Asbury Automotive Group Inc (ABG) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Asbury Automotive fourth quarter 2006 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 Ms. Stacey Yonkus. Please go ahead ma'am.

Sorry for the delay this morning. It seems everybody dialed in at the same time, so we are off to a little bit of a late start.

As you know, this morning we reported our fourth-quarter and full-year 2006 earnings. The press release is posted to our Web site, asburyauto.com. If you don't have access to the Internet or if you would like a copy of the release faxed or e-mailed to you, please contact Gail Falotico at our corporate office. She can be reached at 212-885-2520.

Before we start, I just want to remind everyone 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 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 to our Web site under the investor relations section. We will also from time to time update the Web site with additional financial information, so any interested investors should check the site periodically.

The purpose of today's call is to discuss Asbury's fourth-quarter results. Our agenda will be as follows. Ken Gilman, our President and CEO, will begin with a few introductory comments; then Charles Oglesby, our Chief Operating Officer will briefly discuss the results and provide an overview of some of our key operating strategies; after that, Gordon Smith, our CFO, will provide everyone with some financial highlights; then Charles will have a few concluding remarks. And 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. We're very pleased with our fourth-quarter results. On a GAAP basis, our income from continuing operations was up 8%. But, most importantly, if you adjust for various nonrecurring items, which we have laid out quite clearly in the release, on a comparable basis our income from continuing operations was up 23%. And earnings per share on that same basis were up 18 -- pardon me -- 19%.

Considering the industry environment, it was a very strong performance, which we think reflects very positively on our continued high-quality execution against our balanced sales and services business model, as well as Asbury's specific strengths in terms of brand mix, attractive geographic locations, and our outstanding general managers in the dealerships.

I promised my colleagues to keep my remarks short and sweet today, but I also wanted to comment briefly on the second press release we put out today. As I am sure you noted, I'm going to be retiring from Asbury, effective with our annual meeting on May 4th, and my successor as President and CEO will be Charles Oglesby, our Chief Operating Officer. I am very excited about the change. Since I joined Asbury over five years ago, we have been able to successfully take the Company public. And with the two secondary offerings completed last year, we have been able to provide our private equity sponsors with a much deserved exit on their investment.

Our results today -- and this is what we're most proud of, and I'll speak for myself and my colleagues -- they represent our ninth quarter in a row of exceeding Wall Street analyst expectations, and what we believe to be industry-leading performance. Personally, I feel I've accomplished what I set out to do, and the time is right for me to spend more time with my family, including my 10-year-old son and seven-year-old daughter. And I want to spend time with them at least while they're willing to talk to me, which is probably for another three or four years, and then they'll be off on their own in terms of who they're willing to talk to, as many of you know.

I can leave the Company with great confidence knowing Charles is in charge. Charles was actually my first hire after joining Asbury over five years ago, and it certainly turned out to be an excellent hire. With the additional three months we have now to work together, we'll have had a total of nine months for transition, so I know for sure that I will be leaving the Company in strong hands.

At this point I'm going to turn the call over to Charles and Gordon to review the results, but I will be available to answer your specific questions during Q&A; meaning, if you want me to answer a question, you're going to have to address it to me. Otherwise it's going to be Charles or Gordon. Charles?

Thanks for the kind words, Ken. Asbury has certainly flourished under your leadership, and we have a terrific team in place that has posted some very impressive results over the past few years. And I look forward to continued successes with this team in the years ahead.

Turning to the business, Asbury's dealerships continued to perform very well in the face of a challenging retail environment. There are, obviously, significant forces outside of our control in terms of demand for new vehicles, the ongoing manufacturing overcapacity among the Detroit OEMs and the ever-changing incentive wars. But by remaining focused on executing against our business model and strategy, there is much we can do to grow the business and improve our performance, regardless of the environment for new vehicles. And that's exactly what we've been doing over the last two years. I would like to thank all of our employees, led by our local management teams and the general managers of our dealerships, for their daily contributions that make our success in 2006 possible.

Looking down the P&L at the fourth-quarter results, we are all proud of what [the] business has been able to produce -- growth in each of our business lines, expanded gross profit margins, and continued improvement in our SG&A expense leverage, resulting in, as Ken mentioned, an impressive 23% growth in income from continuing operations.

The new vehicle business was once again helped by our brand mix, as the shift in sales toward higher-margin luxury vehicles, combined with our midline import dealerships capitalizing on manufacturer programs, resulted in a 20 basis point increase in gross profit margin to 7.5%. With unit volumes relatively flat versus last year, the improved margin translated to a 5% increase in new vehicle gross profit.

As you may know, a large portion of our operations are located in Florida, totaling one-third of our new vehicle sales for the fourth quarter. Sales of new vehicles in Florida were down slightly, which is consistent with the soft results that other retailers, both in the auto industry and in other retail sectors, have reported in the region for the fourth quarter. I mention this because I want to use the Florida performance to illustrate two points. First, the importance of strong leadership at the local level, and second, the versatility of our well-balanced business model.

Entering the fourth quarter, our management team in Florida was able to adapt to the change in local market conditions; in this case, the softening of the new vehicle retail business. They stocked more used vehicle inventory and shifted their marketing dollars toward used vehicles. Under the leadership of our management team, the region was able to navigate through a difficult new retail market (technical difficulty) making up for the 300 unit decline in new vehicles (technical difficulty) 600 incremental used vehicle sales. And most impressively, they were able to maintain their overall profitability.

This illustration is a testament to our business model and quality of our leadership at the local level, which are truly interdependent. Without our model, you would not consider relying upon local management to make market-based decisions. And without high-quality management at the regional level, the model could not trust the decision-making process. The environment we have fostered here at Asbury, operating under our business model, is truly special and has resulted in exceptional operational performance.

Just a quick note before I go through the rest of the business. We are generally not going to distinguish today between total and same-store metrics, because in most cases they are now essentially the same. Where there is a significant difference, we will make clear which we're talking about.

In used vehicles we have -- we had a very strong quarter, with gross profit up more than 12%. Our growth in this area was equally driven by a 7% increase in unit volumes and a 30 basis point improvement in gross margin, as we continue to benefit from our used car team approach, inventory management software and focus initiatives. We continue to view the high-margin used vehicle business as an opportunity for significant growth in the years to come, and we have [a set of] very focused initiatives designed to continue this growth, which I will discuss in greater detail a bit later in the call.

In fixed operations, we continued our consistent gross profit, up 5% over last year's fourth quarter. Very strong results, and there was one less workday in our fixed business in the fourth quarter than there was a year ago. So, on a per-day basis, our gross profit improved 6% -- more in line with our past performance during 2006.

Our parts and service business continues to benefit from our significant investments in additional capacity. Over the last couple of years we've added 120 service bays, increasing our service capacity over 6%. We also continue to focus on marketing our customer pay service and parts offerings, driving 9% growth in this business for the fourth quarter.

Dealership-generated finance and insurance revenue was up 11%, and most importantly, the true operational metric of our F&I business, dealer-generated F&I per vehicle retailed, increased to $975. A portion of the improvement in our F&I business resulted from a renegotiated contract with our third-party service provider, adding approximately $33 per vehicle. We also again achieved a strong improvement in our SG&A expense ratio as a percentage of gross profit, with a 160 basis point reduction on a comparable basis.

Now I'd like to turn the call over to Gordon to bring you through our expenses in greater detail.

Thanks, Charles, and thank you, Ken, for putting up with me for the last several years. I appreciate all that you've done for me and for the business since you arrived at the Company in 2001.

[The organic] growth that Asbury delivered during the fourth quarter, and for the full year, for that matter, was nothing short of exceptional. As Charles discussed, we were once again able to showcase the strength of our business model, expanding gross profit in each of our business lines during a difficult new vehicle retail market.

Adjusting the quarterly performance for nonoperational items that were not contemplated in our original earnings guidance provides an apples-to-apples comparison to gauge against Wall Street's estimates. Specifically, removing a 1.6 million after-tax gain on the sale of a franchise and 400,000 in after-tax costs associated with capital markets activity results in earnings per share of $0.42, versus $0.37 last year, exceeding our previous expectations and bringing us in above the high-end of our previous guidance range. Excluding the change in accounting for stock-based compensation, income from continuing operations was 15.4 million, up 25% from last year's fourth quarter, and for the year, 69.4 million, up 18% from 2005 -- once again, excluding all disclosed nonoperational items.

Charles has brought you through the improvements in our gross margin by business line. These improvements, combined with a shift towards our higher-margin businesses, with used and fixed operations comprising 31% of our total sales, has resulted in a 25 basis point improvement in overall gross margin to 15.6%.

Taking a look at expenses, I'm proud to say that this marks the ninth consecutive quarter of year-over-year improvement in our expense ratio. SG&A expenses on a comparable basis improved 160 basis points for the quarter, to 77.0%, excluding stock-based -- excluding stock-based compensation. And the performance for the year mirrored that of the fourth quarter, with SG&A expense down 170 basis point to 76.1%.

More specifically, the SG&A improvements for the quarter came from two areas. Personnel expenses as a percentage of gross profit declined 130 basis points, as we continued to leverage our organizational cost structure. Also, in advance of converting the dealerships to a single DMS provider, we have identified efficiencies in our accounting processes and organizational structure. For example, today 58% of our stores run a shared back-office environment, compared to only 20% two years ago. We expect the SG&A ratio to continue improving as we benefit from the ancillary cost savings we will continue to uncover in the DMS conversion process. In addition, we have several corporate-wide initiatives under consideration that will lead to further operational efficiencies.

Strong bottom-line growth was not only the only achievement for 2006. We also initiated a dividend to return capital to our shareholders as part of our new shareholder return model, investing in the facilities and continued improving our debt leverage. We also improved the [float] of Asbury shares 73% to 27.6 million shares through two secondary offerings. Cash and cash equivalents totaled 129 million at the end of the year as the business continued to generate consistent cash flow from operations.

Adjusted EBITDA for the year totaled 175 million, up 13% from 2005, with the EBITDA margin improving to 3%, from 2.8% last year. Dividend payments to shareowners were made in August and November and totaled 13.3 million. Based on the current dividend payment, the annual dividend yield is about 3.2%.

During 2006 we invested 45 million in existing facilities, which was lower than our 80 million budget due in large part to the timing of our facility construction projects and our fixed expansions. Of our total CapEx spend, 30 million was internally financed, with the remaining 15 million to be financed through sale leaseback transactions. In 2007 we expect capital expenditures to total between 70 and 80 million, [50] million of which is reserved for maintenance CapEx, with the remaining balance to be focused on new facilities (indiscernible) capacity expansion, of which we intend to finance 50% to 60% through sale leaseback transactions.

During the third quarter we initiated a $40 million debt repurchase program, and through the end of 2006 we repurchased approximately 18 million of our 8% notes. The debt repurchases, combined with the strength of our operations, resulted in reducing the debt-to-total-cap ratio 380 basis points to 43.8%. Taking into account -- into consideration the current cash balance, the net ratio is 31.9%. We remain on track to achieve our targeted debt-to-total-cap ratio of 40% during the first half of 2008.

The capital structures remain solid, with over 95% of our long-term obligations fixed and with nothing outstanding under the $125 million revolving credit facility. The subordinated debt facility ultimately matures in 2012 or later, and the first call date is June 2007.

Looking at new light vehicle inventory, days supply was at 60 days, up seven days from last year. By category, luxury brands were down four days from last December to 44 days on luxury inventory decrease of 3%. Midline import brands represent the largest increase, as additional inventory has been made available from the manufacturers based on our travel rates. Days sales reached 58 days at December, up 16 days compared to last year, and overall midline import inventory was up 27%.

Our inventory levels are in line with the industry, as last year's midline import inventories were well below the five-year historical average and are currently trending a bit above. In our view, these brands are well positioned to gain market share in 2007. Lastly, midline domestic brands were at 103 days, up from 89 days last December. Overall domestic inventories were up 5%. Used vehicle inventory is in good shape at DSI 45 days, down from 47 days last December.

With respect to portfolio management, over the last two years we have continued to move our dealership portfolio towards luxury and midline import nameplates. During the fourth quarter of 2006 we sold four stores, generating a loss of $0.05, $0.10 from discontinued operations, and a $0.05 gain in income from continuing operations. In the fourth quarter of 2005, income from discontinued operations totaled $0.18, principally from the gain on the sale of our Portland stores.

Reviewing the 2006 performance of our portfolio shows that all but three of our stand-alone stores operated at a profit, with those three stores basically breaking even. This is pretty impressive considering industry-wide, about one in four dealerships lost money in 2006. Overall, the changes to the portfolio have resulted in an asset base that is extremely well positioned, with 80% of our new vehicle sales being driven by luxury and midline import brands. Nonetheless, we will continue to (indiscernible) our assets, meaning our franchises and our locations, to make sure they are being put to the best use. And in particular, we'll keep a close eye on the bottom 10% of our stores.

Looking forward to 2007, it is important that we evaluate the performance of the business in the context of our total shareowner -- shareholder return model. When you put the pieces together for 2006 -- organic growth of 15%, growth from acquisitions of 2%, and an annualized dividend rate of 3.2% -- we provided our shareowners with a total return of over 20%, far in excess of our shareowner return model of 12 to 15%.

Taking the model piece by piece for 2007, first, we are confident that our brand mix, well-balanced business model and focused initiatives will continue to drive organic growth, meeting the 6 to 8% objective, even in a year when we expect the retail SAAR to be flat. Our model assumes that the Fed will leave interest rates unchanged during 2007, and we will face a slight increase in our tax rates to 38% due to a new income-based tax in Texas.

Second, with more than 129 million of cash on our balance sheet and 125 million available on our line of credit, we have the capacity to fund acquisitions far in excess of our total shareowner model targeting 2 to four%.

Furthermore, our brand mix leaves us well positioned to add strong performing stores, irrespective of the manufacturer. Bottom line on acquisitions, we intend to be active in the marketplace during 2007, closing as many deals as possible that meet our disciplined return requirements.

Finally, we will evaluate our dividend policy in the third quarter. As you are aware, we set our dividend payout at 40% of net income, and we expect to continue that percentage, subject to board approval, of course. Also, as we released this morning, the Board of Directors approved the repurchase of up to 1.3 million shares, with the objective of [spending] further dilution in 2007 as a result of past and future stock-based grants to employees.

With all the pieces in place for a successful 2007, we expect that the business will deliver between $2.05 and $2.15 of earnings per share from continuing operations, excluding acquisitions.

With that I'll turn it back over to Charles for some concluding remarks.

Thanks, Gordon. I had a few more topics I wanted to touch on. First, despite achieving industry-leading results over the last couple of years, we still have significant opportunities for further improvement. We have developed specific initiatives that all our stores will focus on over the next year or two.

As we began developing these initiatives, our main objective was to surround our employees with consistent processes and procedures, leading to greater efficiency in the sales process. As often happens, these initiatives at some point take on a life of their own, and a new focus is born out of the process. As it turns out, many of the processes that improve efficiency also foster professionalism in our customer-facing activities, enhancing the customer experience.

Now, many of our initiatives are assessed from the standpoint of professionalizing the sales process and customer touchpoints. A few of the specific programs that we are currently working on include implementing a desking tool to provide our customers a more transparent negotiation process, while at the same time increasing our closing [ratios] and gross profit per vehicle retail.

We also are working on increasing our used vehicle sales through a focus on sub-prime customers. While we have pockets of success today, usually driven by the presence of a talented individual, we plan to systemize our process and success, and roll out a dedicated sub-prime program across more stores.

And the last initiative I will share today is creating a training culture. We spend significant resources on training today, but there is an opportunity for us to add more structure to our processes, ensuring all key employees receive the right targeted training throughout their careers. We envision both live and Internet-based training, where we share a common Internet-based backbone across all our stores. We're still early in the formulation stages of some of these projects, but I will keep you updated on our successes as we progress.

Looking ahead, we are strongly committed to our business model. The combination of centralized back-office and infrastructure functions, with market-based decision-making at the local level, fosters the entrepreneurial spirit of our talented, high-performance employees, while providing us with cost leverage opportunities across the organization.

The environment we have created at Asbury empowers each individual in the organization to perform his or her duties in the best way possible, and then surrounds those individuals with processes designed to improve the effectiveness of their efforts. Simply put, our results have proven that this strategy is working.

I will conclude my remarks today by again saying how pleased I am to be stepping into this new role during such an exciting period for Asbury. There have been a lot of operating initiatives that have contributed to the strong financial results, initiatives the management team has implemented over the past several years, such as the used vehicle team approach, capacity expansion and equipment investments in fixed operations. All these programs have contributed to our growth, and with our current operating initiatives, well-positioned balance sheet, and high-performance professionals throughout our organization, I'm very excited about the opportunities ahead of us in 2007.

Now we'll be happy to take any questions you may have. Operator?

(OPERATOR INSTRUCTIONS). Paul Swinand, Stephens Inc.

I'm on the call for Rick Nelson, who is out today. Congratulations on the quarter. First, I want to -- wanted to ask -- any comment on the current environment? Obviously, the North is getting hit with lower traffic due to weather, but that's not going to affect you guys too much. Any comments at all on customer traffic and just trends you're seeing?

There have been a few days in a couple of our areas that we have suffered from some weather systems. But overall, what we've noticed is traffic is similar to last year; indicates to us that we may be in a period of flatness. But traffic is surprising. We'll have traffic strong over a weekend, and then Tuesday and Wednesday in the next week it'll be flat. But on a balance, we're seeing similar to last year.

Just to recap, you said your SAAR assumption is flat with last year?

That's correct. On a retail basis. That would mean on a total basis it probably is down a couple of percent. Most of the SAAR that you see coming down, I think 16.3 is about where everybody is averaging out from the 16.6 this year. That's mostly going to come out of wholesale in our fleet, in our estimation. So we are expecting retail SAAR to be about flat.

Great. A question on the midline imports. You did mention that they are -- that inventories are up a tad. Any outlook for margin pressure this year in the midline imports?

If you look at last year where they gained share, we maintained and, in fact, gained a little margin on our midlines. So, we are not -- we haven't experienced any, and we're not seeing any at this point in time. So we're in good shape with our inventory, the mix of what we have, so we're not seeing that pressure.

A question on the SG&A, as you made some nice -- you continue to make nice improvements, and I thought that statistic about the shared back-office as you convert to the common DMS system was very interesting. You're at 58 now. How far will you be at the end of 2007?

In 2007 at least 75% of our stores will be shared.

So, you've still got some improvement, both 2007 and 2008, just from that shared back-office?

Exactly. There's some stores that -- we look at things on a geographic basis, and some stores are stand-alone, so there won't be as much of an opportunity to combine those. But 75 to 80% is certainly a doable number that we're -- we're attacking at this point in time.

So would it be fair to model similar SG&A improvements in this coming year, as you've seen in the past?

As you know, these kinds of productivity improvements tend to go in kind of more step functions. This year will be, my estimation, more in the 40 to 50 basis point range. As we transition over to a single DMS, that's going to eat into some of our productivity improvements. So this year I'm looking at more of that 40 to 50 basis points range. Then for 2008, seeing a little more of a step up.

Kelly Dougherty, Calyon Securities.

I'm just thinking about your acquisition plans. And given that you're paying a pretty healthy dividend, you've got the buyback and now the share repurchase plan, does the pullback in acquisitions mean you guys are just not seeing things at valuations out there that you think are justifiable? Or is it that you're kind of attaining a balance where you're pretty happy with your 80% import and luxury brand mix?

I'll take it first. Charles, feel free to chime in. 2007 -- I would characterize as being patient in 2006. Valuations were pretty [frothy] in 2006, so we kept our powder dry, looking for the right opportunities. The right opportunities are starting to come to the forefront, and we will be very active in 2007.

So I think that patience, quite frankly, has paid off. We've got 250 million of capital available to us for acquisitions. You mentioned those other pieces; that will not interfere with our acquisition plans. The dividend will come from operations on a current basis. And the buyback, quite frankly, is a blip on the radar screen.

Do you guys have any numbers around acquisition targets for 2007?

We're going to take what the market gives us. If that's -- if the prices are too high, we won't participate. But if they're at prices that we see our returns, we'll do as many of those deals as we can. I'm not going to set a member. Our financial model says two to four deals a year. But if there's 10 deals available that we like, and it's the brands we like and geographies, we're going to do 10 deals.

Without levering up, you guys are still going to balance that against the 40% debt-to-capital target?

(inaudible). The only time that I'll come off the 40 is if the market presents us with deals that we're getting a strong return on that investment, I'll do that. So the 40% is assuming an average kind of an acquisition year. However, that will be the trade that we look at. So, it may slow down our 40%, but that's -- it would be because we see deals that we want to invest in.

Great. Thanks. You talked about a flat overall retail sales environment in 2007. I'm wondering if I could get some thoughts on what you guys are thinking on the used vehicle side of things, and then just in particular on the market, if you're concerned about the pickup segment's correlation to housing, and whether you're still remaining bullish on the premium luxury segment as a more stable segment of the market.

We see tremendous opportunity still on the used vehicle piece. There's 40-plus million used vehicles sold a year, and that is divided up into a number of different categories. We believe with the processes, and as I mentioned a little earlier, one of our initiatives on the sub-prime, that gives us an opportunity with some of our stores that are not in that market right now.

Some of our stores are doing an excellent job with it, so it's not as much an opportunity there. But overall, we believe that we can -- with our processes, with our software, with our used car teams, with the experience level that we have at our local dealerships, that we have the opportunity to continue to take share from not only the independent used car dealers, but as well as some of the other franchise dealers. So, we still see that as a great opportunity for us. The luxury market -- we're still very bullish on the luxury market. That sector seems to be -- continue to grow.

[How about] pickups?

Pickups -- I think that the new introductions that we're going to have this year will help that sector. Housing in some of our markets is a little slower right now, but we are seeing some robustness in other areas. Robustness may be the wrong term to use, but we're seeing some activity. But I think that the balance will be with the new entries in the pickup level.

Thanks. One more quick follow-up. The sub-prime, you said that some regions are more focused on it than others. Any particular areas where you're focusing on that now?

We have -- it's a mature business for us in some parts of Texas. Arkansas is getting some new lenders in the state, which helps that state. They were limited in the past, so we have an opportunity there. There's some of our stores in our Atlantic region, North Carolina, South Carolina, that they're focusing on. There's some opportunities in Atlanta and the South region. So, anywhere we can find that pocket of opportunity, we will look for it.

Thanks very much. Congratulations.

(OPERATOR INSTRUCTIONS). Rich Kwas, Wachovia Securities.

I wanted to check in on the F&I, just get a little more color. I think, Charles, you mentioned there was a contract renegotiated with a service provider. I assume that's onetime. But, could you give a little more color there?

No. It really -- it's reduced our costs. So it's worth about $33 a contract for the fourth quarter. That is something that was started in May, and will sequentially reduce -- or increase our F&I PVR between $30 and $50.

That's ongoing.

Just a follow-up on the sub-prime business. Given the struggles with the housing market, with lenders out there having to write off loans in the housing -- with housing loans, what is your sense for the auto market right now and where we are with sub-prime lending, given that this is going to be likely an increasing percentage of your business? Where are you right now in terms of percentage of used units that are sub-prime customers? And where do you think that eventually goes, and how do you balance the risk?

Right now we have about a fourth of our used vehicle sales are from sub-prime. We see the opportunity there increasing on a number of different levels.

Number one, for the reasons that you mentioned, that that market itself is growing. And there are more lenders getting in that market. And then, with our initiatives that we are putting focused towards that market, in that when some customers come into the dealership today, they're not aware that they really are a secondary finance customer. And being able to understand how to transition that customer from a primary lender to a secondary lender is part of the skill set that we will be developing in the organization.

So, we see it as being positioned right in the marketplace. Having the availability of inventory, looking specifically for the inventory is one of the other keys, because the inventory needs to match that market as well, as well as the lender. So, by being able to put all of those pieces together, we will grow as that market grows because of other outside reasons out of our control.

This sounds more of like an opportunistic -- you're going to be fairly opportunistic, rather than mandating this across the portfolio of stores.

Yes, that's true. What we really enjoy about our kind of operating initiatives, really, is that each of the local -- by being market-driven locally, each operator can really decide what they need to increase and continue to grow their business. So by having this available and supporting them whenever they move into it is what makes it successful, because it's a choice that they make, as well as having all the processes available to them.

Because in some stores, quite frankly, it doesn't make sense to have a sub-prime lending initiative. For instance, in a Lexus store down in Roswell, or our Galleria store down there, it doesn't -- it's not that that customer is not going to go to that store. So it's in the stores that we feel there is an opportunity to develop a sub-prime market.

Finally, Charles or Gordon, could you just comment on the -- on the Florida market, you talked about building your used inventory. And you were able to capitalize that, and that offset some of the weakness on the new side. Is that a strategy you're going to use here in the first half of '07? Is this kind of something we should be looking at as at least a near-term way to offset any new vehicle weakness?

That's actually the way that we -- our model works, because we can respond to local conditions as necessary with our business lines and the way that we focus on them. So, having that opportunity in Florida, where they read the market and felt, and with their experience, that it would slow down, they early on started acquiring inventory and shifted some of their advertising dollars to you. So they were able to capitalize on what the market was giving and, in response to that as well, maintain their profitability. So, absolutely; being able to respond to those kind of market conditions is exactly what we'll be doing.

I would remind you that when we've been out talking about the business and the four pieces of the model, we always talked about the used being a little countercyclical to the new, and that's some degree of what you're seeing. SAAR was down 300,000 units in 2006, yet we were able to increase our used business. So, it's working the way we had anticipated.

Gordon, last question on acquisition market here and where we are. Valuations -- you indicated things are becoming a little more reasonable. What do you think is driving that?

To some degree it's what everyone has available under their framework agreements. And when you have some of the more valued assets, if you will, you want to keep your powder -- you want to keep your powder dry. And you're going to be very selective in the deals you want to do. So, to some degree it's -- the governor is the capacity that we as public retailers have available to us.

So you think the market -- the buyers are just more rational, relative to, say, a few years ago?

I would say somewhat, yes.

Matt Nemer, Thomas Weisel Partners.

My first question is just coming back to the finance, the F&I contract change. Is that on finance contracts or service contracts? And has there been any change in chargeback terms, or anything that we should be aware of on that front?

No. It's service and -- no. There has been no change in our chargeback ratios.

Secondly -- and maybe this is a question for Charles -- but on the midline import inventory, it seems like we ended the year up about 30 -- 25, 30% for the industry versus sales growth. I don't have the retail numbers, but I'm assuming it's maybe half of that. Does that -- what are your thoughts on that? Does it concern you that the midline imports are sort of building inventory in the channel at a rate much faster than sales growth? Or do you think it's a short-term issue?

I would -- most of the imports adjust inventory. As the sales rate improved and they produce the inventory, and we earned more inventory with our turn rates, we're kind of in a position -- right now we look at it as an advantage going into the spring months, that we have the inventory that we expect to match the market. So we -- at this point, I'm not concerned about it yet.

Lastly, this is just more of a curiosity, but have you picked a vendor on the desking tool product that you're looking to roll out?

We have. We're reviewing a couple vendors right now. We have been testing the Reynolds desking solution, but we are looking at one or two others.

Rod Lache, Deutsche Bank.

First I want to congratulate you guys on a nice job, and wish you a happy retirement, Ken.

Thank you. I'm still here, by the way.

It's hard for him not to speak.

A couple things. Do you have a longer-term target for where you think SG&A to gross could go?

Longer-term meaning three years, or --?

Beyond 2007 is there like an objective level that you have your eyes set on, or is it sort of like an annual 40 basis point improvement per year?

I think this year it's going to be in that range. I think once we get through some of the process changes then [of] going to a single DMS, I think there's opportunities to leverage off of that to produce maybe 80 to 100 for 2008. And at some point it does -- it slows down a little bit, and it'll be more dependent on the growth of the business than -- and leveraging off of that than actual cost takeouts. But this year, 40 to 50; 2008, I would say 80 to 100 is where I would be looking.

That's quite a big jump. Can you maybe touch a little bit on what's driving the margins in the parts and service business? That's quite a big year-over-year improvement.

Sure. As we talked about early on, we talked about really making sure that we keep the customer from the entry point of buying the vehicle, and keeping them coming back to our service facility. And so, we undertook some very low-margin business to do that, with the expectation that when it started to mature a little bit, you would see the customer come back for the more -- the more complicated work. And that's what we're seeing. So, we had anticipated early on in this year that we'd go down, and that by the end of the year we'd see some good improvement. And as you'll notice that for the year, we're about the same margin as last year, up 10 basis points, so that directionally, we're seeing what we had anticipated when we undertook those programs. So, our customer pay is up about 9% this year. And that's driving some of it as well.

Just two more things. Do you guys have a target for what you think the new-to-used ratio could be or should be in the long run? And on these discontinued operations, do you have -- I assume these are assets held for sale. Do you have some expectation for proceeds and what these businesses are worth?

I'll answer the last one. We had -- we sold two of them in December, and the other two were sold at the end of beginning of February. They're relatively small stores. I think the net proceeds were around $3.5 million to $4 million in those. So, it mostly was done last year.

When you grew up in the business like I did, we always think in terms of one-to-one used-to-new, or new-to-used -- however you want to say it. I'm not sure that with our -- with the luxury stores that we have that we can quite reach that number. But, we're at 1.7 now. And the tighter we can move that down -- we don't have a target on that as much as we do -- that will happen by being able to execute the initiatives we put out. And as we find different markets and different strategies, we will be able to move that number closer to that one-to-one.

Still a lot of room left to go on shifting that over.

Yes. That's the exciting part, by the way.

(OPERATOR INSTRUCTIONS). Jerry Marks, AutoRetailStocks.com.

Ken, best wishes, and thanks for having patience with guys like me who didn't always understand the Asbury story.

I appreciate the kind words, Jerry, and I'll have to give you my other e-mail address so I can continue to get your daily missive.

Charles, I had a question. Are you going to have somebody step into the COO role? How do you see kind of the balance now? Where, I guess, for the last nine months you've been focused on the operations, Gordon has focused on the finance, and Ken was kind of balancing things out in the middle, how do you see the structure of Asbury going forward?

We won't be replacing the COO role. With the team that is in place to help support me move into the CEO role, and with the operational experience that I have, that role really won't be necessary.

Gordon, you mentioned the transition to the DMS kind of dragging on your guidance this year, your SG&A improvements. Does the guidance include any termination charges you're going to have with your old DMS contracts?

It includes $0.02 to $0.03 for the transition costs over to the new system. And the way we timed it is that it's working almost with the end of the old contract. So there shouldn't be any termination [costs associated with it].

The last one. I don't know if it would be Ken or Charles who would answer this, but a few years ago you guys set in place kind of a management training recruiting-type program [with] college people, and I haven't heard about that in the last year or two. I was just kind of wondering, especially now, as attracting talent in the space is becoming such a big issue, where you guys stood with that, and if you've had any success with that program that you did several years ago.

That program is an excellent program. We have had some success with it. We have not utilized it in the last year or so for various reasons. But it is one of the initiatives that we expect to revitalize and get the benefit of it. We've learned some things that we can do better with that program, and it is an excellent program. And we find a lot of very bright young people that really love the business once they see the story.

But in terms of things you learned, is it just that they weren't ready when they came into the dealership culture, or --?

Part of it was our lack of execution. These type of initiatives are learning curves when you put an initiative like this that is not normally in the operational side of the business. So, part of it was some of the selection process, part of it was the execution process on our part, and the inability to integrate these people into the organization.

On the other hand, where we did those things right, we did choose the right people, we were able to do it efficiently and effectively on getting them integrated in the organization, we have some managers now that have gone through that program. So we've learned from the program, and we will be much better positioned today to be effective with it.

Got you. So it's the selection process that [you also have to] kind of change.

That's part of it.

That's all I had. Best of luck again, Ken.

Thank you.

Darren Kennedy, Goldman Sachs.

I'm here with Matt Fassler. I have a quick question on guidance. Does that incorporate acquisitions? I'm not sure if that's [you guys'] normal convention.

No, it does not.

Okay. And actually -- and as far as acquisitions go that you're thinking about this year, you said that they need to meet certain criteria in terms of returns and brand mix and geography. I was wondering if you could give us a little detail on brand mix and geography for anything you'd be -- if you had a wish list.

Our objective is to get a 15% return on invested capital. We say an average of three years. Domestics, if we're going to purchase domestics, we'd like -- we want to see and have visibility to that in the first 18 months. If it's midline imports, we may grow into it. It may take a little longer, four years or so, to get there.

As far as geographies are concerned, right now we're looking at just filling in across our business. Not looking to expand beyond our geographic -- our geographies today. And as I remind you, most of our geographies are growing at twice the national average. So we're in the right markets today, and we'd like to just fill in with specific brands in our regions. What was -- the third part of that was how many?

Actually, I think that was it. I was just to looking for what you were thinking of in terms of brands and geographies. Thanks very much.

Okay. By the way, I should say there are some good domestic acquisitions out there that we will be targeting. So, with our brand mix, we're not looking to change our mix that much. But opportunistically, there are some good deals out there on the domestic side that we can -- with our processes and technologies we can improve pretty dramatically. So we'll be looking at those as well.

Paul Swinand, Stephens Inc.

Quickly, somebody mentioned the word risk when referring to the sub-prime lending initiative. Just to be clear, there is zero financial risk in that. And the only risk would be operational, correct?

Yes. Right.

We're not taking financial risk, no. But the processes around sub-prime, you have to be really tight on your processes. In the industry, (indiscernible) the old dealers will tell you that the sub-prime market, if you're not -- if you don't have real good controls, there is risk associated with doing that business. So we have developed very strong processes within that, so that we're very comfortable that we'll do it, and we'll do it in a way that mitigates the risks that are inherent in that product or that customer base.

Okay. Real quick, I know -- I think we're all comfortable with the fact that everybody has disc ops, but we have had some questions on the $0.10 being a little larger than normal. Is there any additional color on why the amount of EPS in disc ops was a little higher?

I'll remind you that because of the accounting conventions that are in place, it's net $0.05. There is $0.05 from the disposition of a franchise up in continuing ops. So net net, it is $0.05. It ends up sometimes the vagaries of accounting allocate more goodwill to the discontinued operations than the actual store should; it's just the percentage of revenue-based calculation that is somewhat arbitrary that causes some of that. But, I'd just point out that it's net $0.05, not $0.10.

Peter Siris, Guerrilla Capital.

I actually just have a comment. Unfortunately my chair just broke as I was picking up the phone, so I apologize. The comment I wanted to make is for Ken, who I know is leaving. I've been a long-term shareholder and follower of this industry. And when Ken first showed up there, I would say virtually everybody in the industry, from competitors to analysts like Jerry -- Jerry Marks, who was kind enough to make his comment before -- basically couldn't understand why I guy coming from the -- how a guy coming from the clothing business could manage an automobile company and automobile dealer. And I just want to say as a long-term shareholder that you proved them all wrong, Ken, and congratulations.

Thank you, Peter, and bless you.

We agree with that, Peter.

Paul Carey, Fountain Capital Management.

Peter stole my thunder a little bit, because I had that same not-a-car-guy-criticism-overcoming comment to make. But, I also did have a question for you, Ken, and that is -- as you've seen the environment change a little bit, especially as it concerns the domestics and trying to shrink the domestic dealer base, could you talk about what you see in that environment right now? And especially given kind of the direction that you guys might be going in terms of looking at domestic investments right now, what are the manufacturers offering, doing to help facilitate that process of shrinking that base in an effective manner?

The factories are in a bind, because the state franchise laws won't allow them to do what really needs to be done, which is to rationalize their channel. That said, where it makes sense, there is money available, perhaps at times not as much as the dealers would like. And so, some of the dealers are going to have to experience more pain. And that's unfortunate.

I do think that some of the mathematics that some of the people have written about in Automotive News, for example, were silly. Just to use ratios that are similar to what Toyota has, to say that 50, 60, 70% of the domestic dealerships should be closed; that is ridiculous. We've taken advantage of money that the factors have altered. We've bought Buick franchises to combine with Pontiac and GMC. We've turned back Pontiac, Buick, GMC. All of these combinations are possible, and sometimes with more factory help than others. What you need to be is flexible.

As Gordon said, there are wonderful opportunities to acquire domestic franchises, provided you're coming off a very strong base, the way Asbury has. We're 80% luxury midline imports, which means that we are where virtually everyone else wants to be, so we can acquire those strong domestic stores. And let's not forget, Chevrolet brought in -- which, as Charles was alluding to -- a brand-new truck series this year. And the Silverado is a wonderful vehicle. So, yes; there's great opportunities out there, and I think Asbury is going to be taking advantage of them.

Thanks, Ken, for your sense of humor and no-nonsense demeanor over years. Appreciate it.

Pleasure.

Grange Johnson, LaGrange.

This is really more for Ken. I know that Peter Siris just said it, but I had a different take. I thought it was excellent that someone not from the car industry was coming in to run Asbury. I thought that was -- the industry could use some fresh thinking. And Ken not only executed and led us all to the promised land and made us all a lot of money. So I just wanted to thank him. And, I think, not often enough do investors thank CEOs who do a great, great job. I'm sorry to see you go, Ken, but you really built one hell of a business. Thank you.

I appreciate the kind thoughts, Grange.

At this time there are no further questions.

I will sign off the call, then. Thank you very much for joining us, and we look forward to our next conference call with you at the end of the first quarter. Bye bye, everyone.

That does conclude today's conference. We do thank you very much for joining. Have a wonderful day.