Asbury Automotive Group Inc (ABG) 2003 Q2 法說會逐字稿

Good day and welcome everyone to the Asbury Automotive Group second quarter 2003 earnings results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Ms. Stacey Yonkus. Please go ahead.

Good morning everyone and thanks for joining us today. As you know earlier this morning, Asbury reported the second quarter earnings. You should all have received a copy of the press release which is also posted on our website at asburyauto.com. If you don't have access to the Internet or would like to have the copy of the release faxed or emailed to you, please contact Judy Cello (ph) at her office. Judy's number is 203-356-4414 and she'll make sure you get a copy right away.

Before we get started, I want to remind everybody that the conference call oday will include some forward-looking statements that are subject to certain risks and uncertainties, which are detailed in the company's 2002 10-K report as well as other filings we have with the SEC. In addition, certain non-GAAP financial measures as defined by the SEC may be discussed in this call. To comply with the SEC rules, we will post a reconciliation of non-GAAP financial measures on our website under the company's Investor Relations section. We will also from time to time update the website with additional financial information. Interested investors should check the site periodically for such information.

The purpose of today's call is to discuss Asbury's second quarter results, as well as to update you on our earnings outlook for 2003. Today's agenda will be as follows. Ken Gilman, our President and CEO will begin with a few summary comments. Tom Gilman, our CFO, will review Asbury's financial performance for the quarter. After that, Ken will have a few concluding comments and of course as always we'll be happy to entertain any questions that you might have. Ken?

Thanks, Stacy. I would like to start by saying that we are satisfied with the company's second quarter financial results and in several key areas Asbury made measurable progress during the quarter. Clearly, we think that the strong focus placed on the company's core operations paid off during the quarter and will continue to yield positive results for the balance of the year. Knowing the difficult environment we have been faced within the new car market, there's been a conscious effort on our part to make up for the new vehicle gross short fall so to speak. We intend to maintain this focus so that our core businesses continue to perform well, demonstrating to investors that our diversified automotive and retail and services business model is working very much as planned.

I would like to take a moment to review that model, the one we often referenced in our Investor Relations presentations. So, you can compare the elements of that model, compare and contrast it to the results we have released today. First, the overarching goal was 15% earnings growth, 8% organically. Driven by finance and insurance per vehicle retail growth of 3 to 5% a year. Fixed operations is part, service and body. Gross profit growth on a comp store basis of 3 to 5% a year. And in terms of vehicle sales performance for new vehicles, planning to be a bit better than the market due to our brand mix, but not required, for the 8% organic growth rate. In other words, we'd like to be better, but it's not required to achieve the 8%.

And for used vehicles the goal is to continue to improve our used to new ratio that is to sell more used vehicles on an increasing basis but again this is not required to deliver on the 8% organic growth model. As for the other 7% of the 15, the model calls for tuck in acquisitions of 3 to $500 million a year in acquisition revenue annually. So with that as background, let's get back to the quarter's results.

As many of you know, the company went through a fairly challenging period at the end of last year into early this year. We wrestled with the need for expense reductions in how exactly to implement them while staying true our business model. Many of you will remember that on our last conference call we described our expense reduction initiatives, which we implemented starting in February as well as the positive earlier results we saw in our numbers for March. We also said that the impact of our program would be more fully evident in the second quarter. With the results we are reporting today I feel increasingly confident in saying that Asbury's expense initiative has to date proven to be a success and in fairly convincing fashion.

For the second quarter, we still realized higher expense rates when compared to a year ago. However, our expense trends are very positive. For example, June platform level expenses as a percentage of gross profit were below June a year ago. As I will describe it, we initiated our expense reduction program in the first quarter, achieved traction in second quarter and anticipate a fully implemented program by the third quarter. This should allow us to convert increased gross profit dollars in the second half of this year into higher profit levels when compared to prior periods. Overall, we are satisfied with the improving trends that are apparent in Asbury's financial performance during the quarter.

Starting with our bottom line results our earnings per share from continuing operations were 44 cents. You should note that our historical results have been restated to exclude the results of discontinued operations including our Price 1 pilot program, which was about 3 cents of the 6-cent discontinued operation. And so in accordance with the GAAP, the year ago numbers have been adjusted accordingly. On that basis, earnings per share from continuing operation for the quarter were equal to a year ago, a dramatic improvement from the first quarter when our earnings per share from continue operations were down 30%. While we are pleased with this overall trend-having earnings equal to a year ago is obviously not the goal here. Earnings gains are and I believe that the insight you can and will gain from our second quarter results will allow you to conclude as we have concluded that our earnings guidance for this year as we will be discussing later is very much achievable.

We are pleased to see several other positive trends become apparent during the quarter, particularly our ability to generate meaningful increases in revenue on gross profit on a comparable store basis. Thanks to our expense control initiatives this allowed our year over year increases in operating expenses to be much better aligned with our rate of revenue on gross profit growth than either the first quarter of this year or the fourth quarter of last year. And this relationship should get even better as the year progresses. Viewed in another way, our operating income equaled 20% of our gross profit in the second quarter, compared with less than 17% in first quarter. And while there is certainly some seen seasonal strength behind this comparison there is also the impact of substantial cost control efforts.

Although cost reduction has been a big focus for the last six months, I have to say that in many respects, the queue (ph) of the quarter and balance of this year is a getting back to basics orientation, focusing on the core elements of our business that make our model successful. To that end, we made several difficult decisions during the quarter that allowed us to maintain that focus, which included closing several non-core businesses. We believe this is one of the reasons we were able to continue growing our higher margin business. This was clearly evident in the faster growth this quarter and our finance and insurance income which rose 19% overall. On a comp store basis, our F&I income per vehicle retail grew over 12% for our six consecutive quarters of double digit increases.

Overall, our parts and service operations fixed, gross profit was up more than 11%. So, we had very strong performances in both fixed operations and F&I which together account for more than half of our earnings. And as a result of this, our overall gross profit increased almost 8% for the quarter, nearly three times as much as in the first quarter. Our strategy in terms of new vehicle sales remained unchanged from last quarter as we continued with a focus on sustaining unit sales.

Partly the strength in our relationships with our manufacturers and partly in the knowledge that increased unit sales have a very profitable carryover effect on other key segments of Asbury's business. While the new vehicle environment remains challenging, our 4% same-store increase and new retail unit sales was much stronger than the industry's slight decline. Similarly, we experienced the same-store increase in used unit retail sales while the overall performance of the franchise dealers was down for the quarter. So in terms of both new and used vehicle sales, Asbury continued to outperform the industry during the second quarter. With that, I'd like to turn the call over to Tom to review the quarterly numbers in greater detail.

Thanks, Ken. Included in the press release you'll find an income statement for the second quarter and the first half of 2003, as well as a balance sheet and the selected data sheet, which details some of the specific metrics we used to track our performance. Ken reviewed with you the basic assumptions of the business model focusing on F&I and fixed operations as key drivers for our success. I'll go into the details of our performance for the second quarter regarding those.

First let me talk first of F&I. Finance and insurance income for the quarter was up 18.8% versus last year. And we achieved an 11.6% increase in our F&I PVR to $815. On a same-store basis, F&I income rose 15.9% from a year ago, with a 12.5% increase in the F&I PVR outperforming the business model objective. Our F&I performance was driven by the introduction of additional F&I products, the continued success of our preferred lender program and an overall increase in our F&I penetration.

In fixed operations, which include our part, services and collision repair businesses, revenues increased 11.3% and gross profit was up 11.1%. The fixed operations margin was 52.7%, essentially the same margin as last year. On a same-store basis, our fixed operations revenue increased 7.1% with gross profit up 6%. Outperforming our business model objective as well. So from our perspective we are satisfied with our performance in the second quarter against our key business model objectives, and I'll talk about the new and used car markets. We sold 26,133 new vehicles during the quarter, up 7.7% versus last year and up 4.2% on a same-store basis.

Our average selling price on new vehicles was up about 6%. And our total new retail vehicle revenue increased 14.2%. We continued to see pressure on new vehicle gross profit. Our second quarter gross profit was up only 1%. Gross margin decreased from 7.5% -- to 7.5% from 8.5% a year ago. On a same store basis we saw similar trends, new retail revenue was up 10% while gross profit was down 3.3%. In used vehicles, we sold 15,552 retail units, up 4.3% versus last year's second quarter. And used vehicle retail revenue was up 4.2%. The average selling price and gross profit dollars were essentially flat and our used retail gross margin was 11.5% versus 12% last year. On a same store basis, used retail units were up 1.3% with revenue up 0.8% and gross profit down 2.4%. So, for the total company our revenue increased 11.1% and our gross profit increased 7.6%.

Let's talk about expenses. As Ken mention we initiated a company-wide cost reduction program at the end of the first quarter and we're beginning to see the effect particularly in our expense ratios. Our SG&A expenses, as a percent of total revenue was 11.9% versus 12.9% in first quarter of this year. SG&A expense as a percent of gross profit also improved to 77.4% versus 80.6% at the end of the first quarter. While we are seeing significant cost reduction efforts at the platform level, we believe there are still opportunities to further improve these ratios. Floor plan interest expense was 5.1 million compared to 4.5 million last year, reflecting higher inventory levels. Non-floor plan interest was 10 million compared with 8.9 million a year ago. Net income from continuing operations for the second quarter was 14.3 million, compared with 14.9 million last year.

Basic and diluted earnings per share from continuing operations were 44 cents per share in both periods. Net income for the second quarter was 12.3 million compared with 12.8 million a year ago. Basic earnings per share were 38 cents in both periods. While diluted earnings per share were 38 cents for 2003 versus 37 cents for 2002. As you know, net income takes into account the results of discontinued operations. As previous announced, the company decided to close the Price 1 used car pilot car program during the quarter and reclassify the results of the program into discontinued operations. The second quarter effect of this was approximately 3 cents per share.

In addition as we launched our cost reduction program in the beginning of the quarter it became apparent to us that non-core businesses and underperforming stores are major cost drivers of the company. The non core businesses were identified as several remote used car centers in Oregon and North Carolina, and underperforming franchises in Mississippi. These operations were also classified as discontinued operations in the second quarter. And the effect of this was about 3 cents per share. EBITDA for the quarter was 38.7 million, the EBITDA margin was 3.1% compared with 3.4% last year. Long-term debt excluding floor plan was 499.3 million during the quarter, and our debt to total capitalization ratio remained at 53% the same as at year-end. At the end of the quarter 48.7% of our non floor plan debt including mortgages was at floating interest rates.

Based on this debt structure, we estimate that 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. Our day supply and inventory at the end of the quarter was 64 days on new vehicles, down from 73 days in first quarter, and 43 days on used vehicles, well within our operating target of 38 to 45 days. Total capital spending was 24.6 million for first half. And we continued to target around 50 million for the full year. Free cash flow was about $20 million for the first half of 2003. At the end of the quarter, the company was in full compliance with its financial covenants. During the quarter, we successfully completed an amended credit facility with the big three captive finance companies, which was extended through January of 2006.

The credit facility includes 695 million for floor plan financing and in addition 450 million for acquisition financing and working capital purposes. The company requested a reduction of the acquisition financing commitment from the original amount of 550 million to 450 million. The original amount of our financing agreement was, which was executed in January of 2001, was based on the needs of a private company with limited access to capital markets. As a result of our public financing activities in 2002, including our IPO, and a bond offering shortly thereafter, we paid down almost 300 million of debt and as a result, we are able to reduce the committed level of our acquisition line. This will reduce our committal fees and still provide with us sufficient capital to execute our business model for the next several years.

As of the second quarter our debt outstanding on the acquisition line was 108 million leaving us 342 million of dry powder for new deals. So we are pleased to have this one-year extension in our credit facility and we look forward to continuing our strong relationship with our lender group, Automotive Credit DaimlerChrysler Services and General Motors Acceptance Corporation. Now I'd like the turn it back over to Ken for some additional remarks.

Thanks, Tom. I want to make a few more operational points and then we'll open up the call for Q&A. In terms of our platform performance, take a new look at the quarter's results, two of our nine platforms had double digit percentage increases in operating income.

Five platforms experienced solid single-digit increases on a same-store basis when compared to a year ago. One platform was essentially flat and one was down substantially. Here's a bit more detail on three of them. Obviously I'm going to talk about the two that were at double digit and the one that was down substantially, in case anyone was curious. First, Atlanta was relatively strong with an increase in operating income of nearly 20%. In fact, Atlanta had its two most profitable months ever. Any months since we have acquired the business in Atlanta, thanks to strong performances in both of its Lexus stores, plus a healthy increase in its F&I and fixed businesses. Secondly, Arkansas's operating income nearly doubled from a year ago.

Accordingly, we think it's pretty apparent this platform has turned the corner. To put it simply, under Charles R. Oglesby direction there's been a true leadership driven change in culture (inaudible) Arkansas, in terms of putting the necessary people, processes and controls in place. Arkansas had a great quarter, showing good increases in both new and used unit sales as well as strong double digit increase in its F&I income and a single digit improvement in fixed operations. Now, there's a flip side and that's Portland. Portland remains our weakest platform, but I think there's good plan in place to turn that platform around. We have a new CEO in place in Oregon, Steve Silverio, a strong leader from Jacksonville, which is our largest, most profitable platform. He is a very hands-on executive with a strong sales background.

I can say we have gotten off to a good start by getting rid of some of the distractions in Portland. As Tom mentioned earlier we closed the six Thomson select stores and as well as several other ancillary business integrated into this platform. It is not to say that these were bad businesses, it is just that we think management's time could and can be better spent developing the strong franchises we have in this market. So really as I said earlier, it all ties back to focusing on those core businesses that make our model work. With that said, I have no intention of dwelling on our discontinued Price 1 pilot program except to point out that it is no longer an issue for us. It was a good idea that could have worked, but it didn't.

And now we no longer have that distraction. We also learned a few things that are going to help our much larger ongoing used car operations at our existing dealerships. As most of you know, we have not yet been able to close the Bob Baker Auto Group acquisition that we announced last year. This is a transaction that I suspect will come to a conclusion in the near future. As you know, the California new motor vehicle board has rendered a decision that may make it impossible for us to complete the acquisition of Bob Baker's originally structured. We are currently speaking with Bob, discussing how to proceed, what would be best for both Asbury and the Bob Baker Auto Group. We will keep you posted on that front.

Notwithstanding my comments about the Baker deal, we remain committed to our previously announced goal of completing acquisitions that will contribute 3 to 500 million in annual revenues each year. So far in 2003, we have completed acquisitions representing revenues of approximately 150 million dollars, and we have a strong pipeline of pending transactions. I am confident that we will meet our acquisition target of 2003. Reflecting back on the decision to close down Price 1 on the appropriate accounting treatment we have adjusted our earnings guidance slightly for 2003 and this numbers move around, I will try to be quite clear as to what we are doing and we did. We now expect earnings per share from continuing operations in a range between $1.55 and $1.60 for the full year.

What we have done is we have increased the bottom end of the range. We have tightened the top. Previously we were at $1.50 to $1.60. You add back the continuing operation; the numbers move a penny or two either way. So now we feel very comfortable with $1.55 to $1.60 for continuing operations. And if there are any questions on that, we'll be glad to answer them during Q&A or Stacy can handle them off line. The industry environment has improved slightly as we and most other observers expect it so we have not changed our assumption of U.S. light vehicle sales totaling about 16 million for the year.

As we noted in the past, the industry currently has an excellent line of new products particularly in the luxury and import sectors where Asbury is well represented. Vehicle affordability remains exceptional by historical standards and the manufacturers continue to focus on driving unit volume with incentive programs. With that said, we remain optimistic about the balance of the year. I would however like to keep investors updated on several open matters, which may have an impact on second half results and have not been reflected in our earnings guidance range. There are four matters.

First, in the event that the Baker transaction is completely abandoned, we will need to write off approximately 3 to 3.5 million of deferred costs related to the transaction. Second, the Kendrick arbitration. As many of you know, we are involved in an arbitration with the State of our former CEO, Brian Kendrick. We expect a decision from the arbitration panel by the end of September. We believe that any claim for amounts in excess of those due under the written employment agreement between Mr. Kendrick and Asbury are meritless. Third, we anticipate that we will have some expenses during the second half of the year due to the recent management changes in Texas and Portland.

We have a new CEO in place in our Texas platform, Mike Kane, and feel very fortunate to have recruited an executive with such an extensive and successful background in automotive retail to capitalize on a strong McDavid brand in the large Texas market. And finally, you should be aware that we conduct annual reviews in accordance with GAAP accounting guidelines on the valuation of our intangible and other fixed assets to see if there has been any impairment.

Two platforms that have been under the valuation microscope since last year, Arkansas and Portland. Arkansas as noted earlier has turned around, while Portland's assets will continue to be evaluated in a normal course of our review. I want to reiterate that the fundamental earnings power of our business model remains the same, regardless of the ultimate outcome of these matters, which are all non-operational in nature. And in an effort to have full and forthright disclosure on investors, I thought it was important to let you know about any open matters that may come up during the second half.

With that said, I want to say again that we continue to expect 2003 earnings from continuing operations in a range of $1.55 to $1.60 per share. As best we see it, from a financial performance perspective, the year is unfolding pretty much as we outlined for you three months ago. We believe there is in fact more room to reduce expenses and I think you will see that in the second half. Our second quarter results underscore the diversity and strength of our multiple income streams, even in a difficult operating environment and we are positioned for further improvement in the second half. And with that said, we'll take questions that you may have. Operator?

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, you may signal us by pressing the "*" key followed by the digit "1" on your touchtone telephone. Again, that is star "1" if you would like to ask a question.

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

N. Richard Nelson, Jr,: Thank you. Good morning. When do you think in the end that your used car pass didn't work?

Our Price 1 is very simple. I think that Houston was the wrong market. I think it's -- Texas overall if you look at the national statistics for franchise dealers. Its one of the state that sells the fewest used cars in franchise dealers relative to new of any state in the country. Second, I think that the premise that being a Wal-Mart lot would necessarily cause people to shop with you. I think we got great market awareness, but when people are buying groceries and housewares they don't necessarily want to stop off and buy a used car. I think the traffic was there, we know the customers from research were in the market, a certain percentage for used vehicles. But when it comes down to buying I think, they want to go to car row.

Our closing ratio was great. We closed on hard numbers because we were good at keeping track of the customer accounts, 20%. We learned a lot including how to make further penetrations in the sub-prime market. So, we think we learned a lot. If I had to do it over again, I would do it over again, but only in a better -- a market that is more receptive to used cars.

N. Richard Nelson, Jr,: And how about Thomas group of used car stores? You made the decision to exit those as well?

Yes. We have excellent franchises in Portland. We have got two dominant Ford stores, Honda, Toyota, Nissan and two Hyundai stores and a very good Pontiac-GMC store. To turn Portland around, we simply have to focus on those stores and those franchises. We do not need any distractions from remote lots. So, what we decided to do, they were all on relatively short-term leases, has close those lots down. They had about 18 months average remaining term on the leases. We accrued the cost of those. It was about 2 cents of the discontinued operations and let it go at that. We're going to turn Portland around by focusing on the basics of what we do best, which is selling new and used vehicles from our franchise dealerships.

N. Richard Nelson, Jr,: Okay. And you mentioned additional expense opportunities. I'm wondering where those expenses are and how do you go about cost reduction in a decentralized structure like you have?

Well, it's a little more difficult. To answer that one, sort of the qualitative side, its a little more difficult. What we have to do here in Stamford is work through and with the platform CEOs. We think that their expertise which is decades, I don't mean to imply that they're old people but they're just decades of automotive retail experience and at least 20 years in the local markets. We need to work through with them on the expense control initiatives. What happens is that you got to understand productivity measures. You have to understand motivation and what gets folks moving. The pay plans and how they operate and it just takes sort of a level of working it time and time again. A lot of it is iterative.

In fact, you make certain changes and you think you can get a certain outcome and many times you do, and sometimes you don't. And then you just have to go back at it again to figure out why, because you're dealing with human behavior and, you know, thousands of people.

N. Richard Nelson, Jr,: And would you expect expense ratios that they -- you mentioned year over year in June. Would you expect that trend to continue over the back end of a year?

I would, and what we'd like to say is that the goal would be to get to historical levels of expenses. Back to.

N. Richard Nelson, Jr,: Okay, thank you.

Our next question will come from Gery Marks with Raymond James.

Good morning. Just a couple of quick questions. Ken, I really appreciate you breaking out, I mean these potential impacts that might come down the road. What are these are cash and, you know, would they be made in potentially in installments and what are -- obviously the valuation adjustment would be non-cash, right?

But, the value had two of them are clearly non-cash. The Baker -- the -- any deferred fees that would have to be written off in connection with the Baker transaction were completely abandoned. Those costs have already been -- almost all of them have been incurred. And if there were an asset-impairment charge, that is a non-cash charge. The Kendrick arbitration as we said in our 10-K, we think that any amounts in excess of the agreement, employment agreement with Mr. Kendrick are meritless. We, of course, accrued the amounts due under the agreements. So, the cash piece that we would anticipate some level of expenses related to the management changes in Texas and Portland and those would be cash expenses.

But would be over several periods or you don't want to go into that yet?

It's difficult to say. Some of these you can't accrue until employees are notified. That's GAAP accounting, and the expenses we're just saying it could be in the second half. I mean, the Kendrick arbitration is due at the end of September. The arbitrators could delay. The management changes and how those expenses are incurred, for example, you simply can't accrue a relocation expenses because you've hired the executive and you've got to actually have an impairance (ph) of those. So we don't know when people will be moving around, for example, (indiscernible) buying a house and moving to Portland. Steve hasn't shared -- I know he's house hunting, he's found a great house, but he hasn't shared with me exactly when his wife wants to move which I think is probably the governing factor. So I can tell you I'm pretty confident in the second half. I just can't tell you which quarter?

What are you going to do about the Jacksonville platform? Are you promoting somebody who is already there?

We've actually promoted two fine executives in platform -- in the platform to basically split what Steve had been doing. And we're very pleased. They have been there a long time. These are not folks that are new to Jacksonville, new to the Jacksonville team. They know the territory, they know the stores, they know the GM's. So we feel very confident that we will be able to ship that leadership responsibility and not (indiscernible). However, you need to know where Steve came from because there are consequences sometimes unintended. We think we have a great team in Jacksonville and we don't think we've put that platform at risk. I'd like to be able to say to you in three month, six months that that was in fact the case.

Great. Two last quick questions. Logistically in terms of your EPS guidance of $1.55 to $1.60, what EPS number are you assuming for first quarter? Also we have heard a lot about, you know, the problem of relationships with Ford and Baker and I think most of the industry is having problems with Ford right now. What auto manufacturers do you have good relationships with?

I think we have good relationships with all of them. I think we've been approved to do quite a few deals. I think that there are -- you look at what some of the other public companies have published, they are on again, off again with some of the factories. I think Ford's taken an unusually harsh standpoint in terms of how they're viewing the public consolidators. I think that we've got some paperwork issues to put up with Toyota and the rest we've been basically working deals and have a good relationship with them.

Notwithstanding, we still have a commitment to make in terms of performance. And if we don't achieve those performance requirements, we're ht going to be able to acquire deals. So the relationships are just I think very strong. I feel good about it. I know our pipeline and other deals that have been approved. We're not simply sending out press releases, willy-nilly depending on what we have done. So I think the relationships are good. In terms of the first quarter, it's 24 cents a share.

24 is what you're assuming? I got --

Wait a second. That's back, that's what we did do.

No, no that's what it is after we redo all of discontinued ops and all --

Right. That's what it was.

In the first quarter?

In the first quarter, right.

You had 21 all right in terms of what was reported with Price 1 so we add back - we make a historical adjustment for continuing ops?

That's right.

Okay, that's what I wanted to clarify.

Yeah.

Thanks.

Okay, Gerry.

Our next question will come from Deron Kennedy with Goldman Sachs.

Hi, there. It's Deron Kennedy on behalf of Matt Fassler. Good morning. A question I think this was just asked but to clarify the guidance that is $1.55 to $1.60 excludes the 3-cent loss from the first quarter from Price, correct?

That's right.

Great. The Texas new management and the changes there, I know that used cars there were underperforming. What are the biggest focuses for change in that platform?

Well, I think that from a changed standpoint we want Mike Kane (ph) to just get seasoned in his job. We have a lot of good general managers down there, and it's basic blocking and tackling. I would like to have some domestic brands under our -- the McDavid name. So, that we can expand our truck offerings down there. We have wonderful import brands particularly Honda and Accura. Although that's not slide that the Lincoln-Mercury store, the Kia store, and Pontiac-GMC, but we'd like to have some of the others as well. We think it's a great opportunity in Texas as a light truck market. So, we think it's basic automotive retailing.

Okay.

And by the way, we've got another Honda stores that's going to open next year in new point. We have got in Frisco, which is in the Dallas market. And it is a very large, from a planning potential standpoint Honda stores, so that's going to be a major preoccupation for the leadership team in Texas.

Okay. That point comes on next year you said?

Yes. It's under construction now. And if you get a chance to go to Dallas and you want to drive by, let us know. And to open up a store like that you have to hire a lot of people and get -- do a lot of preparation and so Mike is going to be very busy with that as well.

Great. And I want to get back to the expense account. I think we talked about it a few times but could you try to detail some of the costs that you think can still come out, essential on platform level, and when you refer to store level expense what are you talking about in terms of percentage of growth or percentage of sales or however you want to look at it?

Well we think that we like to look at it above percentage or gross in percentage of sales. When you have your sales mix move and it shifts from vehicles to part service and F&I, you can't hang your hat on it and say well it's improved as a percentage of sales because that may in fact be meaningless. So with have to look at it and say really and truly as a percentage of gross, but directionally it's percentage of sales. What's happening, we believe that we can get back to the historical levels that would allow the increases in gross that we have been achieving to flow through in terms of increased earnings. I would like to of course be able to leverage that a little bit, but right now I'd like to get back to even in terms of historical rates. I'm not going to peg that for you by quarter, dig into the financial statements.

Yes, I mean as I look at historical rates look like they're closer to 11 rather than over 12. Is that kind of what you're talking about?

Thomas F. Gilman Right.

Percentage of sales?

Right. It's obviously below 80% of gross and over 80%. In terms of the programs, I think it's matter of making sure that all of our pay plans are effective, that we have the right level of people to match the right level of service we need to deliver. The folks out there are doing it. So we continue to work it.

Okay. And as far as -- are there opportunities to change more of your cost variable from fixed that haven't been pursued or --I mean are compensation plans fairly non-negotiable or rigid?

Well, I wouldn't say that. What I say is much of it is flexible. A question is how do we flex it and how does management at the platform level pay attention to that? And I think that we're always analyzing the pay plans to making sure that people are paid fairly for the work they do, and we think that's what winds up producing the kind of expense efficiencies and controls that we're interested in.

One final question. Are there any other ancillary businesses out there, they are similar to those that you closed down in Portland? Either of those deserving a management focus like this operation, those you consider -- would consider shutting down at a later date, if you can discuss it by platform?

Well, I think that there are -- I don't think there's anything that's real meaningful out there.

Okay.

What I do think is that we're going to continue to look, because there are -- just by being relatively large and important in the communities that we do business in, you just sort of pick up things. I don't want to say sort of like barnacles because you pick them up intentionally. But I think we have to look very closely at what we have added to the business and anything you add, adds to a level of complexity. In addition, we're going to continue to look at the stores we have, and we're going to continue to see if we want to keep in our portfolio all of the stores that we currently own. We're going to look at the brands and then maybe a reshuffling of some of the stores. Because we preferred to focus on the luxury and midline imports that we have. Although that we've got a lot of wonderful domestic brands. So that said what does all that mean in terms of netting down? We'll probably decide that certain stores no longer fit and so at that point, stores will be reclassified to discontinued operations. I don't think that those will cause us any meaningful amounts of losses on the discontinued line.

Okay. Thanks for your time.

A pleasure.

Our next question will come from Zabbar Nazeem (ph) with J.P. Morgan.

Yes. I was wondering if you give us some pickup on the gross margin basically gross margins on domestic brands versus luxury versus imported, and what the trend has been compared to last year?

Yeah, we can do that. It goes all over the map. For example, some of our brands in the second quarter, they were down a little bit. We'll -- we are talking midline import were down a little bit. And some of the luxury brands were up. But they're sort of even split. For example, BMW and Lexus our grosses were up and Mercedes were down a little bit. I can't look at a pattern and say there's one emerging. What I can say is that I think that new car grosses will be under pressure for the foreseeable future. We want to sell our units, we want to keep our customers happy, and we want the factors to be happy. And so we just think that what we need is our compensating strategies to make sure that we continue to deliver on the earnings. Because what investors care about is a solid business model that regardless of the environment that we're in, management can continue to deliver what investors want, which is increasing levels of profit.

Okay. Thank you very much.

Thank you.

Now we'll hear from Grange Johnson with LaGrange Capital.

Hi, guys. Two quick questions. One is I'd love a little bit more insight into the Price 1 decision. Just for what made you decide to do it, because your explanation so far seems like if you just had been in a better market from Houston you might have kept going. You know, what was sort of the short-term, long-term cost benefit? Everyone is more housekeeping type of question. In your free cash flow calculation in the press release, you have two line items for sale lease back and then lease back proceeds paid to lenders. Can you give me a little insight into how these items work and how sort of recurring, nonrecurring they are in the course of the year and going forward?

Okay. I'll take the Price 1 piece and Tom will talk about the free cash flow question. Price 1, I think it was a good idea to do it. I think that it was a bad location in terms of the city. And I think that when we look at the overall opportunities out there, we have to say, well, intuitively does that mean we should have gone to another market, continued with it, put another 3 or $4 millions into it? I didn't feel comfortable enough doing that. Backing it up with intuition up with a commitment of money and human resources. Just did not want to pursue it. Our basic business model is more than capable of generating that 15% earnings gain compounded year-over-year, and right now I think that is what we really need to do.

We really need to commit ourselves to and we're not going to be distracted. I meant it when I said if I had to do it again I would. But I would have done it differently. With that said, I'm not looking back over the decision to cut it off. There's tremendous earnings power in this business and we intend to use it and deliver results. Tom, would you like to take the free cash flow calculation question?

Sure. When we look at free cash flow, there are two line items that we have added in here that represent proceeds that we received from mortgages. That's the finance capital expenditures. And the second piece of it were a couple of facilities in Texas that we sold to an automotive (inaudible) and those are the proceeds that we received from the sale of those. When we take the cash in, we make a decision whether we want to take it and use it to pay down debt or keep it in house for working capital. We in this calculation we assume that we would add that into free cash flow because it really is, you know, cash available for us to make financing decisions.

What happens -- I would like to qualitatively elaborate on that a little bit. We ran into some technical issues related to our timing of financing of projects, and we decided that, hey, let's get beyond that. Let's do up operating leases on our properties when we have an opportunity to build the new store or even when we buy a store, let's not be in the property ownership business unless we have to beyond what we already own. We build those costs into the pro forma. The project either returns on the capital invested or it doesn't. If it doesn't, we decide not to do it and it's because of the burden of the sale lease back being higher than the mortgages that we could obtain so be it.

The first half of this year, we did sales lease back transactions on properties that we had incurred for the CAPEX for the prior year. That's going to be some ins and outs on that and you call up off line and get specifics from finance team here on how that breaks out. Go forward, all of the new projects that get financed that way. You won't see the in and out, it won't be confusing at all. But letting the investment community know we're not in the property management business in terms of the ownership side of it that cause automotive dealers. And they're good at that and we're very good at running the dealerships that we occupy under operating leases and that's how we intend to make a living.

Okay. So is it fair so to say we'll see more of the properties in these sale. You expect pipeline actions when possible going forward?

Well, probably not. Under what -- for what we own. What you'll see is the new properties that come on stream. So for example we're doing a new Honda store. We're just breaking ground. We broke ground yesterday in Durham and that store from the ground up is going to be financed through cars. So that you won't see the in and out flow. It is just going to go directly to an operating lease when we open the store up you'll see the lease commitments, the rent commitments and the footnotes goes up. But you're not going to see the number, the cash sloshing in and out of the statement of changes.

So if I understand this clearly and sorry to harp on it, you'll have less up-front CAPEX for Greenfield new build projects like that, but you might have a higher on going operating because you'll still be paying money to cars? Is that a fair statement?

That's exactly right That's 100% right. What you're seeing now what the year to date numbers is our sort of catching up on what we paid out of pocket cash last year, and we did the sale lease back transaction this year. But ongoing it is exactly what you are going to see.

Last question on this. Is there a trade-off to this? Is there any sort of negative to doing it this way versus to another positive I should say?

I have to say in the short term, mortgage rates today are very low, but I say in the long term given where we would borrow money, the sale lease back rate it's competitive with the -- I mean, a non-investment grade credit , if we are going to the market give or take a few basis points it's equivalent. So we think for the long term money that it represents that we're getting effect through the use of the operating lease, it's pretty fair when measured as well what would a mortgage cost you today on a LIBOR basis it is a little bit more money.

That said if you build it into your pro forma when you're evaluating a project to the front, you should not be doing a project simply because today's LIBOR rates are low and then the mortgage rates are low. That shouldn't be the difference between a good project and a bad project. A good project is one that stands on its own, at a CAP rate from a rent standpoint. That's a market-clearing rate.

That's terrific. Then one just sort of off topic question. Any trends, anything you're seeing out there, any, you know, platforms doing well, any sort of -- I think we talked before, you had seen certain trends towards some different foreign or luxury automakers. Is that continuing anything? You're just seeing out there?

Well, we think that obviously on the use side what we have done in Tampa is producing kind of the results that investors want to see. And it's our job to roll that out to the balance of the platforms in a very disciplined way. In terms of the brands, I mean, all of our retail is an interesting industry. You can go on at nauseam with statistics and analysis, so we try to keep it at a high level to let you know directionally on a brand adjusted basis, that is if you took the weighting that we have for our stores, we still outperformed the industry. So that our stores did a little bit better.

And that's the fairest comparison, but it gets very (inaudible). Then you say, well how about regionally? I think directionally what we try to say is how do we do compared to the industry on a brand adjusted basis, we did stronger. And let it go at that. If there is an area that's geographically weaker and Texas has been one of those, well, just tough on us, we still got to make a profit down there and grow the business. But we want to give you an understanding directionally what's been happening and therefore you can draw an investment conclusion as to what is likely to happen. We do think at a very basic level you cannot get away from the power of the brand. And in our case, we have a wonderful brand mix. It is not to say that some of the others don't. But we have a wonderful brand mix and that's something that year in and year out investors can rely on to produce consistent strong results.

Thanks a lot. I appreciate all of the disclosures today.

Well, it's pleasure.

Our final question will come from Eunice Perry (ph) with GlennView Capital.

Hi, just two questions. One is I don't know if you've covered this, but the cost of 2.2 million is included in your SG&A for this quarter?

That's correct.

So EPS would have been 48 cents without that?

You have to draw your own conclusion on that. The reason I say that is I don't mean to be disingenuous or make you think that I'm using tricky words. I think that you can't read the financial press these days and come away with the conclusion that without coming away with the conclusion that the SEC, the regulators, people that look at corporate governance are tired of companies saying my EPS would have been if I could have done this or could have done that.

Understand.

What we're trying to say to you, here it is and by the way, this was included. We're trying to be very, very rigorous in how we describe our earnings. We believe that GAAP reporting is the appropriate way to report. But by the way, we think you ought to know what's in it. If there's anything that's unusual, then draw your own conclusion. I don't want to say it's 48 cents. If you get me over a beer in night, maybe I would. But I really want to play this one straight up. That's the way Asbury releases its numbers. That's why as Stacy said earlier in the call we update our websites to reconcile non-GAAP information to GAAP information. We really believe in GAAP. We really believe what the investment community (inaudible) appropriate. I didn't mean to get on a high horse but I really believe in this stuff.

That's okay. What I know -- I know you our assuming 16 million and your planning may not be according to ( inaudible ) for the back end. Are you assuming the sales rate for third quarter would be drastically different from second?

No. I think it's going to tie out to about the 16 million rate. And you can pick up the normal calendarization.

Okay. Have you been more specific on what you can take SG&A down to?

No. We have some internal goals but I think what you've got to do is go back to dig our Q's, dig out our K's which I know you guys have and you got the spreadsheets on it take a look and see, hey, what is a good third quarter? For Asbury, what is a good fourth quarter? Obviously last year wasn't, and say that's what these guys are shooting for do the math and then say, hi, do you think we can get there? We think that's what we're shooting for. Obviously I think we can even do better as the grosses grow because I would like to deliver some operating leverage to investors.

Do you have any substantial acquisitions closing off to June 30th that you've already announced?

No. What we have is a nice pipeline and we don't -- as those things are appropriate to be announced as the material, we will announce them. But we have buy/sells out there that have been executed. We are simply awaiting the closing. And they have been factory approved, and we have got a -- it's a nice -- I would just -- I don't want to go further, it's nice pipeline with a really good brands in good cities.

Okay.

(Indiscernible) the best of execution of our strategy.

Because all I'm trying to understand is your guidance and I know there's partly conservatism in the numbers out there for the third and fourth quarter 47 and 39, and we just did 48 and sales rate is better or equal to the second quarter and SG&A is coming down. So put all that together and it just seems like -- there's fine.

Right. You have to draw your own conclusion and you said that's 48.

Thank you.

I'd like to thank everyone for being on the call. As always, we stand by within the limits of SD (ph) to answer your questions off line. And we'll sign off here.

And that thus does conclude today's conference call. We thank you for your participation and have a good afternoon.