AutoNation Inc (AN) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AutoNation third quarter 2003 earnings conference call. At this time, all lines are in a listen-only mode. Later, there will be a question and answer session and instructions will be given at that time. If you do need assistance during the call today, please press the star followed by the zero. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to the company. Please go ahead.

Good morning, ladies and gentlemen and welcome to AutoNation's third quarter 2003 conference call.

My name is John Zimmerman, AutoNation's Vice President of Investor Relations. I'd like to remind you that this call is being recorded and will be available for replay at 1-(800)475-6701 access code, 701295 through November 7, 2003. Leading our call today will be Mike Jackson, Chairman and Chief Executive Officer of AutoNation. Joining him will be Michael Maroone, President and Chief Operating Officer and Craig Monaghan, our Chief Financial Officer. At the end of their remarks, we will 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 and the use of non-GAAP financial measures. Certain statements and information on this call will constitute forward-looking statements with the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks which may cause the actual results or performance to be materially different. Additional discussions of factors that could cause actual results to differ materially are contained in the company's S.E.C. filings. Certain non-GAAP financial measures as defined under the S.E.C. rules may be discussed on this call. As required by applicable S.E.C. rules, the company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on the Investor Relations section of AutoNation's website at www.AutoNation.com.

And now, I will turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Good morning and thank you for joining us.

The third quarter was another solid quarter for AutoNation with earnings per share of 38 cents, a 15% increase compared to a year-ago and a record EPS for any third quarter. This performance resulted from the continued repurchase of outstanding shares and initiatives aimed at maximizing operating efficiencies that allowed us to further leverage our cost structure. In the quarter, AutoNation posted gains in revenue, gross profit and operating profit and net profit.

In addition to this, SG&A. as a percent of gross profit, was down 110 basis points in the quarter compared to a year-ago and we are on track for a four-year, 500 basis point or approximately 150 million annual reduction in SG&A as a percent of gross profit. We are pleased with the continued progress in this area.

It is important to comment on our California business. In the third quarter, we experienced pull-ahead business as consumers rushed to beat the tripling of the vehicle licensing fee on October 1st. Uncertainty persists as to whether the increase will be rescinded and if so, what the time frame will be. California represents approximately one quarter of our revenue. Given this, we are maintaining our full year guidance of $1.31 to $1.33, which excludes benefits from our first quarter tax settlement and fourth quarter items related to a favorable state income tax settlement and the gain on the sale of a noncore equity investment and offer fourth quarter guidance in the range of 27 to 29 cents from our core business.

On a GAAP basis, the fourth quarter range of 27 to 29 cents translates to 32 to 34 cents and the full year guidance of $1.31 to $1.33 translates to $1.80 to $1.82. In addition to our solid operating performance in the third quarter, we feel good about our financial position. Supported by a strong balance sheet, we continue to make strategic investments in the company as we balance share repurchase, reinvestment in our existing stores and acquisitions.

Now, Craig will provide detail on the numbers and Mike will follow with comments on our operating results.

Thank you, Mike. Mike has taken you through the high level P&L results for the third quarter. I will now review some specific items of interest during the quarter.

Included in the reported results of 38 cents per share is a benefit on our income tax line of approximately $3 million, or 1 cents per share, in favorable adjustments related to the resolution of various state income tax matters. The resulting tax rate in Q3 was 36.6%. Continuing with Q3, looking at our capital structure we accelerated our previously disclosed IRS settlement payment for $366 million, repurchased $112 million worth of stock and reinvested $30 million in capital expenditures in our business. We now anticipate full year capital expenditures to be approximately $130 million. We continue to remain disciplined in our cash outlays and are targeting 2004 capital expenditures to be in line with this year's level excluding any acquisition related spending.

At September 30th, our nonvehicle debt was only $739 million, even after paying the IRS $366 million. Our debt to capital ratio stands at 16% and we have incremental borrowing capacity in excess of $600 million. Most of our key debt ratios would be considered investment grade.

Let me add some detail to our fourth quarter EPS guidance. As Mike stated, the expected range of 27 to 29 cents per share is from our core business. In addition, we will also have a favorable impact of 5 cents per share from two fourth quarter noncore events. First, in early October we favorably resolved approximately $9 million or 3 cents per share of additional state income tax matters that will be reflected in Q4. However, looking forward to 2004, our tax rate could be negatively impacted by changes in our state income mix and increases in state taxes. These changes are expected to increase our effective tax rate to approximately 39% in 2004.

The second October event we have excluded from the fourth quarter guidance is the sale of LKQ Corporation, an auto parts recycler for a pretax gain of $10 million or 2 cents per share. This completes the liquidation of our investment in LKQ.

In conclusion, in Q3 we had solid operating results, strong cash flow and we continue to enjoy tremendous financial flexibility all of which puts us in great shape to capitalize on opportunities in the market today.

Now, let me turn you over to our President and Chief Operating Officer, Michael Maroone.

Thanks, Craig and good morning. As I begin, please note that my comments will be on a same store sales basis. We were very pleased with our performance in the quarter as we recognized improvement in each segment of the business and continue to make progress in our key initiatives.

Starting with new vehicles, our same-store unit volume was about 115,000 in the quarter which was down 1% compared to a year-ago. New vehicle revenue increased 3% to $3.2 billion as our mix was more heavily weighted toward more expensive trucks and luxury vehicles. The industry sales pace in the third quarter was relatively flat compared to a year-ago. Industry volume in the markets that we operate in for the brands we represent was down approximately 2%.

The marketplace remains intensely competitive and as such, we experienced same-store new vehicle gross profit compression of $34 per vehicle which was more than offset by increases of $55 for F&I and $35 for used vehicles. Our new vehicle day supply was 53 days as of September 30, a slight increase compared to the quarter a year-ago and down 12 days compared to the second quarter. Our inventories are well positioned with fresh product for the fourth quarter.

Turning to used vehicles, we are pleased with continued progress in the quarter, AutoNation retailed 64,000 used units in the quarter generating a 3% improvement in gross profit on an increase in unit volume of 1%. This despite a modest decline in used vehicle revenue at 1% which we attribute to a lower price mix of vehicles.

We continue to strive for a greater mix of less expensive used vehicles. This provides our customers with a selection that reflects an attractive price differential between used and heavily incentivized new vehicles. In the quarter, our used vehicle average selling price declined just over 2% compared to the period a year ago. This reduction, coupled with the increases in unit sales and gross profit, reflected our objective of stocking the right used inventory at the right price is on track. Our days supply for used vehicles was 38 days as we close the quarter, in line with inventory levels a year-ago and just 1% of our inventory was over 60 days.

We move through the model year changeover with no disruption to the value of our used inventory and are comfortable with the 38 day supply as the Manheim Index continues to reflect stabilization of used vehicle values.

In the area of parts and service, we were encouraged with our results in the quarter, same store revenue increased $12 million to $629 million and gross profit was up $5 million to $275 million, both increases of 2% compared to a year ago. Service absorption in the quarter was 93%, an increase of 400 basis points compared to the period a year ago. Our focus continues to be the implementation of and the adherence to best practices that include a common service drive process, optimizing in store pricing models and refined service marketing initiatives. We look forward to the continued growth potential in our service operations.

Turning to finance and insurance. The third quarter mark another record quarter for F&I gross profit per vehicle retail with $818 per vehicle, an increase of $55 or 7% compared to the period a year-ago. We attribute this strong and continued improvement to narrowing the bandwidth of our performance by focusing on fourth quartile stores in an effective compliance program that ensures full menu presentation to provide transparency to our customers.

Before I close, I would like to comment on the conditions in a few of our markets. In the third quarter, we continued to find the Atlanta, Chicago, Dallas and Houston markets to be challenging. However, we were encouraged by the strength of the markets in South and North Florida, Denver, Las Vegas, and Southern California. Relative to California, thus far in the fourth quarter our business has been impacted. The Governor Elect has proposed a recision of the increased license fee and we are hopeful for a timely resolution to the uncertainty surrounding this issue.

In summary, as America's largest retailer of both new and used vehicles, we are proud of our third quarter results and of the continued efforts of our associates to simultaneously drive costs out and organically grow our business. With that, I will hand it back to Mike Jackson.

Thanks, Mike. As you can see, AutoNation delivered a solid third quarter as we maintained our focus on cost containment, operational improvements and the efficient allocation of our capital. To reiterate the guidance I provided earlier in the call, we expect our fourth quarter earnings per share to be in the range of 27 to 29 cents from our core business and our full year outlook is $1.31 to $1.33.

In 2004, we expect the light vehicle market to remain highly competitive in a stable volume environment and offer full year 2004 earnings per share guidance of $1.40 to $1.45. With that, we thank you for joining us today and ask that the operator open the call for questions.

Thank you, ladies and gentlemen, if you do wish to ask a question, please press the star followed by one on your touch tone phone. You will hear a tone indicating you have been placed in queue and you may remove yourself from queue by pressing the pound key. If you are using a speaker phone, you may need to pick up your handset before pressing star and then one. So, once again if you do have a question, please press star and then one at this time. And our first question comes from Rick Nelson with Stephens. Please go ahead.

Thank you, good morning, guys.

Good morning, Rick.

Good morning.

Looks like you have reigned in guidance in the core operations for the fourth quarter, Mike. Is that the California issue or are there other things you are seeing in the business?

Well, first and foremost we are confirming our full year guidance at the high range of our previous guidance and we are calling out unquestionably that there was a transfer of business from the fourth quarter to the third quarter due to the situation in California and I think that is the fair and appropriate thing to do. Simple as that.

Used cars, we have seen some mixed reports and results there. Any comments on what you see as we enter the new quarter?

Rick, it is Mike Maroone, we see the used car market as being stable. It is the second consecutive quarter we have showed some same store growth. The market is stable and I would say it is good.

What do you think you guys are doing on the SG&A front that some of your peers are missing out on?

You know, I can't focus on our peers and I won't focus on our peers but I think any one who has spoken to anyone in management of AutoNation, we clearly stated that putting in place infrastructure, discipline and controls to manage a $20 billion enterprise is absolutely essential to our future and all the pain and difficulty, agony and disruption that comes with that, that we've worked through over the last 3 to 4 years, would put us in a position to perform consistently on a going forward basis.

So, we are very satisfied that we've achieved that and we are very satisfied that the numbers reflect that we have created that capability which is both to ensure variability that our costs, variable costs move with the velocity of the business, reduce our fixed costs to the greatest extent possible, grow our recurring service and parts business to give us the greatest fixed coverage possible and you heard the number from Mike, we're now up to 93 percent, that will then throw off tremendous positive cash flow, we now have positive cash flow which is basically, equivalent to net income and then reinvest that cash on a very disciplined basis. That is the AutioNation business model, we've worked very hard to get it to this point and are looking forward to the future.

Thank you.

Thanks and we do have a question then from Jerry Marks with Raymond James. Please go ahead.

Good morning.

Good morning, Jerry.

Good morning, Jerry.

Just kind of a technical question with LKQ and I see they sent us revised historical numbers, does the $1.31 to $1.33 now in your new guidance for 2003 exclude out the benefits. I think it was about 2 cents a share that you got from the second quarter in your initial sale of your investment on LKQ?

The guidance for LKQ is excluding the $10 million gain that we will recognize in the fourth quarter. The.

I'm sorry, go ahead.

Any gain that we saw early in the year is relatively immaterial in those quarters and is just rolled up in those reported actual results for the first three quarters of the year.

Even when you, because didn't you sell half of your stake in the second quarter, I thought?

Not at price that we sold it in the fourth quarter.

Okay.

The simple way to think about it is it there is a $10 million gain coming in the fourth quarter that is not included in the guidance. And the rest we just go off of the historical data for the first three quarters?

And I'm looking at the numbers in front of me, in the first and second quarters the gains were in the 2 to $3 million range, so really not material to those quarters.

Okay. With the F&I you guys were mentioning that you continue to focus on the bottom fourth quartile, can you give us an idea how much that kind of narrowed, are these stores in the bottom fourth quartile now running 5 to $600 F&I per vehicle or how much more do we have to go there?

Jerry, it's Michael Maroone. I think the bandwidth right now probably goes anywhere from the middle 500s up to a thousand. We continue to narrow it, we are really working hard in those fourth quartile stores. I wouldn't want to speculate how much more is there but we do think there is more opportunity going forward.

And last question. Just regarding the new environment you said that there was, you know, some pressure on the new vehicle gross margin and you kind of made it sound like that has become kind of a competitive thing. Are some of your private dealers that are you competing against doing irrational things in the pricing market?

The compression we had in the quarter was only about $35 a car. We still maintained gross profit per unit of $1,988 so, we did not feel feel it was a major issue but certainly on the brands where there is higher day supply, there is some more pressure from both public and private sellers.

Wouldn't you guys kind of have more, I'm surprised that the private dealers are able to do that because, I mean, it seems to me like you guys would have a stronger balance sheet and the ability to do that while smaller private dealers could put themselves out of business if they were to do that?

As far as the private entrepreneur, driving them out of business, that is not going to happen with the basic automotive retail business model that exists. Now, we are already operating at margins approaching double what the private caps have but at the end of the day, they still have a fairly resilient business model that they can fall back on and so, and they are not necessarily coming from the same motivations that we are. So, you put that all together, it is an intensely competitive environment out there and it is appropriate to point that out.

I'm sorry, last question: One of your competitors was talking about forecasting sales and, you know, basing their inventory selection on that and you guys have talked about that a little bit in the past, have you made any progress in that regard?

I will have Mike get into the specifics.

The first thing I will observe as far as talking about new vehicles is, it is not a completely rational approach in that we are buying inventory before we necessarily know what the incentives are and what can be a wrong decision at one moment could be a right decision three months later, so, you have to factor that into your inventory buying on new vehicles which we are doing more and more of that. On used vehicles, it is another story where we can really use our historic knowledge to purchase and position ourselves for the opportunities there in the future.

Jerry, it's Michael Maroone, from a forecasting basis, we look both forward and behind. We look the the historical data, we look at the seasonal data, we look at manufacturer's production schedules so we look at a number of things but Mike Jackson really called it out is that we are ordering vehicles before we know what the incentives are. With all that said, we are very pleased to have a 53 day supply at the end of the quarter, we think we are in good shape and we have fresh product on the ground to sell in the fourth quarter so, we are in good shape. On the used car side, that's as clean as we have ever been, we're 1% over 60 days, 38 day supply, that is exactly where we want to be.

Thanks.

Thank you and we do have a question then from David Siino with Gabelli & Company. Please go ahead.

Good morning.

Good morning, David.

Question for Michael Maroone. You talked about used vehicles, making a more concerted effort to go after lower priced vehicles. What does that do to, if you could talk about what it does to gross margin in absolute dollars and margins going forward, presumably the margin would be higher but maybe the dollars would shrink somewhat, could you talk about that?

Yeah, I think revenue will always be under some pressure but the gross margin in the quarter we were up $34 and we think there is good margin opportunities on lower priced cars. It is the "nearly new" that give us more trepidation and that is why we have moved away from those vehicles.

Okay. Thank you.

Thank you. We do have a then from Domenic Martilotti, pardon me if I'm mispronouncing that name, sir, with Bear Stearns, please go ahead.

Hi, it is actually Mike Gahagan for Dominik. Regarding new cars, one of your competitors pointed to a couple of the big three automakers, you know, having lower sales as being a driver of disappointing results and with a higher exposure to the big three, I'm wondering if this California pull-forward sort of offset the same kind of challenges that you might see with big three new car sales, you mentioned something about a 2% reduction in the brands that you handle but can we expect later on, especially in the fourth quarter, the same kind of difficulties with big three sales?

No, absolutely not. This is Mike Jackson. The core competency of AutoNation is running big volume stores and premium luxury stores and when you achieve our scale, of course, our brand mix is basically going to reflect the marketplace. You can't reach $20 billion and have ambitions to continue to grow with a boutique selection of what brands you are willing to manage.

I have also always pointed out that that is not the critical issue on profitability. Our profit per vehicle retail in an import store is exactly identical to our profit per vehicle retail in a domestic store because our domestic stores are big and have scale we are able to achieve that. Now, if I had small domestic stores that would be another story but that is not AutoNation's strategy, we have always said, big volume stores in metro markets can be run profitably. That is a core skill set of AutoNation so, it is not an issue for us.

Now, of course as share shifts from brand to brand, we will move with the flow and manage through it and adapt to it but we know how to run big volume stores, whether they are imports or domestic.

Is it fair to say that future acquisitions going forward will be targeted at the same sort of weighting to your mix right now?

Our acquisition strategy will reflect the capability that I just stated. We, primarily where we have infrastructure today are interested in acquiring any volume brand whether that's Ford, General Motors, Chrysler or imports that fits into our infrastructure or a premium luxury store.

Okay. Last question, regarding your share buyback, you mentioned that that was on the order of $112 million this quarter?

Correct.

By my math, I'm guessing that this is around 6 million shares that were acquired which gets to an average price per share in the high 18s, is that correct?

Yep, absolutely.

Okay. Is there a level at which we can expect this type of buyback activity to slow or to cease and I guess that goes hand in hand with what your capacity for future buy backs is?

This is Mike Jackson. Certainly we feel that our business model and how we see the future of our company that our shares are a very attractive buy in the past and they are attractive buy today. At the same time, we have a tremendous focus on improving the core business, so that when there is a crossover between the valuations we see on the acquisition side combined with the scale and productivity we bring to an acquisition, if it is a higher return than share repurchase, then we will seize that opportunity.

So we are constantly analyzing where the best return ultimately is and over time, that will shift depending upon our own capability, valuations we see in the marketplace and the value of our stock. So, we work very hard in the core business to make the cash and our free cash flow almost equals net income today and then reinvest that cash that will produce the greatest return ultimately for your shareholders.

Okay. So for the fourth quarter, is there a dollar amount of additional buyback capacity that your covenants are allowing?

Yeah, this is Craig. We've got over $100 million of buyback capacity at end of the third quarter.

Okay.

So, according to the covenants on the bond and the bank we have the capacity to repurchase about $100 million worth of stock in the fourth quarter.

And you are comfortable continuing to do that in the 18 to 19 dollar range, okay, thank you.

Okay, thank you.

Thank you.

Thank you, we do have a question from Jonathan Steinmetz with Morgan Stanley Please go ahead.

Good morning, everybody.

Good morning.

Good morning.

A few questions. First on the guidance, you talked about your underlying assumptions on the guidance in 2004 for the new vehicle market. Could you discuss at all, your assumptions on share repurchase and on floor plan, meaning the expenses versus the credits there?

Our general approach, again, this is Mike Jackson, is, to give you an EPS frame and a view of where we think the macro of the new vehicle market will go. Exactly how the year will unfold, we don't know. And we will manage through depending upon the opportunities that we're presented with. What we love about our business model is the diversity of that, we are diversified geographically, while we are challenged in some markets, we have opportunities in other markets, we are diversified by brand, take advantage of the latest product offerings but in total, have a basket of brands and we are diversified by business type, seeing everything from service and parts to new cars and we are diversified as far as our capital opportunities and I can't sit here today and say whether it is going to be share repurchase or acquisitions, it will depend on what the pricing and valuations are month by month and quarter by quarter but the basic underlying philosophy and principle that was outlined will remain the same and our behavior will always fit those principles and we feel when you put it them all together looking at next year, we can manage towards $1.40 to $1.45.

A couple questions on California. First, relative to the normal monthly cadence, has California new vehicle sales improved at all as you have gone through the month or does the tax issue still linger large?

It's Michael Maroone, Jonathan. I think the market was a little bit soft in California. There was definitely some pull from Q4 to Q3. There is some other issues in California with the fires and others but I think that as the Governor clarifies his position, I think the cloud will kind of disappear. I think long-term, we do not think that California is going to be a negative factor, we just think it influenced some buying patterns in Q3.

Okay and is F&I per vehicle in California higher than the company average? In other words, is part of this increase due to a mix shift to California or is it the fourth quartile store factor?

I think it is slightly higher in California but I think it is really, overall a tightening of the bandwidth in F&I in our performance and through the quartiles.

Great, thank you very much.

Thanks, and we do have a question then from Nate Hudson with Bank of America Securities. Please go ahead.

Good morning, just wondering if you could give us any sense of how much additional opportunity you see on the SG&A front, I mean, is there third and fourth quartile stores in regions there that you have the opportunity to improve and in a two-year time frame, how much improvement do you see there?

Nate, it's Craig As we look out, I'd say, over the next three years, maybe a little bit more, we think we have got about 200 basis points of additional SG&A reduction. that's on top of the 500 basis point that we have been able to take out over the last four years.

Is that from a variety of initiatives or is it, is there any specific things going on?

I think it is the same fundamentals that Mike talked about earlier. It is discipline, process, it is focusing on those bottom quartile stores and just driving our costs across the board.

Okay and then second question, on California, could you be any more specific as to the sales performance in the third quarter or September? What was the percentage change and then similarly in October, can you give us some order of magnitude of what kind of sales comparisons you're seeing?

I think it is difficult to give you precise figures on that. Other than to say there clearly was a, started to pick up in August, you could definitely feel a lift that was out of synch with the rest of the country and other patterns we were looking at and when you go through all the numbers, basically comes down to a penny shift from the fourth quarter to the third quarter.

Okay and one last question. You mentioned you thought your debt ratios were investment grade, which I would agree with but have you had any meetings with the ratings agencies and you know, what is their, what is holding them back from actually giving you further upgrades?

That is a good question and I would love to get an intelligent answer on it. Quite frankly, if you look into the consistency of our performance over the last four years with the type of positive cash flow that we are able to throw off and the disciplined way we manage our business, it is genuinely a head scratcher. If you read what the rating agencies say, they say there is a cloud over automotive altogether, they don't know how to deal with that and they absolutely positively hate share repurchase.

Clearly, we would have been, as executives, totally irresponsible not to buy in the number of shares that we bought in the last three or four years at very attractive pricing. So be it but, if you look at where the bonds are trading, let's move to the real world, they are certainly trading at investment grade so seems everybody is there, except for the rating agencies.

Thanks very much.

Thank you. We do have a question then from Carla Casela with J.P. Morgan, please go ahead.

This is Stephan on Carla's behalf. A couple of questions. One is the acquisition expenditures, so far, is significantly below last year and lower compared to the smaller sized competitors and could you comment on what is going on here, is that deliberate strategy on your part, or?

This is Mike Jackson. On acquisitions, we have a return on invested capital target of 15% after tax to green light an acquisition and that is a very ambitious threshold but that is the type of value creation machine we want to create and we simply, absolutely refuse to do deals that do not meet that threshold.

When I arrived here, the company had a return on invested capital of 6% and we are now approaching 9%, meaning that the incremental reinvestment of our capital is producing a return far higher than our starting point and the ultimate goal is to create a company that return on invested capital will be significantly above our cost of capital. We are absolutely positively determined to do that and we feel the that time is on our side.

The marketplace is only consolidated to single digit percentages, so the more patient and disciplined we are, we feel the better valuation that we will see and even more importantly, the more scale and productivity we will bring to the acquisition and what excites AutoNation so much and why we put so much focus on improving the core business because it not only pays off today in improving the business, it also applies to every acquisition that we make in the future. So, if I make an acquisition several years from now and I have a 700 basis points in SG&A improvement I apply 700 basis points rather than the 500 basis points that we have today. So, we're out there discussing and we have a lot of interesting deals but until it hits the magic triangle, we are not going to make the acquisition.

I see. Next question was can you provide us a range of, what kind of range of F&I per unit do you have in your company, the low end and the high end?

I think we answered it earlier but we will repeat the answer, it goes from about $550 a car to over $1,000 per car, it varies by brand, it varies by geography but that is the range and the range continues to tighten on both ends.

Okay and my last question is, could you provide a break up between domestic vans and imported and luxury vans and new vehicle same-store sales and gross profit dollars?

Our mix of stores of domestic and import really reflects the overall mix in the industry and, in terms of gross margins, I would say they are comparable throughout the high volume franchises and then comparable in the premium luxury. So, we don't have major variations within the volume franchises.

Sounds good, thank you.

Thanks.

Once again if any one does have a question please press the star fold by one on your touch tone phone. We are showing a question from Jeff Black with Lehman Brothers. Please go ahead.

Yeah, good morning, guys. I guess the question is for Mike. Where does a dividend fall in your priorities for cash for the next couple of years?

We, our basic feeling is that we are a young company and to contemplate instituting a dividend, which is a long-term strategic commitment, is premature in our life. When we look at the opportunities that we feel we have on share repurchase or investing capital in our existing business or down the road in acquisitions, we feel that is going to produce the greatest return for our shareholders so, at this point it feels very premature.

Fair enough and next question for Craig. I noted the tax rate gave it little bit up this quarter. Could you give us a little color on why that happened, how that happened and what we should be looking at or thinking about in terms of a tax rate for both Q4 next year?

Yes, Jeff, I think there is, when we look at taxes you have got two different things you have got to consider. One is the, if you would, the underlying fundamental tax rate, like I said, we think that as we move into 2004 we will move towards that 39% rate and that is primarily just driven by the mix of business we have across the states and we think there is a real potential for some of these states to increase the local tax levels.

In addition to that, you have got a separate issue that is going on here works if you looked back to when Mike Jackson joined the company, we had a $900 million deferred tax liability and we have been working aggressively to get that under control, as you are well aware. In the first quarter, we reached a major settlement with the IRS that allowed us to basically take that deferred tax liability down to somewhat in excess of $350 million. As a result of that settlement, we were able to reach some agreements with some of states and that is what you saw come out in the gain in the third quarter and there will be another gain in the fourth quarter with other state issues that we just now resolved. And then I would add to that, that we are continuing to work with both the states and the IRS and actually now have an open audit from 1997 forward and we are approaching that with the IRS the same way we did this major negotiation we just completed and it is a very proactive and what they call life audit and we are working with them to see if we can't get that resolved as quickly as possible and in the best interest of both parties.

Quickly, in this is a is a scenario may mean over the next 12-18 months. We feel we are adequately reserved and about the only additional thing I could say on this front is, as we get these things resolved, we will call them to your attention.

Great, thanks a lot.

Sure thing.

Thank you. We do have a question then from Adrian Dale with CIBC World Markets, please go ahead.

Thank you. I noticed that you had one revolver that was maturing in June of 2003, has that been refinanced?

Yes.

Okay, and where are the details on that?

We have got a $500 million revolver, $200 million is on a 364 basis and the other $300 million is this five year.

So the terms were the same as the prior revolver.

Correct. Okay, great.

Okay, great, I'm sorry any missed it but what is your revolver availability right now?

We have not touched it.

Okay and are there any letters of credit drawn or anything?

There are some letter of credits drawn, they are about $50 million. So technically we would only be able to get access to about $450 million of of that revolver but I would point out that we also have mortgage facilities on tap and we put another $100 million of mortgage facilities in place last quarter, so our total mortgage facilities are about $400 million of which about $240 million have been drawn, so that gets us to roughly the $600 million of debt availability that we talk about.

Great. Perfect and then with respect to the '04 guidance, for the new vehicle side what kind of a sales rate are you using for your assumptions?

We are saying basically it will be a stable environment, equal to this year.

Okay. Great. Okay. That's all I have, thank you.

Great, do we have one final question?

Thank you, yes and that question comes from Eric Selle with Wachovia, please go ahead.

Hey guys, appreciate your time. I just wanted to get some more clarity on the tax settlement, you guys said you accelerated the payment on that, I guess, $320 million, is that reflected in the debt at end of the the quarter and if not, should we see that in the fourth quarter?

No, it is reflected in the debt.

Wow, you guys are a free cash flow machine, appreciate your time.

With that, [LAUGHTER] thank you everyone for joining us. We very much appreciate your questions.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.