Asbury Automotive Group Inc (ABG) 2004 Q4 法說會逐字稿

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

Thank you. Good morning, everyone, and thank you for joining us today. As you know, this morning, Asbury reported its fourth-quarter earnings. The press release is posted on our website at www.AsburyAuto.com. If you don't have access to the Internet or you'd like a copy of the release faxed or e-mailed to you, please contact Gail Felodiko (ph) at our corporate office. Gail's number is 212-885-2520 to 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 on this call. To comply with the SEC's rules, reconciliations of non-GAAP financial measures have been attached to this morning's press release and will also be posted on our website under the Company's "Investor Relations" section. We will also from time to time update the 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 fourth-quarter results as well as to update you on our earnings outlook for 2005. 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, of course, as usual, we'll be happy to entertain any questions you might have. Ken?

Thanks, Stacey, and good morning to everyone. Thanks for joining us today. I know many of you have just come off the Group One call. These back-to-back calls can be a little difficult. Hopefully you'll find this one informative and perhaps entertaining.

It's always a pleasure to host these calls, but especially so when we have such good results to discuss. From a broader perspective, the year had its share of bunts (ph), especially with the hurricanes that hit in the third quarter. So our fourth quarter was certainly a nice note to end the year on. Specifically, the results we reported this morning were in line with our preannouncement last month.

As we disclosed in January, our fourth quarter was not just strong in terms of overall performance. It was also remarkably well balanced. The kind of balance we have been striving for. We achieved double-digit increases in same-store gross profit from all four components of the business model. New vehicles, used vehicles, parts and service, and finance and insurance. Not only did all four business lines perform well, but from a geographic perspective, our performance was also well balanced. Solid and not just propelled by our Florida markets. Specifically, our non-Florida markets had an 11 percent increase in same-store retail gross profit. So the business model delivered in all respects. All cylinders firing on time.

We've talked a lot in the past about our organic growth model, specifically how our primary focus is to consistently grow the services side of the business, parts and service and finance and insurance. We've acknowledged that both unit volume and profitability in vehicle sales, particularly new vehicles, would be highly influenced by the dynamics of the marketplace, which are in many respects beyond our control. For example, the OEM promotional and incentive calendar in Cadence has almost completely altered selling patterns, including customer expectations and behavior. To the point that monthly SAR (ph) numbers have become highly distorted. The good news is that for sometime, our results have been acceptable because the business model performed relatively well, as advertised, if you will, despite pressure on vehicle sales in terms of unit volumes, grosses, or both. However, this fourth quarter demonstrated what can happen when we catch a tailwind from strength in new and used vehicle sales when we are positioned and stay positioned to capitalize on an improved market environment. This is not to imply that the business is overly cyclical, because consistency is the hallmark of our automotive retailing model. I am simply pointing out that when the opportunity presents itself, we are more than capable of taking advantage of those opportunities and delivering to the upside. While we certainly were presented with an improved retail environment in December, which was driven in large part by some generous manufacturer incentive programs, I'd like to point out that in terms of new vehicle unit sales, Asbury significantly outperformed the industry during the quarter. While the industry was up 2 percent, Asbury same-store new vehicle unit sales rose 8 percent. We clearly benefited from our brand mix.

Drilling a bit deeper into this, let's take a look at our mid-line imports, for example. These brands accounted for 27 percent of the industry's unit sales in the quarter, but were 47 percent of Asbury's unit sales. And not only did these brands continue to grow much faster than the overall market, with an 11 percent gain for the quarter, but Asbury's unit volumes rose even faster, increasing 16 percent. So we are heavily weighted in perhaps the fastest-growing sector of the market, and we are also outperforming within that sector.

Obviously, in Florida, we experienced a bounce-back in the quarter as the state began to recover from the four hurricanes. Government aid and insurance money began flowing and consumers started visiting the showrooms and buying cars again. But while our Florida operations clearly outperformed the rest of the Company, as I mentioned earlier, the performance of our other platforms on balance was also relatively strong.

I think another key take-away from the quarter from my point of view was our ability to retain and flow through to the net income more of the gross profit we generated, which reflects our improved expense control. Gordon will discuss SG&A in greater detail, but I will say we clearly saw some improvement in SG&A relative to gross profit on the same-store basis. There's still plenty of work to be done in this area, but we're making progress, demonstrating that with a bit of discipline, we're able to drop an increasing percent of gross to the bottom line.

One of the bright spots on the expense side during the quarter was that vehicle sales were robust without a big increase in advertising spending. In fact, on a same-store basis, our total advertising spending increased 5 percent, but was below budget by 4 percent and decreased both as a percentage of gross and on a per vehicle retail basis by $13 a car or about 4 percent.

It's also worth noting that 2004 was a good year in terms of continuing to focus on the basics of the business, a focus we intend to carry forward in 2005. In other words, we don't plan on creating any new initiatives in our business this year. Clearly, neither me nor my management team are bored with the continued pursuit of excellence in executional basics.

In 2004, we also made a lot of progress in terms of investments for the future. That's one of the reasons our consolidated SG&A numbers look somewhat high. In effect, we laid the groundwork for stronger results in 2005 and beyond. Some examples include a new state-of-the-art Honda dealership in Frisco, Texas, and a relocated 100,000 square foot Lexus dealership in the Atlanta area. In addition, we incurred startup costs related to our entry in the Southern California market.

And Gordon rearranged our balance sheet with a large sale-leaseback transaction that was essentially P&L neutral but converted floating-rate debt into rent and SG&A. In 2005, we'll start to reap a return on these investments and you should start to see our SG&A numbers improve accordingly.

Now I'd like to touch briefly on our new regional management structure, which we announced in January. Gordon is going to walk you through the financial impact. Basically, it's all about management effectiveness and efficiency at the regional or platform level. As you'll recall from our previous announcement, we have consolidated our nine platforms plus our rapidly growing California operations, principally into four regions -- Florida; the West, which includes California, Texas and Oregon; Mid-Atlantic, which includes North Carolina, South Carolina, Virginia and the South, which currently is Georgia and Arkansas; Mississippi and Missouri are remaining as stand-alone platforms. The decision to move to this structure stemmed from a conscious effort to improve effectiveness, a big theme throughout last year and this year. This structure simply makes sense. By reducing redundancy and streamlining reporting, using management's time more effectively, both at the local, platform and corporate level.

The specific structure of each region was decided on a case-by-case basis. We evaluated the unique needs of each platform. Again, this was simply not an exercise in cutting costs or headcount reduction. A lot of thought was put into the process. In some cases, certain platforms simply had not grown to the size we originally expected, the scale needed to support a full platform management company. In other cases, the structures were lean and the results were strong so that a combination was not necessary. There's always an element of cost savings to any restructuring, of course, but that wasn't the primary driver to our decision. We have not reduced the authority or flexibility of the executives responsible for our dealerships, nor have we altered the way our dealerships operate or the ability of our general managers to manage them.

With that, I'd like to turn the call over to Gordon to review the numbers in greater detail and then I'll have a few more comments.

Thanks, Ken. Good morning, everyone. As Ken mentioned, the quarter was certainly a strong one in many respects. Income from continuing operations was 13.8 million or 42 cents per share, up 25 percent from last year excluding some nonrecurring items included in our 2003 results. For the full year, Asbury's net income from continuing ops was 52.7 million, or $1.61 per share compared with 18.5 million or 57 cents per share in 2003. If you exclude the items highlighted in the attached financial table, net income from continuing operations in 2003 was 49.2 million or $1.50 per share.

Some additional highlights for the full year include a 16 percent increase in total revenue, a 14 percent increase in gross profit, same-store retail revenue for the year increased 5 percent, while same-store retail gross profit increased 4 percent.

Turning back to the quarter, our strong performance was the result of an across-the-board double-digit increase in each of our product lines. Our Florida region had a tremendous quarter, posting a 45 percent gain in same-store net operating income on the strength of a 24 percent increase in gross profit and a 350 basis point improvement in expenses as a percentage of gross profit, excluding the impact of the sale-leaseback. While the region greatly benefited from the bounce-back following the hurricanes that plagued the third quarter, it also delivered great execution across all four business lines as well as displaying solid expense management.

I'm not going to go to into any further details about Florida. There is a summary attached to today's press release that gives you the results by business line.

The rest of the business delivered solid results. In our non-Florida markets, same-store net operating income was up 15 percent on the strength of an 11 percent improvement in gross profit, and a 140 basis point improvement in expenses excluding the sale-leaseback. Essentially every aspect of our operation added to our performance. Even if you assume that the Florida results are only due to a bounce from the third-quarter hurricane, on a same-store basis, our non-Florida businesses posted a 6 percent increase in new retail sales while our related gross profit was up 3 percent, resulting from a $50 per vehicle increase in incremental growth.

Same-store used retail sales were up 19 percent and gross profit was up a spectacular 27 percent as the result of a 14 percent increase in a unit sale and $192 increase in gross profit per unit.

Same-store finance and insurance income was up 17 percent overall and 10 percent on a PVR basis. And our gross profit from fixed operations was up 10 percent on the strength of our customer pay business.

Drilling down a little further to brand level, the news is even better. Net operating income growth in our luxury mid-line imports, mid-line domestic and value brands were all up double-digits. Luxury brands were up 11 percent buoyed by a 20 percent growth in fixed operations. Mid-line imports were up 36 percent due to a 16 percent increase in new unit sales and a 14 percent increase in used unit sales. Mid-line domestic brands were up 37 percent on the strength of a $472 increase in gross profit per unit on slightly lower new sales and stronger used gross profit. Last but not least, value brands were particularly strong with all business lines delivering strong growth, resulting in a 38 percent increase in net operating income.

Turning to expenses, expenses as a percentage of gross profit were 80 percent, flat with the same period last year. This includes the impact of the large sale-leaseback transaction that was completed in July, which had the impact of increasing expenses as a percentage of gross profit by 100 basis points. Keeping in mind that after taking into account lower depreciation and mortgage charges and investment in the cash proceeds, this transaction was only slightly dilutive on an EPS basis. The 80 percent also includes the impact of the startup that increased our expense ratio by approximately 100 basis points. Taking these two items into account, our core expense ratio actually decreased approximately 200 basis points in the fourth quarter. Additionally, on an EPS basis, startup operations in Frisco and Southern California reduced their losses to just less than 3 cents a share compared to 4 cents in the third quarter.

Turning to the balance sheet, our cash balance at the end of the year was 28 million, down from 107 million at year end 2003. A portion of the cash we had on hand at the end of 2003 was used to fund $75 million of acquisitions. You'll see when we release our 10-K next week that our cash flow from operating activities was negative 11 million for 2004. This was due essentially to two factors.

First, our decision to pay down floor plan (ph) debt in the second half of 2004. Assuming we had maintained the same level of equity in our inventory as prior year, cash flow from operations would have improved by approximately 68 million.

Next, due to our strong sales volume in December, our CIT (ph) and accounts receivable were both up approximately 35 million from prior year. We expect our cash flow to benefit from these collections in early 2005.

Inventory at the end of the year was 762 (ph) million, up 111 million from 2003. Taking a look at days supply, we were at 70 days on new, down three days from 2003. Luxury brands had 56 days supply; mid-line imports, 45 days; mid-line domestic, a disappointing 116 days; and value brands, 94 days.

New (ph) days (ph) supply in inventory for the quarter was down seven days year-over-year to 42 days. The aging of our used vehicle inventory continues to be within our target range and 88 percent of inventory is less than 60 days old compared to 85 percent last year.

Now, let's take a look at capital expenditures. For the year, we spent about 70 million on a gross basis, financed 25 million externally for a net capital expenditure of 45 million. During the year, we completed 16 major projects and started another 14 projects. Including the projects started in 2004, we have 30 store renovations/additions scheduled over the next three years with an estimated CapEx expenditure of between 80 and 90 million in 2005 with approximately 60 to 70 percent externally financed.

As Ken maintenance, we reorganized the Company into primarily four regions and two stand-alone platforms. The underlying goal of this structures is to improve productivity and management effectiveness. However, the financial benefit from the change will be tangible. Approximately 45 form (ph) level executives will be made redundant. And as a result, we expect to incur a charge in the first quarter of 2005 of approximately 4 million for severance and other onetime-related costs, including the settlement of several multi-year contracts.

Prospectively, we expect to realize annual savings of 4 to 5 million, reducing our expense ratio as a percentage of gross profit by approximately 50 to 60 basis points. Specifically, we expect to realize 3 million of these savings this year and the full effect in 2006. On an earnings per share basis, adopting this structure will reduce earnings by approximately 2 to 4 cents per share this year and increase earnings by approximately 10 percent next year.

Looking ahead to 2005, as we indicated in our preannouncement last month, we are comfortable with the range of between $1.70 and $1.78 of earnings per share from continuing operations. During 2005, we will be adopting FAS 123, accounting for stock options, which has the effect of expensing stock option grants that will reduce earnings per share. Based on our existing stock options outstanding, our stock compensation expense will reduce our 2005 earnings estimate by approximately 8 cents. Our current estimate also does not include the potential net cost this year of the regionalization reorganization, which I mentioned a moment ago.

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

Thanks, Gordon. I want to quickly go over a few more topics and then we'll be happy to take your questions. Hopefully, there will be a lot of questions.

Addressing the fourth quarter from a geographical standpoint as we've discussed, Florida recognized very strong gains in operating income from a year ago. However, every one of our platforms reported increased operating income from a year ago and every platform was profitable. On a same-store basis, Arkansas and Texas had the strongest gains, of course, along with our Florida markets. In Texas, our Honda stores benefited significantly from generous manufacturer incentives as well as from the new leadership we've put in place earlier last year. Northern California and Mississippi were basically in the middle of the pack, though still with solid double-digit increases in same-store operating income. North Carolina, Atlanta, and St. Louis all posted single-digit gains.

In St. Louis, as we anticipated, our new vehicle gross margins were affected in the quarter, as we worked through the remaining hail-damaged inventory. I think right now we have about 20 units left.

Our performance in Oregon is still not where we'd like it to be, but it did report a small operating profit for the quarter compared with the loss a year ago.

On the acquisitions front during the fourth quarter, we acquired a Nissan dealership in Clovis, California, which is near Fresno. That represents our third dealership in Northern California. Earlier in the year, we acquired a Mercedes dealer in Sacramento, our second Mercedes dealership in Northern California. Also during the year, we acquired three dealerships in Southern California. Overall, we acquired seven high-quality dealerships during the year, representing Mercedes, Honda, Nissan, Dodge, and Hyundai franchises. The acquired dealerships have projected annual revenues of approximately 300 million, which was within our stated objective of 3 to 500 million in annualized revenue from acquisitions.

Overall, I'd say we're rather pleased with the results we're officially reporting today and do believe Asbury made significant progress across a number of fronts in 2004. We reported increased earnings for the year despite the challenges posed by the hurricanes, a sometimes turbulent retail environment, and our investment spending in a number of areas. We are excited about our new regional management structure and look forward to a continued focus in 2005 on the fundamentals of the business. We are working diligently to deliver solid organic growth on a consistent basis and feel well positioned to do so with our high-quality brand mix, strategic focus on higher-margin service businesses, and disciplined approach to expense management. In addition, we remain committed to our acquisitions approach. That is, targeting specific brands in key geographical markets.

Our foundation is sound and at the end of the day, it's really going to come down to execution. Plain and simple, classic retail execution. If we execute, we know we can excel within the industry. And if we do that, we're confident that our shareholders will be appropriately reported. With that, I'd like to open up the call to questions. Operator?

(Operator Instructions). Gerry Marks, Raymond James.

Good morning, gentlemen. This is actually John Tate (ph). Gerry had to run to another conference call pretty quickly. The one question I had was about the franchise count. It looks like it declined -- the number of franchises declined year-over-year. I was wondering why that occurred.

It's pretty simple. We are continuing to cull the group, and we've tiered our franchises. And the ones that are in the bottom tiers that don't perform, we're getting rid of. We're selling them off and in some cases, so we've turned one or two back to the factories.

Do you anticipate any more in 2005?

I think we'll sell a few more, yes.

I think we're always looking at the bottom 10 percent of our stores and culling the ones where we think they don't fit our model.

What I'd point out and what Gordon is saying is last year, we did in '03, about 4.5 billion. This year, 5.3. Yet we went down in franchise count. So if you look at the ins and outs, what we're doing is we're getting better quality stores and fewer of them, which means the profit potential of the business has improved significantly.

Okay. Makes sense. Thank you, gentlemen.

Matt Nemer, Thomas Weisel Partners.

Good afternoon, everyone. First question is, is there a way to break out same-store sales excluding the Florida impact and the Southeast impact? Because I'm wondering if you also saw a bounce-back in some of your stores in the South. Maybe you could just highlight the performance in the West or Mid-Atlantic.

Well we broke out Florida, which -- the third quarter performance in Atlanta and Mississippi and Arkansas wasn't materially impacted by the weather. So there really wasn't any effect that there's any kind of analysis. The -- it was our Florida platform that had the issues and we, I think, split that out pretty well in the press release.

As I say, Matt, North Carolina, Atlanta had single digit gains. Texas and Arkansas had strong double-digit gains. That's about as far as we think we need to provide the details.

Okay. And then do you guys have any Mitsubishi franchises? And if so how many and where are they valued on the balance sheet?

We have none.

Okay, that's good.

Just don't read into the answer to John's question earlier about which ones we might have turned back to the factories. But I won't comment.

That's what I figured. Next, I wanted an update on your inventory management systems that you're using for used vehicles. Have you pulled back on the use of those systems? And what sort of value are they providing?

We have not pulled back on the use of assistance. In one platform, the DMS doesn't automatically integrate, so we haven't really brought it up. But other than that, we're using them. It provides a really great tool to understand what your inventory is, what you should be buying, strong indications of what you should be buying, what you should be selling off, what you should be taking to wholesale immediately. It's really -- it's a real good quality specialty retail information.

And then -- this is more of a housekeeping item, but the options expense, that's just the 8 cents, that's just the second half that that hits. Is that right?

Depending on what you elected it -- basically recap back to the first quarter. So it's spread over the whole year when you adopt, is probably how it's going to look.

So I guess on an annual basis, the number should still be about 8 cents.

That is excluding any potential option grant or restricted stock grant that the Board may choose to give employees in the second quarter of this year.

Okay. And then --

There may be another layer that has not been approved by the Board at this point in time.

Got it. And then one more housekeeping question -- are there other sale-leaseback opportunities that you guys are looking at? And I'm sure you are. But I guess I'm trying to get a sense of how much more rent could come out of SG&A.

Well, the sale-leaseback would include -- increase rent.

Yes, I'm sorry.

It would increase it. There's a couple, but very small. And most of the sale-leasebacks you'll see prospectively will be associated with our CapEx plan for this year and acquisitions.

And then the last question is, in terms of your SG&A, are there any longer-term opportunities that you guys are looking at, such as going to one DMS provider or consolidating back-office employees by platform? Just wondering what the long-term opportunity is on SG&A.

The answer to those two questions is no. The way I view the DMS systems, may be a little bit differently than some of the others. I look at that consolidation to a single DMS provider as sort of an internal versus external view of the world. You're trying to figure out something inside the business that really doesn't affect the customer and in fact may be disruptive to sales. So that you can pick up a few dollars, but at what price? That said, we are in six platforms on rentals, and the other only three that are not. There are some opportunities in SG&A, but they basically involve programs that have to be implemented one at a time. There's no broad-brush, single, mega idea that's going to take it down by a meaningful step.

Actually, one last question if I can sneak one more in. What are your assumptions in the guidance for interest rates and inventory and any changes in OEM assistance for '05?

I'll take the first one. The interest rate, as we've assumed it, is that will continue to increase rates through the July meeting, which would say that I expect rates to top out at 3.50. A LIBOR of 3.50 is where our models are built.

And in terms of floor plan assistance, the OEMs that have it tied to prime will continue to adjust as the primary moves.

And inventory assumptions?

Well, I don't -- I'm not assuming we're going to keep the domestics at over 100 days. That's a challenge for us, and we're going to take those down. The rest, I think, are reasonable where they are.

Great. Thanks so much.

John Murphy, Merrill Lynch.

Good morning. You hit quite a few of my questions. But one that's left is you had pretty good performance in F&I PVR. And it sounds like some of the other dealers out there had a tough time increasing that in the quarter. Do you guys do anything special or have any new initiatives there to push that?

No. I think that what we've done is we've -- I think our F&I executive here and the directors in the field, I think that we just focused on the underperforming stores. And by focusing on the underperforming stores, we raised the average. So it's -- this is one customer at a time. We don't have any mass sales effort. A customer comes in, you work with them, you explain to them what -- find out what their driving needs are and hopefully match their needs with the products you have to sell. There's no magic to it.

The second question is, on the dealer programs you alluded to in your press release in the fourth quarter, how big were those in the quarter? And were a lot of those -- it seemed like a lot of those were coming from the non big three, the import brands. I wonder if you could comment on the level there in the fourth quarter.

Well, without being specific, Honda had an important program. And Honda is our most significant brand at about 16 percent of our sales.

Yes, that's right, excluding Acura.

Excluding Acura. And Ford had a large program as well, which is our third biggest brand after Nissan.

And are those programs continuing into the first quarter? Or can you comment on that?

Well, those programs ended. Whether they do something as a follow-on, I can't say. And then Ford just started a program yesterday, different kinds of programs -- they like to mix and match. I don't know what's going to happen.

Okay. Our next question is on acquisition prices, where are way out there? Especially if you're building critical mass out in California, how are the acquisition prices out there? Are they out of the ordinary or pretty standard?

I haven't seen a whole lot of change since we've been in the market.

Okay. Thanks a lot, guys.

Rick Nelson, Stephens Investment.

Thank you. Ken, the reason I (multiple speakers) in Florida -- is that continuing beyond the fourth quarter? Was that a one quarter phenomenon?

I think -- my sense is that Florida is going to be, knock on wood, a pretty strong market, if you accept the rebound premise for probably 18 months. There's anywhere from -- you can pick your number of between 20 and $40 billion is going to flow into the state from the hurricanes. 20 billion so far and the balance over the next year or so. So I think that it's going to continue.

Do you have any comments on the current environment? We're hearing about weak sales -- how margin pressures in the industry?

Well I don't want to talk about specific results that we've had for January or into February. What I would say is that I expect overall sales this year to be about to give or take a percent or so what they were last year. I expect and as I have for a couple years and been talking about it, new car grosses to continue to be under pressure because of the overcapacity in the industry, and a desire for every manufacturer to hold and take share. Hold in the case of the domestics or I guess Ford and G.M. and take share on the part of everyone else. So I think it's going to be an environment that represents a challenge at retail.

With that said, as you know, new cars only represent a small portion of our overall gross profit. And if we do our job in the other aspects of the business model, which is what I was referring to in my remarks, in used and F&I and fixed, we can deliver the acceptable results. When you catch a tailwind, as I said, and you get new cars that really pop, that's -- you get some extraordinary results. But I think that we will have more than acceptable results in the environment we're in.

(technical difficulty) Could I get your days supply, domestic versus the import labels?

I'm choking on that as Gordon looks the number up.

(technical difficulty) domestics (technical difficulty).

For mid-lines, it was 116 days. Is that what you were looking for?

The mid-line imports?

Mid-line imports were 45 days.

And the domestics?

Mid-line domestics were (multiple speakers)

It was 116 days.

Oh, 116. And how do you go about reducing that?

Stop ordering. Which we've done in many cases in many stores.

Your target there would be what 60 days?

Overall?

For the domestics.

I think the domestics it would be more in the 70 day range, 75 day range. We are not skinning it down. Our goal is -- the way some of the others in the business have talked. Some of that is due to the specifics of some of our large stores. Our largest single domestic store has a relatively large business where they sell to commercial operations not fleet. And so they keep a number of generic light-duty trucks available, so they can have immediate delivery for example. So they need about an extra 15 days at that store. So I don't think we're going to get as low as 50 or 60 days as some of the others have been talking about. I think Gordon is right. I think about 70 or so is where we should be.

And the manufacturers have stepped up incentives here recently to help you reduce those?

Well, they've stepped them up to get our flow-through so that we can continue to order from them and they can keep their factories going. It's purely selfishness on their part. It's not -- we've got to move the metal.

Okay. Thank you.

Matthew Fassler, Goldman Sachs.

Thanks a lot. Good morning. A couple of questions to ask you. First of all, on the used side, and I guess bigger picture, thinking about the sustainability of your performance versus the industry, I want to focus first on used. You had a terrific number. Just looking back at the past twelve quarters or so, both of your fourth quarters, '03 and '02 were down double-digit same-store on the used side, and those were by far your softest performances of each year on the used side. So would you view the used number here as particularly anomalous? In other words, does it go back to kind of the punk (ph) growth that we've seen in the used arena? Or do you think that some of the rationalization that's been out there could lead to a sustainable run on the used business for you, even though your comparisons are more normalized the rest of the year?

Well I think that -- I'd like to think that it's a result of the programs that we put in place. They've been operating with fits and starts. We have tremendous success and pull back. I think right now, I feel comfortable that we've got traction -- and I'm not just saying that based upon our fourth-quarter results.

Right.

So I'm not going to make a prediction about it. But I'd be very, very disappointed if we didn't have a reasonably good used year.

Got you. And on the new side, are there any efforts in particular -- because you know this year and I think the year before as well, your new business did outgrow the SAR. And that was obviously most pronounced in the fourth quarter with or without Florida. What are the initiatives that you have in place that you would point to for '05 that you think could help propel that sales on performance once again?

On the new car side?

Yes.

I think we've got -- we've put a lot of CapEx into the business, and I think those stores are more attractive on a competitive set basis. I think we're in good locations. I'd like to think we have better dealers and better general managers. But on a brand mix adjusted basis, our business model and the numbers that Gordon was talking about -- they're just predicated on a performing (ph) industry.

Got you. Two other questions. The first is on floor plan. You alluded to the supplements or offsets from OEMs or from your financing partners that are linked to prime, having kind of moved along with rates, as rates have moved up. If you look at the floor plan dollars, they've certainly increased at a greater rate than your inventories, which would suggest that there is somewhat of a higher cost of doing business here. I guess what piece of your floor plan debt, measured in dollars or any way you want and just in rough terms, has offsetting subsidies that will move at the rates? And to what degree do you have a little bit of real exposure there as the factor rates move up?

Just in general, it's about 75 percent of the rate increase will flow through directly to the bottom line. There's about 25 percent of the floor plan credits are associated with prime. The rest are mostly a fixed number. Then they go up at -- so there's about a 75 percent correlation there.

So you're saying that that 75 percent of an increase in rates will flow through to higher floor plan expense?

Yes.

So you're saying 70 -- and it's also true that 75 percent of the floor plan deals are tied to prime?

No. That's that --

It's the inverse.

Got you. 25 percent tied to prime. Understood. That makes sense.

I'd say, Matt, by the way that I think perhaps why we're going to -- should have explained it a little bit more -- the stores we built and the stores we remodel -- we're striving for a better quality customer experience in the store. And I am hoping that what we do differentiates ourself on a sustainable basis.

Good. And third and finally, just kind of a financial detail. If you look at the other expense or income line on the P&L, this year I believe you have a $500,000 favorable item. Last year you had a million 2 unfavorable. I know these are not big dollars, but the delta does add up to a decent piece of the increase in pretax profit. So if could just talk to what the moving pieces were in that line item.

It was other income?

Yes.

Last year, I think in the number you're looking at was probably the charge we took for the Baker acquisition. And this year the number is principally investment income associated with the cash we received, both from the sale-leaseback at midyear and that deal we did at the beginning of the year. Big pieces that were sitting in other income.

Is it fair to say that this should all kind of be a wash in '05 on that line item? I know it's never all that big anyway.

Yes, it's going to be pretty much -- the only other thing that would go in there is if we have small real estate transactions. But that will be small dollar amounts. Mostly what you'll see in the other income line is investment income.

Got you. Thank you so much.

Adrienne Dale, CIBC World Markets.

Hi, thank you. In speaking about the domestic inventory, you are saying that in many cases you have actually stopped ordering. Could you just talk a little bit about the pushback you're getting from the OEMs in doing that?

They don't like it. They don't like it but we don't want to talk about it. In other words, I'm not going to go out and campaign publicly. It's a one-off transaction. The -- we have very sincere people representing the factories coming in and wanting to sell your vehicles. And if we don't need them, we turn them down. And they are very unhappy. Whenever you turn a salesman down, the salesman is unhappy. I mean Willy Wellman (ph) spent his life being unhappy.

So all I can say is that they -- sometimes they'll say we're not leaving until you give me the order and we're ready to turn the lights out. You need that level of discipline. I can't say that all of our general managers always have it because there are also salespeople that make believe they can sell their way through it. And they don't like to turn these people down that they have really strong business relationships with. I mean their folks that represent the factories -- they're quality professionals who are working very hard and their factories own interest. We have to represent our shareholders and act in our interests. So I think that we're going to see the domestic inventories come down appropriately.

Okay. And do you see them kind of increasing the level of assistance they're willing to give you, given the fact that you are sort of pushing back on orders?

I don't think so. Last year G.M. did one little program where they extended the number of floor plan days that they gave. What I think is you're going to see the domestics continue to use their incentives to generate velocity at retail. And that's the way they create demand from the dealer. Because we're going to want to have an inventory level that can meet the sales demand.

Okay, great. And then in terms of your '05 guidance, what kind of a same-store sales number are you looking for?

Increase in sales? Total revenue? Probably in the 5, 5 to 6 percent range.

I think it's less than that. We didn't do the number that way.

For revenue -- just revenue.

Just pure revenue? I think it's below that. It would be low single digits.

That's a total? Or that's your same-store excluding any acquisitions?

I think it's same-store.

Okay. And then your CapEx guidance for '05?

It's 80 to 90 million.

That's a gross or a net number?

That would be a gross number. With the kind of CapEx we're looking at this year, we're probably going to be financing 60 to 70 percent of that number.

Okay. And you were speaking about a large sale-leaseback in '04, but I don't think you ever gave the numbers. Was that kind of consistent with what you're seeing now, 60 or 70 percent?

The large sale-leaseback last year -- it wasn't associated with any CapEx. It was stores we had mortgaged. And on or around July 1st, we took about $60 million of mortgages, refinanced with $115 million sale-leaseback transaction. The purpose of that was to convert floating-rate debt into fixed-rate debt. And the result -- I got approximately $40 million of cash out of it and effectively did it without diluting EPS. But that was a one-off kind of a transaction compared to what we're talking about here, which is sale-leaseback transactions that are on specific assets.

Right. And I know in the release you broke out the incremental rent associated with that. But what was your actual total rent for the quarter or for the year?

Per total sale-leaseback?

No, total rent.

No, total rent expense.

Total rent for 2004 was -- in the quarter it was 11.3 million on a same-store basis. On a total year basis, that number, it was -- for the quarter it was 12.8 million. And for the year -- the total rent was 43.3 million (ph).

Okay. And this is sort of old news, but we haven't heard any kind of a status update in a long time. I was just wondering if there's any update on your relationship with Ford. I know a while back they've been sort of nit-picky about your performance. And I was just wondering if they've changed sort of the way they look at you in general.

Our two stores in the Memphis region were first and fifth or first and third or something like that. We performed exceedingly well. Our stores in Florida and North Carolina performed exceedingly well. Our two stores in Portland did not. Although in the main, we sort of held share in the back half of the year in those two stores. So the answer is relatively pleased with the way the Ford stores are performing. Ford Motor Company may view us a little differently. And we agree to disagree with them.

Okay, so really no change.

Right.

Nate Hudson, Banc of America.

Hey. Good morning and good quarter. A question on your parts and service business was up but just under 7 percent for the full year last year. Was there anything you would consider unusual in that or indicative of what the long-term performance there can be?

We have set as a goal 3 to 5 percent compo store gain in parts and service. I think we can do better than that. Our business model calls for 3 to 5 percent. I think we're working very hard at what the needs of our individual stores are in terms of stall capacity, a tech availability, service rider (ph) availability and training, and equipment. And as we continue to make progress in those areas, I think we have the opportunity to exceed the long-term guidance of 3 to 5 percent that I've given you and that we've talked about for the last couple of years.

Is the performance by brand what you'd expect given the changes in fleet with Lexus's and BMWs at the top and the domestics near the bottom?

I'm not sure I understand what you mean.

The brands that have had the biggest increases in sales besides the vehicle fleet, is that where you're seeing the largest increases?

I don't think so. I think in some cases it's based upon units and operation. Which, of course, the more vehicles you have out in your area of responsibility, the more opportunity you have to service them. And others, it's where we're putting in additional service capacity for adding equipment. So you can't generalize.

What I do know is that there's increasing about 2 million cars a year net on the road. These vehicles are increasingly complex. For example, if you're driving a late-model BMW and you have active steering, you really shouldn't go anywhere but the dealer to get that vehicle aligned,. Because it involves both the typical alignment and the steering components require it. The new 3 series now is going to come out with that same active steering. Mercedes has their version of it. The new 7 serious -- there's over 80 major microprocessor locations in that vehicle and they're connected with fiber-optics. We get that kind of work. So I think over the long-term, the franchise dealer is going to continue to take share. Hopefully we'll take more than our share.

Aside from these, I think especially true on the luxury brand. Where the vehicle obviously is a lot more complex. And it is where we saw -- it was about -- we increased our fixed growth about 4 million in these luxury brands in the fourth quarter, up from 22 million the previous year. You can do the math as to what the percentage growth was. But it was pretty strong in luxury. And to a lesser degree, but still strong in the mid-line imports.

Okay. And just last question, did you disclose your brand mix in the quarter -- what percent domestic were you?

Were still about 70 percent mid-line imports and luxury, and 30 percent domestic and value. That hasn't changed.

Okay. Thanks very much.

Deborah Fein (ph), Fein Capital.

Good morning. Congratulations on the results and I applaud the huge amount of disclosure that you have in your press release. I'm wondering if you could just give us, on the inventory levels, what they were this time last year in the same categories that you just spoke about them. So what was 116 days last year this time?

It was -- it's up slightly. I think it was about 103, 104 days last year, up to 116 this year.

And then in the other categories?

There were about the same as previous year. I don't have it off the top of my head. But they were about the same.

Okay. Thank you.

Peter Siris, Guerilla Capital.

I've been waiting. You said at the beginning there was going to be a lot of humor on the conference call. And so far, I haven't had much humor. So (multiple speakers) going to get the humor before the end.

We've been doing it at our end, Peter, with the mute button on.

Well then I'll ask a couple of non-humorous questions. You merged a couple of your regions. If I were to look out three or four years, would you expect -- should I expect to see more of that merging of regions? And if so, sort of over the long-term, what kind of cost savings might I see?

I think that you could anticipate that we will maintain four regions. I think that there -- I really fervently believe that automobile retailing is a local business and that you need strong local management and local control. To have fewer regions, I think stretches that a bit. I never say never. But when we look at the geography, we look at the kinds of relationships we want our regional CEOs to have with their general managers, I don't want them to have too many dealerships to be responsible for. We want the retailing and the servicing of our customers to happen locally, to be directed locally. And so I don't think there's a reason to go below four.

And the second question I had is, obviously, your results have been very good. And everybody is asking all of these questions about what the market is doing. But I just want to ask a micro question, which is, if you were to say what two or three things do you think you're doing better than you were a year or two ago?

There's several. I think that we've redefined the business strategically. We had said previously it was the best branch and the best locations with the best dealers. And as we have changed, it's the best brands and the best locations with the best general managers. We've really focused on the recruiting, the training, the developing, and the retaining of our general managers. While everyone in the business is important and has a role to play, that's the pivotal job and so we've spent a lot of time on that.

I also think that we've spent, between the CapEx last year and what I think is the peak this year, a lot of time and effort and thought has gone into what we want our facilities to be like and how we want to treat our customers. And I think that's had a difference. So -- and combine that with the shift in the mix. We basically sold or turned in 10 dealerships this year and still wound up with give or take within two or three of where we were. We added six or seven. And so I think by working the fleet to have fewer, bigger stores, having general managers on board that are committed to the same kind of customer experience that we are, and in a way, that we're able to pay them commensurate with that responsibility, I think we're having a big impact.

Thanks.

Mr. Gilman, we have no further questions standing by at this time. I'll turn the call back over to you for any additional or closing remarks.

I don't have any closing remarks. You've heard us drone on for about 55 minutes. I thank you all and we look forward to reporting our first quarter to you. I guess that's going to be at the end of April. Thank you all and have a nice week.

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