Group 1 Automotive Inc (GPI) 2003 Q2 法說會逐字稿

Good morning, Ladies and gentlemen. Welcome to the Group 1 Automotive Conference. Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, press star followed by 0. As a reminder this conference is being recorded, today Thursday, July 31, 2003.

I would now like to turn the conference over to Mr. Russell Johnson, with Fleishman Hilliard. Please go ahead, sir.

Thank you, MAVE. Good morning, everyone. Welcome to the Group 1 Automotive second quarter conference call. Before we get started, I'd like to make a brief remark about forward looking statements. Except for historical information mentioned in the conference call.

Statements made by management Group 1 Automotive are forward looking statements that are made pursuant to the safe harbor 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 and 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 markets. Those and other risks are described in the company's files with the S.E.C. in the last 12 months, copies which are available from the SEC. or may be obtained from the company. Representing Group 1 this morning are Mr. B.B. Hollingsworth, Jr., Chairman, President and CEO. and Mr. Scott L. Thompson, EVP, CFO and Treasurer.

I will now turn the call over to Mr. Ben Hollingsworth. You may continue.

Thank you, Russell. Good morning and welcome to the conference call. This morning, we will discuss operating results for the second quarter and first six months of 2003. First for the highlights. We announced this morning double digit increases in revenues and earnings per share for the second quarter.

And record revenues and net income for the second quarter, and six months. For the quarter, diluted earnings per share increased 10.3% to 86 cents. Revenues increased 11.1% to $1.1 billion. Parts and service revenues increased 21.7% and gross margin expanded to 16%, versus 15.6%. Our solid second quarter performance demonstrates the flexibility of our business model.

Facing a slightly less robust automobile retail environment, we dealt with declining vehicle sales and delivers earnings growth and gross margin expansion. This quarter's performance keeps us on track to achieve our goal of growing earnings per share for the sixth consecutive year. From a brand standpoint, Lexus, Infinity and Honda were among the strongest performers. From a geographic standpoint, we had outstanding performances from the Los Angeles and Boston platforms.

I will now ask Scott Thompson to go over the details of the financial results as well as the brand and geographic mix. Scott.

Thank you, Ben. Starting with the operating results for three months ended June 30, 2003, the company's revenues totaled $1.1 billion for the quarter. We retailed over 41,000 vehicles and serviced over 300,000 vehicles. The positive impact of the investments and acquisitions, stock buy-back, combined with solid parts and service growth near record F & I income revenues, and improving expense ratios offset same store revenue decline and increased floor plan expense.

The result was double digit growth and diluted EPS at a time when the auto market was soft. From a tend standpoint. We had a very strong March. After a very strong March, we experienced a softer April, and then May and June were solid. We continued to see a solid, but volatile marketplace. From a geographic standpoint, we had outstanding performances in California, Oklahoma, Austin and Boston. Offset by Atlanta and Dallas. From a geographic standpoint for the quarter was as follows. Oklahoma represented 15% of our business, Oklahoma 15%, Houston 13%, Boston 12%, California 11%. Austin, 8%, Florida 8%, West Texas 7%, New Orleans 6%, Dallas 6%, Atlanta, 5%, Beaumont, 3%, New Mexico 3%, and Denver, 1%.

As Ben mentioned from a brand standpoint, we experienced very strong performance in Honda, Lexus and Infinity. The second quarter domestically badged vehicles represented 47% of sales and import badge vehicles represented 53%. Luxury brands represented 11.% of the business, up from 10.5% same period last year. This is due primarily to the addition of infinity, which we acquired in the Miller acquisition in the third quarter of 2002.

From a brand in this case standpoint for the quarter, Ford represented 25% of our business, Toyota Lexus represented 25% of the business. Daimler-Chrysler, 12%, GM, 11%, Nissan 10%, Honda Acura, 10% and the balance is an array of brands. The truck market continues to be very healthy. Trucks and crossover vehicles represented 58% of the unit sales, cars were 42%.

Our gross margin for the quarter increased 40 basis points to 16%. This is the highest second quarter gross margin we have ever achieved. The increase was a result of favorable merchandising mix as higher margin businesses, parts and service and F & I income expanded for rapidly than vehicle sales. Gross margin was also positively impacted by near record results in F & I revenue per rue tail units sold. F & I revenues grew significantly. Retail finance fees were up 12.7%, vehicle service contract fees were up 25.2% and other F & I income was up 17.3. This resulted in profit per retail units sold of $1003 this quarter up from $890 same period last year.

We benefited from increased penetration in finance and vehicle service contracts combined with the addition of the Miller group with F & I income is higher than average. We anticipate $950 to $1,000 per retail unit in the third quarter of 2003. Individual product margins for the quarter are as follows --new vehicles, 7.4% this quarter, compared against 7.7% last year.

But I should point out gross profit per retail unit this quarter was $2,021, compared to last year, $2,024. Basically, we are making the same gross profit per unit and it's the increase in new vehicle prices, which is causing the margin compression. Retail used vehicles margin was 11.2% this quarter, versus 10.5% last year. Parts and service, 55.9, versus 56.2 and gross margin, 16% compared against 15.6%. Same period last year.

The third quarter of 2003 we expect new vehicle margins of approximately 7.5%, we expect used vehicle retail margins of 10.5 to 11.5%, and parts and service margin should be approximately 55 to 56%. Income for operations for the quarter reached $40.3 million or 3.5% of revenues. As you might remember, we were heavy on SG & A in the first quarter of 2003. During the second quarter, SG & A as a percentage of gross profit improved and was only slightly above target.

Excluding our underperforming Atlanta platform, SG & A is a percentage of gross profit would have been consistent with prior years. We have comfortable with the 3.4 to 3.5% operating margin for the third quarter of 2003.

As discussed op the first quarter earnings conference call we ended the first quarter long on new vehicle inventory, at 83 days supply. At the end of the second quarter we still have 83 days supply in new vehicle inventory. Exclusive of Ford new vehicle inventory, we would be at 67 days' supply. As you can see, the excess inventory is concentrated in the Ford dealerships.

The Ford dealerships experienced same store sales decline of 15% for the quarter. Interestingly, excluding Atlanta our Ford stores performed in line with our earnings expectations for the quarter. The same store sales decline combined with higher investments and F-150 inventory expanded the Ford inventory. The extra Ford inventory cost us 2 cents per share this quarter.

Since quarter end, Ford new vehicle inventory has been reduced by 15%, and every one of our Ford stores we have declining inventory. We expect to make further progress on this during the third quarter. We expect our average inventory will be above plan in the third quarter, but by continuing to reduce order, and a slight pickup in Ford sales, we expect to progress towards our targeted day supply. Remember the risk of loss on new vehicle inventory is minimal. A dealer's risk is really the cost of carry. We're very comfortable with the valuation of our new vehicle inventory.

The used inventory is in very good shape. The used inventory turn for the quarter was 28 days, quicker than the plan of 38 days. We're comfortable with the values of the used car inventory at the end of the quarter. Floor plan interest expense increased $1.7 million, due to the increased level of inventory driven by acquisition growth, slower inventory turn and increased leverage on the inventory.

Floor plan debt outstanding for the quarter increased $276 million. Leverage increased on inventory as we spent the $100 million proceeds from our October, 2001, common stock offering, which during the second quarter of 2002 had been temporarily financing inventory. Interest rates were down about 50 basis points, partially mitigating the impact of increased floor plan debt.

The quarter floor plan assistance, which is recorded as a reduction of new vehicle costs of sales and only realized when vehicles are sold, totaled $7 million. For the quarter, even with inventory long, floor plan assistance covered a total of 112% of the company's total floor plan interest expense.

Companies effective tax rate was 37%. We expect the tax rate in the future will vary between 37% and 38%, depending on which state contributes the most income. The quarter, the company made $20 million or 86 cents per share on a diluted basis.

The quarter return on average equity was 17%, return on average equity in the last 12 months was 15%, even with our conservative financial leverage. Turning to same store sales data new vehicle revenues were down 4.8%, used vehicles retail were down 12.1%, wholesale used vehicles were up 4.2%, parts and service was up a healthy 5.6, and finance and insurance down 8%, and total revenues same store sales down 5.1%.

The new vehicle market was very competitive during the quarter as dealers dealt with a less robust vehicle market and excess inventory. 65% of the same store sales decline came from Ford dealerships. The used vehicle market continues to be less vigorous than last year. This is evidenced by the following two negative items incurred during the quarter, a 12% downdraft in same store retail sales and a 4% increase in wholesale used cars.

Two positive items in used vehicles for the quarter were the average gross per retail unit was up $85 to $1606 and the average wholesale loss was on plan. Bottom line, the market shows some improvement, but continues to be volatile.

Lastly, I should point out that 55% of our same store decline in used vehicles came from our Oklahoma operation.

That operation was on budget for the quarter, and had same store sales profit same store profit increases over the last year. I point this out to remind you that same store sales does not tell the whole story in this industry. This is the proper management of sales, gross margin and variable cost structure that generates profit. Parts and service same store revenues were up 5.6%, domestic warranty was down 12.9%, while import warranty was up 15.3%.

Resulting in warranty work in total being down 3.2. We were able to offset this overall decline in warranty work with other parts and service revenues, and are pleased with the tone of business in parts and service. Our same store absorption rate has improved to 75.7% from 74.8 in the second quarter last year.

Turning to capital issues, total capital expenditures for the quarter were $6 million. Of which approximately $3.1 million were for new or expanded operations. We expect total capex for 2003 to be approximately $40 million, including $11 million of recurring maintenance cap ex. We expect weighted average diluted share outstanding for the third quarter to approximate $23.6 million, before any repurchase activities. As of quarter end, the company had $120 million in working capital.

Company's long term debt cap was $14.8% 14.%, the lowest financial leverage since March of 1998. You should also note during the quarter that we extended our senior credit facility by three years to so it matures in 2006. That facility is supported by 13 financial institutions.

As recently announced, the company is expect thing to close $150 million subordinated note offering. Funds will be used for general corporate purposes, including the possible redemption of the company's 10-7/8th bonds that are callable in March, 2004. If the 10-7/ths bonds are redeemed in March, 2004, the company would incur a one-time expense of approximately 18 cents per share for the early extinguishment of that debt. If successful, the debt to cap would be 33%, assuming the 10-7/8th bonds are redeemed, the long term debt to cap would be 25%.

Until the newly raised funds are invested in acquisitions or stock or bond repurchases or capital improvements, the offering will be diluted to earnings per share. After the funds are invested, we anticipate the transaction to be accretive to in.

Our acquisition and working capital line of credit is undrawn as of quarter end and as of today. We estimate depending on cash stock mix that we have the financial resources to acquire somewhere between $2 billion and $3 billion of revenue. It is clear that we are positioned for growth. Now, I will ask Ben to update you on our guidance for the quarter.

Thank you, Scott. We expect a solid vehicle market for the balance of 2003. Although volatile at times, and less robust than 2002. Based on recent financial performance, and excluding the impact of the recently announced debt offering, we are confirming our previously announced range of diluted earnings per share guidance for 2003 of $3.10, to $3.30.

The impact of the proposed debt offering that Scott discussed will depend on its terms and timing of subsequent funding of investments. Based on current market conditions and the net funds raised in the proposed offering being temporarily used to pay down short term debt, the offering would reduce 2003 diluted earnings per share by approximately 10 cents.

Earnings per share growth is expected to emanate from a combination of dealership performance and acquisitions, as well as common stock repurchases as warranted. During the last 12 month, Group 1 repurchased 1.1 million shares of the common stock at an average price of $23.83. As of June 30, 2003, we had remaining board of directors authorization to repurchase $22.5million of the common stock. In July, 2003, our Dallas platform completed a market consolidation in conjunction with Daimler-Chrysler's alpha initiative.

Transaction resulted in the consolidation of three dealerships consisting of four franchises into one 100,000 square foot dealership, housing Dodge, Chrysler and Jeep franchises. This initiative is expected to result in improved operating leverage and increased sales in the Dallas operations.

We continue to seek strategic tuck-in acquisitions to augment the current markets as well as platform acquisitions to enter new markets. The targeting dealerships with aggregate annual revenues of approximately $800 million. Year to date, we require three franchises with estimated annual revenues of $131 million. Group 1 stable cash flow from operations combined with one of the strongest balance sheets in the industry, allows us to take advantage of opportunities to make investments that enhance shareholder value.

Turning to the top selling vehicles for both the quart second quarter and six month, the top five number one, again, the Ford F-series pickup truck, number two, the Toyota Camry, number three, the Dodge Ram pickup, number four, the Ford Explorer, and number five, the Toyota Corolla. Group 1 currently owns 71 automotive dealerships, comprised of 112 franchises, 29 different brands and 25 collision service centers located in nine states, with 13 platforms.

We'll now be happy to take your questions.

Thank you, sir. Ladies and Gentlemen, at this time, we will begin the question and answer session. If you have a question, please press star, followed by the one on your much button phone. If you would like to decline from the polling process, please press star, followed by the two. You will hear three-tone prompt acknowledging your selection. Your questions will be polled in the order they are received. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for the first question.

Our first question comes from Rick Nelson. Please state your company name followed by the question.

Steven. Good morning, guys.

Good morning, Rick.

Did you see any change at all during the quarter on used vehicle same store sales, and what are your expectations there for that business?

As I mentioned in the prepared remarks, you know, from a trend standpoint, April -- we had a robust March. April was what I would call very soft. And then the following two months were more solid. I would say it would be the same in the trend in used cars. In used cars, I would say generally, we have gotten better, but we have been very cautious in that area, because it's gotten better a couple of times in the last 12 months and then gone backwards on us.

Yeah. Rick, let me just add to that. What we're trend line seeing is prices have tended to firm. Financing, retail financing available for used cars is --has seemed to improve recently. But we're still cautious about it, because our view is that on a go-forward basis still volatile as long as incentives on new vehicles are aggressive.

Yes. Question on terms of parts. Why do you think your same-store there was so good given the warranty issues that you're confronted with?

I think that's been a strategic decision made here to improve customer pay, and not really just on warranty work. Actually started probably about 18 months ago, and I think we're seeing the benefits of a focus on customer pay.

And lastly, Atlanta and Dallas seem to have been the issues for a while now. When do we begin to anniversary their poor performance and start to he so some up-tick?

Rick, this is Ben. I'll take that question. The -- you probably noted that the Atlanta market is -- first of all, there's a market issue there, and you have heard from other public retailers that the Atlanta -- supposedly the domestics are real soft. Dallas -- let me address it, also, kind of first. You have heard our initiative in Dallas where we are really consolidating that market under Daimler-Chrysler's alpha initiative. We think those are very positive steps that we have taken.

As I mentioned, we're looking for operating leverage from that enhanced sales and improved profitability. We're excited about that potential in Dallas. In Atlanta, I think I've mentioned on the first quarter call, we have a new platform president in place in Atlanta. There have been another -- a number of other management changes in Atlanta, and in these things -- these things take time . It's a big operation over there. We are seeing signs of improvement, so you know, we feel cautiously optimistic about both of those markets that you're absolutely right have been under performers for us for some time. We think we have initiatives and the people in place now to turn those in to very positive performances for us.

Thank you. And congratulations on a good quarter.

Thanks, Rick.

The next question comes from Matthew Fassler. State your company name followed by the question.

Thanks a lot. Good morning. It's Goldman Sachs. A couple of questions if I could. On the Ford side, you can given us insights as to how the -- how your Ford stores compared with the broader Ford market. You can do that including and excluding, Atlanta, if you choose.

You don't -- you don't get great data on trying to figure out what every other Ford store in the United States is doing. May? I would probably -- it's easier to make general comments. I would expect the Ford dealer body nationwide is long on inventory. Exclusive of Atlanta, I think the Ford stores performed better than other Ford stores in the marketplaces after you take geographic differences into consideration. I think probably the only Ford stores that were underperforming compared to their peer group would be the Atlanta operation.

Got you. That's helpful. Second question, you reiterated guidance for the remainder of the year to considering the impact of the debt offering. You exceeded certainly consensus estimates in our numbers for the second quarter. Should our read on your guidance therefore, be a more conservative outlook on your --on your end for the second half of the year than you might have had a couple of months ago?

I don't think so. Let's talk about the guidance was set at 310 to 330.

Right.

Before there was a war. We set that guidance that we didn't know what to do if there was a war, but we're 310 to 330, assuming no war. We didn't revise any guidance even though there was a conflict overseas. We certainly think that the back half of the year is going to be better than the front half of the year. So, I don't think there's been any change in what I would say our thinking is for the year. Other than we were able to retail through international conflicts without having to take our guidance down. So, I don't think you should read that into it.

Sure. and then a final question, kind of a two-parter. On acquisitions, first of all, does the 310 to 330 assume any acquisition activity over the remainder of the year, and now that you have geared up, certainly your balance sheet, even better than it had been before, and you have been in great shape there, do you see higher likelihood of acquisitions, say -- say, in the second half of the year or in the near future?

Yeah. Matt. I'll take that. First of all, there are no unannounced acquisitions included in the guidance of $3.10 to $3.30.

Great.

We do have three acquisitions we closed earlier in the year. They're included. We have stuck with our guidance on $800 million in revenues acquired for the year. That would imply another $670 million to be assigned between now and the end of the year. That's certainly back-end loaded on our forecast, but that is not included in earnings guidance. And your absolutely right. We are able to successfully complete our offering.

We will have a balance sheet that truly is poised for growth. We're seeing good opportunities, but as you know, we are very disciplined in that approach. If we are not able to achieve the returns that we seek, then, you know, we don't do those acquisitions.

So, we reject a whole lot more than what we -- than we ever come to successfully complete. But I think that certainly, that's one of the reasons, as Scott mentioned, we're basically look to refinance the existing bonds that are outstanding that have a higher coupon, attractive environment right now for us, and certain additional funds available for acquisitions, stock repurchases, capital improvements, other investment opportunity.

That's very helpful.

We're sticking with our $800 million that we had given earlier.

Thanks, Ben.

Thank you, Matt.

Our next question comes from Scott Stember. Please state your company name followed by the question.

Sidoti and Company. Good morning, guys.

Good morning.

Can you touch on the used vehicle market and talk about how you are benefiting from the certified preowned programs and maybe just talk about how far you guys are into that type after program within your --particularly in your impart and luxury brands.

Yeah. I'll take a first stab at that. This is Ben. Most of the certified preowned that we sell are in our -- in our high-end luxury brands. For us that means the Lexus. As Scott mentioned, we're about probably market weighted on what we call high line brands, but very much underweighted in -- for exam, just in Mercedes-Benz, BMW, we just acquired the first infinity store as Scott mentioned. That's a new addition. Most of the certified preowned -- you know, that we market and used comes from those stores.

Very little in the other stores, although very -- I mean, it varies widely from probably zero up to 85% in one of the Lexus stores.

So, I'd say just a positive trend, as you know, certified preowned has certain financing advantages, certainly only the franchise dealers can offer those vehicles. It has warranty advantage, which is good for our service departments. So, it's a growing trend as more and more of the manufacturers are looking at and are starting to advertise and certainly will benefit from that and participate in it as it rolls out.

OK. And going back to your parts and service business. You were talking about, you know how you're benefiting from having more customer pay versus warranty. Can you just tell us what the percentage of your business is customer pay now versus warranty?

Warranty work represents about 20% of our parts and service business.

If you had to compare that to about last year?

It will be down slightly. You know, 1%. I mean, it's 21% last year and 20% this year. It's -- it's declined slowly. Some of that decline is really coming off historical highs because of the Ford Firestone issues of a couple of years ago.

We should expect that number to -- the warranty percentage at least to decline slowly in the future periods?

Yeah. I would talk about if you are talking about a five year time frame, I think you should expect to seat warranty work to generally decline slightly during that period. I would expect the domestics to get -- to go down a little bit faster, and it's possible that the imparts may actually increase. Those are the trends we have been seeing last few quarters.

OK and just Scott one last question here. When all is said and done a year from now we're through this -- you know, this offering, and you have refinanced or locked in maybe on more debt. What percentage of the overall debt would you expect when interest rates start to climb you'll be at a fixed level?

Well, if you look at floor plan debt and realize that we get paid interest assistance from the manufacture, and most or at least half varies with interest rate. I would say half the floor plan debt is effectively hedged through the interest assistance program with the manufacturer. OK? So, I look at it as half of the floor plan debt is variable, and then we would have no other variable debt on the balance sheet. We certainly wouldn't be in the -- I don't think we would be in the acquisition line. We would have little direct exposure to increasing interest rates after this offering. That's one of the strategic reasons why we think now is a good time to go ahead and lock in very long term financing.

All right. That's all I have. Thanks.

Our next question comes from Nate Hudson. Please state your company name followed by your question.

Hey, Banc of America, good morning.

Good morning.

Good quarter. Question on the inventories. Is would hoping that you could clarify, what methodology do you use to calculate that. Is that a straight trailing 30-day.

30 day supply at the end of the quarter.

OK. and just as far as getting that down, kind of at what point do you start to worry about the model year changeover and start to sell it up more aggressively, maybe somewhat lower gross margins?

I don't think we'll have to we always watch the inventory levels obviously. If you look at where we're long, about 37% of our Ford inventory is F-150's. F-150's obviously there's changeover coming with the new model, but also F-150 has been the most popular vehicle in the United States for 20 years. So, it's OK to be long in inventory when you are long in what I will call good inventory.

We watch that closely. If we look at the margins on the new cars, like I mentioned before, you know, gross profit per retail unit this quarter. We didn't see any pressure in that item. So, I don't really think -- I don't expect to have any pressure in the new car margins in the third quarter. I think it will get cleaned up over the third and probably a little bit into the fourth quarter.

But it's very rare for an automobile retailer to really lose money or have to cut margins to move -- move product. As long as it's quote, good product.

Let me just add to that on the Ford issue. As I'm sure as most of you know that they are doing parallel production with the 2004 F-150 and will continue production of the 2003 F-150. I think I'll word it the opposite way Scott did. If you talk to all of our Ford guys, they would tell you the last thing they want to be is short on F-150's. As we go through this model changeover. Part of that strategic and pause of that product and as Scott mentioned, it's not only the number one selling vehicle in America, it's Group 1's number one selling vehicle. We feel that issue will resolve itself in the next several months.

The second question, can you just talk more about Oklahoma. I know that you used -- your used car comps have been negative. Is that just a function of the subprime market or what is going on there?

It's certainly a function of some tighter credit standards. It's also a function of what's going on in the local market. I think what's interesting is even though they have had declining same store sales in the used cars, they have had good new car performance, and very good parts and service performance and very good cost control, so when you get down to the pretax number, it hasn't been impactful. It's just an excellent exam of how the business model works when's well managed. Sometimes you cannot force the market, but you certainly can manage your other businesses, and you can certainly manage your costs.

OK. Just one last question. Just kind of go flew what your attitudes towards leverage is, historically as debt to capex or debt to EBITDA what are the targets or upper limits?

Since we went public in 1995, the maximum debt target has always been a 42% long term debt to cap is where we said that's our maximum appetite for debt. I don't believe historically we have ever gotten that high. I think we got up to 38% long term debt to cap one time during the last five years. Generally, we probably think this business model depending where you are in the business cycle, you know, should probably about a 30% long term debt to cap. Is probably more of where we would like to be. We have been under leveraged here recently. But we have also had a little bit of a soft economy and we have had dynamic things going on in the world. We have been more conservative lately. We think we have been underleveraged recently.

All right. Thank you very much.

The next question comes from Jerry marks. Please state your company name followed by the your question.

Raymond James. Good morning.

Good morning, Jerry.

I hope this wasn't asked already that -- the 10 cent charge, what exactly is -- or I'm sorry, potential impact from the debt refinancing. Is that just the higher interest expense or would there be a charge in that?

No. We have two things you should think about. The first thing is what I'll call the 2003 additional expenses you would have the offering successful, until those funds are delayed. And that's because we would raise money at an interest rate, and then we would pay down our floor plan debt, which is a short term debt, so basically we're borrowing long, paying down short term debt and there's a negative spread.

Is that 800 basis points, Delta. ?

800 to 900 with all offering expenses in there. You're going to have a negative spread until the funds are used to pay oft 10-7/8th bonds callable in March. Or the funds are used in the acquisition program or are used to do stock repurchase or do capital programs that you have earnings. If there's a little bit of --little bit of a drag on earnings during that period. So, that's your first thing that you should think about in the offering.

The second piece that you should think about in the offering is, you know, if we do call the bonds in March of 2004, which is management's current intention, we're going to pay a premium for the bonds. As the press release says, the call price is 105. So, I'll have a one-time expense for the calm premium in the first quarter next year, additionally, I have one amortized debt call -- offering costs from the offering that I need to write off, and if you combine all of that up together, you would have a one-time hit in the first quarter of 18 cents 19 cents to for the early extinguishment of that debt.

So, the way to look at it -- the way I look at it, you have a few months here until the funds are deployed that it's going to be a little bit of a drag in earnings. That's what -- that's Ben's ten cents that he talked about. There's a one-time profitable hit if we call the bonds in the first quarter of 18 cents. But then if you look at funds and deploy them, and use any kind of rate of return based on our historical investments, you will see that the offering in 2004 after the one-time item is very accretive and in 2005 very accretive to earnings per share. So, what -- I guess what I would tell is you is we're doing the right thing for the long term growth for the EPS, although there are -- EPS, although there are short term fine tunes to the EPS.

Just to clarify, so, the ten cents is primarily the 800 --the next five, six months, 800 to 900 basis points spread?

Yeah. It's just a negative spread on the bonds and money being raised.

Based on -- if the bonds are called, we won't have to worry about another 10 cents being in the first half of -- next year.

No. OK.

OK. And then in terms of I think Matt asked you the question about, you know, the results coming in better, but the -- you know, your yearly guidance staying the same. Maybe if I can ask it a different way, how did the quarter come in relative to what you guys were expecting?

Well, in line.

It came in line?

Yes. In line with expectations?

OK.

You know. The first quarter was softer. Than we originally would have expected. But the second quarter, I would say came in line with the original expectations.

OK. and then so, basically just all of us were just way too pessimistic, in other words?

I don't know what you all have been. I give annual guidance and I stop looking.

Your gross margins being up at 16%, how sustainable do you think that is? I mean, it seems to be pretty good right now.

I think it's going to be a function a little bit of a new car market. If the new car market is robust, then the margins will come down a little bit. But if the new car market is where it is today, that's a sustainable number for the third quarter. Then it should come down slightly, you know you know, in the fourth quarter. Because of the seasonality. Parts and services is less than the fourth quarter, or

Thanks. Great quarter.

Thanks, Jerry.

Our next question comes from Lee Matheson, please state your company name followed by your question.

Hi, guys. AIC group of funds. How you are guys?

Good.

Good morning. I just had a quick question with regards to the bond issue. One was any indication on restrictions on share repurchase in that note?

Like all subordinated notes, it will have some restrictions in that area, but those have been kind of negotiated, I guess is the best way to say it. We will still have some share repurchase capabilities after the note is closed, and then that basket will grow with earnings. That's going to be a percentage of net income

Yeah. But at the same time you haven't moved authorization at the board level from what your existing authorization is?

We did not have to bring down authorization because of the transaction?

Right. OK. OK. Then the other thing is, is this just -- you can explain why the dealership in Denver? I mean, strategically?

Yes.

OK.

That's a good question. We have a one dealership platform in Denver, and it happens to be an outstanding dealership, LUBE Chevrolet, one of the best known brands in the market. When we made that investment, we made the investment with the intention of expanding that --in that market and building a platform around that one dealership. I will say it's been an outstanding dealership, having seen what the results have been, I would do that again given the opportunity. But we have not been able to add dealerships through acquisitions in that market that meet our return criteria.

OK. So, we have done no other acquisitions, although, it's still an attractive market. We still continue to look.

So, you still view it as a potential platform.

Thanks, guys.

Thank you.

Our next question comes from Michael Millman, state your company name followed by the question.

Millman Research.

Good morning.

Good morning.

You told us that warranty work represents about 20% of P & S, but do you break down further for us the parts, collision, and customer pay and then, also with your focus on customer pay, could you tell us how that affects your thinking on the pricing of new cars?

I can answer the first part of the breakdown. No, we normally just break down warranty work in total. I don't think it would be dissimilar from with what you asked. 20% gives you what you need as far as understanding how much warranty work we do.

I agree with that. If I understand your ---the second part of your question. I guess you're saying that do we want to cut our gross margin on new cars to increase units in operation in order to enhance our parts and service operation?

Well, that's -- I'll put it actually -- I asked it the opposite way that since you focused on customer pay, were you less inclined to try to buy parts and service business?

Well, let me -- I'll answer it as best I can. We're very focused on customer pay, as Scott mentioned, we began training the program --training the programs and initiatives 18 months, two years ago, really. In order to enhance that higher margin counter cyclical part of the business, but we don't believe that, you know, we need to give away new cars in order to drive business to our service department. We believe that we can -- you know, we can achieve a reasonable return on our new car sales. Still be relatively aggressive as far as market share is concerned, and -- but still have that -- have data -- have that as a profit entity on its own and still be able to continue to feed our service departments. So you know, we're not willing to give up one for the other, if I could put it that way.

OK. Great. Thank you.

Our next question comes from Steven corn. Please state your company name followed by the question.

Hi. Guys. Lowe's Corporation. Two quick questions. One, can you give any more granularity to the inventory where you stand today and what the Ford F-150 inventory is.

Yes. I said of the Ford inventory.

Yes.

37% of our Ford inventory is F-150. And so, that's a lot of it. And as I said, that's most popular vehicle in the U.S. As Ben mentioned, there's strategic regions why we want to be 150. I also mentioned since quarter end, the Ford inventory is down 15% from where it was at quarter end. We see that coming down. But I also said I don't expect us to be on a 60-day supply by the end of the third quarter. I think we'll still be off a little bit on what is our target 60-day. We'll probably be in the low 70-days, at the end of the third quarter. That's where we probably expect to be. Based on what we are seeing.

Got it. And then more recently, as rates have kicked up over 100 basis points, have you seen a -- you can comment as to what effect that has on the ability of the end customer to finance both new and used and how some of the incentive programs are potentially changes from the OEM's?

The treasury rates have picked up recently, we are a LIBOR base borrower. LIBOR has not been moved up quite as aggressively. As far as how it impacts the customer. If you look at 100 basis point change in interest rates and average car loan, that really only affects the customer by $8 a month on his car payment. We like to say not very much. That's lunch money. It's really the willingness of the financial ins -- willingness of the financial institutions to lend aggressively. It's not the interest rate. As Ben mentioned, we are beginning to see, and it's early we are beginning to see the financial institutions lighten up on the credit standards which had been tightening for probably an 18-month period.

Yes.

So, if anything, we see that environment a little bit better on a go-forward basis than it's been historically, because it's driven based on the willingness to loan as opposed to the impact of interest rates on a customer payment.

Just to add color to that, specifically, we're seeing the captive finance arms of the manufacturers be a bit more aggressive, and, you know, what we call buy a little deeper into the market. The sub prime lenders, again it's early, as Scott said. (inaudible) cautious on that. The -- -- I will caution on that. The sub-prime lenders tend to be more aggressive. I would add one thing, and Scott didn't mention it, but he should get credit for it, he talked about the new credit facility in our -- our participants in that facility are our preferred providers for retail finance. And those -- those preferred providers have been very big --a very big part of our supply source for retail finance, and it's a great advantage that we have of having those preferred providers, or we funnel a very large amount of retail paper to a few lenders.

It means that we have a greater ability to get our customer finance, which as Scott says, that's more important than the particular rate.

OK. Great. Ben, if you can allow me one more question. I think in the beginning of the year, you had a target of $800 million of revenue for acquisitions, but it was not something that you were holding yourself to do, and given the rate that you have done in the first half, can you comment at all as to, you know, what's in the pipeline, and is $00 million do you still think that's a likely target, or what you're seeing $800 million, or would you bring that down a little bit?

We did discuss that. It's a good question. Certainly, if you look at travel rate on what we have done, you would think that might not be likely. We still think at this point in time that that's an achievable goal for this year. It will certainly off-- come late in the year, and you should not plan on it contributing to earnings very little, if any. Because it will be very much back-end loaded because of the timing of closing these transactions. But because of our balance sheet and financial capabilities, you know, we're able to really look at larger platform acquisitions now.

We're able to do cash transactions or cash and stock, whichever is the most advantageous. I would say at this point in time, that still looks like that's a possible goal. We'll look at it later in the year, and again, it's not in the earnings guidance, and we'll look at it later in the year depending how we have progressed. We may or may not adjust that.

Great. Thanks a lot. Congratulations.

Thank you.

Thank you.

Mr. Hollingsworth, at this time, there are no additional questions. Please continue.

Good. I want to thank all of you. In closing to accomplish our vision, we need continued commitment of the dedicated 7,600 co-workers and the support of our 29 manufacturing partners. We thank them for their contributions and look forward to the successes their efforts will continue to produce this year, and in the future. We are indeed creating the future of automotive retailing. Thank you.

Thank you, sir. Ladies and gentlemen, this concludes today's Group 1 Automotive second quarter result conference. If you would like to listen to a replay of today's conference, please dial 800-405-2236, or 0303-590-3000 followed by access number 544024. Once again, if you would like it listen to a replay of today's conference, please dial 800-405-2236, or 0303-590-3000, followed by access number 544024. We thank you for participating. You may now disconnect.