Asbury Automotive Group Inc (ABG) 2005 Q3 法說會逐字稿

Please stand by. Thanks very much for holding, everyone. Welcome to the Asbury Automotive Group Quarterly Earnings Results Conference Call. Just a reminder that today's call is being recorded. At this time, for opening marks and introductions, I'd like to turn the call over to the Director of Investor Relations, Stacey Yonkus. Please go ahead.

Good morning, everyone and thank you for joining us today. As you know, this morning we reported third quarter earnings. The press release is posted to our of bound website at Asburyauto.com. If you don't have access to the web, or you'd like a copy of the release faxed or e-mailed to you, please contact Gail Solodeco(ph) at our corporate office. Gail can be reached at 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 forward-looking statements subject to certain risks and uncertainties which are detailed in the company's 2004 10K report, as well as other filings we have with the SEC. In addition, certain non-GAAP financial measures as defined by the SEC may be discussed in this call. To comply with SEC rules, reconciliations of non-GAAP financial measures have been attached to this morning's release, and will also be posted on our Web site under the company's investor relations section.

We will also from time to time, update the Web site with additional financial information. Any interested investors should check the site periodically for such information. The purpose of today's call is to discuss Asbury's third quarter results. Today's agenda will be as follows. Ken Gilman, our president and CEO will begin with a few overview comments. Gordon Smith, our CFO will provide everyone with financial highlights. After that Ken will have a few concluding comments. Then, of course we'll be happy to take any questions you might have. Ken?

Thanks, Stacey. Good morning to everyone, and thank you for joining us today. We are especially pleased to discuss results for the third quarter with you because this marks a fiscal year, the fourth quarter in a row, in which Asbury has delivered a strong balanced performance across all four of our business lines. In fact, as best I can tell, and only I think four of the public companies have reported so far, our comp store gross profit increases are the strongest in the industry, as well as our new and used retail vehicle comp store unit sales increases.

I want to thank all of the Asbury associates in all of our stores for doing that. We don't do it from headquarters. They make it happen day in and day out and they deserve the thanks. Earnings from continuing operations were $0.53 per diluted share, a 34% increase from the prior year, with same for retail revenue and gross profit increasing 11% and 12% respectively.

We also leveraged these increase with a significant improvement in our expense ratio, which Gordon will get onto in a few minutes, while our excellent third quarter comparisons in part reflect the negative impact of the hurricanes last year, the quarter's results were a true reflection of our strong operational performance, as well as our ability to gain traction on the expense front. Our best estimate is that, excluding the hurricane impact, our operating income was up 14% for the quarter. Gordon will also have more to say about this.

Again, the quarter's results are truly impressive display of what Asbury and the Asbury associates can do when all four of our business lines perform as we know they can. The icing on the cake, which we weren't seeing a few quarters ago, is a strong contribution from vehicle sales to go with, to complement, if you will, the continued solid performance in our service businesses. Not only were new vehicle sales strong, but we managed to hold our grosses with new vehicle retail gross profit dollars increasing 9% on a same-store basis. On a percentage basis, remaining flat year over year, when we had been, and the industry and the main (ph) had been experiencing declines for a while.

Taking a closer look at the industry environment, as you know, the news was dominated again this quarter by the domestic manufacturers employee discount programs. Although compromising somewhat the manufacturer's profitability, these programs clearly accomplished the design objective of bringing down inventories to such an extent that many dealers found themselves with a mismatch between consumer demand and the most desirable vehicles, particularly after gas prices took off in September and consumers pulled back from large SUVs.

Overall, the industry unit sales for the quarter increased somewhere between 4% and 5% versus a year ago. Asbury's unit sales on a comparable store basis rose twice as much, a 10% increase with, as I noted, no erosion in our new vehicle gross margin rate. The key for us was the strategic strength of our brand mix, which as you know, emphasizes midline and import luxury brands. Honda, Toyota and Nissan were all very strong for us. In fact, overall, our midline import brands posted a 15% same-store unit sales increase.

Our used vehicle performance was, to my way of thinking, even more impressive. Over the last few years we have focused considerable efforts to position Asbury to increase our used car market share, and we are particularly pleased with our performance this past quarter. In the face of a very challenging market, including very choppy and even slightly risky, and I -- and potentially risky and I might say financially dangerous used care wholesale pricing environment, particularly for trucks and large SUVs, we were able to achieve a car dealer's version of a hat trick -- an increase in same-store unit sales, used unit sales of 13%, improved used vehicle gross profit margins, 90 basis point improvement, and reduced wholesale losses.

We were able to strike the right balance of retail when valuing trade, so we didn't make new car deals at the expense of hurting the used car business. And in fact, improved our used car business significantly. Clearly, our used car business benefited from the sharper focus we placed on this area of the business over the last couple of years, including creation of dedicated used car management teams at the regional levels, and the implementation of new technology that enables our managers to do a better job on trading to further fine-tune their inventories.

Our service business has, again, turned in strong performances. Fixed operations in finance and insurance turned in same-store profit gains of 10% and 9% respectively. In parts and service, as we discussed previously, we're continuing to benefit from our decision two years ago, to invest more in this side of the business. We made significant capital investments, additional service capacity in new equipment, in fact, we've added about 100 service technicians and about 30 service stalls so far this year. We anticipate, by year-end, to add an additional 20 to 30 technicians and another 30 to 40 service stalls.

We've also made meaningful investments on the people side of fixed operations, including more vigorous training program for our service advisors in F&I or profit growth was driven by vehicle unit sales increases. Or F&I PVR at the platform level was down 1% for the quarter, but I still think we can squeeze out further improvement F&I on a PVR basis, by continually working on improving our underachieving stores. In terms of setting expectations, after several years of running strong growth in F&I PRV, it's reasonable to assume that the -- PVR games in F&I of yesteryear are likely to be smaller go forward and that overall F&I increases will be driven more by vehicle unit sales in the future.

As you know, we've gotten more aggressive managing our portfolio dealerships over the last couple of years, particularly in terms of divesting under performing stores. During the third quarter we entered into agreements to sell our remaining dealerships in Oregon. These transactions should all close by year-end. But it's difficult to truly predict as it's an OEM driven process. It was the right decision to divest these stores in Portland, as Portland's been a rough market for us for several years and it simply makes more sense to redirect our resources, both financial and management's time and energy, to other areas of the business where the opportunities are greater. At this point, I would like to pause and turn the call over to Gordon Smith, our CFO, who is going to review the number for us in greater detail.

Thanks, Ken. Good morning, everyone. As Ken mentioned, it was the fourth solid quarter in a row for Asbury with income from continuing operations of 17.5 million or $0.53 per diluted share, up 34% from last year. Pro forma operating income for the quarter increased 14% after adjusting for the impact of last year's hurricanes, which cost our Florida operations approximately $0.10 of EPS. Breaking our performance down by business line, new vehicle same-store gross profit increased 9% over last year, driven by 10% increase in same-store units.

As Ken mentioned, we were able to maintain our new vehicle margins of 7%, even during the high sales volumes in July and August, resulting from the employee pricing promotions. Used vehicle same-store gross profit increased 28% over last year. Sales increased 13% on a same-store basis. The higher volumes is in part due to the higher traffic associated with a strong new retail market. The 90 basis point improvement in used vehicle gross margin to 12.2% is attributable to our focus on developing our used car business over the last several years, and our ability to bring vehicles in on trade at a fair value, during the employee-pricing program.

For those who include wholesale in used margin, it was 9% versus 7.9% last year. Our parts and services business continues to grow at a steady pace, with a 10% increase in same-store gross profits from last year. The growth in this area of the business is largely due to our investments in expanding our service capacity, adding technicians and training our service advisers. In addition, our parts and services business benefited from our strong retail sales volume through their reconditioning of used vehicles and new vehicle add-ons.

Finally, our F&I business grew 9% on same-store basis, due to the strength of our retail business. Dealership-generated F&I PVR was virtually flat with last year. As Ken mentioned, we do expect to see some slowdown in F&I PVR growth, as we get closer to the maximum level of which we can expect on a PVR basis. However, we have not yet reached these levels and we began to see improvements in our F&I PVR in September and the first part of October. As anticipated, we have experienced a reduction in our income generated from our corporate retro portfolio, down to 1.2 million from 1.4 million last year. We expect this revenue to decrease significantly over the next two years.

In comparison to last year, our bottom line continues to be impacted by an increase in interest rate environment. Floor plan interest expense was 6.6 million for the quarter, a 36% increase over last year. We estimate that the 200 basis-point increase in average LIBOR rates cost us an additional $3 million in floor plan interest.

Our average new vehicle inventory for the quarter was down over 20 million on a comp store basis. Reflective of our lower inventories, day supply was down to 61 days, versus 67 days last year. By category, luxury brands were 54 days versus 55 days last September. Midline imports were 45 days, down dramatically from the 62 days last year, with total inventory in a comp store basis down approximately 11%, due to relatively tight supply of the most popular models, and at certain locations we sold out of our high-volume inventory.

And finally, midline domestic brands were 96 days compared to 86 days last year. It's important to note that days supply for domestic brands, which is based on our September sales, was negatively impacted by a soft September as the employee pricing promotions lost momentum. In total, domestic inventory on a comp store basis was down approximately 11%, as we were able to capitalize on the employee promotions of the Big 3, with a 7% increase in sales volume for the quarter versus flat industry sales.

Used day sales were down slightly to 47 days from 48 days last year. SG&A expenses as a percentage of gross profit for the quarter was 77.2%, excluding the reorganization costs, a 280 basis point improvement over last year. We attribute the improvement in our expense ratio to a 40 basis-point reduction in personnel costs, resulting from the reorganization of the company into regions, a 90 basis-point decrease in advertising expense, due to a strategic reduction in new vehicle advertising, a 90 basis point reduction insurance costs due to our strategic initiatives in the area of workman's comp, and cost efficiencies resulting from our back office consolidation efforts.

Year-to-date, EBITDA from continuing operations was $117 million, a 12% increase over 2004. Adjusting for the reorganization, EBITDA increased 16%. Our strong cash flow from continuing ops was used to pay down mortgages of 32 million, acquisitions of 9 million and CapEx spend of 51 million, approximately 12 million of which has been financed to date.

For the year we are forecasting EBITDA from continuing operations of approximately 150 million, and cash flow of approximately 55 million. The current forecast does not include 60 million in cash we expect to receive from the sale of our Oregon stores. As Ken mentioned, we expect these stores will be sold during the fourth quarter, however, obtaining approval from the OEMs may extend the process. Upon completion we expect the sale of our Oregon stores will result in a gain of approximately $0.05 to $0.07 per share, which will be included in discontinued operations.

With respect to our construction projects during the quarter, we completed a new Lexus store in St. Louis, celebrating the grand opening in mid October. In addition, we have substantially completed a new Toyota Nissan campus in Brandon, Mississippi, which combined with the largest sports store in the Memphis region, will create an automotive destination in one of the fastest-growing areas of Mississippi.

Presently we have 13 major CapEx projects under way. These include a new BMW facility in Fort Pierce, Florida, a new Honda store in St. Augustine, Florida. Also included is the full renovation of a Honda store in El Monte, California, which we expect completed in the fourth quarter. The remainder of our CapEx projects relate primarily to service expansion. We expect to spend approximately 80 million on CapEx this year, of which we expect to finance approximately 60%.

Turning to the balance sheet, debt-to-total capital ended the quarter at 49%, compared to 52% at the end of last year, and 57% at the same time last year. Once the fix-to-floating rate swap on the 8% note unwinds in March 2006, our capital structure will be 100% fixed, with the exception of our floor plan debt and 22 million of loaner vehicle debt. Our long term capital base has not changed and consists of 450 million in subordinated debt, which matures in 2012 and beyond and 26 million of mortgages. We currently have nothing outstanding under our $150 million revolving facilities.

In summary, our strong third quarter resulted in year-to-date EPS from continuing operations of $1.38, which includes $0.04 of net reorganization costs, was up 17% from last year. Due to the soft retail environment we have seen so far in October and general uncertainty regarding the OEM incentive programs for the fourth quarter, we are currently more comfortable with the lower end of our previously announced range of $1.71 to $1.77 EPS from continuing operations, which includes the net cost of regional reorganization of approximately $0.03 per share.

The fact that we expect to fall within our previously announced range, despite facing a changing retail environment in the fourth quarter, is a direct reflection of our business model strength. Unfortunately, we have a fire alarm going on, so if you hear background noise, we do apologize.

It's a drill though. There's a fire drill

With that I turn it back to Ken for his final remarks.

I'll get close to the microphone. Thanks, Gordon. I would like to emphasize I am really pleased with how we managed over the last nine months, both our store disposal program and our regional reorganization. My expectation is that these simultaneously executed initiatives will continue to deliver shareholder value in terms of capital redeployment and operating effectiveness.

Now, I'd like to take a moment or two to comment on a few more topics, and then we'll get onto Q&A. First, in terms of our regional highlights, Florida was clearly the standout performer with very substantial double-digit increases in operating income. Of course, this partly reflects the negative impact from the hurricanes a year ago, but the results were still very, very strong. Our south region also performed well, particularly in the Atlanta market, benefiting from the outstanding performance of our Lexus stores. The stores have benefited from a strong luxury market in that region, as well as the company's overall focus on fixed operations.

You may recall we relocated one of our Lexus stores in 2004. This store has grown quickly in terms of fixed utilization, and in fact, we're already adding more sales offices and have added more technicians to keep up with the business. Results in Texas were again up significantly as the turnaround there continues. We are benefiting in Texas from the performance of our new Frisco Honda dealership, which we opened last year. As you may recall, Honda is our biggest brand in Texas. While the Honda market is very competitive in Texas, the new Accords and Civics are selling extremely well.

The performance in our other markets was relatively flat. Some down a tad, others up a tad. Adding a bit of color to this and only a bit, in southern California we're basically in start-up mode, incurring increased expenses ahead of the opening of our 100% reconstructed Honda store in El Monte, which as Gordon noted is scheduled to reopen sometime in the fourth quarter. As we mentioned, this dealership is down the street from what we believe is the world's highest volume single franchise dealership, so we're optimistic about this Honda store's potential.

As for acquisitions, three months ago we told you we expected to come in below the low end of our target range this year for acquisitions, which was 300 million in annualized revenues. Here is an update where we are. During the third quarter, we acquired two dealerships, domestic brands in Florida and Mississippi. Earlier in the year we had acquired a third dealership. While we may sign additional deals in the fourth quarter it is likely -- is unlikely that any will close before year-end. It appears we will end the year having completed three acquisitions, representing incremental revenue on an annualized basis of 115 million.

As we've said, we are intentionally being selective, and will not pay uneconomical prices to induce owners to sell, just to simply demonstrate that we're getting deals done. Having said that, I do think you will see increased acquisition activity in 2006, as we are currently pursuing several attractive deals.

As we look to the future, we continue to believe that among our peer group, the publicly held automotive retailers, we're one of the best positioned in terms of the basic strengths of our portfolio. We have a high quality brand mix, over weighted to the midline import luxury brands that have been gaining market share and are likely to continue gaining share. Our stores are located primarily in the most attractive parts of the country from a demographic perspective, the fast growing south across to California. So really, we have the right brands in the right markets.

In addition, we're focused at the senior management level on specific initiatives to help us deliver sustained growth in used vehicles and our service businesses, which should help us weather the ups and downs of the new vehicle market. We have increasingly disciplined expense controls and we're supplementing that with strategic tuck-in (ph) acquisitions in our existing markets. On balance, we feel confident that we can continue to deliver earnings growth and rewards to our shareholders.

Before I conclude with my prepared remarks, I'd like to, once again thank each and every Asbury associate from our regional CEOs to dealership GMs down to the lot valets because without their leadership, dedication and work, we could not be outperforming the industry. And now I'd like to turn the call back to the operator so Gordon and I can take some questions.

Thank you Mr. Gilman. [Operator Instructions]. We will go first to John Murphy at Merrill Lynch. Go ahead, please sir.

Good morning.

Good morning, John.

Just a question on the fourth quarter real quick. The comparison is pretty tough because we had a good bounce back after the hurricanes in the third quarter last year. It also looks like, obviously, fourth quarter is a little bit light on a seasonal basis for you. How much of this is sort of the naturalized tough comps and seasonality, versus sort of weakness you're seeing in the sales market or the new vehicle sales market?

Well, there is a natural seasonality that you described. I would also tell you traffic is down. It's down more in the domestic stores than the imports. On the import side, as Gordon noted, inventories are very lean, particularly in Honda and Toyota. So you've got a number of things going on and what we've tried to emphasize is, we are going to make the numbers in the range, and it has nothing to do with sustainability in terms of the quality of the earnings, the view of the company to go forward. We have four business lines and one could be a little stronger, a little weaker, which is the new vehicle sales and we're very comfortable with the balance of the business. So, yes, I think right now traffic is a little lighter. There's no hiding from that, but our brand mix will continue to deliver, I believe, superior results.

Just to add to that, if you look at 2003, the fourth quarter, it's coincidental that traffic in the early part of the fourth quarter that year was about the same as it was this year. It was kind of slow, started in mid September, continued in October. And coincidentally, the consumer confidence level was exactly the same -- at the lowest level of 85%. So this quarter, the fourth quarter, is lining up very much like what we saw in 2003. Now clearly, things can change with incentives and things like that. But right now, it's feeling a little bit like the 2003 fourth quarter.

And just on the Oregon platform and your divestitures there, you mentioned they were OEM directed. I was just curious if you could remind us --

No, no it's a process. The process. They weren't OEM directed. We decided to divest/ The way it works is you reach a contract with the buyer and then you turn it over to the OEMs and they have to approve the buyer. And so the pace of that process is governed by the OEMs.

Okay. And can you just remind us which brands were in that market?

Two Ford stores, two Hyundai stores, a Honda store a Toyota store.

Okay. You just mentioned -- you alluded to valuations in the market being potentially a little bit high. Is that a correct characterization, just as far as the acquisition pace being a little bit slower?

I think that in the main there are some -- the brands that everyone is interested in, there may be some unreasonable expectations out there. We have to see whether they continue or not. There are still deals to be done, but I think what we don't want to do is create -- and I think most of the -- if you look at the work that's been done by the other public companies, you don't want to create a frenzy out there of bidding activity, even though we typically don't come across them, the other publics in the markets we are in.

So I think, yes, in the main a little higher. Some dealers are just not interested in selling right now. They want to see where the market's going. So that's why we've been a little cautious, and the activity has been a little lower.

Okay. Great. Thank you very much.

Thank you, John.

Next up is Rick Nelson at Stephens Inc.

Thank you and good morning.

Good morning, Rick.

Rick, are you awake?

Yes.

I figured you stayed up and watch the game last night.

It was a late one. I did not see the whole thing but good outcome. The supply constraints, Ken, that you alluded to, Honda and Toyota, that affected third quarter, is there any light at the end of the tunnel there as we look to the fourth quarter?

Yes, I mean, they're continuing to deliver. We've got some very hot product in those brands, as I mentioned, the Civic and the Accord. The Civic is brand new and Accord has significant refresh. They're in demand. I would call those sort of product-driven brands. They don't need to be stimulated at the cost side of those brands with incentives. So I think that the factories try to manage their business as they see fit. That's created a bit of a supply crunch, but that's okay. We'll live through it and they're going to continue those brands to take share and sell more units year over year.

If you look at inventories, SUVs and trucks relative to the cars, what does that day's supply look like?

I do not have that information available, but I'll work something up and get it to you.

My view is it's going to be higher.

Right.

I'm not concerned about the trucks, by the way, because basically, we're in truck country and when I visited -- I was in our biggest store last week -- our biggest domestic store which is a Ford store and the trucks are doing fine. It was the SUVs, the Explorer, for example, that was way off. The truck business, you can have some reaction to gas prices, but it's basically a utility vehicle and I'm not really worried about it. SUVs, I think, you're going to see, you've seen the shift and you're starting to see it even.

(Inaudible) Per unit was down year over year. What is contributing to that?

I missed the first part of that.

F&I per unit is down year over year.

It was down about 1% at the platform level. Nothing really significant. We focus on selling product. I think that our goal is 3% to 5% and I think that when you outrun that goal for a sustained period of time as we had, ultimately it catches up with you. I don't want to say it regresses to the mean, but I think that some of that is true. I do believe that there is continued upside, but I think it's still within that conservative band. Some folks have said it's the internet. There's still a lot of digging to do.

If the acquisitions that you have made, the 115 million in revenue, what sort of multiples -- those are all domestic dealers?

Two are domestic and one was an import. And I think, very reasonable fair multiples. I don't want to give specifics. You can look at the cash flow statement and see the amount of money we've spent, but I think reasonable. Not outside the boundaries of what we've talked about.

Right. If you're adding a number of service bays, I'm wondering how you look at the return on capital of those bays?

Well, we look at generating, if it's a luxury brand, about 15,000 per store - I'm sorry, per stall per month, so we look at the market what's available to us, and see if that can accommodate those kinds of levels. The midline imports we're looking for 10,000 to 12,000 per month from those bays. So we look at it -- how much we're spending to get that kind of revenue.

That's incremental gross profit -- and there's obviously an absorption period. It results in a strong ROI.

In general, you're looking at return on invested capital in the high teens,15%, 20% at the end of the day.

And that's 15,000 a month -- that assumes 100% utilization?

No. But, utilization in the 80% -- 80% plus range.

Thanks a lot.

From Thomas Weisel, this is Matthew Niemer (ph).

Hi, everyone. Great quarter.

Thank you.

First question, with regard to the fourth quarter, everyone knows that it will be a little bit soft what can you do or what have you already done to take some cost out of the structure?

We're looking at obviously advertising and you want to ensure that your people costs flex with the gross profit. That said, you don't want to be terribly disruptive to your dealerships because we focus on trying to have lower turnover. We are in the main success at reducing turnover, although it is still, to my way of thinking, too high. So we don't want to do anything that's radical.

We have a good balanced business model, and we're going to have a nicely profitable fourth quarter. If -- could it be better? Obviously, there is always room to do better. We have to see what the new vehicle market is all about. I think we're a lot more in charge of our destiny in terms of the services side of the business and used. So I don't want to go on a rampage of ripping costs out of the business that are destructive but I think there are efficiencies to be gained and that's why we've taken a bit more conservative view in terms of letting (ph) in on which side of the guidance we came out on.

I think the last thing you want to do is panic in a situation like this. You don't want to cut into the bone because of the expected soft quarter. Clearly, you want to manage through it as opposed to panic.

Got it. Just to dig a little deeper. On the SG&A elements that worked in your favor, which of those do you think are sustainable? I mean, clearly sounds like the advertising might be, but on the personnel and insurance front should we just carry that forward?

Certainly on the personnel front with the reorganization. That will continue. The insurance piece, I look at that more of a step function as opposed to a continuous decrease. We put a lot of programs in place, specifically around workmen's comp, but casualty, as well. And we've driven the cost, the workmen's comp costs down almost 50% in the last couple of years, and I would expect that to level off a little bit next year at what we're seeing in 2005.

Okay. Is the advertising going to be roughly equal to what it was in the third quarter? Or does it actually --

It should go down.

Dial back?

It'll go down a little bit. It's seasonably adjusted. It should go down.

And then on the CapEx, I missed what you said -- I think you mentioned you were thinking 80 million. Was that for '05 or '06?

That's '05.

And that's on a gross basis?

Yes. We'll finance about 60% of that when it's all said and done.

And any feel for -- as you look at the major projects that you're going to work on in 2006, any feel for how that could change?

In terms of total?

Yes.

I would guess it will be down slightly from 2005. We haven't completed the CapEx budget for next year, but I would guess probably still in the $70 million. We still have some major projects we'll be working on next year.

Okay. And then, lastly, you guys have sort of made a bet on Honda, and it seems like that might be starting to pay off after we've gotten some of the new models there. Any feel for how much that can move the needle if the new products are a real hit?

Honda is our number one brand --

About 20% of the business.

-- and it will be important and it will be meaningful. How much? We have to see what the competitive marketplace is like. Unfortunately, even when you have a hot product such as the new Civic, the temptation for a lot of the dealers out there is to discount. So we'll have to see what happens. It's better to have a hot product than not. That's always good, so when you want to look at, if you're a trader in the shares, you might not like that response. If you're looking for long-term value building, it speaks very positive to the value creation at Asbury and the other public dealerships that have focused on the kinds of brands we've focused on.

But I think it's unfair to just look at Honda. I think all the midline imports are doing very well. Nissan is up substantially, as is Toyota, so I wouldn't focus specifically on just Honda. All three of the midline imports are doing very well.

Great. Thanks, everyone.

Next up is Paul Ross at ING.

Hi, Ken and Gordon. I have two questions. Gordon, could you handle this one? Excluding acquisitions, where you do think the gross and net CapEx in '06 is likely to be?

In '06? I think it's going to be gross around 70, and I would expect to finance, oh, about 60% to 65% of that.

Thank you. And Ken, in looking at the press release, you're quoted as saying the following, "I am pleased with how we have managed both our store disposal program and our regional reorganization over the last nine months. My expectation is that these simultaneously executed initiatives will continue to deliver shareholder value in terms of capital redeployment and operating effectiveness." The question I have is should we expect that capital redeployment would include share repurchase, given how close the shares are trading relative to their book value?

That would be a misreading of what I was describing. It's always possible when the board looks at our capital structure several times per year. I was in the main referring to the $60 million that Gordon talked about, that's being re-deployed and made available from the Portland dispositions. It's always possible to buy shares back. Quite a few of the companies in our industry have dividend programs, but we all have different ownership structures and the board will have to take a look at that in due course.

The last, item is it says in the prior paragraph that if you are able to realize $60 million in cash, that you'll book a gain from the disposition of the Oregon activities. Could refresh my memory, hadn't you previously taken a write down of the goodwill or the net asset value in Oregon?

Yes, we did.

When was that so I can go back and see --

That was 2003, fourth quarter of 2003. We wrote off $37 million pretax of good will.

Gordon, thank you very much.

From LaGrange this is Grange Johnson.

Hi, Ken. I have a quick question on your guidance. I know we've touched on it, but I just want to make sure I'm reading it correctly.

Sure

It looks like you beat, by roughly a nickel, versus expectations in this press release. I am showing a consensus estimate of $0.40. I think if I were to do the math, it looks like you are guiding for the next quarter something between $0.32 and $0.38. If you expect the low end, $0.32, that seems like a fairly dramatic, begin the momentum of your business.

I know we've talked about it. I want to make sure I'm understanding kind of where you see the quarter going. Is that really what you think or is this setting -- setting the bar low I guess is what I'm trying to say. I mean, how much new car sales is slowing into your business and given your sort of mix shift of more foreign makes? Is this a realistic guidance?

I think we're comfortable with the overall range, but what we wanted to say was -- and we did the same math you did and we had this very same conversation internally -- would we be sending the wrong message to investors? Because basically you want to talk about what is happening in the future, not the quarter we just - that just ended. That's to learn from, but you want to know what does that speak to, in terms of the future.

We felt though that, it was important to let you know that the conservative end of that range, and perhaps a recalendarizing of what the analysts, the street analysts, the sell side were calling out for the full year was appropriate, pending a greater visibility into what the OEMs were going to do. It doesn't impact the overall -- the way I think investors ought to view the overall business, but it can move pennies around from quarter to quarter. And what we wanted to do was say, look, we all know what's happening in retail. The numbers are published, Powers (ph) does a survey after 10 days, this is just what we think. So we have not turned bearish on the business. We're saying you might just want to recalendarize your thinking a bit.

I would remind you that last year in the fourth quarter there was a lot of incentive money out there that, quite frankly, I don't anticipate will be repeated. In addition to that, there was a fairly significant bounce in the Florida market coming out of the hurricanes that happened in late August, early September time frame. So it's a very -- it's a very tough comparison versus last year. And as Ken said, we still -- the fixed part of the business F&I and used, we still continue to believe we're grow.

If I hear you, you're saying , it sounds like you think maybe the expectations for this quarter have been a little bit high based on what had happened last year, then based on what you are seeing as soft new car trends you are taking things down? That doesn't mean we should say okay since it's coming down as much as 20% in the Q4 if you just do the math on your numbers? That's not something we shouldn't be rolling into next year?

I guess what I'm trying to say, fine, things are soft, you are being conservative. This quarter has tough comps. I think I'm hearing all of that. I guess what I am really asking, as this rolls forward, are we looking at, instead of doing $1.77 next year, $1.50 or something like that?

No.

I mean, because if you do the math of what you are taking out of this quarter, if things are really that soft, then I just want to make sure that is not what you're seeing for the outlook of the industry and your business in particular.

I think the outlook for the industry next year is about flat to this year on the new car side. I think that the brands we have will continue to take share. I think we're positioned well to capitalize on that. I wouldn't want to alarm anyone that we thought next year was not going to be the up year, that the Street's calling for. We'll issue guidance on that when we announce our year-end earnings in -- I guess, the end of February. And I would feel comfortable with that. I think it's more of a recalendarizing than anything else.

Just to refresh people's memory, I don't remember who asked the question in the second quarter call about the calendarization this year. And I indicated at that point in time that you ought to more take the calendarization from 2003 than try to look at 2004. And that's basically what you're seeing. The calendarization is more attuned to a normalized year without the noise of some of these weather problems we had in '04.

Okay, that makes sense. And getting back to -- my favorite question on building shareholder value. Again, we are barely above your IPO price. You continue to drive the business. I guess if you're not going to pay a dividend and not do share repurchases, both which would make some sense, although I've always leaned towards a dividend, has anything changed on the landscape such that, say a competitor with a more domestic mix like an Auto Nation could buy you? Have the troubles of the Big Three made it more likely they would say, hey, let's have a stronger dealer base and may be more willing to allow further consolidation and perhaps --?

I don't know, Grange. It's - you'd you have to ask those CEOs what they're interested in. What we're interested in is running the business. Focusing on the operations as we've described to investors. I think what we've done for the last 2 years is tell what you we're going to do, how we're going to do it, and then reporting against that, and to the best that we've been able to do, we have achieved what we said we were going to do. I think our business model is solid and we've delivered as described.

No argument, Ken. I think you've executed terrifically well.

I didn't think you were arguing.

No argument. I'm just - I'd say relative to the value of the industry, I'd say, I could argue with your mix and execution you should get a premium multiple industry traded at discounted multiple.

And we agree.

And there are things you can do through financial engineering that could at least close some of that with a relatively intelligent buyout firm on your board, I would think you might take some steps, just have a continuing frustration with, let's call it a low PE, low price-to-book, whatever you want to call it, discount for something that probably should have a premium discount to its peers.

We feel the same way. We have two actually very -- two great private equity firms on the board. The founder. Ripplewood and Freeman Spogli, and they are very savvy people. And, I would tell you, the opportunities to use the capital structure to enhance shareholder value are not lost on them -

Or us.

-- and us. And we will -- we continue to look out. As I said earlier, the board pays attention to it.

Then if you won't pay a regular dividend, any thought given - I know the high-yield markets tightened, but they are still pretty loose compared to historical standards and perhaps a special dividend, leveling up and taking a special dividend - creating value that way?

We've done the analysis, and quite frankly, we don't see what the value to that is. I don't think it creates any long-term value for the shareowners. We certainly explored it as well as all the other items you talked about, but that would be the one I would be less likely to do.

Understood. All right, guys. Again, you've been executing terrifically. No arguments on the operational side.

Thank you.

Well take a question from Jerry Marks at Raymond James.

Good morning.

Good morning, Jerry./

Gordon, I'm not sure if you mentioned a revenue impact from the divestiture of the Oregon dealerships. Is that around $400 million?

You caught me on that one. I don't have the revenue number. It's in that range. I can get you the specific number, but you're right, it's in that range. I don't have the number specifically.

Okay. So - but next year we should see $400 million in fewer revenues?

Hold on. Hold on. We've taken it out of our numbers, what we reported today, those are all on discontinued operations. So what you're seeing is - and I don't want this to be lost on anyone, I'm glad you raised the point, Jerry. The business continues to grow its topline in gross as we dispose, continue to dispose of underperforming stores. So the business model is stronger. The business is getting bigger, growing, not swelling. And I think we're better positioned to take advantage of what's happening in the marketplace because of it.

So, we are going to be reporting over $5 billion worth of sales for the year. I think so far we're at, I guess, 4.1 or thereabouts and this was a $1.4 billion quarter. So you can pick your number wherever you see your models take you, but it's going to be over 5 and we have fewer stores. So I'm quite pleased with it.

And I'd point out that, that revenue produced no operating income. So the margins will be improved.

That was my other question. But Ken, you bring me to my next question and I know we've been harping on the fourth quarter, but Gordon indicated that this feels like the fourth quarter 2003. Based on the first few weeks of October I can't totally disagree. But I guess you guys earned $0.34 in the fourth quarter of 2003 and you are $4.5 billion revenue company, you had 13 districts versus your four regional structures. You're running at a 5 billion plus run rate. And you've gone through some of these inventory swings now and have been focused on putting in better processes and systems.

So I'm wondering why the high end of your range -- the numbers that I run is more like $0.29 to $0.35 excluding out the charges fourth quarter -- why you would be looking for things, at the high end of the range to be close to what you earned fourth quarter 2003 and not a little bit higher?

The simple answer is LIBOR rates in 2003 were 1% and today they're sitting around 4%. So there's a very significant change to the floor plan costs and non-floor plan interest costs. That's the short answer to that question.

Okay that's fair.

We do think there's some upside, but, I think -- look, I don't want to depress anyone's thinking about the business. We owe you candid comments. We don't give guidance by quarter as Gordon said. The second quarter call we wanted recalendarization, but we're not going to just put the numbers out there. And we don't set them artificially low to beat them. We tell what you we think and what we're working on, and we'd like to beat the numbers. We're going to do our best to do that.

I think the answer is fair. Gordon, one last question. In terms of - could you refresh my memory what the difference is between the corporate generated F&I and the dealership generated F&I? That 1.3 million or whatever you guys indicated that you're booking that you didn't earn actually or something?

Well, it was back just before I arrived in the second quarter of 2003. We changed our program on F&I from -- how you do explain? We changed the program and we had a duplication, one had a retro on it and the new program, we changed the pricing. There was no retro on it. It was a duplicate program that the old program we just kept that corporate because it was in runoff mode. So, it wasn't indicative of where the PVR should be for the company. I didn't want to have a high PVR and then have it run it down and then explain, well, it's because it's the runoff of the retro program. That's basically the reason. That is the reason. That's all of it.

Okay.

The duplication of the program.

Okay. Great, thanks.

We'll move on to Deborah Fine (ph) at Fine Capital.

Congratulations on the great execution, gentlemen.

Thanks Deborah.

I have a couple of questions. First one, for Gordon. You mentioned and maybe you just answered it, earlier on the call that you reached the maximum level on a PVR basis? I didn't understand what that meant.

No. We haven't reached the PVR We plateaued, as Ken said. We took a little bit of a breath this quarter. Lots of little reasons, but no systemic problem. We can still grow it. It will just be at a slower pace. I think once you start to come in to $1,000, which I won't say that's the ceiling, but as you approach that number, it gets a little harder to move the PVR beyond that point. Especially when we're very particular. So there is a limit to how far you can go, rightfully so, put these limits on the business.

That's clearer. Thank you. And then Ken, regarding the limited inventories on a product basis on the Honda Accords and the Civics, were there any limits in inventories that you planned that you misplanned? Meaning you were unwilling to take the inventory risk, as opposed to not being able to get them from the manufactures? I mean, did you under plan for the quarter or was it mostly OEM driven?

It was all -- put it into the import badges and domestics. We basically have a policy of not turning down import-badged inventory. We take what they ship. So that was purely supply chain driven from the OEM. I don't think we missed anything out there. There are simply constraints and there's nothing wrong with that. I like having brands that are highly desirable, where demand is exceeding supply.

No I agree. I want to know if you missed sales.

Well, I'm sure we did. If we had more units in my Honda stores, we would have had more sales. If we had more Toyotas in the Toyota stores we would have had more sells. On the domestic side, I am sure that we missed a few sales, but not nearly against the risks, when measured against the risks of over inventorying domestic brands. So I'm really not worried about that. There are some good sellers on the domestic side, but I think you have to be more cautious there.

Now, you were talking very quickly on the call. The domestic brands are up to 95 days?

96, yes.

96 days, and how do you manage that? I guess the answer is seldom, but I mean, is there anything you can do?

No. I mean, we -- the platform CEOs they're continually looking at the order book. They're going through it with their GMs on a daily, weekly basis just to make sure that we have the proper inventory. So, yes, it is managed. It's not accidental. You tend to carry more inventory in the domestics with all the different product that's out there. But, I can assure you that our platform guys are watching it very closely.

Would you expect that to come down in the fourth quarter, the domestic inventory days?

They tend to go up just on a seasonal basis as you position for 2006.

Okay.

I would add, Deborah, that we are probably going to run higher than the other publics on the domestic side. We give more latitude to our general managers. That's why we outperform the industry more than double, in terms of unit sales on a comp store basis. I think it's a risk we're willing to take. And I think it's paid off. I don't think we've been burned in the long run. Our floor plan costs maybe a little bit higher. We want to be good partners to the domestics, not foolish. So, I think we're always going to run a little higher.

Okay. The sale of the Oregon platforms, have you given an indication of what multiple you sold them at?

Gordon said they didn't have any operating earnings.

So you gave them away?

No. Not at all.

The opposite of that. We got 60 million in cash from stores that generated no operating income.

Okay. I was trying to get a little more color on that. Are there other opportunities for -- given that the valuations seem to be rich and you're generating income from facilities that generate no income? Are you getting cash from platforms that generate no income. Are there any opportunities to divest? Sounds like a good trade.

Well, in Portland it was. We go through a rigorous analysis of our poorly performing stores. And we are just about at the bottom of those -- of the list that I'd like to dispose of. Yes we have a bottom 10% but I think in the main, the bottom10% is populated by brands that should be doing better and we have fixes to put in place. There are a few stores that I, candidly, I would like to get rid of, but they occupy real estate that I do not want to get rid of.

So we're going to continue to run that store until we have a better -- it's not costing us anything, we're not earning anything. There may be some opportunity costs, but I don't want to permanently get rid of a piece of wonderful real estate that I believe may be useful down the road for another brand in that location. So in those cases, we'd like to keep them. We've traded for stores. We're working the portfolio very, very aggressively.

Okay.

Just to put numbers to that. On the bottom 10 stores in terms of income producing this year, we've divested six. Two of them are start-up and the other two are what Ken described, they're on real estate that we do not want to -- to lose.

And those last two or the chunk above those, as well, do those generate cash?

They're about breakeven on a cash basis.

Okay.

A little bit positive, not significantly though.

Okay. Thank you. Good luck for the fourth quarter.

Thanks, Deborah

Our last question today will come from Mark Irisara (ph) at Goldman Sachs.

Hey, guys, thanks. Nice quarter.

Thank you

My first question - actually a lot of mine have been answered already. On the used car side of the business, can you talk about what you're seeing in October? And kind of maybe the progression of the used car business throughout the third quarter, as well, particularly in September and then, here in October, now in terms of not only units, but also pricing? Thanks.

Well, I'll address that directly. The used car business is consistent. We're not seeing the decline, call it the volatility of that market that we're seeing in new. That has been the history of the used car market from a franchise dealer's point of view. It was in the third quarter and it is so far in October. In fact, just before the call, I was looking at our results through the 23rd of the month and they're basically in used, going to be on budget for the month, give or take 1%. I mean it's that close.

Pricing, and we've tried to emphasize this before, and I think that this -- your question offers an opportunity for me to elaborate on it. The pricing in the wholesale market can be volatile. It really doesn't affect us, so you can -- other than the impact it has on the inventory you own, which churns about 9 or 10 times a year. And if you mis-trade -- in other words, if you value a trade higher than it's worth -- you can see from the increase in our used margin rate that that wasn't the case. We sell in the main, and I can complain about this from cost up, and if we buy right, it doesn't really matter what's happening on the cost side of the business. We will get the proper margin if we inventory right. That is put the right units, right brands, right age, the right mileage and so forth on our lots.

I feel pretty good about it. It's a good business. It's a stable business and I think it's a business where we've taken share. I think the franchise dealers have, and I think we've taken more. I think - and I'm just delighted with our performance in used.

And I think, Ken, you mentioned the words financially dangerous, I think it was when talking about the used car market? Just in light of kind of the hat trick you pulled off. Can you just characterize that a little bit more and help me understand, are you concerned about the direction of prices in the inventory levels, if there is kind of more sluggish demand on the horizon for traffic overall?

No. I can answer that question. I -- to be forewarned is to be forearmed. I think that what I was letting you know is that, yes, if you take an SUV and a trade and you're not smart about it -- I'll give you an example. You could lose $2,000 in the blink of an eye -- if you decide to recon the wrong vehicle, you could lose $3,000. In this market you cannot, for example, rely on the blue book or the black book, whether that's Kelley or NADA, in terms of what a trade is worth. Just the simple fact of printing those books the market moves. You have to be in the market every day.

Your used car people have to be at the auctions with a frequency, and then communicating to the people that are doing the trading, right now, real-time almost, what the vehicle that you're trading for is worth. And our technology helps us do that. We follow the auction market and the people we have in the markets day in and day out. So what I try to let you know is, it's dangerous, but if you know how to do it right, you can produce the kinds of results that we did, which I think are in the main sustainable. But, you have to approach it not business as usual.

And again, in complete transparency to investors, the biggest challenge I think, is letting a customer know that when they looked up Kelley Blue Book for the value of their trade -- in fact, we're not trying to pick their pockets. The deal may not be worth what they thought it was worth, because the markets move rapidly. Our job is to stay on top of those markets, trade fairly, give the customer the most we can for every vehicle and make every deal we can.

Did you find with the employee discounts and kind of the fixed prices if you will, that it was harder at the domestic dealerships to get the trades or price the trades appropriately?

No. In fact, it just -- that's what started all the pressure and the volatility. You saw a lot of large vehicles come in, SUVs, in particular, and you had to be on top of that market and you had to really work with your customer. I think it was very important that you let the customer know exactly what was going on, because we made up our minds we weren't going to send a lot of it, as they call it in the industry, the heavy iron.

And the math of that is really -- if you look at our margins, including wholesale, they were 9% this quarter. At the same quarter last year, they were 7.9%. We saw 90 basis points at the retail, but we also picked up another 20 at the wholesale side. So that's really the outcome of what Ken just talked about, that we didn't lose money on the trade. In fact, we did better than we had for last year in that wholesale market.

Great. And then just, Gordon, quickly on your floor plan interest, it did come in a little bit lighter than I would have thought. What were your credits for the quarter -- the third quarter? And then can you just kind of help me understand that line a little bit better there?

Probably down for a couple of reasons. The credits, to answer your question, was 20 million for the quarter. That's compared to 17 million last year.

It's year-to-date, Gordon.

I'm sorry. I apologize for that.

That proves that I'm listening, by the way.

I do apologize for that. If you look at it on a quarter basis, it's 7.1 million for the quarter, versus 6.3 million last year. But you're also seeing -- the inventory probably is a little lighter than you had your models for the reasons we discussed. The employee programs, the domestic inventory was down just under 20 million, as were the imports were down 20. And that was -- it was a $13 million increase in the luxury brand. So, I would guess from your model, it's a little bit on the inventory side.

Got you. Great. Thanks, guys.

Thank you. And I'd like to, on behalf of my colleagues here, and again, for the folks that actually do the real work of making these really great results happen, the folks in our regions and stores, I want to thank them. And thank you all for participating in the call. We're signing off. Bye-bye.

Thanks again for joining us everyone. That will conclude the conference call for today. Again, have a good day.