AutoNation Inc (AN) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2003 earnings conference call.

At this time, all lines are in a listen-only mode. Later there will be an opportunity for questions, instructions will be given at that time. If you should require assistance during the call, please press star 0 and 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 AutoNation's fourth 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 716118 through February 12, 2004.

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 will also be available by phone to address any follow-up issues.

Before we begin, let me read a 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 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 material to be materially different. Additional discussions of factors that could cause actual results to differ materially are contained in the company's SEC filings.

Certain non-GAAP financial measures as defined under the SEC rules may be discussed on this call. As required by applicable SEC 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 web site at www.AutoNation.com.

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

Thanks, John.

Good morning, ladies and gentlemen.

I'm pleased to announce that AutoNation achieved fourth quarter 2003 earnings per share of 28 cents. An increase of 8% compared to the period a year ago and our eighth consecutive quarter-over-quarter record EPS from continuing operations. Excluding the benefit from the first quarter IRS settlement, full year earnings per share from continuing operations were $1.32, an increase of 11% compared to 2002, and another year of double-digit EPS growth in what remains a highly competitive environment.

Our results were driven by continued leverage in the area of SG&A expense and our ongoing share repurchase program. We reduced SG&A expense as a percent of total gross profit by 100 basis points in the fourth quarter and 90 basis points for the full year, compared to the respective prior periods. And over the past four years, our cost cutting efforts have resulted in a 500 basis point reduction in SG&A, which translates into ongoing expense reductions of approximately $150 million per year. Our intense focus in this area has contributed and will continue to contribute to our profitability.

Turning to share repurchase, in the fourth quarter we repurchased $6.2 million outstanding shares for $110 million. For the full year, our share repurchase totaled 39 million shares, which, net of option exercises, was a reduction of 10% in the outstanding shares from last year.

In addition to our solid operating performance in the fourth quarter and in 2003, we feel very good about our financial position. Supported by a strong balance sheet, we will continue to make strategic investments in the company as we balance share repurchase, reinvestment in our existing stores and acquisitions.

With that, I'll turn the call over to Craig Monaghan, our CFO, who will be followed by Michael Maroone, with comments on our operating results.

Thank you, Mike.

Mike has taken you through the high level P&L results for the fourth quarter. I will now review a change to our financial reporting format and some specific items that occurred during the quarter.

In an effort to improve reporting consistency with our peer group, we have modified our revenue and gross profit breakouts for two items. First, F&I revenue and gross profit have been adjusted to include corporate volume incentives that were previously reported within Other. This additional -- this is additional income from manufacturers, vendors and preferred lenders that we receive due to our large national scale.

Second, the Used Vehicle caption has been modified to include the results of our wholesale business in addition to retail. Wholesale was also previously included in Other. All peers presented have been adjusted to be consistent. There is no impact to total revenue or total gross profit. As a result of these changes, the remaining amounts in Other are now diminimus.

For Q4, the reported results of 28 cents per share includes several largely offsetting one-time items.

First, we recognized a real estate impairment charge of $27.5 million. $17 million after tax ,or 6 cents per share, related to three underperforming new vehicle stores which currently operate in converted used vehicle mega stores. The underlying real estate is being written down to market value.

Second, as previously disclosed, we sold our remaining investment in LKQ Corporation, an auto parts retail recycler, and recognized a $10 million gain. $6 million after tax, or 2 cents per share.

Lastly, during Q4 we recognized a net income tax benefit of approximately $10 million, or 4 cents per share, related primarily to favorable tax adjustments and resolution. The resulting tax rate in Q4 was 27.6%.

We expect additional tax adjustments over the next 12 to 24 months as we continue to resolve various income tax matters. Our underlying base effective tax rate for full year 2003 was 38.3%. Going forward, we expect our base -- our base tax rate will approximate 39%.

Turning to capital structure items, during Q4 we purchased $110 million worth of stock and reinvested $44 million in capital expenditures in our business. Full year capital expenditures were $133 million, including lease buyouts of $10 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 or opportunistic lease buyouts.

With respect to leases, we have already executed approximately $70 million worth of lease buyouts thus far in 2004.

As you know, we view acquisitions and share repurchases opportunistically. We are targeting 2004 combined spending on acquisitions and share repurchases of approximately $400 million.

At December 31st, our non-vehicle debt was $654 million. We are comfortable with debt at these levels, considering that we have cash and incremental borrowing capacity in excess of $600 million. At a 17% debt to capital ratio, we have a very low debt leverage relative to our auto retailing peer group.

If you add in the impact of leases, our debt to capital ratio is approximately 24% while our peer group averages over 50%. In fact, most of our key debt ratios would be considered investment grade.

In conclusion, in Q4 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.

My comments will focus on our operational results for the quarter and will be on a same-store basis unless otherwise noted.

In the fourth quarter, total revenue increased. Our parts and service business continued to improve and our finance and insurance business also continued to be strong.

We are particularly pleased with the progress of our parts, service and collision business in the quarter, where on a same-store basis revenue grew 2% to $592 million, compared to the period a year ago. Due in large part to an increase of 4% in service revenue. This despite continuing declines in domestic warranty revenue.

Same-store parts, service and collision gross profit of $258 million in the quarter was an increase of 2% compared to the period a year ago.

We remain focused on improving customer pay revenue through initiatives that include the implementation of a common service drive process, optimizing our in-store pricing models, and refinancing our promotional campaigns -- refining our promotional campaigns, excuse me.

Another highlight in the quarter was finance and insurance, which contributed $136 million in revenue, an increase of 6% compared to the period a year ago. F&I gross profit per vehicle retail was $924 in the quarter, an increase of $66 or 8%, compared to the quarter a year ago. As Craig mentioned earlier, this calculation now includes corporate volume incentives. We attribute our ongoing solid performance in F&I to continued focus on our fourth quartile stores and intensive ongoing training of F&I associates in all of our stores.

In the quarter, we also is substantially completed the transition from in-house to manufacturer-extended warranty programs, and expanded -- expanded our preferred lender network to include additional prime and nonprime lenders.

In the area of new vehicles, we generated $2.8 billion of revenue in the quarter, an increase of 3% compared to the period a year ago, on volume of 93,000 units, off just 1%. The increase in revenue resulted from a greater percentage of more expensive trucks and luxury vehicles in our mix of new vehicles sold.

We were pleased with our ability to improve market share for the brands we represent in our markets. Our same-store and new vehicle volume was off 1%, while the brands we represent in our markets were off 3%. The overall industry posted a 1% increase in the quarter compared to a year ago.

In the quarter, our north Florida, Denver, Las Vegas and Phoenix markets were strong while our Atlanta, Cleveland, South Florida and Texas markets were more challenging. In Southern California, our business rebounded in the mid to late fourth quarter after the increase in the California vehicle licensing fee was rescinded.

The industry experienced pressure on new vehicle gross margin during the fourth quarter in what remained a highly-competitive market with excess supply. We are concerned about the continued compression in new vehicle margins and believe that an improving economic environment in 2004 will both -- will stabilize both volume and margins.

From an inventory perspective on a total store basis, we ended the quarter with a 71 base supply of new vehicles, in line with the industry at 68 days, both an increase of 8 days versus December 31, 2002.

Turning to used vehicles on a same-store basis, our performance was in line with new vehicles, with volume down 1.5%. Our same-store used vehicle revenue of nearly $1 billion was down 4% compared to the period a year ago, due primarily to our continued efforts to transition our used inventory to a greater mix of lower priced vehicles.

Same-store used gross margin was down just 1% in the quarter compared to the fourth quarter of 2002. Our used vehicle day supply at December 31st was 41 days, just one day higher than the period a year ago.

We are proud of our accomplishments to date and are optimistic about our business in the year ahead, where we will continue to work on expanding revenue and gross margin as well as reducing our operating costs. With an improving economy and the introduction of 48 new models in the industry, this year our team is excited about the road ahead for AutoNation.

With that, I will turn the back to Mike Jackson.

Thanks, Mike.

As we look to 2004, we believe that the market will remain intensely competitive and a stable volume environment. In closing, we confirm our full year 2004 earnings per share of guidance of $1.40 to $1.45, and issue fourth quarter 2004 guidance in the range of 29 to 31 cents.

That concludes our remarks, thank you for joining us today.

Operator, please open the call to questions.

Thank you.

Ladies and gentlemen, if you'd like to ask a question, please press star, then 1 on your touch-tone phone. You will hear a phone indicating you've been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you're using a speaker phone, pick up your handset before dialing.

Our first question comes from Charles Grom with JP Morgan. Please go ahead.

Good morning.

It looks like your used car margins dropped about 100 basis points sequentially, despite a 4% rise, I think, in pricing. Can you comment on what led to the decline? And more importantly, how pricing has trended in the used environment during the quarter and into January?

Our used vehicle margins in the quarter were below our full-year margins and it certainly was a difficult market. We found the manufacturers continuing to incent prior year models to a high degree and that always impacts our fourth quarter margins.

We do believe that pricing has stabilized. The markets in January have already improved and we believe it's going to be a good year for used cars but the fourth quarter is always a little more challenging.

All right, great.

And then just a question on private dealer valuations. I wondered what you're seeing in term of what valuations are trending at, and I know multiples have pulled back considerably since the late '90s, but in your view are they still pretty high? And what will be pace of acquisitions will be for the industry?

We think while, as you've stated very correctly, there has been a pullback in valuations from the rapid consolidation period of the late '90s, we don't see any dramatic values out there. It's still a pretty tough environment to make acquisitions that will hit our return threshold targets, which is 15% after tax.

With the discussions we have going on out there and as we improve our scale of productivity that we bring to acquisitions, we are hopeful that we can acquire between $500 million or $1 billion worth of revenue this year.

One of the reasons that AutoNation takes such a disciplined approach on focusing on the core business is that the payoff for us is not only the improvement in the core business, but our view is that it will apply to every acquisition that we make in the future. So, the longer we wait, we feel the better valuations we'll see and the more scale and productivity will bring to that acquisition.

So, that's sort of our mindset and exactly when the lines are going to cross over that we move at a faster pace, I can't say. But if we see it this year, we're prepared to move for it.

Great. I couldn't agree more with your mindset.

And just one quick comment on housekeeping, what was your mix versus domestic imports in the quarter?

We were about -- for the year about 55%, is that for the quarter, Mike?

55% for the quarter.

55% for the quarter for domestic, about 30% import volume. About 15% premium luxury and 5% other.

Great, nice job in the quarter, thanks.

Thank you.

Our next question comes from Rick Nelson with Stephens. Please go ahead

Thank you, and good morning, guys.

Good morning, Rick.

The gross margin pressures in new vehicles seem to get more severe in the fourth quarter. I'm wondering what is causing that and how do you see it -- the gross margin shaking out?

And also a comment on inventories, new vehicles. How many one-day supply looks a little heavy?

No -- no question, Rick that we're concerned about the gross margin compression.

If you look at the inventory levels in the fourth quarter this year versus last year, clearly inventory levels for the industry and for us are too high. High inventories always put margin compression pressure there, combined with what remains intensely competitive environment. out there.

Our outlook is that as the economy improves in '04, that the volume and gross margin situation will stabilize. I do not think the economic recovery will be strong enough that you'll see significant or dramatic improvements in either volume or gross margin but I do see the opportunity to stabilize the situation, and we have an intense focus on that this year.

Rick, it's Michael Maroone. If I could just add, I think another thing that will help us stablize the margins is the fact that we've got 48 new models coming into the market. Some of which are pretty good volume.

So, as we sell the newer models, I don't think there will be quite as heavy of discounting.

And Mike and Mike, how do you see the incentive environment shaking out in 2004? I know the manufacturers are talking about pulling back on incentives if the economy improves?

I think it's a situation where everyone knows incentives are not going to go away. You will have a basic overcapacity situation of the ability to produce well over 20 million vehicles, which is going to be in the high 16s to high 17 million. So, there's going to be a share fight from the OEM level and incentives are a weapon of choice.

I think, though, the combination of 48 new products, as Mike mentioned, with an improving economic environment, that they will look for an opportunity to modulate the level of incentives. I think they would love to cut them in half. I don't think they'll be able to do that. I think the truth will be somewhere in between where we are today and cutting in half.

Thank you.

Thank you.

Our next question comes from John Casesa with Merrill Lynch. Go ahead, please.

Thanks very much.

I have two questions, one is to follow up on Rick's question on incentives. Mike, are you saying then, that you think the average incentive will decline this year because of new product introductions and a better economy?

I think there is a chance. I'm not absolutely saying that. What I'm saying absolutely is incentives will remain. I expressed the manufacturer point of view of where they'd like to take them. I think they have a chance that there will be some modulation on the levels of incentives, particularly with the 48 new products.

Is your -- is it your perception, just in the near-term, it looks like in January incentives were up. We just heard this morning about a big Toyota program that maybe is just regional, but a lot of money in the Camry. But is your perception that right now that the year is starting off very promotional or not? Are we misreading that data?

No, you're absolutely correct. The 48 models did not arrive in January. That's for sure. They arrive through the course of the year and quite a bit of them coming in the third and fourth quarters.

OK, and then, my second question is on this whole controversy surrounding dealer reserve. Do you guys have a viewpoint on how this may play out either politically or in the press? And what's your thought around some of the public discussion about dealer reserve and the reporting about this?

John, whenever you get caught up in situations like this, first I look at the underlying economics and the underlying benefits to know whether structurally what's occurring makes sense out there or not, to weigh how much the political environment will have an impact on it. The fact of the matter is that we negotiate wholesale rates for our company, which we then turn around and and make available to consumers with a fee or margin built in. And the final price to the consumer is still below what they could get on a direct basis walking into a bank.

So, there is an economic benefit for all the parties concerned, hat we are a very efficient originator of high volume of loans for the banks. Do it much more effectively than they can do it themselves. The consumer ends up an attractive rate and the finance institution ends up with a big portfolio, and our margin averages somewhere between 1% and 2%, which to me is a very fair and reasonable margin.

Now, that's the underlying economics. Politically, obviously, it's going get a lot of attention, I don't think the issue is over. I think there's going to be, perhaps, a movement toward regulation as far as capping, how much margin you can take on this type of business, or else fix fees. Again, when I look at our company -- and disclosure levels.

When I look at our company, I think we're in pretty good shape since we already have a 3% cap in place and we already are very much -- have disclosure type contracts, so I think we will be able to manage the politics of the situation in a reasonable way.

I take your points on the economics very well. But do you -- do you think it's improbable, then, that this -- there -- let me put it this way, do you think it's possible that we just wind up going to flat fees on a lot of this business and then the whole issue of markup becomes moot?

You know, it's very difficult, John, to say how it's going to play out and I think it's also going to play out on a state by state basis, not on a federal basis. So there's all kinds of scenarios that -- that could happen. But I think the end result will be more transparency, some sort of cap, if not a fixed fee. I can't predict today exactly what it will be. But what I am saying is looking at the business from our perspective, that it will be a manageable situation.

Okay. Terrific. Thanks, Mike.

Thank you. We'll now move to Steve Girsky with Morgan Stanley.

Good morning, everybody.

Steve, how are you?

Could you talk a little bit about the weather impacting sales in January? Would that come back in February at all?

Yeah, this is Mike Jackson. I will turn it over to Michael Maroone.

We were doing our operating call, I really said to everybody, I already saw the weather report this morning, I don't need to hear it again. But Mike, you want to talk about how you see it?

Yeah, Steve, I think there was certainly an impact in our Chicago and Cleveland business and I do believe that we will pick that back up in February. The bulk of our business, however, is in the Sun belt. So I don't think we had a big impact in January, other than those couple of markets.

And you mentioned South Florida was weak. Is there anything going on in South Florida?

No, actually, you know, South Florida -- it's the first quarter that we showed a little bit of weakness. I think the market overall for the brands we represent was off about 5% from the previous year.

I know you remember, the previous year was really heavily incented on the domestics and we have a lot of very big domestic stores. So, financially the district performed well. The new volume was a little bit off in the entire market.

And you guys talked about inventory at 71. The end of January day supply looked worse. Is something going to break here sometime soon where we're going to figure out the -- the manufacturer is going to show their hand here or what?

This is Mike Jackson.

First, you know, we already talked about inventories, they're definitely too high, but we have to be careful not to shoot ourselves in the foot here because come March 1st, the selling rate steps up -- begins to step up considerably, and stays up for quite some time, and you quickly move into model year changeovers.

So, I definitely would have liked to have carried less inventory in November, December, January and February, but I've got to bear in mind to also stock on a forward-looking basis.

Mike, you want to add anything to that?

We're optimistic about the spring selling season, Steve, and as Mike said, we're a little heavier than we'd like to be and I think our guys have already made the adjustments in inventory, but we certainly believe that we need to aggressively stock core models coming into the spring selling season and build-out.

Okay.

And what about inventory -- I mean warranty versus customer pay? Could you guys break that out at all?

Yes, warranty obviously varied tremendously depending on whether we're looking at domestics or imports.

Our domestic warranty business, in aggregate, was off about 14%. That's parts and labor. Offset by our imports, were up 21%. And our luxury was up 17%.

So, if you put it all together, our warranty business was up, I believe, about 3%. So, it's really a mixed bag.

And the customer pay side, then?

Customer pay was up about 1% for the quarter and that's where our focus is for 2004.

Okay.

And just one more thing on the inventory. The -- I won't call it a game, but the, sort of, the spread you're making on the inventory, that seems to be contracting at the margin. If rates go up, does that start to contract even further?

Well, the -- the interest rate help that we get from the manufacturers moves as the rate moves. So, certainly it has some impact if we don't turn the inventories, but if we turn the inventories the way we hope to and the way we plan to, it shouldn't have a big impact on our carrying costs.

Steve, it's Craig.

If I could just -- maybe a little more clarification on that.

Great.

There are some differences in the programs between manufacturers. So, some of the imports, for example, have a fixed rate assistance plan and in that case, if rates go up, we do feel it directly.

So you won't see it -- so -- if rates start -- they haven't pushed back on you on rates yet at all on the wholesale side?

No, we're in good shape right now.

Okay. Thank you.

Thank you.

Our next question comes from David Siino with Gabelli & Company. Please go ahead.

Hey, David.

Good morning, most of my questions have been answered.

Craig, a couple of housekeeping items. The IRS tax payable was what, at 12/31?

The tax payable -- what I'd rather do with the full balance sheet at 12/31 is when we put out our K, just walk you through all the detail there.

Okay.

And did you say something about $70 million in lease buyouts in '04, to date?

That's to date. Yep that was done in January.

That's the same thing you've seen us do in the past, where we've got a number of leases that -- normally on about a three-year basis, we got a shot at them. Many of them have cap rates in excess of 10%. And when we can buy those out we will, because obviously we can finance this business at rates substantially lower than that.

So, the full year number would be?

We don't know what kind of other opportunities we'll have in the course of the year and whether we'll be able to successfully negotiate something or not. So can't really say today, but if -- if other opportunities come, we will definitely take them. And not only is it the cap rate but it's also to control the -- get the site control, get rid of the escalators, and get more flexibility with what you want to do with the property and not have to renegotiate every time.

So, it's -- a core expertise of ours is the holding and management of automotive real estate. So, our philosophy is somewhat different than our peer group in that leasing is not really where we want to be.

Okay. So, if I add up Cap Ex and and lease buyouts for '04, likely quite a bit higher than '03?

Yeah, yeah. We're looking at base Cap Ex about $130 million or so, leased to 70 right now. So, yeah in total you will be pushing 200.

And in our mind, quite frankly, David, it's a choice between a financing decision. We basically are responsible for the rate. Now, how do you want to finance it?

Do you want to finance it through a lease and pay double-digit rates and not have the flexibility and/or control? Or -- or do you have the balance sheet where you can go out and finance it yourself. It's just -- it's just a financing arrangement. In my mind.

Agreed. Thanks a lot.

All right, great.

Thank you.

We now have a question from Jeff Black with Lehman Brothers. Please go ahead.

Good morning, guys.

Good morning, Jeff.

On the expense management side, you know, we're cycling a -- a real good year in '04 and I'm just wondering how much benefit you've incorporated in your current guidance from continued leveraging of the expense line?

This is Mike Jackson.

I think we're looking at a more balanced approach in '04, in that we will continue our expense and productivity work, and we feel we have the potential over the next several years of about 200 basis point improvement in that. How much of that we will actually realize in '04, I can't say exactly, but that's sort of our view.

But clearly as the economy improves and new products come from the manufacturer, we see opportunity also on the revenue and gross profit side which has not been there in the past. So, I view '04 as sort of a transition year for AutoNation, where we could be able to see some revenue enhancement as well as continued cost work, and that that ratio in years '05, '06 will change even more.

Well, since you're bringing it up, what are your targets for same-store sales in new and used, given everything you just said for the year?

You know, we've always taken the approach that we give earnings per share guidance, and this year we're saying $1.40 to $1.45. And my experience in the four years here is that nothing ever develops exactly as you think it is, and the challenge is more to manage through with the situation that you're confronted with, all of the time keeping, your long-term strategy in place.

So, I don't think it makes a lot of sense to break it down into a lot of detail. Directionally we're going for $1.40 to $1.45, and I sort of called out the issues as we see them.

Let's go a quarter out. What about guidance for new and used, any color on that?

We're saying 29 to 31 cents for the first quarter.

Okay, thanks.

Thank you.

Our next question comes from Gerry Marks with Raymond James. Please go ahead.

Good morning.

Good morning, Gerry.

Just a couple of quick questions.

First of all, I apologize, I didn't catch all of David's question, but did you give the percentage of stores that you have currently right now that under leases versus how much of the real estate you own?

Yeah, we own about 70% of our properties, about 30% are leased and those are, to a large extent, leases that we've inherited.

Okay.

And your balance sheet has kind of changed a little bit. Going back to Steve's question, could you give us a little bit of an idea -- you've provided in the past for every hundred basis points what the impact is to EPS, do you have an idea of that roughly? In the -- if the rate environment changes by 100 basis points?

I think the easiest thing for you to do is just take a look at the debt on the balance sheet and run that calculation yourself.

Okay.

The -- the reason why I'm asking is because I mean, Craig, you alluded to the -- the foreign automaker as doing it as a fixed percentage of invoice. And what I guess I'm trying to wonder is if -- if we start to see rates go up, if we start to see floor plans squeezed or if you think that somebody like Toyota goes and changes their interest expense systems.

Well, this is Mike Jackson.

There's no question that rising interest rate environment will have a impact on our carrying costs for inventory. But my view is that when the Federal Reserves finally start increasing rates that we will be clearly in a significantly improved economic environment. So, there should be counterbalances to that.

Okay.

If we don't necessarily have much of a counterbalance -- I mean one of the things that we've kind of noticed is there seems to be perpetually a higher level of inventory levels and one of the things we hear from the automakers is that there's a greater willingness to accept inventories. If that rate environment changes, what do you think kind of happens to the willingness of -- of the industry?

I think you have -- absolutely right to the point there, that the inventory levels that you see now, one of the facilitators of that is the rate environment. Meaning that, simply the cost to have this much inventory is so much lower.

In a higher rate environment, this is not going to happen. I mean we will -- we will carry less inventory in a higher rate environment, unless the manufacturer wants to offset that additional carrying cost.

Okay.

And final question, Mike, if you could -- I know you were starting to answer a little bit with Jeff's question, but -- you guys seem to have have been pretty consistent about generating 90 to 100 basis point improvements year-over-year in SG&A as a percentage of gross. You know, could you give us an idea of some of your '04 initiatives you think can maybe help continue on that course?

This is Mike Jackson. I mean we are -- we are very much attacking the fixed cost structure. That could be an energy plan in California where we've been able to reduce our electric bills by 33%, to South Florida, consolidating our vendor selection and going from 6,000 vendors to 3,000 vendors and getting a better pricing in the whole equation. All that type of work is ongoing.

And on the compensation side, we have staffing plans that we have designed, depending on the size of the store that will -- that will produce the greatest productivity for those stores. And I would observe, if you look at us today compared to four years ago, we're the same basic revenue today than we were four years ago, yet we have 2,000 fewer associates than we've had over the last several years. So, that's part of the staffing plan and productivity, and we see that work continuing with -- we feel 200 basis point opportunity over the next several years.

Okay. Thanks.

Thank you. We now have a question from Domenic Martilotti with Bear Stearns. Go ahead, please.

Good morning.

Good morning, Domenic.

Just a few follow-ups on the previous questions.

First on the dealer reserve, when you spoke of margin between 1% and 2%, is that a basis point markup? Or is that a different ratio?

That's a basis point markup.

Okay.

And -- and looking at, you know, the pricing in terms of incentives that are out there, you know, you talked about you think that they could go down, but it seems that the manufacturers are -- are picking their spots, use a little more dealer incentive. Do you have a kind of corporate philosophy in how you push your general managers to either chase the dealer incentive or not?

You mean as far as volume targets?

Yes.

Yeah.

Stair step programs as they're referred to in the industry, where you have to hit a volume target to get the incentive on a retro basis back to units you've already retailed. That's a -- that's a very critical calculation that we make on a store by store basis because in many cases you almost have to make a calculation from a pricing point of view, whether you're going to hit the target or not hit the target.

Sometimes we make the assumption that we will achieve it and off we go, and other times we say no, the target is unrealistic, we can't put that into our pricing. If we make it, we make it, if we don't, we don't.

Most of the time we call right, sometimes we don't.

So, that's in the hands of the local managers to try to pursue those targets.

We have visibility all of those targets here in national. And Mike, you go through it district by district?

Yes, we look through it brand by brand, district by district. We get a rollup of all the manufacturer programs and then we'll certainly try and understand what the impact is store by store. I would tell you it's not the same store by store.

So, we think there's great opportunity, but as Mike clearly said, we look at it on a case by case basis and are very cognizant of what it costs us to chase those targets.

So, again on this whole incentive issue and how they're going to develop this year, I mean, I'm really -- if they modulate, that means the manufacturers are hitting their volume targets and see the opportunity to do it, which means we're selling the volume. And if the volume is not there, then their incentives are going to be there.

So, I am either going to get the volumes with lower incentives or they're get the volume with higher incentives, so, I don't see how we lose in the equation.

I agree.

Looking at the used car market, you know, you spoke that it's about getting your inventories right in terms of lower priced inventory. Are you seeing some movement there in the fact that there's less cars coming off lease? So I would consider those to be higher priced inventory and there's an opportunity to get a better mix of vehicles in there?

Yeah, Domenic, it's Michael Maroone.

I think you hit it right, it is always hard work to go out and get the low priced inventory. We look to have 30% of our inventory under that $10,000 price point and work very hard to get there.

Certainly off-lease can skew the average inventory cost up, but we really try in general and stay away from that current model used.

Do you have a number of where you're average price is on the used cars?

Our average revenue last quarter was $15,500. So, you can back it out -- we try and stay under $14,000, but we've worked almost every quarter, you will see us inch that number down.

Okay.

And looking -- looking at, you know, the acquisitions you talked about, you're looking for 15% after-tax return. Is it safe to say that because of your -- your slower pace there, that you just can't find the returns there, and you see the returns better in buying back your stock?

Yes, that's a -- that's a very apt description. You know, when I arrived at AutoNation four years ago, the return on invested capital was languishing around 6%. So, clearly that's not a winning formula.

By taking this disciplined approach over this -- this four years for the entire company, we have now moved that figure past 9%. Obviously by investing on the increment, the whole -- it takes a while to move the whole number, but we absolutely believe at the end of the day, that is one of the key metrics that -- that you have to meet to create shareholder value. And so we work very hard to make our -- our cash and our capital, and we absolutely want to redeploy it in a very disciplined way.

And so we'll wait for that intersection of lines between where our scale and productivity can meet that kind of threshold. The industry is still in its infancy in consolidations. I feel no pressure to -- to go out and do acquisitions for acquisitions sake. That will not hit the return thresholds. Because it's not like we're sitting on our hands in the meantime. In the meantime, we're able to put our focus and energy in improving the core business we already have, and we continue to have a very attractive opportunity to repurchase our shares.

Okay.

And looking at the uses of cash, I mean at what point do you think the better use of the cash is perhaps a dividend versus purchasing shares?

I still think we're a young company and I would not want to make the strategic commitment to a dividend at this time. It's not something that we'll -- that I rule out, but I don't see it in the near-term horizon. And I really believe the gains that we're making in productivity and in scale will allow us to do acquisitions and we continue to have our share repurchase opportunities.

So, for the -- for the horizon that I can see at the moment, I don't see a dividend.

Have you guys put out a target for cash flow, free cash flow generation in '04?

Craig?

No, I think the way you can look at free cash flow for us is that our maintenance Cap Ex essentially equals our depreciation, so, in essence, our free cash flow is our net income plus whatever else we can do to continue to squeeze cash out of the balance sheet.

All right.

And just lastly, what are your macro assumptions for '04 in terms of your guidance?

I -- I believe the new vehicle market will be equal to, if not better than, '03. So, 16,600,000 units I view as a stable environment and the best case upside would be something knocking on 17 million.

So, stable to improving.

Okay. Thanks.

Thank you. And just a reminder, it is star 1 if you have any further questions.

We'll move on to Adrienne Dale with CIBC World Markets. Go ahead, please.

Hi, thank you. I have a few things.

First of all, it looks like your debt level has gone up quite a bit. Was that just to replace the cash on the balance sheet? Or what was the -- what was behind that increase?

There's two key drivers behind our debt increase this year. The biggest driver was the -- our share repurchase program, where we -- we spent $575 million in share repurchase. We also had a settlement with the IRS early in the year that it also contributed to the increased debt.

Right, but it's gone up just over the past quarter, right? So, hasn't that already been paid out in the prior quarter, the IRS settlement?

Yes, the IRS payout was earlier in the year.

So, it's mostly just share repurchase?

Share repurchase and just some of the seasonality of the business will cause the debt levels to move quarter-to-quarter.

All righty.

And then, what's your revolver availability now?

We have a $500 million revolver that's untapped. With also have mortgage capacity that we don't take advantage of today. That would be another $100 million or so.

Okay.

And then -- what was your rent? And then going forward, given these buyouts and what have you, what are your expectations for rent '04?

I think what I'd ask you do on rent is maybe we can get back with John Zimmerman afterwards and he will take you through some more of those details.

All righty.

It sounds like you're going to continue to buyback stock and you continue to see your shares as being undervalued. Do you have any kind of a target price at which the stock is fairly valued?

No, I don't.

I mean that's an equation we constantly look at between what's available in the marketplace vis-a-vis acquisition versus our stock price. All I'll observe is that our multiple, our PE at the moment is 12, and I think that's less than what the company should be fairly valued at.

Okay.

And then you also spoke about how there aren't many great values out there in terms of acquisitions. So, what kinds of multiples had you been acquiring at in '03? And what are your thoughts for '04?

You know, when we do an acquisition, you can measure all different kinds of multiples. On all different kinds of bases. We do that, but I don't think it's necessarily the right way to think about it.

For us, the green light on acquisition, we look at all the capital out the door to make the acquisition. And look at our operating plan that goes underneath it. Which includes both the existing run rate and the scale on productivity we'll bring to the acquisition, and there, within a reasonable period of time of two to three years, we want to the achieve a 15% after tax return.

I would say what that means is that stores that are overperforming with outstanding walk on water entrepreneurs who are not going to stay after you get the acquisition, is not something that we would be terribly interested in. I think the expertise that we are developing is to acquire underperforming stores, whereby, including AutoNation's scale and productivity, we're able to significantly improve their performance and hit our return targets.

Okay, great.

And then finally, are you happy with your mix of domestic versus imports? And more specifically, you know, obviously the Asian OEMs are doing a lot better in terms of their sales volumes, but the domestic OEMs are now coming out with a lot of new volumes.

Do you intend to kind of tweak your mix to account for one or the other?

First, AutoNation has always taken a diversified approach to the business. We're diversified by brand, we're diversified by business type, we're diversified geographically, and there will always be winners and losers within that mix that you just have to manage through. But we've made the commitment to have this diversified approach.

We have significant relationships with the six major manufacturers, seven counting BMW, and we think that it's the right approach. And our acquisitions strategy is always focused on those relationships and the markets where we have density or infrastructure.

So, we would not hesitate to acquire domestic imports or premium luxury where it fits our footprint. And our core expertise is running big mass markets, stores in major metro markets, and running premium luxury stores.

So, that's our focus on the acquisition side.

Okay. Great. Thank you.

Thank you.

Our next question comes from Eric Selle with Wachovia Capital Markets. Please go ahead.

Good morning, guys.

Good morning.

Hey, just real quick, for housekeeping, what's outstanding on your mortgage facility? Is that around 250 right now?

The mortgage facilities are going to be -- let me come back to you, Eric and I will get you an exact number.

Okay.

And looking at inventory, Adrienne kind of hit on your brand mix, you know, in the -- the mindset that you guys are -- you're know, sounding optimistic toward the spring selling season, have somewhat of an easy comp versus last year, however, you do have a lot of new models hitting the lots. Let's say that this spring beats the easy comp of last year, but you have to go out and buy all these new models, how should overall inventory trend, you know, in the first quarter versus year-end? Should it be flat, or is it going to be slightly up?

I think it's going to be roughly comparable, perhaps a few days less. Not in an absolute number, but simply because the calculation is done on a trailing 30 day basis and the sales rate, I believe, will be higher in March than it was in December.

Okay.

And then, you know, getting back to Adrienne's question, are you comfortable with the inventory mix between, you know, 2003 and 2004 model years? And how does that compare to last year?

Eric, it's Michael Maroone, we don't see a problem with our 2003s. The incentives were very aggressive from the manufacturers, and allowed to us put our inventories in pretty good shape. So, it's not an issue with us.

That sounds great. Hey, I appreciate you guy's time.

And if you would, just before you go, the mortgage number? Mortgage loans today are just north of 300. We've got total capacity of about 400.

Okay. Great. Thank you.

That's all the time we have for questions. I enjoyed it very much. Would like to spend more time, but that's all the time that we've been allotted. So, thank you for your questions.

Thank you for your interest and we're looking forward to moving on with the first quarter.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.