Asbury Automotive Group Inc (ABG) 2007 Q3 法說會逐字稿

Good day and welcome, everyone, to the Asbury Automotive Group, second quarter 2007 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 Vice President of Finance and Investor Relations, Mr. Keith Style. Please go ahead sir.

Thank you. Good afternoon, everyone, and thanks for joining us today. As you know, this morning we reported our third quarter 2007 earnings. The release is posted to our website at www.asburyauto.com. If you don't have access to the internet or would like a copy of the release faxed or e-mailed to you, please contact Gail [Claudico] at our corporate office. Gail can be reached at 212-885-2520.

Before we start I'd like 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 companies 2006, 10-KA report as well as other filings we have with the SEC. In addition, certain non-GAAP financial measures, as defined by the SEC, may be discussed on this call. To comply with SEC rules, reconciliations of non-GAAP financial measures have been attached to this mornings release. We also from time to time, update the website with additional financial information. So, any interested party should check the website periodically. The purpose of today's call is to discuss Asbury's third quarter results. Our agenda will be as follows. Charles Oglesby, our President and CEO, will begin with a few introductory comments. Then, Gordon Smith, our CFO, will add some financial highlights. Charles will finish with a few concluding remarks, and after that we'll be happy to take your calls. Now, I would like to introduce Charles Oglesby, our President and CEO. Charles?

Thanks Keith, and good afternoon to everyone and thanks for taking time to join us today. As many of you are aware Asbury has delivered excellent results over the past 11 quarters. Our past performance has been largely achieved for growing our high margin businesses,used vehicles, fixed operations and finance and insurance. And during the quarter we have continued our growth and fixed operations and F & I. In addition, our performance in new vehicles, considering the retail environment. To some extent we have set ourselves up with some pretty difficult comps, particularly in used vehicles. I'm sure there's concern regarding our used vehicle operations and I will address the cause of the third quarter decline, the actions we have taken, and what we expect in the future. In addition to our solid performance in new vehicles, fix operations -- at F & I, we have positive momentum on several other fronts. With our latest acquisitions we have now acquired 350 million in revenues this year exceeding our target of 200 million. And with the progress of our share repurchase program we have now returned almost 50 million in capital to our shareholders this year.

We have also entered into a partnership with deal track and plan to convert all out of our stores to [Arcona DMS] And let me be very clear. While I'm disappointed in our performance in used vehicles this quarter, I have the utmost confident in our team, our portfolio of stores, and our model. Looking at the overall results EPS from continued operations was $0.58 up 7% over $0.54 last year. And Gordon will discuss the results in greater detail in a few moments. But adjusting last years performance for non-operating items, we were down slightly on an EPS basis with EPS being $0.59 last year. Our results were heavily impacted by the challenging retail environment in many of our markets in both new and used vehicles. The pace of the quarter was inconsistent from an industry perspective with weak new vehicle sales in July and September surrounding a relatively strong August such that the industry's overall US light vehicle unit sales were down over 5% for the quarter.

Asbury's performance in new vehicles, again benefited from our favorable brand mix and we significantly outperformed the industry with new light vehicle unit sales down just 2% on a same store basis. Our heavy truck business, again, weighed down our performance in the third quarter, down approximately $0.02 on an EPS basis. For the year to date, the heavy truck business is down approximately $0.06 of EPS and as we've discussed, this business benefited significantly in 2006 from an increase in sales ahead of tighter emission regulations that took effect last January. Our new heavy truck unit sales for third quarter were down 25% and the related gross profit was down 28%. Industry analyst were initially projecting a turn around in the heavy truck market during the third quarter. But now that turn around has been pushed out as far as the second quarter of '08. In response to the slower market, we have reduced support personnel, revised pay plans, and brought both new and used heavy truck inventories in line with the market. However, we expect to experience negative bottom line comps in our heavy truck business, at least through the end of the fourth quarter.

Turning to used vehicles, we have enjoyed industry leading results over the past couple of years, where third quarter gross profit improvements of 29% in '05 and 11% in '06 making our comps there very difficult. A portion of the improvements, in our past performance, was related to weather events in some of our markets. But a substantial portion of the growth was a result of our focus on technology and our used vehicle teams. With respect to this quarter there are several factors that lead to our reduced sales volumes. First, the post Katrina hurricane impact a year ago, made difficult comps this year in our Mississippi and Houston markets. Which experienced a used vehicle gross profit decline of 21% on a combined basis. Second, weakness in our Florida markets spilled over from new vehicle sales into used vehicles. And as we've discussed several times over the last year, our Florida management team has done an excellent job offsetting weaknesses in the new vehicle market, by growing the higher margin brands.

In the third quarter, however, the continuing decline in the states retail environment, finally took its Toll on the performance of our Florida operations with the used gross profit down 13%. Despite the current weakness, our long term view of the Florida market is favorable and demographic trends remain positive. And finally, our subprime initiatives have been instrumental in driving gains in used vehicles. And in fact, due to our past successes in the subprime market we might say that we placed a bit too much emphasis on subprime. And there are certain components that need to be in line to put together a subprime deal and in the current market, we're seeing pressure on the model in several areas. The customer is more cautious and the lenders are making sure all the I's are dotted and the T's are crossed. These issues, in combination, have led to reduced sales volumes as well as pressure on margins. And I'm happy to report that our used vehicle teams have made progress in aligning the inventory to the current market, reducing our used vehicle inventory by 5%. But, we're not finished.

We'll continue to focus on reducing our used vehicle inventory into the fourth quarter. And, however, given the current market conditions and our difficult comps, we expect used vehicles to be flat to slightly down during the fourth quarter and into the first quarter of '08. A bright spot in the quarter with a 2% increase in same storm F and I income. Finance and insurance, remain a bright spot in the quarter. With a 2% increase in same store F & I income. F & I, on a PVR basis, increased 9% or $81 to $989 PVR. The continued improvement from a year ago reflects increased sales penetration of our warranty and insurance products. And an increase in the average length of finance contracts.

We continue to look for opportunities to grow our F & I income further and continue to focus on improving the performance of the bottom third of our stores. In the third quarter, we were able to raise the low tide substantially with the bottom third of our stores improving 24% on a PVR basis. Our fixed operations, again, turned in solid results with same store revenue up 2% and gross profits up 4% for the quarter. The overall gross margin in parts, service and collision repair improved 110 basis points from a year ago. The warranty business remains soft with a 9% decline in same store gross profit.. And as you know, the declining warranty business is an industry wide trend reflecting the higher quality of newer vehicles. In response, we have sharpened our focus on billing our customer pay business, by providing up to date, comfortable facilities, quick personalized customer service and additional service pay capacity, to accommodate the continuing growth in vehicles on the road amongst our luxury and import brands. We have focused and continue to focus on encouraging our customers to keep come back to our dealerships for all their service needs, even after they are off warranty. Our results in the customer pay business reflect these efforts with same store gross profits up 7%.

During the quarter we acquired a Honda and Dodge dealership in the Tampa area. In addition, in October, we acquired a BMW mini dealership in Princeton, New Jersey. While we generally acquire stores in our existing markets, under our tuck in strategy such as the stores in Tampa, our points of life strategy allows us to reach outside our markets for large well run luxury franchises. The Princeton is an example of what we would look for as a point of light, dealership. A high volume, luxury franchise with an exceptional facility and solid management. As is our typical approach with adding domestic franchises, the Doge acquisition is a strategic cost play. As our existing Chrysler Jeep franchise in Tampa will soon be moved into the better located dodge facility. As I mentioned earlier, our acquisitions for the year to date now total approximately 350 million in analyzed revenues. Substantially exceeding our target of adding at least 200 million in annualized revenues from acquisitions. Another highlight, was the announcement earlier this month of our partnership with Dealertrack to convert the dealer management systems and all our dealerships to its [Arcona DMS] platform over the next three years. Once fully implemented, we expect this web based technology will reduce our direct DMS costs by as much as 70%.

The transition to this new technology has been planned to minimize the risk of implementation and takes in to consideration the obligations under our current DMS agreements. And we currently have three stores and pilot programs and the transition to the new technology and the training of our employees has gone very smoothly. We're very satisfied with the support we have received from Dealertrack in all aspects of the transition. Dealertrack shares our vision for having a fully integrated end to end technology solution for our stores and our customers. Our (inaudible) DMS systems are open to integration with other technology vendors, which will enable us to integrate tools like our desking solution, CRM used vehicle inventory management and F & I menu selling to create a totally seemless (inaudible). We believe this will generate significant efficiencies, increase the productivity of our employees and speed up the entire deal process and enhance the consumer car buying and service experience. And now I'd like to turn the call over to Gordon Smith to review our financial performance in more depth. Gordon?

Thanks, Charles, good afternoon everyone. Income from continuing operations increased 5% for the quarter to 19.2 million or $0.58 per share up from 18.4 million last year or $0.54 per share. As Charles mentioned when you take into consideration the impact of non-operational charges disclosed last year which totaled $0.05, EPS for the quarter, was down slightly. Our bottom line performance was aided by a tax benefit which I will address in a few minutes. However, it's important to note that the tax benefit was almost fully offset by nonoperating charges in SG&A during the quarter. This quarter marks the first time in nearly three years that we were not able to deliver productivity on our adjusted expense ratio. Obviously in a difficult retail environment, particularly one characterized by inconsistent pace of business, it was a challenge for us to react to conditions in our local markets. What the numbers for the quarter do not reveal, is that the actions we took late in the quarter with our regent management teams reducing our advertising plans by more than 10% and performing an in-depth review of our dealerships staffing levels, to ensure that we are properly positioned to head into the slower selling season. SG&A expenses on a comparable basis declined 160 basis points to 77.1%.

However, as I mentioned earlier, our results for the quarter included 1.8 million in charges related to abandoned real estate development project and a legal settlement costs, contributing 80 basis points or nearly half of the deterioration. Excluding these items our SG&A deterioration dropped to 80 basis points which can be largely attributed to the reduction in retail sales. Many aspects of our variable cost structure improved during the quarter with personnel expenses down 30 basis points, sales person compensation down 50 basis points and F & I compensation down 60 basis points. All of these are considerable improvements over last year but not enough. As increase in gross profit did not offset the increase in our fixed expenses. As Charles mentioned, transition to the [Arcona DMS] has already begun starting with our next call we'll provide you with details on our progress, including the numbers of dealerships, transitions, costs incurred and a forecast of future costs and benefits associated with our transition. On average the payback on this transition cost is less than six months and total annual savings, once fully implemented are currently estimated at $3.5 million.

The last item I would like to address on our results is the benefit to our tax rate. As you have heard us discuss on prior calls, we have continued to make progress in our back office consolidation efforts, including our national payroll system. We are beginning to reap the benefits of our efforts in this area, as the national payroll system has allowed us to accurately report worker comp opportunity credits, especially the Katrina credits. One of the principal drivers of our tax rate benefit. In addition as a result of the tax reorganization, we were able to utilize some of our (inaudible) further reducing our rate. As a result, our effective tax rate for the quarter, was 32.3% compared to 37.5% last year. Planning for the fourth quarter we expect the tax rate to come in around 37.3%. Turning to the balance sheet, cash and cash equivalents totaled 41million at the end of the quarter, compared to 129 million at year end 2006. We have used our cash to fund our acquisitions activity and buy back approximately 50 million of our stock. During the third quarter we invested 12.1 million in facility expansions and real estate. Bringing our total investment for the year to $41million. For full year of 2007, we expect capital expenditures to total approximately $60 to $65 million of which $15 million is reserved for maintenance CapEx. The remaining balance will be used to new facilities including real estate and capacity expansion. We intend to finance between 50% to 60% of these expenditures through sale lease back transactions.

We have made substantial progress in improving the debt to total capital ratio over the past few years. However, during 2007, we have aggressively repositioned the balance sheet and have been actively repurchasing our stock. Both of these activities have resulted in increases to the debt to total cap ratio. With our debt refinancing at 120 basis points and our share repurchase program adding 210 basis points. Our debt refinancing completed in the first half of the year, served to reduce our average cost of debt 200 basis points from 8.6% to 6.6%. On our share repurchase programs, we have bought back approximately 6% of our stock through the end of the third quarter or 1.9 million shares. Under our current share repurchase program, we repurchased 638,000 shares in the third quarter at an average price of $21 per share. And through today, we have repurchased approximately 1million shares at an average price of $20.50. As a result of these activities, our debt to total cap ratio currently stands at 45.6% and taking into consideration current cash balances, the net debt to total cap ratio is 43.4%. The capital structure remains solid with almost 95% of our long term debt obligations fixed.

Nothing outstanding under 125 million revolving credit facility as of the end of the quarter and approximately 50 million available under our used car facility. Looking at new light vehicle inventory, DSI, based on selling days, was 64 days, up 7 days versus last September. And overall inventory up 10%, a disappointing result. By category luxury brands rose 4% to 53 days while luxury inventory in total was up 19%. Midline import brands were most affected by the weak new vehicle market as DSI rose 11 days to 60 days. Overall midline imports inventory was up 18% largely due to our inventory mix. Honda, which is up industry wide over 25% is the largest component, of midline imports for Asbury. Lastly, midline domestic brands were up to 18 days to 100 days supply, versus last year. However, overall inventories were down 8%. With respect to the dealership portfolio management we continue to evaluate our lowest performing stores, for potential disposition. Currently we have identified three small stores that we will be placed on the market during the fourth quarter. The capital released from the sale of these dealerships will be put to use in other areas of the business where a better (inaudible) is available.

Turning to guidance for the year we have lowered our previous EPS guidance range of $2.20 to $2.28 to a range of $2.10 to $2.18 from continuing operations. The reduction in our guidance reflects our third quarter performance, continued softness in the heavy truck segment. Lower expectations for our used vehicle business and further softening of the Florida market. This range excludes costs associated with the debt refinancing and the retirement benefit paid to our previous CEO which we recorded in the first half of the year. I'll turn the call over to Charles for closing remarks. With that, I'll turn the call back over to Charles for some closing remarks. Charles?

Thanks, Gordon. In summary, I'm satisfied with our performance in light of the challenges we face during the quarter as our balanced business model provide a considerable stability during a period of weak retail sales. As a management team we have taken aggressive steps to insure that we are well positioned for future success and I remain confident that our operating model, which allows our regional management teams to react to local market conditions, while enjoying the savings of our shared infrastructure, will continue to prove an effective approach to managing a large automotive retail organization. And I would now like to turn the call over to the operator for questions.

Thank you very much. The question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We will pause for just a moment to assemble the queue. Our first question comes from Edward Yruma with JP Morgan.

Hi, thanks for taking my question. Charles, I know historically you've prided yourself on having at an operationally decentralized model and given some of the inventory pressures are you taking more of that control in-house and providing some governance to that?

Edward, the inventory is certainly a concern for us. As midline inventories rise. I would say that our model has always been great communications with our local CEO's. There are much more familiar with the needs in their local markets. Overall as an organization, we will look very favorably at reducing our inventories. So, the communication style has not changed. But from a local standpoint, the opportunity for reduction of inventory -- they will take advantage of it.

Got you. And help me understand a little bit about your comments around subprime and some of your historic successes there and maybe some of the weakness you are not seeing. I couldn't help but notice when I was in Florida recently, that they were very heavily advertising some of the subprime promotions with your [cogging] group. When did you start pulling back on that business in the quarter? And how long do you expect that to persist for?

Well, the subprime market is being affected in a number of different ways, Edward. That market traditionally is a solid market. There are some unique events that are going on now. Part of it is that the fleet inventory that was returned to the market is now a lot less than it used to be. So, that market is more expensive. So, when you have -- normally you've got to have the right customer with down payment with a substantial amount of down payment and the lender looks to be behind book with their inventory. Those conditions are really not the same today. That's a part of it -- where it's down. We're also finding that from a subprime customer, that their cash is a little less today. Their disposable cash is going into other areas, higher gasoline, grocery, mortgages, different aspects of their budget. So, in the past they may have been able to afford, lets say a $275 payment. Well, today they can afford a $210 payment. So, that puts pressure on the margin as well as the type of vehicle that you have available for that subprime market. We are -- that is still a major part of our business. But part of the inventory positioning, we may have been out of alignment with that. So, we're repositioning some of our inventory now so that we can look at, kind of the traditional prime market and continue in the CPO market as well.

Got you. One follow-up if I may. I think you've historically said subprime is about a third of your business, is that about right? And is that the piece that was entirely affected? Or is it a smaller subset of that subprime bucket? Thank you.

That's still is about the same size of our market. However, each piece has been impacted by that. But the subprime we certainly did not -- I don't think we took as advantage of much of it as we have in the past.

It was -- this is Gordon, it was 30% of our business this quarter. One could argue given the emphasis that we put on that business, we would have expected it to be a little higher than it was. But that didn't materialize.

Got you. Thank you very much.

Thanks Edward.

Moving on we'll hear from Rod Lache with Deutsche Bank.

Good afternoon.

Hello Rod.

A couple of things. Just looking at the margin deterioration in the used business. When you said that used would be flat to down in Q4 and Q1, were you referring to units or revenue or gross profit? How should we be thinking about the outlook for that business?

Well on a comp basis, we expect that we will be down. There has been margin pressure on used throughout the year. And a part of that is because of the wholesale market being up some. So when -- we have stabilized on our comps. We have very strong comps in the past, we have been as high as 12% to 12.1%. And last quarter I believe we were at 11.6%, so, we improved, from a low of 11% back up to 11.6%. We're expecting continuing margin pressure because as used market declines as the new does, there still is a supply of inventory in the market. And as that supply works through the market, there will be pressure on margins.

Okay. And then how -- can you just explain what's happening in the wholesale business and how that's related here? Looks like there was a bit of an erosion there. And wouldn't the tighter inventory be a positive for the wholesale business?

Yes. And that's what we're doing right now. We want to increase our turn rate on inventory. Inventory was at a certain level and as the market declined, we had a surplus of inventory. So, as we are working through that inventory we received some wholesale losses on that. But that is what we're continuing to do is to reduce this surplus. And as you know, that is kind of tricky, because at the same time we're taking trade-ins on new cars. Because as the incentives continue own new vehicles, a lot of customers will move from used to new. And so we will be taking those trade-ins as well. But getting the inventories down is absolutely one of the initiatives that we're working on.

Okay. And can you --just lastly, give us what your exposure is to Florida and California as a percentage of the total?

Total NOI basis, Florida is about 30% in the third quarter of our income. On a -- excluding the headquarter costs, 30% of region income is associated with Florida.

For California we have four stores, so it's a small exposure.

Great. Okay. Thank you.

Well take our next question from Rick Nelson with Stephens.

Thank you, good afternoon.

Hey, Rick.

Can you talk about the time line for rolling out [Arcona] and how quick you expect to see benefits?

We expect -- we're rolling out now. We expect about 50% of our dealerships at the end of next year. And then we still have some obligations on our old contract but we're more than likely we'll speed that (inaudible) through 2011. But we will more than likely speed that up. And we will certainly -- we're starting to receive the benefits of this relationship. Every store that we get it in we receive those benefits immediately. So, about 50% by the end of next year.

Thank you. There was discussion about Florida. I'm wondering if you can address other markets around particular strength or weakness?

Well, certainly our Texas market is probably one of the stronger markets right now. And we I have noticed some of the weakness in -- through Mississippi and Arkansas. And the rest of our markets are about flat. However, one of the ways that we kind of measure our performance in our local markets, is whether we gain share or lose share in our franchises. And we generally have been gaining share, even in a declining market. Which, again, that's a great measure of what our local general managers and our local regional teams do in those markets.

Any comments on October sales what you're seeing to date for the industry?

Rick, we really don't want to comment on this quarter.

Thank you.

And our next question comes from Joe Amaturo with Buckingham Research.

Good afternoon.

Hello Joe.

A couple of questions -- how are you? Could your just tell us what your expectation is for the Florida used vehicle market for the fourth quarter that you have out there for your full year guidance? You said it was down I think 13%.

We're looking for a similar performance in the fourth quarter. Around 10% to 12%.

And then as it relates to the Katrina impact, could your just discuss what the impact is year-over-year during the fourth quarter?

That would have been in our Mississippi and Houston stores. And they were down 21% in gross this quarter versus last quarter. The third quarter of last year.

Is there any effect rolling over into the fourth quarter as well, is my question?

I would expect similar softness in the fourth quarter. Maybe a little bit less but a similar magnitude.

Okay. Next, could your just discuss what percentage of an overall heavy duty dealership's gross profit comes from service and parts and comes from new vehicle sales?

Yes, we'll get that. One of the things that I'll share with you as Gordon is looking at that, is that our focus is to get 100% absorption rate out of our heavy truck franchise and as we are making the changes in that facility today, as I mentioned, we've made substantial structural changes from an operations standpoint with personnel, with pay plans, with reduction of inventory. And as that starts to improve, we'll see some tremendous benefits from that franchise. We're still -- we still like the franchise. It's at a difficult time. We've mad some, again, operational changes in it, we've really brought the expense structure down and as we move forward in future and freight starts rolling again we're expecting some real good things from that franchise. Gordon, do you have those numbers?

It's about 70% of the gross profit of the motor trucks business. Go ahead.

Have you seen a ramp up in service and parts with the decline in the sales? Or is that something we should expect going forward?

On a go forward basis, what normally happens, when ever the sales decline in heavy truck, normally you would expect the improvement on the fixed side. We went through a period of time where that did not happen. Where trucks really just were not moving and so the service was not being provided. As well as, there are a lot of new trucks on the road today that were pulled forward last year. So, as those trucks start coming in for service, we do expect an increase on the fixed side, from a parts standpoint. And we have a very strong wholesale parts department there as well. We sell parts more than just to our own locations. So, we are expecting a lift. And actually we're beginning to see some of that.

For the quarter our fixed operations was only up 1.5%. But to Charles' point, a lot of that is a result of -- when we pulled forward as many new sales as we did, there's a lot of new trucks and they haven't started to roll through the shops yet. We would expect that to ramp up in the coming months and into next year.

So, I guess it's fair to assume another $0.02 hit in the fourth quarter from heavy duty as we've seen kind of quarterly throughout this year so far?

Yes, that's what we're expecting.

Okay, then lastly. Based on your debt covenants, how much stock could you buy back, currently?

Right now about 14 million of stock at this point.

Okay. Thank you.

And moving on we will hear from Rich Kwas with Wachovia.

Hi, good afternoon, guys.

Hi Rich.

Gordon, could you comment on the -- could you provide some color on that comment you made regarding reducing support personnel near the end of the quarter? What type of impact do you expect in the fourth quarter? And how much more do you have to go in terms of fixing the overall expense structure?

I think plagiarism is a great thing and one of the things we're asking everybody to do is really look at the bottom 10% of your employee base and those are the ones that are a real drag on the operation. So, we're actively looking at that and trying to take that piece out of the business. As a starting point obviously, with retail sales being down as much as they are, we have to actually look at the management layer of the company. We've set a lot of these stores up for much higher volume rates, and with the lower demand at this point in time it makes a lot of sense to start hitting that pretty actively. As you know, personnel is about 30% of the overall cost structure of the business. So, that's where we'll be looking and looking hard. We just started the process in September. Not much of an impact. Hard to measure at this point exactly how much we have. We've made some assumptions that overall costs will be at least flat on an SG&A percentage basis in the fourth quare versus last year on declining revenues to kind of mute the impact. And then with further -- most of the impact being seen in the first quarter and beyond.

That's helpful. And then the new guidance what sales assumption are you making for 2007?

For 2007?

Yes, I mean, I thought that your previous guidance, I think, was hinged on a 15 -- a range to the range -- the sales range was 15.9 to 16.7 if I recall.

Yes, that's correct.

So, what's the new number? Is that --?

We're looking at about 16. At this point in time. If you look at some -- a lot of things that are being published by some of your guys, is with consumer confidence where it's at, people are expecting a relatively soft Christmas and that's the biggest -- you know, when we look to the fourth quarter, as you know, the last week of the year really makes or breaks the quarter. And it's the part we're most concerned about at this juncture. I think it was Wachovia that just published today on consumer sentiment being down very significantly on October, which doesn't bode well for the Christmas selling season and we're trying to take some of that into account.

Okay, and then on import margins, particularly Honda, what are you seeing? One of your peers talked about import margins getting worse sequentially from the first part of the year. Are you seeing the same trend? And then incrementally in Q3, were they much worse than Q2? And what do you expect going forward?

As far as breaking it down, obviously, with the incentive money on Honda, we saw margins improved about 120 basis points. That's about $238 a vehicle. We -- and we didn't -- have seen some deterioration in Toyota, our margin on Toyota was 6.9. The third quarter of 2006 was down to 6%. In general, of the other ones are pretty much about the same as we saw last year. BMW being somewhat the exception versus last year with the three series. That's up at 7% which has been fairly constant throughout the year. So, a little deterioration in Toyota. It will be interesting to see how Honda holds up with the new Accord going into the fourth quarter. But their margins should stay about where they have been in the -- for the first two quarters of this year they were 7.6,7.7, and as I said it was 8.8 in the third quarter. So, we expect it to be back in the 7.5 range in the fourth quarter.

Okay and then what did you say was the benefit on the volume bonus for the Honda program this quarter? Did you -- you booked almost all of that, right?

Yes, which state?

No, I was just saying what was the overall benefit to gross margin to Honda this quarter?

Well, in terms of just -- in terms of, on a per vehicle basis, just that's about -- that margin improvement is about $236 a vehicle.

And that was all retro right? So, it included the volume that you booked early in the year too, right?

Yes, pretty much. There was a little in the second quarter but most of it was recorded in the third quarter. That's correct.

Okay, great. Thanks so much.

Our next question comes from Darren Kennedy with Goldman Sachs.

Hi there, its Darren Kennedy with (inaudible). One question I had was about the heavy truck market. If I'm not mistaken it's been down around 40%, 50%, in your brand mix, I think, each month all year long. Is there something new that seems to be pressuring that business? Or is this just really more -- it seems to have caught you off guard now?

I wouldn't say that it's caught us off guard. What we've been working on actually is again getting that business in line with where the market is and setting it up for more success in the future. There were some basic changes that we needed to make. We had made some strategic decisions last year, that at the time we made them, were great decisions and that was to ramp up on inventory. Because we had the opportunity to get some inventory that others did not because of our performance we had in the past. And as the market -- because we expected that that to be -- that inventory to be in high demand because there just wasn't any more of it with the new emission regulations. It ended up not being the case and so we have had to work through that inventory. So, we've had older inventory and there's not much new inventory on the market because as you've seen the production rates on heavy trucks has been down. So, we have worked through that inventory and really done a good job of reducing probably over $40 million worth of inventory we've been able to move out of. So, it hasn't caught us off guard. The -- I'd say the duration was a little more surprising to us. And in talking with the analysts and some of the manufacturers there, they're expecting early second quarter next year that we should start to see some improvements.

When we first put the plans together late last year into the first part of 2007, the expectation was the first half of the year -- that retail demand would be off very significantly, somewhere in the neighborhood of 40% to 50% and we did see that and that was the result of the pull forward on the emissions. What somewhat took people by surprise is really, you know the credit crimes, the economic environment in the second half, hasn't supported a rebound for the new trucks. You know, it's all caught up in the same stuff we're all reading about, the macro environment took everybody a little bit by surprise. So, it is softer than what we had anticipated it to be and plus the tough comp with all the pull forward, a lot of that was in the fourth quarter last year. So those are the factors that contributed to it.

I see, so, you're really saying that you (inaudible) expected a recovery by now, but the weakness is just a persistence of it that is a little different.

Exactly.

And then moving to Houston subprime. It sounds like you're -- going after that business has kind of bitten you, but it does not appear it's because of the some of the common concerns I've heard, like the lenders -- are the lenders really pulling back, or is this just a subprime consumer, you believe, feeling pinched more than the consumer more broadly as well as the fleet impact on inventory making it so there's less subprime product?

Well, the subprime lenders from their perspective -- they've got a very mature model. They've been in this business a long time and they've been in the collection business a long time. What we are seeing from that aspect is that in the past they may have been more lenient with their guidelines and today they are not. They're being more strict and adhering to their guidelines and the consumer is more difficult for that customer to meet the current guidelines. So, we're kind of seeing a combination of events there.

So, it's really effectively a tightening of standards even though its really the -- the policies haven't really changed its just that they are getting --.

And the inventory -- the inventory as we mentioned. There's less of that prime inventory available today and what is available is more expensive. So it doesn't quite fit the model as easily as it did before.

At least in some markets, I know you said it works better in some markets than others, it certainly helps sales. What do you think that this -- pursuing this business has gotten you in terms of incremental growth in Houston and what kind of comparisons should we be concerned about as you cycle that?

Well, when you look at the growth that we experienced the last two years, some of that has been as a result of weather conditions in our other markets. Because we had some explosive growth in Florida in '05 after the hurricanes there. A lot of it has been because we implemented software technology two and a half, three years ago, and with implementation of our used car teams, I don't know if there's as much low hanging fruit as we had to gain in the past. So the -- when we look at the comps and the soft market, you know, we didn't stop selling cars. I mean this is basically the same team that performed all of these 11 quarters of great performance in the past. So, we just didn't fall off a log unfortunately and this happened. So, it's a number of conditions that came at the same time that made this performance look as it does. So, on a go forward basis, that's why we're saying flat to down on the used car side.

Houston was one of your main markets with subprime. Didn't you say something about the comps being up there? What was the metric you discussed? Was it up 30% relative to the rest of your business, or --?

No. I think -- post Katrina with our Houston and Mississippi, our gross was down 21% because of the comps that we had in '06 from Katrina. They were up.

Right. It was up significantly. I thought that was a result of your effort going into subprime.

That's true. There was a very strong effort and we still have a strong team in that Houston market.

Okay. Thank you.

And our next question comes from Matt Nemer Thomas Weisel Partners.

Good afternoon. My first question is can you provide the new vehicle margin per unit excluding the Honda Accord bonus payment? Is there a way to back that out?

For just Honda?

I'm sorry. Everything other than Honda. Just trying to get a sense at the underlying new vehicle gross margins excluding that bonus payment.

I can get you that calculation. I don't have that one off the top of my head.

Okay, fair enough. And then -- I didn't hear, but did you provide any detail on the abandoned real estate project?

Yes, it was just a -- we were looking to do a very fairly substantial green filled project down in Florida. We got a long ways into the project. But the ancillary costs associated with doing the project just overwhelmed the -- our -- it started not to make sense. The city was asking for incremental improvements to the roads and all that cost that we didn't anticipate seeing at the beginning -- ended up making it uneconomical to continue with the project. And that's why we have eventually abandoned it. Very painful, but it was the right business decision to do to stay where we are.

Got it, and then lastly, it's my understanding that [Arcona] is perhaps more streamlined than the ADP Reynolds or UCS solutions. That it was typically prior to this year used by either smaller stores or single point stores. Are they making significant improvements or changes to the software this year or are they doing any custom work for you to roll this out to create synergies between stores?

Yes, they -- I mean -- as we had great and in-depth conversations with Dealertrack and [Arcona] about being able to serve the needs of an organization of this size, and with the improvements they have made and are continuing to make, with the cost savings which was only part of the driver, the other part was the vision that we shared with Dealertrack and that is to create a seamless process where not only customer -- we have a tremendous customer benefit -- but our employee benefit as well. So that we can create speed and efficiency in the sales process. And service process and follow-up process. So, we have just a tremendous vision of where we will end up with this partnership with Dealertrack and [Arcona]. So, the cost savings and absolutely their ability to serve our needs as well as just -- I mean tremendous vision that I personally had for 20 years in this business and have not seen an opportunity for a large retailer and an IT partner to come together and create something of this vision in the past and we had the opportunity to do that and they shared that same vision. So, absolutely yes they can serve what our needs are and on a go forward basis it will continue to improve on the efficiency and speed of the process.

What we're looking for, Matt, really as Charles said, is really a seamless process where we input customer data once and it follows the customer all the way through the fixed departments and then out the other end in terms of doing the next transaction with the individual. And to that end, Dealertrack has committed a substantial amount of their R&D efforts to making that happen, including on the DMS side. Let's be fair. They're not where they need to be in terms of that product today. But they have the resources and the commitment and with our help they're going to get there. And they've committed quite aggressively to making that happen. It's not that it's a bad product today, we're just going to make it better.

Got it, that's helpful. Thank you.

And just to add on to that a little bit Matt, the way I look at this, the savings we're getting from the DMS I think that's really the tip of the -- you've heard me say this before but that's the tip of the iceberg. When you look at a seamless process and one of the metrics we are looking at typically takes a customer about four hours to get through the dealership once he's serious bout buying a car. With this -- when we're successful with this process, we can at least half that time if not even beyond that. So, lots of savings which translates into, at that point fewer salespeople that can do more deals and so on and so forth. You can see the domino effect of having an integrated system like this. And that's what gets us excited about going forward with Dealertrack.

Our next question is from [Lance Eddis] with [Warner Road Capital]. Mr. Eddis, your line is open. Mr. Eddis, your line it open.

Why don't we cut him off?

Moving on, we will hear from Rich Kwas with Wachovia.

Hi, just follow-up on -- in terms of the implied guidance for the fourth quarter. What are the big swing factors with the $0.08 spread?

I'm not quite sure I understand the question, Rich?

When you -- when I think about the implied guidance for the fourth quarter here, with the 210 to 218 for the fourth (inaudible) quarter what gets you to the 210 versus what gets you to the 218? What are the assumptions?

That's purely on the retail side of the business. As I said, a lot of it comes down to what happens in December and more specifically in the last week or so of December. If the Christmas season is soft, that gets you to the lower end of the guidance. I think it comes down to that in particular. That's the reason for the wife -- pretty wide spread in the guidance at this point in time. Because, we're not quite sure where that piece is going to fall out.

Okay, and then on the 3.5 million total pretax savings -- is that's annual savings going forward?

Right.

Okay, so thats 3.5 million going forward. And when do you expect to get this first piece of that? In '08?

You can't do this, but excluding the cost transition that the stores, we will start to see about, as Charles said during 2008. My expectation is we will see about 35% to 40% of that savings starting in the second half of 2008.

Thank you.

At this time we have no further questions in the queue. I'll turn it back to our host for today for closing remarks.

Well we appreciate everyone joining us today and we are, just to kind of summarize, we're very excited about the -- this particular market is challenging. We've seen these kind of dips before and the market has always rebounded. We don't ever know how long it will take for it to rebound but we know that it does and the long term trends are very positive. And we are very positive on our company and the leadership particularly in our field organization as well. So, thanks for everyone joining us today.

And once again this does conclude today's call. Thank you for joining us and have a great day.