Asbury Automotive Group Inc (ABG) 2006 Q3 法說會逐字稿

Good day and welcome everyone to the Asbury Automotive Group third quarter 2006 earnings results conference call. Today's 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, Ms. Stacey Yonkus. Please go ahead.

Thank you. Good morning, everybody and thanks for joining us today. As you know, this morning we reported our third quarter 2006 earnings. The Press Release is posted to our website at asburyauto.com. If you don't have access to the internet or if you'd like a copy of the release faxed or emailed to you, please contact Gail [Soladico] in 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 some forward-looking statements that are subject to certain risks and uncertainties, which are detailed in the Company's 2005 10-K report, as well as other filings we have 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 website under the Company's Investor Relations section. We will also, from time to time, update the website with additional financial information. Any interested investors should check the site periodically for such information.

The purpose of today's call is to discuss Asbury's third quarter results. Our agenda will be as follows. Ken Gilman, our President and CEO will begin with a few overview comments. And Charles Oglesby, our new Chief Operating Officer will briefly review some of our key operating strategies. After that, Gordon Smith, our CFO, will provide everyone with some financial highlights. Ken will have a few concluding comments and then, as always, we'll be happy to entertain any questions you might have. Ken?

Thanks, Stacey and good morning to everyone. Thanks for joining us today. Let's get right down to it. Our third quarter came in at the high end of our pre-announced range from two weeks ago. Quite clearly, it was another solid performance by Asbury. By the way, I never get tired of saying that. It was also our eighth consecutive quarter of what we believe will be overall performance that will lead the auto retailing industry.

On a GAAP basis, our income from continuing operations increased 7%. But on a pure operating basis, backing out the impact of our capital markets activities, which Gordon will be discussing and non-comparable stock-based compensation charges, income from continuing operations rose 14% to $0.59 a share. That, I am pleased to tell you, was an all-time Asbury high for any quarter. Speaking personally, I think these results are pretty outstanding, considering the difficult new car comparison to a year ago, due to employee pricing promotions, as well as the headwinds created by increasing interest rates. Hopefully, we've seen the last of those interest rate increases.

Asbury's strong performance this quarter, as with the prior seven, is easily understood. It reflects our continued success in executing against our balanced business model. New and used vehicle sales, finance and insurance and parts and service, as you know we called that fixed operations, as well as our ability to control costs and leverage our expense structure.

Addressing the specifics of our performance, same-store retail revenue increased 3%, while same-store retail gross profit, which is my preferred metric, was up 5%. It's an interesting story as to how these numbers came together, as it reinforces, once again, what we have been talking to investors about, most recently on the road show. Namely, that the success of our operating strategy, how we have delivered industry-leading results for the past two years and why we think it's sustainable is that it's built on a foundation of the best brands and strong markets with stores run by the best general managers in the industry.

Let's get to the details. Starting with new vehicles, the retail environment for new cars remained challenging in the third quarter, with year-over-year comparisons that I noted, particularly difficult due to the stimulating impact of employee pricing discounts a year ago. Still, we continued to benefit from our favorable brand mix with 79% of our light vehicle unit sales coming from midline imports and luxury nameplates, the segments of the market that continue to gain share. While it's difficult to quantify, we believe that our new vehicle sales would have been stronger but for very tight inventories in some of our most popular brands, including Toyota, Lexus, Honda and BMW.

Even with lower new unit sales than we would have liked, it's important to note that same-store new vehicle revenue was about flat to last year due to higher retail selling prices. More importantly, our average gross profit per vehicle increased about $150, or 7%. The net results, again driven by our great brand mix, is that same-store new vehicle gross profit rose 3%, which means that we made more money selling new vehicles this year than last year.

In used vehicles, we had another strong quarter. Same-store unit sales were up about 5%, with the revenue and gross profit both up again in the low double digits. Charles Oglesby, our new Chief Operating Officer is going to comment about how we're driving performance in our used vehicle and services businesses, so I'll refrain from commenting. Suffice it to say that it's definitely not a random event or even an industry-wide phenomenon. We have carefully laid the groundwork for these exceptionally good results.

We also had another solid quarter on fixed operations, our parts, service and collision repair business. Same-store revenue was about 3% with gross profit up about 5%. Drilling into the detail a little bit, the quarter was stronger than these numbers would normally imply. Our body shop business, which is driven in large part by weather, was down a tad while the business we have the most control over, customer pay parts and service, was up 9%. In finance and insurance, same-store revenue is up 2%. However, what you need to know and what we've been regularly disclosing and I need you to focus on in terms of evaluating finance and insurance performance, is that last year included income generated at the corporate level from the runoff of some retro income pools. At the dealership level, which is the best measure of store F&I productivity, F&I revenue increased 6%. Dealership level F&I PVR, per vehicle retail, at $905 was also up 6% on a comparable store basis. This was driven by increases of about 2% in both our average product penetration and our finance penetration.

Finally, we remain pleased with the continued progress we've achieved in reducing SG&A as a percentage of gross profit. Gordon will fill you in on the details.

I'm now going to turn the call over to Charles Oglesby. Many of you have already met Charles. He was promoted in August to Senior Vice President and Chief Operating Officer. He's a 35 year industry veteran, although he doesn't look that old, who joined Asbury in 2002 as President of our Arkansas platform. And then in 2004, took on the additional responsibility for our Atlanta business as President of our South Region. He's done a great job for us and is clearly one of the most respected and knowledgeable car guys around. His challenge is to help us continue executing successfully against our growth strategy. Charles?

thanks, Ken and good morning everyone. First, I'd like to say how excited I am to join this management team. As most of you know, Asbury has a heritage of talented individuals making decisions at the local level. And that's fundamentally what attracted me to Asbury almost five years ago.

And over the three decades I've spent in the business, I've learned there's nothing more important than having the right people and empowering them to do whatever it takes to satisfy customers. Here at Asbury we take it one step further and that's having the right people with the proper support, focused on the right issues. Our management philosophy is to provide our general managers with the proper level of support and a framework of procedures so that they can focus on customer facing activities. These include all the daily decision in the dealership, such as inventory management, advertising and personnel decisions. It's our reliance on the general manager and their local business knowledge, which we believe sets us apart. We also believe it allows us to attract the best general managers in the industry, a further reason for our industry-leading results over the last couple of years.

Being decentralized in our customer facing activities is only half the operating equation. Our back office and infrastructure activities are becoming more centralized in terms of consistency, software and so forth. This will allow us to support our dealerships and regions with tools to deliver higher gross profit and expense savings, such as our Deal Management Software what we call [desking] and CRM tools, used car management software and website technology, just to share with you some of the strategies we are currently using to improve our operating effectiveness and drive the growth of our high-margin businesses.

In used vehicles, we have professional used car teams that utilize state-of-the-art software to make fact-based decisions, allowing us to understand what the best inventory stocking levels are for each dealership and what the fastest turning merchandise is for that particular location. The software also allows us to transfer vehicles across all our dealerships to the one that is likely to get the highest gross for that particular vehicle.

As for the fixed operations part of our business, it's all about capacity, plus talented technicians and service writers with great processes backed by the right support staff. To that end, we continue to add capacity to keep pace with the rapidly growing units in operation for our high growth brands. In total this year, we will add about 70 stalls and 50 technicians. In addition to building capacity, we're also adding technology. We field test some of and roll out the most advanced diagnostic equipment and continue to expand our product offers in categories that traditionally dealers have stayed away from, such as batteries and tires. This combined benefit is a 11.5% year-to-date increase in parts and service, customer paid gross profit, which as many of you know, is a portion of our business we can control.

In finance and insurance, we're testing a new deal management process in Texas and Atlanta, which we believe will eventually allow us to provide customers with an almost paperless transaction. Our goal is to bring compliance right to the desktop. This will allow customers to make more informed choices, which should also lead to an increase in product sales. You know, we take F&I compliance very seriously and not only is each and every one of our finance and insurance professionals certified, but we're in the process of certifying our entire sales force, hopefully to be completed by the end of the year. Every one of our employees that interacts with a customer's car purchase will be familiar with compliance procedures.

These operating initiatives are just some of what has contributed to our strong financial results. Looking forward to the remainder the year and into 2007, I will be working with each of our regions to develop specific initiatives, focused on additional operational improvement. And I look forward to sharing some of these initiatives with you on our next call and eventually reporting the positive impact on future calls.

Now, I'd like to turn it over to Gordon to review the third quarter results in greater detail. Gordon?

Thanks, Charles and good morning everyone. To say the least, this was a very active quarter for us in the capital markets arena. First, we initiated a quarterly dividend of $0.20 per common share, based on our 40% net income payout ratio, with a current dividend yield that is the highest among all the public automotive retailers. Second, we improved the float of our Asbury's shares by 65% to 23.8 million shares through a secondary offering. Finally, we began to utilize available cash to improve the balance sheet, initiating a $40 million bond buyback program and as of September, we have repurchased 15 million of subordinated notes in the open market.

The capital markets activity resulted in two one-time items during the quarter. $530,000 of after tax costs for the secondary and an after-tax charge of $570,000 associated with the notes that we purchased.

Turning to our quarterly performance, income from continuing operations, excluding the cost of the capital markets activity and restructuring activity in last year's quarter, was $19.3 million, including stock-based compensation, up 14% over last year. These results were achieved despite a stiff headwind of rising interest rates, which we estimate cost Asbury $0.06 of EPS compared to last year's quarter.

For the quarter, we saw margin improvement in each of our business lines, with overall gross margin improving 20 basis points to 15.1% on a comparable basis. Looking further into the business, we experienced a modest improvement in new vehicle margins, up 13 basis points, including fleet. The used vehicle business, including wholesale, improved 28 basis points to 9.3%, proving once again that we are able to grow this business while maintaining our margins. The fixed operation margin improved 70 basis points to 51.2%, as the high margin service business continues to benefit from the initiatives and service expansion that Charles discussed earlier. Finally, dealership generated F&I PVR improved 6%, as Ken said, or $50 to $905 per vehicle retail.

On expenses, the SG&A ratio improved 130 basis points and adjusted for stock-based compensation and the one-time items, the ratio improved an impressive 180 basis points. Our continued progress in controlling expenses and leveraging the cost structure has enabled us to flow more than 55% of the incremental gross profit through to operating income. And combined with our gross profit gains, delivered more than 15% of operating income growth before floor plan. More specifically, the SG&A improvement came from two areas. Personnel expenses as a percentage of gross profit declined 40 basis points, as we continued to leverage our fixed cost structure and execute our strategic initiatives. And advertising expense per vehicle retail declined 4% as the regional management teams continued to more effectively deploy advertising dollars.

Turning to inventory management, days sales is up slightly to 60 days, compared to 58 days last year. By category, luxury brands were 50 days versus 54 days last September, with luxury inventory decreasing 4%. Midline import brands increased 7 days compared to last September to 48 days and overall midline important inventory was up 22%. The increase in our midline imports is largely due to additional availability from the manufacturers, based on our travel rates. And midline domestic brands were flat with last September at 81 days. We consider this a solid performance, considering the difficult comparison to last year's inventory levels, which were lower than usually due to employee pricing promotions. Overall, domestic inventories were up 11%. Used vehicle day supply was down two days from last September to 45 days.

Operations continued to generate substantial levels of cash flow, with EBITDA of $48.2 million, excluding stock-based comp and one-time items, a 12% increase over last year. The adjusted EBITDA margin continues to show improvement from last year at 3.2%, up from 3% last year, despite the increase in interest rates on our floor plan financing.

Taking a look at our capital expenditures for the quarter, project and maintenance CapEx totaled $11 million, of which approximately $5 million will be financed. Year-to-date project and maintenance related CapEx totals $35 million, of which approximately $12 million will be financed. We expect that our CapEx spent for 2006 will total approximately $60 million, down slightly from our previous guidance. And that between 40% to 50% of this year's CapEx will be financed. The business generates sufficient cash flow to fund internally financed CapEx, pay the quarterly dividend and fund the acquisition strategy, with excess cash being used to fund the bond buyback program I mentioned earlier.

Turning to the balance sheet, cash and equivalents totaled $133 million, a $76 million increase from December 2005 and up $44 million from June, 2006. The debt to total capital ratio has improved 310 basis points since December, 2005 to 44.5% and including cash, 36.7%. 70 basis points which was due to the $15 million note repurchase, with the remainder attributable to the strength of our earnings over the first nine months of the year. The capital structure is solid with over 95% of long-term obligations fixed and nothing outstanding under the $125 million revolving credit facility. The subordinated debt facility ultimately mature in 2012 or later, with a first call date in June, 2007.

Looking forward to the end of the year, we expect that the business will delivery between $1.85 and $1.90 of EPS, up from our previous guidance of $1.82 to $1.87. This estimate is inclusive of stock-based compensation and the impact of one-time items we addressed on this call and our previous earnings calls in 2006. In other words, our earnings estimate for year is income from continuing operations on our GAAP income statement.

With that, I'll turn it back over to Ken for some final comments.

Thanks, Gordon. I'm going to touch briefly and for the last time on our regional performance because Charles will be doing it from now on. As in the second quarter, Florida, our largest region faced particularly difficult comparisons with a year ago because of high concentration of General Motors dealerships. In the second and third quarters of last year, I'll take a moment to remind you, those dealerships took full advantage and then some of GM's employee pricing programs, sold lots of new cars and made lots of money. And here's what's important about it. This year, even with the decline in new vehicle sales and profits in Florida, Florida achieved a slight increase in total same-store gross profit, which is exactly how our diversified business model is supposed to work. The bottom line is that with solid performance in used vehicles, fixed operations and F&I, our Florida team was able to offset the softness in new vehicle sales.

Our strongest region again was our west region, which includes our former Texas platform and our newer operations in northern and southern California. Texas is performing exceptionally well under Tom McCullen's leadership, partly due to the strength of Honda, their biggest brand, and partly due to the superb performance in used vehicles. Texas is testing some new approaches to marketing on used vehicles and they're clearly working. As a result, used vehicle gross profit increased nearly 40% for the quarter in Texas. Profits were also up significantly in both northern and southern California. Our new Spirit Honda store in El Monte continues to perform extremely well and we're about ready to expand our used vehicle capacity at that location.

As many of you know, we've reduced our targeted range for acquisitions to approximately $200 million per year in annualized revenue, a level we do not expect to achieve this year in 2006. The brands and locations that we are interested in acquiring are generally less available. And as we've said before, we are not going to simply pay up just to get deals done, unless the return on invested capital is satisfactory. That said, our longer term goal of acquiring $200 million a year in revenue is very reasonable. To meet this objective, we need only add two to four single point dealerships per year. To put that in context, within our existing markets there are approximately 400 independently owned dealerships in the luxury and midline important brands we're targeting. So, two to four per year should be achievable.

In conclusion, Asbury is well positioned to continue to deliver on our 12% to 15% total shareholder return objective, 6% to 8% from organic growth. 3% to 4% from acquisitions and a 3% to 4% annual cash dividend. We have a great portfolio of brands, with dealership locations in many of the country's fastest growing markets. We have great people managing our dealerships, executing against well understood, clearly defined strategies, designed to continue building our higher margin used vehicle and service businesses. We have a number of opportunities to further streamline our expense structure and we have the financial flexibility, and Gordon went into this in some detail, using our surplus cash and ongoing strong free cash flow to supplement our growth with tuck-in acquisitions when they make sense and for other shareholder value enhancing activities. You can take that and define it as you will.

With that, I'll turn the call back over to the Operator and we'll take any questions. Operator?

Thank you. [OPERATOR INSTRUCTIONS] And we'll take our first question from Rick Nelson of Stephens.

Rick Nelson. Thank you and good morning.

Good morning, Rick.

Can you talk about the sales trend here in October? We hear things are picking up. And also on the inventory, the shortages that you talked about in the third quarter, Toyota, Honda, I take it the four cylinder engines, any relief there?

Charles, why don't you take that?

The fourth quarter we believe is -- what we have seen, Rick, is an increase in the last 10 days in October. And with the inventories coming in, we believe that the fourth quarter is going to be fine for us. The shortage of some of the vehicles has been more of a specific mix from the manufacturers. And it has been on the four cylinder engines and six cylinder engines, that kind of inventory that you mentioned, has been short and that inventory started to come back in now as we've earned it.

That's good. Any signs of weakening at all at the high-end? I know that BMW numbers this past quarter were not that strong. Is that a sign of the customer or is that more product issue?

I think it's a little bit of a combination, Rick. It appears to me, and this is my opinion, that there is a little bit of a breather going on. However, as you probably already know with the release of the new LS460 from Lexus, we've got quite a list of customers that are standing in line for that vehicle. So, a lot of it is product-driven, waiting on some of the release of these new products, as well. And the X5 from BMW, we expect quite a strength in that market as these new products come out.

We're really kind of seeing maybe the stretch customer is not quite coming in right now, the customer that would like to move up, but is not quite ready because they may be looking at their own personal situation first. But overall, we feel we're still very bullish on that sector of the market.

And the used cars, any comment there? You've had a string of strong growth in that category.

Well, we think it's a combination of things, Rick, that have helped us with that. We are continuing to execute our strategy and the more we execute it, the better we get at it. And it's also a selection process. And that is having the right vehicles in the market that the customer is looking for. So, as we continue to execute that strategy and refine it, we just continue to have these results. We also believe that that market, as Ken has stated, is a pretty steady market. And the opportunity we have to take it from other independent dealers, as well as other franchise dealers that don't quite have some of the systems and processes in place that we've been working for the last couple of years.

Great. Thank you.

Our next question comes from Matt Fassler, Goldman, Sachs.

Hi. It's actually Robert [Higgenbothman] in for Matt. I just had a quick, simple question on the bond buyback. Your $15 million in now and I was wondering if you could give us a sense of what the timeframe and the completion of that program would be? And what kind of charges you're kind of building into your earnings expectations going forward? Thanks.

The $40 million, it's opportunistic. The bonds don't trade that much and so we're just opportunistically doing it. We have, other than what we did in the third quarter; I haven't included any cost associated with the buyback in the future EPS guidance, only because I really don't know, since it's more opportunistic. And don't know what guidance to give, in terms of timing and how much they'll cost.

Okay. Thank you.

Our next question comes from Matt Nemer of Thomas Weisel.

Hi, this is Kate [Messmer] in for Matt Nemer. Congratulations on a great quarter, first of all. My first question is on parts and service. It showed an improvement in trends in the last few quarters, in terms of the margin there. I was just wondering what the main drivers were? If it was a higher mix of customer pay, like you mentioned, or if there was any else there?

We've talked about our strategy in the area of building customer pay and using some of the lower cost items with the lower gross margin items, rather, to build that base and I think it's coming to fruition.

Great. And secondly, since you mentioned that your performance in Florida was somewhat weaker, I was just wondering if you think that's related at all to the slow down in housing?

I don't.

Okay. Great. And then third, I just wanted a little clarification on the guidance, whether or not that excludes or includes the one-time items this quarter? I'm just trying to figure out what that implies for the fourth quarter?

It includes everything. It is a GAAP number that includes all one-time items that we both reported in this quarter and in the second quarter. So, the guidance is an all-in number.

Okay. Great. Thanks so much.

Our next question comes from Rod Lache of Deutsche Bank.

Congratulations everybody.

Thanks, Rod.

A couple of things. That performance you cited in the western region sounds huge. Is that off of a depressed comp or is that just setting an incredible high for that region?

One, it's not off a depressed comp. Two, it reflects, I think, the strong work that we've done in the region and the willingness under Tom McCullen's leadership to take some risks and do some new things. We've been working very hard to improve our performance in used vehicles. We've been working at it for several years, in terms of technology and process, procedures and new ways of marketing. And much the way Fred Astaire made incredibly complex dancing look very easy, Tom makes it look very easy to sell more used cars. But, no, we've been working very hard at it and I think he deserves every one of those dollar increases.

So, that's a new high for that region, obviously?

Yes, indeed.

Okay. And are there, at this point, major differences or significant differences in your gross profit margins between regions? And is there one region that you would cite as the potential for an opportunity?

I'll pass that over to Gordon.

In terms of just used or overall?

Overall.

Overall, there are not a lot of differences amongst the regions. On an individual line, there is. But when it gets down to the bottom line, they're within 0.3 of each other, plus and minus. So, not much variation.

Okay. And I didn't understand and maybe you can just go over this again, your explanation for the fixed business, same-store sales comp slowing versus the first half?

Well, there's one day fewer in the quarter. And the body shop business was down a tad. But the customer pay was up 9. I think Gordon -- that may be a little bit below, maybe a point, year-to-date. But basically, it's the overall mix. So, we're pleased with the performance of that business in the quarter.

Okay.

That one day is versus the third quarter last year. There's one less service day.

Right. Well, I was just looking at like the same-store sales comps were up 9% in the first half and up 3%, I think, in the third quarter. But it's essentially just this --?

Yes, the daily rate's about just under 8% growth. So, it was really just --

It's pretty comparable?

Yes, it's pretty comparable.

Okay. And then one last one. Can you just go over the free cash flow in the quarter? What was the cash from ops and CapEx?

The CapEx numbers for the quarter were --

Are you hearing paper shuffling?

I just want to make sure I gave you the right number, as I shuffle through this. We had CapEx for the quarter of $11 million. And we're going to finance $5 million. We haven't financed it yet. So, there wasn't a lot of activity in the third quarter. Quite a few of our major projects are being pushed back, as we wait for some of the permits, are being held up in some of the local jurisdictions. So, we're a little bit behind on CapEx. The EBITDA for the quarter was $48.2 million, up 12%.

Okay. Do you have a cash from ops number, after working capital adjustments or should we just wait for the Q?

I don't have that off the top of my head. I'll get it to you.

Okay. And then on the CapEx for the full year, I guess, based on your run-rate, it's going to come in a bit lower than what you had previously projected?

Yes. We had previously been talking about it in the $70 million range and right now it looks like it'll be closer to the $60 million.

Great. Thank you very much and congratulations again.

Thanks.

Thanks.

Our next question comes from Rich Kwas of Wachovia.

Hi, good morning.

Good morning.

I wanted to ask about the DMS conversion. Where are you with that? I know it's a little bit of a longer term process, but what's the status?

Right now we're in the planning stages of it, getting everything lined up. We'll start converting stores in January, February timeframe. And we'll be completed with the process by December of next year.

So, will it be a net hit to SG&A next year, as you convert? And then the benefits will come in '08; is that kind of the --?

There will be an overlapping cost as we transition, purely on an accounting basis. But there will be a little bit of a cost overlap, yes.

And then on Texas, Ken, could you just comment? I mean, you have some new strategies there for the used business. Is that transferable to other regions or is this somewhat region specific?

I'll let Charles talk about that.

It is transferable. It's kind of a best practice and we are in the process of sharing that within a couple of our other regions currently. We love used cars.

And then just hitting on that again with used, what are you seeing in the used SUV market?

You know, that market with fuel prices declining, we are seeing a strengthening there. We did, however, find as the market, even though fuel prices were increasing, we found that as the market adjusted the price in a lower mileage, high option vehicles, there was still a strong demand for that particular SUV. So, we've been able to adjust to the market and so we're priced right. And the consumer still sees that as a value. There is still a desire in a segment of the marketplace to have that vehicle with that size.

And then finally in California, it sounds like you outperformed the market. It sounds like the market was down in the third quarter, given what AutoNation has said in their press release. It sounds like you did a lot better. Could you just comment on what's really driving that?

Well, it's our smallest market, but we have really good brands and really good operators; we've been working on it for a while. I can't speak to the brand mix that AutoNation has. I read their release this morning and I feel badly that they're having a tough time in that market. It's just we paid our dues in southern California, in terms of remodeling of the Spirit store. And we've done a lot of the right things there and we continue to just plug away. I think a lot of the brand mix and a lot of being able to attract the best general managers in the industry really does pay off.

Alright. Thank you.

And our next question comes from Douglas [Carson] of Banc of America.

Yes, thanks guys. [Inaudible].

Can't hear you.

We can't hear you.

Can you hear me now guys?

Yes.

Sorry about that. In your debt buyback, do you have any preference over the 8% of 14's versus 9% of 12's?

No. No, actually when you look at it on an economic basis, they really come in at about the same, in terms of benefits.

Can you give us some color out of the 15 that you have bought back, which you bought back?

They were all the 8's.

All of the 8%'s?

Yes.

Okay. And to fund the next $25 million, I think you may have said it earlier, but I may have missed it. Are you going to be using free cash flow?

Yes. Well, I've got $130 million of cash on the books so I'm not looking for future operations to be able to do it. But yes, there is plenty of cash on the books currently to fund this modest program.

Okay. Alright. Great. Thanks so much, guys.

And I didn't say it on the script, but it really is part of the strategy that we're employing to reduce our debt to total cap ratio down to 40% by 2008.

By 2008?

Yes.

40% debt [total cap]. Thank you.

Our next question comes from Kelly Dougherty of Calyon.

Good morning. Thanks for taking my question. Just to follow up on Rich's question earlier. You mentioned that the cost improvements are expected to continue through 2007 and beyond. And I'm just wondering if you can talk to some of the other large buckets, besides the DMS platform that you think you can get additional cost savings? And I'm wondering if you have any targets and if you're willing to share them?

Well, we've talked about it in the past and we're implementing it. Of the about 50% of our stores currently are in a shared back office structure. That's delivering some of the savings. That's up probably from about 25% of our stores last year. So, we're consolidating our back offices into geographic regions, geographic meaning a city. So, we're getting the benefit of that, some of what you're seeing today is a result of that. We have some more to go there.

Any thoughts on when the other 50% may be up and running on the same platform?

Over the next 12 months.

Okay. Thanks.

And so, as a result, we're looking at a targeted 50 basis point improvement prospectively on our SG&A ratio and about half of that is real cost take out and the other half is coming from leveraging the current structure on the higher gross profit, is what we're targeting.

Okay. Great. Thanks. And then just one more. I'm wondering if you can talk a little bit about your divestiture strategy, especially now that you've lowered your acquisition plans? I guess I'm wondering if you intend to accelerate divestitures to further improve your portfolio composition, now that you're slowing acquisitions? Or are you largely satisfied with where you portfolio composition is today?

We look at the bottom performing stores on a monthly basis. And we run that against a number of criteria, absolute performance, cash flow, the brand, the real estate and we have candidates to dispose of and as we continue to assess those brands and their potential, we may, in fact, dispose of some stores. But I don't think we have more than four stores that are cash flow negative. And it's very small in total. So, we're not under any financial pressure to dispose of those stores; there's no reason for haste. So, we do it when we think it's right. It's a very serious decision to take and we are pretty methodical about it.

Great. Thanks very much.

Our next question comes from Peter Siris of Guerilla Capital.

Hi, guys.

Hi, Peter.

How you doing? I'm confused about two things.

That's it? Only two?

I'm actually confused about a lot of things. The first thing I'm confused about is why you feel bad that AutoNation has weaker sales than you do?

The main reason is I don't like it when any player in an industry that only has six companies -- public companies -- in it performs poorly, because I think that it casts a pall over the entire industry. Second, I like Mike Jackson and Mike Maroone and it's just uncomfortable. I've been in a public company environment for 30 years and when you have to report earnings that are disappointing, it's not -- I've been in those shoes and I don't like it; didn't like it. I love reporting industry leading results the way we have been. But I feel for them. So, I think one, it effects how our securities are viewed and we're trying to define why we're different and why we're likely to perform exceptionally well go forward. And I feel for those guys.

I'd actually like to ask Gordon a question. When you guys were on the road show, you talked about the impact of increasing interest rates over the last couple of years on earnings. And if you could just refresh my memory? Two things, Gordon. First, if interest rates had been flat at a certain level, whatever the level was, what would earnings have looked like? And if interest rates are flat on a go-forward basis, how does that impact what the earnings are going to be?

Sure. Yes. I went backwards. What I said was if we had today's interest rates back in 2003, what would the results look like? And that would have been approximately about 30% growth rate in the Company over the last three years, is how I relate it. In terms of how it's impacted us this year, it's costing us about $0.22 on an EPS basis, is the cost of the rising interest rates over the last 12 months. And prospectively, -- 9 months. 9 months; I'm sorry. And prospectively, if we implemented our strategy -- if we got the results we've achieved in the last three years in the next three years, we would be looking at a growth rate of about 25%.

Okay. So, this year's earnings -- maybe just help me out. This year's earnings have the one time charges; from everything in this year's earnings are how much?

It's on a pretax basis it was $2.5 million of expenses and then another $900,000 to buybacks, pretax.

What would be an EPS without those numbers?

It's in -- let me -- if I take out everything that we're talking about, it would be on a year-to-date basis, it would be $1.57 versus last year at $1.42. And last year's number included some reorganization costs. So, on an apples to apples basis, on a purely operating basis, we're up 11%.

And that's 11% with $0.22 for the 9 months?

Yes.

Of negative?

Yes.

So, if interest rates stay flat at their current level, does that mean that -- I mean, when Ken says that the projected growth rate is 12% to 15%, what does that assume for interest rates, on a go-forward basis?

That assumes interest rates are flat.

So, in other words, you've been growing at a much faster rate, 12% to 15%, if I take interest rates out, 12% to 15% assumes interest rates are flat?

Right. That's correct.

So, why shouldn't you do better than 12% to 15%, if you've been doing better than 12% to 15%, ex interest rates?

I'd love to do better than that. In fact, we'll do everything we can to beat those numbers. But I look at it, I think, 12% to 15% is a fairly good return for a business like this. And I'd rather under-promise, over-deliver than the opposite. But certainly the results we've achieved are certainly in excess of that number. We haven't gone through our annual forecasting of the next year cycle yet. And when we do that, hopefully we'll be giving you numbers that you'll be pleased with.

Well, okay. Thanks. I appreciate your answers and good work, guys.

Thank you.

This does conclude our question and answer session. So, for any further comments or additional remarks, I will turn the conference over to our speakers.

Well, I'd like to thank you all for joining us today and I guess the next time we talk to you will be after the New Year so have a great holiday season. Go out and shop. Bye-bye.

This does conclude today's conference. You may disconnect at this time.