AutoNation Inc (AN) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for you standing by, and welcome to the fourth-quarter earnings conference call. At this time, all telephone participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If you do have a question during today's meeting, please press the one on your touch-tone phone. You may remove yourself from the queue by depressing the pound key. And if you are using a speaker phone, please pick up your hand set before depressing the numbers. These instructions will be given again right before our question-and-answer session. Also, if you should require assistance* during the call, please depress zero, then star to reach the conference operator. As a reminder, this conference is being recorded. I would now like to turn the conference over to AutoNation. Please go ahead.

Good morning, ladies and gentlemen. And welcome to Auto Nation's fourth-quarter 2002 conference call. My name is John Zimmerman, Auto Nation's vice president investor relations. I'd like to remind that you this call will be recorded and will be available for replay at1-800-475-6701, access code 669580, through February 14th. Leading our call today will be Mike Jackson, Chairman and Chief Executive Officer of AutoNation, joining him with be Mike Maroone, President and Chief Operating Officer and Craig Monaghan, our Chief Financial Officer. At the end of their remarks, we'll open the call to questions. I'll also be available by phone to address any follow-up issues.

Before we begin, please let me read our brief statement regarding forward-looking comments. Certain statements and information on this call will constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risk, which may cause the actual results or performance to be materially different. Additional discussion of factors that could cause actual results to differ materially are contained in the company's SEC filings. And now I'll turn the call over to AutoNation's Chief Executive Officer, Mike Jackson.

Good morning. And thank you for joining our call today. I'm pleased to report that AutoNation delivered fourth-quarter earnings per share of 26 cents, making it the fourth time this year that our company reported record EPS and exceeded the consensus estimate of analysts. We also achieved record full-year earnings per share of $1.19. Both the fourth quarter and the full-year EPS results were within the guidance we provided the at the end of the third quarter. In the tough vehicle sales environment, our focus on gross margin and expense control was absolutely critical to our results.

Our cash flow continues to be impressive with fourth-quarter EBITDA of $158 million and full-year EBITDA of $728 million, both up significantly from the prior year, and for a record for the full year. Even without the benefit of an expanding U.S. light vehicle market, our vehicle sales, parts and service and finance and insurance areas delivered strong cash flow that fueled our share repurchase, acquisitions, and ongoing strategic initiatives. To this end, I am pleased to report that for the full year, AutoNation repurchased approximately 10 percent of the company's outstanding shares at a cost of $390 million and closed acquisitions representing an annual revenue run rate of approximately$500 million.

Before I turn the call over to Craig, it's important to note that in the fourth quarter of 2002, the industry is comparing against Q4 2001 where the industry saw surge in new vehicle sales due to the launch of zero percent financing by the domestic manufacturers in an effort to jump start the economy. At AutoNation, despite declining revenue and unit volume, we delivered improved store performance margins as a percent of revenue and as a percent of gross margin for both the quarter and for the full year, which again illustrates the resiliency of our diversified business model. With that, I'll turn it over to Craig Monaghan, our chief financial officer.

Thank you with, Mike. During the fourth quarter, we reported earnings per share of 26 cents. In addition, we generated operating profit of $136 million and earnings before interest taxes, depreciation and amortization of $158 million. Strong profits in cash flow that allowed us to reinvest in our business and aggressively repurchase shares at very attractive stock prices. We invested $72 million in capital expenditures and repurchased $191 million worth of stock, all within internally generated cash.

Reviewing some details of our performance, revenue for the fourth quarter was $4.5 billion, down 12 percent versus Q4 2001. As Mike said, this decrease was primarily due to the fact that we are comparing against the surge in new vehicle market during Q4 2001 due to the launch of zero percent financing. Despite the decline in revenue, gross margin decreased by only seven percent, or $51 million, to $675 million. We improved gross margin as a percent of revenue by 80 basis points to the 14.9 percent versus 14.1 percent in Q4 2001. Driven by the mixed effect of the decrease in new vehicle revenues, our lowest margin business, the increase in S&I growth margin TBR and parts and service margin expansion.

New vehicle gross margin as a percent of revenue in Q4 was 7.2 percent. In line with the prior year. This was in spite of the fact that new vehicle revenues declined 15 percent and floor plan (ph) interest expense net of assistance was virtually flat versus Q4, 2001. In essence, although interest rates remain low, they are now on par with the latter part of 2001, when rates declined significantly. Despite is a 12 percent decline in revenues we were able to hold our store performance margins at percent of growth at 27 percent. This was a accomplished by taking out almost $40 million of store SG&A, primarily from the two largest components compensation and advertising. Corporate SG&A increased $9 million versus Q4 2001 primarily due to investments and strategic investments in infrastructure.

We continue to aggressively manage our liquidating consumer loan portfolio which contributed one cent per share of profit during Q4. We have approximately 90 million of financing, receivables and related assets remaining as of the end of 2002.On a comparable basis, our Q4 reported earnings adjusted for Goodwill amortization and one-time items were 25 cents per share or $76 million versus 27 cents per share or $88 million a year ago. One-time items relate to charges from exiting our consumer loan business and the assumption of certain obligations for ANC rental. These items are detailed for you in a supplemental data provided in our earnings release. During Q4, we commenced negotiations with the IRS on our outstanding income tax matters and these negotiations continue. The potential settlement terms are in line with our previous disclosures. We will update you when we have more information.

Looking at our capital structure, we reduced non-vehicle debt, net of cash by $52 million versus a year ago to $475 million. At December 31, 2002, we had approximately $800 million of available liquidity given our cash balances and credit capacity. As such, we are well-positioned to settle the tax liability while continuing aggressively to pursue stock repurchases and other opportunities. As I mentioned earlier, we repurchased 17 million shares for $191 million in Q4. For the full year 2002 we repurchased 31 million shares for $390 million. As of December 31, this left $370 million of the $500 million board authorization for future repurchases. Through January 31st, 2003, we have repurchased an additional six million shares for $79 million. We are excited about 2003. And feel that our strong cash flow generation coupled with our financial flexibility put us in great shape to withstand economic challenges in addition to capitalizing on market opportunities. Now let me turn you over to our President and Chief Operating Officer Mike Maroone.

Thanks, Craig. And good morning. In the fourth quarter of 2002, our stores remained focused on reducing costs and driving toward increased variability in our expense structure. Our same store results in the quarter reflect we were able to make the necessary adjustments and deliver improved variability. AutoNation delivered a same-store store performance as a percent of gross margin of 27.4 percent of the quarter, a reduction of just 30 basis points compared to the same period a year ago, despite declining vehicle volume and a reduction in of 10 percent in gross margin dollars for the quarter.

This was achieved by adjusting our expense structure in a timely manner and reducing same-store SG&A expense in the quarter by $48 million, a nine percent improvement compared to a year ago. This SG&A improvement was driven primarily by significant reduction in compensation of $35 million that resulted in large part from right sizing our workforce, improved productivity and ensuring variability in pay plans, and to a lesser extent by a reduction in advertising expense of $6 million in the quarter.

For the full year, our same-store SG&A as a percent of gross margin was 71 percent, a 60 basis point improvement compared to the prior year, driven primarily by 130 basis-point improvement in compensation as a percent of gross margin. Our same-store store per--was 29 percents, also a 60 basis point improvement. As expected, the fourth quarter of 2002 was characterized by lower new vehicle volume as compared with Q4 2001. And while the industry reported a reduction in new vehicle volume of 9.5 percent, when we adjust for fleet to arrive at a retail sales level, the decline approximates 14 percent, based on data obtained from C&W marketing research.

The markets that AutoNation operates in were somewhat softer than the overall retail industry with a decline of 18 percent. Prime examples would be Atlanta, Houston, Chicago, and Denver. These market conditions created competitive pressures on pricing that resulted in AutoNation giving up a modest amount of share in the quarter as we folk United focused on preserving gross margin. For the full year, we maintained share.

Turning to inventory, we monitored our new vehicle day supply closely in the quarter and ended the year at 79 days, which is calculated on a trailing 30-day basis. Looking ahead, we are comfortable with inventories that have slightly higher day supply and are in proper balance as we enter the selling season. At December 31st, our used vehicle inventory stood at a 40-day supply with just two percent of our units over 60 days. The average day supply for the quarter was 37 days. The affordability of new vehicles continued to put pressure on used vehicle pricing in the quarter.

In November, the Mannheim (ph) used vehicle value index, a leading indicator of used vehicle values, tracking back to 1995, registered 106.6, its lowest point since March 1998. The index's seventh consecutive monthly decline. And it reflects the weakness in the market that's resulted from oversupply and continued strong manufacture incentives on new vehicles. This is especially true to the current to two-year old used vehicle market. While used vehicle prices have increased in recent weeks, the sales environment remains challenging due to the previously mentioned new vehicle incentives and more restrictive financing. We will continue to optimize our used vehicle inventory mix through core competencies and tools that we've developed to manage these assets in a volatile market.

Our parts and service same-store revenue for the quarter was $572 million, a reduction of $12 million or two percent, when compared to the same quarter a year ago. The primary driver of this decline as was a continuing trend in reduced warranty volume from domestic manufacturers. They resulted in a reduction of $15 million in the quarter in warranty revenue. Our efforts are increasing customer pay parts and service revenue resulted in an increase of $3 million that partially offset the warranty decline.

Additionally, we continue to be impacted by soft collision repair markets in comparison that include the 2001 Firestone recall. Same-store parts and service gross margin dollars also declined two percent in the quarter to $248 million. However, as a percent of gross margin, we realized an increase of 10 basis points. We remain focused on our fourth quartile stores and our efforts to reduce parts and service expenses continue to pay off as evidenced by a five percent reduction overall in same-store expense. With the largest contributor being a reduction of nearly four percent in compensation quarter over quarter.

In the area of finance and insurance, he reported a same-store fourth quarter PVR gross margin of $771, a record performance, and an increase of $81 or 12 percent compared to the same period a year ago. We attribute this performance to having the right people in the right processes. We remain keenly focused on improving the performance of our third and fourth quarter stores and committed to quality menu presentations, ongoing training, and full compliance. In the quarter we realized an increase in preferred lender and product penetration, and we launch an electronic F&I deal log which will provide greater transparency to our F&I business. The tool tracks F&I performance by associate and has the added benefit of contributing to cash flow.

Before I close, I'd like to bring you up to date on a few other items. During the quarter, AutoNation announced the acquisition of Jim McNatt (ph) Honda of Dallas and Vista Toyota of Corpus Christi. With the closing this week of the Vista Group, which in addition to Toyota includes Chevrolet, Cadillac, Oldsmobile, Mitsubishi and Isuzu franchises, our dealership count stands at 286 store, representing 370 franchises. And this does not include Jim McNatt (ph) Honda which we expect to close in the near term. Our branded markets continue to perform well and we're pleased to share with you that we'll be branding our southern California market in March with the name "Power." In addition, we anticipate branding at least one additional market in the first half of this year.

Our team is excited about the opportunities that exist in2003. We've been piloting common sales and service processes that we hope to roll out across the enterprise. The common sales process is piloting in our dealerships in Palm beach, Florida, in Atlanta, Georgia, and our common service process is piloting in stores across several of our districts. The goal of both initiatives is to drive increased levels of customer satisfaction as well as increased revenue opportunities. Early results are quite positive and work is ongoing to validate all pilots. And with that, I'll turn the call back to Mike Jackson.

Thanks, Mike. The Detroit Auto Show kicked off 2003 in high style. For me it was the most exciting show from a product point of view ever. The manufacturers have created an energy that is driving customers to showroom which when combined with compelling (inaudible) should keep the market above 16 million units. We are looking forward to the year, and believe that AutoNation is positioned to continue to grow earnings per share in a market where expect U.S. sales and new vehicles to decline three percent to five percent compared to 2002.

With that, we offer guidance for our first quarter of 2003 earnings per share in the range of 28 cents to 30 cents and reconfirm our full-year earnings per share guidance of $1.25 to$1.30. Thank you for joining us today. Operator, please open it up for questions.

Ladies and gentlemen, if you wish to ask a question, please press the one on your touch-tone phone. You'll hear a tone indicating you've been placed in queue. If you pressed one prior to this announcement, we ask that you please do so again at this time. Now, you may remove yourself from the queue by pressing the pound key. If you are using a speaker phone, please pick up your hand set before pressing the numbers. Once again, if you have a question, please press one at this time. And our first question will be from the line of Rick Nelson with Stephens. Please go ahead, sir.

Thank you. Congratulations on a terrific bottom line performance.

Thank you, Rick.

... have been weak for several quarters. I'm wondering where you see that going as the year unfolds.

Rick, it's Mike Maroone. We're looking for about a two percent improvement in volume in used over the 2002 full-year numbers. And probably a one percent increase in price. We've really seen the market stabilize some in January, but certainly realize that the environment is going to be difficult for current to two-year-old used vehicles.

And how about (inaudible) we've felt some pressures this quarter.

Our margin actually improved this quarter. I think margins will be about flat for the year.

On used vehicles.

Yes.

Okay. Parts and service, the same store decline of 2.1 percent, you mentioned warranty. Should we be looking for negative comp (ph) it's going forward in parts and service department? The focus seems to be on expenses.

I think that the way we're looking at the business right now is we're looking at two percent to three percent growth. We obviously felt that the Firestone influence, even into the fourth quarter, certainly we had some pressure from the warranty side, but we do think there's some customer pay opportunities and we're aggressively going after them. And one of the key initiatives we have in the company is to work on a common service process that we're rolling out across the districts, and it's certainly got some components in it to help grow the revenue.

I also understand you're rolling out some new selling programs, Palm Beach being one market. Where you're doing that, any comments there?

Yes, we've put a lot of work into a common sales programs (ph) we think is very customer friendly and believe it also gives us an opportunity for higher closing ratios. We piloted in our Palm Beach market. It's been ongoing since early December, and we're now rolling it out to an Atlanta market. And as we validate and continue to tweak the process, once we've got that level of satisfaction, we will then roll it out across the enterprise. But we're very excited and believe that customers really deserve that consistent sales process that provides total transparency in the transaction.

Thank you.

Thank you for your question. Our second question from the line of David Herman with Shawmut (ph) Capital. Please go ahead.

I'm sorry. That was a mistake. I didn't mean to hit the number.

Oh, Mr. Herman. You don't have a question, correct?

No.

Okay. One moment, please. Thank you. And ladies and gentlemen, we'll just take a moment here just to remind you that if you do have a question or a comment, you may press the one. One moment, please. Our next question is from the line of Domenic Martilotti with Bear Stearns. Please go ahead.

Good morning. I have a few questions, if I may. First one related to floor plan. The Delta for assistance versus expense was still pretty large in the fourth quarter. I think if the calculations are correct here, about 14 percent of your net income was due to the difference there. What kind of expectations do you have in '03 for that?

Domenic, it's Craig. I think we're going to have to sit down with you or get on with you separately. The delta in the fourth quarter actually worked against us. The difference between (inaudible) assistance and full-time interest expense quarter on quarter was actually about a negative $1.3 million. So we might want to take that offline.

Yeah, I mean, I see assistance was$32 million in the quarter and expense was 19.5. So ...

You got to compare it to the prior year.

If you look at the prior year for the fourth quarter, we had assistance of $33 million and (inaudible) of about20. So the quarter on quarter difference between the two components is only about $1.5 million. And it's a negative variance. Effectively, what's happening is the interest rates are starting to (inaudible) one another. There's about a 50-point basis difference in the rates that's in our favor but since we had slightly higher inventories in the fourth quarter this year versus last year we're seeing that negative $1.3 million impact.

But you anticipate not (inaudible) versus year-on year quarters but just the difference between assistance and expense, should it be pretty existent in the $10 million range or so?

Yeah.

Okay. Secondly, on corporate overhead, I notice there's a big jump in the quarter. What was behind the corporate increase in overhead?

What we're doing there is we've got a number of strategic initiatives underway. You'll hear us talk about what we're doing in F&I, what we're doing with use the vehicles, parts and service. We're also rolling out share (inaudible) centers. We've got those programs in place now. So if you look at the corporate overhead on a quarter-on-quarter basis, fourth quarter last year versus fourth quarter in '02, you're seeing the impact of that investment spend if you would to get this infrastructure in place.

Craig, could you talk a moment about shared resource center and common payroll?

We've got -- thank you, Mike. We've got two major initiatives that we -- we're rolling forward with right now. And those are the shared resource center and common payroll. We have one of our ten districts today that has a shared resource center which you can think of as a consolidated back office. We take the accounting functions or many of the accounting functions of the store and put them if a central location. We're in the process of rolling out the second shared resource center right no win south Florida and we plan to get two more done this year, both north and south Texas. And just to give you a small sample of what that does, in our typical district today, we'll have 120 bank accounts. Once we get a shared resource center in place, we have three bank accounts.

We consolidate our AP functions and our AR functions as well. It brings us much improved control. The other thing that we're doing is we are consolidating our payroll function now at the district level. We've got one of those done in Denver. We intend to roll out at least eight more this year, and essential lay that does is it takes the payroll processing function out of the store and, again, it puts in a consolidated back office at a district level.

These are major infrastructure investments that we have piloted and proven as far as efficiency, transparency, and control. It's a quantum leap forward. And we think these are very sound investments for the long-term performance of the company.

Do you anticipate the expense - expenditures associated with these strategic moves to be consistent going forward or just kind of more like an up-front big investment for your guys?

No, we have built the expenses for these programs into our plans, a portion of which will be capitalized. There's a lot of systems work that has to be done when we do this. Essentially what it means is we take all the stores in the district, we put them on a common (inaudible) and a common charge account, but all of that is already contemplated in the plans and the guidance we've given you. It's rolled into the dollar ...

Yes, but there is a step up in one time installation costs that is in last year's numbers and some of that will continue to roll into this year and as far as shared resources, that will continue even into '04.

To give you a -- an order of magnitude number, it will be less than $5 million of incremental expense that will incur this year to roll out both of those initiatives.

Okay. And lastly, kind of talking on capital employment acquisitions versus share buy-backs, obviously you guys are very aggressive in the buy-back of shares. At what point do you think you bought enough shares back and is it just investment in the AN shares versus potential acquisitions that are out there? Or I mean, do you see a possible dividend in the future for AutoNation?

Starting with the dividend question, as long as there's double taxation on dividends, I think when you I look at the opportunity analysis between share repurchase and acquisitions, it's not a very close call. Only a change, fundamental change in taxational dividends would change that equation. Going forward, we continue to view our shares as significantly undervalued and it's a very tax-efficient system for those shareholders who want to sell and for those shareholders who remain with the company, we're increasing their ownership stake in our company and rewarding them also and certainly at these prices we think that's an attractive opportunity.

At the same time we're in ongoing discussions on the acquisition side. We're looking to acquire stores that fit into our geographic footprint and are infrastructure that are the right brand and are appropriately priced that we can hit our return targets of a 15 percent after-tax after integration.

Okay. Thank you.

Thank you. And our next question is from the line of David Siino with Gabelli & Company. Please go ahead.

Hi, good morning.

Good morning, David.

Could you help me out on what the brand mix looked like for the full year in terms of brand or OEM or big three or however you look at it?

David, it's Mike Maroone. From a revenue point of view for a full year, the big three domestics were about 57 percent of our business, premium luxury was about 15 percent, and the balance is in the major ill imports.

Okay. Correct me if I'm wrong, that57 percent is down from a year ago, correct Z.

That's down slightly. And the quarter was down even a little bit lower.

Okay. And I guess one question for Craig. Is there any kind of sensitivity I can use in terms of interest rates as they relate to floor plan income or expense? And what kind of lag we would see in in terms of rising interest rates, how quickly that would flow through.

I think a ball-park numbers you can use is that one percentage point change in interest rates will mean somewhere around two cents per share EPS.

Okay. Thank you very much.

Sure.

Thank you for your question. And our next question from the line of Nate Hudson with Banc of America Securities. Please go ahead.

Hi. Good morning. Nice quarter. I just wonder if anything you could give us a little more color for a little update on the tax liability if there's any change in the parameters you laid out on the last call.

It's Craig. There's no change on the parameters that we laid out. Just kind of recap those for you. We thought that (inaudible) liability somewhere between 500 and $550 million. We thought we would be making enough (inaudible) and that we'd had subsequent payments out over15 year beyond that point in time. The negotiations are ongoing. We feel good that we should be able to get something resolved in the first half of this year, maybe even by the end of the first quarter. But broadly speaking, we still feel that any settlement that we would reach would be within the range of those parameters that we gave you earlier.

Okay. Thank you. And second question, I was just wondering, kind of in general terms if there are any specifics you could provide, how much of a performance gap is there at this point between the better performing brands, primarily import brands and some of the lesser performing brands like my guess would be Ford and Chrysler, has the margin gap widened or have you been able to adjust your cost to keep the performance of the weaker stores still at reasonable levels?

This is Mike Jackson. You can really divide the world into two categories. You have your premium luxury led by Lexus, BMW, and Mercedes Benz, which have substantial gap in operating margins at the store level. And primarily due to the very strong service and parts business. You have a technically complex products with an owner base that wants to take very good care of them. When you then go to the mass market volume, our core expertise is operating big volume dealerships in big markets. And whether it's Chevrolet or Toyota, we're very good at doing that. And leveraging our scale and at the end of the day, the difference in the margins within those stores is not material.

Okay. Have the used vehicle comparisons been similar at the volume import and the volume domestic stores?

Yes. I think that they've been pretty consistent. Traditionally, the domestic stores have done a higher used vehicle volume than the imports. But we see every year the imports getting more and more into the game, especially on the certified side, and I would say they are comparable.

Okay. And just one last question. Do you have the wholesale loss in the fourth quarter and how it compared to last year?

We lost -- we actually performed slightly better from a wholesale point of view for both the fourth quarter and the full year.

... thanks very much.

Thank you for your question. And our next question will be from the line of Jerry Marks (ph) from Raymond James. Craig, I notice that the other interest expense kind of jumped up in the four.

Quarter and it seemed like your non-vehicle debt stayed pretty constant. So I was wondering what was going on there, if your blended rate increased or what happened there?

Jerry, let me come back to you on that one. Be back in just a second.

Okay. And Mike, in terms of $35 million that were reduced in head -- or head count and compensation adjustments, can you could you give is an idea in tells of how many people you let go and your guidance or next year if that assumes continued kind of reductions in SG&A expenses.

This is Mike Jackson. We have a productivity drive within the company where we benchmarked best practice which then gives us a staffing plan for each dealership that is optimized. Then over time through normal attrition we migrate to that staffing plan. Employment year over year was reduced by 1500 through this process in'02. We still have some more of it to go this year, but I could not give you a specific figure.

Okay. And then the guidance for next year, does that assume a certain level of share buy-backs, indoor acquisitions in it?

Yes.

Is there kind of -- should we just assume, like, your cash -- your free crash cash flow is reinvested as a benchmark ...

Hey, Jerry. It's Craig. I can help you out.

Okay.

I'll go back to this other interest expense and maybe come back to the capital structure issue.

Okay.

The other interest expense quarter on quarter is up$600,000. Relative to the size of our balance sheet, I don't have the hard answer, but I suspect what happened in the quarter was that our debt balances over the course of the quarter may have varied a little bit differently than they did last year at this time. And that's the $600,000 is now something that we've dug into at this point. With respect to the capital structure question, I think for planning purposes, some of the key numbers that you might want to think about is we're targeting capital expenditures in the $150 million vicinity.

Okay.

... acquisitions would be around $250 million and (inaudible) would be around $300 million. And like Mike said earlier, he don't feel we're tied down to those numbers. We will move back and forth between acquisitions and share repurchases as we see the opportunities in the marketplace.

Okay. And then finally, in terms of your markets being a little bit weaker, I guess you indicated that it was down about 18 percent, you were down about 19 percent. When we kind of factor our fleet sales, probably down 14 percent. I mean which guess I'm just wondering is it that you guys are ordering a little bit less vehicles to be conservative or kind of you know why you felt that you lost a little bit of market share during the quarter.

This is Mike Jackson. As you know, the quarter started out extremely slow with the velocity of business dramatically declining from August into October. We immediately knew that the key to the quarter would be variability on our cost structure. So we put our focus and energy there. And we're willing to give a slight piece of share to make sure we got that piece done. The plan worked exactly as calculated and for the full year, we held our share position. So we think it was the right plan for the circumstances and if faced with similar circumstances, we would do it again.

So you guys targeting something like ten employee per -- or how does that work, ten vehicle sales per employee per month or something? Is that kind of how that works, and so you felt that the vehicle sales could be declining pretty significantly in the fourth quarter so you cut the headcount in terms of that way?

The productivity drive is an ongoing program that we focus on quarter in quarter out. The real key is the variability of the pay plans. There's a lot of safety nets in a lot of pay plans out there that means that the variable comp is really on a 90- to 120-day lag from movement in the marketplace. We've worked very hard to ensure that variable comp is moving with the velocity of the market on a much shorter time span. And the fourth quarter was an acid test for us, and we feel we passed it.

Great. Thanks a lot.

Thank you for your question. Our next question from the line of Carla Cassella (ph) with J.P. Morgan, please go ahead.

Hi. I think I missed your cap ex number for the year.

I'll walk through that again. It's $150 million for capital expend expenditures. We had $250 million for acquisition. And $300 million for share repurchase. But again, the (inaudible) till we move around (inaudible) we see opportunities ...

So this is for the year we just finished, not for the upcoming.

No those are our projections for '03.

Yeah, did you give the number for '02?

'02, it's in our press release.

Oh, I'm sorry. I must have missed it.

We have got some supplemental data.

Okay. We'll find it then. Also, can you --you can give us what the balance for the deferred tax liability, the current portion and a long-term portion, that we'll actually see on the balance sheet for year end?

I'll come back to you in just a moment with that.

Okay. Great. That's all I have.

Thank you.

Thank you. And our next question from the line of Jeff Jacobowitz with (inaudible) and company. Your line is open.

Hi. On the parts and service, you said the domestic warranty was soft. You can explain why that is and what's going to change so you'll have a two percent to three percent same stores sales increase this year?

I think couple things. I think primarily it's a comp versus 2001 where we had a lot of Firestone tire revenue both in Q2, 3, and 4. But I think the real reflection is that the manufacturers are building a much higher quality product. And we hope to really focus on our customer pay side. I think the last factor would be is that the labor time guides in warranty, especially with Chrysler and Ford, work out so we're paid less time for the same kind of repairs as prior years. So it's a combination of those things.

Less time ...

We have labor time guides where we're paid a certain number of flat rate hours for every repair. Manufacturers went in and made some pretty dramatic adjustments in 2002 to the labor time guides on some of the domestic manufactures so we got paid less for doing similar kind of repairs. But that's just one of the factors.

Okay. Is that an ongoing trend?

We have not seen any intention for from the manufacturers to cut them again in 2003.

Okay.

I also don't expect them to be restored to 2001 levels.

But with all that it would still be a two percent to three percent increase.

Correct. All that factored in, we still expect two percent to three percent growth in parts and service.

On the cap ex side, firstly, the depreciation itself was down, and I'm wondering why that would have been considering that your spending in capex is so much more than what you're depreciating.

The -- it's Craig. The swing in depreciation reflects the fact that we've got a number of stores that we plan to make major renovations to or had planned to make major renovations to. And when we see that type of situation develop, what we will do is we will accelerate the depreciation to get those properties, if you would, depreciated down to the point that they're essentially at zero when we go through and start to (inaudible) them down in advance of rebuilds. That will cause that number to jump around on you a little bit.

So the acceleration happened in the fourth quarter of last year.

Yes.

Okay. In general, I mean, you're spending substantially more than your depreciation. Can you talk about why you're doing that and when the cap ex number or if it might come down somewhat to more proximate what you're depreciating?

We really look at -- this is Mike Jackson - capex through two aspects. One is maintenance cap ex, what we need to spend to maintain the business that we have ongoing today. And that maintenance cap ex clearly is about equal to our depreciation. Then we have what we call opportunity cap ex where we've identified a business opportunity that would bring incremental revenue and incremental profitability. There that opportunity capex must meet our return threshold of being in excess of 15 percent after tax. So we spend equal to our depreciation to maintain the business that we have, and then we really have three opportunity for our capitals that we look at, business opportunity within the company, acquisition or share repurchase, and we're constantly judging the returns that we can receive from those three opportunities. So the cap ex number after maintenance will move based on the type of business opportunities we have.

Okay. So there's a cap ex number for example include building dealerships from ground up or is ...

That is correct. So if we do a Greenfield dealership, that will be at the pure plus business opportunity, but that will be in our cap ex budget.

So how many dealerships from ground up. Are you going to build this year and what's the cost for all those new dealerships?

If you're talking about '03 ...

Yes.

... I don't have a number I can give you ...

What was it in '02?

Craig, you'd have to ...

We'd have to come back -- maybe what we can do is ask you to call John Zimmerman afterwards and we can dig out some of that information for you.

Just two or three more things if I could. On the buy MF-back you mentioned your stock was very undervalued. My sense is that a lot of the dealerships out there are being acquired for maybe ten times after tax earnings. I've heard cases where it's even quite a bit less than that. And your stock's trading at about ten times after tax earnings. So you know, tell me how you think about your stock being undervalued and why do you think that if you're buying dealerships at around that price?

First, share repurchase, there's no integration risk involved. I mean, you do the calculation. You make the purchase. And it's done. And we are very focused on our return on that capital, and that's how we do the calculation. The same thing with an acquisition, when we do an acquisition, we now have a very good idea of what our scale and what our integration abilities will bring to the performance of that dealership. So the concern while we negotiate very tough on the acquisition side, it's not so much the trailing multiple we pay, it's whether we will be able to transform that business into something that will exceed our return thresholds. And that's how we make the decisions.

Okay. But what you're targeting is a15 percent return on the acquisition and it would seem at least to me if you buy your stock back at ten times earth that you're getting a ten percent return on your stock.

That's the -- well ...

Or did I not state that correctly?

I think the answer to that question is it's not what paying for your stock today but where you think your stock price will be tomorrow. Our view is our stock is undervalued. It has significant upside potential. We think it's a great investment.

Okay. The -- inventory days were up quite a bit. Can you just talk about that a little bit.

Yes, of course, the inventory is calculated on a trailing basis. And we are in a seasonally low period of December and January and going into February. Therefore, you will show a high day supply. The reason you can not take the inventory down to match this seasonally low period is because come February 15th to the 20th, the spring market begins to kick in, and you need to best equipped for that level of sales rate. So on a forward-looking basis we're absolutely confident we have our inventories at an appropriate level.

But last year, you would have had the same issues, though, right?

Last year I think was an anomaly in that you had the launch of zero percent financing which created a bubble of demand in the fourth quarter that we had not stopped or planned for and we were actually too low in inventory going into the spring selling season.

Okay. Last question, what do you expect for the year on net floor plan assistance?

Craig?

Sure thing. Give me one second. Let me pull this up. Net floor plan assistance for the year will be somewhere around $40 million. We think that's down -- a be down about 10 -- gonna be down 10 or $15 million from what we realized in '02.

Thank you very much.

The next question is from (inaudible) from with a Coveya (ph). Please go ahead.

Excuse me, guys. Sorry about that reverb. Hitting the inventory question again. I've talked to other folks in the industry, and you know, I think there was a situation where a lot of manufacturers accelerated deliveries. Is it fair to say the manufacturers can stuff the channel this the short term but in the long term you guys have a better control over the inventories, and if that's true, when do you guys start pushing bag on that? I know there was a seasonal build-up, but many dealerships in the form RNLT quarter and the fourth quarter and there was a push-through by the manufacturers. Maybe that's not the case for you guys, and if so, correct me. But if this is the case, when does the push-back occur? And I guess you kind of answered it with the February 15thspring selling season.

Mike Jackson. This is Mike Jackson. I think your characterization is absolutely correct. And we - and Mike can talk about it -- have a tremendous focus on optimizing our inventory, taking into consideration the environment that we live in. Now, when you compare our day supply figure with the published industry figure, you have to be a little bit careful, because the big factor in calculating day supply is what the sales rate is. The official published industry figure is including fleet sales in the calculation of retail inventory. So do the correct calculation for the what the inventory is at the retail level, you should eliminate the fleet sales since there is no fleet inventory, meaning the normal day supply of our competitive set is far higher than the published industry figure and far higher than the other publicly traded groups. So the publicly traded groups are doing an excellent job of managing their inventory. We're very comfortable again on a forward-looking basis where with our inventory is.

That's great to hear. I appreciate that clarification. Just real quick, the fleet sales, is that mainly government? Is there any rental business that's ...

Oh, yeah. So they're counting -- if you count in the retail sales rate, the sales -- the rental car companies to divide into your retail inventory, you're going to get an understated day supply of what really exists in retail. So if you do the calculation for the industry, they're counting all sales to all entities and then comparing it against retail inventory.

Eric, it's Mike Maroone. We have the ability to pushback on a monthly bases as we do our wholesale orders. What we've done is where we've got real critical mass both within a market and within a brand, we're working together to try and optimize those inventories. But instead of doing it on a backward look, which I know is traditional for the industry, we're looking on a forward-bases to try to look for opportunities in the marketplace. We're trying it be realistic about our sales targets. So we don't lose that opportunity to say no, but we do feel good about the spring selling market and feel good about the products that the manufacturers are offering. And they're willingness to -- their willingness to support them with significant incentives. We're encouraged.

That's great to hear. That's very encouraging. With the specter of war everybody's focused on that. But I guess you're able to look through that.

I would caution you, we're certainly not able to look through a war scenario. If that's where the country and Mr. Bush decides we need to go, then our first thoughts are with the armed forces. There certainly will be an impact on business how much and how long, no one can say. But we'll just manage our way through that.

That is true. On the parts and service side, have you guys had any incidents of the manufacturers taking over the wholesale parts business? Do you guys have any incidents of that occurring?

I think -- it's Mike Maroone. There has certainly been some changes in the way they distribute parts in a number manufacturers are going to more distribution centers. Which does impact to a degree your dealer to dealer business. But there are so many opportunities out therein the parts business and, no, I don't see the manufacturers trying to take over it. I really see them providing a higher level of service. You can go wider in your inventory rather than deeper, because you know you can get same-store deliveries in many cases. So I really looked at the distribution system improvements allowing to us provide a higher level of fill rate and a an ability to serve more customers. So I think they're very positive and I think the offset of the dealer to dealer sales is much less important than the ability to get parts real time and fix customers' cars.

And plus that's a much lower margin business, as I understand.

The wholesale business is significantly lower than the retail business. But they're both important ingredients.

Well, hey, thanks a lot for your time.

Thank you.

Thank you. And our next question is from the line of Maurice Dan (ph) with Janice Capital (ph). Please go ahead.

Hi. Thank you very much. I just wanted to ask you your key assumptions for the first quarter earnings per share. I presume that you have budgeted lower SG&A in there and also was curious what your assumptions were for the (inaudible) pricing and gross margins and interest expense and share repurchases.

You know, we get very broad guidance. We think the new vehicle market is going to be down three percent to five percent. We think all (inaudible) will still grow EPS in that environment to $1.25 to $1.30. For all the details within that I suggest you call John Zimmerman and he'll be very helpful in walking you through some specifics.

Just gross margins in pricing then, would you care to share that with us now here? Assumptions for the year.

No, that's all the guidance we're giving.

Thank you.

If you want any details, you can talk to John.

Thank you.

And our next question is from the line of Hardy Bowen with (inaudible). Please go ahead.

Hello. I was wondering what your -- what is happening with the financing you're getting from finance companies. I think most people are trying to raise their credit scores since they're having bad experience and what's happening with sub prime financing specifically and whether that makes any difference to your used car business particularly but also the new car business?

It's Mike Jackson. First we're completely out of the underwriting finance business ourselves. We receive origination fees and commissions for finding lender --appropriate lender solutions for our customers. Certainly some - sub prime has -- and the difficulties there have impacted the used vehicle market. The ability to get a used vehicle financed is crucial as to whether you make the sale and how much you the gross profit is on the sale. We have not seen that much impact on the vehicle. Mike?

I think there's plenty of financing out there on the new vehicle side. Certainly the used vehicle is less restrictive. Our business is primarily with the captives, although we also have some preferred lender relationships with some very large lenders. But I don't anticipate it being a major negative factor in our business going forward. I think there's still plenty of financing available.

I guess the offset to that is interest rates are lower than they were a year ago. For the used car financing?

Yes. That's correct. They are.

Okay.

Thank you.

Yep.

That was our -- Craig, you have something gels.

Yeah, I just want to come back. Carla requested asked a question earlier about the -- our tax position on the balance sheet. We have -- these numbers aren't done yet. So let me put these out as rough numbers you we have a current tax asset of about $60 million that you should expect to see at year end and a long-term tax liability of about $950 million for a net liability of about $890 million.

Thank you, Craig. We have no further callers. I want to thank everyone for joining us today.

And ladies and gentlemen, that does conclude our conference call for today. I'd like to thank you for your par participation and for using AT&T's executive teleconference deserve service. You may now disconnect.