Group 1 Automotive Inc (GPI) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Group 1 Automotive Third Quarter Results Conference Call. [operator instructions]

As a reminder, this conference is being recorded on Thursday, October 30th of 2003. I would now like to turn the conference over to Mr. Russell Johnson from Fleishman Hilliard. Please go ahead, sir.

Thank you, Nicole. Good morning, everyone. And welcome to the Group 1 Automotive third 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 management of 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 filings with the SEC over the last 12 months, copies of 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'll now turn the call over to Mr. Ben Hollingsworth. Mr. Hollingsworth, you may continue.

This morning, we will discuss the results for the third quarter and first nine months of 2003. First for the highlights. We announced this morning record revenues and net income for the third quarter and nine months. For the quarter, net income was $21.7 million on record revenues of $1.2 billion. Diluted earnings per share increased 9.5% to 92 cents. Parts and service revenues increased 12.5% and gross margin expanded to15.7% versus 15%. Reducing new vehicle inventory was a focus during the quarter.

We brought our new vehicle inventory down from 83days supply at June 30 to 62 days supply at the end of the third quarter in line with our target while delivery growth in earnings and an improved operating margin. This quarter's performance keeps us on track to achieve a sixth consecutive year of earnings growth. From a brand standpoint, Lexus, Infiniti and Honda were among the strongest performers. From a geographic standpoint, we had outstanding performances from our Los Angeles, Boston, and Austin platforms. I will now ask Scott Thompson to go to the details of our financial results as well as our brand and geographic mix. Scott.?

Thank you, Ben. Starting with the operating results for the three months ended September 30, 2003. The company's revenues totaled $1.2 billion for the quarter. We retailed over 44,000 vehicles and serviced over 320,000vehicles. The positive impact of our investments and acquisitions and stock buy-back combined with solid organic growth in parts and service and near record F&I revenues for retail units sold offset same-store revenue declines in vehicle sales and increased interest expense in our newly issued 8 and a quarter percent bonds. We also benefited from improved new vehicle inventory position, has been mentioned, our supplies came down almost 25% to 62 days.

From a geographic standpoint, we had outstanding performances in California, Austin, and Boston offset by poor performance in Atlanta. Our geographic mix for the quarter was as follows: Okaylahoma was 14.7% of our business, Boston-13.2, California-12.8, Houston-11.4, Florida-7.8, Austin-7, Atlanta-7, New Orleans-6.4, West Texas-6.4, Dallas-6, Beaumont Texas-3, New Mexico-3. and Denver-1%. As Ben mentioned from a brand standpoint, we experienced very strong performances in Honda, Lexus, and Infiniti. Third quarter domestically badged vehicles represented 47% of our sales and import badge vehicles represented 53%. Luxury brand represented 11.6% of our business, up from10.2 the same period last year. This is due primarily to the growth in Infiniti sales which we acquired in the Miller acquisition in the third quarter of 2002. From brand mix for the quarter was as follows: Toyota Lexus was 21.6% of our business, Ford was 26.1%. Daimler Chrysler was 12, GM-10.5, Nissan-10.3 and Honda Acura-9.6 and the balance to a hundred and array of brands.

The truck market continues to be very healthy. Trucks and crossover vehicle represented 59% of our unit sales and cars were 41%. Our gross margin for the quarter was 70 basis points, was up 70 basis points to 15.7. This is the highest third-quarter gross margin we've ever achieved. The increase was a result of favorable merchandising mix as our higher margin businesses, parts and service and F&I income expanded more rapidly than vehicle sales. Gross margin was also positively impacted by near record F&I revenues per retail units sold, improved new and used vehicle margins. Our F&I revenues grew as finance fees grew 3.2%, vehicle service contract fees were up 20%, and other F&I income was up .18%. This resulted in retail profit of 1,000 per retail units sold compared to $894 same period last year.

We benefited from our training programs and the addition of the Miller group which was added last year. Individual product margins for the quarter are as follows: New vehicles-7.3% this quarter compared to the same period last year, 7.2. Used vehicles, retail-10.9% compared to 10.1% last year. Parts and service-55.5, compared to 55.8 last year. And again, F&I per retail units sold a thousand versus 894 last year. And gross margin for the quarter, 15.7 versus 15%,a 70-basis point increase. The fourth quarter of 2003 we expect new vehicle margins of 7 to 7.3% and we expect used vehicle margin of 10 to 11.5% . And parts and service margins should be approximately 55 to56%.

Income from operations for the quarter reached $42.9 million or 3.5% of revenues. As you might remember, we were heavy in SG&A in the first quarter of2003. During the second quarter, our SG&A improved and now for the third quarter we can say that we're on target excluding the Atlanta performance. Our gross profit would have been consistent with last year. We are comfortable with a 3 to 3.3% operating margin for the fourth quarter of 2003. Remember from a seasonality standpoint, the fourth quarter is less robust than the third quarter. As we discussed in our second quarter earnings conference call, we ended the second quarter long on new vehicle inventories at 83-day supply.

During the third quarter we were able to reduce the inventory about $100 million in our62-day supply as of September 30. In reducing our new vehicle inventory we incurred losses which had previously been reserved for and as a result of the improved inventory position, we reduced our valuation on our new vehicles by$400,000. We feel our new vehicle inventory's in great shape going into the fourth quarter. Our used vehicle inventory turned for the quarter was 32 days. Consistent with the last few quarters we accelerated whole sale activity mitigating the impact of increased depreciation rate in the used vehicle market. Our used inventory is in great shapes also going into the fourth quarter. We have found interest expense decrease and interest rates declined approximately 70 basis points and one of our interest rate swaps expired during the quarter.

Other interest expense increased due to the newly issued 8 1/4 bond. These bonds were 3 cents dilutive this quarter and are expected to be 7 cents diluted in the fourth quarter. The quarter full-plan assistance, which is recorded as a reduction in new vehicle cost of sales and only realized as vehicles was sold was $7.6 million. The quarter floor plan assistance covered 159% of the company's total floor plan expense. The company's effective tax rate was 36.5%. We expect the tax rate in the future will vary between 36% and 38% depending on the geographic origin of the taxable income. The quarter the company made $21.7 million or 92 cents a share on a diluted basis. The quarter return on average equity was 18% even with our conservative financial leverage. We continue to focus on return on invested capital. Year-to-date, return on invested capital is 12.4%. I believe this would compare favorably with other retailers in general and others in our sector specifically.

Turning to same-store sales now, new vehicles were down 4.4% percent, retail used vehicles were down 14.5%, wholesale used vehicles were up 10.7%, parts and service up 8.4%, finance and insurance down 6.1%. Again, total revenue same-store sales were down4.7%. Ford and Mitsubishi dealerships and acquired dealership in Houston accounted for the decline in new same-store sales. The used market continues to be less vigorous than last year. This is evidenced by the two following negative items, the 14.5% downdraft in same-stores retail sales and a 10.7% increase in wholesale used revenues. Two positive items in the used market were the average gross profit per retail unit was up $100 to 15 -- to $1,530. And the average whole sale loss was on plan. Bottom line is the used vehicle market continues to show some improvement but continues to be volatile. Parts and service, same-store revenues were up 8.4%, domestic warranty is down 4.6% while import warranty is up 20% resulting in overall warranty work being up 4.8%. In addition to increased warranty work, we also had growth in customer pay and parts and service and wholesale revenues. Our same-store absorption rate improved to 76.9% from73.8% last year. We continue to be pleased with the tone of business in our parts and service area.

Turning to capital issues, certainly one of the highlights of the quarter with the successful offering of $150 million work of 8 1/4 10 year bonds, approximately $80 million of the proceeds are expected to fund the early redemption of the company's10 7/8 bonds which are recallable in March of 2004. The balance is expected to be used to fund future acquisitions. That transaction is expected to be accredited once the funds are deployed. If the 10 7/8 are called in March 2004 as expected, the company will incur a one-time pretax expense of $6.4 million which is a combination of a $2.3 million non cash expense to write off unamortized bond costing discount and a $4.1 million cash expense to pay the expected call premium.

This will result in an after-tax expense of $4.1 million or 17 cents a share in the first quarter of 2004.As of quarter end, the company had over $275 million in working capital which is about $190 million more than we need to run our business. Even after redeeming the 10 7/8bond, we'll have $110 million of excess working capital, which we expect to deploy in the acquisition program. The company's long-term debt to cap is 31.8% today. After the 10 7/8 bonds are redeemed, our long-term debt cap will be 24%. Our working capital line as September 30 and as of today is totally undrawn. We estimate depending on the cash stock mix; we have the financial resources to close between $2 to $3 billion in revenue. It's clear that we are positioned for significant growth. Total capital expenditures for the quarter were $5.8 million of which $3.1 million were for expanded operations. Our expected total CAPEX for 2003 is $36 million, including $11 million in recurring maintenance CAPEX

We expect weighted average diluted shares for the fourth quarter to be 23.8 million. Since going public we've reported 22 quarters of earnings per share growth, out of 24 quarters. We're on pace for our sixth consecutive year of EPS growth, and are confident in our associates' ability to continue to create the future that might be retailing. Ben will now provide you color on the quarter, and up dates you on guidance.

Thank you, Scott. During the third quarter, Group 1 acquired dodge, Lincoln Mercury, and Mitsubishi dealerships in the New Orleans area. The dealerships will operate as part of the bone automotive group platform, and are expected to add approximately $110 million in aggregate annual revenues. Year-to-date, we have acquired seven franchises with estimated annual revenues of $241 million. While we may close additional tuck-in acquisitions this year, most of the transactions that are currently in process, will not close before 2004. 22,000 dealerships in the United States, there are ampful acquisition opportunities that meet our criteria. Additionally, we expanded our brand diversity with Toyota's launch of Cyon. The Cyon brand operates under the Toyota motor sales marquee, and is focused on trendsetting youthful buyers. Cyon began its initial rollout in California in 2003, and is expected to expand geographically during 2004. We anticipate selling Cyon on in all nine Toyota franchise that we currently operate.

We expect a solid vehicle market for the balance of 2003 and for 2004. Based on recent financial performance and including, the dilutive impact of the recently completed debt offering that Scott mentioned, we expect diluted earnings per share for fiscal 2003 of $3.05 to $3.15. Additionally, excluding future acquisitions, we expect diluted earnings per share of $3.10 to $3.30 for fiscal year 2004. Again, guidance for 2004, $3.10 to $3.30. If we redeem our 10 and 7/8% bond in March 2004 as Scott discussed, and as we expect to do, the one-time after-tax charge of 17 cents per share, is not included in our 2004 earnings guidance.

We continue to seek additional strategic tuck-in acquisitions to augment our current markets, as well as platform acquisitions to enter new markets. With the carryover from 2003, the company it is now targeting to add dealerships, with aggregate annual revenues of approximately $1 billion in 2004. Group 1 stable's 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 share holder value.

And now for the top-selling vehicles for Group 1, for both the third quarter and the nine months this time, number one, again, the Ford S series pickup. Number two is the Toyota Camry. Number three, the Dodge Ram pickup. Number four, the Ford explorer, and number five, the Toyota Corolla. Again, that's for both the three months, and the nine months. Group 1 currently owns 74 automative dealerships comprised of 116 franchises, 30 different brands, and 27 collision service centers located in 9 states, with 13 platforms. And we're now happy to take your questions.

Operator, we're ready for questions.

Thank you, sir. [operator instructions]

One moment please, for the first question. Our first question comes from Mr. Rick Nelson with Stevens Inch. Please go ahead, sir.

Good morning, guys.

Good morning, Rick.

Congratulations.

Thank you.

Thanks Rick.

How are you were you able to avoid the gross margin pressures in new vehicles that seem prevalent in the industry this quarter?

That sounds like a setup. You know, I think every market's a little bit different. You can see we did areal good job on a retail, on a gross profit per retail unit. Actually expanded $100 to 1988 from little bit, $100 less than that. But at the same time we also had some same-store sales challenges, and particularly in market, like Houston and Atlanta. So i think I'd like to say it's just we're great, Rick. But it probably has a lot to do with brand and individual markets. But we also continue to be very focused on return on invested capital and hitting budget targets as opposed to just selling volume. I think some other of our peers may be focused a little more on just volume.

How big is California as a proportion of total revenue?

It's around 12.8% this quarter of our revenue.

And are you guys seeing the pull-forward related to the issues out there?

There's no question that our California operation had a very good quarter. There probably was some pull-forward. I think if I were guessing which would say you're talking about a penny or two, which between the third and fourth quarter. If you look at the vehicle tax, which is the issue you're talking about, the DMV tax, if you look at $25,000 car, that tax has gone up from $200 to $530. But it has what the sales tax slowed since that tax was put in effect October 1st. But again I think you're talking about a 1 or 2 cents switch between the two quarters.

Okay. And why has the acquisition pace not been more aggressive? Are the valuation expectations too high out there among the private dealers?

Rick, you know, I think it's as much discipline. You know, if we wanted to pay, you know, any price that a seller wanted or there was a particular platform that might be very attractive, may be they're wanting a higher peer ratio that we are seeing for, part of what I tell, our guys to do acquisition. They get paid as much for keeping us out of deals like that as for doing successful deals that meet our criteria. Our return objectives are very high. If they don't meet those returns, we don't do them. We look at lots of deals. And probably, I always say if I -- if we turn, raise the fee ratio of click, you could probably do most everyone one of the deals available out there in the United States right now. Our view is there's 22,000 dealers. There's plenty of opportunities with patients and discipline. We're going to be able to execute our acquisition strategy, and produce the returns to shareholders, that we think are a lot more important than just buying revenues. So I think it's more a function of the discipline, and looking for the ones that meet our criteria than a lack of available candidates.

Thank you.

Thank you, Rick.

Thanks, Rick.

Thank you. And our next question comes from Mr. Scott Stember with Sidoti & Company. Please go ahead.

Good morning, gentlemen.

Good morning.

Today you talk about how the F150 rollout's going and how your Ford stores maybe performed in the quarter and how that's translating over into the fourth quarter, particularly October, of course?

Yes. This is Ben. I'll take the first part. Scott can jump in on some of that. You know, we were long on Ford inventory in the second quarter. There was a lot of chatter about that among the investment community, and we, said at the time it was a strategic decision. They were going to run parallel production at Ford between the '03 F-150 and the new '04 F-150. That's exactly what's happened. We positioned our inventories correctly. The '03 F-150 is actually been the hot seller. It's very --it's what they're calling really in the re badge, the heritage model. It's heavily in scented, so there is a great value right now for the customer. So it's a product, that at this point of time, our entry, you can't get enough of it.

On the other hand, the '04, what we're seeing that's selling really well is a very high end of that. The super cruise leather, you know, all the options, that high end of that model is doing very well on kind of the less price sensitive buyer. The more kind of basic model of the '04 isn't moving quite that well, and the general consensus among our platforms that have four dealerships is there's going to have to be some more, there are going to have to be a price adjustment on that '04 F-150 incentives in the fourth quarter, In order to really get that moving. Great reviews on the product. Anybody that's seen it or driven it really, really raves about it. So I just think there's a little tweaking coming up here shortly, we'll start moving broadly across that '04 segment. But it's happened pretty well the way we thought it would, with the '03-'04 dual production.

So when the '04 really does start to take hold and become the primary focus, you guys are in good position with '04 inventory right now as far as the F-150.

Yes. I think you go through the details in the F-150 was 8% of our sales this quarter to give you an idea of the significance of the product. As been mentioned, we entered the third quarter with a pretty aggressive inventory position. We had had 146 days worth of supply, about 150 going into the third quarter. At the end of the third quarter, we had 48-day supply of F-150's. So you can see that we had really a very good quarter from F-150 standpoint and 48 days is probably a little short from where we would like to be as we sit today. You also asked about the Ford dealerships in general. And in general, I would say, this quarter they were slightly off-budget, but our Ford managers and general managers and platform presidents have done a great job in retailing in some what of a difficult environment for Ford.

As far as the guidance for 2004, can you may be just touch on what kind of core growth rate -- what kind of a sar are you building in there? And as far as the acquisition, just clarify how much in actual revenues you would actually expect to hit, whether it be carry over revenues or future announced acquisitions?

As we've always said, going straight from a sar to an EPS number for us is always a challenge. But just to give you kind of a sar number to give you tone of business might be better way to say it. We're thinking next year somewhere around a 16.3 to 16.5 new car vehicle market. And we expect the used car market to be slightly better, but not much better. You know, try to give you some color on that. And we expect parts and service to continue to have organic growth. As Ben mentioned in his remarks, the target for next year's acquisitions is $1 billion. It's not in the estimates. Generally, what we do internally when we think about it is we usually divide the number by two and say we're going to try to get $500 million of revenues in the numbers from an accounting standpoint during the year and just use a midyear conviction.

So it's fair to assume that what you - what you have given out there as guidance does not include any incremental effects from acquisitions whatsoever at thispoint.

Right.

Anything beyond that would be gravy.

That's correct. It does not include share repurchase, and it does not include future acquisitions.

Okay. And as far as buy-backs, were there any in the quarter from a share perspective?

There was a small amount during the quarter to just cover basically the employee stock purchase plan, about68,000 shares.

Okay. That's all I have. Good job. Thanks, guys.

Thank you.

And our next question comes from Mr. Matt Fassler from Goldman Sachs.

Good morning. Couple of questions, if I could. First of all, if you could talk a bit about the state of the used car market, some of the market talked about prices, prevailing market prices at auction, perhaps not coming down sufficiently to reflect some of the deals that were available on new models and your comments on the'03 F-150's being cleared out, I would imagine probably wait on some of the late model used car market developments. So if you could give us a sense of how that market's shaping up and at what point you may see the sales numbers in that market stabilizing?

Okay, as you said, it's kind of a volatile market, Matt. Couple of figures we're were not particularly positive, one being the amount of wholesale used vehicles we had during the quarter represented 23% of our used car sales. That would be the highest percent we've incurred except for one quarter in '98. So we're still having to wholesale quite a few cars rather than taking them through retail. But at the same time, the cars we are selling in retail, we're making more on them on a per retail unit basis. So the ones we're selling, we're doing well on but the volume is certainly down. The wholesale losses, as far as what we're losing on the cars we're having to wholesale, that number's been coming down through former pricing at the auction. So that would be a positive trend. I don't know what to tell you, it's kind of mixed.

Matt, let me just add to that, when Scott's giving you that wholesale, we're holding the line at the end of the quarter, we had 32 day supply in used car inventories. So keep that inventory very lean, turn it rapidly. And in mvolatile times you're going it be wholesaling more vehicles.

And is this volatility in your view solely a function of the combination of incentives and model transition or is there something else that could be undermining demand on the used site?

I think it's just incentives. I don't even think it's model changeover. I think it's just flat incentives.

I agree with that. It's incentives and it's aggressively seeking market share with the captives on new vehicles.

Second question then relates to acquisitions. You spoke to essentially valuation issues it sounds like were the dominant barriers to closing the deals, you initially set out to do, are you looking to do the right ones here? Do you see any of that giving way? Is it a question of the market moving in your direction, or is it just moving down the path with individual transactions that happen not to -- happen not to have gotten done or are likely to get done by the end of the year.

I think it's more of just moving down the path as opposed to a change. One thing and you've heard us say this, we really compete, not with the other consolidators, probably but the cash flow, the free cash flow that these dealerships produce. As you know, it's very high. So a private dealer looks at that cash flow and values it in many instances higher than what were valued in the public market place. So that's what you're competing with. And you've heard me say that. I think they're right probably. We just need to convince everybody else that they are.

But your view is that some of those price points are going to come around as soon as the negotiations wind down.

I think it's just a matter of finding the right ones and finding the right mix. In our model, especially for platform, we're going to track those really great retailers who want to stay and grow their market. So sometimes they have some incentives that are beyond just financial. They made longer term financial, I should say. So that's what we're really looking for. We got some of those we're involved with right now that we're really excited about.

So there is a pipeline that leads to some of these numbers.

Well, we always have a pipeline.

Fair enough.

But we have -- the pipeline is really pretty good right now.

Got you. Just a couple of other quick ones on some of the other revenue numbers. Scott, you talked about vehicle service contract revenue in the neighborhood of 20%. I haven't tacked -- tracked that through the year. Sounds like an unusually large increase. If you could just give us a sense as to why you saw that number. And also, is that a significant dollar amount within the F&I category?

Yes, we've had very good results in vehicle service contracts all year for the last few quarters, Matt. Some of that comes from the Miller group, which generally has higher service contract penetration and profits for retail unit -- per retail unit basis. Also we had -- as you know, we've deferred some revenues and profits on service contracts for dealer obligor state and that runs off over a period of time and so we're bringing in some of that deferred profit as those contracts are running off.

Got you. And is that a -- is the vehicle service contract number producing within the F&I number oris it smaller -

No, the vehicle service contract number in total probably represents 40% of the total F&I per retail unit.

Got you. And final question, just a small one. You talked to significant differences in the warranty --in terms of warranty work between the domestic and imported vehicles. Once again, not an issue I'd focused on certainly, but is this something that has been changing recently, or is this for more of a structural dynamic in your view.

This is a trend we've seen over the last two or three quarters where domestic manufacturers are doing a much better job on warranty basis as far as their warranty claims are down. Specifically Ford motor company's warranty claims are down significantly. At the same time, the import manufacturers generally who are building vehicles in the U.S., we're seeing their warranty claims increasing.

Is this a quality issue in your view that's driving the difference?

I can only tell you that they're going up.

Fair enough. Thank you.

Thank you, sir. And our next question comes from Mr. Jeff Black with Lehman Brothers. Please go ahead.

Good morning, guys. Good quarter. And you know, the expenses look really in line with where we'd like to see them. Given what happened last year, why the conservativism on the guidance? Is there something you're seeing in October that gives you pause and if so, you know, what line of business are we looking at? You mentioned used a couple of times, but if you could you just give me a little color on why so conservative when you face what looks like a very easy comparison particularly from an expense standpoint.

Well, I mean, one I think we always try to be accurate but probably a little bit conservative. I think out of 24quarters, I think we've hit our estimate 23 times. But I don't think we're seeing anything in the business that you don't know or see. And there's no hidden message in the guidance. I think the other thing you may not be factoring in when you look at the guidance -- remember, we're having to eat about 7 cents a share in the fourth quarter to carry the bonds. Because of the extra liquidity we're carrying. So you have got factor in that 7 cents when you look at our guidance for the quarter to really get what I'll call an operational comparison to last year. I think if you do that, you'll see that we are budgeting our forecast -- or forecasting a significant improvement in operations fourth quarter to fourth quarter.

And as Scott said, as far as just a -- kind of a color on what we're seeing in the industry, we're certainly not seeing a -- some huge increase or -- in the new car side of it or some kind of revolutionary turnaround in the used car side. We're kind of seeing more of the same. So we're going to be a bit cautious on that. Remember, no acquisitions are included in that guidance.

Right. And in terms of, you know, I was looking at some of the specific numbers. I mean, it looks like a weaker new car margin. It looks like the range on used would take you to a significantly low number if you hit a low end of that range. . So that was sort of the focus of the question. And are you seeing some initial indication?

We're not seeing anything that you don't know, but I think you always like for us to be a little conservative.

Yes, fair enough. Okay. Thanks.

The next question comes from Mr. Jerry Marks with Raymond James and Company. Please go ahead with your question.

Good morning. Scott, I heard you say inventory levels that you adequately reserved for and something about then you added back 400,000. Did I hear that correctly?

Yes. I think I said it something kind of like that. What we do, Jerry, as you know, we -- every quarter look at evaluation reserve on all our used and all our new cars to make sure they're carried at fair value. During the third quarter, we aggressively retailed out of some new car inventories. That we were a little long. The F-150 happened to be strategic. But it is not a product line for you a little bit long. The inventory cleaned up well for us. And then when we looked at our reserve at the end of the quarter, compared to the inventory we had on the ground, we found our reserve to be a little heavy, and $400,000 of reserves came into the quarter. That would be a one-time item.

But it was taken away from the prior quarters

It would have been taken out of the income statement in prior quarters. And probably wouldn't have been big enough each time to talk about

Right.

Felt like considering we brought down the inventory levels to the degree we did and the shape our inventory was in that it was appropriate to bring that amount in this quarter.

Okay. And sorry. You said a little bit fast. The parts and service and the used same-store sales comps, what were those numbers for the quarter?

Sure. Used same-store sales, and this is retail, down 14.5%. And the wholesale used vehicle sales were up 10.7%. Parts and service was up 8.4%.

Okay. Thanks. And then, Ben, I mean, I know you guys have about 10% of your business with Nissan. I think it's Nissan that's coming out with the Titan. I've been reading about that, could be competing against the F-150. Do you have any thoughts? And I can see the way you guys If you lose some business on one dealership, you again it on the other. But do you have thoughts how competitive that become with the F-150.

I do actually. Thank you that's a great question. Actually two products are under it. The Toyota tundra they've increased the size of that a bit recently to compete a little more effectively. The product we've gotten on the ground from Nissan right now at the dealerships is the new pathfinder, the full-size SUV. Very attractive, very, very competitive, I think, with the full size SUV.

And then coming in December, we'll get the full-size pickup trick, the Nissan Tight an. They're clearly going after the big three's market share in full-size pickup trucks and SUV's. I think they will be formidable competitors. Toyota is building a new tundra plant you probably know in San Antonio. And our new basketball arena herein Houston is known as the Toyota center now. So they're taking dead aim on the Texas market, which means trucks and SUV's. I think Ford's got a real challenge.

From our standpoint, you know, we think our Ford dealers will perform very well, but you've heard us say, that's why we have brand diversity, and we don't have all our eggs in one basket. We like to have that because you get new product coming all the time. Some is hot. Some is not. We don't make it. We just sell it. We want to be able to sell all of them. I think they will be those products and also Infinities products, with Nissan, have been really outstanding. Our Infiniti performance and in our LA .store has been terrific. The G-35, the new FX SUV, great, great products. Nissan's on really a good roll. And of course, Toyota always on a good roll. And I think the new F, the old F-150's also an outstanding product that's going to do very well and continue to be the number one selling vehicle in America.

Thanks.

Thanks, Jerry.

The next question comes from Mr. Lesarna Jhim (ph) from J.P. Morgan. Please go ahead.

I had a question on your used car pricing strategy, your used car prices, some are higher than most of the other competitors. One of your competitors actually actively trying to drive down their used car prices as a way for improving margins. And it's certainly works for them. So I was wondering if you could comment on that.

Our used car average price is around $13,000 to $14,000. There is another -- there is a strategy of going down market with some lower value cars. Some people have been very successful in that. We do that in some of our markets where that fits that market, like in Albuquerque, and it's something that we continue to look at. But we do a lot of the used car business in the near new market. So our average price would be a little higher than some of our competitors.

I see. That's pretty much it. Thank you.

And the next question comes from Mr. Steve Girsky with Morgan Stanley. Please go ahead.

Good morning, everybody. Can you hear me?

Yes, good morning.

Ben, on your '04 guidance, you took out the redemption of the bonds, the charge, but is the interest benefit in that '04 guidance or not in that '04 guidance?

It is in that '04 guidance.

So we get the interest and we'll -- but it excueds -- excludes the charge.

Correct.

Is Miller in the comps or no?

Miller would be in the comps starting in the fourth quarter.

Okay. And just -- most of our stuff's been answered. But what's your feeling on '04 incentives? We're getting anecdotes, that October floppy that the '04 that starting to pile up a bit. Is this something that's going to start to break basically next Monday, or what's the -- what's your feeling on that?

I wouldn't disagree with your description of October. With the exception of probably Chrysler. But -- and I talked about that on the incentives on the '04 F-150. It's my view, incentives are here to stay. I expect you'll probably see some fairly aggressive incentives as we move in closer to the end of the year. That's what we're --we're looking forward to that, and I think that probably will happen on various models, not just the F-150. And then they'll use the incentives in '04 just like they have this year to prior price sensitive points, that you know they not only use it to hold market share for their capacity manufacturing capacity, they also use it which I think pretty effectively to tweak price points. So instead of having to announce some big price change, if it's kind of may be missed it as the market did it on a launch, they'll just put the incentives in to tweak that price and bring it right into line. I think it's going to be more of the same. That's what we're preparing for. That's one reason we're talking about the used car market continue to be somewhat volatile.

Yes, was this a -- so I guess two questions then. Is this -- do you think October is slow because they haven't been as aggressive on the '04 incentives as they sort of were on the '03's at this time? And is this -- if they do come with incentives on '04's it's going to certainly take used car values down relatively quickly, I would assume. Is that a strategy on your part to sort of keep the used down, the used inventories low in preparation for that?

Yes, that's always the strategy, to keep the -- from the used car standpoint, to keep a 30-day supply because of that issue you just spoke of, which I think is probably accurate. And if you look at the last year or so with incentives, usually what we're seeing is we see a couple of good months, really good months and then a slow month. And then everybody comes back with incentives. Clearly, the manufacturers when the volumes get good, they try to pull back on the incentives. The market slows down a little bit. And then they have to come back to the party.

Next data point. The new programs will be announced Monday. Right? Or beginning the of next month. Right

I believe that's right.

Okay. All right. Thank you.

Thank you.

The next question comes from Mr. Steven Korn (ph) with Lowe's Corporation. Please go ahead.

Caller: Hello, guys.

Good morning.

Good morning. Just a couple quick of house keeping numbers. Can you tell me what the wholesale number of car sale in the quarter was?

Sure. The number of units?

Yes.

11,985.

Okay. And then the tax rate dipped a little bit in the quarter. What's your expected tax rate on a go-forward basis or -

It's going to vary between 36 and 38. I would probably use 37 for the next 12 months.

Okay. And can you give -- could you give me a little bit of guidance as to what a 100 basis point increase in interest expense -- or let's just say - on floor -- what that would have an impact on the floor plan interest expense line? Right now there's a positive arbitrage for you. I'm just trying to understand what an increase in rates would mean for that line.

Yeah, well, I can tell you what it means for the company overall. 100 basis point change in interest rates. You ought to think about that as about a 5 or 6 cents per share impact on Group 1 On a particular line item, it will vary. The reason -- I'm trying to avoid giving you the line item, right now our floor plan debt is unusually low because of the heavy liquidity in the company. We've paid down our floor plan debt to a level that's really not the normal floor plan debt level we would carry. But 100 basis point is going to be, you know, 5 to 6 cents a share.

Okay

Annually.

I just want to follow up then on one other question asked earlier with regards to acquisitions. Are you losing your bids to other competitors, or are the private owners actually just walking away and holding out for higher prices and just sitting on the market? Or is there a supply of acquisitions growing?

You know, the supplies-- because of the -- I like to say the (inaudible) changes monthly but with 22,000 dealers, events change their motivation to want to sell or not sell. And so, generally what I think, what you see with us, because we're all looking for a little different thing. We're looking for that platform where the management of that platform stays. They become our partners, shareholders. They want to grow their market. They want opportunities for their key people. Others don't really look for that. So we attract that type of dealer. And so it's more, as I said, I think we really compete with their cash flow in trying to fit that in to the public pricing. And you know, give them what they think is a decent return on their cash flow. And that's more of the challenge. If we, for example, we have said that we pay 7 to 9 times after-tax earnings for platforms. We were to raise that 10 times after-tax to platform out there today. Then our return would fall. Understand.

Understood. What I'm trying to understand is the market appears to be more efficient in acquisitions and that there's more competitors to Group 1 looking to acquire whether it's platforms or tuck-ins.

I don't really think that's true. I don't agree with that statement. Auto nation is really not doing acquisitions. Four years ago, they were really formidable. They were out there aggressively, high prices. Some of the others you can look at the other public companies' balance sheets and you'll see how ours compares. We're in a very favorable situation from a balance sheet standpoint. So, you know, we really don't see that. We all look, as I mentioned, also we look for a little different things. You know, different opportunities, different things that attract us. But I don't see that, I don't agree with if being more competitive from a buyer's standpoint. It's just more competitive from the cash flow from those dealers.

Got it. Okay. Well, thank you very much.

Thank you.

Thank you. and our last question comes from ((Mr. Peter Saris of Whorli Capital)). Go ahead.

Peter Saris. You're talking about your capital structure and being less leverage than everybody else. I guess what I'm, let me see if I get at this question articulately. Supposing that somebody passed a law today that said that for, there would be no more acquisitions. Okay? First question is, on a, an ongoing basis, what would be a capital structure that you would feel comfortable with? And if you had to just operate your business with your 12% return on capital, how much, what would that business look like on an ongoing basis? I guess what I'm trying to understand, trying to compare you with everybody else. They've gotten rid of all their real estate and trying to understand where your earnings would be if I wasn't the, see, I'm not including acquisitions, but I'm giving you a penalty for being delivered.

Okay. I can answer some of that. I think if you're talking about where we think ideal capital structure for us is and you're not building up liquidity for acquisitions and those kind of things, I think this model runs very well at a 35% long-term debt to cap. Okay? That kind of gives you where we think the ideal capital structure is. And then, you know, clearly we have too much liquidity in the company, $90 million. I guess you would take that $190 million and the leverage us through either buying stock or paying off debt and put us at a 35% long-term debt to cap and make some pro forma adjustments to earnings and see what that is. I haven't done that. I don't know exactly what that number is.

If you made no acquisitions, how much free cash flow would you have, say, in a, this year?

I think if you had no acquisitions, your free cash flow is going to be somewhere between $3.10 to $3.30 per share.

Okay. Now, if you, let's say you were a private company and you're making, you're having $3.10 and $3.30 a share in free cash flow. If I was going to model that forward and I just took, I could take that $3.10 or $3.30 and just use that money every year to shrink the capital structure, right?

Yes.

Okay. And I could then using those numbers then come up with ten years of cash flow or something like that. Right? And see then what the value of the company was. Right?

Yes

It looks to me if I did it that, and I don't have my excel model because I'm not one of these high-priced analysts, but if I had an Accident sell model it would look like the price at margin value of the company would come out to be much higher than its is if I ran the math.

I have not run the math but that makes sense. I think mathematically you'd come up with a much higher number than our current market cap.

The question I have is if I would come up with a much higher number than your current market cap, then why make, you know, why not just dramatically shrink the capital structure right here?.

Because you're looking at the price of the market equity of the company at a point in time, and we're looking at the company over a longer run-wise.

Okay.

And we can continue to make acquisitions on high returns on invested capital, so ultimately, the cash flow to the company are higher. If we, if the market ever got saturated and the acquisition market became un favorable, I think the strategy you just articulated would make a lot of sense. But it's because of the great opportunities that Ben just talked about is the reason we're willing to eat the extra liquidity and why we're focused on growing the company through acquisitions.

So, I, so what you're saying is based on a private market value based on cash flow, the stocks should be worth much more than it is now, but your view is that with acquisitions you'll get there and more. Is that a reasonable

That's correct.

That's exactly right.

It's also what I'm saying when I, when I say what we're competing with on acquisitions of private dealerships and their cash flow, that very same point. They're valuing that higher than the public is valuing our cash flow stream.

Okay. Great. Thank you. Appreciate it.

We have one additional question. Coming from Brett Hendrickson (ph) with Finance Capital. Please go ahead.

Hello, guys. I didn't want to drag on the call. I'm sorry.

No problem.

Just a quick one. The assumptions you gave for your Q4 guidance, I think you said what you're assuming for used and new margins, and I missed them.

7.1 to 7.3 on new. And 10 to 11.5 on used.

And did you guys give any kind of comp assumptions for rev on those two segments?.

No, we didn't, but we would expect it to be slightly positive, would be my initial guess at this point. Realizing we're benchmarking against a very soft quarter last year.

Okay. Thanks a lot.

Thank you.

And there are no further questions. Please continue.

One last point on the acquisition question. One of the great things about this industry is the side. It's over a trillion-dollar industry. It's the largest do domestic retail sect. There's over 22,000 automobile dealers in the United States. So it's a very fertile acquisition environment. And it's one of the very attractive things about the industry. I thank all you for joining us today. And in closing, to accomplish our vision, viewed to continued commitment of our dedicated 7,500 co-workers and the support of our 30 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. And goodbye.

Ladies and gentlemen, this concludes the Group 1 Automotive third quarter results conference call. If you would like to listen to a replay of today's conference call, please dial 303-590. 3000 or 1800-405-2236 and enter the access code of 554842. Once again, if you would like to listen to replay of today's conference call, please dial 303-590-3000 or 1800-405-2236 with the access code of 554842. You may now disconnect. Thank you for using A&T teleconferencing.