Asbury Automotive Group Inc (ABG) 2002 Q4 法說會逐字稿

Good day everyone and welcome to the Asbury Automotive Group’s fourth quarter and year end 2002 earnings 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 Stacey Yonkus, Director of Investor Relations. Please go ahead.

Thank you. Good morning everybody. As you know, earlier this morning we reported the fourth year and full year earnings results. You all should have received a copy of the released posted on our website at www.asburyauto.com

Before we get started. I want to remind everyone that our comments will include forward-looking statements that are subject to certain risks and uncertainties that are detailed in the company's IPO perspective as well as other filings we have with the SEC. The purpose of the call is to discuss Asbury’s fourth quarter results and the earnings outlook for '03. Our agenda today will be as follows. Ken Gilman, our President and CEO, will begin the call with a few summary comments and Tom Gilman, our CFO, will review Asbury’s operating performance for the quarter and year. After that, Ken Gilman will offer closing remarks and will open it up for questions and answers. Ken?

Good morning. As Stacy noted, Tom will be discussing the numbers for the fourth quarter in detail in a few minutes. We revised our outlook for the quarter in December, and today's results are in line with guidance. I'd like to provide a little perspective on that as well as where we are as a public company.

First of all, one of the main reasons we revised our numbers in late December was our expenses were out of line with the lower than expected sales volume for the quarter. I want to make it clear to some extent this was a conscience decision on our part. We spent a lot of time during the early part of 2002 building our infrastructure in a quality way. Good people can be hard to find. Even though we have reasonably large sales, we're still a relatively small company.

In today's environment, we cannot let go of good people so we didn't want to rush to cut back after we built a quality team. One thing, suspected that we could easily wind up regretting having reduced our platform headcount as the business proved more resilient than many people expected, and that had been the pattern over the past four years. So we held off in making the cuts, and we paid a price for that. Accordingly, during the first quarter of '03, we began to implement adjustments to staffing levels and certain platforms.

Obviously, it takes a bit of time to feel the full effect of such cuts, as pay plans need to be modified and severance payments need to be made. We anticipate seeing the full effect of these changes in the second quarter.

Operationally, some of our platform CEOs would not have made these if they were still operating as a private company that is paying the salaries out of their own pockets, however, as a public entity with absolute and certain ongoing obligations to our investors, our platform has recognized that they needed to take action, and we have.

We also faced certain cultural changes as a newly minted public company during '02. Challenges hardly unique to Asbury, but challenges nonetheless.

We are in a transition mode from a private company shifting towards the focus of consistent quarterly reporting of our results to Wall Street.

Going public is more than a simple financial transformation, in practical terms, the challenge is at the platform level where we have to sustain the entrepreneurial spirit and drive of the platform while we meet investors expectations. The demands placed on a company by nature of actual public ownership are simply different and are more rigorous in many ways than in a private environment where Asbury was created and grew so successfully. This is reinforced in my mind for the need for heightened disciplines throughout the company and we're going to get the job done.

Throughout 2003, there will be a more uniform focus with our platform management driving the results in a more consistent manner, quarter after quarter, to make sure we meet investors' expectations. It's that simple. With that said, and as most of you are aware, we took on an additional opportunity in '02, our price one used car venture in Houston.

You may recall we embraced this challenge eagerly because we believed and still believe that the potential risk/reward trade-off was very compelling.

The idea that we may be able to quickly establish a presence selling used cars on a significant percentage of Wal-Marts parking lots in the U.S. was obviously very attractive. And not surprisingly for a pilot program, it meant we had to absorb certain up-front costs, although the earnings impact wound up being greater than anticipated.

We continued to believe upside potential of price one offered an attractive risk/reward trade-off, and we remain optimistic. Over the past three months, operating performance has improved month to month. Regarding industry outlook, we expect a reasonably good year in '03, notwithstanding all the geopolitical uncertainties out there.

We have not built into our forecast the effect of a war with Iraq, but there is no denying that auto retailers as an industry face somewhat difficult comparisons this year. With all the zero % financing and cash back incentives provided by the automobile manufacturers in 2002, the push to sustain unit volume to keep those factors humming was certainly intense. But we believe there are still powerful forces at work in '03, not the least of which is that we see no let up on the manufacturers and their incentives, as General Motors came out at the NADA and said directly. And those incentives, as you know, affect the manufacturer's profit margins, not ours. A few more comments on the industry.

New vehicle affordability is the best it's been in several decades, and powerful ongoing demographic trends remain very much in force. In the final analysis, though, it's the quality and appeal of the products we sell that is the key factor which affects our results. And here, I think, the news is particularly good because the new products coming out of this industry are by far the best we've seen in decades, perhaps ever.

The new product pipeline looks particularly exciting in the luxury and midline import sectors which as you know, the bulk of Asbury’s mix is concentrated, so we should be in a relatively strong position.

The bottom line is that for planning purposes, we are continuing to build on a SAR rate of about 16m vehicles a year, and in all likelihood, we think we'll wind up at that level and above, notwithstanding the external factors that could affect the industry and the overall retail environment in the United States. We remain optimist for the near and long-term aspects for Asbury. Later in the call, we will provide some additional guidance for '03. At this point, I'd like to turn the call over to Tom Gilman, our CFO, who will review the numbers for the quarter end in detail.

Good morning everyone.. Included in the press release you will find an income statement and balance sheet for the fourth quarter as well as selected data sheets which detail some of the specific metrics we use to track our performance. There's also annual information there as well.

Before I review the results, I want to update you on the status of the re-audited. Deloitte and Touche has completed the previously announced re-audited of Asbury's financial statements for '01 and '00. It was based on guidance by the auditing standards board for companies with discontinued operations and who's previously issued financial statements were audited by a firm who has ceased to exist. The result of the re-audit is that no prior-year restatements were required. Now, let's talk about the quarter.

As Ken just discussed, we obviously faced some challenges during the quarter related to volume and expense control. The good news is for the first nine months of the year we were tracking closely to our internal plan, and this allowed us to an absorb the price one impact and re-audit fees. Overall, the quarter was a difficult one and it's reflected in the financial results.

For the quarter, the company's revenue decreased 2% compared to the fourth quarter of 2001, and gross profit was essentially flat. On a same-store basis, total retail revenue was down 5.7% for the quarter, while same-store total retail gross profit decreased 3.7% for the quarter.

During the fourth quarter, we were obviously facing some strong comps from the same quarter last year, which was fueled by the onset of heavy incentives post-9/11.

Our new retail units were 22,331 down 8.6% from last, and average selling price was up 4.6%, new retail vehicle revenue was down 4.4%.

Gross margin decreased to 7.9%. On a same-store basis, our new retail units decreased 10.2%. New retail revenue decreased 6.1%, and new gross margin decreased to 7.9%.

Regarding used vehicles for the quarter, our used retail units decreased 7.2%. Our average selling price was up 2.1%, and our used retail vehicle revenues decreased 5.2%. Gross margin remained flat at 11.7%. On a same-store basis, used retail units were down 12.8%. Used revenues decreased 10.1%, and used gross margin decreased slightly to 11.6%.

Wholesale office for the quarter were $900,000, a decrease of 21.1%. So, from a unit-volume perspective, we saw weakness in both new and used. However, parts, service, and collision repair revenues increased 6.1% while gross profit rows 8.3%. During the white we continued to emphasize our customer pay business and expanded product offerings, all of which paid off nicely.

Our parts and sevens margin moved up to 53.6% compared to 52.5% a year ago. On a same-store basis, parts and service revenue increased 3.7% and gross profit was up 5.9%. Also, for the quarter, in finance and insurance, we achieved a 5.4% increase in income resulting in a 14.7% increase in our F&I PVR to $765.

A strong growth in our F&I PVR is primarily from preferred provider programs initiated in '02, as well as the continued success of our manual selling process. Observe a same-store basis F&I up 1.2% from a year ago while the F&I PVR was up 14%. A strong back end business, parts, service and F&I performed as we expected and provided a stable earnings stream in light of weaker vehicle sales. Our operating expenses not including D&A were up 2% from a year ago.

Depreciation and amortization was $6.1m compared with $7.9m a year ago driven at a large part by the elimination from goodwill.

Income from operations totaled $24.8m compared with $27.4m last year, down 9.5%, or 15.8% after adjusting for goodwill amortization.

Our operating margin was 2.3% versus 2.5% last year. Total non-floor plan interest expense declined 7.5% when compared to a year ago, reflecting lower average borrowings during the quarter. Floor-plan interest expense $4.8m compared to $4.4m year ago, reflecting higher inventory levels during the fourth quarter of 2002.

Pretax income was $10.2m, down 5.9% from the prior year and 20.8% after adjusting for goodwill amortization.

Net income from continuing operations for the quarter excluding costs associated with the company's price-one-pilot program was$7.3m or 21 cents per diluted share.

Reporting GAAP net income from continuing operations including price one was $6.2m or 18 cents per share.

EBITDA for the quarter was $26.4m down 16.1% from a year ago, and EBITDA margin was 2.4% versus last year's 2.9%.

So a tough fourth quarter. But let's take a look at 2002 in total. In total, the company's revenue increased 7% during 2002, when compared to the prior year, and gross profit was up 8.2%.

On a same-store basis, retail revenue was up almost 1% for the year, while same-store retail gross profit increased 2.8%.

In 2002, our new retail units were 96,282 up 2.4% from a year ago. Our average selling price was up 4.2%. Overall new vehicle every up in 6.7% and gross margin decreased 0.1%.

On a same store basis, our new retail units decreased 1.9%, but new retail revenues increased 1.9% and gross margin remained essentially the same.

Regarding used vehicles for the year, our used retail units increased 0.7% overall. Our average selling price was up 3.2%. Our used retail vehicle revenues increased 4%. Gross margin increased to 12.0% in spite of a difficult pricing environment in the used market during the second half. On a same-store basis, used retail units were down 7.3%, used revenues decreased 4.1%, but used gross margin increased to 12.1%.

For parts, service, and collision repair, revenues increased 6.9%, while the related gross profit rows 8.9%. Our parts and service margin moved up to 52.8% compared with 51.8% a year ago.

On a same-store basis, parts and service revenue increased 2.4% and gross profit was up 3.5%. For the year in finance and insurance, we had a 13.4% increase in income, resulting in an 11.5% increase in our F&I PVR to $749.

On a same-store basis, F&I revenues were up 8.4% from a year ago, while the F&I PVR was up 12.9%. Our operating expenses not including D&A were up 9.5% from a year ago. Depreciation and amortization was $23.9m compared with $30.3m a year ago, driven in large part by the elimination of goodwill amortization, which was $9.6m last year. Income from operations totaled $132.4m compared with $120m last year, up 10.3%, or 2.1% after adjusting for goodwill amortization.

Our operating margin was 3% versus 2.9% last year. Total non-floor plan interest expense declined 13.6% when compared to a year ago, reflecting lower interest rates during the year.

Floor plan interest expense was $17.9m compared to $26.4m a year ago, due to lower interest rates during 2002.

Pretax income was $76.6m, up 53.5% from the prior year, or 28.8% after adjusting for goodwill amortization. Pro forma net income from continuing operations for the year excluding costs associated with the company's price one pilot program was $50.5m or $1.49 per diluted share. Pro forma net income from continuing operations for the year including price one, was $46.1m or $1.36 per share.

EBITDA for the year was $139.1m, up 8.7% from a year Ago, and EBITDA margin was 3.1%, consistent with the prior year.

So, as you can see, the company finished 2002 with good results in virtually every category, despite the fourth-quarter performance. Regarding the balance sheet, as many of you know, Asbury continues to implement its cash management system on a national basis, and during the year we made significant progress sweeping cash from the field, and then using it to pay down debt.

During the second half of '02, as we consolidated the company's cash from operations, we repaid a total $31.3m of senior secured debt, excluding floor plan, our debt to total capitalization ratio decreased to 52.5% from 60.3% in the same period last year.

In the acquisition facility at year end, we had about $461m of unused borrowing capacity, and that's dry powder available for possible acquisitions, plenty of liquidity.

At the end of the quarter 45.9% 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 of approximately 4 cents on an annual basis.

Our day supply of inventory at the end of the quarter was 73 days on new vehicles and 41 days on used vehicles. Our inventories increased by $109m during the Quarter, primarily driven by a sharp increase in new vehicle inventories consistent with general industry trends at the end of the quarter.

Total capital spending for the year was $57.5m, and we're targeting between $55m and $60m for 2003. And I'd like to turn it over to Ken for some additional remarks.

Thanks, Tom. I'd like to make a few more points, and then we will be happy to take your questions. To reiterate a couple of things Tom noted earlier.

I'd like to point out that although our retail vehicle sales were down for the quarter, roughly in line with the industry trends, we're pleased with the continued robust performance in our parts and service operations and finance and insurance businesses. These businesses provide a strong element of stability to our bottom line.

A 6 point gain in parts and service margin -- the gains in parts and service margin and the in F& I PVR are real accomplishments.

As Tom noted, the increase from these areas enabled to us to achieve higher margins in the quarter of 15.8%, compared to 15.6% a year ago.

I'd like to take a minute or two to give you a quick run down on how our platforms performed during the quarter. The picture is fairly similar to the last couple of calls. Fortunately, our largest platforms taken together continue to perform well. Jacksonville, the number one platform, remains our strongest performer. Even tough comparisons, Jacksonville achieved a mid-single digit increase in operating income for the quarter. Our next three, Atlanta, North Carolina, and Tampa also continued to perform well over all.

North Carolina achieved a strong double digit increase in operating income fueled in part by acquisitions. Tampa was nearly equal to last year's operating income while Atlanta reported a decline in line with the company average.

Our Texas platform continues to struggle reflecting the performance of its Honda and Acura stores which are down in line with the performance of those brands throughout Texas.

Portland had another difficult quarter as well. We continued to work through issues there related to a single large dealership in that market, and we also have had a change this senior management in Portland. Finally, our performance in Arkansas was well below plan, and so we continue to work through some management issues there as well.. Speaking of platforms. I want to provide you with a quick update on the status of Of our proposed acquisition of Bob Baker Auto Group in San Diego. At this point, we continue to move forward with the transaction with the goal of closing the deal at the first half of this year. I will keep you posted as to the developments.

As to the future, from my perspective as CEO, looking across our company, I'm going to be focused on three themes for 2003.

First, delivering earnings inline or above our guidance to the extent that it's possible in view of the macro factors beyond our control. A year from now, I do not want to be on this conference call with you explaining why problems specific to Asbury and ultimately controlled by Asbury as caused us to miss earnings targets. We are going to enforce disciplines across our company and the platforms, and they are going to be delivering consistent results to expectations. So first of three earnings.

Second, we'll continue to build strong factory relays and, yes, I do mean to use the word "continue." I know that some of you may look at the timing of closing the Bob Baker acquisition assuming the manufacturer relations are not what they should be. I can sure you that's not the case, and the trend is clearly improving.. Asbury had issues with manufacturers, but we are building manufacturer relations.

We work closely with the manufacturer setting goals and objectives and remain on track to achieved these goals, again, our approach is to enforce specific factory-oriented disciplines across the company down through the platforms to the specific dealership level.

First, earnings, second, factory relations, and third -- My third focus. The third focus we're driving through the business is going to be on the greatest single asset that this company or any company can have, and it’s the people that we work with day in and day out. Although we've built a strong team thus far, there is room for continued improvement. Having the right people in the right positions, evaluating and measuring performance at all levels and having the discipline to make changes when necessary is truly the only way to ensure success for growth.

For '03, our thoughts and guidance for the year. As you may recall in last quarter's call, we provided you with our roadmap as to what was included in setting our earnings targets for '03.

Our current view is that we expect our earnings per share to be in the range of $1.50 to $1.60, excluding -- and I want to emphasize the word excluding -- the impact of the pending Bob Baker Auto Group acquisition as well as other acquisitions which will close in '03.

Previously, we included the Baker acquisition in the '03 earnings range we discussed. However, so as not to confuse, because we can't give assurances as to the timing or completion of the Baker transaction, we have not included Baker or any other acquisitions that may close in '03 in this earnings range.

On a pro forma annual basis, the full impact of the Baker acquisition is expected to add earnings per share of approximately 13 to 15 cents. Here's an update on the components of our 2003 earnings guidance which we previously talked about and which we are including in terms range I just mentioned.

First, we are starting with earnings per share for '02 that we announced today of $1.36, including price one and our one-time audit expenses. So that's the earnings for '02.

For guidance purposes, we are assuming that '03 new light vehicle sales will be approximately 16m units. We continue to factor in organic income growth including parts and service revenue and F&I income of 4 to 8 cents per share in '03.

The pro forma full-year benefit of acquisitions closed in '02 will add 3 to 5 cents per share to our earnings in '03. We spoke last quarter of our share repurchase program based solely on the shares we have thus far repurchased. We should see a benefit of about 3 cents per share.

We continue to expect losses from price one to come down to 7 cents per share from the 13 cents last year, an improvement of 6 cents per share. And lastly, we will not have to anniversary nonrecurring IPO expenses and re-audit costs, adding about 3 cents per share to our earnings in '03.

As far as developing quarterly estimates for the year, particularly for the first quarter, based upon the $1.50 to $1.60 guidance we're announcing today, we have taken several factors into consideration in developing our view.

First of all, we missed our fourth quarter objectives due the volume and expense issues. As previously noted, we have addressed the expense issues with results expected in the second quarter. Volume in the first quarter appears on a relative basis consistent with the fourth quarter run rate; and lastly, overall, the gross profit percentage in 2003 to date is consistent with the fourth quarter but slightly below the same period in '02. With that said, I'd like to open the call for questions and answers. Operator?

Thank you. Today's question-and-answer session will be conducted electronically. If you had like to ask a question, press the star key and the number one on your phone. If you find your question has been answered you may remove your specifically by pressing the pound or hash key. We'll go to Rick Nelson from Stephens.

Service and parts, same store increase that you put up this quarter is much better than some of your industry peers, and I'm wondering if that's brand mix and if you're seeing notable differences between the domestic name plates and the foreign name plates in service and parts.

Well, the answer to that -- both questions is yes. And there's a third factor as well: We've emphasized the fact that over the past year we're working on developing an ongoing parts and service relationship or a customer-for-life philosophy with our customers. The import and luxury customer maintains their vehicle more frequently and in accordance with the factory-scheduled -- or recommended scheduled maintenance, so that has a sustaining and growing impact as well.

Also, we've invested significant amounts of money in expanding our parts and service -- serviceability. That is basically the numbers of stalls we have. As you saw the units in operation grow significantly for the luxury and import brands and for example go forward the number of Lexus units in operation will double over the next five year.

By positioning Asbury in the brands that are growing more rapidly in terms of UIO, we believe we will continue to see and have seen a growth in the parts and service business. But it's all three plus the way we're investing in the business.

Are the domestic name plates showing the same sort of growth in same-store?

Overall, they're coming down. A piece of that's good news because the quality is improving. So we're seeing a decrease in the warranty work in the domestic bands. That's clear. And we'll just continue to focus on building our customer pay business in that area. So that is not a concern to us. In fact, we think it's a benefit for the customer that They don’t have to bring their vehicles in for the same level of warranty work they experienced in the past.

SG&A widened considerably both as a percent of revenue and cost of goods sold, with a decentralized platform like you operate. How do you implement cost-reduction measures?

Well, you do it a couple different ways. The first is that you establish some very strong guidelines as to which expenses must be maintained as a percentage of gross profit. For the quarter, our sales compensation was basically flat to a year ago. So we did a really fine job of maintaining that on a consistent level. However, the area that we're referring to was the salary and supervision, or what we routinely call the personnel side of the dealership. And we work. That is something you have to work more stringently on, because it really is people-driven. You have to maintain that as a percentage of overall gross profit as Well, and as I indicated in my prepared remarks, we were reluctant to pull back on that in the face of what we thought might very well be just a temporary blip in unit sales.

So you simply focus on that and say you're going to have to move that with gross profit, which is something the dealers are very well experienced in doing. CEO's, in retrospect, now agree that we have to do that and are responding to the environment. I think, perhaps, more slowly than we should have, but responding, nonetheless. Tom.

Two of the other things that drove the numbers, one was insurance cost which I think everyone in the industry and everyone in corporate America is facing right now. And we had some significant increases in insurance premiums during the year and the second piece is advertising, which spiked a little bit in the fourth quarter. And it's difficult to get out of your long-term advertising contracts as quickly as needed to be done to have advertising come in line with the fourth quarter performance.

Thanks. Would you expect those ratios would be flat with a year ago as percent of cost of goods sold, SG&A, in the first quarter?

No, that's the reason we say you're going to see most of the impact in the second quarter. We've got severance pay that has to be paid in a lump. And secondly, pay plans have to be adjusted. The way you want to adjust your pay plans is you want to adjust them not in the weakest months of the year, but in a month that's going to be reasonably good. So we're going to impact our pay plans in the beginning of February and March. I think that's the best way to adjust pay plans and retain people.

Any comments on sales trends in maybe February as it relates to January?

Reasonably consistent.

Good. Thanks.

We'll go next to Deron Kennedy with Goldman Sachs.

Good morning. As far as inventory, they're up pretty big, and that the something most auto retailers have been talking about currently. You discussed how you’re positioned for the spring and the quality of that inventory. And the second question will be on used. And I put out there now, it's basically tough all over as well, and I was wondering what you're seeing in used and what kind of assumptions you're using to get to your numbers in '03?

I will talk about the inventories and then talk about the Ken will talk and the trend. Inventories went up to 73 days on new. Used inventories were pretty much in line with our guideline which is anywhere from 35 to 40 days.

The spike in inventory which was actually outside of our guidelines, we tried to keep inventory on new to 60 days, really was a phenomenon that I think you saw throughout the entire automotive retail industry and that is the manufacturers trying, at the end of the quarter, to make their numbers, shipped an awful lot of vehicles. And, really, pre-shipped -- or early shipped orders that were in their system. And our stores were the victims of that as well, and that's what spiked is the inventory. I will give you one little trend in one case, one of the manufacturers, during the quarter, shipped us an additional $40m worth of inventory on pre or early-ordered vehicles.

We wouldn't accuse them of channel stuffing, but what you do is you place your orders, whether it's 60 or 90 days out, and you expect them to come in a routable fashion which is normally the case.

We put the best spin on it possible, factories that are going to be shut down for model changeovers, so forth, you might get vehicles more normally than you would count on. So we saw that happen at the end of the quarter. Of course, obviously, there was a slight slowdown in the sales rate as well. But between the two, we saw the inventory go up. We don't believe there's any risk to it. We looked at the mix of the inventory, which is the key. And it's all good '03 stuff, so we're not concerned about it.

Deron Kennedy Has the inventory improved since the end of December?

It's about the same as the end of January than the end of December.

It's about the same.

And used is about, what, Tom?

44 the end of January.

In terms of the same-store assumptions that, you're referring to sales, I would guess. We indicated we built it around a 16m SAR which is down slightly from where this year 2002 was.

As far as used, though, would there be a similar experience to what you're seeing in terms of the change in what you're expecting for new? Or kind of recovery?

In sales rate?

Uh-huh.

Give or take a little bit. It doesn't move a whole lot in terms of percentages. So give or take, it doesn't really matter. We've continued to turn those at nine or ten times a year. The margins are still good. We see prices firming a bit, although what I think you're going to see is a volatility in the used car market probably equal to last year's, where I think the trend right now the reasonably decent. But I think you could see months where there's a dip.

Okay.

Pardon me, but our wholesale losses did go down in the fourth quarter versus a year ago.

Right. If you could embellish a little bit on where things stand with Ford. If you could give us an update on how things are going there.

Well, the Ford issue relates to Ford's reluctance to allow us to acquire the Bob Baker Ford store, and that, Baker is a party to an action in the new motor vehicle bureau court system in California, and he's vigorously pursuing it. And we are continuing to outperform Ford nationally and in virtually every region where we have a Ford store. Ford is candidly upset with us over performance in 2000 and 2001, which predates me and my management team. And basically the platform heads that have the two to three biggest groups of Ford stores.

We performed very well last year for Ford. We continue to perform well. We like Ford. We're going to sell a lot of Ford vehicles, and hopefully they'll come to their senses and understand that we both can make a lot of money selling their vehicles.

Thank you very much.

Thank you. And we'll go next to Eric Sell (ph) from Wachovia.

How much share repurchase activity did you consummate in the fourth quarter on a dollar basis?

We purchased 772,824 shares, to be exact.

What was the average price on those.

$8.50.

And then could you break out the components of debt for me at the end of the year?

Sure.

Okay.

We had -- in the credit facility at the end of the year, we had $88.5m, $250m of subordinated debt, $117m of mortgages and $20m in loaner vehicles and capitalize leases, and miscellaneous stuff. A total of $475m.

In regards to the inventory. Tell me if this is a fair characterization of what's happened, and we won't accuse anybody of stuffing the channel, but, you know, the fact of it is that most dealers are high on new vehicle inventory at the end of the year, and the manufacturers are also have high new vehicle inventory at the end of the year.

Either way, I've been talking to our customers, is this is kind of a one-time blip for the dealers. You guys are basically full right now, and inventories are basically flat at the end of January. Can you translate that looking forward and say manufacturers are going to have to cut production because of the situation we're in right now, or are you guys going to take on more inventory?

No, we don't take on more inventory than we ordered, so it's really -- the blip is exaggerated because we only took in what we ordered. The timing was off. And the inventory, essentially the only true increase over time was the sales shortfall we experienced, which is not a significant amount. The factories talk about their forward production commitments and their folks that spent more time studying than we do. There was some speculation this week in the press in terms of whether GM or Ford's going to have to cut their factory schedules, but right now, we're very comfortable we'll sell through. The inventory is not aged, they're good units. We looked at the models and colors and how they're accessorized and we're not concerned about it .

I want to speak a little bit about that, too. On the luxury end --

Yeah, what we do see is the luxury side of the business -- thanks, Tom -- we think that there's going to be a little more pressure in the luxury end, and we see it right now in terms of some of the promotions that are happening, whether it’s BMW doing a new lease deal on the 325I sedan, or Mercedes putting money on the hoods, dealer financing on some of the C-class vehicles they have out there, Audi on the A4 and the A6, and the TT. So we see a little bit of activity there, and that could create just a tad of margin pressure.

And, Eric, you know we can sell off all the luxury vehicles we get, and having the financing programs in place will just help that effort as well.

If anything, it's going to hurt some of the other dealers weighted towards nest I can, is what I believe .

No question. We believe that, too.

I see it translating through that over the year. On parts and service, we've heard of, you know, several trends that that kind of popped up -- one over the last year but two, you know, fairly recently. One of the trends manufacturers taking over the wholesale business. Are you guys seeing that in any of your markets?

No.

Okay. I think that's very isolated, but other companies have reported that. And how about the manufacturers' allocated time per warranty job? Are you seeing that coming down a little bit and if so, what percentage is it coming down and how is that expected to impact parts and service?

It is coming down, but that's been ongoing for, you know, as long as I've been around the business.

It's a learning curve, right?

Pardon me?

It's kind of a learning curve? As you guys get better, they put it in their models.

They do it across the board, not only with the automotive retailers, but the independent dealers as well.

Also, continuing to get increases in labor rates.

Productivity on customer pay is increasing as well.

And then the last thing is, is the Bob Baker -- what is that lawsuit surrounded around? Is that anything having to do with what Auto Nation is dealing with in California?

I don't know, but there are franchise laws in California that govern the ability of the dealer to sell and the rights of the dealer vis-à-vis the factory. And Bob Baker group has taken the Ford churn-down to that venue, and they're challenging it.

Eric Sell Okay. All right. Thanks a lot, guys.

Yeah, by the way, we are not Plaintiffs in that. That is an action between Bob Baker and Ford in that court.

Eric Sell Definitely. Thanks a lot, guys.

And we feel go next to Gerry Marks with Raymond James.

With regard to Arkansas and Portland, I know there's been a change in the Portland management team, can you tell me kind of what those issues were?

In Arkansas we changed quite a few of the GM's out. We focused on selling units, and we think we're getting unit sell through success there, and that's the first thing you need to address.

I also changed the financial management in the platform as well. We have a new CFO and new controllers in some of the stores there.

I mean, I guess what I'm kind of getting at is I, I mean, those management teams, from what I would presume had kind of different vision than you guys, so it didn't really work out. I guess what I'm trying to make sure of is when we look at some of these potential compensation structures that are going to be happening over the next months, we don't see more of these issues arising in other platforms.

No, I don't think so. We would hope not. But it's different. Arkansas and Portland were relatively unique in terms of what they were facing. In Portland, there was a meaningful increase in income year-over-year, just not what we wanted. They've got one store, a relatively large Ford store, that is just having a devil of a time. We watched the market share for each of th4e brands in that market, and we think we're making the progress we need to make, although slower.

In Arkansas, now, for example, our Ford store has reclaimed the number one share in that market. So we have new a GM there, a new GM in the Toyota store we opened, and I have a very successful Nissan store in the market. First things first, and that is, can you sell and can you make gross? And then we have to work on the other issues because, at the end of the day, we have to deliver net income. And, so, that's what we're doing, just not to a pace that I'm happy with, but to a pace that says, yes, we can sell vehicles and generate gross profit when we do.

Are you transferring employees at all? Because it sounds like the Jacksonville operations are really successful and maybe taking some of the good things happening there and moving them around?

Yes, we did that, but not to Arkansas. We have an approach to selling used cars with centralized teams in terms of buying and managing the inventory, and we took the number -- the right arm of the guy that runs that operation in Jacksonville and transferred it to Tampa, and we're seeing almost immediate results. We had a -- we set up a centralized used car team in Tampa mid-year last, it didn't have the right leadership, moved someone over from Jacksonville and got an immediate turnaround starting from late last year. So we're very pleased with that. Typically, we would not like to transfer GMs from store to store. We think it's important that the General Manager stick with his brand, understand his brand, develop relationships around that brand, understand the zone of district people that represent the factory, understand the customer, and just simply make that dealership the most successful dealership it can be.

What we have to do is find people, when we want to create some turnover at the GM level, that can be successful in that store on a long-term basis. We’d rather not have two stores with new GMs, we’d rather have one.

You talked a little about the Ford issue with the Baker group. Is there any progress made on the Toyota front?

Yes. Toyota has been a paperwork issue and, so, we have not had any paperwork stoppages or blockages. It's simply paper work going back and forth. We responded very rapidly. Toyota has all of our paperwork in an acceptable format, and we're waiting on, now, paper work coming back from them.

Gerry Marks Okay. So I guess one way to look at it is that, if there really looked like there would be a concern on that side of the business, Baker wouldn't only be suing Ford, but Toyota on they franchise laws in California as well.

I can't speak for Bob Baker. On the Toyota side, it's a great brand, great people to work with. The paperwork is moving back and forth, no negatives in paper flow. Matter of timing.

Final question, you mentioned, Ken, you know, your three focuses for '03, and particularly you mentioned earnings, that you don't want to have surprises. Obviously you can't control the macro issues, but obviously surprises on things like the cost structure and things you can control, and you seemed to encounter some of that in the fourth quarter. Kind of looking back, now, to almost a full year of being public, or you're coming up on that, can you point to any specific lessons learned that you're going to be focusing on this year?

Yes, I can. Asbury has a really terrific platform philosophy and approach. We rely on, as built upon the strength of the entrepreneurial CEOs. That said, the CEOs have to align what they do day in and day out to the overall goals of the corporation and that means the goals that will deliver to investors what investors are expecting.

That means we have to make sure the targets are set, and we then also set boundaries within which the CEO's have to manage their platforms.

We're not talking about shackles, but boundaries that give them a lot of room to manage, but boundaries nonetheless, in particular the ones that deal with expense. They're really terrific car people. They know how to sell, how to manage their dealerships, how to hire really good GMs, but the boundaries are the boundaries and they have to work within it. It's a cost discipline approach that is perhaps more stringent than one I indicated in my remarks, that if they were spending their own money, they would have employed. But it's an approach that they understand and agree with, and that's what -- we have implemented, and that the what we will be managing to go forward.

Gerry Marks Great, thanks.

Thank you.

Thank you. We'll go next to Michael Millman with Salomon Smith Barney.

Hi Michael.

Hi. How are you?

Good.

Following up on what you're talking about sizing the company, it sounds like you're sizing the 16m. I wondered if the number looked like it was 15.5m, how quickly you would size to that or the platforms could size to changes? Because we're also told this is an industry that's, I guess, 70% variable cost, but it sounds like it takes some time to get there.

Also, could you -- and we've talked about this as well, but I'm a little unclear -- when you look at the market SAR numbers for the quarter, it looks like your new same-store sales were in line down kind of 10%, 11%. And we always think that the public companies should be better and, therefore, do a little bit better. And secondly, with your mix of luxury and imports, you should probably do a lot better. You indicated you could sell all that you have. And, so, maybe you could talk a little bit about that as well. And then just sort of one little nit, maybe you could talk why the F&I vehicle number was down about $30 sequentially. Is that typically seasonality? And if it is, why should there be seasonality in that number?

We'll look that up.

I don't know what you're looking at, Michael, but I may have to follow up with you on that. Because I'm not quite sure what you're looking at I.

Maybe I have the wrong number. I thought third quarter was 792.

Okay. I see what you're looking at. We'll have to get back with you on that. I see the numbers, 791 and 765. I will give you a follow up call.

In terms of expense reaction, I think the best way to answer your question is to tell you what you've asked the CEO's to do, and that is, within whatever range of gross profit they experience for sales compensation and the personnel costs, we want them to maintain the same percentage of gross. If sales go from 16m to 15.5m in terms of SAR, what we want them to do is maintain the same percentage of sales compensation and personnel costs even though the gross profit dollars, in fact, will be lower.

In terms of mix and what we sell and how does that relate to the overall numbers the industry is seeing, in general, the premise is accurate that luxury-midline imports should do better. However, there is a heavy market influence to that as well. For example, Texas did not perform nearly as well, whether it was luxury or mid-line imports, in our case, Honda and Acura, vis-à-vis the rest of the country. When we factor those in, we believe the overall sales rate is stronger. When you look at the inventories that we have on the ground, are we selling through what we received on the luxury side in the answer is yes. And, so, we can't see, for example, how we would be able to sell more Lexus in Atlanta when we sell everything we've got. I mean everything we’ve received, we’ve sold. So we look at the inventory flow on a monthly basis, the returns for the luxury vehicle that are highly prized and allocated, and cannot see the ---where we are not selling what we receive.

To follow up, on the first one, how fast can the platforms adjust to changes in the gross profit in what they're seeing? And in regard to the second one, does it make sense for us, in doing our modeling, because there's always going to be shifting amongst platforms geographically to assume that the same store sales kind of mirror SAR numbers?

Well, as to the latter, that's not a bad starting point, and to see what your sensitivities are. One of the things that impact us, for example, is when -- and this is maybe more detailed than anyone on the phone call wants to hear, but if you're dealing with a luxury brand and the factory allocates those by zone and the number of units, then the people who build new stores or renovate stores get first call on those units, you can have a temporary decline on the units you're getting. We saw that in Atlanta and DFW, with and the Virginia and North Carolina area. Those go up and down. It's almost impossible for us to see on a month by month basis how that’s going to work out A new dealership opens up and I have to load it up with 125 cars, that's going to come out of that zone's total deliveries.

It eventually equals out, but month to month and quarter to quarter, that can impact you within a zone and a particular store or platform.

How fast we react, what I asked our CEOs to do and the way I believe that that they are approaching is they should actually go deeper on some of their cuts and be able to add back, technically, to adjust. If you have to take some heads out, you're going to have to pay the severance costs. What we're seeing is that perhaps, to go deeper in some of the actions we're taking and see how the retail sales relate.

We won't know that until we start to get the specifics, which we received from a couple or three of the platforms, and he see what else happened this month and how the expenses react to the new pay plans where we've implemented them in March.

So we think that we've taken the lessons -- gone to school on the lessons from the fourth quarter, and the CEO should be reacting a little more rapidly -- in fact, quite a bit more rapidly than they did in the past.

If we don't get deliveries of vehicles in a particular store, we better keep our expenses in line to match the lower sales rate. And when we get the vehicles in and sell them, gives us a little latitude in terms of how we spend the money.

And finally, one last follow-up, would you ---what do you suggest that you guide to for SG&A percentage? That has sort of reasonable steady state after the second quarter or starting the second quarter.

Well, it winds up being different by platform. For your modeling purposes, we didn't give that kind of guidance. We tried to indicate to you so you can sort of reconcile out or build a bridge from last year where we think expenses are going, where volume and gross is going. And we think you should -- you ought to build your models accordingly.

Okay. Thank you.

I’ll take one more question.

We'll go next to [inaudible].

Can you tell us again what the CAPEX numbers are? I missed that?

Sure, the CAPEX numbers for the year, 57 --

For '03.

Oh, we're targeting between $55m and $60m.

And it was $57m this year?

Yes.

Why is that staying the same?

Well, we have manufacturer-required program.

We’ve got a couple big stores that we're building.

Yeah,. Doing a new Lexus store in Atlanta where we bought the land this past year, and the building will go up, and we've got ---the Honda Orlando store will be completed and a new Honda store in Durham.

How many stores are you building?

Those are the three new stores. We're doing a lot of image programs, relocating several stores.

And the new BMW point in Richmond.

I'm still unclear in the relationship with Ford. Can you walk us through what is the time line from here? I mean, what do you have to do -- are we going to hear about it, like, publicly? Or how do we find out if relationships are okay, et cetera?

Well, from my point of view, other than the fact they turned us down from Baker, we're continuing to do a good job with Ford. We're outperforming Ford in virtually every market we're in. We continue to sell the vehicles, and we like the product and we, in fact, are the number one store for Ford of over 340 in the Memphis region, as Greg Daniels in Jackson, Mississippi, and No. 9 is Northpoint in Little Rock. As I indicated earlier, Ford is disappointed in our results for 2000 and 2001. Those results were in place, I'm not passing it off to anyone else ---they’re historical, and we're continuing to take back share. When they get happy, I can't tell you when they get happy. They have a lot of things on their plate, and hopefully our results will speak for themselves and they're they'll get happy with us. We're doing a fine job with Ford.

Okay. Could you walk us through the decision on price one? How did you come up with continuing it and then what’s your thinking? Because we haven't gotten any visibility on why you decided -- because it seemed like, on the last difference call, you were more tempted to actually stop it. But could you just elaborate on how we got to this answer for now?

Well, I didn't say we were going to continue it. What I said was I'm going to see if I can find my talking points -- that the -- each of the last three months have improved month over month. We have a good selling team in place on a cash out-of-pocket bases versus the bottom line bookkeeping, the cash drain is very low. And we simply have a traffic issue at the store level. The closing rate is good in terms of percentage of customers that come in that ultimately buy. So, as I said, we continue to believe the upside potential of price one that it offers an attractive risk-reward trade-off, and we continue to evaluate it.

Again, the monthly cash burn is very low. I have not changed my view about it other than results have been better, and, so, we continue to look at it.

So when will we know whether you're continuing it or not? Because I was hoping for, you know, a firmer answer this time around since you've had a board meeting, et cetera, and you've had the benefit of, you know, eight months now.

Well, we'll tell the public when we've taken a view and a decision one way or the other. We've got people that go to work there every day that give a first rate customer experience. We're in the market buying and selling vehicles, maintaining our inventories, and we're going to continue to evaluate it as we see results. And we see results daily, actually.

Is it three months, six months, one month? What is it? Is it a year? Is it a new market you need to open?

I don't think it's appropriate to say, well, it's going to be three months and it drops dead, I don't think business work works that way.

We have to look at how we're doing and how we're working. And if we didn't see the meaningful improvement we did over the last three months, I'd feel a little more strongly about saying, well, this is something that should not be. But with the improvement we've seen, it's consistent, we just want to continue to move sideways. Again the cash drain is very low.

How much debt are you expecting to pay down this year?

I don't think we'll actually pay down debt this year. I think the debt ratio will come down as we add to the equity, but our goal is not to pay down debt, it's to do acquisitions so that we can continue to grow the business. And with the Baker transaction, the debt will actually go up in and of itself.

And you're comfortable with the capital structure given where we are, you know, external environment that's causing you to be concerned about your own earnings?

Oh, yeah, capital structure is solid when you put the $250m ten-year debt on the balance sheet that we did a year ago, you can't just look at the 50% debt ratio percent. You have to say how much of that debt is actually -- over the next two or three years you could have a liquidity issue, and virtually, we have $80m of debt from acquisitions that technically matures in two years. If we wanted to, we could pay that off F we wanted to stop the acquisitions. I don't think that's the right way to deliver shareholder value in this environment. If we hadn't done the sub-debt deal, I might feel differently about it.

Could you explain the buyback process to me? Because I'm unclear on how it's working. I know you bought 772,000, and we're obviously about 20% lower than where you bought it back. How does Goldman Sachs decide when and where to buy, or what are some of the guidelines?

We don't talk about that. We just announce when we announce to the public what we've done. We don't telegraph how the program works.

Thank you.

All right. I'd like to thank you all for participating in the call and we look forward to reporting results as '03 rolls out.

This is concludes today's conference call. You may disconnect at this time.