Asbury Automotive Group Inc (ABG) 2004 Q3 法說會逐字稿

Good day, everyone. And welcome to the Asbury Automotive Group Third Quarter Earnings Results Conference Call. Today’s conference 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. [Stacy Yonkus] [ph]. Please go ahead.

Good morning, everyone. And thank you for joining us today. As you know, this morning Asbury reported its third quarter earnings. The press release is posted on our web site, 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 contact [Gail Bilatigo] [ph] at our Corporate Office. Gail’s number is 212-885-2520, and 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 SEC filings. In addition, non-GAAP financial measures as defined by the SEC may be discussed in this call. To comply with the SEC’s rules of reconciliation of non-GAAP financial measures has been attached to this morning’s press release and will also be posted on our web site under the Company’s Investor Relations Section.

We will also from time to time update the web site with additional financial information, so 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 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 the financial highlights. And after that Ken will have a few concluding comments. And, of course, we’ll be happy to entertain any questions you might have

Ken.

Thanks, Stacy. And good morning to everyone. Thanks for joining us today. I know there’ve been quite a few earnings announcements from Company’s in the States, and that’s why we ran a little late, to give some folks a chance to join us on this call.

The results we reported this morning were essentially in line with our announcements earlier this month. That said, I’d like to reiterate this quarter was one that tested our business model on many levels, with some aspects proving to be robust as advertised, if you will, while others were challenged. The good news is that while the quarter was stressed by severe weather in our Florida markets as well as a less than optimal industry environment the validity of the business model itself was once again reaffirmed.

As we disclosed previously, the four major hurricanes that struck Florida during the quarter had a significant impact on our dealerships in the Jacksonville, Orlando, Ft. Pierce, and the Tampa markets, causing numerous store closings and other disruptions. Our Florida operations accounted for about 43 percent of our operating income a year ago, and as we’ve said the decline in their results this year works out to approximately 10 cents per share. To a lesser extent, these storms also affected our operations in Georgia, North Carolina, and Mississippi.

The precise impact these storms had is difficult to measure. For example, it’s relatively easy to add up the number of the days the various dealerships were actually closed. However, the days leading up to and in the days after the storms passed, those are the days that had the biggest impact. Our customers had a lot more pressing things on their mind than buying or servicing a car. We also had employees that were personally impacted by the storms. The good news here is that none of our employees or their families, family members were injured.

What we don’t know yet is the bounce back affect that we’ll be seeing in these markets as insurance proceeds flow into and some might say flood the State. And that after the Florida economy absorbs what some report to be in excess of $20b of reconstruction cash being added to the Florida economy.

Historically, and I’m relating now to Hurricane Andrew in 1991, the Florida economy went through a very robust period after Andrew. So if history is any indication we may see a significant improvement in Florida’s economy over the next year or two. The only notable difference now is that the rules on homeowner insurance deductibles have changed since Andrew, and it’s uncertain how these higher deductibles will affect consumer spending.

My thinking is that in terms of the quarter, specifically, we were once again able to demonstrate our ability to generate meaningful increases in gross profit. Excluding the results in our Florida platforms our earnings would have been at least equal to last year’s level. Considering the difficult market environment we think this would have been a respectable performance, especially in view of some of the pressures we faced on the SG&A front.

Clearly, however, our earnings should have been better because SG&A should have been lower. On the surface, we had a pretty noticeable increase in SG&A during the quarter as we continued to face some challenges in expense control below the gross profit line. A meaningful part of the increase resulted from some line item shifts in the P&L. Step functions that haven’t impacted the bottom line. Others did impact the bottom line. Gordon will discuss this in greater detail in a few minutes.

Looking at industry trends, another considerable challenge to the quarter was the intensely competitive market for both new and used vehicle sales. As you’re well aware the new U.S. vehicle market was particularly challenging in July and August, but showed some signs of improvement in September. The domestic manufacturers in particular continued to be aggressive in their incentive programs in an effort to sustain U.S. volumes and keep their factories moving.

The dealership community, however, is caught in a difficult position. Under pressure from the manufacturers to take more cars, yet unwilling to let inventories get out of control. The result is continuing pressure to trim dealer margins to move more cars, even though the incentive dollars come out of the factories’ pocket.

Our same-store new vehicle unit volume was down 2 percent for the quarter excluding our Florida platforms we were roughly in line with the industry. However, our new vehicle gross margin again was slightly lower for the quarter, decreasing 20 basis points from the prior year. As we said for some time, I think over a year, we are assuming that these pressures on new vehicle gross margins will continue for the foreseeable future.

These new vehicle dynamics also have an impact on the used vehicle market, especially the late model used cars that compete most directly with highly incentivized new vehicles. On a same-store basis our used units for the third quarter were actually down a bit more than new units. However, excluding Florida used vehicle same-store retail revenue was up about 2 percent.

On the service side of the business our parts service and collision repair operations had another good quarter with a 5 percent same-store sales increase and nearly a 3 percent increase in the same-store gross profit. These numbers include Florida, where results would have been stronger if many of our dealerships had not been hurricane impacted for extended periods.

When you exclude Florida, and you’ll see in the material accompanying the press release, we gave you a lot detail with and without Florida, on a lot of these line items that I’m talking about, our parts service and collision repair business on a same-store basis was up 5 percent in revenue and 4 percent in gross profit.

Additionally, although one might expect to see a pick-up in fixed operations as a result of servicing storm damaged cars, in most cases it’s difficult to make up the lost business when you consider the fact that these are larger, more mature platforms operating close to full capacity it’s not so easy to recover a significant portion of that lost revenue and gross.

And finance and insurance, we also saw continued growth during the quarter, although the rates of growth are inevitably slowing down somewhat as we begin bumping up against tougher comparisons from a year ago. But when I think about F&I PVR for vehicle retail, I think about it on a sequential basis when value adding performance, and trying to understand and talk to you all about where we’re headed.

While I’m not making any promises about the future, not making a projection, it is worth noting that September was the best PVR month at the platform level in the Company’s history. As I mentioned earlier, I continue to be pleased with our ability to post meaningful increases in gross profit. During the quarter our same-store retail gross profit was down .7 percent, however, overall excluding our two Florida platforms same-store retail gross profit increased 1.6 percent, virtually the same as the second quarter’s 1.7 percent increase.

The underlying dynamics remain similar as well with new and used vehicle gross margins under pressure throughout the industry. At the same time, we effectively offset this pressure, and this is where the model is working very, very well, with continued solid increases in income from our F&I and fixed operations.

At this point, I’d like to turn the call over to Gordon to discuss our financial performance in greater detail, including some of these expense issues. Gordon.

Thanks, Ken. Good morning. First of all, congratulations to all of you longsuffering Red Sox fans, me included.

Income from continuing operations for the quarter were 13m or 40 cents per share. While this was down 22 percent from last year, several factors contributed to the quarter’s performance. The performance of our Florida platform cost us 10 cents, and startup costs associated with our Southern California platform and our Honda store in Frisco, Texas cost us an additional 4 cents.

To put our Florida platforms and their affect upon our overall performance in perspective we have included an abbreviated income statement breaking out Asbury’s third quarter numbers with and without Florida. All in all, we have 35 franchises operating at 26 locations within Florida, and historically, they have generated around 43 percent of our operating income.

As Ken mentioned, the hurricanes, especially sensitive to resilience of the Asbury organic growth model during the quarter. Our objective is to organically grow both our F&I and fixed operations businesses by 3 to 5 percent annually. Our model held up to this task. Our F&I gross profit PVR increased 3 percent versus the same quarter last year to $870, and our total fixed operation gross profit grew by 3 percent on the same-store basis, and excluding Florida we were up 4 percent.

While the hurricanes had the affect of significantly reducing sales dollars for new and used vehicles, as Ken pointed out, an oversupply of vehicles is driving margin pressure at the midline and volume dealerships without a corresponding increase in demand. Excluding Florida our new vehicle margins were flat with margins on midline domestics, and value brands up 20 basis points, offset by a 30 point reduction on midline imports. Additionally, used vehicle margins were down 60 basis points or $134 a car.

While in total Asbury sold 2 percent and 5 percent fewer new and used vehicles respectively on a same-store basis as compared to last year, excluding the performance of the Florida platforms we sold 138 or less than 1 percent fewer new vehicles and 177 or approximately 2 percent more used vehicles. Therefore, excluding the Florida markets, our overall gross margin was up 2 percent in a very difficult environment.

Now, let’s take a closer look at Asbury’s expense structure during the third quarter. SG&A expenses as a percentage of gross profit increased by 530 basis points from 75.8 to 81.1 percent. 140 of the basis points of this increase was principally due to the affect of the hurricane. Excluding the performance of our Florida platforms, our SG&A expenses increased by 390 basis points.

160 basis points of the increase came from continuous startup costs from our entry into the Southern California market, as well as our Frisco, Texas Honda store. As I discussed last quarter, earlier this year we acquired three franchises in Southern California and introduced a new brand, [Spirit Automotive] [ph]. In addition, our new Honda point in Frisco was opened in July. As I mentioned a moment ago, these startups had the affect of reducing the quarter’s earnings by about 1.3m or 4 cents per share. We believe that our investment in these high growth markets will only enhance our success in the long term.

In addition, 160 of the 390 basis point increase is attributed to the sale leaseback transaction we closed on July 1st. Which I discussed in our last call. As I mentioned then, the transaction had the affect of increasing SG&A expenses by 2.3m, but after factoring in the impact of reductions, and depreciation, and mortgage interest expense it’s only slightly dilutive, less than a penny a share. It also allowed us to reduce our exposure to rising interest rates and reduced our debt to capitalization ratio by 3 percentage points.

The remaining 70 basis points are essentially due to the continued competition in new and used retail vehicle markets that Ken mentioned earlier. As competition for new vehicles heated up we were forced to increase advertising spending to defend our market share. As a result, our advertising PVR increased 10 percent or $29 per vehicle, again, excluding the affect of Florida.

In the case of used vehicles, this action resulted in an increase in volume YOY. In many areas, Asbury has made progress in controlling its SG&A cost structure. However, we are disappointed with our lack of overall progress and productivity. We acknowledge that cost control is an ongoing issue with any retailer, and we’re confident that programs being I implemented now will have a positive impact on future results.

Turning to our balance sheet, at the end of the quarter we reported [18.9m] [ph] in cash. In addition, we invested cash generated from the sale leaseback transaction to pay-down some of our floor plan obligations. As a result, compared to last year, Asbury’s equity in inventory rose by 64m.

Inventory was up 132m for the third quarter versus 2003, generally as a result of acquisitions made in 2004. Our new vehicle days supply of inventory was 63 days compared to an industry average of 64 days and 54 days for the third quarter 2003. Breaking days down by market segment we had 55 days of luxury vehicles compared to 47 days last year, 46 days of midline imports compared to 34 days, and 77 days of domestic vehicles flat with last year.

Used days supply for the quarter was down one day YOY to 42 days. The aging of our used vehicle inventory continues to be within our target range at 84 percent of inventory being less than 60 days old, compared to 89 percent last year.

Now, let’s take a look at capital expenditures. YTD Asbury has spent 53m on capital expenditure projects of which 23m was financed. We expect to spend between 70m and 75m on capital projects this year with approximately one-half of these externally financed.

So actually, around three-quarters of Asbury’s capital spending in 2004 will be discretionary, and about half of our investment will be made in building new facilities. So while a significant portion of Asbury’s operating cash flow has been on capital projects this represents an important investment in the future of Asbury.

Looking ahead we expect that earnings from continuing operations for the full year will be within the range of $1.52 and $1.57 per share.

I would be remiss at this point if I didn’t talk about the St. Louis platform. As I mentioned in the second quarter call, St. Louis suffered through a devastating hailstorm that damaged over 80 percent of its tie line inventory, or about 800 cars. I mentioned it in the call, we believe, as we sold through these vehicles it would be difficult to maintain margins and felt that it was about $1.5m of risk in our numbers.

The platform did a fantastic job in selling through these cars, while the damaged vehicles, the platform did sell at lower gross they were able to achieve higher margins on their undamaged inventory, and therefore, mitigate all but $57 of gross profit per vehicle.

That said, the platform still had approximately 100 vehicles of the most damaged, 100 of the most damaged vehicles remaining, and therefore, some of our margin concerns will persist through the fourth quarter.

With that, I’ll turn the call back over to Ken for his closing remarks.

Thanks, Gordon.

I’ll provide you a bit more color in a few areas, and then we’ll take questions.

From a geographical standpoint we saw some different trends in the quarter, but it was really dominated by the weather in the Southeast more than anything else. As we’ve noted, our two Florida platforms were significantly affected by the storms. Atlanta and North Carolina also had substantial declines in operating income from the quarter, partly a result of these storms.

In Texas, our results again were down somewhat on same-store basis as we continued to feel the affects of a very competitive Honda market. In addition to cost structure on the platform was strained as we faced startup costs, as Gordon indicated, with the opening of then we store in Frisco, which is now a current run rate running just shy of it’s breakeven point.

With that said, we expect the decision to build one of the largest new Honda stores in the country in a very rapidly growing community on the outskirts of Dallas will payoff handsomely over the next few years. We remain very happy with our decision to open that store, and we remain very happy with the new management team in Texas led by Tom McCollum.

Our Oregon platform continues to struggle with lower sales and profits during the quarter compared to the prior year, however, we have made good progress overall with expense reduction, and we’re pleased that the platform remained profitable for the quarter.

In Southern California we experienced some additional costs with the completion of the buildout of the infrastructure needed to support the stores we acquired earlier this year. We continue to expect that we’ll be well positioned to leverage these investments and infrastructure in the near future as we continue to build our presence in this highly attractive market.

In Northern California our two Mercedes Benz stores are doing extremely well exceeding their acquisition pro formas.

Other bright spots included Arkansas and St. Louis, both of which posted healthy gains in operating income.

Although we did not complete any acquisitions during the third quarter, earlier in the year we closed transactions for dealerships with annualized revenues of about 315m which is within the range of our target of 300m to 500m for a full year. In addition, we currently have two deals under contract, one of which should close by yearend. We continue to have a disciplined acquisition program focused on truck and luxury, and midline import brands.

On balance when I think about the quarter, where Asbury is, I think about it and I concluded that our ability to successfully deliver on our model is in within our control. While a portion of the expense increase we experienced during the quarter was unavoidable, such as the impact of the hurricanes, some of the overall increase represented investments in the business that should, and we really believe will eventually benefit us.

Another area, as Gordon indicated, the expense increases were less than intentional and really represented opportunities for us to do a better job of bringing more of our gross profit down to the bottom line. The challenges we’ve faced only serve to confirm the direction we’re headed in and the work we still need to do.

In some areas such as fixed operations and F&I our performance remains strong, but in other areas we know we have more work to do. Used vehicles is one of those areas. We know we can do a better job in used even in this kind of an environment.

And clearly, and you’ll be hearing more about this as we talk to you at the conclusion of the year, and as we go through 2005, as Gordon mentioned, we can, we are confident we can implement programs during the last months of this year and well into 2005 that can help us wring more costs out of the business, which should translate into additional profit falling through to the bottom line.

And with that said, we’d like to open the call up for q and a. Operator.

[Caller instructions.]

And we’ll first hear from Rick Nelson at Stevens.

Thank you. Good morning.

Good morning, Rick.

Are the production cuts that we’ve seen out of GM and Ford combined with the incentive levels that are currently out there enough to alleviate this inventory overhang? And enable gross margins to return to better levels?

I don’t think so. I think it’s a fourth quarter full back in production to balance out the inventories. My long-term view is and I think for those of you who follow the industry announcements, no one is going to give up share. The import badges are going to continue to go for share, they’re continuing to build transplant factories, assembly plants, and expanded assembly plants.

And so I don’t see any let up in the aggressive approach that many, many of the factories are taking to the market. So I’d say, and I’m saying to our executives in the business, build our models around a continuing stimulation on the part of the factories and be prepared to look for additional gross opportunities elsewhere than in a recovery on the gross line for new vehicles.

Then when do you think – at what level of gross margin do dealers actually lose money on a transaction?

We’re a long way from that, because the way you really need to look at it is you need to put the F&I income per vehicle on top of the new vehicle growth, and so we’re a long, long way from that. But I don’t see that happening, losing money on it. It is the entry ticket to the business. If you’re not good at continuing to generate additions to your fixed business and searching for opportunities, in the F&I area, you’re going to suffer but I think that we’re going to just be in the same kind of environment for new vehicle grosses. If I’m wrong I’d be delighted to be wrong.

Yeah.

Because there’s only up side to what I’m talking about. But I think that if you’re not prepared to deal with it then I think you’re in for nasty shock.

How about October sales? Any comment there? And especially what you’re seeing in Florida?

Our sales in October will be meaningfully more than our sales in September.

Versus the prior October?

Just, I’m going to tell you what I told you.

Yeah. Okay. Thank you.

Okay. Thanks, Rick.

We’ll next hear from [Matthew Kessler] [ph] at Goldman Sachs.

Thanks a lot. And good morning.

Good morning, Matt.

A couple of questions. First of all, when you walked through your inventory position and your margin by classification of new vehicle it seemed like the margin was under more pressure, and the inventories were, well, the margin was under more pressure in any event. In the imports then moreso than in the domestics. And I’m curious why the that inventories are clearly out of whack, morseo in domestics than in imports?

Well, as you know, the domestics are the ones where all the incentives are, and therefore, when a customer is shopping in the midline, clearly while not proportional it would impact your import brands more because there aren’t the incentives from the manufacturers. Therefore, the dealer has to make-up some of that difference. Not all of it, but it puts more pressure on the import than the domestic.

Got you. And I’m just kind of curious, given that your inventories, you know, while up from a year ago in the midline imports are still certainly the best in the change. Do you feel like you were too aggressive in trying to blow that product out, or is this just the way it had to be given the promotional environment from the domestics?

It is up, but some of that is a little bit of noise from Florida, as you would expect. But we’re not at all concerned about the inventory levels. We’re very comfortable with what we have right now. Our mix, we’re about 50, 50 between 2004 and 2005 brands, so the inventory is fine.

I guess what I’m saying is, you know, given that the inventory is in relatively good shape for midline imports do you feel like you’ve pushed a little too hard on the margin to move that product, or is that just going to be the way it is so long as the domestics are pushing a promotional buttons?

I think it’s just going to be the way it is.

Got you. A second couple of questions relate to the used business, are you seeing adjustments within the wholesale market to more accurately reflect the pressures from the new market, and similarly within the used business what kind of activity are you seeing between late model, used, and perhaps the lower quality or older model used product?

Well, there’s a lot to that question. What we’re seeing is, you’ve seen the Mannheim Index, as well as we do, and you see it firming. But you see within that index there’s a lot of movement, the large SUVs would be under more pressure and they can move rather rapidly. Then you have the offset of fewer off lease vehicles coming in which retained on certain segments, I’d say the cost side, drive-up the prices a little bit, to firm them, if you will. You can’t draw a generalization other than we think that the best opportunity is in the lower price point used vehicles.

Got you. And l you know, another question, another quick couple of questions. On the SG&A front you talked about the 160 basis point shift associated, you know, more or less with, you know, a couple of new distribution points that you have. You spoke about Southern California and Frisco. Was there, I mean that’s 160 basis points from those dealerships that wasn’t there a year ago. Were there other new dealerships a year ago that had similarly increased last year’s cost structure, or is this your net, net for new businesses versus new businesses a year ago?

For Asbury this is the first in recent history that we would have actual startups, so there’s no comparable last year.

Got you. And finally, your D&A dollars were down slightly. I don’t know if that had something to do with the sale lease back or?

Yeah.

Got you. Thank you so much.

Moving on, we’ll hear from [Matt Neimer] [ph] at Thomas Weisel Partners.

Hi, everyone.

Hi, Matt.

Thanks for all of the detail in this release, it’s very helpful. First question is on the used side the percentage of your used inventory that’s older, that’s aged, has come down. I wonder how much of that is due to the auto exchange software that you’re using? And what would be related to other factors?

Yeah, I’ve been waiting for Bob Frank to have a question to answer. He’s the Senior Vice President of Auto Operations. Bob, why don’t you take that question.

Yeah, we think the tool is working well for us. Obviously, it’s a learning curve that we go through at each individual platform. And some are doing a better job than others. But generally speaking, we think we’re getting our arms around the inventory better than we’ve ever had it before, so we’re, we think the tool is working for us.

Is that rolled out to every dealership? And are you having any issues getting people internally onboard in terms of using that software?

We’ve got it in every platform right now, and obviously, depending on the Management’s acceptance of the program, and enter it in something new at any retail operation you’ll see varying degrees of compliance. But I think all the guys recognize after they use it for awhile that it works for them, so we’ve got the confidence of the Management of the platforms, and that’ll drive down through the stores.

Great, thanks. And then, Ken, as you look at the used business do you see anything that can change in the near term in terms of altering the, I guess the value equation between a new vehicle and a slightly used vehicle? It seems to me like the used business is essentially competing with factory advertising dollars and factory balance sheets, it just doesn’t seem like that’s going to change.

Well, I don’t think it will. I think that there’s a segment of it that won’t. There are others that, depending on how you managed if your business and what you’re trying to sell, it’s immune to that. So we trade a lot of the cars that we sell, should we be trading for more of them. I think we’ll have the opportunity to do that as the platforms continue to get familiar with the auto exchange product that Bob was talking about. It’s a lot easier for them to use it to understand the aging of inventory than it is for them to use it to go on the offense in terms of understanding the inventory that they need, what they should be trading for, what they should be retaining, what they should be wholesaling, so that’s where we expect the biggest learning to take place going forward.

Okay. And then just a final housekeeping item, did the filing that you guys, I think it was an 8-K filling last week or this week regarding some severance payments, has that that already hit, or does that come out in the fourth quarter?

We took that in the first quarter of this year.

Okay. Are there any more of those outstanding? Or is that pretty much behind us?

I think it’s pretty much behind us, although if some of our CEOs on the call want to volunteer, but they’re not getting any severance pay. No, I’m just kidding. No, I think that’s behind us. That was, David left the business as an executive, an operating executive, over a year ago.

And then, actually, one final one. Is there something going on in St. Louis regarding unionized parts and service providers at dealerships where they’ve been striking?

They had a strike that went on for 10 or 11 weeks. Our dealership is not unionized. I won’t speak to the issues that the machinists and the teamsters were fighting over. We pay our benefit package and our basic pay packages are equal to or better than the, what’s offered in the unionized shops. We run a paid high line operation, they’re the one location, and we think our labor relations are excellent.

Great. Thanks very much.

Up next is John Murphy at Merrill Lynch.

Good morning. I have three questions here. The first is and this might be a tough one to answer is with your inventories being so high with respect to inventory how much ability do you have to pushback? I mean is that getting [easier] [ph]?

I’ll put it this way, I don’t think they’re out of line. In other words, they’re about equal to last year, and I think that if you target 60 overall and we’re at like 77 or so, I’d like it to be a little lower but not much. That said, you can absolutely turn down inventory. There are times in the year when you don’t want to because they go through something called buildup when they’re going to shut a factory down and you want to have inventory.

Also, you want to, and this is a very tricky thing with domestics, you don’t want to be out of inventory when they have this habit of popping these incredibly strong incentivized promotions, and then you run out of product. So I think if we took it down to 60 days on the domestic side I think we’d run a real chance of losing business.

It’s also a very important to keep the right mix in the domestic side and I think that at this point they’ve got the broadest product line offered is in the domestic, and so the imports are catching up. And that will also to some degree over time lift the amount of inventory you carry.

So I feel comfortable where we are. There are some stores where obviously I’d like to have a few less units on the ground, but in the main in our tier one brands I’m comfortable where we are. Okay, that’s the first question, John, what’s the second?

Thank you, and I only have two more. The second is, the end of the second quarter we had a SAR falloff at [inaudible].

You’re breaking up. We didn’t hear you.

Can you hear me better?

Yes.

At the end of the second quarter the SAR fell off the map, you dropped to 15.5. At the end of this quarter, you know, we had a real booming SAR of about 17.5. And, you know, you cited that as part of the problem that you had at the end of the second quarter. How much of that helped you in this quarter, because the SAR was much higher ex-Florida, obviously?

It’s really tough to say. I think it was going to be about a 16.5m unit year. The SAR, I think it’s still going to be. I think the SAR, give or take a little bit doesn’t matter. It could be heavily influenced by a lot of other factors, such as the way the factories are pushing units out to the fleets and so forth.

So, in general, you’re setting up your advertising, and your pay structure, and things like that for a 16.5, and if you’re above you benefited. If you’re below you might take a little bit of ahead?

I think, yes, I think what we’re doing is we’re controlling the advertising on a total dollar spend basis, not on a per vehicle retail. And if something drops off, yeah, it’s going to happen. But I think what we were more aggressive for the first nine months of this year with advertising dollars, and in hindsight we shouldn’t have been. And Gordon addressed the impact in terms of basis point creep in our SG&A.

I don’t think you’ll be seeing that go-forward. There’ll be certain places where we do it, and you’ll see some areas where say the new point in Frisco that we’re going to continue to stimulate with some advertising and some stores that we relocated that we’re going to continue to stimulate with advertising, because we want the customer to remember we’re still in their community. That said, we’re going to control the inventory dollars to a basically on a total spend, X new stores or the unique circumstances I’ve just described to last year levels, or below,.

Well, one of the things that happened to us in the second quarter, as you mentioned, June the SAR was ver low, but if you’ll remember it was up and down, and it was the impact was that one month it was at 18, if I remember correctly, then it goes down to 15. It’s those kinds of movements that make it very difficult to manage the expense lines in the business. We didn’t see as much of that in the third quarter the SAR number was relatively stable throughout the quarter.

Got you. Just a last question, real quick. On FI PVR you’re running about 902 in the quarter, how high can that go to get in trouble?

Well, I would say this is the way you have to think about it. You start-off every day by saying you’re going to run an ethical business. And one of the first things I did when I joined Asbury three years ago was to put caps in on the product prices that we charge. That said, you focus on the bottom third of your stores. And I won’t promise you Bob is shoving a number in front of my face, as the operator, he knows what happens if we can get the bottom third of the stores up to the average of the top two-thirds of the stores. There’s still a meaningful increase that can be had.

Now, how successful will you be in always working your bottom third to the average of the top two-thirds? That’s the art of the operator. We’ll see. But there is plenty of room I think, that’s why we’ve used a long-term view of 3 to 5 percent. I think there’s room to achieve that over the next, for all intents and purposes, your investment horizon, call it 3 years, although I’d like to believe that you’re a long-term investor and you’ll never sell a share of Asbury stock.

But I think that we can achieve that, and we can be within that band. But the absolute commitment is we run an ethical business, we have 240 F&I professionals out there, and every day we hope they wake-up and say, ‘there’s a perfectly legitimate way to make a living and to sell our customers the products and services they need.’ And by doing that in the right way we can increase the F&I PVR.

Great. Thanks a lot.

Up next is Jeremy Marks of Raymond James.

Good morning.

Hi, Jeremy.

Actually, most of my questions have been answered. But just following up on John’s question, where you mentioned that there’s a lot of volatility in the SAR, that doesn’t seem to be changing any time soon. What processes are you kind of implementing to try to balance one month at 18m and maybe another month being 15.5m?

I think you’ve got to plan on a little tighter, but it’s a challenge. I think what you have to do is in advertising, for example, control the dollars. And then, on a per vehicle retail basis, if the advertising on a surge month drops, well, you’ve benefited. Hopefully on an average, and you say it’s going to be a 16.5m year next year, it’ll come out to be about where you need it to be in terms of the P&L model you built for the year. On the people side, I makes it a bit more challenging, it legitimately does.

But what I would say, though, is that you would manage to a lower SAR number because it’s easier to flex numbers going up than going down. So, you know, as a management tool, as Ken said, you know, just manage it, not the truck clearly, but not to the high end either. Somewhere in the lower middle is what we’d have to do help mitigate some of these issues.

And I guess the reason why I ask that is because Ken indicating and we’ve been hearing on some of the calls saying October sounds like it’s a little bit better, there’s some comp issues going on with California and the Southeast now, that maybe make October a little bit better. But we're coming up to a tougher comp in December, and how do people plan to avoid what potentially happened, you know, in June of this year, for that? It’s just like what you said, so maybe kind of plan for it to stay at 16m SAR even though October and November run are maybe 17m, 18m SAR?

I think you have to because when you break it down and say ‘what’s the impact on our store, you’re talking about a very small impact on an individual store, 10 units, 15 units, 20 units, you should be able to manage within that. The risk is if you always plan to the higher number of units, and then you multiply times 100 and then you don’t get it.

Right. And I guess that’s what brings me to the question, your guidance, you guys base YOY in the third quarter were down about 20ish percent, your guidance for the fourth quarter kind of implies flattish EPS, is that kind of assuming somewhat, you know, like you said, you know, that the lower SAR?

That’s consistent with where we’ve been running for the year.

Right.

In terms of the…

3.5, thereabouts.

Okay. But I guess that’s just what I’m saying is you’re looking for something to change in terms of what happened in the third quarter, where you had that difficult EPS, a lot of that then is just the hurricane factor?

A lot of it was.

We’re expecting that the Florida market, at the very least, will come back to their historical seasonal run rates.

Okay. The last question, we’re hearing something about a new tax issue where fleet owners might not be able to write-off expensive SUVs and those type of things, have you heard about that? Are you familiar with it? And either could that be an impact?

I don’t – you never say nothing, it couldn’t be an impact. There was something in the tax bill that the President signed that dealt with, it used to be $100,000 and now just $25,000 pluses and minuses, I don’t believe when you just keep the tax code the same, that’s not a political statement. And the American business man will figure out how to run his business, what they want is consistency. I don’t think it’s going to have a big impact. There was a lot in the industry press about it, so people were following it, we’ll see.

Okay, thanks.

We will by the way, luxury and midline import driven, so we don’t compare to some of the other sell as proportionately as many of the large vehicles that will be subject to the vagaries of this change.

Okay, thanks.

We’ll now hear from Kinsey Shaw at CIBC World Markets.

Hi. Just a couple of housekeeping items. I think I missed the final balance on the floor plan notes for September 30th, could you give me the balance?

The balance in our floor plan is 555.

555. And could you give us the rent expense for the quarter?

I’m sorry, I missed – the what expense?

The rent expense?

Oh, the rent expense.

I don’t know if we disclose that.

We usually don’t at this point.

At the quarter, I think we only put that in the annual results.

Okay. And…

If I’m mistaken we’ll get back to you and we’ll put it on the web site so everybody knows.

Okay. And just a lastly, could you give us the unused borrowing on the revolver?

We have no outstanding under the revolver at the present time. It’s currently the $100m commitment.

Okay. Thank you so much.

We’ll now take a follow-up question from Matt Neimer.

Hi. Just one quick follow-up. One of your peers this morning mentioned that they thought the optimal inventory level was closer to 50 days versus I think what NEDA puts out which is 60 days. And I’m just wondering, you know, what your opinion on that is? And if floor plan expense starts to go up, or rates start to go up, which they most certainly probably will, how does that alter your thinking on optimal inventory levels?

I’m not sure who was the one who said 50, but keep in mind that our brand mix towards luxury and midline imports would suggest that 60 days is a good number for us.

Yeah, I think also we’ve got some very large, for example, Ford stores that I want to keep a little heavier in inventory, for example, the [situation] [ph] in Florida, I think we’ve got the number one and either the third or fourth largest stores. And we intentionally go little heavier there. So I’m not concerned.

I would argue that 50 days is I think a little tight, but hey, there’s a lot of different ways of winning this game. And if we compete with that particular company in any markets, if there’s a business to be had, perhaps we’ll get it and they won’t because we’ll have the unit the customer wants. There’s a limit to that type of thinking, but the bottom line is I think that between, give or take 60 days is fine. And in some brands it should be a little higher.

Got it. Great. Thank you.

And there are no further questions in the queue. That will complete today’s question and answer session, as well as today’s conference call. We thank you for joining us, and you may now disconnect.

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