Group 1 Automotive Inc (GPI) 2002 Q1 法說會逐字稿

Good morning, and welcome to the Group 1 Automotive first quarter conference call. All participants will be on a listen-only mode until the question and answer session of the call. At the request of the company, this call is being recorded today. If anyone has an objection, you may disconnect at this time.

I would now like to introduce your moderator for today's call, Mr. Jeff O'Keefe. Sir, you may begin when ready.

o'keefe:

o'keefe: Thank you, Michelle. Good morning everyone and welcome to the Group 1 Automotive first quarter conference call. Before we get started, I would like to make a brief remark about forward looking statements. Except for historical information mentioned during the conference call, statements made by the management of Group 1 Automotive are forward looking statements that are made pursuant to the Safe Harbors Provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Those risks include, but are not limited to: Risks associated with pricing, volume and the conditions of market. Those and other risks are described in the company's filings with the FCC over the last 12 months, copies of which are available from the FCC or may be obtained from the company.

Representing Group 1 this morning are Mr. B.B. Hollingsworth, Jr., Chairman, CEO and President and Mr. Scott Thompson, Executive Vice President, Chief Financial Officer and Treasurer. Without further delay, I would like to turn the call over to Mr. Ben Hollingsworth. Sir, you may begin.

Thanks, Jeff and welcome to our conference call. This morning we will discuss operating results for the first quarter of 2002, but first for the highlights. Net income rose 66 percent to $15.5 million dollars. Diluted earnings per share increased 36 percent to 64 cents. We have recorded 18 consecutive quarters of double-digit earnings per share growth exceeding analysts' estimates each quarter. Margins expanded in new vehicles, used vehicles and parts and service. Gross margin improved to a record 16 percent. Operating margin rose to 3.4 percent and we are increasing earnings per share guidance to 2.70 to 2.85 for the 2002 year and we are raising our acquisition target for 2002. Our unique position in automotive industries, especially retailer and service companies, has produced these record first quarter results. The continuing achievement of our objectives is once again evidence of the strength and flexibility of our . I will now ask Scott Thompson to go over the details of our financial results, as well as our brand and geographic mix. Scott.

Thank you, Ben. The company had an outstanding quarter driven by margin improvement, strong finance and insurance business and lower inventory finance costs. The company's revenues totaled $946 million for the quarter. The overall car market was off 4.6 percent first quarter to first quarter. Our same store sales exceeded our expectation coming in even with last year. This follows the robust 21 percent increase in same store sales we experienced the fourth quarter of 2001. From a geographic standpoint, we had outstanding performances in Houston, West Texas, Boston offset somewhat by performances in Atlanta and Dallas.

Our brand mix for the quarter was as follows: Houston Beaumont represented 17.3 percent of our business, Oklahoma 14.6, Florida 11.1, Austin 10.9, Boston 10.5, West Texas 9.3, New Orleans 7.1, Atlanta 6.9, Dallas 6.6, New Mexico 3.9 and Denver 1.8 percent. From a brand standpoint, we continue to experience very strong performance from our import brands led by Toyota/Lexus, Honda and Nissan and offset somewhat by our Daimler Chrysler performance. Our Ford dealerships met expectations. Domestic manufacturers represented 54 percent of our sales and import manufacturers were 46 percent. Luxury brands were approximately 10 percent of our business. The brand mix for the quarter was as follows: Ford represented 28.8 percent of our business, Toyota/Lexus 26, GM 13.8, Daimler Chrysler 13.1, Honda/Acura 6.1, and Nissan 5.3 and the balance is an array of brands.

The truck market continues to be strong. Trucks and crossover vehicles represent 60 percent of our unit sales and cars were 40 percent. This is consistent with past quarters. Our gross margin for the quarter was a record 16 percent, which is up from 15.3 percent last year, as our used vehicle margin increased after a challenging fourth quarter last year and our finance and insurance business increased to 3.9 percent of revenues resulting in a positive merchandising mix.

Finance and insurance grew 14 percent this quarter as we earned some annual incentive bonuses. Profit per retail unit reached a record $987 dollars this quarter up from $859 dollars the same period last year. We would expect 925 dollars per retail units sold for the balance of 2002.

Individual product margins were up in all businesses for the quarter. The margins for the quarter were as follows: New vehicles were 7.4 percent up from 7.3 same period last year. Used vehicle retail margin was 10.8 up from 10.6 last year and up significant from our fourth quarter performance of the last year of 8.4. Parts and service 55.5 this quarter compared to 55.1 same quarter last year and, again, gross margin 16 percent for the quarter versus 15.3 last year. For the second quarter, we expect new vehicle margins to be about 7.4 to 7.5 percent and we expect used car retail margin to be around 10 percent. The 10.8 percent margin we achieved this quarter was a record for us and I think we benefited some from conservative valuations at year-end. As you might remember, we had an 8.4 percent used car margin in the fourth quarter last year.

Income from operations for the quarter reached $31.8 million, or 3.4 percent of revenues. The 3.4 percent operating margin is up from 3.1 percent first quarter of 2001. Our new vehicle inventory turned for the quarter with 66 days exceeding our targeted 60 day turn, but our March new vehicle inventory turned with 57 days. Our used vehicle margin turn for the quarter and for March was 31 days. We feel our new and used inventories are in good shape going into the second quarter.

For the quarter, floor plan interest expense decreased as rates are down about 44 basis points and the average floor plan debt for the quarter was down $130 million. These factors result in a $4.9 million dollar reduction in floor plan interest expense. The reduced leverage on inventory accounted for 46 percent of the decline and interest rate changes accounted for 54 percent of the decline. The favorable interest rate and leverage change was somewhat mitigated by a $1.5 million dollar reduction in manufacturer floor plan assistance, which is reported as a reduction in cost to sales of new vehicles. For the quarter, floor plan interest assistance totaled $5.7 million. At March 31st, after considering long-term interest rate swaps, approximately 40 percent of the company's debt is subject to variable rate pricing. Factoring in manufacturer assistance and interest rate swaps, we feel 100 basis point change in market interest rates based on our current capital structure will impact EPS about 6 cents a share. The company's effective tax rate is 37 percent, which is down 100 basis points from same quarter last year as we implemented the new on good will. We expect a 47 percent effective tax rate going forward.

For the quarter, the company made $15.5 million, or 64 cents a share on a diluted basis. This represents a 36 percent increase in EPS over the same period last year. , part of the increase is due to the new on good will. On a pro forma basis affecting 2001 earnings for the new accounting standards, earnings per share grew 23 percent, even after absorbing the dilution of the fourth quarter equity offering. On a true apples to apples basis pro forming the good will and the temporary dilution from the equity offering, earnings per share grew 45 percent. Anyway you compute it, this represents the 18th period that the company has achieved quarterly double-digit EPS growth on a year over year basis. We have achieved a compound annual growth rate of 36 percent over the last 18 quarters. for the quarter was $34.6 million. For the quarter, return on average equity was 15.4 percent versus 14.9 first quarter of 2001. Remember, we are less leveraged and we still improved return on equity. This number should improve as we close pending acquisition as we move to our seasonally stronger quarters, the second and third quarters. Return on average equity over the last 12 months is 19.3 percent.

Turning to same source data, now, same store new vehicle revenues were up 60 basis points. Remember, the market down 4.6 percent for the quarter. Our used vehicle same store revenues were down 4.2 percent. Parts and service were up 3.2 percent and total same store revenues were down 40 basis points. We have applied 142, new on good will, effective January 1st, 2002. For the part of applying new accounting standards, we have evaluated the fair value of our 284 million of intangible assets recorded on our books. Based on our estimate of normalized earnings, which is supported by historical cash flows and our judgement of market value of our operating units, we feel comfortable with the realization of this asset. Therefore, based on current facts and circumstances, we do not expect any valuation write down. This is evidence of disciplined acquisition approach and the effectiveness of our do-diligence processes.

Turning to the company's capital structure, as of quarter end, the company had $171 million in working capital. We believe this is an approximately 120 million more than we need to operate the business. In fact, we will fully fund the acquisitions we announced today out of working capital. Thus, after all announced acquisitions are closed, the company's long term debt to cap will still be the lowest it's been in years at 19 percent. Total capital expenditures for the quarter were $8 million, of which approximately 6.2 million before expanded operations. We expect for 2002 to be approximately $30 million. We expect the full acquisitions weighed average diluted outstanding shares for the quarter to be $24.7 million. I am pleased to report that our financial capacity for acquisition has never been stronger. We have $120 million of excess working capital, our 2002 is expected to be over $150 million, and our $200 million dollar acquisition working line of credit is totally undrawn. We estimate, depending on the cash stock mix and purchase price, that we have the financial resources to close $2.5 to $3.5 billion in revenue and maintain a long term debt to cap under 40 percent.

As outlined in the press release, our acquisition goals for 2002 is $800 million, but it is clear that we are positioned to exceed our goal if we choose to. It is clear that we are positioned for significant growth without reliance on future capital transactions. The investment of excess working capital and releveraging the balance sheet represents opportunity for upside in current EPS estimates. Ben will now update you on earnings guidance for 2002.

Thank you, Scott. We are pleased with our continued progress and are encouraged without our future prospects. Favorable interest rates combined with manufacturer's incentives and rebates and more innovative products with shorter cycles, as well as the affordability of vehicles, continues to attract customers to our dealerships. In addition, record sales levels the last few years have produced more automobiles and light trucks in operation, driving business to our higher margin in parts and service departments. We expect these positive business trends will continue. Including the acquisitions announced today, we are increasing our diluted earnings per share guidance for 2002 to a range of $2.70 to $2.85. Earnings per share guidance for 2002 is after the 31 percent diluted impact of our fourth quarter common stock offering and, as Scott mentioned, the 20 cents per share positive impact of the new accounting standard on good will amortization's and assumes that the announced acquisitions close by the end of the third quarter.

We continue to focus on our operations while seeking to acquire new dealerships that meet our high standards. We will see traditional platform and strategic tuck-ins in acquisitions in 2002 targeting those dealerships with total aggregate revenues of at least $800 million dollars, as Scott said. Year to date, we have acquired dealerships with 80 million dollars of revenues and disposed of one dealership with 22 million dollars of revenues. We announced today we have agreed to acquire dealerships with approximately $530 million dollars in annual revenues. The dealerships include: a new California platform and tuck-ins in Tulsa and Houston. These acquisitions include 10 franchises and, upon completion, will bring Group 1's annualized revenue rate to over $4.5 billion dollars. This is in keeping with our previously stated goal of seeking platform and tuck-in acquisitions in 2002.

We are very excited about our California platform, the Miller Auto Group. With annual revenues of approximately 400 million dollars and six dealerships located in Culver City and Van Nuys, California. This is our initial entry into the largest automobile market in the United States. The operations consist of two Honda franchises and Toyota, Nissan, Infiniti, and Mitsubishi franchises in this major market for imported vehicles. Fred and Mike Miller will continue to operate the business, which has been in their family for almost 60 years. Fred Miller, the former Chairman of the American Import Automobile Dealers Association, and Mike Miller, the former President of the California Motorcar Dealer Association, are icons in our industry and we are extremely pleased that they and their proven management team have decided to join Group 1. We have been patient and disciplined in looking for the right platform in this important market and we have found it. for Strategies, a San Francisco investment bank, acted as the financial advisors to the Millers' on this transaction.

We also added tuck-ins in Tulsa and Houston. We have agreed to acquire BMW, Buick and Jeep franchises in Tulsa, Oklahoma, with annual revenues of 80 million dollars. These franchises will become part of the Bob Howard Auto Group platform, which is the largest dealership group in the state of Oklahoma. We have also agreed to acquire a Nissan dealership in southwest Houston with annual revenues of $50 million dollars. The dealership is near Sterling McCall Toyota, the second largest Toyota dealership in the nation, and will become part of the Sterling McCall Automotive Group platform.

I would like, as is our tradition, to give you Group 1's top five selling vehicles for the first quarter of 2002. Number one, again, the Ford F-Series pick-up truck. Number two, the Toyota Camry. Number three, the Ford Explorer. Number four, the Dodge Ram pick-up and number five, the Ford Expedition.

Upon completion of these acquisitions, Group 1 will own 69 automotive dealerships comprised of 106 franchises, 28 different brands and 25 collision service centers located in Texas, Oklahoma, Florida, Georgia, New Mexico, Colorado, Louisiana, Massachusetts and California. Through its dealerships and Internet sites, the companies sell new and used cars and light trucks, arranges financing, vehicle service, and insurance contracts, provides maintenance and repair service and sells replacement parts.

At this time, Scott and I will be happy to entertain your questions.

Did you want to begin the question and answer session?

Yes, we are now ready to entertain questions.

To ask the question, press star, one. To withdraw from your question, press star, two. Once again, to ask the question, press star, one.

Our first question comes from Matthew . Your line is open, sir.

Good morning, Matt.

I would like to ask questions on two issues. First of all, I want to understand the trends that you are seeing in the used car business today given that there is, I guess, some deceleration in same store momentum in that business. I think, actually, last year's first quarter, if I am not mistaken, was also a little soft on the same storefront in used cars. So, if you could give us sort of a state of that market and what you would expect in the used car arena as you look forward.

Okay, great question. I think it is fair to say that the used car segment under performed slightly this quarter. If you look at the average price of the units, they were down a little bit. That is probably a reflection of the decline in the fourth quarter in the used car market. If you look at the margins, you can see that they were very strong and if you look at what we made on a per retail unit, it was very strong and stable. But the unit volume was down slightly. I think this is probably a one quarter thing. I would expect to see same store growth in the second and third and fourth quarter in new cars, probably in the lower single digit range.

Scott, I think you just said in new cars. Did you mean to say in used cars?

I meant in used cars, Matt.

Okay. So, the unit growth would turn around?

Yes.

Okay. I mean it is interesting your competitors out with numbers today also had kind of choppy, at least one of them had particularly choppy used car results.

Listen, you also have to remember we had 20 percent plus growth same store sales in the used car market in the fourth quarter.

Right.

There is a lot of talk about pull forward in the new car market, but I think probably there was a pull forward in the used car market that we experienced this quarter.

Right. Second question relates to the inventory leverage dynamic you spoke about. If you could just elaborate a bit more. Obviously, there are two ways you are winning on the floor plan front. One way is on interest rates, the other way is on the degree to which you are depending on floor plan debt to finance debt inventory. Can you give us a sense of your strategy there? What is driving that favorable comparison?

Okay, you are right. There are two factors in there. One is the leverage and one is the interest rate. As you know, we did an equity offering in the fourth quarter that raised quite a bit of money. That money has been in working capital until it is deployed in acquisition and it has effectively deleveraged our inventory. If you look at our average floor plan debt in the first quarter last year, it was $491 million dollars. This year, our average floor plan debt was about 360 million dollars. We will releverage the inventory as we deploy money in the acquisition program because that is our cheapest source of financing.

So we should look for floor plan interest expense, all other things being equal, to probably come up with that?

We have come up whenever you project the closing of the acquisition.

Which is for when?

We said that they would be closed by the end of the third quarter.

So basically if you are now talking April, we should not build them into our numbers prior to the fourth quarter?

We said we would have all the acquisitions closed by the end of the third quarter.

Okay. So, to the extent that you are guiding to 285, that would probably imply on your guidance not much more than one quarter of accretion from those deals?

That is correct.

Okay. Thanks a lot.

Okay.

Our next question comes from Rick Nelson.

Hey Rick.

Thank you. I was wondering if we could get some color on the Miller Group acquisition. How it was structured, cash and stock proportions and the valuation.

Sure. Thanks Rick. The Miller acquisition restructures as an all cash transaction. As we announced this morning for the California platform and then the other two tuck-ins in Tulsa and Houston there was a total of 85 million dollars. That is all cash. That is a little bit of a deviation for us on a platform, but Fred and Mike are going to stay with us out there. They have an outstanding management team. We will work to get equity, as has been our case in the hands of those key operators, the general managers and the chief operating officers, the CFO, but I think probably it was, from the Miller's standpoint, because of their age, they were more interested in liquidity rather than any kind of equity investment. So, for us that was fine because the key managers are all in place and we think there is an outstanding management team there. The pricing on all those are all within the range of our announced pricing guidelines, seven to nine times after tax earnings and all meet our return on investment criteria.

And are we likely to see more in the way of these cash acquisitions? It is a deviation from your prior strategy.

It is Rick. It is not unusual though, in fact the last platform acquisition we did, our Boston platform, the majority owner was an older gentleman who did take all cash and then the younger son, who is our platform president who was a minority shareholder, took predominantly all stock for his portion. So, that is a structure we will pursue and do pursue on a regular basis. I think going forward probably you will see us, I think the Miller platform, I would consider it more of a deviation than the typical platform for us. It is going to include some stock, especially for the key operator. In this instance, the key operators, the younger people running that dealership, had no equity ownership. So we will work to address that, but I think on a go forward basis, you will typically see us continue to use stock for those key operators who become our partners and in many instances the platform president. Let me also say that while this is a very sizable step into the largest car market in the United States, Scott mentioned our capacity. So, it shouldn't be surprising as we are looking at other acquisition candidates, that we are certainly looking at larger dealership groups now than we have in the past because of this capacity we have.

So, as Scott mentioned, we expect to close these acquisitions in the third quarter. I also believe that, because of the Miller's reputation and their great presence in that Los Angeles market and in California, we are going to see great opportunities in that market to add to that platform. It is one of the reasons we are so excited about it. They are so well known, we are so well positioned in that great import market, just as an aside, the import brands that are included in the Miller platform, their market share in Los Angeles County is double what it is nationally. So, it is certainly an ideal brand lineup and especially ideal for us, just exactly the kind of thing we look for and especially in that market.

Are you likely to do more fishing for a platform dealers in California, or mostly tuck-ins in the southern part of the state?

I think that we will do both, Rick. I think we will certainly do tuck-ins to the Miller platform as we established a great base in the greater Los Angeles area. But, because of the size of the market out there and now that we do have a presence and, of course Fred and Mike are probably as well known as any auto dealers in the state of California, they will be instrumental in introducing us to other platform opportunities.

Thank you.

Thanks, Rick.

The next question comes from .

Thank you. I guess a couple of questions and maybe it might be a little unfair because I am going to ask you to compare with another company, but I think you indicated that your average gross profit on new cars jumped to $987 in the first quarter. I guess about half of the gross profit that Auto Nation, who just had a conference call minutes before you did, has them. So, I was wondering if you could help us understand what the difference is, what is in or not in your company numbers. Secondly, on the other hand, your F and I number was considerably higher than theirs was and you did say there was something unusual, but I didn't quite get it. So maybe you could repeat what was unusual about that and maybe you could talk about what your F and I penetration is and break it down between new and used car penetration and what might be considered normal. And again talk about why that's considerably higher by about 1/3 higher than Auto Nation's numbers.

Okay, great. First of all, I think you got a bad number or I spoke incorrectly. Our used cars had a 10.8 percent retail margin. We make about $1,500 per retail unit. Not the $987 I think you were quoting.

The $987 was the F and I.

The $987 is the F and I number. What we said about the F and I number is that we earned some annual incentive and so it was enhanced this quarter and that we think $925 is the sustainable number on a per retail unit basis in the area of F and I. On particular penetrations, which you asked for, new vehicle finance penetration for the quarter was 75.9 percent. If you look for new vehicle service contract penetration, it was 38 percent. Used vehicle finance penetration was 68 percent and used vehicle service contract penetration was 46 percent to kind of give you an idea from a penetration standpoint. So, I said the used car market and used car dollar amount we made per retail unit was about what we normally make. The average sales price was down somewhat, which expanded the margin.

Is the average sales price down because you chose to carry lower priced used cars?

There are a couple of platforms that move downstream in the market and affected the price and then generally, I think the used car pricing was down a little bit in the quarter. So, I think it is really a combination of both.

I see. In the F and I, could you give some idea of what is included in that $925 or $987?

Yes. It is what I would consider to be the traditional what is included, which is the finance income, service contract income, credit A and H, and some documentation fees to be received for doing some paperwork. The after market stuff is considered part of the vehicle. But I think it is consistent with what generally everyone else is putting in F and I income.

Thank you.

Let me take this opportunity on F and I. It is an area that we have given a great deal of attention in our training programs and I think if you will go back, when we went public in November 1, 1997 and see how that number has grown and improved. And even compared to last year, during the four quarters of last year we had continual improvement in that area and it is a great progress. It is really one of training and presentation and really offering really good products for our customers and that has been a great area of growth. Although the first quarter was certainly extraordinary and, as Scott mentioned, had certain kind of non-recurring type items in there. But nonetheless, our goal has been $900 per retail unit for, I guess, about 18 months now and, as you can see, as Scott mentioned, we have now kind of raised that target a bit to $925. Thank you for the question and we would be happy to take more now.

Our next question comes from .

Good morning, Jordan.

Hello, can you hear me?

Yes, good morning Jordan.

Good morning, how are you doing?

Good morning.

I am sorry. I was having some problems with my phones here, I apologize. Congratulations on a phenomenal quarter. Let me start off with that. The F and I per vehicle retail was $925 then in the quarter, is that right?

No. The F and I for the quarter was $987 per retail unit. What I am saying is there are annual bonuses that we received and earned in the first quarter.

So it is really $925 on a core basis?

On a core basis, what we see going forward is you should expect $925 until you get to the first quarter of next year.

Okay. Next question, is the $800 million, that's assumed to be closed at the end of third quarter and is in the guidance you have given, right?

No that is not right Jordan. What is included in there would be the..

I am sorry. I apologize. The announced acquisition of the Miller group is in that guidance, correct?

Yes it is.

Okay. So that is approximately $400 plus the other acquisitions making a total of $500 million. Approximately about $800 million, if it would be there the entire year, what would that be worth in and of itself?

Well, what we have said is, say $800 million dollars. We are just going to make assumptions up here. Let's say the average sales department purchase price is 15 percent so that means we are going to spend 120 million dollars. We have said that we look for 20 percent rate of return on that investment and let's say it costs us one percent in administration. So we are really going to get 19 percent net of overhead and we are going to fund it out of working capital, which is currently offsetting 4 percent floor plan. So what all that means is you get net 15 percent to the bottom, okay. That would be $18 million dollars, tax it and you get $10 million 8 and $24 million 7 or so in shares and you would get somewhere around 44 to 45 cents.

And let's say you probably have a third of that in this current year if you close everything by the end of the third quarter.

I think what we have said is that we have got acquisitions announced of 530 million and that we would have them closed by the end of the third quarter. So we have said that we would get a fourth of the impact of 530 million dollars worth of acquisitions this year.

But you'll probably make the rest of the acquisitions this year as well.

Yes. We have raised our total target and we anticipate making the rest of those acquisitions, but you probably shouldn't expect them to contribute much, if anything, because they will be closing probably in the end of the fourth quarter.

So let's assume they contribute nothing. Then, if nothing else changes, you have got about 33 cents of additional earnings going forward to '03 on a run rate basis.

If you did that math with $530 million dollars, you would end up with around 30 cents to 32 cents a share.

That is what I was trying to get at. Okay. Thank you very much and, you know, the thing that strikes me the most is how unleveled your balance sheet is, which is a big benefit compared to everybody else at this point.

No question Jordan.

Yes, that is absolutely right Jordan.

You have the highest return on capital of anyone.

Yes, we appreciate it.

Have a nice day.

Thank you Jordan.

Our next question comes from Jerry Marks.

Good morning.

Hey Jerry.

Good morning Jerry.

Just two quick questions. With regards to the Miller acquisition, could you give us any idea in terms of what the F and I per vehicle was so we can kind of see the potential improvement that you guys can make or are they already similar to you guys?

Well, we are not complete with our due diligence yet, Jerry. But it is already a fairly high performing operation. Remember, it is a platform and it is going to be our anchor for doing tuck-ins in that market place. So, I wouldn't look for drastic improvements in the F and I area.

Okay. But, the tuck-ins that you mentioned in Texas, now those you can look for improvement from?

I would think that we are going to have significant improvement in the tuck-in area.

Okay. And lastly, Martin , last week on the Ford call, was indicating that the Ford Credit Group was going to be reducing its used vehicle loans in terms of how they, I think it was on the number of vehicles that they are planning on financing. Is that going to impact you guys in any way? Have you heard anything about that?

I don't believe so. We have numerous relationships with lenders and it is very normal in the market place for some lenders to pull back and some lenders to get aggressive and that is pretty much normal in the market place. That is why you maintain numerous relationships in the area of finance.

Also let me add to that, Jerry, that we have relationships with Ford Motor Credit and other, what we call, preferred providers. We are very big customers of those. We generate a lot of retail paper for them. So we tend to get preference and we can get our customers financed when other people can't and the independent, privately owned dealer is either going to be reduced or is going have a harder time. So we think there is a distinct advantage for us in the area of retail finance.

Right. Thanks a lot.

I would like to add one other thing on the question about those tuck-in acquisitions and us being able to improve those operations. I want to point out that those two, the Nissan store here in Houston and the BMW/Buick/Jeep dealerships in Tulsa are being added to two of our premier, top performing platforms. So, we are very excited about what our guys are going to be able to do with those new additions.

Okay, thanks.

Our next question comes from Matthew .

Thanks. I have a couple of follow-ups. First of all, given that you are obviously back in the acquisition market in a very significant way and more so than you have been in recent quarters, can you talk about how you found the acquisition environment in terms of the competitiveness of attracting the kind of deals you wanted and pricing environment as well?

Good morning, Matt. The pricing environment, I will assume you are just speaking about the platforms.

Either or.

Okay. All of those were within our normal guidelines. The reason we have the return on investment capital that we have is because we are very disciplined in that. So, in our allocation of capital, our pricing guidelines is within our seven to nine times after tax earnings and the return on investment is within our target for that. So, you know, it is more just a question, I think, of opportunities.

I think in the Miller's case, they found a group that they felt comfortable with. They felt that their key employees would be offered opportunities to continue to grow and stay in this business and that is really our model. And so if I had to say it was really kind of a match made in heaven. We were looking for a great presence in California, they were looking for, you know, a partner that they could entrust two generations of Millers and what they have built in their family enterprise that they could entrust that to someone who would continue their legacy and offer opportunities for their employees. And that is really our model and so I think it was just an opportunistic fit.

Fair enough. Secondly Scott, you talked now about the fact that you had some extraordinary factors driving F and I in the first quarter. If you could get me a little more insight as to precisely what these were. It sounds like you don't expect them to continue. But if we could just get a bit of understanding as to what the details were on those additional items.

I do expect them to continue, but I don't expect them to be earned and paid until the first quarter of 2003. These are annual bonus programs we have with our preferred providers based on a lot of different attributes: production and profitability. We have some sharing arrangements and once a year we earn them and we get paid on them. They will hit in the first quarter.

Did you have those last year as well?

Yes, but we didn't do quite as well on them.

And you chose not to accrue those over a time period?

No. We record those when programs are complete and we have received payment from the vendor.

Fair enough. Finally, no one has really asked you about expenses. My sense would be that the fact that the expense ratio rose fairly sharply relates, to some degree, to the mix the fact that parts and service was quite strong and was quite strong as well. But can you talk about what the moving pieces were within the cost structure that would have driven the expense ratio higher?

Within the cost structure what you are seeing is basically compensation and, as gross profit rose up, we had some bonus plans that our associates earn and it is the sharing of the profits with various personnel within the dealership is really the only thing that is in the expense structure this quarter.

So it basically reflects the degree to which gross profits are up because the increase in SG and A did exceed, to some degree, the increase in gross margin.

Yes. But it is compensation driven.

Fair enough. Thank you.

Our next question comes from Doug Gordon.

Hey guys.

Good morning Doug.

Good morning Doug.

Congratulations, as usual.

Thank you.

Thank you.

I just have a simple quick question for us people who aren't as sophisticated as others. You guys obviously did a transaction last year. There was a lot of ups and downs considering everything that happened last year. So I am having a tough time kind of trying to take a look at earnings on a year over year basis as we move forward. So I was kind of trying to look at this maybe a slightly different way and it seems like your seasonality amongst the different quarters has been pretty consistent across the last three or four years. I was just wondering if maybe, is there any reason why this first quarter isn't kind of a decent base/foundation to build kind of the seasonality of earnings to go forward. Does that make sense?

Yes, it makes sense. I think you can use the first quarter as a base for seasonality. After you adjust it for the bonuses that I talked about in the F and I area and if you will adjust the quarter for that. And then if you want to assume interest rates are the same and the environment is the same you should be able to apply some seasonality to it.

Great. Thanks a lot.

Thanks, Doug.

I am showing no other questions at this time.

Okay, great. Listen, thank you very much all of you for joining us this morning and, in closing, let me just say to accomplish our vision, we need to continue commitment of our dedicated 6,000 co-workers and the support of our 28 manufacturer partners. We thank them for their contributions and look forward to the successes that their efforts will continue to produce this year . We are, indeed, creating the future of automotive retailing. Thank you.

Thank you. This concludes today's conference call. All parties may disconnect.

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