Asbury Automotive Group Inc (ABG) 2005 Q2 法說會逐字稿

Good day and welcome, everyone, to the Asbury Automotive quarterly earnings results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Miss Stacey Yonkus. Please go ahead.

Thank you. Good morning, everybody. Thanks for joining us today. I just want to apologize. We had a little bit of technical difficulties with the call this morning, so thanks for your patience. Sorry about the delay.

As everybody knows, this morning we reported our second quarter earnings. The press release is posted on our website at AsburyAuto.com. If you don't have access to the web or you'd like a copy of the release faxed or emailed to you, you can contact [Gail Philatico] at our corporate office. Gail's number is 212-885-2520. She'll get you 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, defined by the SEC, may be discussed on this call. To comply with the SEC rules, reconciliations of any 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 addition financial information. Any interested investors should check the site periodically for such information.

The purpose of today's call, as you know, is to discuss Asbury's second quarter results. Today's agenda will be as follows. Ken Gilman, our President and CEO, will begin with a few overview comments, and Gordon Smith, our CFO, will provide everyone with some financial highlights. And after that, Ken will have a few concluding comments and then, of course, as always, we'll be happy to entertain any questions you might have. Ken.

Thanks, Stacey. Good morning to everyone. Thanks for joining us today. I'm really pleased to discuss today's results with you as I feel we've had another strong quarter, operationally turning in a very solid performance with meaningful top and bottom line growth.

Earnings from continuing operations were up 9% to $0.54 per diluted share, versus the prior year. Same-store retail revenue was up 9%, while same-store gross profit was up 7%, a truly solid showing, I believe.

As everyone is aware, the big story in our industry this past quarter was GM's daring employee discount program, which ignited quite a buzz in the marketplace, and it still does and it's still resonating. Although we have a relatively low exposure to GM franchises in comparison to the rest of our mix, our GM stores posted exceptionally strong results and really capitalized on the program. With this in mind, our 3% same-store new retail unit increase for the second quarter was very solid. While the industry was nominally up 4% for the quarter, after stripping out fleet sales, the industry's overall retail unit volume was actually down to last year. This means that we outperformed the industry in a quarter when the market leader, GM, adopted an unusually aggressive incentive program that many of our dealerships did not participate in.

Once again this quarter, new vehicle gross margins were under pressure. Specifically, this translated to new vehicle retail revenue up 6% on a same-store basis, but the related gross profit only up 3%. Ultimately, this fits the script and expectations we've been talking about for the last several years, which we've been very candid in sharing with you. Our planning has been to compensate for this margin erosion in other areas of the business, which we accomplished this past quarter, and then some.

To that point, we had a particularly strong quarter in used vehicles. This is especially noteworthy when considering the highly promotional new vehicle environment. Our used car operations posted same-store double-digit increases in both retail revenue and gross profit, with same-store unit volume increasing 6%. I would attribute this performance to traction with programs we put in place to develop this area of the business, which included improved inventory management and our used car team approach.

Despite this success, I still believe additional opportunity exists in used cars, especially in the lower priced end of the market, where we should be able to take market share away from the independent used car lots. Our average used vehicle selling price on a same-store basis actually rose 9% in the quarter. While we're happy to have the additional revenue, this metric tells me that we still aren't doing a good enough job in penetrating the lower priced end of the market.

By the way, without agreeing with the practice, used cars are typically retailed on a cost-up basis, meaning they are generally sold with a certain gross profit dollar amount in mind, not with a specific margin percent driving to a retail selling price. That's why our used vehicle gross profit rate dropped a tad in the quarter.

Our service business has, once again, turned in strong performances, and as I noted previously, when combined with our used vehicle business, it more than offset the pressure on new vehicle gross margins.

For the quarter, fixed operations and finance and insurance generated 7% and 8% gains in same-store gross profit, respectively well ahead of our ongoing objective of 3% to 5% increases.

In parts and service, fixed operations, we continue to benefit from our deliberate decision 2 years ago, to focus more resources in this area. We have made substantial investments in people; we have expanded our capacity through additional service bays; we've invested in new equipment and we've upgraded our training programs for service advisors and we have plans in place for more of the same for the balance of this year into 2006.

During the quarter, we took additional steps in our ongoing effort to more effectively manage our dealership portfolio. We reached agreements to sell 3 underperforming stores, 2 of which are in our Oregon platform. These 3 stores have been reclassified for accounting purposes as discontinued operations. Gordon will cover some specifics on this in a few moments.

The ongoing larger story here is that we're streamlining, continuously upgrading, if you will, our overall portfolio quality. On the one hand, we're focused on adding high quality dealerships through acquisitions, while on the other, we're constantly reviewing the bottom 10% of our stores for divestiture possibilities. This is actually part of our larger effort to improve productivity, something we've spoken a lot about and ultimately increase profitability.

Most of you know that we've announced a regional restructuring program in the first quarter, aimed at consolidating most of our platforms into 4 regions. The goal of that program, too, was to improve productivity, adding greater operating efficiency and management effectiveness with the added benefit of bringing the field and home office closer together. Gordon will discuss the restructuring progress we've made.

At this point, I'd like to pause and turn the call over to Gordon Smith to review the numbers in greater detail. Gordon.

Thanks, Ken, and good morning. As Ken mentioned, this was a solid quarter for Asbury. Income from continuing operations was $17.5 million, or $0.54 per diluted share, up 9% from the second quarter of last year. When you consider the impact of interest rates, which increased approximately 200 basis points, our performance versus last year is even more impressive.

Floor plan costs, net of floor plan credits were up almost $1.9 million pre tax, or approximately $0.04 per share, despite the fact that we are saving 50 basis points with our new floor plan facility and absolute inventory levels were virtually flat after recasting for discontinued stores.

As Ken mentioned, during the quarter, we have focused on balancing our dealership portfolio. In that effort, we agreed in principle to sell our 2 Ford stores in Oregon, a Nissan store in southern California and swap our Chrysler store in Mississippi for a Chevy store in the same market.

Operating losses from these stores totaled $0.02 per share for the quarter and are included in discontinued operations. The remaining loss from discontinued operations of $0.03 per share principally relates to stores that were placed in discontinued operations in 2004 and sold in 2005. We expect all of our pending divestitures to be completed by year end.

The General Motors employee pricing promotion was, from an Asbury perspective, very successful. For the month of June, unit sales at our 11 GM stores surged 77% versus last year and were up 67% versus May. While it is very difficult to quantify the bottom line impact from this program, we estimate that it was $0.01 to $0.015 accretive to our second quarter results.

So far in the third quarter, we have seen the GM program continue to advance unit sales. The newly introduced program by Ford has had a substantial impact on unit sales as well, and the Chrysler program has also increased sales, but to a lesser extent.

SG&A expenses as a percentage of gross profit for the quarter was 77% versus 77.5% last year, a 50 basis point improvement. Excluding rent, which was up 42% to $12.5 million, principally as a result of the sale lease-back on 20 properties consummated in early July 2004, SG&A expenses improved by 180 basis points. We attribute the improvement to first, the reorganization of the company into regions, which was largely completed in the first quarter, a strategic reduction in new vehicle advertising, in particular, at our GM stores during the employee pricing promotion, lower insurance costs due to our strategic initiatives in the area of workmen’s compensation and other cost containment initiatives that have been implemented over the last several quarters, such as consolidating the accounting offices in our southern region.

Turning to the balance sheet, new inventory day sales ended the quarter at 61 days, down 6 days from the same period last year. By category, luxury brands were 56 days versus 54 days last June. Mid-line imports were 54 days versus 58 days and mid-line domestic brands were 80 days, down dramatically from 105 days last year.

We expect that our domestic inventory will continue to come further in line as a result of the employee pricing promotions of the Big 3.

Used day sales were 44 days, versus 50 days last year, with less than 3% aged more than 90 days. Debt to total cap continued to improve, ending the quarter at 50%, compared to 52% at the end of last year and 57% at the same time last year. As of June 30th, we have paid up all but a few million of our floating remortgage obligation. Once our fixed to floating rate swap unwinds in March of 2006, our capital structure will be 100% fixed, with the exception of our floor plan debt and $22 million of lower vehicle debt.

Our long-term capital base consists primarily of $450 million in subordinated debt, which it matures in 2012 or beyond at $22 million in mortgages. We have $150 million revolving facility, with $5 million outstanding at the end of the quarter, which was subsequently paid off. Year-to-date, EBITDA from continuing operations was $74 million. Adjusted for the cost of our restructuring, EBITDA increased 7% over last year. However, cash flow was negative $17 million, primarily due to an increase in working capital resulting from the strong June sales, the pay-down of mortgage of $31 million and CapEx spend of $35 million, of which only $8 million was financed. Another $10 million of this amount will be financed in the third quarter.

A couple of our major CapEx projects include a new Lexus store in Saint Louis, which is expected to open this summer and a new Toyota and Nissan store and campus in Brandon, Mississippi, which combined with the largest Ford store in the Memphis region, will create an automotive destination in one of the fastest growing areas of Mississippi. We also have 14 other major projects underway, of which 9 are service expansion projects and 3 are relocations and enhancements of existing stores. As a result of these projects, we expect to spend approximately $80 million on CapEx this year, of which we will finance 60% to 70%.

In conclusion, based on our strong performance to date and our expectations for the second half of 2005, we have raised our EPS estimate from continuing operations to between $1.74 and $1.80. This range does not reflect the net cost resulting from our regional reorganization, currently estimated at $0.03 per share.

With that news, I'll turn the call back to Ken.

Thanks, Gordon. I'll have comments on a few other topics and then we'll go to q-and-a. First, some regional highlights. Florida, again, was extremely strong, with an increase in operating income of close to 30%, led by our dealerships in the Jacksonville market. Florida is the region where we have our highest concentration of GM stores which, as Gordon noted, benefited from the employee discount program. Clearly, our Florida regional management team, led by Charlie Tomm, continues to do an excellent job.

Our mid-Atlantic region, comprising our operations in the Carolinas and Virginia, posted a low double-digit increase in operating income. Saint Louis was up more than 20%, in part because of a good fixed and used car performance, and in part because of some strong cost control initiatives. In our western region, the turnaround in our Texas operations continues to build momentum. Texas had a very strong double-digit increase in operating income, driven by solid performances in our used car and parts and service businesses. However, the western region overall was impacted by continued difficulties in the foreign market and the ongoing construction of our large Honda store in southern California.

The good news is that we're going to be opening this Honda store, 100% reconstructed Honda store, later in the third quarter. This store, by the way, is located across the street from, we believe, the largest volume single franchise dealership in the world. So, obviously, we should see some considerable traffic. We have very high expectations for this store.

As Gordon mentioned, portfolio management has been another important focus. With that in mind, on the acquisition front, we've been a bit selective in our approach, unwilling to pay above market prices to induce owners to sell. As a result, we expect the year to come in below the low end of our previously announced acquisition target of adding $300 million in annualized revenues. We're sticking to a very disciplined approach in terms of the markets, brands and valuations that we consider attractive. And if we wind up below the indicated ranges for this year, so be it.

Looking ahead to the balance of this year and into 2006, we believe we are well positioned with our high-quality brand mix and the attractiveness of our regional markets. In other words, from a demographic standpoint, Asbury is in the right parts of the country with the right brands. We're continuing to focus on our used vehicle businesses and our services businesses, as they’re providing good, steady growth despite the vagaries of the new car market. We're driving growth organically, supplementing it with strategic acquisitions and leveraging the results through a sharpened focus on expense controls and improved productivity.

We continue to believe that we can deliver sustained earnings growth over the long term and provide attractive returns to our shareholders.

In conclusion and to sum up, we're pleased with our solid results for the first half of 2005. Once again, our balanced business model performed well and on several levels above our expectations. On a comparable-store basis for the first half of the year, new vehicle revenue, retail revenue was up 7%; used vehicle, the retail gross profit was up 7%. F&I income was up 11% and fixed gross profit was up 9%.

With that, I'll turn the call back to the operator and Gordon and I will take some questions.

[Operator Instructions]. We will now take our first question from John Murphy. Go ahead, Mr. Murphy.

Good morning.

Good morning, John.

I was just wondering if you could give us some more color on the major drivers of the margin pressure on new vehicles on the front end of the business.

I think that you've got a -- the OEMs are focused on market share and they're going to be relentless in their drive towards it, and what you, I think, have seen and will continue to see across all segments, with the exception of certain models within certain brands, a drive by everyone for share, which means the factories are going to continue to promote, and dealers are going to continue to not allow customers to leave their showrooms without having a signed deal. So, there's going to be, I think, continued pressure in the marketplace, and I think it's going to be ongoing.

Then on used vehicles, do you see used vehicle pricing going forward and how much risk do you feel like you're carrying on that, and the other is sort of on the flip-side, where are you sourcing your used vehicles? Are they mostly coming from trade-ins?

I'll answer the latter question first. We're trying to source more through trades because, obviously, that's the best source for used vehicles, but when we can't get the right mix, we go to the auctions and we buy. I don't see a major impact on the same profitability of the used business based upon the up or down movement in the wholesale price of vehicles. It only impacts what you own today, or what you're trading for, and if you're on top of that market, you adjust quickly. The inventory turns 10 or so times a year. We focus on making a certain amount of gross profit dollars per vehicle and if you'll go back and look at the historical record, you will see that when –- if you want to use the Manheim Index as a proxy for what's happening in the used car market, it can go up, it can go down, it can strengthen. But it really has very little impact on what we do as retailers. It has a lot more impact if you're a lessor in terms of the residual risk you’re carrying in your portfolio. But it's just completely misunderstood in terms of the impact it has on us, really not much. Again, for the inventory we have today, it'll have some impact, but it turns 10 times a year.

Got you.

And as consistent, we make about $1,900 per copy through all the different markets. It doesn't vary much from that from quarter to quarter.

Okay. Just on the parts and service gross margin, it looks like it was a little bit light in the quarter. That's really just a function of capacity utilization, you adding bays. Is that correct? And how fast can we expect that to recover?

It's a factor of -- it moves up and down based upon the mix of the work that you're doing.

Right.

And it's not a factor of the bays. We're only planning to add about 100 for the balance of the year and the absorption of those, I don't think will impact the rate. It's more the mix of is warranty up or down, or customer pay, or the internal work you do in terms of the used car reconditioning. So, it bounces around a little bit, but I think it's within a zone that's reasonably consistent and firm.

And just one last one, on that Lexus point that you said that you were building out in Saint Louis. Is that an add point, a satellite point or what is that?

It's basically the existing Lexus point that we had, part of the plaza complex of 8 luxury brands and we built the Lexus brand, a brand new facility. And then we're redeploying the other existing Lexus real estate and we're moving BMW into that building and so forth. So, no, it's not new, but it will simply help us to expand our reach and penetration into the Saint Louis market.

Thank a lot.

Thank you. We will now take our next question from Mr. Jerry Marks. Go ahead, Mr. Marks.

Good morning. Actually, I wanted to follow up on John's question. In terms of the service and parts margin, you mentioned that it's a function of mix. Does that mean that warranty work was up during the quarter?

I think it was up a little bit, relative to customer pay. These things, they bounce around when you have that, if the body shop is moving up or down, or you sell parts to the body shop. So it's really nothing that you could draw a conclusion from in terms of a trend.

Okay. If I see the numbers right, your sales were up about 12%, but your inventories were down about 3% year-over-year. It seems a pretty dramatic swing. I'm just kind of curious why that would be, that inventories were really high last year or -- ?

Part of it is the discontinued stores. The recapping for that takes about 35 million. If you want to compare apples to apples, take about 35 million out of last year’s number, and that's the comparable comparison for inventory.

Okay, because we don't have the adjustment for the discontinued ops for last year's Q2 --

Right.

Okay. Ken, you mentioned that you're going to be more selective in maybe into the lower end of the range with your acquisition strategy. Why is it that you seem to be downshifting your acquisition focus? Is it really, is it the pricing front or is it just that you see more opportunity internally in improving operations and those type of things?

No. I think that if we saw the right deals come by at the right price, we'd buy them because we have a business model that says over the long term, we'd like about half of our sustained growth in earnings per share to come from acquisitions and the rest organically. I think that these things -- we're looking at lots of deals and the ones that we want, in our markets, we're not willing to pay to induce the current owner to sell. I think that we're not coming in contact, from a competitive standpoint, with other buyers, so we're not being outbid, if you will. We're just very selective in what we want to buy and we're going to just sit on our cash until we find the right brands at the right price.

I guess what I'm just trying to decipher is, what's going to change since the beginning of the year when you set that target? Is it that environment -- is it just that the environment didn't turn out to be as amicable, or you just couldn't find the type of deals that you thought you were going to be able to find, or is it that the environment has gotten tougher from a pricing standpoint?

Well, it's a little bit of both. I think that the brands, the best luxury brands at the top end, have -- I think that the pricing has gotten very rich, so a few we have backed off on. And the others, the deal flow is, it ebbs and flows, and I think right now, in several markets, we're not seeing as many as we might have in the past.

And, Jerry, when sellers are looking at historical EBITDA multiples, and you have the rising rate environment, all of that has to flush through. So they're looking at it and saying, "Well, gee, I want a 6 or 7 multiple on a historical EBITDA," but if you take that and look at it as a forward multiple, all of a sudden, you're in the 8-plus range. So that hasn't really flushed through the marketplace completely yet.

The forward expectations haven't come down yet.

Yes, exactly.

Okay. Well, I appreciate it. Thanks. That's all I had.

Thank you. We will now take our next question from Adrienne Dale. Go ahead please.

Hi. Thank you. A couple of things, one related to that. With respect to acquisitions, it sounds like you're taking about sort of the 6 to 7 times range. Is that across the board or does it vary by type of dealership?

Oh, of course, it varies. That number that you just quoted is the best of the best luxury brands.

Okay, so maybe (multiple speakers)

Particularly luxuries mid-line import is 5 to 6; luxury is 5 to 6; domestic would be 4, give or take. But you've got in some -- in the premiere markets, the premiere dealers, you're talking about north of 6. There are very few that go at that price, but they do trade at that level.

Okay, great. Then what kind of implications does that have for your dispositions? Are you getting decent value for those or are they sort of underperforming to such an extent that you're not really getting much value for them?

I think we're getting a fair value for them.

Okay.

Does that mean is it a multiple that we're offering? I think that when we're trying to reposition the market, if it's a good performing store, but we just don't want to be in the market, yes, we're getting the multiples that we would be paying if we were buying.

Okay, great. And those I'm assuming are mostly focused on domestic dealerships?

Well, the 2 Ford stores are obviously in Portland. The answer is no. So I guess, right now -- so far to date, they’ve been more domestic than not, but there's not a concerted effort to dispose of domestics over import brands.

Okay, great. Now with the employee pricing program switching over to more of a value pricing, could you just talk a little bit about what you think that might do for you or any implications that might have?

In the long term, I don't think it's going to have -- I think it has the implications if the OEMs are able to make it stick for the experience in the dealership. But I don't think it's going to actually change outside of the near term for market share dynamics, nor the ultimate level of sales. I think when you put a new promotion in, that resonates with the customer, you obviously have a spike.

It's the same in any form of retailing. A new promotion, and as we've seen, first mover advantage with General Motors was highly successful. If everybody goes to that level of pricing, there will be competition on other axes, but I don't think it's going to take a market that -- pick a number, 16.5 or 17 million units and on a sustained basis, lift it any higher than it would normally be. I think it's just going to create a different playing field for dealers to compete and brands to compete.

But from a margin perspective, should we just see the value pricing as kind of having the same impact as the employee pricing programs?

I don't know what's going to happen. If the industry goes to the same pricing that the employee deals now are offering the dealer, I think it's going to shift, has a potential to shift the competitive set among dealers. For example, if you are a dealer that's called an out-of-the-way dealer, but they've been advertising, "We're the cheapest by $500." And so the customer will drive the extra 20 miles, will that dealer, in fact, be able to compete in a narrower margin called the employee discount level of pricing? That remains to be seen.

So I just don't know. I think that -- when I think about the industry in a macro sense, it's not going to change who's getting share and who's yielding share. And I don't think it's going to increase the overall level of car buying. It will in the short term, as we've all seen, but on a sustained basis, it will have no effect. It will have a positive effect on the car buying experience, which is a positive thing.

I think margins on new cars will be under pressure as long as the supply-demand imbalance continues, and we have been saying this for a while, that we don't see that going away any time soon.

Okay. Great. And then just lastly, with respect to your acquisitions, if we see them kind of continuing at these sort of rich levels, do you think you'll start to increase your investment in parts and service more going forward, to sort of offset that lower acquisition rate?

I think there are two separate equations and where we get wonderful returns where we invest in fixed operations, we'll continue to do that as we see the need. And we have to drive shareholder returns on acquisition investments, and we'll take those one at a time. Gordon, do you have a -- what's your view on that?

Oh, I agree with that. There isn't a cash constraint that would compel us to make a tradeoff between the two. They're independent and we will do both as time goes by.

Great. Thanks a lot.

We will now take our next question from Rick Nelson. Go ahead please.

Thank you and good morning.

Good morning.

Good morning, Rick.

My question on the pull-forward that -- or payback, some of your public peers have talked about this. I am wondering what your view is and is that incorporated into your full-year guidance?

The answer is, yes, our thinking is incorporated in the full-year guidance. I don't think that the pull-ahead effect is meaningful over the balance of the year or into the future. No one really knows for how far in advance we accelerated the additional or several -- pick the number 100,000 units that GM sold in June, or that will be sold in July. Obviously, some were customers that were going to buy this year and accelerated; some were customers that were planning perhaps to buy in '06 or even as far out as '07. I think the demand will fall to the natural sustainable level, which I think is right now somewhere between 16.5 and 17 million units, barring anything odd happening in the economy.

I don't think in terms of Asbury, given our brand mix, that it has a meaningful impact one way or the other. Gordon gave you the statistics for June on GM and they were astounding numbers in terms of unit acceleration. I look at it and say, "I think GM had some conquest sales in that month," as they should, because they had an outstanding promotion. They moved first. It was extremely well executed in terms of the materials they provided to the dealers and the way they supported it with advertising. Over the long term, they'll benefit from a certain level of conquest sales, but I don't think it matters in terms of the overall industry.

Rick, that really accounts for the range, though. At the low end of the range, clearly, that assumes that we have significant inventory issues, lack of inventory, if you will and have to do more dealer trades that would impact the margins. We don't see that as as big a risk as some of our competitors, but that is a potential risk. That, coupled with increased interest rates, are included in the low end in the forecast.

Where would you like to be with domestic inventories? You are at 80 days now and I'm curious where you're out with GM?

Well, I've gotten in trouble in the past by splitting them out individually, so I'm not going to do that. But I think that we've been driving towards a 75 to 80 day inventory for the domestics, and with the programs at Ford and Chrysler in July, we should be in that range in the third quarter.

I also have a question about lease type (ph). I understand the rates are marketing these variable write-down leases that are tied to interest rates and wondering if that's what you're doing with these sale lease-backs or -- ?

No, the sale lease-backs we did last year was a fixed rate, 8.25 rate. My strategy for the last year has been to get out of this as much of our floating-rate debt as possible and fixing it. So, not participating in floating-rate leases.

Got you. Thank you.

Thank you. Our next question comes from the site of Matthew Fassler. Please go ahead.

Hi, good morning. It's Matt Fassler --

Good morning.

Good morning, Matt.

-- and [Mark Zorie] at Goldman. How are you? We have just a couple of questions. First of all, can you talk about the impact that the Friends and Family programs are having on the used car business, both what you saw in June in terms of your actual experience and then what your expectations are to the extent that this continued into July with more OEMs and also going forward.

We had an excellent used car core, as you could see. What we saw was that we were flooded with trades. When you have the kind of new car unit acceleration that Gordon quoted to you, most of those customers are trading, and so it has an impact on the market. The key is understanding that when you are trading for that vehicle, so that if there are more than we need, we can wholesale them out without suffering because we always want to offer the customer the most money possible for the trade.

Our view is, we make that new car deal happen. In this case, the retail side was fixed so the differentiating factor was in terms of the net cost to the customer, it very often came down to what we were willing to pay for the trade. I think that we did a pretty good job of maintaining our used car inventories and understanding what the used cars that we were trading for were worth in the marketplace.

So I think there's some jiggle going on. When you sell into an auction market, obviously, it's supply and demand. We'll ultimately find a clearing price and you're going to see some, I think, artificial movement in both June and July at the auctions because of this accelerated movement and availability of used, because of the Friends and Family programs.

But that's artificial movement down, I would take it?

I think so, yes.

And I guess that didn't show up, at least in the June quarter in the aggregate, given that your ticket and your average ticket on used cars was actually up so sharply.

It was up and I think that we traded properly. We spent a lot of time -- the regional CEOs, with their operating executives and their general managers, spent a lot of time talking about and working through how to trade for these cars, given -- against a May level, the 60% acceleration from May into June in GM stores and units. That's a lot of additional trades to deal with.

Was there a lot of -- now, to the extent that your volumes -- it's not just that your trade-ins were high; in other words, it's not just that your supply went up, but also the actual transactions were up real nicely. So is there some sort of effect where the traffic to the store drives the used business as well, and do you think the customer has a set intent to buy new versus used when they come in, that you have a little leverage to get the used business?

They do have an intent. I'll back up. Obviously, Friends and Family created a lot of excitement in the industry. It just wasn't the advertising that GM paid for, but it was in the press. So, people got excited about cars. They came out and shopped. It's interesting that it gets the sales people in those dealerships excited and I think there was, quite frankly, a lot of movement from used into new, so that they were trading people into a new vehicle that may have come in for a late model used. So I think we could have even done better in the used side. But that's just the ebb and flow of what happens day to day in a dealership.

Got you. And I guess one other question, given that you do have a healthy mix of imports in your business which you've striven for over time. How are the operators of the import businesses changing the way they're coming to market, given the Friends and Family promotion on the domestics? Is it something that they're concerned with, changing for or they just assume, "Hey, this blows over, and our market share gains are going to continue over time”?

I haven't -- I'm not aware of anything. I’ve talked to the folks at the factories and I'm not aware of any overt concern. As I said earlier, my view, which is informed by what's taking place in the marketplace and the conversations I've had, I'll just speak for myself. I don't think it's going to alter over the whatever long-term you want to deal with. The next 6 months and beyond, the market share mix that the customer was -- where the customer's obviously going. I think you get an advantage when you have a promotion that resonates with the customer, but ultimately, it works its way through.

But kind of week by week, forgetting about what the factories are saying or doing, you have a lot of these dealerships in your network and their GMs, I'm sure are -- were to take steps to maximize gross profit, even with some headwinds on the competitive front, however ephemeral those may be. So is there anything that they are doing differently at the dealership level in that environment?

Not really. One of the things that we look at is, what models are being traded in? That tells me, or what I would call the "conquest" sales from, say, the GM program in June, were they coming from Ford, Chrysler or the imports? And I would tell you, that in our stores, they were not -- the imports weren't suffering.

Got you. Okay. Thank you.

Thank you. Our next question comes from Matt Nemer. Please go ahead.

Good morning.

Good morning.

First question is on used vehicle sales. You mentioned that you might take a closer look at the low end of the market as an opportunity. Can you give us a better sense of how you might do that? It seems like it -- it's hard to understand how that fits with your brand mix. I'm just wondering where you could go with that.

Oh, I think it fits very well. You're simply talking about a vehicle that's got a little more miles on it or it's a few model years older, and the customer -- you look at an older Honda or an older Toyota or a Nissan, these vehicles are very well made. They're very well maintained and it just -- the customer can step up for a later model used car or a new car. So I think what we need to do is focus on how to merchandise and market these vehicles, how to position them on the lot, and, quite frankly, how to sell them. I think there is a tremendous opportunity out there. If you look at the breakdown of -- call it 45 million used cars sold, 30% or so are sold by independent used car lots.

So you're dealing with an enormous market. They are selling to people and they are making the same gross profit, if not higher, per vehicle than we are. So I think that if you want to look at who you are going to take share from, I think it's a good place to target because 30% of $45 million, that's a lot of units. We're not talking about the penny-saver sales, neighbor-to-neighbor and so forth. So I think that if we just pick up a little bit out of that market, we can really move the needle in our used car business.

Got it. So it sounds like mid-line import is where you would focus there.

Well, I was just using that as an example.

Okay.

But there's just -- it's an enormous market that the independents have. And I think with some of our programs that we’ve put in place, I think we can offer the customer a quality used vehicle with assurance that this thing isn't going to break down on them the minute they drive out of the dealership. For example, the Coggin quality used car assurance program gives the customer a money-back, no questions asked, return policy. We have a limited warranty on the power train and a number of the electronics, including air conditioning in the vehicle. So that customer knows that if they go to Coggin, to buy one of the Coggin used car assured vehicles, they don't have to worry about that vehicle breaking down in a couple of days. Even if they get buyers' remorse in a couple of day, bring it back, no questions asked. That goes very well, fits very well, with competing for share with the independent used car lot, who typically will not stand behind their vehicle. We will.

Got it. Okay. Next on discontinued operations, can you give us a sense of -- are you selling these back to the former owners or who's buying these stores? And then how many more -- I guess, what percentage of your network do you think would be eligible for disposal?

No, we're not –- on the main, not selling back to the former owners. Just as a practice, we have a portfolio of stores and we're always looking at the bottom 10. Where do they fit in? Are they -- do they really fit into our strategy? So it's a continual process. It's not as catch-as-catch-can, if you will. We're always trying to look at the portfolio, look at the mix and call it and add to it as we see it.

Can you give us a sense of what you're getting for these stores, relative to what you paid for them originally? Should we assume that there is a mild gain or is it a loss?

It's some of both, depending on the store. We're getting market values for the stores that we're selling. I can't generalize one way or the other.

Okay. And then lastly, on parts and service, how much of the comp there do you think was driven by used car reconditioning and is that sort of a big factor in the change in the margin there?

It did have an impact and we had a good contribution to parts and service growth because of the used car reconditioning, but we had gains in all areas, obviously in customer pay and warranty work as well. So it does, as I said earlier in answer to one of the earlier questions, it's part of the ebb and flow in terms of the mix.

Great. Good quarter, thank you.

Thank you.

Thank you. Our last question comes from Grange Johnson. Please go ahead.

Hi, Ken. A couple of questions.

Sure.

I believe it was one of your dealerships in New Jersey that was written about in the Journal a few weeks ago.

No, that wasn't ours. Are you talking about the Ford and Toyota store?

Yes, the one where they basically turned in their Ford dealership at no value to expand Toyota’s space.

No, that wasn't us. I think that was an independent dealer.

I guess just a larger question, is there an opportunity -- it sounded like that was a rational economic decision for the dealership. Is that an opportunity for you as you're looking to grow space and margin?

We have done that. The answer is yes. We have turned back franchises. We have a wonderful Toyota store in Tampa that we turned back some franchises in because we needed the space for the Toyota operation. It's a case-by-case basis. As Gordon said, we're always looking at the bottom 10% of the stores. We're trying to drive to the highest shareholder return and we're sort of dispassionate about it. We have no likes or dislikes among brands or factories. We represent them all, the best way we can. And on an ongoing basis, we evaluate the portfolio and take the -- basically, the hard decisions that sometimes we have to take.

We're always looking. Our motto -- we're looking for stores that we think we can grow to making a million and a half plus in operating income. So we're always looking at it and sometimes, that means we can grow it and we'll have a strategy for that. Sometimes it means selling, but sometimes it does mean that because we want the property, it's a good location, it may mean that we would turn a franchise back.

Was that article indicative of what domestic dealerships are worth on a turn-in basis, or was it just particularly bad because New Jersey is so real-estate constrained? Is there some kind of impairment in domestic -- I guess, I don't know if it's a concern, but less of a concern for you, given your mix, but does that mean that some of these domestic dealerships are just really worthless, because that was sort of the implication of that article.

No, I didn't draw that implication. I drew more the implication that you described. I think one of the reasons the Northeast can be difficult is that it's so expensive to expand a dealership, that if you're looking at the ROI, and you're talking about incremental capital investment, that's a tough decision. No, I think the domestic brands, there's tons and tons of great stores. We've chosen to orient our mix towards luxury and mid-line imports, but there are lots and lots of great domestic stores. So, I think that's on a case by case basis. If you can get land out there in the better parts of New Jersey, in terms of retail concentration, it's very expensive.

Understood. Does that mean now as you’re seeing some of the luxury brands dealerships go for higher prices that for the right price, maybe it makes more sense, even though it goes against your sort of mix to go for it, to buy a domestic dealership cheaper? How do you balance that?

We balance it by looking at the individual store and its potential. We are absolutely interested in domestic stores. We've said it. You give us a really good domestic store in truck country and we're all over it, without any hesitation. Good Ford store, good Chevy store, Chrysler, Dodge, Jeep, we'd be there.

Then on the used car mix, it sounds like, if I heard you correctly, a lot of this is getting -- the increase in used car sales was being driven by some of the trade-in that was pulled through from the GM and other promotions. Is that correct?

Well, what I was saying is the availability of cars, we were flooded with trades at the GM stores.

Right.

So I think all quarter long, we were doing reasonably well in used. I think that we still -- the availability didn't say we were going to retail more of them. We just had to be very careful in how many we retained and what price we traded for them.

Would that increase in sales, or that drive, hurt, say, a pure used car independent or, say, a CarMax which doesn't do that much in the way of the new car trade-in? Would that come from out of their hive, so to speak?

I don't know. I really don't. They're much more dependent on what happens at auction. They don't really have the quality mix from a trade standpoint, I think, that we have. The independents do sell on average the lower priced vehicles. We know that. That's what our research tells us. It's tough to generalize beyond that.

Just to give you some stats on used cars, or used inventory. At the end of June, we had 114 million of inventory; in March, we had 115 and at the same time last year, we had 108 million. So throughout all this, our inventory levels haven't increased dramatically. In fact, the increase over last year was to a large degree, us positioning for a fairly large off-campus sale in our Mississippi platform that we had in early July. So, the inventory levels in the main are about the same and the aging is also about the same as it historically has been.

Okay. Just on one thing, if I interpret what you're saying earlier in the call, you said on the GM promotion you were seeing it kind of like mostly GM or other domestic trading in for GM, which would indicate that this is just pulling forward sales for them, based solely on your dealerships, pulling forward sales, but not actually taking share, by and large.

I think that there was a lot of that, but I don't think you can generalize to how far that pull-ahead was from, which is what I indicated earlier. I don't think you can say it's going to come out of the third quarter or the fourth quarter. I think when you look at the rate of sale and you're dealing with -- pick the number of how many hundred thousand additional units GM sold in June and they will sell in July, and spread that out over the next 18 months. You'll find that it is de minimus in terms of the pull-ahead effect. You have to remember that the biggest year ever was '99 and people were talking about pull-ahead then and what do we have? 2000, 2001 straight through last year, these have been great years.

Eventually, it cycles through, so I don't think it's had that much -- will have that much of a long-term effect, and I don't think it will have any effect at all on brand mix. It was just interesting to me, as an observer of the retail scene for a lot of years, to think through the benefits of first mover advantage and conquest sales -- for GM, a brilliant move because when you put a customer into a large SUV or one of their trucks, it's a very loyal customer when it comes to brand and those conquest sales on a long-term basis are worth a lot to them. So I think it was a very savvy move and it was exciting to watch it occur.

Final question. When we talk about the use of free cash flow on a go-forward basis, again, stock’s still trading roughly at where it IPO'd in 2002, single-digit PE, you execute very well vis-a-vis your competitors. If you dial back on some of your acquisitions that should give you some free cash flow. Are we going to see maybe share buy-backs or dividends, sort of use of cash on a go-forward basis?

I don't know. I would have been disappointed if you didn't ask the question, and I'm not being facetious or anything because you've asked us that question before, as you should. It's been on your mind. We're constantly evaluating that. Our float is now up meaningfully. It's over 9 million shares. You've obviously seen the -- what I might term some of the relentless selling by some of the former dealer principals and that's been a good thing. So it makes it easier to think through a share buy-back. And the Board is continually reviewing its alternatives in terms of how to use the capital. So there is a positive, that the float is up and we continue to look at it.

Okay. Any chance when we might get a decision on that one way or the other? I mean, you're talking -- when's the next Board meeting?

The answer is no. We won't reveal it, but if we ever have something to say on the matter, we'll put out a press release and an 8-K.

I appreciate it. As always, you guys continue to execute very well.

Thank you. We appreciate that. I'll conclude your questioning with one remark. Our operating earnings from continuing operations were up as indicated in the press release. Just as an operator of a business, and we have to deal with the cyclical issues out there in terms of interest rates, but had interest rates been simply flat to last year, the operations of the business generated almost 20% increases year-over-year in the quarter.

Now we have to deal with the vagaries of the marketplace and vehicles or interest rates, but the operators of the various Asbury regions and platforms have done an outstanding job in bringing together what they've been working on, or what we've been working on, for 2 years. And I wanted to publicly say to them, take advantage of your question, Grange, as an answer to thank them for the hard work they've done.

And with that, I'd say thanks for everyone for participating on the call.

And I'm signing off. Bye-bye.

Ladies and gentleman, this concludes today's teleconference. Thank you for your participation and you have a wonderful day.