Automotive News World Congress Speech

Earl J. Hesterberg, President and CEO

Group 1 Automotive, Inc.

“Maximizing Human Capital Through Technology”

Automotive News World Congress Speech

January 17, 2006

Slide 1: Title

It is always a pleasure to support these great Automotive News World Congress events put on by Ed, Keith, Peter and their team, especially when they hold them in these resort locations at such a lovely time of the year.

After 30 years with Ford, Toyota, and Nissan in North America and Europe, last April I became the CEO of Group 1 Automotive in Houston, Texas.

I want to begin by giving you a little background on Group 1 so you will understand the framework for some of my comments here this morning.

Slide 2: Group 1

Group 1 went public in late 1997 and we’re currently number 361 on the Fortune 500 list. The company consists of 94 automotive retail dealerships across the United States with a revenue run rate of $6.1 billion. In 2005, we anticipate selling approximately 200,000 new and used retail vehicles and servicing 1.6 million vehicles.

Slide 3: Brand Diversity

Our brand mix is approximately 60% import and 40% domestic brands with 29% of our unit sales coming from Toyota and Lexus and 19% derived from Ford Motor Company brands.

Slide 4: Revenue Growth History

As Group1 1 has grown into a $6 billion company, it has become increasingly difficult to continue to operate with a variety of operating philosophies and procedures. While our extensive level of automotive experience and local market knowledge are indeed competitive advantages, a $6 billion company needs to drive significant operating and cost efficiencies and to aggressively leverage its size.

Slide 5: Prior Platforms

Our company has historically been very decentralized which has generally resulted in us retaining both the management and employees enlisted by the owners selling their businesses to Group 1.

Slide 6: Regionalization

We have begun the process of streamlining our operations at Group 1 Automotive as we are transitioning from 12 local Platform Presidents to a management structure that will be driven by 5 Regional Vice Presidents. These 5 Regional Vice Presidents have more than 150 years of automotive experience which is impressive by anyone’s standard.

Slide 7: Industry Evolution

About 8 years ago when public automobile retailers were emerging in the United States, or approximately 10 years before that in the United Kingdom, many industry observers believed that highly experienced automotive retail people would cease to be a critical part of the auto retailing business.

There were visions of large chains of national automotive retailers that would sell all brands of cars and trucks side by side in a manner similar to a ‘Big Box’ retailer with a buying process as simple as renting a video tape or DVD from your local video rental outlet. Oh yes, and these largest retailers would be purchasing large quantities of uniquely specified vehicles from manufacturers at deep discounts compared to privately owned smaller or individual dealers.

Slide 8: Progress

While clearly some progress has been made on cost efficiencies and the standardization of processes, I am still trying to find that dealership where I can easily browse through all of the major brands and complete my automobile purchase in a matter of minutes. And, I continue to wait for my large shipment of Group 1 Limited Edition Toyota Camry’s at a special discount from Toyota Motor Sales, USA.

I can assure you that we have a long way to go as an industry to realize that one-stop shopping vision, but the industry is taking steps to become more efficient and reduce the marketing and distribution costs of vehicles that total more than 30% of the retail price of a vehicle.

Slide 9: Differentiator

You can assume that I am not receiving specially priced large shipments of Toyota vehicles from the factory, so what is it that would differentiate our Group 1 Automotive Toyota dealerships from those of the other public auto retailers or privately owned Toyota stores? We all buy the same vehicles at the same prices, our locations are generally specified by the manufacturers and virtually all of our buildings are built to the auto manufacturer’s specifications. So clearly the differentiator today is people.

Slide 10: The Right Tools

Now the people factor is only part of what the investment community wants to hear, but they are also looking for an automotive retailing operation that is as standardized and predictable as purchasing milk, a CD or a washing machine from a ‘Big Box’ retailer. Of course, people don’t trade-in old milk, finance CD’s with 72 monthly payments, or crash their washing machines into other people’s washing machines – so our type of retailing is a bit more complex

Slide 11: Technology Empowerment

Much of what we are doing at Group 1 today is working to retain our talented, experienced management and operating employees by keeping them engaged and empowered while streamlining our processes to be more effective and efficient. As you might expect, this quickly brings into play the technology factor.

There is clearly more technology than any business can make effective use of today, so our goal is to focus on how and what technology we can use to support our processes, control our assets, and make our empowered decision makers more objective and cost effective.

Slide 12: UV Inventory

And, our business model works best with same store revenue growth, so we want to use technology to grow revenue, as well as drive out costs.

There are a couple of examples I can give without revealing significant competitive information. The first area we decided to bolster with more advanced technology support is the area of used vehicle sales. At any given time we have over $100 million dollars of used vehicle inventory which supports our annual sales of more than 100,000 used cars and trucks per year. The traditional dealership used car department has not historically been inundated with statistical analysis or reams of data.

Slide 13: UV – Management Tools

This is the department that makes it difficult for automobile dealerships to operate like a mass retailer. The only relevant statistical data used by most used vehicle managers has been how old a given used vehicle is at any point in time. This is the part of our business that has historically been run by gut feel, instinct and the experience the manager has acquired over time.

Many used vehicle department managers are completely averse to being confronted with things such as data, statistics, or historical analysis. Unfortunately, few of these highly experienced used vehicle managers knew that full size sport utility vehicles could drop as much as $5,000 in value in one month following the fuel price increases in the wake of Hurricane Katrina this past summer. The used vehicle business is a real time business. One thing computers can provide today is real time data. They can also provide historical data and data far beyond a single dealership.

Slide 14: UV - CMS

There are several used vehicle computer management systems available on the market and we have elected to install American Auto Exchange computer software in all of our dealerships. Our goal with this effort is to not only increase the transparency and control of this potentially depreciating asset, but also organize and leverage the decision making process for our highly-experienced local market decision makers.

Slide 15: UV Transactions

On a daily basis we sell several hundred new vehicles and appraise 700 - 800 used vehicles. We estimate that we appraise at least one car every minute of every 12 hour day. This means we have a non-stop purchasing organization at work that can either represent a great business opportunity or business risk.

Slide 16: AAX

This new computer software enables us to increase the transparency and control of this purchasing function. It also provides us with the ability to:

·  Monitor our real time used vehicle inventory value versus latest guide book or auction prices

·  Monitor used vehicle appraisal closing rates

·  Identify vehicles with a high probability of retail sale at the time of trade-in appraisal

·  Adjust used vehicle stocking practices to reflect local market historical demand

·  Sell from an expanded number of dealership used vehicle inventories across 5 geographic regions

Without getting into too much detail, you should be able to get a feel for the changing landscape in the used vehicle world as the used car manager’s world opens up to a higher level of transparency, data, analysis, and statistically driven recommendations.

The major point here is that we are using this type of technology to standardize our processes, to leverage higher levels of performance and professionalism from our key operational people in the market, and to give us the ability to hold those people accountable for their performance. But, make no mistake – our goal is to sell more used vehicles! This process and control enhancement is strictly an enabler to selling more with less risk.

Slide 17: P&S

Growing parts and service sales is also fundamental to our strategy and you can see how this revenue has grown at Group 1. You’ll note that we’re steadily increasing our stall count capacity in our dealerships. This is one of our most profitable areas, and therefore, extremely important to our growth. However, there is always room for improvement, particularly with the right tools.

Slide 18: Service Marketing

Another good example of where we are using the latest technology to leverage our field management and revenue generating personnel is in the service department. Traditionally, service marketing has lagged vehicle marketing in terms of sophistication. The traditional mechanism for service marketing and merchandising has been direct mail campaigns. In recent years email and other electronic media have grown in prominence as “CRM”, or customer relationship management software, has become the ”buzz word” in the automotive retail industry.

Again, what we are doing is not rocket science and is not something available only to large dealer groups. However, our size does enable us to realize substantial acquisition cost and operational benefits from these latest tools.

Slide 19: Auto Revenue

First is the use of “Auto Revenue,” an industry specialist in electronic databases and electronic marketing. Although we continue with a base level of traditional direct mail advertising, we are now able to become much more precise with the targeting, timing, and promotional offers sent to a high percentage of our customer base. Auto Revenue consolidates and cleanses our customer email database which we aggressively cultivate from our new and used vehicle operations, as well as from within our service departments. Rather than rely on monthly massive mail drops with approximate 2% response rates, we can stage weekly and daily email marketing reminders and special offers. Further, we can send custom offers to our customers on a daily basis. These daily email blasts can be used to more effectively load our repair shops by advertising the availability of specific services that have open capacity. A manager can simply send an instant email special out to customers for a front-end alignment when the front-end alignment machine has open capacity. This type of daily email advertising can be so effective that managers have actually learned to limit the number of offers as to not over load the shop with cut-rate priced jobs during peak business periods.

Slide 20: Emails Collected

By using Auto Revenue as a core marketing tool, we are now capturing over 20,000 new email addresses per month, a substantial increase from when we started the program. We expect that we will triple our collected amounts in 2006.

In our first year we saved over $1 million in postage cost compared to our previous year’s spending. We are now sending over 200,000 service marketing emails per month with a response rate of 4 to 5 times that of what we normally achieve with direct mail.

These email communications have driven as much as $3.4 million in parts and service revenues in a single month. That’s grown 300% from the start of 2005.

Slide 21: Service Drive Technology

Additionally, when these customers visit our service departments, they will find some of our service advisors equipped with the latest in technology, such as wireless, write-up PC tablets that enable them to sell additional services from a prescribed menu as they walk around the actual vehicle itself. Again, we are using technology to leverage our human assets to become more professional and greater revenue generators.

Slide 22: F&I Technology

One final example of technology we’re incorporating to increase administrative efficiencies and improve cash flow is in our Finance Insurance department. Through our close partnership with financial institutions we were exposed very early to a variety of productivity and gross profit enhancing tools in the F&I world. With tools like Route One and DealerTrack all dealers can make use of technology in the F&I departments. These tools allow dealers to improve transaction speed and accuracy. In addition the ability to transmit contract information electronically to financing sources reduces paperwork and errors, improves productivity and speeds the funding of our contracts in transit. In some cases we can actually receive funding for contracts on the same day that they are written and approved.

Technology in the F&I departments also contributes to consistent practices and compliance issues. When the DMS, credit process, and menu selling system all cross populate information between the steps of the sale, consistent processes can be developed. For example, the use of electronic menus in the finance department gives the customers fully transparent disclosure of a variety of finance and after-market products while actually improving sales and moving them through the F&I process more expediently.