Asbury Automotive Group Inc (ABG) 2004 Q2 法說會逐字稿

Good day everyone and welcome to the Asbury Automotive Group second quarter 2004 earnings results conference call. This call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to the Director Investor Relations, Ms. Stacey Yonkus. Please go ahead ma'am.

Thank you. Good morning everyone and thanks for joining us today. As you know this morning Asbury reported its second quarter earnings. The press release posted on our website at www.asburyauto.com. If you don't have access to the internet and would like a copy of the release to fax or e-mail to you please contact Gayle Pilatico (ph) at our corporate office, Gayle's number is 212-885-2520. She'll make sure you get a copy right away.

Before we start I just want to remind everybody that the conference call today will include some forward-looking statements that are subject to certain risks and uncertainties which are detailed in the company's 2003 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'll post a reconciliation of non-GAAP financial measures on our website under the company's investor relation section. We will also from time to time update that website 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 second quarter results as well as to update you on our earnings outlook for the balance of 2004.

Today's agenda will be as follows; Ken Gilman, our President and CEO will begin with a few overview comments. Then Gordon Smith, our CFO will provide everyone with some financial highlights. After that Ken will have a few concluding comments and then we'll be happy to entertain any questions that you might have. Ken?

Thanks Stacy and good morning to everyone. I'd like to start the call by saying that we're pleased with the way our business model performed during the quarter with solid overall gross profit productions despite lower than expected vehicle sales especially in June. Our service business has again performed particularly well with strong increases in income from both financial and insurance and fixed operations.

The steady growth from these businesses is effectively offsetting the continued challenges we face in new and used vehicle sales and enable us to produce nearly 2% increase of same-store retail gross profit for the quarter. As per earnings per share from continuing operations rose nearly 70% from the quarter and for the first half of the year are up over 15% against the prior year. Obviously on a year to date basis we're pleased with the year over year increase in earnings as well as with the improvement in same-store retail gross profit and again I'm pleased with the gross profit we generated in the second quarter. However, with that said I will tell you that I am not entirely satisfied on two counts. First while to some degree the second quarter results were somewhat affected by lower sales in June given our brand mix and geographic reach, we could have done a better job and second, expenses and how they impacted the second quarter certainly merit further conversation as our bottom-line performance would have been significantly stronger if not for the year over year increase and SG&A expenses.

I'll let Gordon provide you with additional color on expenses in a bit. I'm going to take a moment to comment on the noise that we've heard about our industry lately and that industry is the Automotive retail and services industry, specifically June results. I think it's important to address this as it frames our outlook for the remainder of the year. As everybody knows by now, overall end of the quarter much of the US retail sales environment present largely out of line with expectations and new vehicle sales were no exception.

The trends we experienced on a variable side of the business at the end of the quarter were very different than what we have experienced historically, specifically the deceleration in new car sales between May and June. To that point, our view is that June will not set the sales tone for the balance of the year with the election of course as a wild card. Our working assumptions that June's sales drop was essentially an aberration which was likely fueled by an assortment of reasons such as softer incentives, overall perceptions of the economy related to gas prices and excessive talk about interest rates. How does this relate to Asbury? My view is that if we move too abruptly to shift gears as it pertains to the cost structure and our general approach to the business that if we simply adopt a knee-jerk reaction to June results we will be forfeiting a meaningful opportunity for sales and gross in the upcoming quarter. Frankly I've seen no evidence today to prove anything to the contrary. If we change our strategy every time someone theorized new car sales were going down or being pulled ahead, we'd spend all of our time changing pay plans adjusting advertising budgets and the like instead of running the business.

This debate has being going on since October of 2001 when GM first came out with the concept of 00 and as we all know the balance of the industry followed and has enjoyed quite a prosperous period since and when you consider that only about a quarter of our overall gross profit is derived from new car sales, with historic focus on monthly (inaudible) numbers and the impact on our ability to deliver meaningful results is overstated, so we've chosen at least for now to stay the course. Getting back to second quarter results, not unlike the industry our performance on the vehicle sales side of the business was off in June, but in saying that I'll be frank and tell you that was not merely a factor of industry performance.

We made a conscious decision that during the quarter to step up our advertising spend in an effort to sustain new unit sales, defend market share, to build unit volume for our factory partners. An effort that not entirely successful while we remain focused on sustaining unit volumes, we found independent dealers were willing to be more aggressive on price promotions to maintain their market share than some of our local markets which foster an even more promotional environment and so we also felt a bit of pressure on our new car margins.

Our used market was equally challenging. While the pace of new car incentives slowed towards the end of the quarter, the still a highly incentivized new car market continued to adversely impact used vehicle unit sales. The good news is that we recognized higher margins per vehicle on a same-store basis, a 40 basis point improvement. Clearly it remained difficult for late model used cars to compete with heavily incentivized new vehicles, both in lower unit sales on an overall same-store gross profit decrease of 1 1/2% when compared to the prior year. As always inventory continues to be the biggest factor influencing used vehicle sales to that effect we have rolled out new software across all of our platforms that helps us track our used vehicle inventory and ensure that we have the right vehicles and the right dealerships. In addition, we have significantly increased the percentage of our used vehicles that sell for under $10,000. Vehicles that don't compete directly with new vehicles. We've also added more financing sources for the non-primed customer to help us address the slower end of the market more effectively.

We continue to believe the used car business continues to present a considerable opportunity for us and will remain a significant area of focus for Asbury this year. Although the retail side of our business, new and used vehicle sales remain challenging during the quarter, the services side fixed operation [indiscernible] again delivered solid results.

Parts service and collision repair continue to produce same store sales and gross profit increases of approximately 3 and 4% respectively, which are right in line with our targeted 3-5% increases for this business. However, when you dig a little deeper into this business you get below the cover so to speak the news gets even better .

Our customer paying warranty, parts and service businesses were collectively up approximately 9% on the same-store basis. These results were partially offset by significant reductions in our body shop business, which was boosted a year ago in the wake of a major hail storm in Texas. FNR remains a key driver of our overall performance. Our platform FNIPVR increased 4% on the same-store basis from a year ago to $845 while on a consolidated basis including acquisitions our net FNI revenue rose 17% in the quarter.

In summary the strength of our service businesses which consistently deliver more than half of our total gross profit is offsetting the challenges we faced on the retail side. On that note, based on performance for the first half of the year as well as expectations for the remainder of the year we see no reason to adjust our forecast due to a lackluster June. We are working under the assumption that the onset of additional incentives in July as well as continued strength in the economy will drive additional traffic into our dealerships. At this point I'd like to turn the call over to Gordon to discuss our financial performance in greater detail, Gordon.

Thanks Ken. As Ken just mentioned this quarter once again has demonstrated the strength of our business model, as net income from continuing operations increased 6.6% for the quarter and 15.4% for the first 6 months of the year, despite a volatile vehicle sales environment . The solid performance of our fixed operations and the finance insurance business as well as acquisitions contributed to the growth. As I take you through the details of our financial performance I will focus my comments first on the components of net income, not already touched on by Ken, specifically selling, general and administrative expenses and our effective tax rate. Then I'll take a few minutes to walk you through our balance sheet in particular inventory management, debt structure and liquidity . I'll conclude my comments with an outlook for the reminder of the year.

SG&A as a percentage of gross profit increased 150 basis points to 78.8% compared to last year's quarter as a result of three management decisions. First in attempt to drive unit volumes we increased our advertising spend on a same-store basis by $1.1m resulting in a $31 per vehicle increase over the prior quarter. Second as we had talked about in the past we made a strategic decision to enter the southern California market. During the quarter we acquired 3 franchises , 2 stores in Altamonte, California, a Honda and a Dodge store and a brand new Nissan store in Ranchero, Santa Margarita which is one of the fastest growing areas in southern California. We immediately launched an advertising campaign to introduce our new brand name Spirit automotive to the market. We also started our major renovation project at the Honda facility and incurred additional cost designed to maintain sales during the construction period. All in these stores had a pre-tax net operating loss of approximately $400,000 during the quarter. However, we feel that these acquisitions position us well for substantial growth in one of the best car markets in the country. Third we incurred relocation costs associated with moving one of our Atlanta Lexus dealerships into one of the largest and most advanced facilities in the country. I invite all of you if you're in the Atlanta area to take a tour of this facility, I'm sure you'll be impressed .

In addition we are in the process of opening what we believe will be one of the highest volume Honda dealerships in the country in North Dallas. The costs associated with these management decisions which have the effect of the increasing SG&A as a percentage of gross profit by 1.3% as compared to the second quarter of last year are specifically designed to deliver future growth. Expenses were a disappointment however as our dealerships did not deliver the productivity we believed was achievable. Part of the reason was because of the sales volatility we experienced late in the quarter as it is very difficult to adjust the expenses fast enough when unit volumes are not like you expect. This was compounded by an adjustment to some of our store pay plans designed to compliment our advertising campaign which increased personnel costs as a percentage of gross profit by 1.2% in the second quarter of this year as compared to prior year. But with that said there are no excuses. We have to do a better job and deliver productivity improvement.

Switching gears as we mentioned in our press release, the St Louis platform was hit by a major hailstorm on the Tuesday before Memorial Day. The platform is located on one campus consisting of 8 luxury brands. Lexus , BMW, Audi, Mercedes, Cadillac, Range Rover, Infiniti and Porsche. Approximately 70 % of our inventory or about 700 vehicles were damaged in the storm.

Lost sales and incremental costs resulted in a 2 cents hit to EPS for the quarter. I want to publicly commend the St Louis team for doing an incredible job in minimizing the financial loss, which could have been significantly worse. Through June we have sold approximately 25% of the affected vehicles at near normal profit margins. However, these were the vehicles that accrued the least amount of damage. In the third and fourth quarter as we sell through more severely damaged vehicles we could encourage much as a million and a half dollars of lost gross profit.

Moving down the income statement, our effective tax rate for the quarter was 36.8%, slightly lower than our anticipated full year rate of between 37 and 37.5% as the result of a one-time tax benefit of $170,000. Based on our revenue mix, our effective tax rate this year will be slightly lower than the 38% effective rate for the full year 2003 after adjusting the prior year for the effect of the Oregon(ph) impairment.

Turning your attention to the balance sheet overall inventory was up $96m from year-end. The majority of which was driven by acquisitions, although we did experience a slight deterioration in day sales. Our new vehicles sales day supplies for the quarter was up two days as compared to last year's quarter to 67 days, mostly the results of weak new vehicle sales volume in June. Used day supply for the quarter was also up two days for the period, to 45 days, however the inventory is fresh as 91% of the inventory was less than 60 days old as compared to 89 days at June 2003.

Since we have not had the opportunity to talk with most of you in quite some time I want like to take a few minutes to discuss our capital structure. At year-end our debt to total capitalization was 58%, which was driven up as a result of the non-cash impairment charge that we incurred in Oregon in the fourth quarter. This charge has the effect of increasing the ratio by 150 basis points. As of the end of June we have reduced the ratio to 54%, half of this reduction can be attributed to the fact of that sale lease back transaction that we completed on July 1st. In connection with this transaction we classified $40m of variable rate and $24m of fixed rate mortgage notes payable to liabilities associated with assets held for sale during the quarter. Under the terms of this transaction, we sold proximately $101m of our dealership facilities for $115m and leased those properties back for an initial lease term of 10 years. We used approximately $64m of the proceeds to repay mortgage debt, decrease total non-floor, decreasing our total non-floor plan debt by $61m from year end to $532m. Leaving, approximately $52m available for future CapEx and acquisitions. The transactions, which in total is only slightly dilutative will have an effect of increasing SG&A by approximately $2m or 1% of gross profit per quarter which, will be offset by reductions to interest and depreciation expense.

CapEx, so far this year we have spent $34 1/2 m on capital expenditures, $9 1/2m of which was financed by sale lease back transactions. We expect to spend between $65 and $75m on CapEx project in 2004 with approximately 1/3rd financed through sale lease back transactions.

Looking ahead we are comfortable with the average range of analyst's earnings expectations for the full year of between $1.70 and $1.75 per share. Factored into the range is the potential reduction in gross profit of up to $1 1/2m at our St. Louis platform as previously discussed and the assumption that June market environment was an aberration and not a trend. In summary I am pleased with our income growth so far this year proving again that our business model works. We have some expense challenges ahead of us for the rest of the year as we monitor our advertising spent on review variable paid plans at several of our locations. However, these challenges present us with excellent opportunities. With that I would like to turn the call back over to Ken for some closing remarks.

Thanks a lot Gordon. I would like to provide a bit more color on a few areas and then we will take your questions. Given the geographic diversity of our platforms a particular bright spot was Arkansas which again performed very well posting low double digit increases in operating income. You may recall last quarter this platform recorded operating income that was more than double the prior year's quarter with same store unit sales increases well in the double digits for both new and used vehicles. In Oregon the turnaround continues as we've posted a small operating profit for the quarter compared to a loss a year ago. Unit vehicle sales were down but the gross on those cars that we sold was up and we are also achieving solid overall expense reductions. Several of the other platforms had modest declines in the same store operating income for the quarter generally in the single digits on a percentage basis and mostly for reasons we have discussed already this morning. St Louis as we mentioned was negatively impacted by a severe hail storm in May. In Texas we made an important move during the quarter to improve performance as the platform continued to run below our expectations due to continued difficulties with its two large Honda stores. Our biggest step was the appointment of Tom McCallum our former VP in charge of finance and insurance as the new CEO of our Texas platform. Tom is a Texas native and knows that market extremely well. He is an industry veteran and a true professional and we are confident that he can get the situation turned around.

On the acquisition front we continued to make solid progress during the quarter. As Gordon noted we acquired three dealerships in southern California with annualized revenues of approximately $145m. As he mentioned we incurred some start-up costs related to the development of our initial presence in the market when we acquired those stores. As we continue to build our presence in Southern California, we will of course be able to better leverage these expenses. With the acquisitions completed in the second quarter on a year to date basis we have acquired a total of 6 dealerships with annualized revenues of approximately $315m which is already within our goal for the full year of adding between $300m and $500m in incremental revenues on an annualized basis from acquisitions.

Before we turn the call over to the operator for Q&A we want to take a minute to address the current valuation of Asbury's common stock. As most of you probably know by now we recently announced the withdrawal of our planned secondary offering. With Asbury trading at a multiple of only 8 times the current year's consensus earnings estimate, our selling shareholders simply don't believe present valuation levels reflect the inheriting growth potential of the business. While it has not been my practice to share my thoughts with investors on share price evaluation and most of you know that, as when we talk about the business or what our prospects, I do feel compelled to share with you, my conviction that the stocks current valuation is not at all justified by recent financial performance of Asbury or our outlook for the second half of the year. While all can see there is some element of cyclicality to any retail business. The automotive retail and services business, specialty retailing business, discount stores department stores what have you, I think we have amply demonstrated that our business model is robust and far more resistant to the cyclical nature of new vehicles sales as the OEM's would experience, them than seems to be generally perceived.

The business model continues to perform as we posted double-digit earnings growth during the first half of the year despite a difficult retail sales environment. Our business model calls for 15% annual bottom-line growth with half driven organically by the services side of the business and the other half fueled by acquisitions. A model I believe that is both reasonable and readily achievable. As we execute against that objective over time, we believe the stocks relative valuation will be recognized and with that final comment we'd like to open up the call for Q and A. Operator?

Yes thank you. We will now begin the question and answer segment of the conference. If you would like to ask a question during this period, please press star one on your touchtone phone. If you no longer wish to ask a question, press star nine. If you enter the digits incorrectly please allow five seconds before you re-enter your digits. And just a moment while we have everyone cued up.

And our first question comes from Matt Nemer with Thomas Weisel Partners.

Hi everyone.

Morning Matt.

Quick question on inventory. Can you give us a sense of how that might break down on a day's basis between domestic and import and if you have any brands that are over 100 days.

Sure, let me just get the exact numbers here. If the - - the domestics inventory is days supplied -- day's sales is 99 days with Ford being the highest at 111, Chrysler at 85 and GM at 90.

The Asian brands were at 53 days up slightly from the same time last year and European brands were 61 days.

Great. That's helpful and then the second question is on the hail storm. It seems like there has been a lot of hail storms this quarter but I was just wondering if - - why you wouldn't see an impact - -an offset for that impact from additional parts and service? I guess, I should say body shop revenue.

We will but not completely and as you, you know we can only recognize it when the work is done. We flooded the body shop. There is some lag in getting the requisite number of parts because of the concentration of luxury vehicles in one place is highly unusual.

So, we've considered that in the overall guidance we've given when we talk about the reduced level of gross profit go forward. So that's sort of netted in.

What do you mean?

We've got cars stacked up and we've got customers. We're not the only ones that lost vehicles in that market. A lot of our retail customers did and we have to have a balance between how we repair our own vehicles and how we repair our customers' and again that takes time to get to the shop and the practice in the industry is that you're only going to recognize that when you fill out the repair order at the completion of the work.

Got it. And then does the - - is that covered by insurance or - - I'm just trying to figure out what the cash impact is there.

Partly, it's covered by insurance directly. - -It's a direct cost that we incur. It is covered by our property insurance. We are working with the insurance carriers on the - -what I'll call business and interruption piece of the loss.

So, there is the potential that that is also covered. It's a little bit of a grey area but we are pursing that avenue.

Got it and then two more really quick ones. On used cars, your gross profit for vehicles was up pretty nicely and I'm wondering if part of that is - - is there any impact there from the auto exchange software? And then there's a part two to that, if you could give me the percent of vehicles you have in the used department that are under $10,000?

Well, I'm going to ask Bob Frank to - - he visits with us on every call and doesn’t get a chance to talk a lot. He's our senior vice president of automotive operations.

The issue of auto expense and I'll tell you we're not going to pay the percentage of our vehicles under $10,000. We think that's proprietary, but Bob will give you the operational color on auto exchange.

We have focused in the last year using auto exchange tool to make sure inventory more closely matches the market place and we are concerned at times for the risk that when incentives come up into play on the new cars, they impact your late model used cars a lot more than some of your older used cars.

As a matter of fact, we believe the older used cars are hardly impacted at all. So, we do have a larger percent under $10,000 than we've had in the past and that - - we'll continue to focus on that piece of the business.

We are also sensitized to the heavy sport utilities and we're keeping a lowered base supply of those vehicles than we have in the past because we think the incentives will continue to erode the value of the heavy spot utilities.

Okay great. Thanks very much.

It's our pleasure.

Thank you. Your next question comes from Rick Nelson with Stephens.

Thanks. Good morning guys.

Ken Gilman, Gordon Smith, Bob Frank: Good morning Rick.

The gross margin pressures account in new car sales, is there any light at the end of the tunnel in this regard?

Those of you who've had a relationship with me for a while, I've been talking about this. My view has been for the last year and a half - - and it took a little longer to happen than I predicted. I think - - no. I think that it's going to be continued. I think every brand wants market share.

When we totaled up the factory sales estimates that they were all telling us - - because we all go to the make meetings, last fall and they totaled over 18 million. Our view was they were not going to pull back production in the first half and it would happen in the second but that would create - - they were going to produce to the 18 million run rate and then you were going to see a little blood in the streets.

It happens. It different by brand and different pressure. The domestics don't want to close factories because of their contracts, shut down production, given the way the UAG contracts were.

A wonderful brand like Honda has a policy to date of they've never laid off anyone to slow down production.. So, I think that there is going to be continued pressure.

We also track the factory capacity that's coming on line in the United States from the import badges or the transplants, however you want to call them and it's significant.

Both Greenfield factories such Toyota's Texas plant for expansions that are happening. And we think that there is just going to be a slug fest for market share and it's going to continue. That's the reason why we are focused on the services side of the business, the high margin side of the business.

We think that obviously selling the new units, the entry ticket to the process but there is just a lot of opportunity in the balance business model. Will this work its way out over time? We think the answer is yes and the retailers with the best brand mix and position best will produce the period results over what I think is a reasonable investment horizon.

So, maybe that's a longer answer than you wanted Rick but I do think that the pressure is going to be - - is going to continue and I'm going to keep the pressure on my dealers for market share. There is no question that we have to do it.

We have an obligation to the factories, an obligation to our customers, I mean the whole system is built on it so we are going to continue to do it. We are going to meet the market.

Well where are the brands where the pressures are more severe? And - -where are they better.

I think it's in every brand and certain models that aren't but yesterday you saw the piece in the Wall Street Journal on the 3-Series. It's happening everywhere. I think- - we've got new products coming out. Some folks have talked about Honda and the days supply of Honda is up. It used to be under 30 on a consistent basis. But I think it's just a - -it's no picnic out there selling any of these brands.

I think there are some models that clearly get MSRP and we don't sell over MSRP. We don't put the addendum on the vehicles when they are hot, but there are fewer of those vehicles out there and the vehicles that are selling at MSRP, they sell for shorter periods full ticket than they used to.

So, with Honda, we've got a new Odyssey coming out. I think it's going to be a great vehicle but I don't think it's going to sustain its growth for as long as the old Odyssey did. And I think it's going to be a slug fest for market share.

So, what I think when I look at the business strategically - -and I know that everyone's focused on the quarter but you have to know that I address both the short term and the long term and view of the business.

Where we're located in our stores and the brands we buy are designed to meet that need over the long term and I'm not talking about [indiscernible] delivering but I'm talking about buying assets when we buy a store. That in theory is forever, in a trade territory that we have protected by the franchise laws.

So, I think it's a long winded way of saying it’s everywhere and you go to the auto shows and you read the auto magazines, there’s great new product coming out - but they're slugging it out, and almost every segment is addressed by every manufacturer.

Thank you.

Thank you. Your next question comes from Jerry Marks with Raymond James.

Good morning. The tax credit - sorry I missed - what was that that you got in the quarter that caused it to be a little bit lower?

It was, just a small - the tax rate, it was $170, 000, we got as the - a small tax credit in one of our state tax returns.

Okay, your tax rate has kind of been declining for the last couple of years, is there some specific initiatives in place and can that continue on over the next few years?

Gordon will tell you, but I'm not telling you what we do.

This year clearly the tax rate is going to be in the 37 to 37 1/2 range, it will fluctuate a little bit depending on where our revenues come from but I wouldn't expect it to materially go up or materially go down in the next few years.

Okay, and your cash balances, I guess how come you had over $100 million in cash at the end of the year, and - I mean it's been coming down by about 40 - 50 million a quarter, and do we just kind of stop at like a $5-$10 million level.

What happened at the end of year as you may remember, we did a $200 million bond offering, and about $130 - $140 million of that was to pay off the existing debt, then the rest was retained for future acquisitions, we were going to go out with a 150 but we ended up at 200 because we liked the rate and decided we'd get in-front of some of the rate increases that we're going to have, but - so we add the cash on the balance sheet to do our acquisitions for this year with cash on hand. So that’s why you're seeing the cash every quarter go down, it's been the acquisitions that we've made in those periods. And then, I don't know if you got it but the sale lease back transaction we just completed will bring the cash balance half to the end of the second but as we speak, up to about $60 million, so - my intention is not to increase our debt load this year with acquisitions and bring down the debt to total cap ratios. So cash will be lower than it was at the end of last year but still in a safe zone.

Well is there something in the debt covenants that make you keep it that high or because it doesn't sound like that is being put to much good use whereas you could probably get a little bit better return than you paid on your revolver a bit.

We don't - - there's 0 outstanding on the revolver. So what's been happening is to some degree I've allowed our inventory to be funded with cash as - what with our own balance sheet as opposed to floor planning, so a little bit of that's going on, and that saves a little bit money but the only investment we really have is short term investment and that's not returning much, so --

So you guys are maybe only flooring like 90% of your new vehicle inventories?

In total we're about 90% but it's down a little bit from where we were at year end.

Okay, in terms of your guidance first half EPS growth you had about 16%, and the second half it implies about 9%. Is that because the easy comparison in the first quarter where you had like 30% EPS growth. Is that kind of why it seems to decelerate in the second half?

Short answer, yes.

Okay. The last question, Ken you mentioned that you felt, June was an aberration, in 2002 we kind of saw a May hiccup, and a lot of the consumer data came in and it was rather weak, and then we saw strong summer months because the auto makers piled on high incentives to get rid of the vehicles during the model clearance. Do you think that we could possibly be setting up for stronger July and August months over the model clearance and then possibly run into some risk when we get into the slower winter selling season again?

Well that's always a possibility, when you combine that with the election, however when you look at July to date and obviously - we all know the sales calendar, for auto retailing is back-ended towards the month our best estimate of July is that it bears a normal relationship to May.

If you go back three and four years, ex this year’s June - May and June have a very standard relationship in our business, our brand mix and our markets and then June to July has a relationship. If you take out June and you look at May to July, this May to July looks about normal to us, so I can only conclude that June was an aberration, now a lot of this can be stoked by alterations in the marketing calendar in terms of what the OEMs do with their incentives and they do have a lot of inventory to move, so I think there's only potentially some upside or at the very least firming. What happens when the model year rolls completely into the winter months it’s anyone's guess. Having been in the industry now for 3 years, I have heard an awful lot of pull ahead, and I think pretty soon we are going to anniversary all the vehicles that are going to be coming back into the used markets that they were saying were pull ahead from the first year I joined the business. So at some point I think people are enjoying the fact that they're having new cars yet still they're getting cheaper on a relative measured basis than they were and I think we're going to continue to see reasonable levels of sales.

And maybe the overall vehicle environment is a little bit difficult, but that's because of the fixed capacity levels that the new vehicle automakers have to start competing with substitute products and the form of used?

There's a little some of that - I think they are very much capacity driven and I think that there's some players in the market, some that and they're great. The cars we're seeing today, are wonderful vehicles no matter who is manufacturing them, and I think they all want to go for share and I think there's a hell of a war going on out there and I think the key thing you have you have to ask someone who has my job is how do you think strategically about the brands you're owning and are your brands positioned properly. And if that doesn't give you a comfortable answer we'll be up or down a penny and a quarter, but it says what are we doing with the share holder's money because when we buy a store or sell a store that's sort of a quasi permanent decision, I think that informs you how we think about it, and you can take your judgments as to whether you think that we're thinking about it soundly.

Okay, thanks.

And your next question comes from Grange Johnson with LaGrange Capital.

Hi guys I just want to expand Ken on your comments about you know the low P/E(ph), the stock prices, I know you've bought shares back before, if it continues to stay at these levels with the free cash flow yield low P/E[ph] you're generating would you guys start going back and buying shares cause it seems like no one cares and you guys have done everything you said you'd do. And I'm sort of stunned myself that the stock continues to stay -- to languish.

Well I appreciate you saying that we've done everything we've said we were going to do. I think we try; we don't always get everything right. But we damn well try and we try to be candid with you when we get it wrong. I think Gordon's remarked to that point. On buying shares back the simple answer is no. I think when I analyze our float and when I talk to investors we suffer from a lack of liquidity into smaller float. And the primary investors in the business their goal is to get liquidity and so to take the company back from $6m some odd shares in the float to a lower number I think would be counter productive. Also we think that there are some wonderful opportunities out there. I think our acquisitions this year the crop that we bought are better than ever. I'd rather use the money for that and believe that the consistency of our results, doing what you say you're going to do, cost(ph) correcting and letting everyone know. And when you cost(ph) correct pull it off, will at the end of the day result in a share price.

I didn't want any one out there on the call our investors to think that I was completely passive and not acknowledge it. Because it is important, I normally -- as I said in my prepared remarks I usually don't count the stock. I try to work with investors and explain what's going on and share with you my thoughts both tactically and strategically. I've never -- that's the way I've always done it. I've done this for a long time not just at Asbury. And I don't count the stocks to my relatives. I try to explain to them what's going on and people should make their own investment decisions. In this case I did it once before at Asbury when the stock was at 6 and I just couldn't resist saying, this didn't make any sense to me and so I'm trying to say that now and I want to let you know I’m not, we're not passive. We're going to be aggressively talking to investors, I think that we're going to continue to talk about what our plans are and explain to you how we're doing against those plans. So the answer is no I don't want to buy shares back. I think we can put the money to better use and I think if actually if we had a float of 12 or 15 million shares it would be a lot better off for all investors.

Just a follow up Ken, what about paying in dividends, even relatively modest ones.

I thought about that but given the share ownership of half the shares with two private equity firms I think what we want to do is try to get the share value up so that we can get greater liquidity in the stock. And at some point that is appropriate, that's an appropriate balance in terms of return to share holders. And so at least if Bush continues in office, if Kerry is elected we don't know what's going to happen with the dividend credit. But I think right now all and all given - I didn't mean to put a political thought in there but it does -- I think, it has influenced companies in the way they distribute value to share holders. We'll see what happens, right now the goal is to get the share price up to deliver to share holders the best way to do that is to stay the course and deliver quarter after quarter.

Thanks Ken I appreciate the candor in the operating performance.

Thank you and once again if any one has a question or a comment please press star, one on your telephone key pad. And just a moment while we have every one queued.

I guess there are no other questions.

Actually we just got one, Justin Hughs, from Philadelphia Financial.

Actually it's Jordan Hamwich from Philadelphia Financial. Good quarter guys, a bunch of questions, what was your interest benefits from the manufactures in the quarter, related to the floor plan?

Our floor plan credit, do you want dollar terms? It was $6.6m.

Okay and did I hear you say right you have 99 days of Ford and about 100 of TM

99 days in total domestics, 111 days for Ford, 95 for GM.

And I would assume that fell during the quarter correct?

Yes.

So I'm just wondering you made a million, two between interest income for the manufactures and floor plan(ph) interest expense.

Yes 20%(ph), yes.

A million, two tax affected share base of 32, you made a couple pennies 2 to 3 cents?

Right. This is about that level for the last 4, 5 quarters.

But I'm just wondering with inventories the way they are, you know now don't you think that number will probably flatten out for the remainder of the year. At least I know they have been increasing some but inventories are up. And I'm wondering does the guidance include that sliding out or does it include about 2 to 3 cents per quarter in that growth difference?

Typically it would -- because of the way we account for floor planning credit it will go up in the third quarter slightly. We take the floor planning credits, as we sell the cars in third quarter typically the - our best selling quarter. So one would expect that that and it is included would go up slightly and then come back down in the fourth quarter but all of that is included in the way we're thinking about the year.

I would also say that inventory should come down but you get the same floor plan credit because you get the floor point credit when you buy it. But the floor plan cost goes down when your inventory goes down. So we can sustain units sales, we'll get the same income from the OEMs and if we can reduce our inventories which we fully intend to do on the domestic side, the cost side should go down and we think that will have a big mitigating effect on any further interest rate increases which we think will be another 25 basis points coming up for the next couple of months.

That was my next question, what do you see in guidance for interest rate.

We've assumed that the rates are going to go up 25 basis points the next [indiscernible] funds meeting and another 25 by the end of the year, about 50 basis points by the end of the year.

So the guidance of 50 basis points in interest rates in price and benefits from the interest trades(ph) for lack of a better term between floor planning, interest credit and expense correct?

Yes and that is what we could typically get, yes.

Okay.

It did not change from previous years.

And I just want to say to the other gentleman's question that as a share holder I would much rather see you stop growing and despite paying out the dividend, I think it will highlight the cash flow to the business much better than any other things you could do at this point.

I agree I didn't think the other question actually was designed to prompt us to want to do it differently. But have we thought about it because many of the other consolidators have started dividends. We just happen to be the one that's still controlled by private equity firms, we have a slightly different capital structure. But I agree with you, we think it's the best way to deliver. With that, I would just like to say that concluding that we haven't talk to investors in a while because the secondary was out there. August is a tough month to get in front of investors but we're going to be out there on a regular basis, call Stacey to get time with us. We're delighted to meet with you. We want to explain the business model, we're going to continue to talk and we are going to continue to work on the issues that we've outlined in today's call. So with that I thank you all so much and wish you all a good day, bye-bye.