Asbury Automotive Group Inc (ABG) 2002 Q3 法說會逐字稿

Good day and welcome, everyone, to the Asbury Automotive Group third quarter 2002 earnings results conference call. Today's call is being recorded. At this time for opening remarks and introductions I'd like to turn the call over to the Director of Investor Relations, Miss Stacy Yonkis (phonetic) Please go ahead, Ma'am.

Thank you. Good morning, everyone. Thanks for joining us today.

As you know, earlier this morning Asbury reported its third quarter earnings results. You all should have received a copy of the release. The press release is posted on our website, www.asburyauto.com. If anyone does not have access to the Internet or if you want a copy of the release faxed or emailed to you, please contact Miss Judy Cello (phonetic) at our office. Judy's number is 203-356-4414. She will make sure you get a copy right away.

Before we get started, I want to remind everyone that our comments today will include forward-looking statements that are subject to certain risks and uncertainties which are detailed in our IPO perspective, as well as other filings with the SEC.

The purpose of today's call is to discuss Asbury's third quarter results, as well as to provide you with an outlook for the balance of the fiscal year and beyond. Our agenda today will be as follows. Ken Gilman, our President and CEO, will begin the call with a few summary comments and an overview of Asbury's operating performance for the quarter, then Tom Gilman, our CFO will dig into some of the specifics behind the numbers. After that, Ken will get back on the call and offer a few closing remarks and we'll open it up for your questions and answers.

Ken?

Thanks, Stacy. Good morning to everyone.

Before we start the official part of the conference call, I'd like to take a few minutes of your time to address the current market perception of Asbury shares, as well as those of our publicly traded peers. To say that we are disappointed with the current multiple of our stock that our stock is trading at would be an understatement. I'm sure you are not surprised to hear that we consider our stock, and the entire automotive retailing sector for that matter, to be significantly undervalued from any number of perspectives.

As you know, Asbury and the rest of the peer group are trading at single-digit PEs, far but low any reasonable projection of our sustainable long term growth rates. History has clearly proven the resiliency of the earnings models of automotive retailers, yet the market continues to discount it. In fact, this past quarter we spent a lot of time on the road meeting with our investors trying to gain some additional perspective on why the market continues to underestimate the sector.

Several things became clear to us. The most obvious is that current valuations in the sector are being driven by the perception that the bottom is about to fall out of new vehicle automotive sales, that we will see a downturn in new vehicle sales comparable to what this industry last saw 20 years ago in the early 1980s. During those years, I would remind you, the US was faced with a brutal combination of recession, high oil prices, and interest rates approaching 20 percent. Could that kind of perfect storm occur again and cause car sales to collapse? Anything could happen, but I would point out to you, that no serious economist is projecting any combination of those events.

The costs of buying and owning an automobile today are at record 25-year lows, driven by low interest rates, income gains, and low oil prices on an inflation-adjusted basis. Even if interest rates were to increase, it is far from clear that car sales would drop sharply unless double-digit levels were reached. As we have seen over the last couple of years, the OEMs have a very strong interest in sustaining unit sales and they will do everything they can to keep their factories running.

Let me remind you, without getting too preachy, that these incentive programs affect their profit margins, not ours, yet the sector's multiples suffer each and every time there is negative news about an OEM. Asbury, and our direct peers, are being valued as very cyclical companies, as if we were on the verge of a major profit collapse, a real misconception in my opinion. Given that our business model is well balanced by parts and service, used vehicle, finance and insurance cash flows.

But even if new car sales were to decline, the automotive retailing sector is not nearly as vulnerable as a casual observer might think. The scenarios under which earnings would fall significantly short of their current levels appear to us to be fairly farfetched for several reasons.

First, even if new vehicle sales dropped precipitously our profits would not given our diversified profit streams.

Second, given everything that we know today about current trends in consumer spending, new vehicle sales should not reach the lows of the 1980s because of the OEMs' motivations to move vehicles, vehicle affordability, and the outlook for interest rates, not to mention some of the megatrends we, and the other auto retailers, are benefiting from, which have not gotten, in my opinion, the investor attention they deserve.

These trends include demographic trends, higher vehicle purchase frequency across every age group, the steadily growing US population of drivers, and the growing level of high-quality, new vehicle introductions. All these should support a structural bottom, or lower vehicle sales rates, at levels above what the naysayers and pessimists may be expecting.

As I noted, our business model has a consistently growing true annuity element, the parts and service business. This part of the business, in Asbury's case, at least, is 11 percent of sales, but a whopping 30 percent of dealership gross profit. And should continue to grow as a direct result of the ever increasing number and sophistication of all types of vehicles on the road as well as the continued aging of the US vehicle population.

Factually, current estimates put 60 percent of the vehicles on the road today at over 6 years old and about 38 percent at over 10 years old. These vehicles need to be serviced, with the franchise dealers continuing to gain market share, three percent in the last five years alone.

And let's not forget brand mix. In every downturn, new vehicle downturn, some brands suffer more than others but some brands, luxury and mid-line imports, continue to grow and gain share. It's an Asbury plug, but it's absolutely true. That's where Asbury's brand mix is a big plus, with our focus on luxury and mid line franchises.

Asbury, and the other automotive retailers, have certainly demonstrated our respective and collective ability to generate strong historical and current profits throughout economic cycles. The big question that you should be asking here, is whether we can continue to maintain and increase our earnings per share at meaningful rates. To me, the answer is clearly, yes.

In fact, after we go through our numbers for the quarter, I'm going to be talking about what we have presented in the press release, the detailed road map for how Asbury plans to achieve our EPS goals for the next fiscal year. I have spoken with investors about Asbury's 15 percent annual earnings per share growth rate, laid out our plans for getting there, and I'm confident we'll achieve it, both next year, and the years beyond 2003.

Now with that as background, I'd like to turn to the details of today's press release.

Once again on the quarter, we delivered record operating earnings from our core businesses, one penny ahead of the Street consensus, excluding expenses related to our Price 1 pilot program and the required reaudit of our 2000 and 2001 results by our new auditors, Deloitte and Touche.

Earnings per share from continuing operations, excluding these items, were 50 cents per share, including these items, reported earnings of 44 cents per share. Our overall revenue for the quarter was approximately 1.2 billion, up 12.8 percent from a year ago on a GAAP basis, and up 7.5 percent on a same-store basis. Results were solid for each of the major pieces of our business. New vehicles, used vehicles, parts and service and F&I.

Total gross profit increased 10.2 percent, reflecting a slight decline in our new vehicle margin rate. But as most of you know, new vehicles account for a relatively small portion, less than 31 percent of our total gross profits. We achieved a strong increase in our used vehicle retail margin, which we think is pretty impressive in view of the current market dynamics in the used sector. Our parts and service margin was also higher once again this quarter.

And we're particularly pleased with our 19 percent increase in finance and insurance income. Including an 11 percent increase in our F&I PVR or per vehicle retail. Our retail gross profit on a same store basis, which you have all heard me say, is what we believe is the most meaningful metric out there, was up 6.6 percent for the quarter, which compares quite well to 39.5 percent year-over-year increase in the second quarter.

Overall, we are pleased with the quarter's results. There is really a lot of good news here, as our core businesses remain strong and are performing well overall. All of our key trends are essentially in line with the goals we established at the time of our IPO. Executing on the business model, and meeting those objectives we laid out during the road show, are a constant focus. We are successfully executing on our plans and with the Bob Baker acquisition, which we announced in August, we will have more than met our standard goal for acquisitions this year.

Before I turn the call over to Tom, I want to say a few words about our Price 1 pilot program. I imagine that there may be some questions regarding the quarter's results for the pilot. Let me start by saying, while we are not exactly pleased with the results, we are not particularly surprised. We have said from day one that this is like any other new business pilot, a learning experience, and the unexpected comes with the territory.

Initial losses are to be expected in the case of Price 1 and we have been saddled with some high up-front expenses. We have learned a lot from the program, which is really what we set out to do. Learnings that are applicable to our core business, as well as, of course, Price 1 itself. Today we understand a great deal more about Price 1's target customer and we have moved aggressively to adjust our inventory and price points accordingly.

Having said that, with the adjustments we made over the summer, we have seen some improvement in Price 1 sales and gross margins during September and October, so we are somewhat encouraged. We will obviously be monitoring the situation very closely in the months ahead.

But I will tell that you our basic optimism regarding the opportunities inherent in Price 1 has not changed. We continue to believe the costs and risks are modest, relative to the potential upside, should this concept work. As I see it, the results from Price 1are either going to get significantly better by sometime in 2003, or Price 1 is going to be gone, it's as simple as that. The costs associated with Price 1 were 4 cents a share in the 3rd quarter, and expected to be 3 cents a share in the 4th quarter.

Now I'd like to turn the call over to Tom to review our 3rd quarter numbers in greater detail. Tom? Thanks, Ken, and good morning, everyone.

Included in the press release you will find an income statement and a balance sheet for the 3rd quarter, as well as a selected data sheet, which details some of the specific metrics we use to track our performance.

As Ken mentioned, I will discuss Price 1 and the audit fees in a few minutes, but first let's talk about our core business. Overall, we had a terrific quarter, as our core operations continued to generate record sales, gross profits, and income. In total, the company's revenue increased 12.8 percent, and gross profit rose 10.2 percent. The same-store retail revenue was up 6.8 percent, while same-store gross retail profit was up 6.1 percent.

Now starting with new vehicles, our new retail units were up 2338 units, or 9.5 percent from a year ago. Our average selling price was up 3.4 percent. This led to an increase in retail vehicle revenues of about 13.2 percent. However, while or gross profits dollars were up nearly 9 percent, our margin decreased from 8.3 percent to 8.0 percent.

Our gross profit per unit was consistent year over year, but the average vehicle selling price was up about $900, due to heavy mix of trucks and SUVs. On a same-store basis, our new retail units increased 6.5 percent. New retail revenues increased 9.6 percent, and new gross profit was up 5.2 percent.

Now regarding used vehicles, our used retail units increased 2.5 percent overall, and used revenues rose 7.9 percent, with gross profits up 13 percent. The average used selling price increased $764 per unit, or 5.3 percent. Our used retail gross margin improved to 12.2 percent from 11.7 percent in the 3rd quarter last year. On a same-store basis, used retail units were down 5.3 percent, and used revenues were essentially flat, but used gross profit increased 6.1 percent.

During the quarter we incurred higher than expected wholesale losses, due to the difficult auction pricing environment. Wholesale losses for the quarter were 2.1 million, up 1.2 million from a year ago.

In parts, service and collision repair, revenues increased 6.4 percent and the related gross profit rose 8.4 percent. We actually saw an increase in warranty work during the quarter. We continued our emphasis on increasing customer pay business and we expanded our product offerings, all of which paid off nicely.

Our parts and service margin moved up almost a full point to 52.1 percent. On a same store basis, parts and service revenue increased 3.1 percent and gross profit moved up 4.8 percent.

In finance and insurance, we achieved an 18.7 percent increase in gross, resulting in an 11.2 percent increase in our F&I PVR to $793 for the quarter. The strong growth in our F&I business is being driven by our focus on improving underperforming platforms and improving penetration on service contracts. On a same store basis, F&I revenues were up 14.1 percent from a year ago.

Our SG&A for the quarter was up 11.2 percent rom a year ago. SG&A during the quarter, of course, was impacted by the costs associated with Price 1 and the reaudit fee. Without those two, the increase would have been only 9.1 percent.

Now let's talk about the reaudit. During the month of August, the auditing standards board, ASB, issued a draft interpretation of Statement of Auditing Standard #79 to give auditors guidance when opining on companies whose previously issued financial statements were audited by a firm that has ceased to exist. In this interpretation, the ASB details five conditions that would cause a company's previously issued financial statements to be reaudited.

One of those conditions is the reporting of discontinued operations. As a result of this interpretation, the recent dissolution of Anderson, and the fact that the company adopted FAS 144, the reporting of discontinued operations in 2002, we have decided to engage our current auditor, Deloitte & Touche to reaudit fiscal years 2000 and 2001. Consequently, we have accrued a million dollars of non-recurring audit fees, or 2 cents per share, during this quarter.

The reason we are taking the pro-active approach is that we're very comfortable with the prior year financial statements. You may recall that during the IPO process, the company was reviewed extensively by the SEC and, therefore, there has no reason to believe that the reaudit will result in any material change in our financial statements.

Continuing along, depreciation and amortization was 5.7 million compared with 7.9 million a year ago, driven in large part by the elimination of goodwill amortization which was 2.5 million in last year's third quarter. Income from operations totaled 38.8 million compared with 33.8 million last year, up 15 percent, or 7 percent after adjusting for goodwill amortization. Our operating margin was 3.2 percent versus 3.1 percent last year.

The total non-floor plan interest expense declined 4.7 percent from a year ago, reflecting lower average borrowings during the current quarter. Floor plan interest was down 27 percent from a year ago, reflecting lower LIBOR rates, and floor plan credits more than absorbed our floor plan interest expense for the quarter.

Pre-tax income was 24.7 million, up 37 percent on a reported basis from the prior year, and 21 percent after adjusting for goodwill amortization. Net income from continuing operations for the quarter, excluding costs associated with the company's Price 1 pilot program, and a one-time expense for auditing services, was 16.9 million, or 50 cents per diluted share. Reported GAAP net earnings from continuing operations including those expenses was 14.9, or 44 cents per share.

Income from continuing operations before taxes, minority interest, goodwill amortization a year ago, and the items mentioned above, increased 7.6 million, or 37.2 percent from last year's third quarter. EBITDA for the quarter was 40.6 million, up 11 percent from 36.5 million. EBITDA margin was 3.3 percent, just slightly lower than last year's 3.4 percent, but again, the EBITDA includes the effect of Price 1 and the audit.

And now a few balance sheet highlights. As many of you know, Asbury continues to implement its cash management system on a national basis. We are ahead of previous schedule in which we thought that the system would be completed by the end of 2003. It now looks as if it would be completed this year.

During the year, we made significant progress sweeping cash from the field and using it to pay down debt. By the end of the third quarter we paid down 30 million of our senior secured debt. Excluding floor plan, our debt-to-total capitalization ratio decreased to 51 percent from 54 percent in the previous quarter. Our expectation is that, when fully implemented, we will have swept at least 50 million from the platforms to reduce debt.

In the acquisition facility, we currently have about $480 million of unused borrowing capacity. That's the dry powder available for possible acquisitions.

At the end of the quarter, 44 percent of our non-floor plan debt, including mortgages was at floating interest rates. Based on this debt structure, we estimate that a 100 basis point change in interest rates on our non-floor plan variable debt would affect our earnings per share by approximately 4 cents on an annual basis.

Out day supply in inventory at the end of the quarter was 50 days on new vehicles, and 40 days on used vehicles. Our inventories were reduced 28 million during the quarter, as new vehicles came down 24 million, and used came down by 4.

Total cap ex spending for the first nine months of the year was 38.1 million, and we're still targeting approximately 60 million for the full year.

Now I'd like to turn it back over to Ken for some additional remarks. Thanks, Tom.

I'd like to address the performance of our platforms around the country in a bit more detail. The bottom line is, as we noted in the second quarter, our largest platforms, taken together, continue to perform very well, but the performance does differentiate among these platforms.

Jacksonville, our biggest platform by far, has continued to excel and is really hitting on all cylinders. Basically raising the bar for our other platforms in terms of growth and profitability. Operating income in Jacksonville grew at a very strong double-digit rate for the quarter and was significantly above our expectations. Another notable achievement, especially in the current environment, is the fact that Jacksonville achieved a large increase in its used vehicle gross margin.

Among our next three largest platforms, Tampa, Atlanta, and North Carolina, Atlanta and North Carolina both achieved double-digit gains in operating income but Tampa was down slightly with a low single-digit decrease. Tampa's performance remains strong overall, but it has struggled a bit with its used vehicle business and had some expense issues, which we are addressing.

Not surprisingly, for a company with such diverse geographic exposures, we also have a couple of platforms which are not performing up to our expectations. Texas remains particularly soft for us and we continue to see that, mainly in our two Honda and two Acura stores, which we think are simply struggling along with many of the bigger Honda and Acura franchises in the larger Texas markets. But that doesn't mean we are complacent with the situation or doing nothing about it. We have made some adjustments, and the platform has adopted some of our best practice programs that have worked so well in our other parts of the country. And the encouraging news here is, that sequentially at least, we have seen sizable improvement over the last month or two.

Our Portland platform also had another challenging quarter, with results below our expectations, mainly because of the single large dealership that continues to struggle. We have come to the conclusion that part of the problem is that this location has some fundamental structural problems related to its physical layout which we are going to be addressing shortly.

We have also recently opened some independent used car dealerships in Portland. These dealerships, five thus far, are being called Thomason Select Stores. They are located on the outer perimeter of the city but in the Portland media markets so as to take advantage of our brand advertising. These stores are located on the outer perimeter of the city, but in the Portland media markets, to take advantage of our brand advertising. These stores are really capturing a new market for us, clearly the concept of Thomason Select falls right in line with our plans to build our used car business.

As I mentioned earlier, we're particularly pleased with the growth at Asbury's F&I income so far this year, with double digit increased in our F&I PVR, both for the quarter, and year to date. We believe that our F& I programs are state-of-the-art across the board, including menu selling and our preferred lender initiative, which is a win-win for our customers and Asbury. And as we mentioned on our conference call last quarter, we are requiring that all of our F&I employees at the platform level become certified by the American Association of Finance Professionals.

That means that more than 200 Asbury employees are going through a training program in certification testing, which demonstrates their detailed understanding of the range of finance and insurance products available, the circumstances under which each may be appropriate for a particular customer, and the ethical considerations that should govern all of their interactions with our customers. All but two of our platforms have already completed this process.

Our values require that we treat customers professionally and fairly every time we interact with them. Which of course, in addition to being the right behavior, can only lead to increased customer satisfaction, repeat business and great word of mouth referrals. We continue to view F&I, along with our parts and service operations, as key service components of our business model through which we can drive consistent and sustainable organic growth for years to come.

As we noted in our press release, we have updated our 2002 guidance to reflect the impact of Price 1 and the one-time audit expense, so you can get a more transparent measure on how our core businesses are doing. We now expect that our earnings per share from core operations will be $1.66, a penny above our previous estimates. We also now expect Price 1 will cost us about 14 cents a share for the year. Net-net for the full year on a reported basis, including Price 1 and the audit expense, as Tom talked about, we expect earnings per share to be about $1.50. As I mentioned earlier, I still believe that Price 1 presents a very compelling risk/reward trade-off, should the concept take off.

Now looking forward to 2003, which I spoke a bit about, conceptually,at the beginning of the call, although we are not yet providing formal guidance, as we are still in the midst of our planning process, we are prepared to share with you our internal goals for the year based on what we believe is a very reasonable set of assumptions. Particularly in view of the depressed valuations of Asbury and the other auto retailers, we thought it would be useful to give you our view of some of the very real possible 2003 scenarios.

We would anticipate announcing official guidance for 2003 where our year end 2002 results are released. However, on a preliminary basis, I would like to share with you the earnings goals we have set internally for 2003 and more specifically, from an operational perspective, how we plan to get there.

Earlier in the call, I mentioned we spent a lot of time this quarter speaking with investors. And I can tell you, a frequent request from investors was for management to provide some visibility into our planning process to allow for some sort of sensitivity analysis on their part. So therefore today, we are establishing and publicly announcing our earnings goal, to demonstrate to investor,s both the clarity of our business model, and Asbury's plans to grow the business in a consistent quality manner. Our intention is to disclose, on a regular basis during 2003, operational results and other data so that investors can measure and assess Asbury's progress in achieving our goals for the year.

That said, here's our road map, in effect, to how Asbury could achieve earnings per share in the range between $1.80 and $1.90 next year. First, we are starting with earnings per share guidance for 2002 of $1.50, as defined just a minute ago, including Price 1 costs and a one-time audit expense.

For our modeling purposes, we assume that 2003 new life vehicle sales would be down from 2002 to a range of 16.5 million vehicles, to as low as 15 million vehicles. While we in no way believe that 2003 will be a 15 million unit year, we went that deep in our planning to demonstrate the resiliency of our business model. That stability and earnings per share growth are very realistic expectations, even in the face of a substantial decline in new vehicle sales, a decline that could be as much as 10 percent. We are factoring in organic income growth, including parts and service revenue, and F&I income of 4 to 8 percent, generating 4 to 8 cents per share. This outcome reflects a range of possibilities regarding used car sales.

Assuming our announced acquisitions close, the full year inclusion of Bob Baker, as well as previously announced (indiscernible) acquisitions, should add between 12 and 17 cents per share. Synergies identified, to date, related to these acquisitions, could add another 1 to 3 cents per share. We anticipate executing a $15 million share repurchase program, which should add 5 to 8 cents per share. We expect the losses from Price 1 to come down, leading to improvement of 5 to 7 cents per share. That assumes we stay with Price 1.

And lastly, the exclusion of non-recurring IPO expense, as an audit related cost, of 4 cents per share in 2002.

Look, this is not a glamorous business nor is it incredibly complex. It's retail and services, making customers happy one customer at a time. It's truly a straight forward, very clear business model, that's easy to understand and delivers consistent results through various economic cycles. It's really that simple.

With that, we now would like to open the call up to questions. Operator?

Thank you, Mr. Gilman.

The question-and-answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key, followed by the digit 1 on your touch-tone telephone. If you are on a speaker phone, please be sure your mute function is turned off, to allow the signal to reach our equipment. We will proceed in the order that you signal. Then we'll take as many questions as time permits. Once again, that is Star 1 to ask a question. We'll pause just a moment to assemble our roster.

And we'll take our first question from Rick Nelson, Stephens.

Thank you. Good morning.

Good morning, Rick.

Can you, Ken, talk about the outlook for the used vehicle business as that relates to your fourth quarter and '03 guidance?

I was trying to be a little vague as it relates to '03 because we have demonstrated -- looking back in history, that used vehicle sales are counter cyclical to GDP, so we would expect used sales, absent anything happening in the market, to be flat next year. We did, we think, quite well with used vehicle sales, given the impact that new has had on them, and the margins that we earned on used in the third quarter.

We took our lumps in wholesale, as well, given the fact that we saw record drops in the auction prices paid for vehicles in July and August. That said, we're looking for consistent performance in the fourth quarter relative to the third in used, and we are being cautious relative to 2003.

Negative comps in the fourth quarter and then flat next year?

I would think consistent with the third and about flat next year. And we have given ourselves some room in that organic growth of 4 to 8 percent next year, to have a little wiggle room on the used. So it could still decline a little bit. And we would still make the numbers that we have indicated that support the $1.80 to $1.90 range.

Good. When do you expect the Baker acquisition to close, and are there any manufacturer approval issues?

Uhm, we expect the Baker acquisition to close early in 2003. There are always things to work out with manufacturers. We have 10 franchises in six stores and everybody wants to jockey for separate facilities and a number of other things. So these all get worked out over time. And we don't expect to have any difficulty. As I said, we are going to close in early '03.

Is that later than you were anticipating earlier?

I think I would have preferred -- given a perfect schedule and everything being what it is, I would have liked to have closed December 1. So I think, given the realities of the marketplace, a very clean-cutoff at year end is preferable for us. It makes it easier for everyone's tax returns and so forth. And so, uhm, very early in '03 is the best way to do it.

Okay. Any comments on the tone of business here in October as it relates to September?

Sure. Business in October is, best we can tell, a little stronger than September. It's obviously going to be down to October of a year ago. October last year was the strongest car month in recorded history. And so we're not surprised to see negative comps against that month. That notwithstanding, it's better than September.

Good. Thank you.

We'll take our next question from Matt Fassler, Goldman Sachs.

Thanks a lot, good morning.

Good morning, Matt.

Couple of questions. Given that Price 1, interesting as it might be, doesn't appear to be strategic versus everything else you are doing and the sources of your real earnings and given that it appears as if the financials of that business are deteriorating versus your expectations, and having a material impact on your net income, uhm, what -- why hold on to it? Why not just shut it down today?

Well, knowing that I like you as much as I do, I won't -- I won't argue with you. Most of the cash burn is behind us. So that when you look at the cost of keeping it open, whether it's another day or another four or five months, there's not much cash costs to it. I would say that it could be strategic, if it works. If it works, meaning, uhm, can we get enough traffic from the Wal-Mart store to prove the retail proposition?

What we've learned so far, and to put some -- to flesh out why we think we've learned a lot, we know we could sell a lot of cars, vehicles at a low gross. That didn't make any money. In September, we sold fewer vehicles than August. But at a gross that go forward makes sense. We will sell more vehicles at that same gross or higher in October. So that when you look at the monthly loss at the store level, it's gone down every month, June to July to August to September, and October will be lower.

We have a slightly higher cost structure that we're address right now because, I think, that what we -- if we keep it, we'll roll it out slower, so we don't need the same kind of infrastructure that we had planned. And we're burning off those high front-end fixed costs when we had to put the lease in place.

So I don't -- while not arguing whether it is strategic, we think it would differentiate Asbury if it works. If it doesn't work, we will close it, and the cash costs go forward between now and either success, or closing, are not that great. And so we think it's worthwhile.

Obviously, you know, 14 cents a share is about, I don't know, 8 percent of our earnings. Because it's, call it, or term it, a one time, I don't consider it material. What I do think is, that when you are developing a new business, you have to be willing to take some risks. And if those risks don't in any way compromise the business, in other words they're not bet the business risks, I think it's incumbent upon prudent management to do that.

And so again, I'm not being defensive. We're trying -- we think we weren't clear enough in terms of where those earnings were relative to our core operations and analysts' estimates go forward. That's the reason why we've displayed them differently in our press release, and that was based upon input we received from investors over the quarter. We think that we are either going to turn it around or close it and it won't cost us a whole lot more either way to delay. So I'm respectful of your position. Uhm, stay tuned.

Fair enough. Just following up, I realize, obviously, that if you make the model work, you could have a terrific business, over time. What's your thinking in terms of either the timing of achieving your goals, or in terms of the magnitude of losses beyond which even the promise of the business, you know, would (indiscernible) worth the company as well?

The way I feel about it is we are actually looking at traffic that's coming across the threshold from the Wal-Mart stores and if we feel that that traffic will not sustain higher levels of sales, we are going to take a very dim view of the business. We are not going to pick -- make a commitment to a second market, which has been approved for to us go to a second market, until next year, because we are not going to make any more fixed capital commitments to this business until we demonstrate the retail proposition in the Houston market.

Just one more quick one, if I may, on Price 1. Having visited one of the stores in the southwestern area of Houston, it looked to me like there wasn't much of an opportunity to really publicize your presence. And I'm wondering -- at least in that one unit. I have not seen all of them. I'm wondering whether that's characteristic of all the stores and what kind of flexibility you have, really, to market Price 1, you know, to -- just to make sure that the -- that Wal-Mart's clientele really knows you're there.

Well, it's a real challenge, because what happens is, if you look at marketing costs, and you allocate them to the non-Wal-Mart customers, it gets very expensive on a per-customer basis. So what we really have to do is determine whether, in fact, the premise of being located on the Wal-Mart property works or know.

In other words, if two-thirds of your traffic of your ups come from Wal-Mart, and you're going to start marketing, you are putting all those marketing dollars on increasing the one-third that come off lot. And that becomes very expensive. So what we have to do is determine whether, in fact, the Wal-Mart proposition works or not, in terms of generating traffic, and take a business decision accordingly.

Gotcha. Away from Price 1, if you look at your capital structure and you think about the decision to buy back stock, does that have any impact on -- at all, on acquisition plans next year, or on your flexibility to -- to move forward with that growth program?

No. The $15 million, when the press release comes out it will be indicated, that's the amount we can buy back under our senior subordinated debt. It's a small amount of money. It's a fraction of what we're going to generate in terms of surplus cash from the cash management program so, in no way, we wouldn't compromise future growth by buying back shares. So we are buying back -- our plan is to buy back as much as we can under our indenture and then hopefully, people won't be asking us why we don't buy stock back anymore, and then we'll be going forward growing the business.

And will you be free to launch this program relatively soon?

We have some paperwork to do under all the new rules, 16-B, whatever. And as soon as that's done, we have a window period we have to go through, which is three days. We would expect to put out our press release, hopefully today, announcing the program officially. But we wanted to make sure that all the paperwork is dialed up, because we have to live within these new stringent rules.

Fair enough. Thank you very much.

Our pleasure, Matt.

We'll go next to Jerry Marks, Raymond James.

Good morning.

Good morning, Jerry.

Just to kind of follow up on the share buy-back, I guess that 15 million, although it's pretty small, would all be kind of incremental? It's not part of your, you know, current capital outlay plans? Is that kind of the right way to look -- it's not like some of the other companies where they are going to ship back and forth between acquisitions and share repurchases?

No. It's 15 million, it's all we can do under our indenture. It doesn't crimp our cash availability and we're going to be able to do both. We are not like some of the other large ones that don't have -- they are going to go back and forth, one of the other publicly traded companies, uhm, has talked about it that way.

Okay. But I mean, essentially, is that your guys' cash management program is generating cash beyond what you initially thought it was going to?

Yes, in at an accelerated pace. We thought we weren't going to get this done until the end of next year. But what we've found is, through a lot of good work with the banks we have been able to do far more than that and we are going to do more in the fourth quarter, as well.

Okay. And then sorry, two quick other questions. First of all, regarding the audit, that is going to be done by year end, then?

It will be done by the time by issue K. So it will be done by the finalization of the year end.

Okay. And, uhm, the Thomason Select group, could you expand a little bit on that exactly what that is? That's not like another new growth initiative like the Price 1 concept was in the used market, was it or.... ?

No. We have a good -- in Portland, we have a good trade name under Thomason, that's been highly advertised over the years. We have felt that used cars in the right place off our franchise dealerships could prove successful and we decided to test it in Portland, and it appears to be working.

Thanks a lot

You're welcome.

Our next question comes from Michael Millman, Salomon Smith Barney.

Thank you.

Good morning, Michael.

How are you?

Good.

Ken, since you brought up the topic, maybe we'll push a little bit on -- on sort of the perfect storm, and look at it another way, sort of, not held the way you are looking at '03 numbers. At what -- what kind of market, actually, say, would you be looking at before you got to breakeven? And secondly, sort of unrelated but maybe -- actually related, could you tell us, at this point, how much of your fixed costs is covered by the P&S, and then give us some breakdown? You mentioned, but maybe you could you give us a little more detail on the breakdown of P&S between collision, between warranty, between -- ?

You are going to have to go a little slower on that, Mike. It's a long list.

Now you know the problem we have when you're reading the script.

I know, but you can do replay on it. [ Laughter ]

Where are we?

Well, let's see. On SAR, we went as low as 15 million and said we wouldn't go below the dollar rating and that's our expectation, 15 million. To tell you where it goes to have zero earnings per share, I haven't got it. That is -- that is a really, really low number. It's, uhm, a number that's ridiculously low. We haven't bothered to calculate it. We don't think that it would go that low.

And by the way, that 15 million, when we did our calculation, we applied that straight 10 percent decline to our numbers, as well, and you know, that with our brand mix, if you look at the last decline in vehicle sales, meaningful decline, which is '89, '90, and '91, our brands, for the first 10 percent, didn't decline at all in the main. Th luxury and mid-line imports. It was only until '91, that second 10, did it decline. So we would expect if SAR went down a full 10 percent, we would only go down about 3 or 4 percent.

3 or 4 percent now in new car sales? Or earnings?

Our expectations is, if the past is prologue, if SAR were to go down 10 percent, given our brand mix, it would go down 3 or 4. But what we did in our numbers, that the guidance we talked about -- I wouldn't call it guidance yet until we get into '03, but the $1.80 or $1.90 range, and the components that make that up, we used a straight -- in effect, a 10 percent decline in SAR, to 15 million, and we declined our sales by 10 percent on new car sales. In terms of our overall expenses, 55 percent of our expenses, excluding sales comp, are covered by our fixed gross.

And could you give us some detail of P&S in terms of collision, in terms of warranty, in terms of after-market, and what kind of growth you have seen in those areas, and what kind of margins you're receiving in those areas?

Well, we have not disclosed that. What we've disclosed is in total. And I think the number that we talked about in the quarter was. 52.1 percent as a margin. Let me give you a little bit of that. What we're seeing in the parts and service and collision repair business... The increased gross was primarily driven by, as I mentioned an increase in customer pay business, and new product offerings.

We have a product called Mach products which we sell in the dealerships, that's done extremely well for us. We also are seeing increases in our quick lube business, as well. And we saw that in the quarter.

As far as the service side of it, as I mentioned, we saw an increase in the warranty work, which was a reversal of the trend that we saw in the second quarter. And as far as the body shop business goes, we have had some labor rate increases from insurance companies and we've gotten a little bit more efficient on our paint and materials that we use in the body shops, and those are all contributing to improvements in gross.

Okay, because some people are saying that the insurance companies are going more to totaling, which is hurting the body shop.

We do see some of that, absolutely. But around the margins, what that does is takes the volume down. But around the margins, you can operationally improve.

And I guess the final on the P&S is what -- can you give us some rough rate of increase in coverage of fixed costs? You know, when can you get to 60 percent, for example? What would it take to get to 60 from 55?

You know, Michael, we don't have that right now. We can call you this afternoon and give it to you.

Okay that would be great.

All right.

Thank you.

We'll take our next question from (indiscernible) J.P. Morgan.

Hi, it's actually Carla Cassella from J.P. Morgan.

Hi, Carla.

How are you?

Good.

I'm wondering on the gross margin side for new vehicles, it came down just slightly, even though you have very strong improvement in gross margin comparables. What's driving the margin decline? Is it different commissions for the salespeople or is it incentives?

Actually, I think it's the higher selling price. What we saw in the quarter was -- you know, this is the quarter where the '02s go out and the '03s go in. And we did a pretty good job of bringing down our '02s, and we had some push for volume, as well, that we did on the new car side. And I think all of those things were a factor in driving our margin down just slightly. If you look at it dollars of gross per vehicle, it's virtually unchanged. What you have is the retail side went up. And that's a little mix. But the gross we're earning per vehicle is the same and that's what caused it.

Okay. Great. Uhm, also, on the, uhm, the used car business, uhm, the (indiscernible) used car business, you doesn't do any service at those centers, do you, the test --

Price 1, no, we don't.

Price 1? Uhm, so is your -- I assume it's a completely different, then, business model in terms of the fixed cost, there is no fixed cost coverage by a fixed operation? It's purely used margins that you would need to cover the fixed cost?

Yes. What you have is, you have margin on the sale of the vehicle and finance and insurance.

Okay. And what would be a typical break even period for -- would you target for a location like that? Because you would be incurring losses until you cover that fixed cost.

I would think, once we open up -- we have a better -- we open a store. Given what we know today, I would think a store could get to a breakeven on a forward basis in about 6 months.

Okay. And just lastly, you mentioned the high initial expenses being why it's generating loss off the bat. And is that purely the rent expense? Are there other initial startup expenses that you need to cover?

Yes. We think the launch curve was a little longer than we thought, getting -- opening up, being ready, and getting the licenses that had some impact. Understanding the proper mix of price points that we need to sell, required some adjustment. Things that are very typical of a startup.

What I would say is the selling proposition, how we treat the customers, how they feel, what they feel about the experience, talk to them afterwards, uhm, they're just delighted with it. So, uhm, all the problems that we have, in terms of making the profit model work, have not shown themselves in front of the customer, so the customer comes in and we delight the customer.

The question is, can we get enough customers now, given the fact that we understand what the proper inventory mix is to make this thing work? So we have worked out all the pluses and minuses, getting the inventories right, but at the end of the day, right now, can -- and there's going to be some minor adjustments, still go forward. Can we get enough customers to cross the threshold to experience Price 1 and buy?

Right

That appears right now to be the biggest challenge. We started off with price points that were too high, we needed to remix it a bit, and we've learned quite a bit, which is to be expected. But right now, we think that we have the mix about right. You can always tinker with the mix in retailing. But that's not holding us back. Right now, it's foot full.

Right.

Tom? Uhm, one of the other things that I think that's important to note when Ken talks about the launch curve is, these stores have been open for a very short period of time. We opened our first store in May. We opened our second store at the beginning of June. Our third store in July. And our fourth store in September. So we now have four stores up and running and they really haven't had a full go yet at what -- or a full running rate, as far as operations go.

Yeah, that makes sense. On -- what I'm trying to get a feel for is if you decide that do you have to exit it, what would it cost you to exit? I mean, would you have still lease payments would you have to pay on the, uhm, the areas, any of the write-offs you might have to take?

There would be some but not much.

Okay.

Not much. The, uhm, we would have to figure out what to do with the buildings, but on a gross basis, we only invested about a million four in all four facilities. And they have been depreciated down by about 300,000. They have some residual value. I don't know what the salvage value is. We have to put the properties back in shape as Wal-Mart parking lots. But besides that, there's not a whole lot. We would have to liquidate the inventory and there would be some losses on the vehicles. But not much. And it would be one-time behind and us.

We didn't incur, on Price 1, a lot of up-front permanent costs. We had up fronted within the test periods, we have some costs. That's why most of the cash burn in the test is behind us. And I don't like to get argumentative. I think that while about 8 percent of our profit this year is meaningful to a year, I think it's de minimus when you look at -- it's all in one year, we are about ready to enter the new year, all things being equal, it's not much given the potential reward.

I think businesses have to be willing to take risks where -- and I don't mean to get preachy here, where it's part of your core expertise if it works. Where it's translates profit directly to cash flow. Where it's not some ephemeral concept. It's really a long-term view, with very short-term costs, if we intend to go forward and if we don't, they are still short-term costs. So I think it was a reasonable bet that I said -- I spoke to folks about before.

We had to do it, when we did it, we couldn't delay it. Given my druthers, I might have wanted to, but that wasn't the option. And so, given that, most of the fixed costs, high fixed costs, are behind us. We've given you the range of what it will decline next year, if we continue to go forward. If we decide to kill it, obviously, the improvements earnings per share would be even greater. I think that one of the other things is that, fundamentally, this is not been a distraction for our core business. Our core business, as you can see from our numbers, continues to excel in, pretty much, every area. So Price 1 isn't a drain on resources, as well.

No, I agree, it's very prudent that you've done it one market, and I like the fact that you also set up a timeframe that, if it doesn't work, you'll kill it. So I think that you're going about it prudently. I just wanted to make sure I have all the facts straight. Thank you.

We'll go next to Eric Selly, Wachovia Securities.

Hey, guys. Good morning.

Hey Eric. How are you?

Doing well, doing well, You guys are making it easy on me with results like this. Basically looking at, you guys are -- your share repurchase plans for next year-- First I wanted to hit what your cash impact of acquisitions are in the 3rd quarter? Hit on that, and then go, what you expect your cash outlays, for acquisitions in the '03 period are.

We expect next year -- The deals we have announced so far would be what we would disburse next year. We could do additional deals. The Baker deal is going to be about 70 million in cash. Tom will feed you, right now, what we have spent so far this year. I would like to continue to spend, just conceptually about 70 to $100 million a year on acquisitions.

I would hope to be able to accelerate that somewhat, if a few things come our way. We're highly selective in the markets we're looking at for platforms. And we're, in terms of total spend, we're not as aggressive as we could be in our existing markets, because we, sort of, like our brand mix with the orientation to luxury and mid-line imports. So we could spend more, we're not going to. Given timing, call it, you know, $70 to $100 million a year is what we would like to spend, that 3 to 500 million or so, of sales, of increases through acquisitions. So when you add it up, next year on a pro forma basis, while not making an official projection, would be, if all these deals that have been announced close, would be over $5 billion and we're still out there looking.

Okay.

Eric, uhm, regarding your question, we had one acquisition in the third quarter. It was a Chrysler store in Atlanta. And we spent 4.8 million on that.

Okay. Great.

Just to -- so that you understand the reason for, that acquisition is more strategic in nature than just buying another store. The manufacturer had come to us and asked us if we would participate in that and allow them to facilitate an alpha point in Atlanta where we would take our Jeep store and combine it with the Chrysler Plymouth store, which is what we did. That freed up a property for us where we could move our Audi store from a poorer location into a larger facility, and so that's going to allow to us do more service work on Audi, as well as have an Alpha point in the heart of Atlanta.

Yeah, that, uhm, and you guys have done that in other markets as well?

Sure, we have.

Okay. And then finally, just a housekeeping, what do you guys expect cap ex to be next year? And then, what's your debt breakout as of the end of the third quarter this year?

I think cap ex, we haven't finished our planning process, but we were thinking it was about 50, but I think it's going to be a little higher, 50 to 60 because of a Lexus facility in Atlanta. We're moving our Marietta store which, was not in the planning horizon. We had to move that store within the next several years and we came across a great piece of ground that cost 8.5 million, and actually we bought that piece of ground. We'll buy it this year. And some of the other cap ex we had planned for this year will slip to next year.

So -- and we may be able to do a second Lexus store move in -- don't know about it yet, in terms of the zoning approvals, in St. Louis. So that could also take it up.

But we're thinking it's going to be 50 to 60, probably closer to 60, uhm, and we will be able to break out in greater detail later on, maintenance cap ex versus factory required image cap ex, and offense cap ex meaning, when you build that Lexus store you are going to get additional vehicle allocations, and you are going to get a very fine return for your money. We did that, of course, on the Roswell store in Atlanta. That's our companion point which we opened in 2000. Just actually took a look at those numbers in connection with going for Board approval on moving the Marietta store and just excellent return on investment. Eric, regarding your question on the long-term debt, we really haven't -- the most significant change, I guess, is the fact that we have swept the cash and paid down the debt. Right now, as you know, we have the subdebt of 250 million. On the credit facility, we have a $550 million capacity. We only have 68 million outstanding. And then we have another 118 million, or another 120 million or so, of mortgages.

Okay.

Okay? We would like to take one more question.

We'll go to Matt Fassler, Goldman Sachs.

Hi, just a couple of follow-up points if I may. Would you be able to quantify, as precisely as you can, just the impact of Price 1 on the different line items? In other words, what the impact was on cost of goods, what the impact was on SG&A and whether there are any other line items that sustained an impact from Price 1?

Primarily, Matt, what you'll find is the predominant amount of costs that are associated with Price 1 is in that SG&A line.

Right. Okay. Second question, do you have a year-ago inventory number? The release has one for year end '01 and then for the third quarter. But do you have a third quarter '01 inventory number?

Yup. That's -- the noise you hear is turning pages. 474.

Great. And finally, what cost of capital are you assuming, as you talked about the accretion from the share repurchase? Which of your credit facilities are you thinking about in terms of the -- well, just what interest rate are you using as you think about the repurchase?

About 5%.

5%. And that would be derived how?

What -- money's costing us.

Yeah, I mean --

Plus an uptick for next year. That's what we're currently spending.

Fair enough. Your marginal borrowing cost on your line, in other words.

Yeah, it's the revolver line.

Okay. That's all I wanted to check. Thank you so much.

On that basis, we would like to offer our thanks to everyone for joining us today. If you have more questions, get in touch with us. Our Investor Relations folks, Stacy in particular, is looking forward to being very busy today. If we don't hear from you, we're looking forward to sharing our fourth quarter results with you sometime early next year. Thank you very much and have a great day.

That does conclude this Asbury Automotive Group conference call. We thank you for your participation. You may disconnect at this time.