Asbury Automotive Group Inc (ABG) 2003 Q3 法說會逐字稿

Welcome, ladies and gentlemen, to the Asbury Automotive third-quarter earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, Stacey Yonkus. Ma'am, the floor is yours.

Thank you, good afternoon, everyone, thank you for joining us today. As you know this morning, Asbury reported its third-quarter earnings. You all should have received a copy of the press release, which is also posted on our website posted at AsburyAuto.COM.

If you don't have access to the internet or would like a copy of the release faxed or e-mailed to you, please ccontact Judy Chello at our corporate office. Judy's number is 203-356-4414. She'll make sure you get a copy right away. Before we get started, I just want to remind everybody that the conference call today will include some forward-looking statments 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 S.E.C.. In addition, certain non-GAAP financial measures as defined by the FCC may be discussed in this call. To comply with the FCC rules, we'll post a redonciliation of non-GAAP financial measures on our web site under the companies investor relations section. We will also from time to time update the web site with additional financial information. Any interested investors should check the site periodically for such information. The purpose of today's call is to discuss Asbury's third-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. Gordon Smith, our Chief Financial Officer, will surprise everyone with financial highlights. And after that, Ken will have a few concluding comments. And of course, as always, we'll be happy to entertain any questions you might have. Ken?

Thanks, Stacey.

I'd like to start by saying that in several respects this quarter's performance has been quite satisfying. Our earnings per share from continuing operations rose 13% in the quarter, but 21% of you exclude certain management-related change expenses which we'll get into a little later. This quarter's results also reflect and reinforce the balance and consistency provided by our diverse income streams, as well as our successful implementation of the comprehensive expense-reduction program earlier this year. Our core business has turned in result that for the most part were consistent with the trends we saw in the second quarter, trends that we had talked about, with strength in our services businesses more than offsetting a continued challenging environment for retail vehicle sales. Gross profits in these service businesses, parts service and collision repair, what we called fixed, and finance and insurance, F&I, were up at double-digit rates for the quarter and again, accounted for well over half of Asbury's gross profit. Asbury's improving performance over the past few quarters is a reflection of our focus on getting back to the basics of solid retail execution. We have eliminated several noncore businesses, made some key management changes, streamlined our expense structure, and quite simply gotten back to focusing on the basics of our core retail operations. But of course, I'm most pleased by the fact that the results of our work are starting to show up on the bottom line. Obviously a big focus this quarter as well as for the year has been our expense reduction initiatives.

Gordon will provide you with some specifics on how these initiatives affected the core's results. But, I will say this, while pleased with the progress we have made to date on our expense reduction initiatives, we are certainly not ready to rest. In fact, we have intensified our focus on variable costs because we are heading into the seasonably slower months of the auto retailing calendar, which is November through February. We have reviewed and implemented detailed plans of each of the platforms, and each of our stores within those platforms to ensure that their planning on the proper level of controllable expenses for people, advertising, and inventory, our three biggest controllable expense categories. On a seasonably adjusted basis and certainly compared with a year ago when, quite frankly, we did not react as quickly as we might have. We are expecting continued improvement in our expense ratios. It's worth noting that the process is a lot more specific than simply specifying platform-level expense rates. We evaluate each platforms' requirements, not only taking into account current performances but, also brand and dealership needs as well as local market conditions. I'll give you an example. In Atlanta, which has a relatively larger fixed operations business than most platforms, we would expect to have an expense structure tailored to its needs. Atlanta does, and that really means that fixed operations have a higher personnel component to it than variable or the selling of new and used vehicles. This means that in some cases, no realignment of expenses is necessary or desirable. On the other hand, other platforms must reduce their expenses and have plans to reduce their expenses. And these reductions will be on an absolute dollar basis through employee attrition, lower advertising, and stringent inventory control. Although the retail side of our business, new and used vehicle sales, remain challenging during the quarter, pretty much as we expected because we had talked about it with investors before, the services side of the business, fixed operations, and F&I, again delivered excellent results. Both fixed operations and F&I achieved high single-digit growth rates on a same-store basis from a year ago. Our platform, F&I per vehicle retail or PVR increased 6.4% year over year to $846 per vehicle.

Our success in F&I is directly atributable to management focus at the corporate platform and store levels, on strict adherence to menu selling which has driven higher product pentrations and profitability as well as the continued maturation of our corporate programs. In fixed operations, our gross profit was up 14% on a GAAP basis, and 8% on the same-store basis. Well in excess of our business model objective. To add a bit of color for you, our same-store improvement and fix was driven by a 6% increase in our import customer pay business. And even larger increase import brand warranty work, up nearly 18%, which reflects strong import vehicle sales over the last several years. Our domestic fixed business was down about 7%, both for customer pay and warranty work. Again, due to our heavily weighted import mix, we were able to exceed our 3% to 5% same-store fix long-term growth goal. So again, this is another example of how brand mix really does matter. The retail sales side of the business was as I mentioned expected, quite challenging. Our new vehicle retail unit sales were down 4% on a same-store basis, but would have been flat excluding Oregon, where we've been making some management changes and are beginning to see the initial signs of improvement. I'll have more to say on that in a few minutes. An interesting fact of note about our new vehicle sales performance is the 9% increase in our average selling price per new vehicle, which reflects our strong luxury brand mix. As a result, we achieved a 4% increase in same-store new vehicle revenue. New vehicle margins remain under pressure, as expected, and as discussed with investors given the industry environment. One area where we clearly have room for improvement is in used vehicles. This is the story I'm talking to you about. It's one that I'm preaching on a continual basis inside the business. Our same-store unit sales were flat and used, with dollar sales down about 2%. We have proven most notably in Jacksonville and Tampa that we can significantly improve our used vehicle sales by creating dedicated platform-level teams for used cars, which in a nutshell allows us to carefully monitor and maintain the right inventory by store. A large part or implementation challenge at our other platform, those other than Tampa and Jacksonville, revolve around making a cultural change at these platforms. And the way these platforms approach the used car process overall and specifically how they adopt the centralized used car team concept.

We are also rolling out used vehicle management software which we believe will provide our used car professionals better tools to manage inventors and maintain an optimal mix of vehicles. The bottom lane is that we could have done far better in used regardless of the industry environment and the continued aggressive promotions on new vehicles, which obviously make late-model used cars somewhat less attractive. At this point, I'd like to turn the call over to Gordon Smith, our new CFO. By way of introduction, we are welcoming Gordon to Asbury after an extremely successful 25-year career with General Electric. Where he played a key leadership role of CFO of several of G.E.'s most proviable financial businesses. Gordon?

Thanks, Ken. I'm pleased to be joining the Asbury team, especially since we have a very positive result to discuss. Income from continuing operations for the quarter were $17.2 million or 53 cents per share. The highest in our history. Contributing factors to this quarter's performance were our successful cost-control initiatives and our ability to adapt to changing market conditions. As I walk you through the details of our financial performance, I will focus my comments on our balance sheet, specifically our inventory position, debt structure, and cash flows.

Income statements focusing on our expense reduction initiatives and include -- and conclude with a few comments about the outlook for the remainder of the year. In regards to inventory, as Ken mentioned earlier, new and used unit sales remained a challenge, as we saw softness in the later half of September on into October. Therefore, it is vital that we position inventory levels accordingly. These sales inventory or DSI for new vehicle inventory to at the end of the third quarter was up slightly to 52 days compared with 50 days at the end of the same period in prior years. However our inventory mix is better. With 54% of our total inventory being luxury and midline imports, as compared to 47% at the end of the third quarter last year. Historically, luxury and midline import brands hold their value better than domestic and value brands. DSI on used vehicles has remained virtually constant with third-quarter of last year at approximately 40 days. However, we have brought down units aged grazed on 30 days more than 500 basis points from the third quarter of last year. On the other side of the balance sheet, our capital structure remains strong with debt to total capitalization ratio with 54% quarter end, up slightly from 53% at the end of 2002, as the result of $72 million of debt financing -- debt finance acquisitions during the year. Our $536 million of debt is broken down as follows -- $250 million of subordinated debt, mortgages of $116 million, acquisition debt of $144 million, and loaner and vehicle notes and other borrowings of $26 million. The outstanding balance of our credit facility leaves us with $306 million of available -- availability for future acquisitions. A positive attribute of the company's performance has been our continued ability to generate positive cash flow.

For the first nine months of the year, we generated $68 million in cash from operations. Resulting in a $26 million increase in cash, leaving us with $49 million of cash at the end of the quarter. In October, we put this cash to work investing $30 million in our swing line which has the same impact of paying down acquisition debt without reducing liquidity. Capital expenditures for the year totaled $33 million, and we anticipate that total capital expenditures for the year will come in around $44 million. Under our original projection of $55 million to $60 million, the decrease is primarily the result of timing of capital improvement projects. I would now like to shift the conversations to the income statements. As mentioned earlier with new and used unit sales trending down and with the continued pressure on vehicle margins, it's essential that we control our expense structure. I'm happy to report that in the third quarter, we've made significant strides in this area. Our major focus to this point has been personnel costs, both variable and fixed. Each platform has modified their pay plans to better match variable compensation with income-generating activities. In addition, each platform reviewed their staffing to ensure that they employ the appropriate level of administrative and managerial personnel. Specifically, SG&A expenses for the third quarter were $151 million, which included $2 million of charges incurred in connection with management changes in Oregon, Texas, and at the corporate level.

Adjusting for these costs, SG&A for the quarter was 75% of gross profit, which was flat with a very good-performing quarter last year and a dramatic improvement over the 78% we were running at the -- for the first half of 2003. After adjusting for one-time charges, moreover, the result was achieved despite an increase in insurance premiums of 66%, a 120-basis-point increase in SG&A expenses as a percentage of gross profit during the quarter. Now we'd like to briefly touch on the change in our effective tax rate from our historical rate of 39.8% to 38% for the quarter. As we operate nationally, our effective tax rate is dependent upon geographical mix of our revenues. We began an evaluation of our revenue mix during the third quarter, which resulted in the rate change. We will continue these evaluations in the fourth quarter and in the future with the expectation that our annual effective tax rate will fluctuate between 38% and 39%.

Turning our attention to the outlook for the remainder of the year, we believe that the softness in new and used vehicle sales that we experienced late in the third quarter and the beginning of October will most likely continue for the remainder of the year. As a result, we have reduced our original new and used unit sale targets for the rest of the year by a combined 2,500 units. As for our other product lines, we believe that the same-store gross profit growth trends that we experienced in both fixed operations and as an IPBR during the first three quarters of the year will continue through the fourth quarter. That in combination with the cost-control initiatives currently in place should produce income from continuing operations of around $1.55 per share for the year. This estimate does not consider certain items highlighted in our Q2 call, including the outcome of the ongoing arbitration proceedings with the estate of our former C.E.O. The potential charge of $3 million to $3.5 million, including the writeoff of capitalized costs if we are not able to consumate the Bob Baker acquisitions or any charges associated with the potential good will impairment at our Oregon platform. We changed management in Oregon this year and have been satisfied with their initial progress. With operating income growth of $1.6 million for the -- from the second quarter to the third, however continued improvement will be necessary in the fourth quarter and throughout 2004.

In accordance with FAS 142, we will cotinue to monitor Oregon as well as other platforms for impairment on a regular basis. In summary, I'm pleased with our results for the quarter, and I'm looking forward to the challenges that are in front of us. At this point I'll turn it back to Ken for some closing remarks.

Thanks, Gordon. I'd like to make a few more points. And then we'll take your questions. In terms of our performance at the platform level, there were three platforms that really stood out in the third quarter. Stood out for different reasons, but stood out nonetheless. As most of you know, our Portland platform has had more than its share of difficulties over the last couple of years, starting with a challenging regional economy and more recently a number of management changes. However, under this new CEO, Steve Silverio, who moved to Portland from our very successful Jacksonville platform, I think we are seeing the light at the end of the tunnel. And as they pro-verbally say, it is not the light from an oncoming train. While vehicle sales and operating income in Portland were once again well below year-ago levels, they, in fact, improved fairly well from this year's second quarter, and Steve -- Gordon gave you the numbers on that.

Specifically, in Portland, operating income was up notably this quarter versus the second quarter. You can discount a bit of this improvement due to seasonality. But it's basically a solid improvement. So we are once again optimistic that our Portland platform is finally headed in the right direction. Texas has also had difficulties off and on over the past year. This past quarter was particularly challenging one for our Texas associates as we made changes in several key management positions. We recently appointed new general managers at our two large Honda stores as well as at our Acura store under the new Texas CEO Michael Caine. We're confident performance will improve in Texas but, are anticipating that it may take a little bit of time. On the other hand, we had a very strong performance in our Atlanta platform driven in part by the platforms two Lexus stores and motor trucks as well as excellent growth in F&I and fixed operations.

Our six other platforms all had what I would characterize as solid performances overall, with increases in operating income on a same-store basis ranging from low single digits to the low double digits. I would point out that included in that group of six is the Jacksonville platform, which remains by far the largest, most profitable, and where we achieved a mid-single digit gain in operating income. Now I'd to update you on our -- acquisition activity for the year. So far, we've acquired four dealerships representing a total of approximately $330 million in annualized revenues. These deals, predominantly luxury and midline import franchises, put us firmly within our annual target range of adding between $300 and $500 million in annual revenues for acquisitions and obviously the year isn't over yet. Specifically during the third quarter, and this is all part of the $330 million I talked about, we closed on two deals. The largest, the BMW and Volvo stores in Atlanta are expected to generate over $100 million in annual revenue. The other acquisition, was a full-line G.M. store in Mississippi, which expected to add about $70 million in annual revenue. While there can be no assurances regarding acquisitions until a deal is actually closed, we often comment on how robust our pipeline is.

To date, we haven't really put numbers around it because we haven't talked about acquisitions until the deals were closed. We're going to give you a sense of where we stand specifically today in numbers. Right now, we have under contract three deals that represent about $175 million in annualized revenue. And another three deals representing $250 million in revenue under signed letters of intent. In total, about $425 million. Our acquisition program is on track, and there are still many attractive opportunities out there. The challenge for us is to maintain our discipline and continue to acquire the right brands at reasonable prices. As far as we can tell, we'll be able to meet our objective of generating half of the targeted earnings growth of 15% two-year acquisitions.

The other half of our growth model, as we've discussed many times, and I'd never get tired of talking about it actually, is organic growth. We continue to believe that Asbury is better positioned than most other retailers to generate strong organic growth in the years ahead. Our brand mix remains second to none, in my opinion, with about 65% of our new-vehicle revenue coming from luxury and midline import brands. So we have great brands, and our stores are located, in many of the most attractive geographical markets for automotive retailing in the United States. And we are now more focused on leveraging our fundamental strength as we go about delivering results for shareholders. It's simply all about quality of execution because the strategic elements are all in place. With that, we'd be happy to open the call up for q-and-a. Operator, if you could take over?

Absolutely. Ladies and gentlemen, the floor is now open for questions and comments. + q-and-a Once again, ladies and gentlemen, to pose an audio question, press one followed by four on the telephone keypads . Are first question of the evening comes from Rick Nelson

Thank you. Good afternoon.

Hi, Rick.

Hi, can you, Ken talk about the multiples that your paying for these acquisitions, or the evaluations.

The multiples we're paying is -- with the business -- I've been with the business two years, and they haven't changed a whole lot. Domestics go from, you know, three to five, call it four. And the imports and luxuries go four to six, and typically at the high end of that range. The better quality product, ones where you can see that they're taking market share, obviously, go for a higher amount. Talking about -- you could look at the numbers that come out each month on the vehicle sales by brand. And it -- it correlates pretty well with the upper end of the range. So but it's consistent.

We haven't seen the bidding frenzy or -- or heightened competition driving those numbers up.

All right. Some of the other car dealers have not been making too many acquisitions. And their parameters are within the same multiple range as yours. Why do you think you've been successful when others haven't?

I can't say that they haven't been successful. I'd have to take your word for it. I just -- I just think we're out there in the markets, our platform approach, which really says know your local markets, be the leading local trade name, the dealer -- the CEO in our platforms all have on average over 20 years experience. They're supposed to know their dealers. Who are also in the market. Hopefully that gives an edge in what people want to sell. They know they're selling the store to someone who's a good operator. Cause all money is green at the end of the day.

My dollar from Asbury is as good as anyone else's. So I think it all has to do with relationships. Accepting of course your premise that the others and -- are not doing what we are doing.

And are these cash and stock combinations or cash deals?

These are all tuck-ins, all for cash.

Okay. Also it appears new vehicle sales are quite soft in October. I'm wondering, why you think that is. Is it the incentive environment? What do you anticipate along those lines?

New vehicle sales are a little softer. And we've given you quite a bit of detail, I think, on how to -- how we've thought about modeling our view of the full year. This is always a retailing conundrum when results are a little softer than you anticipated, especially when the economic environment is very strong.

And obviously, everybody knows about third-quarter GDP growth this morning announced at a little over 7%. We are very good July and August. September, as Gordon indicated, we saw a slowdown. It's continued into October. I think that the consumer may be preferencing soft goods or hard goods, right now. I don't have access to sales of appliances. Homes are strong. But, I think that may be a reflection of where interest rates are. I think this is just something where the consumer -- for the time being is preferencing another class of goods. What I can say is that historically when the economy is good, when automobile sales have slowed, they've always come back because this consumer preferencing one category over another doesn't sustain itself. So in other words it's not the translation of a long-term pattern. You typically would not see a slowdown that is of any permanent nature without some sort of shock to the system. In terms of adverse economic news, the sharp uptick in interest rates and so forth. So, it's something that we think is temporary. I think personal it's going to be a very good Christmas for the soft goods guys out there. And I think we've got some slow months ahead of us.

Our plans have been cast accordingly.

And you I know have talked in the past about the reverse correlation between new and used. Now it appears we have both new and used soft. When do we see those trends --

Well, I think that our used -- the softness in our used business is our fault. I don't think we've positioned our inventors as profitably as we should have in terms of price points and overall merchandising. I think as Gordon indicated, we are looking for the slow months, November through February, to be just that. As, Gordon said we pulled 2,500 units new and used combined out of our prior projection for the fourth quarter. And we're just going to work our way through without shocks to the system. Our expectation is when typical new vehicle buying season opens up. The early part of next year. It's going to come back as it normally does.

Thank you.

Thank you, Mr. Nelson.

Our next question comes from Paul Ross with IMG. Mr. Ross, your line is live. Mr. Ross, your line is live. I'll check his line. Our next question comes from Jerry Marks with Raymond James.

Good afternoon.

Hi, Jerry.

Just a quick question on the guidance that you gave. You kind of gave percentages for parts and services, and F&I. But you said that you pulled 2,500's from your prior projections for new and used I mean does that mean they're expecting, you know, basically like flat sales in the fourth quarter for new and used or how does that translate on a percentage basis?

Oh, Gordon -- I think we put that in the press release. I thought we were -- we said we were down mid to single digits on a comp store basis.

I apologize.

We had down 10%, and new -- used down 10%, and new high digits, 7% to 8%.

Okay. And then in terms of consideration kind of -- you're saying three to five times. If we look on a revenue basis, I mean, it's about $425 million, that's under contract or is that consigment is that the way that works out?

No. What you do is when due a deal, first you sign a letter of intent which is nonbinding. It basically stops someone from shopping the deal elsewhere. Then you put up a binding contract together. And then the binding contract is presented to the factory for approval.

So we've got three deals where we've got binding contracts simply waiting for either factory approval or the -- the simple closing process to happen because you've got this paperwork that has to be done, leases that have to be signed for real estate and so forth. Then we have three deals that are subject to non-- nonbinding letters of intent. Where we feel very comfortable that we're going to be able to close on a transaction but we won't give anyone assurance that we can. And again, these are also subject to factory approval. So we've got 175 under contract, 250 under letters of intent. You'd say, well, that's 4.25, does that take us to 750 for the year? The numbers add up that way. Will it happen? We can't give you any assurance that it will. I feel very comfortable about the ones under contract.

Right.

And I -- I think the deal is that we've got under letters of intent represent good quality deals with honorable sellers.

Okay.

But so from a modeling perspective, it would be dangerous at least for the 225?

Well, we haven't built any of that into this year. If you want to build it into next year, I wouldn't.

Okay. When we --

-- Pardon me. When we talk about next year, I guess good Q & A procedures says I ought to let you finish your question before I answer. But, I think that until the deals are closed I wouldn't model them. When we announce a guidance for '04, it will exclude any deals that have not closed.

Okay.

Just the way we do things. We don't talk about it until they're done. There's no reason to include puffery of any sort in our announcements.

I understand going back to Rick's question about talking about the difference between -- you know, the multiple ranges sound similar. When you buy these dealerships, do you usually get the real estate with them?

We don't want the real estate. If the real estate comes with it, we'll typically sell it off in a sale lease-back transaction. We're not in the real estate business. And we build that cost into the overall return equation so that whether we evaluate return and invested capital, that lease cost is built in as an operating expense.

Okay. Thanks.

You're welcome. How's the weather in Tampa?

Thank you, Mr. Marks.

Too late for the answer.

Our next question comes from Paul Ross with IMG.

This any better, Ken and Gordon?

Yes.

It's great, Paul, how are you today?

Fine. Could you talk about gross margin percentages in new and used in the third quarter versus the second quarter and what your expectations are in the fourth quarter, please. Not dollars but percentages. Profit, percentages.

In total, our margins this the -- in the third quarter on new was 6.4% versus 7.1% in the same period last year. In terms of what it was the second quarter, it was actually a little higher at 6.7%. In terms of used in the third quarter, we were at 12%.

And same time last year, we were at 12.4%. And in the second quarter of '03, we're at 11.5%.

And can you --

And for the father quarter, what we've modeled in, we're not seeing it -- a deterioration in the margins. They're holding relatively stable. The information we've got so far in October is that margins are holding at the third-quarter levels.

Any comment you'd like to make about the margins?

We've talked about -- you know, I stomped around and talked about new vehicle margins being under pressure. And I think that's going to continue for the next two to three years. And we've cast our plans accordingly to deal with it.

So think we'll -- I think were going to be able to make our organic growth given a softer margin environment because -- I think if you look at the headline from the Reuters pickup of our press release today, basically said the services side of the business delivered. Which is what we try to tell people. We -- we have a business model that regardless of how anyone or -- any one or two elements are performing, investors still want to see consistency and profitability delivery. And, we think that we've got it engineered such that we can do that. So we think it's going to continue. We think that the supply of new vehicles is going to continue to exceed the demand, obviously except for certain categories. Certain models within certain brands. That's just the environment we're going to be in. We're going to continue to make our plan so that we can continue to achieve our 15% growth model, half from organic, half from acquisitions. We think over time we will deliver on that consistently and investors will be happy.

Thanks, Ken. Thanks, Gordon.

Next question comes from Adrian Dale with CIBC World Markets.

Hi, how are you?

Fine, Adrien, your self.

Oh good,

Thank you. Regarding the Bob Baker acquisition, do you have any sense of a target date for everything there will be resolved and you'll have a final decision?

My sense is what I think is going to happen -- and I'll -- in fact may not happen. We are -- we have basically come down to very few differences in paperwork between Asbury and Toyota in terms of signing a framework agreement. And we're hopeful that we will be able to put the relationship between Asbury and Toyota into a very concrete form. So we understand where we stand relative to the future acquisitions. And make the unknown unknowns. That said, if we can't, we're going to have to terminate the Baker acquisition discussions. And I -- I would like to think we're going to understand that sometime in the next week or two. Every time I think we're getting that close, we always narrow the differences.

But it takes a little longer. At this point, we're down to, dare I say, perhaps one difference other than specific wording that goes into a contract. That said, if we -- if we can overcome the Toyota paperwork issue, are we still -- we still have to reach agreement with Mr. Baker on how we see the future of the Ford piece that transaction. And that still has to be worked on. I am hoping that sometime because Mr. Baker wants to go with his life and and we want to basically, and we want to basically free up the capital we've reserved for that transaction, before December 1, we really need to go on with things. So we're hoping that we'll be able to resolve it one way or the other. We're optimistic we're going to be able to reach a resolution with Toyota. That means -- they're very nice people out in Torrance, California.

We'd like to be able to do a transaction to acquire the Baker business in San Diego, forest fires notwithstanding. We'll see. We'll let investors know. But, the key to take away from this is we've made our -- we believe we've got built into our numbers the acquisitions necessary to fulfill our acquisition side and growth models for next year, first point. I guess that's the main point.

Okay.

That these are taken care of.

All righty. And if by some chance you don't close on the Bob Baker acquisition, do you have another platform in mind to get Asbury into the California market? Another platform acquisition there?

The answer is no, we don't, but we're considering a number of different ways to get into the southern California market because, it's an excellent automobile market regardless of what the folks out there with their -- the registration fees and went into effect as of October 1.

So we think that we're going to be able to take advantage of that wonderful market in southern California. And if it's by platform, fine. If not, there are other ways to assemble a group of high-quality brands.

Okay. Aside from the California market in general, are there any other platform opportunities that you're looking at right now? Or are you just focusing on tuck-ins right now aside from Bob Baker?

Well, we're always talking to people. But, the primary focus right now is on tuck-ins.

Great. Thank you very much.

Thank you. Ms. Dale Our next question of the afternoon comes from Eric Selly with Wachovia Securities.

Hey, guys. Just -- how are you?

Good.

Just a real quick question, bookkeeping. On your availability on your revolver, I was just wondering what precluded you have from having the whole facility. Did you have to put some of that up because of some acquisitions, or was it just letters of credit?

I -- I don't understand the question.

Outstanding debt -- Um --

We haven't done the acquisitions.

So it's available to us when we have the right opportunities. With the $306 million is available to us.

Okay, I was asking with 144 out on it, you know, 550 in total --

No, 450 --

450. Okay. Sorry.

We brought down $100 million in --

Okay, my mistake. And then my second question is, you know, trying to get your temperature toward building inventory in the fourth quarter of this year, obviously with the backdrop of last year where we saw, you know, manfacturers delivering vehicle shipments early, you know, obviously inventory grew, are you going to be aggressive or somewhat cautious toward inventory building in the fourth quarter?

Having not been in the business last year, it's going to be brabd brand specific. Clearly if we can get high-line inventory, we'll take it. There's -- there's usually not a deterioration of value in high its line. So -- So the inventory on that side, in that mix says there's no problem. We're -- we're more concerned on the value line and making sure that we keep that in line.

Our focus will be on the used side. And keeping that inventory and actually trying to push that down. Currently as we said, we're about 40 days. We're trying to pull that down to maybe 30, 35 days by year end so that we don't take the wholesale losses that we've experienced in the past.

All right, guys. Thanks a lot.

Next question comes from Matt Fasler with Goldman Sachs.

Thanks a lot. Good afternoon.

Good afternoon, Matt. Glad you could join us today.

Thank you so much. A couple of questions. First of all, you know, if we use your projections for the fourth quarter, this would be I guess the second straight year that the fourth quarter would be softest in terms of same-store sales growth, both for new and used. And I'm wondering, is there in some change you think in the seasonality of the industry related either to model transition or to the timing of incentives that you think is just taking automotive sales away from the fourth quarter, redistributing them elsewhere in the year?

You know, that -- that isn't -- that's an interesting question because I have been wondering the same thing when I look at the monthly SAR numbers. Because when you look at it, the seasonality factors, if they're good, you shouldn't see them jumping all over the place, which they have typically done.

My suspicion is that there may be some change in the pattern. But ,again I don't think it's something that affects long-term vehicle sales. In other words, if this is a -- pick the number for this year, 16.5 million, whatever, I'm talking actual sales. The end of the day when they're tallied up, January 5, people know what they actually sold, do you want to recounterize how that falls by months? I think that might -- that might be appropriate. 2002 wasn't particularly soft for us. We didn't manage our expenses very well. This year we're seeing some softness. But you have to recognize there's been 60 month almost of wonderful vehicle sales. And this is the -- the fifth great year in a row.

But -- may not the best of the five, but five record years. And I think that to some -- some level customers may be preferencing some other categories. But as I said earlier, long-term, I don't believe that affects the overall demand for vehicles. You will see some impact on the domestic side with incentives. I think that they ultimately lose their punch. If 3,000 didn't work, you go to 3,500. Once that's flowing in the customer's veins, for a while then where do you go? 4,000? It's discouraging to see new products. Brand-new products on the domestic side now getting a incentive. You don't see that with the import brands. You don't it with -- in the luxury -- the import luxury brands for sure. You only see it in those with a closing out a model, for example, the way BMW closed out the old 5 series in September and the new 5 series is flying out. So I think there may be a little calendar shift.

I think it's more the sort of the economic environment, 60 great -- 60 great car months, one on top of the next. And you can't beat a 7.2% increase in GDP for saying the future looks pretty bright.

I guess a related question.

By the way, Matt, I don't mean to interrupted. You follow hard goods, so maybe it's not a good -- process to ask a question of a questioner. Off-line, I'd be delighted to talk to you about what the hard goods retailers are seeing. That's something else.

Sure. I guess second related question. How has the composition of the used car business changed as you think about the third quarter in particular some some of the another auto retailers said both on-line and off-line that the discounts for example on -- both on the '03's that were getting cleared out late in the third quarter and on the '04's as you spoke about the initial -- initial cuts of the new models coming out very highly -- incentivized with a lot of promotional dollars backing them up. That might have put some pressure on different pieces of the used car market. I'm wondering what you saw within your used car mix that -- that would support or negate the statement?

Well, there's no question, I think we referred to it earlier. The -- the late model used vehicles are under pressure.

Because basically when you look at -- this is the way you have to think about it when you're selling a vehicle. Monthly payment. The monthly payment -- payment for a late model used vehicle when you can buy a new one for the same amount, it's -- really tough to convince that customer that they shouldn't have a new vehicle. So when I talk about mix and why we left money on the table, I don't think we -- I think we had a little too much positioned against the late model used vehicles and not enough positioned against the slightly older models, where the quality is fine, yet the price points make a meaningful difference in the monthly payment. We are working on strategies to properly position the inventory, and a big piece of that is having these centralized used car teams because it's very difficult to take 90 used car managers and say go out and change your inventory mix. It's easier to have nine of them. Nine used car managers at the platform level do that.

And would you expect that used car prices overall having stabilized if you look at some of the option numbers would come under pressure again, given that this is not supposed to be a problem thats unique to you?

Well, I got to tell you, it's tough to answer that question. Sort of like predicting interest rates. I used to be challenged to do that. It's a tough thing to do. We at the end of the day, really are indifferent to auction prices because we sell from essentially cost up,

So margins can take little movement here or there. on used, the wholesale losses if you keep your inventors short, as Gordon said, are -- are aging is down 500 basis points against a year ago. If you watch that, you really don't get hurt, and you're turning your inventory quickly. 9 or 10 times a year. So I really don't think we're going to see -- if I had to predict -- I'm using this time, killing it to pull my thought together, I don't think you're going to see a whole lot of downward pressure. I think you have fewer off-lease vehicles coming. And so I think you're going to see more -- a more traditional month-to-month pattern in auction prices that reflects seasonality rather than an overabundance of vehicles.

Got you. Thank you so much.

Sorry for the long-winded answer.

Our next question comes from Nate Hudson with Bank of America Securities.

Good afternoon.

Hi, Nate. A couple questions for you.

First, the jump in the average sales price was pretty striking at 9%. How much is a shift, just your higher priced brands selling better and how much is actually a -- an increase in price in given brand?

All of it in brand mix. Virtually.

Okay, for example, your Ford average price isn't increasing, it's just more BMW and less Ford?

No, the new f-150 is selling. We're very pleased with that. But we have wonderful Lexus stores, BMW outperforming the market. Lexus we outperformed the market. And so when you are selling your luxury mix and outperforming those brands nationally which we've done, and we're weighted toward those brands, well, our average overall mix is going to go up. What we're trying to do is obviously the facts are the facts.

And you see them in the color commentary that we're trying to add is, hey, it's a side benefit for the brand mix. We keep preaching it. We tell you we like all of the companies, the six of us in this space. We happen to think that brand mix is really important and insightful to the future. We try to show you and tell you when it affects the results that we're reporting. And in this case, it's attributable to it. So when you look at the average gross profit dollars per new vehicle retail, it was only down less than $30 against the same quarter a year ago. That's all due to mix. The rate went down, but the bucks we earned virtually the same.

I apologize if I missed it. Did you actually break out the domestic import luxury mix in this quarter?

I don't know --

No, we didn't.

I think we just talked about -- typically 65% luxury midline imports. I don't think we do that until year end.

Okay. And then just -- last cleanup question. How much cash if any was expended on stock repurchases in the quarter? And then secondly, how much was spent on acquisitions in the quarter?

There was no stock buy-back in the third quarter. And we spent $37 million increase in our debt from acquisitions in the quarter.

Great. Thanks very much.

You're welcome.

Thank you, Mr. Hudson. Our next question comes from Paul Kerry with Fountain Capital Management.

My questions have been answered. Thank you.

At this time it appears we have no further audio questions. I would turn the floor back over to Ken Gilmore for any closing comments --

Well, it's Ken Gilman, but that's all right. Paul, I hope we gave you good answers to the questions that were answered during the prior questions. We are looking forward to ongoing discussions with investors. We're out there regularly meeting with investors. We like to talk about the company. We try to show you and share with you what's going on. We always, obviously, try to stay within the limits and rules of FD.

We think those of you who saw the -- the live webcast from our new Richmond BMW store, we're trying to be innovative in the way we show you how we are putting your money, the investors' money to use. So that we can demonstrate to you that our business model, the way we approach automotive retailing is a place for you to actually invest your money. So with that, I'd like to say thank you very much. And for those of you who I don't talk to and Gordon doesn't talk to before Christmas, have a very nice holiday season.

Ladies and gentlemen, we thank you for your participation in today's audio teleconference. You may disconnect your lines at this time. Have a pleasant evening.