Asbury Automotive Group Inc (ABG) 2005 Q1 法說會逐字稿

Good day everyone and welcome to the Asbury Automotive Group quarterly earnings results conference call.

At this time for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Ms. Stacey Yonkus. Please go ahead.

Thanks. Good morning everyone and thank you for joining us today. As you know, this morning Asbury reported its first quarter earnings. The press release is posted on our website at 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 feel free to contact Gail Selatico (ph) at our corporate office. Gail's number is 212-885-2520. She'll make sure you get a copy right away.

Before we start, I just want to remind everybody that the conference call today will include some forward-looking statements that are subject to certain risks and uncertainties which are detailed in the company's 2004 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 rules, reconciliations of non-GAAP financial measures have been attached to this morning's press release and it 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 first quarter results.

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; and after that, Ken will have a few concluding comments and of course, as always, we'll be happy to entertain any questions you might have.

Ken?

Thank you Stacey and good morning to everyone. Thanks for joining us today. I'd like to begin with the overall comment that we're pleased with our results for the quarter. Adjusted for the expenses related to our regional restructuring, net income from continuing operations of 12% with earnings per share of 36 cents versus 33 cents a year ago.

Given the slow start for the quarter, including a tad, and I will just say a tad of December (inaudible) forward from January, we consider this a very good performance. It was also a very balanced performance. We did exceptionally well across each of our four business lines, new vehicles, used vehicles, parts and service, and F&I, with our services business as once again being remarkably strong.

I'd like to take a moment to thank our regional platform leadership and their management teams and most of all, our dealership general managers for again delivering gross profit gains this quarter that should be the envy of the industry.

In fact, in several ways, this successful quarter was very similar to our fourth quarter, the immediately preceding one of course, which also began with a difficult new car environment in the first two months, but wound up churning in our overall strong and balanced performance.

You all know that many of the mid-line domestic automotive brands are struggling with imported vehicles continuing to take market share. Consumers clearly have become very attuned to the incentives that increasingly are available in our industry and more and more of them realize that if they just wait, they wait out the manufacturers, the deals will come, that the manufacturers will raise the ante.

The transplant name plates are also driving their growth aggressively with incentives, but the transplants express these incentives differently from the customer's perspective. The combination of these trends continues to work in Asbury's favor. Specifically, we saw sharp increases in sales of Honda and Nissan vehicles in March, which happen to be our two largest brands.

Honda, Nissan dealerships generated 19% and 12%, respectively, of our new vehicle revenue for the quarter. As a result, while the industry's unit sales were down slightly for the quarter, Asbury's same store unit sales increased about 3%.

Overall, as you know, our brand mix is heavily weighted towards luxury and mid-line import name plates, which account for about 70% of our unit sales, much higher than the industry average, and as the marketplace dynamics continue to evolve in favor of these brands, we believe we are well positioned to benefit both near and long term.

As I noted, our business model again delivered a very balanced performance in the first quarter. In fact, while we're relatively pleased with our new vehicle performance, our results were actually better in each of our other three business lines.

Used vehicle retail gross profit was up 7% same store and 11% overall; finance and insurance income increased 11% same store and 17% overall; but the real standout to my mind was our parts and services operation, fixed operations, which achieved a 10% increase in gross profit on a same store basis and a 15% increase overall.

The strong performance in parts and services was non-accident. It did not just happen. We caused it to happen. Here's the background to that statement. About two years ago, we took the view that the OEMs, Lexus being the sole exception, take (ph) an environment of significant over-capacity for the foreseeable future. And that to keep their factories humming, the factory incentive programs would not only continue, but would most likely intensify. Intensity, why we as retailers are insulated from these kinds of incentive costs, we anticipated some spillover in terms of new vehicle margin pressure, erosion that is, at the retail level.

By the way, that is exactly what has happened and we believe this environment will continue until factory capacity, not just near-term production schedules are more closely aligned with demand. Based on this assessment for new vehicles, which aside from brand mix, is really beyond our control, we determined not to be the victims of our environment.

We set out to deliver growth for our shareholders, which is one of management's prime obligations, by focusing on the areas of the business, the business lines if you will, that we can impact more directly. In other words, we have implemented a variety of specific programs and are driving growth organically in the areas where we have the capability to do just that.

We focus first on finance and insurance, and as a result, between 2002 and 2004, our F&I per vehicle retail at the platform level grew by 14%. Next, we introduced a number of programs aimed at our used car business, which frankly have been less successful, in part due to the spillover impact of the competitive industry conditions in new vehicles and in part by our own missteps.

We know we still have lots of opportunities to improve used vehicle sales, although we're encouraged with aspects, just aspects of our performance for the past two quarters. In parts and service, fixed operations, we set very aggressive goals for growth for 2005, beginning about two years ago because it has the longest lead time in terms of impacting business trends.

And we are seeing the fruits of that labor in our current results. We surveyed all of our service operations and determined where we could most profitably invest capital dollars to increase our capacity. In addition to our physical facilities, we focused on our people, for example, our more rigorous and consistent training of our service advisors.

And now we're beginning to see a return on these investments. Many of these investments were made in 2003 and 2004, and more are yet to come. This year, our goal is to expand our fixed capacity with the addition of 100 service stalls and 200 to 250 technicians on a base of 2,250 stalls and 1,500 technicians. Simply put, better trained service advisors directly impact results.

During the first quarter alone, we saw same store increases in our customer pay business of 10%. We also saw an increase of 8% in warranty work on a same store basis, which reflects our brand mix and a substantial increase in units and operations of mid-line import luxury brands in our trade areas. So obviously, you can see that investments in this area of the business are prudent ones.

And with that, I'd like to turn the call over to Gordon to review our numbers in greater detail.

Thanks Ken. Good morning everyone. All things considered, this was another good year for Asbury. As Ken mentioned, the selling season got off to a slow start compared to last year. In fact, on a February year to date basis, we were actually down about 4 cents.

Customer demand driven by manufacturer incentives has added a new dimension to the typical seasonality of the auto retailing business, and in certain cases, may dictate whether we achieve a particular quarter earning target. However, as customer incentives simply wholesales from one tier to another, being or missing one quarter target may not necessarily require us to move our annual guidance up or down.

With slower traffic in our stores in the first two months, new vehicle margins were under pressure, down 40 basis points from the same quarter last year and 50 basis points sequentially to 7.2%. This in turn put pressure on sales compensation as a percentage of variable gross profit, which rose up 40 basis points from last year on a same store basis.

Despite this increase, SG&A as a percentage of gross, excluding rent and restructuring costs, was down 210 basis points on a same store basis and 140 basis points on a GAAP basis. On a GAAP basis, this is a result of advertising being down an average of $9 per vehicle and personnel costs being down 50 basis points as a percentage of growth.

Revenue expense for the quarter was up 38% to 12 million on a same store basis, largely due to the $116 million sale lease that we executed in July of last year. Including rent, SG&A as a percentage of gross, was down 70 basis points on a same store basis, excluding the restructuring costs.

We remain committed to reducing our SG&A costs as evidenced by the progress we made in regionalizing - made in our regional restructuring. During the first quarter, we incurred $3.6 million in severance out of the related costs. The organizational changes made to date translate into annual savings of over $4 million.

We expect to complete the final phase of our regional structuring over the next few quarters. Currently, we estimate that our regionalization, we have a negative impact on EPS of two to four cents in 2005, and will improve the EPS by 10 cents in 2006 and beyond. As anticipated, the regionalization has not only reduced our cost structure, but has resulted in many ancillary benefits in the financial operations area.

With our regional CFOs working closely together, we have uncovered additional deficiencies and cost savings opportunities ranging from financial systems architecture to back office personnel structure and even to deal processing. In short, we are finding that our regional CFOs are embracing change and are excited about the impact this will have on our future operations.

Touching on one operational point, in the past, I have discussed the impact of our startup in Southern California and our Honda store in Frisco, Texas, have had on our operating performance. To provide you with a quick update, our Southern California stores have not yet turned the corner to profitability, mostly due to the large scale renovation of our Honda store and now Almonte.

When construction is completed in the third quarter of this year, it will be a top of the line facility in a market that has already proven to be a - to move a high volume of vehicles. And good news regarding our Honda store, our sales volumes are on the rise at the Honda - as the Honda brand is coming around and our fixed business is building momentum.

This store made money in March and we are projecting that it will be profitable over the remainder of the year. Before I turn to the balance sheet, I'd like to briefly review our credit facility. As some of you may have read, in March, we announced a new $150 million working capital line and a $650 million floor plan facility.

JP Morgan and Bank of America led a 19-member syndicate including four captives, BMW, Toyota, Southeast Toyota and Ford. In addition, GMAC and Ford will continue to provide floor plan financing for their franchises, bringing the total line to over $1 billion. This new credit facility provides us with additional flexibility in utilizing our excess cash.

More directly, it has enabled us to aggressively maneuver against rising interest rate environments. For example, we paid off approximately $20 million or two-thirds of our remaining floating rate mortgage debt during the quarter, the remainder of which was paid off in April.

In addition, we continue to have a high level of equity in our inventory, at $66 million at the end of the quarter compared to 40 million at the same time last year. Our mortgage pay down has reduced our debt to total cap ratio by one full point to 51% and left us with $505 million of debt, the lowest level of debt since September of 2003.

Currently, 93% of our debt is fixed with maturity dates starting in 2012. Turning to the balance sheet, cash ended the quarter at $39 million, including equity, and floor plan was $105 million, compared to 94 million at the end of 2004. As discussed above, we used $20 million of cash to repay floating rate mortgages during the quarter.

As an aside, I want to assure you that our use of cash to pay down debt is not a signal that we are changing our acquisition strategy. Rather it is a reflection of the flexibility that the new credit facility provides. We have several acquisition prospects in the pipeline and remain confident we will achieve our annual revenue target for acquisitions.

Taking a look at Cap ex, our activities for the first quarter focused primarily on renovating our existing facilities and increasing the capacity of our service centers. In addition, we have a few new dealerships under construction, including a Lexus store in St. Louis, a Toyota and Nissan store in Mississippi, and a Honda store in Northern Florida.

As we have discussed previously, we expect to spend 80 to $90 million in Cap ex during 2005, financing 60 to 70% through sale lease backs. Before we take a look at inventory, I would like to discuss our deep day (ph) supply calculation. It's confusing to me and probably to you as everybody uses a different method.

Simply put, our day supply is calculated monthly as an ending retail inventory divided by the cost of sales in the month multiplied by days in the month. To further specify, the days are calendar days, not selling days. If we use selling days, our calculation would probably be 8-to10 days lower than we're reporting. I hope this will help you to (inaudible) our numbers.

New inventory ended the quarter with 66 days supplied, just slightly higher than our targeted level of between 60 to 65 days, up only slightly from 63 days at the end of 2004 and down from 68 days at the same time last year. By category, luxury plants were at 62 days, mid-line imports at 55 days, and the domestic at 97 days.

Our domestic inventory remains high, but we have made some progress in reducing our supply of domestic products from 104 days at the end of 2004. Used vehicle inventory ended the quarter with 45 days supply, up slightly from 44 days at the end of 2004, and 40 days at the same time last year. As forecasted, we will continue to face increasing interest rates through the remainder of the year.

However, we are confident that our operations will be sufficient to cover the additional interest. With that in mind, excluding the impact of our restructuring and potential adoption of new rules on accounting for stock options, we remain comfortable with our previously issued guidance of income from continued operations at $1.70 to $1.78 per share.

With that, I'll turn it back to Ken for closing remarks.

Thanks, Gordon. I want to quickly cover a few more topics and then we'll take your questions.

First let's talk about our regional performance a bit. As Gordon mentioned, we made some good progress during the quarter with our regional reorganization. In particularly we realized benefits from this new structure in our Florida region, where we posted 13% improvement in Sanstro (ph) gross profit during the quarter. While certainly we were able to take advantage of the state's economic growth, the gain was largely fueled by our strong management team in that region and the actions they and our general managers took.

Our regional CEO Charlie Tomm, and I hope, Charlie, you're on the call, because you deserve this public management and the senior management team at their management company, have done an outstanding job of integrating our Jacksonville and Tampa operations. Charlie has also added some impressive new talent at the general manager level in several of our largest Florida stores.

While we were pleased with the performance of many of our regions, our West region underperformed due to a combination of factors, some of which Gordon talked about. Startup operations at our Texas-Frisco store and our Southern California market combined with overall softness in our Texas markets, especially the Honda stores, all contributed to the shortfall in that region.

As Gordon mentioned, the good news is that in March we began to see an improvement in our Texas markets, specifically our large Honda stores, a trend that has continued into April. We were also very optimistic regarding the mid-year prospects of the West startups.

As to our acquisition and divestiture activity during the quarter, we continue to focus on portfolio management, concentrating our acquiring desirable franchises and divesting underperforming stores and brands.

From the beginning of 2003, through March of this year, we added eight stores and divested 10. The net effect has been to reduce the total number of stores owned, while significantly upgrading the quality of our portfolios with high quality brands and desirable locations, and increasing average dealership revenue by 15%.

Simply said, it's about improving the quality of the portfolio, not simply adding to it. Our most recent acquisition closed last week, a dealership in Little Rock, and our Nissan Brand, which will add approximately $35 million to annualized revenue.

We remain convinced and believe we have demonstrated that we have great assets, a very attractive brands mix, excellent dealership locations and rapidly growing regional markets. We think we have the right strategies in place to leverage these assets, a focus on the high margin services businesses. As a result, Asbury's positioned to deliver solid organic growth in the years ahead. We intend to further leverage that growth through our disciplined acquisition program, which is targeted narrowly at selected brands and key geographical markets.

Before we turn the call back to the operator for Q&A, I just want to make a final comment. As I take a look at our sector over the past two quarters, specifically publicly-held automotive retailers, I can't hope by notice the standout gross profit results Asbury has delivered in each of our four business lines versus that of our peer group. If you look closely at our performance in the fourth quarter of 2004, Asbury by far surpasses peers in gross profit performance on a comp store basis across all four business lines.

Of those of our peers who have reported thus far this quarter, we believe we have again handily outperformed them on that same basis. I point this out not as a knock on our peers, who are all fine companies, but because I truly believe our results over the past two quarters demonstrate that we have turned an important corner. It's been a long road over the last three or four years, replete with its share of bumps.

Over the past two years, specifically, we have placed a tremendous focus on having high quality general managers in each of our stores, plus first-rate execution against our business plan at the dealership level across all of our regions, so it's very gratifying, it's very nice, to see it start to pay off.

With that I would like to open up the call for questions and turn the call back to the operator.

Operator?

If you would like to ask a question at this time, press star then one on your telephone keypad.

The first question comes from John Murphy of Merrill Lynch.

Good morning.

Good morning, John.

I've got a question on the secondary offering that was held in late April. I was just wondering if there was any update on that or if any of you guys can give us news on that?

Sure. We - it wasn't a secondary it was a shelf registration. Maybe that's a distinction not worth of a difference but we put up the shelf because there are institutional and dealers - institutional holders, the private equity firms that form the company and the dealers that formed it that ultimately we'd like to see a liquidity event and the best way and most expeditious way is to do a shelf and we haven't done any, taken any activity so far.

How long is the shelf good for with the filing period? With the open window period there?

It's a long time. It's in multiple years. I won't play securities lawyer, but it's at least two years, and I don't know if there's a technical end to it or not.

OK. And then just a second question. On the used care market, and it looks like you actually made a fair amount of money on wholesaling vehicles here, which indicates that the used car market, at least from a retail perspective, somewhere down the line is pretty healthy. You also did pretty well in your used retail sales yourself. Is there any - You're talking about an opportunity there. How big is that opportunity and with that market apparently so healthy, can you capitalize on that in the short run here?

Well, I would like to think so. One, I think, first and foremost, you have seen the statistics about residual values getting better and the focus of those comments in the press relates principally to the lessors of the vehicles who are not going to suffer as great a loss when the vehicles are turned in, but it's reflected in the wholesale value and we've done better.

I think there's a tremendous opportunity for us to increase the unit sales and used vehicles if we pay attention the right way and I think we can deliver additional profit on that basis and I think we can do it in the near term, which basically means the back half of the year.

What is the big leverage you have to pull there? Is it new hires or is it just an increased institutional focus?

Increased institutional focus, meaning our region has - and we're going to be talking about this in a couple weeks when we get together, need to organize themselves a tad differently in terms of going after this market and it's the market share that we want is basically is occupied right now by the independent used car dealers and we need to organize ourselves to go after it.

Then just one last question. Wade (ph), can you characterize the stores that you divested, and you're talking about 10 stores that were divested. Are they mostly domestics locations? Sort of along those lines?

I don't want to knock any brands, but there were some of the important brands that we don't typically pursue and there were a few domestics in there.

But they were characterized by - their revenue base was too low. That's the major underlying theme. Our small stores where we don't believe we can get the right GM, the right talent in the stores to make them profitable the way that we'd like them to be.

Thanks a lot, guys.

The next question comes from Adrienne Dale of CIBC World Markets.

Hi, thank you. You definitely have some nice improvement on the product and service side of the business. Do you have any expectations for what kind of additional improvement you can get out of that side of the business?

Well, yes, I have been reluctant to talk about the plans that we put in place starting two years ago but I feel that after the fourth quarter and the first quarter I needed to let investors know that it wasn't serendipitous that it happened. I'm not going to claim that we can continue to do it but I think we have got the kind of momentum, the kind of plans that we think we can sustain this for a bit.

We are very focused on this part of the business, the services part of the business. We've got a lot of fine, dedicated, fixed directors operating in our regions and the service managers in our stores. So to the extent that something is within our control, versus, for example, the overall new car market, we think we're going to continue to experience a modest degree of success here.

OK. And then you had a nice reduction in your regular debt, but obviously your rent expense what up quite a bit. Can you just suggest the balance going forward and what you expect you do from a regular leverage and a rent-adjusted leverage perspective and your plans for additional sale-lease specs going forward?

Last - First, there is no - we did a large sale-leaseback transaction in July of last year. It was a $160 million facility that had 20 different stores involved. We don't plan on replicating that and just to point out that on an EPS basis, it was neutral. We replaced floating rate mortgages with a fixed-rate instrument and all in it was EPS neutral.

As far as the SG&A costs, we believe and will continue - that we will continue to see the leverages on the first quarter improving a little bit as we get the restructuring costs behind us and see the savings from the restructuring, so as we noted in the release, we think we can generate an incremental 10 cents from the restructure and that there are other plans that we are looking at, I don't have them quantified yet and we still have to put them in the - on the calendar, but we believe there are incremental savings over and above that.

OK. And I'm sorry if I missed it, but did you discuss gross and net cap ex?

Our gross cap ex was - is going to be between $80 and $90 million for the year and of that, 60 to 70% will be financed by sale-leasebacks.

And did you give it for the quarter?

I did not.

Can you get those?

The number for the quarter is about $15 million of gross and we haven't done any financing on that yet. It's in the pipeline.

OK. Perfect. And then, lastly, you said your advertising was down by about nine dollars per vehicle. Did you negotiate better agreements or was there just a significant pullback in volume?

No, it's really a combination of all of that. We did have some better agreements that we put in place, specifically down in the Florida region, but it also was just a tighter budget and the recognizing that sometimes chasing sales with advertising doesn't always work, specifically in the first part of the year.

OK. Great. Thank you very much.

The next question is from Rick Nelson of Stephens.

Thank you. Good morning, gents.

Hi, Rick.

Can you talk about the restructuring charge? I'm calculating six, seven cents per share in the first quarter and you stated you are looking for two to four cents for the year. Do you see some benefits for the rest of the year?

That's exactly right, Rick. We took the seven cents in the first quarter and over the remainder of the year we will capture all but two to four cents of that.

And how do you see that shaking out? Will we see some benefit next quarter?

We'll see a little bit. A little bit more back end loaded but we'll see probably a penny in the second quarter and the rest in the third and fourth.

And the improvement that you cited in March, are you seeing carryover into April?

I think that the business is about - I mean, we've still got six days to go. I was just reviewing our results through the 24th and while we all know the months in this business are back-loaded, it looks like we're going to be about consistent with March, I think. There is some little differences because of how the incentive programs have moved business around, but I think business is about consistent with it.

Yeah. And how about in the luxury segment? Can - did you see deferral of purchases with the new products from BMW and Mercedes heavy M class and ...

Yeah, I think BMW a little lighter. There are absolutely waiting lists for the new 3-series and we'd like to get all we can. We don't have much over an overhang of the older ones. Mercedes has made a relatively strong performance for us and I think it's more where we see it a little softer it is more a reflection on the market that we're in, the local market, because we look at our market share statistics like close lease month, so I think it's more the customer and the brand.

The new M has been received very well, as well as the CLS, which is a beautiful - what they term a four-door coupe. So we're very pleased with those vehicles and I think the lineup that the luxury brands have, including the new Lexus product, is just astoundingly good.

And on the inventory front, things look pretty well-controlled on the import side. How do you go about reducing that inventory on the domestic side, the 97 days supply?

Well, first, I plead with my CEOs who are listening on this call to get it done. No, seriously, we will always have a little bit more than some of the other folks, because we really do by design want our general managers to have a little more latitude in running their stores. We just think that's the Asbury way.

That said, we think it is in fact, too high and we're working with our regions to bring it down. We are not going to control inventory from a corporate office, as some do, and by the way, that's not a knock on the way the others do it. We just have to continue to work away at it and you have to be very careful the way you do it because you just don't want to stop ordering, your mix on the ground will get out of whack because, and this is true across all kinds of retailing, you sell of the top, meaning the customers are the smartest people in the world, they buy the best stuff fastest, the best models, the models with the right trim, and so you have to bring it down very slowly or you will be very disruptive to your operations in the dealerships.

That said, I am optimistic over the balance of this year we will get our inventory domestically where we need it to be.

OK. Thank you.

The next question comes from Gerry Marks of Raymond James.

Hello?

Hi, Jerry.

Just a couple of follow-up questions. In terms of used vehicle gross profit margins, it seemed like the wholesale pricing environment was getting better. How come they were down on a year over year basis?

I'm not sure I understand your question Gerry. What was down?

Your used vehicle gross profit margins.

They were about the same, it was 11.7 in 2005 and the same in 2004.

OK.

The average gross was about 1,900 per unit in '05 and 1,785 in 2004 and it's only up because of the average selling price.

OK. Gordon, you mentioned in terms of your new - or your flooring facility with GM and what happens - there is a lot of concern right now on the Street about GM potentially being downgraded to junk debt. How does that impact your guys' floor plan assistance - or, flooring agreement with GMAC?

No impact. They're flooring their vehicles and I think that they're not going to cut off their noses, so to speak, by cutting off their lifeblood, so to speak, which is inventorying their vehicles so they can sell the vehicles so I think this new facility is a well-rounded facility. It insulates us from issues like that. We don't have - they're not flooring our other franchises, so I think we're in good shape with respect to where we are in floor planning.

So, basically it is - they would have to eat the cost of they were to go junk them?

We have a contract that is a specific rate, so yes.

OK. Last two questions.

And by the way, Gerry, you can argue whether that's been priced into what they're paying for funds now anyway, but GM's a fine company, they've got their own bumps in the road. Their bumps maybe to some of us look like mountains, the Himalayas, but they will deal with them and their finance arm is very strong, regardless of how the rating agencies take decisions on a longer term basis. We're pleased with power of our facility and they're giving us in terms of the flooring they are offering and we don't see any disruption whatsoever.

Actually, Ken, that goes to a question that I had for you, which was related to Toyota's chairman yesterday was indicating that they're talking about maybe giving Ford and GM a breather, maybe increasing their sticker prices so they're a little less competitive with GM and Ford. How does that impact some of your foreign brand vehicles if that does come to fruition?

I didn't read the statement. I'd have to understand it a little bit more but I think we're going to continue to see the far name plates take share. Right now for example the new Avalon it's RB vehicle. I went to a high school reunion last year and people haven't seen in basically more years that I care to count are calling me up and saying can I get them an Avalon.

So I don't know whether they're cushioning themselves for some of the foreign exchange issues and how that corking it. They're very smart people and they - I don't they're going to yield share. I think it's a matter of how fast they take it.

Yeah, I'll send you a copy of the article. It's pretty interesting. Last question Gordon, I know you don't give quarterly guidance but you kind of are giving six to eleven percent annually EPS you know implied from your EPS guidance, but there's some seasonality that's going to occur because of the hurricanes in the third quarter and fourth quarter. Can you give us any sense in terms of the magnitude of the difference between the year over year growth trends in the third quarter versus the fourth quarter so there's no misunderstandings when we get out into the second half of this year?

Well I think the best thing to do is go back and look at 2003 to take some of that out. You would expect that to be a more normal - 2003 was a more normal seasonality where the third was a little bit better than the second and then the drop off on the fourth was directionally about the same as the first. Maybe a little stronger because of the year end push as specifically the luxury brands. So that's what I would look to.

OK incredible. Thank you.

The next question comes from Matthew Fassler of Goldman Sachs.

Thanks a lot and good morning. A couple of questions. If you could just shed a little more light on your new vehicle gross margins in terms of leward down just a little bit even as your inventory has fell back into very good shape. It's down about 40 basis points year over year just as a mathematical number.

It's almost flat in dollars per unit. It's just the competitive set that's out there.

Got you and that's coming you're saying from your retail competition. It's less a function of same mix or changes or your new stores or anything like that.

Yeah I think so. I think that's what I was trying to refer to in my general remarks. I think they're going to be under pressure. I thought it two years ago when we laid our plans and I think it's for the foreseeable future. I think that no one wants to give up gross profit but we're in a competitive environment. We are the channel of distribution for the factories and we want to maintain our market shares so we have to do what we need to.

The way it sounds for the most in the mathematics but it ripples into the midline imports as well through the margin that we're getting on our end because there still has to be within a range of being competitive with the domestics.

Got you. Second question. Ken, in your used car performance is actually quite good if you look at your same store sales you look at your gross profit rate and then you compare it to the other numbers that are coming out around you yet you sounded somewhat discontented with the company's efforts in used so if you could tell us what you don't think you're doing well and where the additional opportunity is.

I want to sell more units and I want to take more - I want some more used units and I want to take that market share from the independent used car lot which is there to be done. We have first rate dealerships in great locations. We have factory trained techs. We have a wonderful delivery mechanism for the customer and I think we can take more units and I think that we have to gear our business up to do that. We need a commitment to do that because we are not in complete control of what's happening on the new vehicle side and so it makes sense and we are going to continue to work on it.

Given your same store revenues in that business were up seven percent which is a pretty darn good number, what kind of number would you want to see to essentially indicate that you're meeting your goals?

I would have liked to see the unit numbers up in the low single digits.

OK.

Kenneth Gilman. So then you compound whatever impact that has but that's what I'd like to see. I'd like to see us taking some share.

Got you. A couple of other questions. You broke out I believe your total rent expense scored on that schedule at the lower part of the P&L. I was wondering just to the extent that there's some moving pieces between rent and E&A. What is the incremental rent expense associated with the sale of lease backs from a year ago because once again I believe the rents expense that you gave us those total rent dollars.

Are you asking what's the impact on the bottom line or in - I'm not quite sure I understand your question.

I guess I'm asking. What is the impact of the sale lease back that you executed last year in pretax dollars?

The rent on that was $2.2 million of incremental rent.

$2.2 million?

Yes.

OK great. And just another couple of questions here. What were floor plan credits during the month or the quarter rather?

The year to date same store - 6.2 is same store.

6.2 that was year to date or I guess year to date for the quarter. How does that compare to a year ago?

That was same store. It's up about 10 percent over last year at 5.4 last year same stores. I'm sorry it's up actually 15 percent year over year. On a total GAAP basis it was $6.5 million versus $5.4 last year up about 20 percent at 9.5 percent on a per vehicle basis.

Great and just one final question. As we look the difference between your total and same store growth it looks like that gap in dollars is bigger for the new car business than for the used car business. I believe that was the case in the fourth quarter as well and I'm only asking this question so that we can forecast our numbers appropriately. Would you - I guess that's a function of mix of stores. Would you expect that gap that difference if you will to continue for the next couple of quarters or should they kind of draw closer to one another?

I'm going to boot that question to Gordon.

You could come back to me later on that one if you choose.

I'll get back to you on that one.

Thank you.

I'll think about that and we'll get back.

Thanks a lot John.

The next question comes from Matt Nemer of Thomas Weisel Partners.

Good morning.

Good morning Matt.

First question. I may have missed this but can you explain the increase in fleet sales year over year and I think there was a bit of an up tick as well from the fourth quarter?

Link sales?

Fleet sales?

I never think about it.

This is (inaudible) the gross number. It's up 64 percent from 600,000 to 400.

It's just a function of what's going on up there. We don't hardly make any money at it and I don't really focus on it so I cannot explain it.

OK just curious. Second question is, can you break our your F&I per vehicle between the financial markup, extended warranty and other?

We can but we just won't do it.

OK and what do you think your limit is on F&I per vehicle? I mean have you thought about how high that number can go?

Oh absolutely. Oh you'd like an answer? OK. I think that we've talked about our long term growth model of three to five percent compounded and so I think that if you look at that and apply it to where we've been, where we were at the platform level in '04 that tells you about how high we think we can get it and the near term where you would be interested three to five years. So you can compound it at the three. You can compound it at the five off last year and you can sort of get a comfort zone in the middle there.

Keep in mind the way you can achieve those numbers isn't by sequentially raising everybody's number. What we're doing is we're working the bottom third of our stores and moving that up and keeping the top stores kind of comparable. So that it makes it easier to achieve the targets we're talking about. It's not reaching a limit of 1500 - I'm just making up a number of 1500 for every store bringing up the low end to the average to achieve the numbers.

Got you and then the last question is you guys have focused on one line and I've tried to focus on one piece of your business each year starting with F&I and then I believe parts and service and then used--

No vise versa...

To use in the parts and service. Where do you go from here? What's - in addition to continuing the focus on those three lines of your business where can you get more SG&A leverage? Have you thought about shared back offices of any other types of ideas like that?

Well I'll talk about the gross and Gordon can talk about the SG&A piece. I think we're successful to my way of viewing the world on news so I think there's still some opportunity and I think that if you do your sums you'll get an inkling as to what we think is potentially doable on the fixed side but the initiatives were major thrust to change the way we think about the business - without doing the business and hopefully we'll have a continued spill over effect in future years.

So it's sort of a single minded focus you could organize around each of those lines of business but it doesn't mean you take your eye off the ball and go forward but in terms of SG&A leverage and some of those other issues I turn it over to Gordon.

Clearly the best way to get leverage is to increase your gross but I think with the regional structure that we put in place we're going to evolve in those regions and more commonality around their processes which in turn will drive out costs from the business. Specifically we'll have regional structures that have regional operating centers if you will that will in turn reduce our systems costs and so we are going to be driving that area but it's not a quick fix so to speak. It will take multiple years to pull all of that together but we do see that there are opportunities to reduce SG&A through the structure we've just reorganized to.

Super thank you.

The next question comes from Paul Ralph (ph) of ING.

Good morning Ken and Gordon.

Good morning.

Good morning.

On the ten dealerships that you were able to offload. Could you tell us some of the following answers. Did they all close in the first quarter? What kind of proceeds for the dealerships did you receive? How did it change your inventory levels and what were the annual revenues because you said they were low revenue stores?

That's a lot. We don't have it all but those went back to - that's over the last year - over the last several years. What we're trying to do is demonstrate that this portfolio management is something you have to continue to work on and sustain and were trying to show that over time. You can have a meaningful change in your overall mix so that when we talked about how the average stores increased that really says we've got larger stores - the potential to have and are having and recruiting stronger general managers because we can pay more and the progress we've made going down that road. In terms of specifics to your question we are going to have to get back to you. Just for further clarification. None of what we were talking about was in the first quarter?

I understand. Let's delete that question. We're just talking about actual proceeds, changes in working capital levels and the annual revenues of those ten dealerships. You also commented Gordon that you - first time I heard you talked about your balance sheet and the ratio of your long term debt to your long term debt and book equity and that that ratio would improve by a couple of hundred basis points. I wondered if there was a target that you had in mind? Or one of your competitors has a target and they talk about it a lot.

Well I think we have historically talked in debt to total cap in the 50 range - 45 to 55 is you know the target we're going after. It will go up and down depending on if we do a large acquisition. It will probably spike up a little bit and then we'll bring it down. If you'll notice we started 2004 with a debt to total cap ratio of 58 percent. We're down to 51 percent and that's a hard round. It's really 50.5 - not to split hairs but that's the range I'm comfortable with 45 to 55.

And the last question. This 40 basis point contraction in the gross margin for new cars. Is there some reason by the end of 2005 why we should still be using a number above seven percent?

Well we're at 7.2 including floor applying credits today and you've seen the contraction over the last year and a half and as Ken said we believe that we'll continue to see margin pressure. There's nothing out there - otherwise there's still even though Ford has backed off a little in production you're still seeing an over supply of cars out there that there's nothing but - drive margin pressure in the business.

Thanks Gordon.

By the way I will point out as Gordon mentioning forward that the Blue Volvo going away for the Ford dealerships going to a different program will be costing us gross profit as starting in the second quarter so that's - without making a prediction in terms of how the basis points are going to flow. That's going to have a dampening affect to some degree and we only have six sports stores but several of them are quite large.

Thank you.

The next call is from Eric Spell (ph) of Wachovia.

Good morning. Just a couple of housekeeping. What did you guys spend on acquisitions in the first quarter?

We did not acquire any stores in the first quarter. We just recently completed the Nissan store down in Little Rock in April and that was about $6.0 million.

So the 400 will hit pretty evenly in the final three quarters?

The revenue number - it's going to be a little more back end loaded than it has been previously. We've got a few interesting deals in the works but there going to take some time to come to fruition so I think vis' a vis' what you see-

Gentlemen, I just wanted to let you know that Mr. Nickola Provitch (ph) is now in the conference.

You know just to collect that thought, I think it's going to be a little bit more back end loaded than in 2004.

OK and then secondly I missed your growth in new stalls and mechanics that you guys gave at the start of the call. Could you guys do that and specifically what is the growth there and what are some of the processes you guys are putting into track and retain some of the mechanics because I know that you guys have been focused on that and you chopped a lot of wood in that aspect?

Well we talked about 100 service stalls and 200 to 250 technicians on a base of 2,250 stalls and 1,500 technicians and what we do is we try to offer simply a backup. The brands that we sell and focus on are brands that offer great growth opportunities not only for selling cars but for servicing them. So it's a great magnet for the techs.

Second. We spend a lot of money trying to create a really good working environment for our techs and that means remodeling the services areas of the stores where it's needed. Their own break areas, washrooms and restrooms and air conditioning the service shops we're going to rotate through and try to get all those done. We're principally located in the south where the summers are warm and we think that by a combination of these things and that basically offering a wonderful place to work we will be able to attract the talent we need to continue growing in the parts and service business.

Is there any incentive based attraction, equity or other that - you know those guys have been there for a long time. They encourage retention or is it mainly on amenities?

It's basically the stuff I talked about they don't - we don't offer to that leap in the organization equity participation.

OK, thanks a lot guys.

The next question is from Nate Hudson of Banc of America Securities.

Hey just one question. Can you put some perspective on your California operations? What kind of annual revenue run rate are they at and I think you said they were unprofitable in the quarter. Can you quantify that and then just kind of give us a time table for getting margins up there in corporate average?

We don't disclose our regional performance. We think that we're going to see some significant improvement in the back half of the year and that's about as far as we're willing to go.

OK thanks very much.

Is that it operator?

The next question comes from John Tomlinson of Prudential. Your line is open sir. OK, the next question comes from Matthew Saffler of Goldman Sachs.

Thanks a lot. Just a very quick follow-up. Back to the used car issue. I looked back Ken and obviously you're right. Your unit comps were flat. Your dollars comps were up seven percent. It believe that's a bigger increase than we saw from some of the wholesale pricing we see over the course of the past several months. So any insight as to why your average ticket in used is rising to the extent that it is?

It's a nexor (ph) sign.

And is that a function of changes in the competition stores or is that just within each of your existing units?

It's a tad of a little bit of both. But it's really mix.

And is that do you think a function of the market moving higher or a function of just your own effort to move up market in that used business?

It's what's happening at the region level. It's how they see their market developing.

Got you. Thanks so much.

And the last question comes from Chris Bates of JP Morgan Asset Management.

Just wanted to circle back and I found a couple of things that have already been covered. First. What was the floor plan assistance for the quarter again total?

$6.5 million.

$6.5 million and I noticed that that's actually less than your floor plan interest expense. Can you tell us for the year would you expect that trend to continue?

Yes. The flow through of the rising interest rates is about 75 percent. So yes that will continue.

OK so on a full year basis you think you'll come in somewhere between 75 and 80 percent floor plan credits to floor plan interest?

I haven't thought about it that way but it will certainly - interest expense will be in excess of floor plan credits unlike past years.

OK, great and then I actually missed. You went over the inventory days by your product segment. I was wondering if you could do that side again?

Sure. Let me make sure I have the exact numbers. Inventory days that we have on the luxury brands it was 62 days; midline and import was 55 days and the domestics was 97 days.

Ninety-seven great and I think you said sequentially that went from 104 to 97?

That's right. In the domestic brands.

In the domestic brands and do you have a target for where you'd like to be a the end of the year for domestics?

For the domestics. We'd like to take seven to ten days out for the next couple of quarters to get down into the 75-day range.

OK, great. Thank you.

And that will conclude the question and answer portion of this conference.

Do you have any closing comments?

No. This is Ken. I'd like to just thank you all for joining us today and have a great day.

Thank you. That will conclude today's conference. You may disconnect at this time.