Asbury Automotive Group Inc (ABG) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to the Asbury Automotive Group quarterly earnings results conference call. Today's call is being recorded. At this time, for opening remarks and introduction, I'd 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 morning, everyone. Thanks for joining us today. As you know, this morning we have the full report for the year 2007 earnings. The press release is posted to our website, at www.asburyauto.com. If you don't have access to the Internet, or like a copy of the release faxed or e-mailed to you, please contact the (inaudible) at our corporate office. [General inquiries], dial 212-885-2520.

Before we started, we'd like to remind everybody that the conference call today, will include some forward-looking statements. They are subject to certain risks and uncertainties which are detailed in the Company's 2006 10-K report. As well as other filings with the SEC.

And in addition, certain non-GAAP financial measures as defined by the SEC may be discussed in this call. To comply with the SEC rules, reconciliation of non-GAAP financial measures have been attached to this morning's release.

The purpose of today's call is to discuss Asbury's Fourth Quarter in 2007 results and our guidance for 2008.

With us today, are Charles Oglesby, our President and CEO and Gordon Smith, our CFO. Following their comments, we'll be happy to take your questions. Now, I would like to turn the call over to Charles Oglesby. Charles?

Thanks, Keith and good morning to everyone. And I appreciate you joining us on our call today.

This morning, we reported fourth quarter adjusted EPS from continued operations of $0.39 compared to 40% a year ago. The year results exclude non-core items as disclosed in the tables attached to our earnings release, including a $0.03 charge in the quarter for legal claims arising in the 2003 and prior, and $0.03 net benefit from non-core items in the fourth quarter of 2006. For the year, adjusted EPS from continued operations excluding non-core items increased 8% to $2.09. We played at an 80% increase in a year as challenging as 2007, illustrates the fundamental resilience of the automotive retail model.

The fourth quarter was a transition period for us. As we adjusted the business to prepare for the weaker retail environment we are projecting for 2008. In the face of a challenging retail market, we acted decisively in addressing the three largest costs of automotive retailing: inventory, advertising and personnel. We have reduced our comp store use inventory level 16 million, or 13% from the third quarter. As planned, we cut our comp store advertising spending 10%, and perhaps, most importantly, we adjusted our organizational structure, positioning the business to deliver a 3% reduction in a comp store personnel expense in 2008. These efforts impacted our operational performance for the quarter.

Specifically, our focus on reducing used vehicle inventory put pressure on our used retail margins which were down a 130 basis points to 10.8% as for retail out of existing inventory. In addition, we took $1.2 million in incremental wholesale losses compared to last year. However, all these adjustments were necessary and have positioned us well as we end the 2008. And we will make further adjustments as necessary to respond to the market as the year unfolds.

Turning to the results for the quarter, we knew throughout the second half of the year, that retail environment was getting more difficult. However, we did not anticipate the extent of the weakness in our Southeastern markets, particularly in Florida, which provides approximately, 30% of our revenue.

Our total revenue for the quarter declined 2%, with the 9% decline in comp store retail vehicle revenues being partially offset by our strong performance and F&I and parts and service, As well as the addition of our 2007 acquisitions. Our gross margin remains steady at 15.6%, with the shift towards higher margin businesses offsetting compression in our retail vehicle margins.

As anticipated, our heavy truck business declined from last year when changes in the emission standards drove sales volumes. This decline impacted the bottom line by $0.01 of EPS.

In the new light vehicle business, we did not have the benefit of strong incentive programs that we saw in the fourth quarter of 2006, particularly, the Honda and Nissan programs that had significant impact on our unit volumes and margins last year.

Against this difficult times, light vehicle comp store unit sales declined 3%, and margins were down 70 basis points for the quarter. Manufacturer programs influenced the pace of our new vehicle business throughout the year. Impacting unit body and gross margin from quarter-to-quarter. However, our new light vehicle margin was down on a 20 basis points to 7.5%. The slower sales pace in December of '07, which results 12 percent led to a nine-day increase in DSI to 69 days. And a 6% increase in comp store light vehicle inventory from the end of 2006. We have been working and we'll continue to work with our OEM partners to control our new vehicle inventory levels.

Turning to used vehicles, as you may recall in 2006, we made a strong push into the subprime market for used vehicles and were very successful in driving profitability gains from that business. And we also benefited from the aggressive finance programs of certain lenders. The tighter standards being applied today abrupt subprime lenders -- have weighed on the used vehicle performance, driving comp store unit sales declines of 13%. The majority of which is directly attributable to the decline in our subprime business. Which now, makes up only 20% to 25% of our used vehicle sales.

Turning to F&I, we have continued to achieve record results. Generating $1,057 in F&I income per vehicle retail. Our menu-driven process insures that all of our customers are offered a complete line of products during the buying experience. As always, we continue to focus on process improvements in all of our dealerships, especially those operated in the bottom third. In addition, we continue to work with our suppliers on pricing improvements for the products we sell to our customers.

Moving to parts and service, we continue our steady performance with comp store gross profit in the quarter of 3%. Peeling back the data, our progress in the high margin customer paid business where gross profit was up 4.5% has been partially offset by the continued decline in warranty, which was off 6.2% for the quarter.

In 2007, we added 55 service bays to our fixed capacity.

In addition, we have five projects coming online in 2008, which will add an additional 95 base. Our investment in the state-of-the-art facility will continue to pay dividends over the long-term as they enable us to better serve our customers. SG&A as a percentage of gross profit increased 140 basis points for the quarter, to 79%, excluding non-core items. Excluding rent increases, which are largely driven by CapEx financing decisions, our SG&A ratio was up only 70 basis points. This increase reflects the deleveraging impact on our cost structure from the decline in vehicle sales volumes.

As I discussed earlier, we reduced our advertising spending by 10% on cost store basis. Personnel expense responded well, down 7% on a comp store basis or 5.6 million. For the full year, the SG&A ratio was up on a 30 basis points to 76.8%. Adjusted for nine core items and excluding rent, the SG&A improved 10 basis points from 20 isics. Interest expense for the quarter was down 1.7 million as a result of our debt refinancing earlier in the year. The floor plan expense for light vehicles was stable with last year on a comp store basis and slightly higher inventory levels offsetting the benefit from interest rates.

Turning to the balance sheet, our financial position remains strong. At the end of the year, we had 53 million in cash and our debt-to-total capital ratio stood at 44.9%. Our average cost of death is 6.6% and we have $125 million available for general purposes or acquisitions under our line of credit. Our cash plus credit line totaled $178 million at year-end, providing plenty of capacity to fund our growth over the coming years. Now, I'd like to turn the call over to Gordon to discuss our guidance for 2008.

Thanks, Charles. Good morning, everyone.

As our press release notes, we've established an initial guidance range for 2008 diluted EPS from continuing ops between $1.80 to $2.00 per share. From a high level, our performance in 2008 will be driven by a soft retail vehicle market of new and used. Focusing on the new vehicle business, we are forecasting U.S. unit sales in the range of $15.3 million to $15.5 million. In addition, we expect new vehicle margins to come under pressure, especially as the industry faces growing inventory levels of midline import brands and declined 20 to 40 basis points.

With respect to the used business, as Charles mentioned, the lending terms today compared to 2006 and beginning of 2007 are tighter. In addition, manufacturer incentives on new vehicles are likely to pull more of the traditional used vehicle buyers in the new vehicle market. These factors will continue to drag on our used vehicle performance. Particularly in the first half of the year, when we expect low double digit declines in unit volumes versus our very strong performance in the subprime business in the first half of 2008. For the year, we expect that unit volumes will decline between 5% and 8%, on a same-store basis and gross margins to continue at the level we experienced in the second half of 2007.

Turning to expenses. With the forecasted drop in the retail business, it will be difficult to regain any expense leverage. As Charles discussed, in is latest comments on the fourth quarter, we have been and will continue to focus on the three largest costs of automotive retailing: advertising, personnel, and inventory, specifically used. We are budgeting for our gross advertising expense to decline 5% to 10% on a same-store basis this year.

We expect there are efforts in the fourth quarter to align our organizational structure that retail environment will deliver personnel expense reductions of up to 3% in 2008. Sales percent in compensation will most likely increase as a percentage of retail vehicle grows with margin pressure on new and used vehicle. But F&I compensation, as a percentage of F&I income, will continue to decline due to our focus programs in this area. Rent will increase between 5% and 7% on a same-store basis. Depending on the completion dates of our gross CapEx projects during 2008.

With respect to our DMF conversion to Arcona, we project that savings from lower licensing fees will be offset by convergence costs in 2008, with a significant savings starting in 2009. Overall, based on our current retail forecast, we expect our SG&A ratio to increase between 100 and 150 basis points in 2008. Floor plan expenses will benefit from the sharp decline of the said fund rate and assuming there is no further disruption in the credit market, we are forecasting that [LIBOR] will average 3.3% for the year.

Keep in mind, though, we have -- we swapped a $150 million of our floor plan -- floating rate of floor plan debt for fixed through November of 2008. We estimate that bottom line impact of interest rate relief for 2008 will be, approximately, $0.15 of EPS. Including the impact of floor plan loaner vehicle obligations and overnight investment.

We will continue to benefit from our 2008 debt refinancing and share repurchases. The debt refinancing will add $0.04 EPS on a year-over-year basis during the first half of the year, primarily in the first quarter. And the share repurchase will continue to provide a lift to EPS through September, also adding a total of about $0.04. We project our effective tax rate between 37.8% and 38.3% in 2008, compared to 36% in 2007. This increase is driven by prospective changes in tax funds in the states we operate, as well as the one-time benefits in 2007. Also, we expect our weighted average, diluted shares outstanding for the year to approximate 32.5 million shares, assuming no share repurchases in 2008.

At the end the year, we had 980,000 shares available for repurchase under approved programs. We'll continue to monitor our share repurchase activity versus our debt [covenant] which limits the amount of capital to return to shareholders in a form of dividend and share repurchase. As of December 31, 2007, this limitation stood at $18.4 million and will increase in 2008 by 50% of net income less the dividend and any share repurchase.

Turning to our capital investment plan, we are forecasting total capital expenditures of $55 million to $65 million, including $15 million of maintenance CapEx. The remaining investments, in growth projects, will total between 40 million and 50 million, of which 60% to 70% will be finance to sale lease back transactions. On the acquisition front, we intend to pursue the annual target of acquiring $200 million in revenue, adding two to three high-quality franchises to our portfolio. We expect that the F-side business will achieve another year of record TBR levels largely due to pricing adjustments and operating improvements.

Finally, fixed operations will continue its steady growth and what is forecast to be a difficult retail environment. And we'll continue to grow at a steady pace of 4% to 5%. With that, I'll turn the call back over to Charles, for some concluding remarks. Charles?

Thanks, Gordon.

Overall, 2007 was a year of many accomplishments for Asbury. Operationally, we partnered with Arcona and Dealertrack to develop a fully integrated software solution for our dealership operations that will dramatically reduced expenses and deliver efficiency gains in the years ahead. Today, we have successfully transitioned 10 stores to the Arcona DMS system in 2007.

In the acquisitions arena, we acquire $350 million in annual revenue, obtaining approval to acquire seven different brands. With respect to the balance sheet management, we refinanced our long-term debt, reduced our annual debt service over 20%, to approximately, $29 million. Finally, we return capital to our shareholders. Repurchasing 2.3 million shares for a total cost of $57 million. And most importantly, we have positioned the Company to outperform the market.

As we enter a year, that many believe will be a challenging automotive retail environment, we've remain committed to our long range plan. Focusing on process and efficiency improvements in our existing operations, driving modest revenue growth of 2% to 4% through acquisitions, and returning capital to our shareholders in the form of a dividend. Our balance growth and income model and primarily the dividend payment was established with the strong cash flow of our operations in mind and was designed to deliver in all economic conditions. And, with respect to our acquisitions, I'm pleased to announce that we are just a week away from closing on a Toyota franchise in the Atlanta market that we estimate will add $100 billion in annual revenue.

In conclusion, I believe the market in 2008, will provide Asbury with an opportunity to prove that the automotive retail model delivers in all market conditions, it comes down to execution. And for Asbury the odds for our long-term growth are in our favor. We believe in the strength of our brand mix and our geographic locations are significant advantages that will fuel our future growth.

Today, Florida's economy is obviously weak. But we believe that over the next few years, it will return to its longer term trend line. In fact, U.S. Census bureau projects that the population of Florida will grow 28% by the year 2020. Compared to the projected growth of U.S. population of just 11% over the same period.

While there will be occasional macro economic factors that impact our retail growth trends, our job is to make sure that we succeed in good times and bad, relying on the staying power of our parts and service business, and making changes to the expense structure during the slower, retail environments. At Asbury we're building a culture of top performance teams and I'm confident that with the talented workforce and leadership we can look forward to the challenges ahead and prove the resilience of our businesses. And with that, I'll turn it over to the operator to ask any questions.

(OPERATOR INSTRUCTIONS)

And we're going to take our first question from Edward Yruma with J.P. Morgan.

Hi, guys, thanks for taking my question. Uhm, can you give us a quick update on your subprime exposure on the new vehicle front as well and have you seen any reduction and kind of availability?

Hey Edward, how are you doing? You know, the subprime really hasn't impacted the new vehicle same rate that it has the used vehicles for us. The availability of credit in the subprime is certainly tightened down because the lenders are crossing the T's and dotting the I's. So from a -- as we mentioned earlier, the subprime market for us, we actually started in '05 and '06, with that -- with those initiatives and announced it, and first quarter of '07.

And we -- it had been about 30% of our used vehicle sales and maybe we pushed it beyond that in the first quarter of '07. So, with that decline, and with the decline in the subprime lending underwriting rules, that has what has slowed down our -- the progress we've made in the used vehicle side.

In addition to that Ed, on a new side, what we're seeing is that the OEMs are stepping to the plate and while it -- I can't directly co-relate it, I'll give you a statistic. And in December of this year, typically, the OEMs account for about 50% of our retail out-financing business. In the fourth -- in December, it was 55%.

So, to the extent there's a little bit of weakness in the bank side of the market for new vehicle sales. The OEMs look to be stepping to the plate and covering that void.

Got you. So does that 20% to 25%, I guess, of your current use exposure subprime. Is that all you've reflected, all the reduction availability or does that go to some number that's lower? And that's the number that's kind of assumed than your used guidance? Thank you.

Yes! -- No, no, that's a number that we're comfortable maintaining, as a part of our business.

The subprime market, actually is even growing today with the -- a lot of the impact of credit markets last year on consumers. So that market is always there. It takes three pieces to be successful in the market: One is inventory, the appropriate inventory; two, having a dedicated staff for that market; and then, three, credit availability. And disruption in any of those areas disrupts that market. So we actually -- we're positioned well.

The first inclination was when inventory started to tighten down and getting more expensive and then as credit tightened down that created the decline in that market. So, at some point in time, it will come back. But I'm not -- I don't believe that we'll move that strong as far as the retail side-portion of our business. We'll probably maintain that 20% to 25%.

What's important here is that we're analizing this and the first half of the year, as I said in the script, we're expecting low double-digit decline in the used business. And that's primarily as a result of what we are anticipating is that softer subprime business. And that's principally at first half this year.

Got you. Thank you very much.

We'll go ahead and take the next question from John Murphy with Merrill Lynch.

Good morning.

Hi, John.

I was just wondering if you can talk about the different markets that you're in outside of Florida? And really, how much of the aggregate weakness you could contribute to Florida and what are the market that are particularly installed?

We have declines in all regions, but the exception of Texas. Texas was stronger. And particularly south Texas to Houston area.

With the subprime strength that we had in the Arkansas, Mississippi areas, they declined as well. The Carolina's appear to be relatively stable or flat. And Atlanta, about the same.

California is still a challenge. However, we're -- we were off slightly in California.

But that's only 5% of our market.

Right.

Okay. Then, if we think of the used business, I mean, some of your competitors they have similar brand mixes, where they will take you very well in the used vehicle business. Recently. And I'm just wondering, given your very strong brand mix, there might be an opportunity to, you know, side steps into subprime and focus more on the CPO market, to offset the weakness? I was just wondering what you might be able to do there in the short term and potentially in the long term.

No, I agree with you.

What the -- the majority of our decline has been because of shift away from subprime business. We absolutely see growth in the CPO market. The manufacturers are getting stronger in that market. It is a great part of our business. We like it. Getting the inventory that's good for our service business, that's good for the customer. So, really, we are getting more into normal retail ranges.

We took it -- we saw an opportunity in '05 and '06 in the subprime market and so we actually accelerated taking advantage of those markets. So we're probably more -- even though the comps are high and it looks as if we're declining, we're actually normalizing the used vehicle operations.

Okay. Then, if we think about acquisitions, particularly in the markets that are weak right now, like Florida, are there better opportunities for you to make acquisitions and is that why we're seeing this above target $350 million rate in last year and sort of ramp-up going forward? Or, are the valuations coming down and there's better opportunities in those markets?

Well, the -- we're very fortunate in that what we look for in our growth model is $200 million or so in revenue. So we can be very selective in what we add to -- from a strategic standpoint. Florida, the marquee franchises wherever they are, generally, are the same franchises that most people want to have. And so, the valuations for the most part are multiple and are not coming down there. So, we make a strategic decision as to how it fits with our long-term growth plan as to what purchase.

Right now, Florida would be a filter process for us, whether or not we'd want to grow more in that market today, it would be a very strategic decision. And a -- from a marquee franchise, we actually would want to add to the portfolio. We added $350 million in revenue last year because we had the opportunity to do that. We had not been in the acquisition market for quite a while. And once we kind of opened the pipe up, we had the opportunities to do that and the ability to do that. So we accelerated a -- more than what our models normally calls for last year.

This year, we expect to do at least the $200 million. We don't have any plans necessarily to go beyond that, unless it is a strategic purchase. And we see the value in it. So we're fortunate, again, that our growth model calls two to four deals and costs $200 million in revenue a year.

I think -- I just think to add to that, you know, we're still very bullish on the Florida markets in the long run, however, when you look at the business on a portfolio basis, our preference would be to add to the other regions as supposed to Florida, which is our largest concentration. It is -- you know, it is the same thing a bank tries to deal with its portfolio, diversification, that's the same thing in our business.

We're -- we have a portfolio dealerships that, you know, I think, we want to take advantage of the high growth areas, and there are other high-growth areas that we'd like to add to, not only in Florida. As Charles said if, we find an outstanding dealership in a market, we would absolutely do it.

We like where our portfolio is. I mean, we're really in great position and we can make great decisions on a go-forward basis. We really don't need to reposition our portfolio in any way.

And then, just lastly, on the service being added, I'm just wondering if you could sort of ballpark where capacity situation in your current service base. Sounds like you added 55 in '07, just planned for another 95 in '08. And you know, how fast those stalls ramp up, if they put in it as flat stalls and then equipped later? Just really the cap, how do we progress from that flat stall to the fully utilized stall remaining, 150 million stalls?

This is Gordon. Uhm, you know, the fixed guys will tell you that -- and fixed guys, by the very nature, are traditionally very conservative. They will tell you that it takes three years to fully utilize a new base.

Our experience, though, it's somewhat dependent on the store and where it is when we had the days, but typically, it's more like 40% to 40% utilization in the first year. And by the end of the second year, you're pretty much up to speed. So, you know, it does depend, but in a lot of our stores that we've done in the past, they come up to speed pretty quickly.

But in your existing stalls, what do you think the cap UTs is? Cap utilization, roughly? 60%, 70%? I'll say, 75% to 80%.

That would be a case by case.

Right.

Okay. Great. Thank you very much.

Moving on. We'll picking our next question from Rich Nelson with Stephens Investment.

Thank you, good morning.

Good morning, Rich.

If you would treat the [EPRO] or EPS target says of is outlined, what do you see free cash flow for the year? And leverage, which would be comfortable with?

Rick, its Gordon. I think, you know, I think that the thumb sketch of that is just taking that income and, you know, add about $5 million to that. That $5 million is the add depreciation and subtract of maintenance CapEx. That's how I kind of define what free -- free cash flow is. That's some sketch of that. What we'll change -- the only other change from that would be what happens to working capital principally used inventory.

And as you notice in -- or when you get the K, our 2007 cash flow was $80 million, right around that number, which is a little higher than the calculation I gave you. And that's the result of lowering our used inventory. So, I would think it would be a little higher than the thumb sketch I just gave you, maybe another $5 million or so. So, that's the quick way of figuring out our cash flow.

Thank you for that. And, how about the leverage, Gordon? Where?

I am not looking to increase the leverage this year. It will come down slightly, probably into the 40, high 43s to 44 range. So, slightly lower than it is today.

Okay, thanks. You quantified the impact of lower rates, floor plan interest expense.

Uh-huh.

Do you anticipate or are you saying any changes it has on assistance?

The only change we're seeing was GM did increase its prenumber -- number of predays, I believe from 60 to 90. That's the only one we saw. The [foreign] plates, principally the midline, there are a fixed dollar amount and haven't changed that. And we haven't seen anything from Chrysler or Ford yet. But, GM changed, I believe, in December.

Thanks. And, Charles, here halfway through the first quarter, and now I'm wondering if there's any comments or color changes such as your saying, particularly as it relates to luxury cars, I guess?

Well, what we're experiencing, I would say, would be consistent with store levels right now, Rick. The -- I think when you saw the sales releases last month that some of the luxury makes were down. I really wasn't surprised by that. And a lot of cases I think that would be a mix issue as well as -- and some of our markets, we did have some weather-related weekends that declined our -- well -- weather-related issues as well. So, I think it's too early to tell.

I think that the luxury buyer -- everyone has some sort of impact from the economic climate we're in. And the luxury buyer may elect to be cautious. But they are -- have always shown to withstand whatever economic situation is going on. So, we're still expecting that market to be good this year.

Yes, as you know, Rick, January's probably the slowest month of the year. So it is hard to glean anything and from that, I think, it's just fair to say February I saw some increased incentives from the OEMs, so there's some reaction going on. And it seems like February is a little bit better than January. But sequentially, it is still off from previous years.

Okay. Thank you, good luck.

Thanks.

And Rod Lache with Deutsche Bank has the next question.

Good morning.

Hi, Rod.

There was not much of a sequential decline on floor plan and other interest. And the inventory was actually up base on the disclosure made in your release sequentially. Was that acquisition or we just didn't see the LIBOR impact falling through, could you just elaborate on that?

Yes. First and foremost, we really lag a month behind the interest rate. Our floor plan resets on the 5th of every month. That's one. The second and probably the biggest impact that costs us a minimum of a penny in the fourth quarter, was the LIBOR spread to the fed funds rate.

As you are aware, that it probably hit one of the record highs in specifically in December. It was like 90 basis points spread when the spread LIBOR -- the fed fund with typically nine days at this point. So those are the two issues that we faced in the fourth quarter. And then, you know, January, we saw some relief that the spread, that it come back in a little bit. But, for us, the rate was in the high four's in the January.

And then we'll see that the true impact as, one the credit spreads, comes closer to normal. They're not quite there. They're still 20 basis points I believe spread right now to included in, as I say that, I think it's completely back in at the end of February. So, we'll see the benefits starting February and throughout the rest of the year. Assuming no further liquidity crisis hitting the market.

Okay. And was there any -- the $769 million in inventory, year-end, was that affected at all by acquisition or no?

Oh, yes, sure.

Okay.

I have to get to the exact number how much inventory we had in the -- I don't have it off the top of my head.

Okay. And can you possibly just give us a rough break down of your SG&A, how does that break down between advertising, personnel and lease?

Advertising, for the fourth quarter, was -- and we'll -- we disclosed that in the K and the Q. So. Just for your information. But advertising, has a total of $166 million, advertising was $11 million. Personnel costs was $77 million. F&I comp was $6 million and sales comp was $16 million.

Okay.

Those are big element.

Last question, just any thoughts on the wholesale losses and how that we should expect that to trend over the course of this year? Looks like it's been a pretty tough market in that regard?

When we made the decision to reduce our inventory, we knew that in that market, we expected wholesale losses. The retail market wouldn't absorb all of the inventory so we had to go to the wholesale market. So, it impacted our retail margins in the wholesale side. And we want to keep our base supply down. And right now, we still have more to go there. It is not dramatic. And I would -- I don't expect it for the full year. For a period of time we still have some adjustments to go.

We'd like to get our inventory down to 35 days. Right now, we're at 45 days. So, we still have a ways to go. And as you saw in the results, we've taken $3 million in the last two quarters. So, you know, I think that the first quarter probably is going to be higher than it was in the first quarter of last year, which, I believe, was slightly positive. I think there was about a $100,000 positive in the first quarter? I would expect that we'll show a big loss in the first quarter.

Right. Thank you.

Sure.

Our next question will come from David Limp with Wachovia.

Hi, good morning, gentlemen. Just wanted to ask about, can you give us an idea about the sensitivity to future rate cuts?

Sure. It's, per quarter point, about $0.02 a share for analyzed, obviously.

Yes, okay.

So that is about $0.02.

$0.02 a share?

And just to answer Rod's question, on how much our inventory was on acquisitions, it's about $50 million of the balance in that in-set acquisition. Sorry.

No problem. Can you also talk about like import margin trends? I mean, are you saying -- is the store continuing where you're saying continued pressure with import margins? Mainline import?

The -- when you have excess plan you always have margin pressure. For the year, actually we did well, the gross was held up. It was the fourth quarter when the market turned down. And there was less foot traffic and there was more inventory than we experienced a high margins.

We look at that as the remaining competitive in the marketplace whenever you have a situation like that, we got to do the things that are necessary, not only to meet the manufacturer's objectives and serve our customers and our employees. So we do expect a little bit of margin pressure until the supplies level out.

Now, are they -- are the asian OEMs taking steps in order to help you guys whittle down that supply? Or are they adding incentives? Can you sort of speak to that, if you would?

Yes. Normally, that is what happens in the marketplace. Whenever you got this kind of supply, you can expect incentives to help pull the inventory or push it through. Or, there will be reductions in production.

And this is, in the case with Toyota, as an example, they would look at their production as well as incentives. So there will be one way or the other, an opportunity to levellize the inventory, because this cannot continue to build, nor will we continue to take it and grow our inventories anymore.

To tell you the truth, I find it interesting, I mean Toyota and Honda had a sort of inventory bloat for a while and we were thinking that they would have taken sort of more of a pro-active or assertive action earlier on, but it doesn't seem to be that way. I mean, are you seeing something else? Or are they sort of waiting to see if the economy turns? What's your thought on that?

You know, when you look at Toyota and Honda and the imports, expectation of what this year is going to be like? They are expecting 16-plus [star]. So I'm not sure they have quite adjusted yet to the current economic climate. I think we all have an expectation that the impact of these rate cuts and a lot of the packages and things that are happening, once that starts, there is the opportunity for movement in the marketplace -- upward, towards the second half of the year. We are hoping for that, but we're not counting on it. We certainly believe that in '09 would be a stronger year.

I do believe that they would make the adjustment, one way or the other, either with incentives or reduction in production once they have a clear picture as to what is going to happen in the marketplace. Historically, that's been the way they handled it.

Just as a reminder, midline imports are low-margin, high-volume. And comparing it to the domestics, principally as a result of incentives domestics have, the margins on the business typically are 100, even a 150 basis points lower in the midline imports.

Okay. That makes -- that's interesting. And, finally, the -- I was just wondering, how comfortable are you guys with your overall variable cost structure at this juncture? You know, I -- the sense that I'm getting is that you're not comfortable, I just wanted to see if you could put -- add some color around that?

Yes. I think that, you know, variable cost structure to me, it's -- there are three pieces to the expense structure of any auto retailer. There is the the pieces the business is directly variable. And that's your commission-based income, both on sales, F&I.

And then, the sales -- a part of the GM's compensation and is variable. That accounts for 25% to 30% of the expense structure. And that's -- that will go up and down based on gross profit.

The other, third, if you will, slightly more than a third -- but the other third is what I called the semi variable. That's salary-type individuals, that's advertising, the big components there. That -- and I think I've said it consistently, you have to take some action to get -- take the cost out.

True.

That's when we're talking about taking out the 3% of personnel, that is an action to reduce this semi variable cost in personnel. Then, the other third, is things like rent, and some other pieces that -- insurance, that are in my mind fixed. So that's how I look at it, a third, a third, a third, at quick and dirty on that. But that's how you have to look at it. So, a third, you can -- happens automatically. A third, you have to take actions to do it. As we've said in the third quarter, we said we were going to, if we saw the market continuing at the pace it was, we were going to take action. That's what we did in the third quarter, to reduce the semi variable cost down to a level that are consistent with what we're seeing on the revenue side?

Got you.

Yes. I would say, when you used the word, that we weren't comfortable, I would want to rephrase that a little bit. That we feel like we took some pretty decisive action. We knew that it would be distracting to our organization. And that action was necessary, that it is like, pay me now or pay me later. We made the decision to do that in the fourth quarter, particularly, December of last year.

And so, there was a distraction on the operating side, while we were doing these putting -- setting our company right for 2008. So, when you look at how comfortable you are with that, we feel like we're actually in the right place right now for 2008. And, then, depending on where the market goes, we still have the ability to move with the market. We can take advantage of the upside and, then, if there's a continued decline, we have the opportunity to adjust to that as well.

Got it. Got it. I guess I was referring to if there's going to be -- if your initiatives right now makes you comfortable or not? And I guess that's the thought that I wanted to convey. But.

Part of cut once, cut deep. And not have a Chinese torture drill.

Right.

Everyday and every month.

Got you.

Would drive an organization nuts.

Got you, Okay. Thank you very much, I appreciate it.

Yes.

Will take our next question from Matt Nemer with Thomas Weisel Partners.

Good morning, everyone.

Good morning.

So my first question is on SG&A. I'm just wondering, the actions that you've taken, can you give us some color on the Cadence of those? And I guess what I'm getting at, have we seen the full impact of those actions in the fourth quarter or do we really see the full impact in the first or is it more like the second or the third?

I would say you are going to see -- you saw relatively little of it in the fourth quarter. Most of it happened relatively late. I would say that you're going to see, I would say, about 60% of it in the first quarter, and a full 100% of it start in the second quarter and beyond.

That's helpful. And then, this is more of a housekeeping item, but can you remind me what the other operating income line is? In your operating expenses? I don't remember seeing that before.

Yes. It is what used to be called other income. We were -- got a request from the SEC to move it up into the operating income section. But it is principally that and it is some -- basically it's just other income, that used to be down below that we had to move up.

Got it, okay. And then just going back to the subprime issue, Dealertrack had some interesting comments this week about lenders cutting off 4,000 to 5,000 dealers, I think, in the U.S. And I don't know if those are franchise or independent. But I'm just wondering if you kind of quantify or give granularity to what's happening from subprime lenders? I know that the documentation requests are more stringent. But are you seeing lenders cut-off specific stores?

Well we haven't experienced being cut-off at any specific stores that their underwriting criteria is definitely tighter. I'm not sure that all of the lenders have the same amount of capital to put in the marketplace they had before. And they're buying, probably 50% of the contracts that they purchased in the past. So, you know -- Again, I think that market at some point will come back as the credit availability or as the liquidity is there. But, right now, it certainly is a challenge.

And, again, we've reduced our retail levels to about 20% to 25% of our business. And we feel like so far with what's happening marketplace we can maintain that.

And in fact, Matt, we actually got some letters from some of the ones that announced that they were pulling back to a little bit. And that they were still supporting our franchises. So, it seems like, you know -- there's a little bit of blithe to quality on their part, and the brand they probably deal or sold would've let them [indiscernible] of quality.

Helpful. And then, on that same topic, what are you seeing in terms of your charge back experience those contracts?

I would say that very slightly up. You know, I'm talking 10 to 15 basis points. Nothing -- but once again, the charge back is not for default. It is when a customer decides that they're going to, you know, pay out the loan or something like that. We're not -- we're not exposed on that side of it.

So they are prepays? Sort of higher prepay experience?

Yes. Matt, when you talk about charge backs, would you define that for me?

Well, I mean that, you know, for some reason or another the lender comes back to you and wants piece of their commission back. Either the documentation was not filled out properly or the --

Yes.

Client prepays or something else?

Once again, on the fence. You know, if there's documentation problems or something like that, there's a 90 day period that they're exposed to. So, we're -- we've seen a little bit, as you know, some of the lenders maybe more diligent in their review of paperwork, but it is not material.

Got it. And then last topic on the subprime. Is that having any impact on your F&I, TBRs? Either positive or negative sort of a mixed shift away from subprime.

Yep. It has moved our number up because we have less problem.

Can you explain that?

Well, the F&I income on subprime is lower. And so as we do fewer subprime deals, that will have the overall impact on our overall number. And the primary F&I income is our retail margin business, than the subprime business is. So we're making more on the primary. We are making less on subprime. Doing fewer subprime deals. So that moves that TBR number up a little bit.

Got it, it's a mixed shift.

Yep.

My last question is, as you look at the -- your restricted payments basket, that the $18 million-plus you have in there now, are you inclined to protect that relative to future dividend payments? Or do you think that you'll be allocating that in -- to share repurchase or something else?

We're committed to the dividend. And that restricted payment basket will be used principally to insure that dividend, we can pay that dividend. Just to put it all in perspective, for you, if we -- at the low end of our guidance which is a $1.80. At $1.80, that restrictive payment basket would be the same at the end of the year. End of 2008, as it is today. That is the break-even point.

So, you can do some math and you can see that we can, not that we're forecasting it, but we can take a significant deterioration in the business and still maintain the dividend and be within our covenants for a fairly lengthy period of time at any visible experience that you can come up with. So, it's our first priority, share repurchase, while right now our stock is cheap and I'd love to be out buying it, I think our view is that dividend is -- shows the market in a consistent way. Our commitment to our share owners. And, you know, that is what we can commit as management thinks, that's what our Board thinks. And therefore, we will continue to support that dividend.

Got it. That's helpful, thanks. And nice job on the expense line.

Thank you.

Thanks.

And it looks as though we have time for one further question. Our last question from Joe Amaturo with Buckingham Research.

Good morning.

Hey, Joe.

If -- you have stated that 25% or 20% to 25% of your business used is characterized as subprime, could you just remind us what that was in 4Q '06 and where that was at the first half of '07?

In 4Q '06, it was about 30%. And we may have pushed it in 4Q '07 a little bit. First quarter '07, yes, might have been. If we may have even pushed to 35%. I mean, it was -- you know, we really took advantage of that opportunity. We don't -- we don't regret that decision because it really took advantage of what's in the marketplace. However, we're looking at more balanced model now.

Okay.

Just as a reminder, subprime business is really first quarter heavy because of refund, tax refund. You know, it's kind of how that business works. So, first quarter is the heaviest and then tails off throughout the rest.

Do you expect it to stay in the 20% or 25% range? In '08? Or?

Yes. Well, we can sustain it. That market is there. It is a market we're prepared to manage through. Because, again, it takes three different pieces for that model to work. With the franchise mix we have, with the volumes that we have, you know, that business is good business. So, yes, we expect to kind of maintain that.

And then with respect to your used inventory, could you just tell us what percent is luxury? Vehicles?

Well we'll have to get back to you on that.

Okay. Last one, with respect to F&I per vehicle tracking and, you know, 1,050, 1,060, are you comfortable that you'll be able to achieve that? In '08?

Yes. We believe that is very sustainable. We continue to work on the bottom third of our performers. And we all -- we're continuing to work with our providers as well. For repricing, reductions. And, you know, we've had a very nice, continued strengthen and movement in our TBR and we don't see any reason at all that would decline.

Okay, thank you.

You know, it's one of those where, quite frankly, again, you get to one level and we feel like we're going for 1,100 this year, and once we get to 1,100, we'll try it for 1,200. So, to continue improvement kind of business. Don't want to push it too hard and don't want to get on the wrong side of the legal community in terms of pushing the envelope. But we feel we can consistently improve that business.

And with that, I will turn the conference back over to Mr. Oglesby for any final or closing comments.

We certainly appreciate everyone's attention today and view, and joining us. If I had something that I would like to leave everyone with, it would be to view Asbury as steady as she goes. We really like the growth and income model. We feel like we execute well and we respond to the market. We've got, again, geographically, and from a franchise mix, right where we want to be.

And we can be opportunistic with our acquisitions. So that's -- that would be the viewpoint we would like to leave everyone with, as we're steady as she goes. With that, we thank everyone for participating today. And we'll talk to you later.

And that does conclude the conference. Again, thank you all for the participation. We do hope you enjoy the rest of your day.