Asbury Automotive Group Inc (ABG) 2008 Q1 法說會逐字稿

Good day everyone, and welcome to the Asbury Automotive Group, Inc. quarterly earnings results conference call. Today's call is being recorded.

At this time for opening remarks, I would like to turn it over the 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 first quarter 2008 earnings. The press release is posted to our website, at www.asburyauto.com If you do not have access to the internet, or would like a copy faxed or emailed to you, please contact Michelle [Ramsouge] at our corporate office. Michelle can be reached at 212-885-2530.

Before we start today I would like to remind everyone that our conference call today will include some forward-looking statements, that are subject to certain risks and uncertainties, which are detailed in the company's 10-K report, as well as other filings with the SEC. In addition, certain non-GAAP financial measures as defined by the SEC may be discussed in this call. To comply with the SEC rules, reconciliations of non-GAAP financial measures have been attached to this morning's release.

With us today are Charles Oglesby our President and CEO, Gordon Smith our Chief Financial Officer, and we also have Michael Kearney, CEO of our Mid-Atlantic region with us today. Following our prepared remarks, we will be happy to take your questions. Now I would like to turn the call over to Charles Oglesby. Charles.

Thank you Keith, and thank you to everyone for joining us today. For the first quarter we reported EPS from continuing operations of $0.35, compared with adjusted EPS from continuing operations of $0.44 in the first quarter of 2007. During the quarter, the industry experienced an 8% reduction in new vehicle sales, and turned in a SAR of approximately 15.2 million. For Asbury, weakness in our key Florida and California markets which we estimate were down 17% and 15% respectively, resulted in a 10% decline in same store new vehicle unit sales. We experienced headwinds in used vehicles a well, with a more challenging environment for sub prime financing, and our parts and service operations experienced weather disruptions in several of our local markets during March, resulting in relatively flat same store sales.

To say the least we had our challenges this quarter, especially against the strong operational results we enjoyed across all of our business lines in the first quarter of last year. However with cost reduction initiatives firmly in place, we were able to deliver better than anticipating savings, in personnel and advertising, keeping us on pace with our EPS guidance range for 2008 of $1.80 to $2 per share.

When you look at the array of negative factors, that are facing our economy and the automotive retail industry, it is easy to lose sight of the resiliency of this business. There are two things we know about this industry. One every period of decline in new retail sales is followed with a strong rebound in the market, and two the business model can be adjusted to meet the current market. The first premise has been proven throughout the history of automotive sales in the U.S., and the second is being proven by Asbury as we work through the current rough patch in terms of customer confidence, and what appears to be at least a mild recession in the overall economy.

Our new vehicle business was under pressure during the quarter in both sales volume and gross margin. New unit sales industry wide came in below our planning range of 15.3 million to 15.5 million SAR for 2008, and with our exposure to the Florida and California markets, our overall sales were a little softer than the industry. The remainder of the markets were generally in line with the overall industry trends, with the exception of Texas where the market remains relatively strong.

Our new light vehicle gross margin was 6.9%, down significantly from a 7.7% a year ago. We experienced margin pressure across all brands, which is generally the case as competition for sales increases, with less business available in the marketplace.

In addition, we saw changes in each brand segment, that added to our overall margin decline. In luxury there was a shift in sales away from high margin luxury vehicles, towards lower margin entry level products. In mid-line imports, manufacturing incentives that added to gross margin and overall profitability a year ago, were down significantly. And in the domestic brands, we saw a shift away from higher grossing trucks and SUVs, towards more fuel efficient lower grossing cars.

In the heavy truck business, we again faced difficult comparisons on new vehicle units. In 2006, we acquired a substantial amount of inventory, before the emissions standards changed, which we subsequently sold during 2007. As we've discussed our our previous calls, we performed a full review of this business in 2007, and positioned it for a lower gross profit environment, and despite the retail sales decline, the bottom line performance delivered according to our internal forecast.

Turning to used vehicles, our guidance for 2008 assumed unit sales in the first half would experience a low double digit decline. Our focus on sub prime customers, which peaked in the first quarter of last year, together with the aggressive lending practices of certain lenders at that time, left us with difficult comparisons to overcome in 2008. In the first quarter of 2007, almost 35% of our used unit volumes were driven by sub prime financing, driving our ratio of used cars to new cars retailed, to the highest levels in our history, reaching 0.68 used to new. In contrast, our sub prime sales this quarter, made up less than 25% of total used vehicle sales, and our used to new ratio returned to a more normal first quarter level of .062. Our used unit volumes for the quarter were slightly below our planning levels, however the adjustments we made to our used inventory in the fourth quarter of 2007 improved inventory turns, and delivered better than anticipated gross margin. Essentially compensating for the weakness in volumes.

In fixed operations, the quarter started off with a normal base of business. With same store gross profit growth of 3% to 5% in each of the first two months, generally in line with our planning levels. However in March, several our regions, including Texas, Arkansas, Atlanta, and St. Louis, experienced weather conditions that caused disruption in the parts and service business. On average, we estimate that our operations in these markets lost three to four days of fixed business due to blizzards, rain, and flooding, and heavily impacting our results for the quarter.

Lastly our finance and insurance business continues to deliver excellent results. Posting F&I PBR of $1,060, a 12% increase from a year ago, and we expect a similar level of F&I PBR over the remainder of 2008. On the technology front, we made significant progress in working with DealerTrack to convert more of our dealership management systems to their Arkona software. To date we have converted 18 dealerships. Our conversions are on schedule, and we are more than satisfied with the support and training we have received from DealerTrack. We expect to begin seeing reduced licensing fees associated with the new DMS system in the second half of 2008. Once the core DMS is in place throughout the organization, we will begin to tap the efficiency improvements that will be available with the new software.

In the current economic environment, the results we delivered in the first quarter would not have been possible without our decisive approach to reducing expenses. As I said on our last call, we cut once and cut deep, and I am proud of our regional management teams' efforts in reducing our cost structure, and delivering the expense savings our organization needed. Now I would like to turn the call over to Gordon, to go over our expenses in further detail, Gordon.

Thanks Charles and good afternoon, everyone. For the quarter, our SG&A as a percentage of gross profit increased 330 basis points to 80.6%. The increase reflect the deleveraging impact of our cost structure from the decline in vehicle sales volume. That same store SG&A was down 6.2% or $10.7 million from a year a go. As Charles mentioned, at the end of 2007 we reviewed our expenses with a focus on personnel and advertising in particular. To ensure that our cost structure was appropriate for our forecasted gross profit levels, our approach was decisive, yet surgical, so that it would result in the least amount of disruption on our retail performance. We reduced our personnel cost by 2% to 3%, or about $10 million in annualized costs. Those cutbacks combined with the natural flex of our pay plans as gross profit declined, enabled us to deliver a $5.1 million or 6% reduction in same store personnel expenses for the quarter.

We took a similar approach to advertising, our goal was a 5% to 10% reduction for 2008, but with the softer retail environment we adjusted our plans even further. Specifically, in traditional media and bought same store advertising down 15%. Keeping our advertising PBR constant with last year at $305 per vehicle. Meanwhile, we continue to expand our fixed operation advertising programs and internet activities.

All of our regions contribute to our cost reduction initiatives, however these efforts were particularly important in offsetting the weakness in Florida and California. For the quarter, Florida contributed 30% of our overall revenue, and California contributed 4%, so more than 1/3 of revenue was derived from very soft markets. In Florida our same store retail units were off almost 20% from a year ago, and as you would expect in this environment, our same store gross profit in Florida was down more than 15%. However due to strong flow through from our expense cuts, operating income declined 35%, or about $0.10 per share.

This is no doubt that the housing crisis continues to weigh on the overall economy in Florida and California, and we are expecting that the softness in these retail markets to continue throughout 2008. Although on a comparable year to year basis, our results should start to look considerably better in the second half. And one last item on SG&A we incurred approximately $500,000 dollars or about $0.01 of EPS in costs related to the conversion of our stores to the Arkona DMS in the quarter.

Our tax rate for the quarter was 38% at the midpoint of our planning range for 2008, and up slightly from last year's first quarter rate of 37.7%. Turning to the balance sheet, our cash balance was $26 million as of March 31. Down $27 million from year end, as a result of acquiring a Toyota store in Atlanta, as operating cash flow was up 55% compared to a year ago, to $25.7 million. Our debt to total capital ratio remained relatively constant at 44.7%, and our average cost of debt is currently about 6.6% with no principle amounts due under our subordinated debt until 2012 and nothing outstanding on our existing revolver.

As Charles mentioned, we brought down used inventory substantially at the end of 2007, and our used inventory levels are almost 25% below March of last year. Our used vehicle DSI stands at 45 days, and we will continue working to align our inventory to meet the demand of our local markets. Optimally we would like reduce our used vehicle DSI to 35 days. Looking at new vehicle DSI, we currently stand at 77 days. With our [brand] we would like to see those numbers closer to 65 days, however with the one month look-back we use in our DSI calculations, and an usually weak retail month in March, inventory levels were up, especially relative to the lower sales pace. In total our new vehicle light inventory was up 54 million, or 11% on a same store basis from last March.

Breaking down new inventory by market segment, at the end of march, luxury inventory stood at 77 days, up from 53 days a year ago. Midline import brands increased to 67 days from 55 days. Finally, domestic inventory increased to 107 days from 77 days last March.

I would like to remind everyone that our floor plan rates are LIBOR based. So with the destructions during the quarter in the debt markets, we have not yet seen the full benefit of that interest rate reductions. The fed funds rate is down 300 basis points since last March, yet our average libor rate for the period of 3.6% was down just 170 basis points compared to a year a go. And generally in line with our planning levels.

Floor plan expenses was down a little over 20% on a same store basis or $2.4 million. currently the spread between fed funds and LIBOR is about 65 basis points. Significantly higher than the historical average of 10 basis points, and our current forecast assumes that LIBOR rates will stay at about 2.9% for remainder of 2008. Also keep in mind that we have a swap in place to fix 150 million of our floating rate that-- through November of this year.

Finally with respect to portfolio management we divested three stores, during the quarter including two value brands and a domestic brand that were under the same roof. As always, we continue to evaluate the bottom 10% of our stores for potential divestiture, and capital redeployment opportunities. With that, I would like to turn the call back to Charles for some concluding remarks. Charles?

Thank you Gordon. Before I turn to closing remarks I want to make everyone aware of more severe weather that impacted our operations in April, this time in the form of a tornado, that directly hit two of our dealerships in Jackson, Mississippi. We are currently evaluating the financial impact of the destruction, as well as the disruption in operations, and estimate that the total financial impact could be as much as $0.03 of EPS for the quarter.

In conclusion today I would like to reiterate our commitment to our long term growth strategy, and reassure our shareholders that we remain very confident in our positioning in the marketplace, in terms of both our brands and locations. During the quarter we saw further migration of consumer demand towards affordable fuel efficient vehicles, as gas prices continue to rise, and macroeconomic conditions worsened. These broad changes, and customer preference are moving directly towards Asbury's sweet spot. During the quarter 60% of our new vehicle sales came from our midline import brands, which offer the widest range of fuel efficient cars in the industry.

We also remain confident in the long term growth prospects of our regional markets. While Florida and California are obviously underperforming at the moment, we have no doubt that their strong growth will resume. As we noted in this morning release, most of our dealerships are in markets with populations growing faster than the national average in 2007, and long term projections still call for these markets to grow significantly faster, than the nation as a whole. During the first quarter, we continued to execute against our strategy, selectively acquiring a high quality Toyota franchise, and continuing to pay the dividend to our shareholders. We remain well positioned to execute tuck-in acquisitions to compliment our organic growth, and need only a small contribution from them to deliver against our growth objectives. Finally, with our balanced retail and services business model, with revenues from four lines of business, and the flexibility to cut expenses to offset any weaknesses, we are well positioned to weather the current turbulence in the economic environment, and likewise when the market does return, we will be in position to take advantage of the retail opportunities. And with that, we'd like to turn the call back to the operator, and take your questions.

Thank you. (OPERATOR INSTRUCTIONS). We'll go first to John Murphy, with Merrill Lynch.

Good afternoon, guys. Just had a question on the new car margin, and if you think this pressure is more structural and cyclical here? Also if you could just talk a little about your profit differential as the mix deteriorates from sort of that higher-end luxury and larger trucks towards these more fuel efficient vehicles, if there is a big swing factor there?

Certainly under today's market conditions, where there is more inventory available than customers in some cases, it will have an impact on the margins. Everyone still wants to turn the inventory. The part of the financing arrangements with the customer that are cash, the cash position is a little bit less. So it structurally changes the deal a little bit. That combination of events, right now makes it unusually difficult on margins. We do expect it to return in the future, as soon as this cycle returns to a more normal business. As far as the luxury margins, the heavier luxury inventory is not in as demand right now, so the margins are softer there. The newer products that are being introduced are still quite strong in the margins, but they are at a lower level.

Can you think about the cost structure, and the fixed cost structure, and what you are able to do there, sounds like you cut pretty far, so far. And I am wondering if there is anything more you can do there, in the face of potentially weaker sales, and as you implement DealerTrack, how much further you can go on these cost savings?

John we continue to manage the business to the market. There will always be more expense takeouts. We did do-- as you know the greatest expense opportunities are the greatest cost in dealerships is inventory, personnel, and advertising. We cut personnel and we did advertising. The one area that is glaring to us is our inventories, and we are working diligently right now to get our inventories down, so we can work on that expense reduction as well.

On a go forward basis we want to be very careful with our advertising adjustments. We still know we won't have the appropriate share in the marketplace of our voice. Personnel reductions, depending on what happens in the marketplace, whether we would go there or not. And then with the efficiencies, and what we look for with the gains with the Arkona and DealerTrack implementation, is productivity gains. From an expense standpoint, you really have two ways to go with it, which is a direct expense reduction, or increase in productivity. We will look for both of those areas to help put us where we want to be, with our bottom line results.

Lastly on the used car market, I am just wondering what you are seeing there. Clearly there is some pressure on profits. I'm just wondering if that is really a function of a lack of availability to these sub prime consumers, what you are seeing on showroom traffic if the credit were to loosen up, and some of these guys were able to get financing, would there be a real big uptick there? Just generally, what is the short term weakness in these, and where there potentially maybe some real recovery here in the near term?

What certainly impacted us, John, was last year as an example versus this year, over 75% of the difference between our volume last year and this year, is our loss in sub prime. The sub prime market actually has always been there. Actually it is growing more today. The ability for the lenders to service that market, and having the right inventory for that market, is not there as it has been in the past, in the past the lenders they stretched their limits a little bit. And the ability of the customer to have a little more cash down, and certain inventory that came out of the rental car companies was in place.

A lot of those conditions have changed, so that changed that sub prime market. I do believe that whenever the lenders are able to have availability of capital to loan, that that will open that market up, that will be an opportunity. And of course with our experience there, we, at the appropriate time and appropriate way, will be able to take advantage of that. That.

Great. Thank you very much.

Yes.

We will go next to Rick Nelson, with Stephens.

Thank you and good afternoon.

Hey, Rick.

Just wanted to follow up on the cost savings. The personnel and advertising expenses that you discussed, that came out. Was that front end loaded, or did that sort of flow through the quarter, and is more back end loaded?

What I would say-- this is Gordon. Probably 75% of it was throughout the quarter, and the other 25% came through the quarter. On the advertising side it was pretty much, it was a little bit more in March than as a percent in January, but January and February are lower advertising months anyway. So that was more back end loaded.

Got it. And the (inaudible) per unit, the nice increase that we saw there, what is the driver?

We have had nice increases, really quarter by quarter, in our finance PBRs, and there are a number of things that contribute to that. One of the greatest things, I think, is the focus on our bottom third stores, where we continue to improve the productivity, and the training, and the skill set of the people in the dealership. That also relates to higher customer satisfaction, a better customer experience. So that is where a lot of it comes from. Some of it has on the PBR side, comes from a natural lift from the decline in our sub prime financing. Some of our product penetrations, and then certainly some of the income that received from our preferred lenders, as well as our contract providers, so it is a combination. But overall, the bulk of it comes from the skill set improvement, in our finance managers.

Thank you for that, Charles. Just a question on acquisition pricing. You have made an acquisition here recently, can you comment on the environment there?

Personally, I think right now, it still is pricey. We look at very specific deals, as you know, and strategic deals that fit for us, and we have hurdles that we must be able to get over before we can make an acquisition. I think right now the number of deals that we have been able to look at, we could load this room right now with them, because there are more deals that as we expected, would become available. I don't know that the rationalization is in the seller's mind yet, as to what the market is. I think that that, at some point in time, will settle in. Right now, I think they are still a little pricey for us. There is more available deals out there.

How do you approach these CapEx requirements that the OEMs are instituting? Mercedes Benz with Autohaus, and Toyota has got their image requirements, how does that work in with your return on capital targets?

We like to have good partnerships, good relationships with what we consider our OEM partners. And their requirements, as you know, seem to be increasing. Where it makes sense for us to do that, we absolutely will do it. But it must make sense for us from a business standpoint as well. It is a matter of managing those relationships in an appropriate way, that it is win-win for everybody. I think ultimately, at some point in time, and it depends on again the return hurdle, as to when it happens, ultimately I think that the manufacturers will get what they are looking for. But we need to put it on our time frame as well when we do that.

All right. Thank you. Good luck.

Thanks.

We will go next to Edward Yruma, with JPMorgan.

Thank you for taking my question. Given the amount of structural costs you've been able to take out of your stores, where does that lower your SAR break even point, or at least where you would cross the $1.80 threshold on low end of your guidance?

I think that we are-- right now we have lowered our SAR expectation. The cost take-outs are in line with SAR-- around probably the end of the 15 to 15.2 range as opposed to where we were, when we started this process at 15.3 to 15.5. So we lowered our SAR expectation and taken the commensurate amount of cost out.

Got it. And given some of the weakness in some of your local Florida and California markets. It feels like you are losing share there? Or are you basically holding or gaining share in those though markets?

I would say on an overall basis, and in all of our markets, historically we have gained share in the marketplace. But if you look at it dealership by dealership, sometimes operational, we have operational changes or improvements that we can make, but on an overall basis, we are maintaining or gaining share. Last quarter I mentioned on our call, that we lost share in last quarter, and it was what I believe is because of some of the distractions where we were doing these expense cuts, and the organization itself was distracted from what we do on a day-to-day basis, was go to work, sell cars, take care of the customer, take care of our employees. So with that exception, we generally maintain or gain share in our markets.

Got you. One final question if I may, I know you addressed the issue of sub prime within the used vehicle market, can you refresh our memories and let us know how much new vehicles are sub prime, and whether you have seen some impact from credit availability from there as well? Thank you.

I am sorry Edward, did you say on the new vehicle?

Yes.

Okay. What we notice is not really a lender pull back. But what the-- what is different in the marketplace is the structure of the deal. The trade in, or the lack of equity being upside down, that the customer is. And that it is-- excuse me a second. I lost my train of thought here. I am sorry.

Your original question on sales, I think-- we do not particularly track sub prime and new, but it is about 8% to 10% of our volume in new is sub prime.

Excuse me. Someone distracted me. That is why my brain went soft there for a minute. The question was on the financing and new side. What we notice again, is the deal itself is changing. So as the lenders look at the deal, they are not over-extending the loan requirements, or the loans, as they did in the past, where they may give 110% loan approval to the customer, whereas now it is 90%. So other than that, where the deal has changed, the lenders are not pulling back, they're just tightened the box a little bit.

Got it. Thank you very much.

We will go next to Deron Kennedy, with Goldman Sachs.

Hello, it's Deron Kennedy here with Matt Fassler, how are you?

Good Deron.

Good. A lot of my questions have been answered. I was trying to pick apart the weakness you are seeing in used. And I think overall, I am surprised the gross margin has held up as well as it has, considering how steeply down the comps are. But is there a way you can kind of break out the sub prime challenges in the markets where you took kind of a deeper dive last year, versus overall weakness in the market?

Most of the impact on sub prime was in three of our markets, Florida, Arkansas, and Mississippi. We know that we lost, as I mentioned, about 75% of our unit volume has been lost on the sub prime part of our business. We know we are very good in the used car aspect of the business. If you are going do anything in this business, you must be good on the used side. You have got be able to dispose of the trade-ins. You've got to be able to know how to trade for them, as well as retail. We are good. As we said before, we really took advantage of an opportunity in the marketplace, so we don't feel that we have dropped off.

And one of the reasons that we were able to hold on to the margins, is because of the inventory repositioning and the reduction of inventory, we did at last quarter of last year, allowed us to have the type of inventory in the market, that the market was looking for. And therefore you can hold a higher margin on that. Again, it is a number of factors that determines performance in the used arena. So again it's a number of factors, that determines performance in the used arena, and so we look at all of them.

Yes. I think I understand how you are really comparing against those three markets last year where comps were so high. Do you have any indicator you can give us, same-store maybe excluding the markets where you were pushing in sub prime?

We can get back to you on that. I want to say off the top of my head though, that we are probably equal to where we were, excluding the sub prime in our other markets. We will get back to you on that with a definite answer.

Lastly on the credit side, I was just wondering if you could talk about sub prime and overall lending conditions, and what your outlook is for the consumer. Overall pull back has been affecting availability for shoppers in your store.

In the sub prime or prime?

Well, I guess if you could talk to both.

Okay. Again as we have mentioned just a little earlier, the lenders, we have seen some pull out of the sub prime business, but there have been others Chase, Bank of America, as an example that have expanded. They see the opportunity in that business, and have expanded themselves there. Others have reduced.

In the prime sector, in our portfolio mix, we really again-- Toyota Financial Credit, NEMAC, Honda Finance, all of these guys are still buying well. Other than a tightening of the deal, as I mentioned just a little while ago, the customer in some cases today is upside down, and they're not over-extending some of the loans. So that is where we are not able to be as flexible as we were in the past. As far as cutting back, we are not sensing that any of the lenders are cutting back.

Okay. There is actually, I noticed one more comment you made about incentives being down in domestic brands. How are incentives trending in other brands, in imports and luxury, and what is your outlook for that?

The incentives that I was mentioning was the dealer incentives that we received last year, that really was where our improvement in gross margin was so dramatic. Today the dealer incentives are not as strong as they were last year. I do expect if inventories stay the way they are, we will see-- there is production cuts or greater incentives. One way or the other, something must move the market.

Got it. Thank you for taking our questions.

We will go next to Rich Kwas, with Wachovia.

Hello Rich.

Hello, good afternoon guys. Question on average selling price. You mention that there has been a shift to cars on the new side, away from trucks. What are you seeing on the used side. Similar shift?

Yes. You know, the market today is more-- anything that is fuel efficient is hot. High-end luxury cars are weaker, except for CPO, the CPO business is in all of our dealerships, is improving, it has always been good but it is continuing to strengthen. And the shift-- SUVs, as you know right now, and trucks to an extent, if that is where your inventory is, you are in trouble. And the same thing for trading for those. You have got be aware of where the market is to whenever you trade for any of that inventory.

I think more than ever, the consumer is really looking at the overall cost of ownership of the vehicle. So they are looking at not only gas prices, but maintenance requirements, and then ultimately the residuals they receive when they trade in the car. Those are the things that the consumer is looking for, and quite frankly that is midline imports, and as you know that is the biggest segment of our business. So we are right in the sweet spot of where the consumer is looking for vehicles.

Have you been able to gauge whether the financing environment has had an impact on the mix of used vehicles? Meaning, lenders are maybe a little more stricter with their guidelines, and the cash that is required to put down is a little higher, and there are a group of consumers out there that do not have that, so they trade down, and accept a cheeper vehicle?

Yes. You have been in our dealerships, I can tell. Those things are absolutely happening out there. There is a shift in the marketplace like that. A lender wants to be protected on what they are lending the money for. And the consumer today, I think that that is one of the keys. When you have a consumer coming in, they may have something in mind, and if that is not available to them, it is the ability to move them to something else, that can satisfy their needs, as well as the financing aspect of the business. That is-- I think the more successful an organization can do that, the better they can weather these type of market conditions.

When you think about that trend, do you think that extends throughout the rest of this year? Are you expecting any kind of relief on that front in 2008?

Rich, I think that it is going the be through this year. Unless something macro-economically changes, I think that is the way we have got think about our business right now. If it does shift, then that's great, we will be ready for that, too. But I think right now, we've got to think in those terms.

Lastly on heavy truck, I recall that Charles that you said that you thought mid year, the heavy truck market would stabilize. Is that still your current thinking?

No. When we made that statement, we certainly had different information than we have today. So we are-- we are expecting continued weakness in that market. However, because we have repositioned that business, and restructured it, and have really pulled the inventory down on both new and used, we are comfortable with what we will be able to do with that business for the rest of the year, even at these lower volumes.

Okay. Great. Thank you.

(OPERATOR INSTRUCTIONS). We will go next to Matt Nemer, with Thomas Weisel partners.

Good afternoon everyone. My first question is, looking at the Accord programs you had last year, I think that one of those payments hit in March, and I think there's another one at the end of the year. Can you just give us a sense of where you are cycling those payments?

In the first quarter, in general, and most of it is the Honda program relative to last year. Incentives are probably on the magnitude of $0.015 to $0.02 lower this year than last year. Last year, I think Honda was about 500,000 of that. A good portion of the lowered amounts from last year was the Honda program. As far as the cycling through, there was a small pick up in the second quarter. My recollection that about 600,000 we took in the second quarter, and the rest of it was in the third quarter, somewhere around $3 million range in the third quarter. A lot of that was offset with lower margins. There will not be that drastic a reduction in the third quarter as a result of not replicating that program.

Got it. And then on certified pre-owned, is it possible to break out what you are seeing there in terms of unit sales? Seems like there has been a pretty significant acceleration for the luxury brands at least, for CPOs.

We are experiencing that. Matt, we don't have it broken out as to specific units. We confirm-- you are exactly right, we are seeing a-- particularly in BMW, that there's a great value story there for the consumer, and of course we know they find the value, and the are, especially with BMWs.

How does that impact your margin dollars. Is it relatively neutral or is it a little dilutive? I am assuming that those are people trading down from a new to nearly new.

Not necessarily. And actually, in the luxury line, we experience higher margins, generally on the used products. Now, in-- we have not noticed yet that these people are trading down. That they are buying the CPO rather than buying new.

Okay. You think it is incremental volume?

The CPO is incremental volume. The luxury buyer is still a luxury buyer and they want new.

Got it. Okay. And turning to parts and service, you mentioned that whether it had an impact there. From a modeling standpoint, should we expect that to tick back up, to the three, four, five percent range? As we get beyond the weather impact in the first quarter, and the second quarter.

We noticed our customer pay is up 1%, and our warranty is down 5%. Normally we are up more than that on customer pay. The weather and our foot traffic slowdown happened about the same time, so we really don't have visibility yet, as to whether or not this is a slow down, and we know how much the weather impacted us. Normally, in my experience, whenever we have a disruption in the market, like we have right now, it will temporarily disrupt the whole organization, the parts and service will experience it to some degree. But what also happens is, as the lifestyle changes that the customer makes, they do get back in the cycle, because they need their vehicle. They have got go to school, they have got go to work, they have got to buy groceries. They need the vehicle. If in fact they are putting that off right now, it is just temporary. They will be back in the service departments.

Matt, for modeling purposes we have assumed for the rest of the year, that we will be at the low end of the range that you just said. Around 3%.

Got it. This is just a housekeeping question, the restricted payments basket should be around 15 million right now, does that make sense?

13.2

Okay. Then lastly, can you comment on any change in customer behavior that you have seen in the first few weeks of April relative to March?

It is kind of hard to say, the SAR for April last year was strong at 16.2. I believe that-- I don't think that we are going get to that level this year. We kind of anticipated15.3, 15.5. It has been less than that. And April, usually is the type of month that is starts off slow and finishes stronger, because Easter is usually in April. Easter this year was in March. I don't know necessarily how much impact that had in March or not, but it certainly was something different. So it is hard to say whether or not it will strengthen or not. We are just continuing to do the things that we do on a day-to-day basis, and take advantage of whatever opportunities we have out there.

Got it. Thank you so much for your time.

At this time we have no further questions in the queue. I would like to turn the conference back to the speakers for any additional or closing remarks.

Thank you everyone, for joining us today. I would like to just extend the comment that I ended our last call with, last quarter. We are steady as she goes, and we are very comfortable that we are executing the model that we have. I am very proud of the people in the field during these difficult economic times, and we will continue managing the business to the level that everyone is expecting from us. Thank you for joining us today.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation, and you may disconnect at this time