments.”

Revenue rose 8 percent to $2.51 billion.

Margin pressures

On an adjusted basis, Group 1’s net income rose 1 percent to $38.5 million. Adjustments included special charges totaling a net $22.1 million, mostly because of an after-tax loss on the redemption of convertible bonds, vs. net charges of $2.4 million a year earlier.

New-vehicle revenues rose 7 percent to $1.47 billion, while revenues from used-vehicle retail sales increased 8 percent to $577.3 million and that from parts and service climbed 9 percent to $283.2 million.

In the United States, the average gross profit on new vehicles remained flat at $1,790, while gross profit on used cars declined 2 percent to $1,714. Hesterberg said margins remain under pressure.

“My impression was the used-car market overall was a little bit softer last quarter,” Hesterberg said. “There was some pressure by manufacturers on new car volume. Much of our weakness was driven by a 20 percent used-car decline in New Jersey and New York.”

Group 1 shares fell as much as 5 percent in early trading today, before rebounding somewhat to close the day at $78.50, a 3 percent decline.

U.S. results

Revenue in the United States rose 10 percent to $2.06 billion.

U.S. sales of new units rose 6 percent overall to 34,685, and 3 percent on a same-store basis, trailing the industrywide growth of 7 percent in the second quarter. Used-vehicle retail sales fell 1 percent to 22,707.

New-vehicle revenue rose 10 percent to $1.19 billion, while gross profits rose 6 percent to $62.1 million

Used-vehicle retail revenue increased 6 percent to $474.1 million, while gross profits rose 2 percent to $38.9 million.

In parts and service, revenue climbed 9 percent to $243.8 million and gross profits increased 10 percent to $131.9 million.

Finance and insurance gross profit per retail unit rose 7 percent to $1,422, and grew 10 percent on a same-store basis to $1,319. 

Overseas

Group 1’s U.K. stores, accounting for 10 percent of total revenue, performed well. Revenues there grew 21 percent to $251.3 million, on a 3 percent gain in units sold, and gross profits jumped 24 percent to $29.5 million.

Hesterberg said the U.K. has a big “low-mileage” used-car business and the new and used market there remains “very strong.”

He added, “We expect a strong September based on the order back up.”

But in Brazil, revenue declined 19 percent, to $199.7 million, as new-vehicle unit sales dropped 22 percent. Gross profits slid 16 percent to $22.8 million.

During the World Cup, “The country pretty much came to a standstill,” Hesterberg said. “We had days where there were no customers in our stores.”

No exit

Despite the company’s problems there, Hesterberg insisted Group 1 will stay the course and not exit Brazil.

“I have absolutely no intention on recommending that we exit from Brazil. The more I work with the country, the more excited I am about its future,” Hesterberg said. “It’s one of the most exciting markets in the world next to China. We have some adjustments we have to make: Cost in the near term.”

Hesterberg said Group 1 might have to “readjust our footprint” there in the future, but things are too unpredictable there to do so in the near term.

It is slashing costs at its 19 dealerships in Brazil and will raise prices in an effort to achieve breakeven during the second half of the year.

“We have to be more aggressive on our cost cutting. Since Monday we’ve eliminated 100 positions,” Hesterberg said. He expects another 150 jobs will be eliminated in the upcoming weeks there, mostly through attrition. “We have no choice but to resize our business.”

“But there are 200 million people there who all need cars,” said Hesterberg. “Somebody’s going to be the best car dealership in Brazil and I’m sure it’ll be Group 1.”

Convertibles

During the quarter, Group 1 restructured its balance sheet by redeeming a large portion of convertible senior notes.

“This should reduce our ongoing diluted share count by approximately 2.2 million shares, which should provide a major benefit to our shareholders in the future,” Hesterberg said.

Group 1 has 153 dealerships worldwide. It ranks No. 3 on the Automotive News list of the top 125 dealership groups in the United States, with retail sales of 155,866 new vehicles and 98,813 used vehicles in 2013.