Asbury Automotive Group Inc (ABG) 2008 Q2 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 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 morning, everyone, and thanks for joining us today. As you know, this morning we reported our second-quarter 2008 earnings. The press release is posted to our website at www.asburyauto.com. If you would like a copy of the release faxed or mailed to you, please contact Michelle [Ramsamouge] at our corporate office. Michelle can be reached at 212-885-2535.

Before we start, I'd like to remind everyone that the call today will include forward-looking statements that are subject to certain risks and uncertainties which are detailed in the Company's 2007 10-K report, as well as other filings with the SEC.

The purpose of today's call is to discuss Asbury's second-quarter results. With us today are Charles Oglesby, our President and CEO, and Craig Monahan, our CFO. Following their comments, we will be happy to take your questions.

Now I'd like to turn the call over to Charles Oglesby. Charles?

Thank you, Keith. Good morning, everyone, and thanks for joining us today. This morning Asbury reported income from continuing operations for the second quarter of $11.6 million, or $0.36 per share, compared to $21.1 million, or $0.63 per share in the second quarter of 2007. The results for both periods include non-operational charges totaling approximately $0.03 per share. A description of these charges is included in the tables attached to our release.

As you know, we've been dealing with a difficult retail environment for more than a year now, and consumers have been impacted by everything from tighter lending standards to record high gasoline prices. With consumer confidence at its lowest level in more than 15 years, much of the buying public has decided to delay the purchase of new vehicles, causing overall U.S. sales to decline rapidly from a 15.3 million SAAR in the first quarter to just 13.6 million in June.

For Asbury, decline in sales was most prevalent in Florida, where the housing crisis has further dampened the local economy. Towards the end of the first quarter and into the beginning of the second quarter, we felt our Florida operations had stabilized. However, as the quarter progressed, we experienced further deterioration at an unexpected pace. With our Florida region historically contributing about one-third of our total revenue, the sharp decline in retail sales, combined with deleveraging of the cost structure, significantly impacted our overall profitability.

The overall market also presented new challenges as shift in consumer demand from trucks and SUVs to fuel-efficient cars clearly accelerated. This shift in consumer preference will have a significant impact on the automotive industry, as manufacturers adjust production schedules to meet consumer demand and redesign their businesses to support less profitable car sales. From an automotive retailer perspective, we will face many of the same challenges, as the change in customer preference will place continued pressure on new retail margins and require that automotive retailers become more efficient in how we run our business.

In response to this new reality, we are evaluating our cost structure at each level of our organization and are taking action. We are executing a phased restructuring plan that will begin with Asbury's corporate offices. We will be shutting down our offices in New York City and Stamford, Connecticut and relocating to Atlanta, Georgia, where our corporate employees will be housed in the existing headquarters of the Nalley Automotive Group. This restructuring will reduce our corporate personnel costs by 20% and provide operational benefits as we're able to work more closely with our regional and store-level management teams.

Now I'd like to quickly review our performance by business line for the second quarter. With respect to our new vehicle results, our 12% decline in comp store retail unit sales compared favorably with the retail sales for the industry, which were down 16% according to C&W Market Research. The current retail environment has impacted all segments of the new vehicle market. On a comp store basis, our domestic sales were down 23%, due largely to declining truck sales. Luxury sales were down 16%, as the upper end of the market was impacted by the weak economy. And mid-line import sales fared better, down just 7%, with some stability coming from their offering of fuel-efficient vehicles.

In total, our advantageous brand mix, which was 83% luxury and mid-line import during the quarter, was overshadowed by weakness in the retail environment, especially in Florida. In used vehicles, the sharp and sudden changes in customer preference also presented challenges in the used vehicle markets and at auction. There were times, for example, when you could even find small used cars priced higher than new vehicles of the same model. And obviously, there were severe in the valuations of trucks and SUVs. To give you some appreciation for the pace of the change, in the fourth quarter of 2007 trucks and SUVs made up 54% of industry-wide new vehicle sales, and cars made up only 46%. Now, with gas prices at all-time highs, car sales have moved up to 55% of the U.S. market.

So the second quarter became a transition period for us, as we moved to meet the demand in the marketplace. In doing so, it was necessary for us to reduce our truck and SUV inventory, which resulted in wholesales losses that were $400,000 higher than last year's second quarter.

Of greater importance, however, is that we were able to lower our used light-vehicle inventory by $12 million from the first quarter of this year and kept our inventory turns at 43 days. These efforts have left our inventory in very good position and will enable us to provide our customers with the vehicles they want.

Touching briefly on F&I, our overall business was down due to decline in new and used vehicle sales. However, our F&I PVR remained strong at $979, up $20 per vehicle from last year's second quarter.

Finally, with regard to parts and service, we're pleased that the business has remained relatively stable despite the difficult economy. The warranty business has continued to decline, with gross profit 3% same store, as manufacturers continued to produce better quality products. However, our continued commitment to growing our customer-pay business delivered 1% same-store growth, and our overall parts and service gross profit declined just slightly on a same-store basis, down 1%. We've remained aggressive in our advertising efforts to bring customers back to our stores for service. And once they return, we strive to insure that the level of service they receive is nothing less than exceptional.

Now I'd like to introduce Craig Monahan, and although all of you -- many of you already know him -- throughout my career I have never underestimated the importance of having a strong financial partner by my side. It was just as important to me when I was working in a single-point dealership, as it was later in my career when I was running regional dealerships groups. And I say with the utmost confidence that the financial partner I have now working along side me is the right one to help guide Asbury through this difficult time.

Craig is well known from the years he spent in automotive retail and as a finance executive who is focused on efficiency and capital discipline. And we're glad to have him here with us as Asbury's new CFO. Craig?

Thanks for the warm introduction, Charles. I'm proud to be a member of the Asbury team. I've been here for three months and during that time I've been focused on the basics. I'd like to share the results of our work with you, because I think it will give you a better understanding of what you can expect from Asbury in the financial and information systems areas in the months and years ahead.

As we announced in June, we acquired the real estate underlying more than 25% of our dealership portfolio which was previously under lease agreements. This investment was crucial to our organization for several reasons. First, it replaced high-cost, sale/leaseback financing with lower cost mortgage debt, saving us more than 200 basis points in financing costs. Second, it removed the future cost of lease escalators that we were facing under the lease agreements. Finally, it provided us with the flexibility to manage our assets optimally from an operational perspective, without having to worry about getting approvals from third parties. As we move forward, we will look to take advantage of additional opportunities to own more of our real estate as they arise.

As Charles mentioned, we're going to be more disciplined in the way we allocate capital. This doesn't mean that we will simply cut projects, but it does mean that we'll be working closely with our manufacturing partners to find solutions that satisfy their guidelines while providing returns well in excess of our costs of capital. We're already putting this philosophy into action. In a recent project, we found creative ways to reduce our investment in a facility by 20%. In the end we will construct a state-of-the-art facility that meets all of the manufacturer's requirements, and makes financial sense for Asbury.

In the second half of 2008, we expect to spend approximately $35 million on CapEx, most of which is associated with major ongoing projects. Our goal for 2009 is to manage our capital spending to $40 million, almost half of our forecasted levels for 2008. Our disciplined approach to capital allocation will extend beyond future cash outlays. We will continue to systematically review all of our dealership operations, reviewing returns on a store-by-store basis. And, when appropriate, we will sell dealerships and redeploy capital into more attractive investments.

With respect to our cash position, we ended the quarter with $35 million in cash on hand, about the same level we have today. And we have $75 million in borrower capacity under our revolver. We are currently working on a new revolver, and anticipate that we will be able to increase our borrowing capacity and improve our covenant flexibility.

On the information technology front, I am pleased to announce that we have recently appointed Stephen McGee as Chief Information Officer. This position will be crucial as we continue to move towards a single TMS provider and a seamless, fully-integrated technology solution. With respect to our conversion to the DealerTrack DMS system, we have now converted 28 or our 89 stores. Progress is going very well and we are pleased with the support we have gotten from DealerTrack. We are on target to convert 40% of our stores by the end of 2008.

We have focused on improving efficiency in every area of the business. For example, we have worked to accelerate our SEC reporting timeline, and will file the 10-Q tomorrow, one week ahead of our schedule last quarter. This accomplishment will allow our finance desk four additional weeks a year to focus on improving other areas of the business.

As Charles mentioned, we'll be restructuring our corporate office. We'll move an initial group to Atlanta in September, with the completion date for the restructuring scheduled for March 2009 after the filing of our 10-K. We expect that the costs associated with the corporate restructuring will total approximately $5.5 million pre-tax, of which approximately $2.5 million will be incurred during the second half of 2008. These costs include employee relocation, recruiting, severance, and duplicate costs during the transition period. Once complete, we expect the restructuring of our corporate offices to provide annual pre-tax savings of approximately $3.5 million.

Before I pass the call back over to Charles, I have a few more topics I'd like to cover. First, I know there's been a lot of speculation in the industry regarding the accounting for goodwill and franchise rights and, more specifically, whether or not there are any impairment issues. As required by GAAP, we conduct a test of our intangible assets annually, which we've historically performed in the fourth quarter. We do not have an impairment issue at this time. If that were to change, it is important to note that an impairment would not have an impact on our existing debt covenants. However, it would impact our ability to pay dividends or repurchase shares.

As I'm sure you saw last week, we announced that we will be paying a second quarter dividend. The dividend remains a central piece of our overall shareholder return philosophy and, as always, we will continue to evaluate the dividend relative to other opportunities to improve shareholder returns.

Finally, as disclosed on our release this morning, we updated our guidance range for 2008 EPS of $1.20 to $1.40. This guidance range reflects a more challenging automotive retail environment than originally anticipated, and assumes that the SAAR for the second half of 2008 will be approximately 14 million. In addition, we anticipate that the market in Florida will remain challenging throughout the remainder of the year. It's important to note that our range includes severance costs included in the first half of the year, as well as expected restructuring costs during the second half of the year. Together, we expect these costs will total approximately $0.08 in 2008.

Now I'd like to turn the call back over to Charles for some concluding remarks. Charles:

Thank you, Craig. Today we face some challenging times. Retail volumes are down and margins are under pressure. The current market is forcing deep change in the industry, a change that we welcome. As automotive retailers, we must become more efficient, focusing on productivity to drive our profitability. At Asbury we're making the hard decisions to navigate our company through this time. And when the market does return, we will be well positioned to capitalize on the opportunities presented to us.

In closing, I'd like to thank our regional staff, our store-level personnel, and their continued diligence in overseeing our day-to-day operations of our stores. And I'd also like to thank our manufacturing partners for their ongoing support.

And now we'll be happy to take your questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS.) Rod Lache from Deutsche Bank.

Actually, this is Dan [Galf] in for Rod. Wondering if you could talk about -- there's been a lot of news about a leasing pullback in the industry. Could you talk about how you think that'll affect you, and also if there's any difference in the profitability of a vehicle sale between leasing and a buy?

The pullback in leasing is going to affect everyone. It's going to impact the customer, because in a lot of cases consumers in the past have been able to upgrade to a vehicle that they would not have purchased before because the lease payments were less. You get more car for less money. And they could turn them in every two, three, four -- whatever the lease term was, mostly three years, and drive a new one. The industry itself is about 20% or so on the leasing side and so some of the manufacturers now are putting retail incentives in place to try to offset leasing.

But at the end result it is going to make an impact. I think that it will have the opportunity to improve used vehicles sales. Some of those customers that can get CPO cars, as an example, will move to that market. It will have an impact. It will have some impact on the luxury side of the business. But I think it will just be in the transition. We went through this about 10 years ago, as many people will recall, where the lease -- the residual values were not equal to what the market wanted, and so there were some major losses at that time. We're going through that transition again. So I think that leasing will return at some point in time. We don't know about that. But right now it will have some impact to the marketplace.

Is there a significant difference in profitability at all?

You know, the difference in profitability -- leases, because of the way they were structured, it was basically a payment, and the residual value and a lease factor that set it. So there was margin built into the lease. So now you'll start working a payment again, and down payment will be the difference. So it can have an impact on margins, but I'm not sure that it will yet.

Okay. And could you talk about what your assumption for used comps is in your guidance for the rest of the year? And also maybe talk a little bit about the weakness in new sales. We noticed fleet was down 50% -- if there was any specific reason for that? And possibly how Honda in Florida is compared to Honda nationally?

Hi, Dan. It's Craig. Let me hop in and talk about the guidance. And I think Charles will follow up with the rest of the questions. But the guidance that we've given here, $1.20 to $1.40, we want to keep at a very high level and not get into the individual components behind it. I would just say broadly, as we put those numbers together we were looking at the performance that we saw in the second quarter and how it slowed down later in the second quarter, basically rolled that forward in conjunction with the softness that we've seen in the Florida market. And then, as I mentioned, we've also got $0.08 of essentially restructuring and severance cost baked into this. And that's kind of the level I'd like to stay for now.

And in reference to Honda in the Florida market, Florida is down about 19% in the markets we operate in. Last year we -- our Honda dealerships performed at a very high level as we went through the changeover in the old Accord and the new Accord. There were some very strong incentive programs in place. And so we highly penetrated the market last year. And so our Honda performance is equal to the manufacturer approximately. It's a little softer in Florida. But we are still -- I mean, so as we look at our comps versus last year to this year, we look a little bit less because of the margins in Honda. But we're so bullish on Honda. You know, it's 31% of our business and that is definitely the franchise to have right now.

And was there anything in particular with the fleet sales? I was like 1,000 units less.

Yes, there was a couple of domestic franchises last year that had more what we call fleet tail business. And that business is not there this year.

Okay. Thank you very much.

Rick Nelson, Stephens, Inc.

I wanted to ask about inventory, if you could break that down between the mix of cars and trucks, and how long you think it takes to get back into balance?

Rick, we currently right at 50-50 car and truck. Our base supply is high, because we are north of a 100-day supply on truck. And we are in the low 60's in cars. Our sales rate has moved from where we were at 45% truck to 36% truck now, and so that makes cars at 64%. So the balance -- we expect it will probably take the rest of the year to get everything balanced. But we feel like we're in a pretty good position right now with having a 50-50 balance.

Thank you for that. Question for Craig -- you've got a lot of experience with shared-resource centers at your prior company. Do you see that being brought to Asbury as well?

Rick, I think, just broadly speaking, that shared resources bring tremendous efficiencies. But I think we have to step back and take a look at where we are here at Asbury. We don't have a common DMS. We don't even have a common chart of accounts. So we've got a lot of things to get done on the technology side and on the standardization front before we can have a serious conversation about a shared-service center.

That said, I think there are tremendous opportunities for us to drive productivity in the future. And the things that we've seen our competitors do and have great success with certainly will apply to Asbury as we can put those programs in place here as well.

Thank you. And a question about sales momentum during the quarter -- and we understand the business got much tougher as the quarter progressed. I know one of your peers said that July was better than June. Do you have any comments there about June -- July?

I'll tell you, Rick, it was breathtaking, the change in the quarter. We felt like April we were in pretty good shape. And then we noticed kind of mid-May a dramatic shift, and I certainly believe that gasoline fuel prices moving above $4 a gallon -- and we saw such a, just again, a breathtaking move from heavy SUVs, trucks, to small cars. And this was such a shift in the business. I mean, we've seen this kind of frenzy only a couple of times in the business. But that dramatic shift is unprecedented and has caused our industry to start an evolution, which I think we're ready for. It's going to squeeze out a lot of the inefficiencies on the manufacturing side, as well as on the retailing side. We've never seen the manufacturers make the decisions that they've made to close plants, cut production, as fast as they did and try to retool and bring in vehicles that the market is demanding.

So that kind of breathtaking change -- actually this is a very exciting time to be in the business. I know I'm kind of going on here, but with these kinds of shifts and changes, this is a very exciting time to be in the business.

How long do you think it takes the OEMs to adjust their production schedules to meet demand for the more fuel-efficient cars?

A lot of the product is in the planning stages. It's just not here yet. And some of the manufacturers are working to import -- you've heard Ford talk about bringing in some of their European vehicles. General Motors is looking for the sa- - everyone is looking for the vehicles that they can import today, because that's where the market is, but the product is on the horizon. And the acceleration of that product -- I don't know how quickly they can do that. But we're really looking at, I would say, a year before we have sufficient inventory in the marketplace for the demand that the consumer is looking for.

Thank you for all this and good luck.

Rich Kwas, Wachovia.

Charles, new vehicle margins -- in your prepared remarks it was kind of implied that new vehicle margins are going to be structurally lower versus history. Am I reading that right?

Yes, what we've enjoyed, pretty strong margins, really -- if you look sequentially from the second quarter of last year through this year we were plus 7% and last quarter we were down to 6.8%. And a lot of that is in the shift. I think that currently there is not only the issue going on with trucks and SUVs and lower margin. Although we're getting all the margins out of the small vehicles, we're missing the margin on the heavier SUV and the trucks, as well as on the luxury side, the S-class, the BMW 7 -- the LS has only been out two years but there really is nothing new there. And this customer is waiting for the new product, in my opinion. The new 7 will be out next year. I think we'll see a pick-up on that side. But whenever you take that gross production out of the marketplace, it will impact the margins.

And the market has not adjusted yet to these lower margins. I do believe that we will find a way to get them back up, but we're not there yet.

So it's really related to product cadence and improvement and increase in product cadence. And as that picks up you expect new vehicle margins across the board to kind of get back to (technical difficulty) level?

I do believe that, Rich.

In terms of the quarter, I know there were a lot of industry pressures here, but how much did the decentralized nature of the business negatively affect your performance in the quarter?

You know, we have always spoken about the strength of Asbury of having talent in our local markets. We still believe that that, in the automotive retailing environment, is an advantage. One of the things that we announced today is a phased restructuring. And we're starting with our corporate personnel and overhead expense by moving to a less expensive area. We're closer to our marketplaces. And in these phased approaches, we are constantly reviewing our cost structure, the overall structure of the organization.

So as we evolve this way and continue to take cost out of our business, one of the pieces that we want to make sure we keep in our DNA is the strength of our local partners in these local markets. They do know what's going on in those marketplaces. They will be able to react quicker. And they are tied to their local communities. The dramatic shift in Florida -- I don't know that anyone could have moved quicker than we are, and we'll adjust there, because that was just, again, such a dramatic change. So I think that we're moving in a very prudent way to continue to take cost out of our business, to continue to review the structure we have, but keep the strength of our local people as part of our DNA.

Would it be fair to say that, let's say two, three years out, do you think the structure's going to be more centralized or less centralized? How do you view that?

I think that as every business evolves, that getting the efficiencies are the key to survival. And so as we continue to evolve and become more efficient then we would get to the natural structure for the organization. We are not ready to dismantle what we have and then reassemble it. But how we do that will be in a very positive, proactive way without destroying the organization that we have. We've got excellent partners in our markets. We've got great general managers. We spend a lot of time with these guys. They've spent a lot of time with us. There's a tremendous Asbury culture. So we want, as we get more efficient and review the proper and appropriate structure for us to have, again, having the quality of culture and quality of personnel at all levels in our company will be the important thing. That will be the guiding light for us.

Okay, thanks. And Craig, in terms of the guidance, I know you didn't want to get into too many specifics, but you are assuming a 14 million run rate in the second half of the year. What kind of cushion is baked into that in case we're not hitting 14 in the second half?

The guidance we're giving is based on a 14 million SAAR. That's the foundation for what we've given you. I think the way we looked at it when we put that forecast together was, we held the SAAR flat, but we tested margin deterioration beyond what we've seen to date. We contested continued softness on a year-over-year basis in our new and vehicle -- well, not new but in our used vehicle numbers. And then, like I mentioned, we've also baked in some costs because as we move down this path to restructure there will be costs that hit us during the second half of the year.

So, I feel like it's a -- I guess I'd sum it up that I think we've given you a very realistic projection, or forecast, for the second half of the year. I don't think we've been aggressive, nor do I think we've been conservative. I think it's a forecast that says the midpoint of that range is the middle of the fairway.

Okay. And then finally, Charles, when you look at the sub-prime business with capital availability being crimped here over the last several months, I know that you reduced your sub-prime mix as a percentage of used sales. I think it down in the 25% neighborhood --

Yes.

-- last quarter. How has that trended here?

We're still experiencing pressure from the lenders in that marketplace, Rich. That is still such a big market that's out there. And there's still -- the availability of the product and the lender to serve that market is not in place yet. I don't know if it will ever get back to as loose as it was a year, a year-and-a-half ago. But that market -- we must find a way to serve it, because it's there. But it's probably north of 20% of our business today. We're focusing on other aspects -- the CPO business is continuing to grow. Customers see a lot of value there. The under-$10,000 -- anything under $10,000 right now is hot. And so we're very proactive in finding that inventory.

Okay. Thank you.

Matt Nemer, Thomas Weisel and Partners.

So my first question is just following up on an earlier question. But looking at financing versus leasing, can you give us any color on the difference in terms of F&I profits per vehicle?

There was lower profits generally on leasing, because you don't have the product spread on leasing a vehicle that you do on the retail side. So we have the opportunity on the financing side. Although we have a lot of -- we're very proactive with compliance, and we will not allow our finance managers to utilize interest rate spreads to gain our PVR numbers. So we used products to -- so, from a financing standpoint, we have the opportunity for more products, because the customer is going to own the vehicle. And service contracts particularly are more attractive to the customer when they're owning the vehicle rather than leasing.

Okay, that makes sense. And then, just turning to the cost structure, you guys I think cut, started to cut, relatively early.

Yes.

And you mentioned some changes you're making to the corporate overhead structure. But I'm just wondering if you could give us an update on what you're thinking in terms of at the field level on cost cuts, whether it be advertising or general compensation?

You know, Matt, all of that is under review. Advertising is certainly something that we cut back starting last year. We're down 8% for this year from a reduced level last year. We will review that even more. There is some of our brands that we still need to support where the market is. We want to be there and let the customer know to come in. So advertising is there.

As we're doing this restructuring we are reviewing every aspect of the business. I think that the move we made buying our properties back, again, is a great long-term move for us to continue looking at how we can reduce expense and use our capital in the right way. Inventories -- we must get our inventories down. Right now we've got 77, 78 day supply of inventory. If the day supply actually is, on the truck side, is north of 100 days, we're in a good position on the cars, with the low-60's. So as that balance gets in we'll -- so we know that that carrying cost is impacting us.

Personnel -- we've got to make sure that we are efficient with our personnel, that we don't have extra people in our dealerships, but that we do have enough people to support the level of productivity for the customer. So we are reviewing from top to bottom and making sure that we are competitive with our pay plans. We want to fair with our employees and we want to have the best employees that we can. We want to support them in the right way.

So everything is on the table, and it will always be on the table. We must always find ways to take the appropriate costs out of our structure.

Okay. And then a question for Craig -- you come from an environment that I think was more focused on share repurchase than dividend, and I just wanted to get a sense for how you're thinking about those two options in terms of getting capital back to shareholders. And then, also, if you could update us on where you're at on the restricted payments basket?

Sure, Matt. Yes, I mean, it's true, I did come from a share repurchase environment, but I think Asbury is a dividend-paying company and we've been paying a dividend for quite some time. And it is a very important part of the Company's shareholder-return philosophy. And I don't see that return philosophy changing because I arrived. That said, like I mentioned in the script, it is something that we take a look at every quarter and ultimately it's a Board decision.

With respect to the basket, it's at about 18 million. It's actually a little larger than it was because during the course of the quarter we discovered that we had not, in our calculations of the basket, taken credit for the fact that when people were exercising options that there were additional funds that flow into the basket. So actually we sit here today in better shape than we have been in the recent past with respect to the basket.

And then my last question is -- and I apologize if my information is not correct -- but I think you have a couple of credit facilities out with the big three, the OEMs, or some exposure. And I'm just wondering if that's still the case and when those are renewable, and if there's any potential that they are not renewed?

We've got a syndicated borrowing facility, and it includes a mix of captives and banks. It's got 16-plus participants in that facility. And it's a facility that we use for both our floor plan borrowings, as well as our revolver. We are working to replace that facility. We are very close to finalizing the design of a new facility. But the new facility will be, I'll call it a more traditional approach to financing the business. We are going to look to the captives to finance the great majority of our floor plan, and then we will have a separate standalone revolver. We are looking to have the captives participate in our revolver, but we're also looking for a large component of that funding source to come from the banks, although it will not be 16 entities that we've had in the past. What we're trying to do is boil that down to just a handful of banks or so that we can have longer-term relationships with.

I should say that, based on the work that we've done to date and our conversation with the banks, and particularly the bank that will lead it, we believe we'll be able to get a larger revolving credit facility than what we see today. And we believe that we'll be able to get covenants that are more flexible than what exist on the current borrowing facility.

I'd also mention that the mortgage facility that we recently put in place when we took out the $200 million worth of leases had covenants on it that in many regards were more flexible than what we see on our current revolver. So we feel pretty good about where we're headed on the financing side.

And just one more follow-up on that -- as you look at your new guidance and the potential implied EBITDA of that guidance, does that put you close to any of your current covenant restrictions?

No.

Okay.

No.

Great. Thanks very much.

John Murphy, Merrill Lynch.

Craig, I know that you're sort of at the first inning of the cost structure process review there. I was just wondering, coming from AutoNation, which has been best in class as far as SG&A's percent of gross profit for some time, and been in the low-70% range, I was just wondering if you think there's anything structurally different between Asbury and your former employer, AutoNation, that would prevent you from getting down to the low-70% range on SG&A as a percentage of gross profit, or that could be an ultimate target that you get to?

Well, John, that's a great question, but I'm just a baby in this job. AutoNation has done a phenomenal job on the productivity front across the board. So in addition to, I think, that being in their DNA, I think their scale also gives them some advantages. That said, and the point was raised earlier, we are a very decentralized organization today and because of that structure, the way it exists, we have not taken advantage of some of the scale opportunities that size brings.

I would answer it this way, maybe. We are big enough that we should be able to take advantage of scale. We should be able to exploit many of the technologies that already exist in the marketplace today. And we've got plans in place to get there. It's going to take some time. From my experience, a lot of it starts with your DMS. If you don't have all of your stores on the same basic operating system, it is very difficult to drive significant productivity improvements. So we're working on that path. I mentioned earlier, we don't even have a common DMS. In my mind that means we don't all speak the same language; we don't even have the same alphabet. So we will go after those things. I think whether or not we can get all the way to the AutoNation net- to-gross number, I think that remains to be seen. But that's certainly our target. In fact, we want to be better than they are.

Okay. That's a good answer. Then on the real estate ownership and you're 25% of the way there, is there anything that would prevent you from ramping that up quickly? I would imagine that real estate values are fairly depressed right now, yet you might have a hard time getting financing for a full swath, or getting to 100%. Can you just tell us where you're targeting to get on real estate ownership, and if this might be a really opportune time to ramp that up quickly?

Well, I think philosophically you're seeing somewhat of a major change in our view on real estate. We like owning real estate. We know that we can go out and finance it at rates that are very attractive, more attractive than what we're paying in some of our other facilities. And I think more important than that, though, we like having control of our operating assets. And we've seen some situations -- I've seen them in just the short period of time that I've been here -- where owning a piece of property has been a real advantage for us when we've wanted to make some shifts or some changes with those properties. We believe we can get the funding. There's plenty of mortgage capacity out there for us to take properties back. But many of these properties are tied down on leases that can be quite lengthy, and they've really got to be managed on a lease-by-lease basis.

I would add that we were thrilled that we were able to get 25% of our properties back in a single transaction. I mean, that was really somewhat opportunistic that that popped up when it did. And I give tremendous credit to the team here. I think we closed that deal in less than 30 days. It was a $200 million transaction. I don't think I've ever seen a deal close so quickly of that size. So when the opportunities come, we'll jump on them. But they're not always in our control.

And then lastly, Charles, as you work through this excess inventory of trucks through the remainder of the year, how are you going to work through the potential pressure on new-vehicle margins here? Are we going to see depressed new-vehicle margins sort of on a one-time basis for the second half of this year and potentially see some real improvement next year as you work through that inventory glut?

No. I think, John, that we will see some improvement as we get through this inventory. The incentives from the manufacturer will help. The delay in introduction of new product will help. Once the bulk of that inventory starts to empty, then the incentive programs actually will help the margins.

But right now the pressure comes in a lot of different ways. The customer is trying to trade and they are trading in a vehicle that is less valued than they thought. There is not enough incentive money. The lenders are tightening down somewhat. So you've got almost a perfect storm. To put a deal together sometimes is challenging right now. The customer may be willing to give the profit to you, the margin to you, but they can't because they owe so much on the vehicle. And we still want to work to put these deals together without putting ourselves in jeopardy. So there are some unique situations right now that are hammering margins that should correct themselves as we move forward.

Great. Thanks very much.

And Mr. Oglesby, that does conclude our question-and-answer session. At this time I'd like to turn the call back to you for any closing comments, sir.

Okay, great, operator. I appreciate everyone listening today. And in conclusion I would like to say that we know how much work we have to do. This is a very exciting time in our business. There is tremendous shift happening, a lot of it I think personally -- I've been saying for a long time there are a lot of inefficiencies in this business from the manufacturer through the retailers. This kind of pressure in the marketplace forces change, forces efficiencies, and for you to review your capital and your return on this capital. And we're excited. And as Craig mentioned that we are behind in some of the platforms to help us gain some of these efficiencies, but we've done so well with those disadvantages that that's the opportunity for us in the future as well.

So we're very excited about -- we're not excited about the performance we just had. We've got great people, great franchises, and we're in a good position for the future.

So thank you very much for being a part of today. And we look forward to speaking to you again at the third quarter.

Thank you. That does conclude the call. We do appreciate your participation. At this time you may disconnect. Thank you.