Group 1 Automotive Inc (GPI) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Group 1 Automotive 2003 fourth quarter and full year results conference call. At this time, all participants' lines have been placed in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone requires assistance on today's conference, please press the star followed by the zero, and the operator will assist you. As a reminder, this conference is being recorded Thursday, February 26 of 2004.

At this time, I would like to turn the conference over to Russell Johnson with Fleishman Hilliard. Please go ahead, sir.

Thank you, Andrew. Good morning, everyone and welcome to the Group 1 Automotive 2003 fourth quarter year end results 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 statement that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statement 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 Hollingsworth, Jr., Chairman, President and CEO, and Mr. Scott L. Thompson, EVP, CFO, and Treasurer.

I'll turn the call over to Mr. Ben Hollingsworth. Mr. Hollingsworth, you may continue.

Thank you. Good morning and welcome to our conference call. This morning we will discuss operating results for the fourth quarter of 2003 and the full year. First, the highlights. Fourth quarter net income was $19.6 million on revenues of $1.1 billion. Fourth quarter diluted earnings per share increased to 84 cents from 53 cents and $3.26 from $2.08 for the full year. Results for the fourth quarter and the year include 21 cents per share from favorable resolutions of taxed contingencies. Parts and service revenues increased 10.5%, and gross margin expanded to 15.9% versus 15.4%. We have acquired seven new franchises with estimated revenues of $349 million, and we are raising our 2004 guidance.

We delivered a sixth consecutive year of revenue net income and earnings per share growth. And we have demonstrated once again our strength as a speciality retailer with the flexibility of our business model, diverse revenue streams, and a strong balance sheet. From a brand standpoint, Lexus, infinity and Acura were among our strongest performers. From a geographic standpoint, we had outstanding performances from our Los Angeles, Houston, and Boston platforms and continued weak performance in Atlanta. Used vehicle retail sales volume was soft throughout the company.

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

Thank you, Ben.

Starting with the operating results for the three months ended December 31, 2003, the company's revenue totaled $1.1 billion for the quarter, retailed over 37,000 vehicles, and we serviced over 300,000 vehicles. The positive impact of our investment and acquisitions combined with same-store revenue growth, improved used vehicle inventory valuation, and a successful resolution of certain tax contingencies drove this quarter's results. The geographic standpoint, as Ben mentioned, we had outstanding performances in California, Boston, and Houston, offset by weakness in Atlanta, which lost money. Geographic standpoint, it spread this way this quarter: Oklahoma, 14.3%,; Houston, 13.6; Boston, 12.6; California, 11.6; Austin, 7.7; Florida, 7.1; New Orleans, 7%; west Texas, 6.7; Dallas, 6.2; Atlanta, 5.9; Beaumont, 3.2; New Mexico, 3.1; and Denver, 1% of our business. As Ben mentioned from a brand standpoint, we experienced very strong performance in our high lines like Acura, Lexus, and Infinity. For the fourth quarter, domestically badged vehicles represented 47% of our sales, and import badged vehicles were 53%. Luxury brands represented 13.6% of our business, up from 11.8 in the same period last year. This is the highest percentage in the company's history. The increase was driven by organic growth in Lexus and Acura and the addition of three Lincoln franchises. Our brand mix for the quarter was as follows: Toyota/Lexus was 27.8% of our business; Ford, 23.9; Daimler Chrysler 13.7; General motors, 10.5; Nissan/Infinity 10.4; Honda/Acura, 8.8; and the balance is an array of brands.

The truck market continues to be healthy. Trucks and crossover vehicles represented 61% of our unit sales and cars were 39. This is the highest truck percentage we've experienced. We realize same-store sales growth in trucks, but a decline in cars. Our grass margin for the quarter was 50 basis points higher at 15.9%. The increase is a result of favorable merchandising mix as the higher margin businesses grew faster than our vehicle revenues. Gross margin was also positively impacted by near record results in finance, insurance, revenue per retail sold, and increase in gross profit for retail sold and units sold.

Finance and insurance grew $6.4 million as we benefited from the sale of new products and our training programs. Additionally, we're comparing against an unusual low number as we had $3.8 million one-time revenue deferrals in 2003. Profit for retail units sold was $1,006 for the quarter, up from 844 same period last year. We anticipate 925 to $1,000 for retail units sold for the first quarter of 2004.

Individual product margins for the quarter were as follows. New vehicles, 7.2% this quarter, versus 7.5 last year. Probably a better number to look at is gross per retail unit sold, which was $2,062 this quarter versus $2,050 lars year. The decline in margins represents the increase in the sales price of vehicles. We continue to make the same gross for retail unit to new. Used retail was 11.5 versus 9.6 last year. Gross for retail unit per used was $1,164 versus $1,375. Parts and service gross margin, 56.1% versus 56.3 same period last year. And F&I per retail unit, 1,006 versus 834.

For the first quarter of 2004, we expect new vehicle margins of 7.3% and we expect used vehicle margins to 10.5 to 11.5%. Parts and service margins should be approximately 55 to 56%. Income for operations for the quarter reached 32.7 million or 3% of revenues, up from 28.6 million or 2.8% same period last year. Our underperforming Atlanta store negatively impacted or SG&A to gross profit ratio, which was 79.2 for the quarter. Excluding Atlanta, our ratio would be much closer to our historical average. We're conferrable with a 3 to 3.3% operating margin for the first quarter of 2004. Remember from a seasonality standpoint, the first quarter is less robust than the second and third quarter.

New vehicle inventory at year-end, with a 75-day supply, which is over our target. This is primarily Ford and Dodge inventory. As for the rest of our inventory, our used vehicle inventory is required to be carried at the lower cost for estimated market value at the end of each reporting period. Valuation reserves are provided against the inventory balance based on a detailed review of our inventory. Actual subsequent sales of that inventory, historical loss experience, and our consideration of current market trends. Receive for wholesale use vehicles at September 30 was $4.1 million and has been reduced as we have whole sale vehicles. Reserve at 1231, 2003 to $700,000 which we believe is appropriate. Our used vehicle inventory at year end is in very good shape at 31 days supply. At the end of January, we sit at 26 day supply, which is below our target of 30 days.

$1.4 million decrease in floor plan interest expense was caused by two factors. First, our vehicle inventory was underleveraged during the quarter due to excess working capital. (INAUDIBLE) interest rates declined 43 basis points. Other interest expense increased $3.3 million due to our newly issued 8.25 notes. These notes were approximately 7 cents diluted for the quarter. The quarter floor plan assistance, which is recorded as a reduction in new vehicle cost of sales and only realized when the vehicles are sold totaled $6.9 million. For the quarter floor plan assistance covered a total of 160% of the company's floor plan interest expense. This is a higher than normal ratio. Again, the inventory was not fully leveraged during the quarter. The company's effective tax rate was 17%. Unusually low as we had favorable resolution of certain tax contingencies. These contingencies were provided for in previous years. We expect our tax rate in the future to be between 36.5 and 38.5 depending on which state the taxable income comes from. In the quarter, the company made $19.6 million or 84 cents per share on a diluted basis. The quarter return on average equity was 15% even with our conservative financial leverage and excess working capital. We continue to focus on return on invested capital. For the year, return on invested capital was 12%, slightly below our 13 to 14% we historically have run. Still, I expect to be leading the sector and certainly above our cost of capital.

Returning to same-store sales data, new vehicle same-store sales were up 6.1% during the quarter. Retail used vehicles, down 11.6%. Wholesale used vehicles, up 17.5%. Parts and service, strong growth at 8.2%. Finance and insurance, flat. And again, total same-store revenues, up 3%. This is the first time since the third quarter of 2002 that we've had positive same-store new vehicle sales.

Used vehicle market continues to be less vigorous than last year. Consistent with last quarter, we accelerated wholesale activity, mitigating the impact of increased depreciation rates of the used vehicle market. Parts and service same-store sales were up 8.2% as we had growth in customer pay, parts and service, and parts wholesale revenue. Additionally, domestic warranty work is down 8.5%, while import warranty work is up 21.6, resulting in total warranty work being up 5.4. We continue to be pleased with the tone of our parts and service business.

Now, this quarter's earnings are more complex than previous quarters, so let me anticipate some questions, and let me see if I can reconcile you to the numbers. We reported 84 cents. We were positively impacted by a one-time 21 cent impact on taxes or settling tax contingencies. The bond offering that we did in the third quarter, because those funds were not used in acquisitions during the quarter, was a negative of 7 cents in a quarter as we carried that excess working capital. And then the improvement of our used car ending inventory at year-end benefited our 9 cents during the quarter.

Turning to capital issues, on March 1, 2004, we will use $79.5 million of our working capital to fund the early redemption of our 10 and 7/8 senior coordinated notes. The company will incur a pretax expense of $6.4 million, which is a combination of $2.3 million noncash expense to write off unamortization debt and discount and will have a $4.1 million cash expense to pay the call premium. This will result in an after-tax expense of approximately $4.1 million or 17 cents to be recorded in the first quarter of 2004. This calling of the notes will reduce our annual interest expense by $8.2 million. As of year-end, the company had over $195 million in working capital et of funds set aside for bond redemption. This is $85 million more than we need to run the business. We expect these funds to be deployed in acquisitions. The company's long term debt cap is 31%. After the 10 7/8 bonds are redeemed, our long-term debt to cap will be 24%. Our acquisition working capital line of credit is undrawn as of year-end and as of today. We estimate depending on the cash stock mix of the purchase price. We have the financial resources to acquire 2 to 3 billion in revenue. It's clear we are positioned for significant growth. Total capital expenditures for the quarter were 10.6 million, of which 6.9 million was for new or expanded operations. Expect total CapEx in 2004 to approximate $43 million, including approximately $12 million of recurring maintenance CapEx. We expect weighted average diluted shares outstanding for the first quarter to approximate $23.7 million shares. Since going public, we've reported 23 quarters of earnings per share growth out of 25 quarters, and the company is comfortable projecting earnings growth in 2004. We're confident in our associate's ability to continue to create the future of automobile retailing.

Ben will now provide you more color on the quarter and update you on management's guidance.

Thank you, Scott.

We have completed the acquisition of franchises with $349 million of estimated annual revenues. $89 million in the fourth quarter of 2003 since we last talked and $260 million subsequent to year-end. During the fourth quarter of 2003, Group 1 acquired Shamrock Chevrolet in Lubbock, Texas, which became part of the Gene Messer Auto Group. This is expected to add approximately $65 million in aggregate annualized revenues. The company was also granted new Lincoln and Mercury franchises in Oklahoma City, Oklahoma, by Ford Motor Company, which became part of the Bob Howard Auto Group. These two franchises are expected to generate $24 million in annual revenues. For the full year 2003 Group 1 acquired or was granted 10 franchises with estimated annual revenues of $333 million.

In the first quarter of 2004, we have completed two acquisitions, which are expected to generate annual revenues of $260 million, and we have entered the central New Jersey market with the acquisition of David Michael Motor Cars. This new platform is comprised of Mercedes Benz, Honda, and Volkswagen franchises in New Jersey. In addition to the David Michael platform, we also acquired a Chevrolet dealership in San Antonio, Texas, and renamed it Freedom Chevrolet. This tuck-in joins the Maxwell Automotive Group and is the first Group 1 dealership in this large Texas city. We're pleased with our new platform and excited David Leavy and his team joining our company. This acquisition as a leading Mercedes Benz dealership to our portfolio of luxury franchises and increases our brand exposure to the important Honda franchise.

For 2004, we expect to see moderate growth in the overall new vehicle market combined with a stable market for used vehicles and continued strong parts and service markets. Excluding future acquisitions, the company anticipates diluted earnings per share of $3.20 to $3.40 for fiscal year 2004. This excludes the previous announced after-tax charge that Scott mentioned of approximately $4.1 million or 17 cents per share to be incurred on the redemption of our 10 and 7/8% notes in March of 2004. Previous 2004 guidance was $3.10 to $3.30 per share, which also excluded the charge for the bond redemption. We continue to see strategic tuck-in acquisitions to augment our current markets as well as platform acquisitions to enter new markets. Including the 2004 acquisitions announced above, the company is targeting to add dealerships with aggregate annual revenues of approximately $1 billion in 2004. We are off to a fast start on achieving our 2004 acquisition goal, while at the same time maintaining our high operational standards, industry leading returns and disciplined approach to acquisitions.

Now, for a recap of Group 1's top sellers: For the fourth quarter, once again, number one, the Ford F-Series pick-up truck; number two, the Dodge Ram pick-up; number three the Toyota Camry; number four, the Ford Explorer; and number five the Toyota Corolla. For the full year, the line up was the same, except the Toyota Camry and the Doge Ram pick-up changed places with Camry in second place and Dodge Ram in third. Group 1 currently owns 80 automotive dealerships comprised of 122 franchises, 30 different brands, and 29 collision service centers located in 10 states with 14 platforms

Scott and I will now be happy to entertain your questions.

Thank you, sir. Ladies and gentlemen at this time, we will begin the question-and-answer session. If you would like to ask a question on today's presentation, please press the star followed by the one. If you would like to decline from the polling process press the star followed by the two. You'll hear a three-tone prompt acknowledging your selection. Your questions will be polled in the order they are received. If you are using speaker equipment, we do ask that you please lift your handset before pressing the numbers. One moment, please, for our first questions. Our first question comes from Rick Nelson from Stevens. Please go ahead with your question.

Thank you and good morning.

Good morning, Rick.

Scott or Ben, I would like to learn more about the used car reserve. How big is that? Where is it in the balance sheet? And I guess I thought it was standard practice to book wholesale losses direct to the P&L.

As I mentioned in my prepared comments, the reserve was $4.1 million at the end of third quarter. It is recorded as a net against the inventory. From our standpoint, the way we understand GAAP, Rick, is you look at all of your assets at the end of each financial period. And to the extent you believe they aren't realizable, you need to reserve and book that loss currently. And so we have always maintained a reserve against our used car inventory. Because historically, this inventory has some built up losses in it. So we do a detailed analysis at the end of each quarter and record what we anticipate to be the losses in that quarter. As you probably know, the used car valuations during the fourth quarter of individual vehicles have firmed up. And so we ended up when we did that analysis, not needing as large a reserve as we had had in the third quarter.

I guess, of the (INAUDIBLE) liabilities in the balance sheet?

Excuse me, no. It is shown as a common asset netted against the inventory. It has been since the inception of the company since '97.

Is that standard procedure in the industry?

I think that is appropriate accounting for GAAP. I think if you're talking about automotive accounting and what individual dealers do, we generally find they do record losses as they incur them as opposed to anticipate them and reserve them when they become probable.

And Ben, if you could talk about the multiples you're paying for the acquisitions? Is it stock and cash or one or the other?

Our multiples are pretty much the way they've been since we went public. We pay seven to nine times after tax earnings for these acquisitions. Tuck-in acquisitions we normally get a little better return. These are all cash transactions, and the platform acquisition that we announced, it had a stock component because one of the principal owners flot form president of our group in New Jersey. So he is, as is our culture, as you know, will become a major Group 1 shareholder. So going forward, you can anticipate us using a cash stock and a mixture of those two depending on the particular situation and depending on our stock multiple at the time. We still like to use stock in the platforms so that our platform presidents are shareholders and stakeholders and we're all rewarded in the same way.

And what sort of EPS implication do you see the recent announcements having in '04?

We did just raise our guidance, which reflects the new acquisitions, from $3.10 to $3.30 to $3.20 to $3.40.

Rick, this is Scott. I think if you were to go through and take those revenues and play with the numbers, you would probably find that they are more accretive than our earnings guidance went up. And I don't want you to misinterpret that number. The acquisitions were priced like they have been historically. We've been a little more conservative on the guidance going forward. Although we see a recovery and are feeling some recovery in our core operations, it hasn't been extremely robust. So we've held back, if you want to say it, what we hope is more accretion on those acquisitions than we normally would budget. It is not because the pricing on the acquisitions have changed from our historical pricing. I should tell you that if you play with numbers and come up with that conclusion.

Thank you very much.

Thank you, Rick.

Thank you, sir. Our next question comes from Nathan Miller from Goldman Sachs.

Hi. Can you hear me?

Yes.

Hi. How are you? Scott, I've got a couple of questions here. The first one is about really operating profit results. You really beat us by quite a bit on the gross margin line, but expenses still seemed a little high. I know you explained Atlanta. If you could describe expenses excluding Atlanta. I know you said it is tracking low with historical averages. Maybe if you could tell us what that was.

I think if you look historically at our SG&A as a percentage of growth, I think you'll see 75% to 78% would be a good target range for us, depending on the seasonality of the quarter you're looking at. And I don't think there is an expense issue systematically throughout the organization. If you pull out Atlanta, our numbers would be within that bandwidth.

Okay. And can you describe a little bit what is going on in Atlanta, what you're doing to resolve the issue, and when we could expect things to improve.

Sure. This is Ben, and I'll be happy to take that. We've actually made another change in a platform president in Atlanta. And it changed out I believe at this point ever general manager in that platform within the last two to three months. We have, I think, in place now in Atlanta, the right management team, the right managers in the stores. There is some market-specific problem in that market. It's been a weak market, as you're probably aware for all of us, private dealers included. But certainly some of our issues over there are self-inflicted. And we think we have, at this stage, new management in place. And we're seeing a, I think, positive direction. I'll put it that way. Just looking at January results versus the fourth quarter. I feel optimistic about Atlanta. I think we've got good stores over there that are positioned well. And I think now we have the right management in place to achieve the results over there that we're expecting.

Okay. Looking at the used car market, do you feel like you have the right level of inventories today? What are you seeing in that market for '04? I know you talked about stabilization. Are you looking for it to track flat or show some improvement?

I think from a guidance standpoint, still would be conservative in the used car market. I think the significant same-store retail sales decline that we've incurred over the last year and a half, I think we've got those behind us. And in looking at January, I think -- you know, I think we would expect probably minor same-store sales decline in the retail used vehicles in the first quarter. And then stabilization after that to be flat to up maybe one or two% for the rest of the year.

Let me add a little color to that. It is a bit early yet to call how this year is going to turn out there. But in kind of looking around the country at our platforms, really, really mixed outlook also. But one of the positive -- some of the auction prices seem to be firming. And you're certainly having -- as probably most of you are aware, fewer vehicles coming off lease. Again, it's early to call it. It should be positive for the used vehicle market. But we're at this stage cautious about predicting that.

You're guided to a 7 to 7.3 margin for new vehicles in the first quarter. And that is lower than it has been typically tracked over the past several years. We know margins have been under pressure. You're expecting that to continue?

Let's be clear on what is causing the pressure. The way the business really works, is we work on a spread basis. We make about $2,000 for retail unit sold in new cars. The reason the margin is contracting and I think probably will continue to contract is that the price of vehicles has been rising. In fact, it is up 5% in the fourth quarter. As far as our economics, what we make per resale unit sold has been very stable.

So on a gross profit per vehicle it's --

But the margin is going to continue to decline as long as vehicle prices are increasing.

Okay. And also on the outlook, you discussed -- could you talk about what interest expense you're expecting for 2004 given your current debt structure after you redeem the notes including that benefit, assuming no further acquisitions at this time?

Yeah.

Are you assuming in your guidance that rates increase at all?

Let me just -- I thought you were looking for a particular number.

If you could talk about an increase year-to-year, anything in ballpark would be helpful.

You can compute the debt interest. That's easy to compute. That's a fixed-date note. You know the call date. The floor plan is variable and is Libor-based. And we would expect that Libor would be steady for the first half of the year and then go up 25 to 50 basis point for the back half of the year. That's built into our model.

Okay. All right. And last question, about the acquisitions you've closed already, how would you characterize the multiples you paid for the acquisitions in '03 and '04? And how the market is treating you?

The multiples has been consistent, the same we've paid all along. Most of you know we're pretty disciplined in our acquisition approach, very disciplined. We don't deviate from those return hurdles that we have for our investment criteria. So I would say that we don't talk about what we paid for individual stores, but in general, those platforms earn 7 to 9 times after tax rate. And then a little better than that on the platforms -- I mean on tuck-ins, sorry. We always get a better return on tuck-ins. Because of the size of the industry with 22,000 dealers, if you're disciplined, you can find opportunities that meet our criteria. And number two, our operating model attracts a very special type of owner auto retailer. The entrepreneur that wants to stay with their business in these platforms, like David Leavy, to grow those platforms, be our partners, join our operating team, and be a shareholder, that's fairly unique among the public auto retailers. So we attract those kind of people. So we offer a unique opportunity for them. In price isn't always the most important thing.

Okay. I actually have one other question to ask, and it is about the other income that you booked. It was, I think, positive $700,000, about a (INAUDIBLE) swing on a normalized tax basis year-to-year. You usually pose a modest other expense. Could you discuss that gain?

In other other?

Yeah, I think it was other income.

We'll run through there. It is basically sale of equipment, nonoperating type items. And we just -- we had a gain this quarter rather than a small loss.

Okay. Thanks very much.

Thank you, sir. Our next questions comes from Scott Stember with Sidoti and Company. Please go ahead with your question.

Good morning gentlemen. Could you touch on the inventories one again? You mentioned that Ford and Dodge were up pretty high in the quarter. Could you just explain that?

It's an easy explanation. We ordered more than we needed and sold fewer than we thought we would, not to be smart-aleck about it. As you know, you have lead times in ordering new vehicle inventory. And you're somewhat subject to production runs. So you don't know exactly when you're going to get delivered vehicles. And you've got to guesstimate your sales. And so any time you get off, you get cars or trucks a little bit quicker than you expected or your sales don't quite meet your target, your inventories get out around around fairly quickly. The good news is they also get corrected fairly quickly by cutting down your ordering. Or your sales get back up above target. It's 75 days. That is higher than we would like to be. Probably this time of year we would like to be north of 60. 60 is kind of the normal target for this time of year going in to the first quarter and the big selling season in the summer, we like to be higher than 60. But we're a little bit high. 75 days. Are we worried about it? No. The cost to carry inventory in this low interest rate environment, very expensive. No. Is it good quality inventory? Yes. What we have done, and this is really what the risk is this time of year, is we've gone through and looked at the 2003 models, which are the old vehicles and made sure we've cleaned out the 2003 so there are very few number of those vehicles left in our inventory. That's really where the risk is. We've already looked at that, and we're in good shape from that stand point.

Well, you characterized where the used was at the end of January. Has that new balance come down a bit going into February?

It is a 30-day trailing computation. And January is not a very big selling month, as you probably know, in the car business. The number is higher at the end of January; it is 88 days. But you're comparing it mainly because January is such a slow selling period. At 88 it is long, but you really can't see what the inventory is going to be until March. March is your big month in the quarter. You've got to have the vehicles on the ground.

Okay. And it is safe to assume by your number one selling vehicle being the F-Series, that the '04 150 is moving along nicely for you guys?

It is. Actually, the Ford F-Series has sold really well for us. It is an introduction. We're still selling the Heritage quite robustly. And we feel really good. The F-Series has been very well received. It has some really terrific new content. And all of your guys feel really strong about it. We're looking for a big year for Ford and the F-150.

One last question, Scott, just to clarify, the guidance of 320 to 340 for 2004, that includes only the $260 million worth of acquisitions you closed on in the first quarter and not the increment am $740 which make out the $1 billion?

Correct. And it excludes the one-time bond charge.

And includes the acquisitions we've mentioned in the fourth quarter that we've closed of course.

Okay. That's all I have. Thank you very much.

Thank you.

Thank you, sir. Our next question comes from Adrian Dell from CIBC world markets. Please go ahead with your questions.

Hi. Thank you. A few things. First of all just a clarification, what did you say your new and used same store sales were?

Coming up.

The new was up 6.1%.

Okay.

Used retail was down 11.6. And used wholesale was up 17.5.

Great. Thanks. And it looks like your (INAUDIBLE) was flat, right?

Yes.

Now, have you instituted any kind of F&I caps or anything? And what are your expectations for same-store F&I going forward?

Yeah, years ago we implemented a cap on rate or finance reserve at 3%. What I said on F&I is that we expect it to be $925 to $1,000 for retail unit, which is pretty much in line with what we've experienced the last two or three quarters.

Okay. Have you made any changes to your actual product offerings on your F&I?

We have started selling some -- a GAAP product, which is a different insurance product over the last year. And we continue to focus on penetration and vehicle service contracts. And then the primary focus in that area.

Okay. Great. And then lastly, could you just give me your rent expense number?

Sure. Lease expense for the quarter was $11 million. For the year, it was $42 million.

And do you have expectation yet for what it will be next year with all of these acquisitions?

That's a real hard -- because I have to proforma in the new acquisitions. I think in general, it runs about 1% of revenues. Depending on what your revenue projection is, based on how aggressive you think the acquisitions are going to come, rent expense is really going to run a little bit less. 5 to 100 basis points of revenue. But 9

Perfect. Thanks a lot.

Thank you.

Let me add on the F&I question there, as Scott said, we did institute caps on rates. We have an F&I mission statement that all of our F&I associates sign. It is posted in our F&I offices. We use menu pricing in all of your F&I offices. We disclose on our menu it was a negligible rate. And we do make a profit on financing.

Thank you, sir. Our next question comes from Jerry Marks from Raymond James. Please go ahead with your question.

Good morning.

Good morning, Jerry.

A couple of questions. Scott, you're talking about F&I and it is pretty consistent with the last few quarters, did I hear you say something about a $3.8 million one-time defferal in 2003? What was that?

If you've looked at the other F&I income, this quarter compared to fourth quarter 2003, you'll see a very large increase. Like $6 million increase in that line item.

Right.

3.8 million of that increase is really because the number in 2003 is unusually low. Because in the fourth quarter of 2003, we had one-time deferrals. And we need to do a little bit of catchup on some deferrals on some F&I products. And it ran through that line item.

What is this deferral, then?

On the F&I products, any time we are an obligator on a product, the revenue is not booked currently, and it is deferred over our obligation period. On a couple of our F&I products, although we have an insurance company that is primarily liablewe're secondarily liable on the product. We do not book that revenue up front. We defer it. We had a catchup entry in the fourth quarter of 2003. So it looks like a huge gain this quarter, but it is really because the 2003 number is unusually low.

Okay. And when you recommended Rick to play with the numbers on the acquisitions, if I kind of take $340 million or so and add that into your guidance, it sounds like you're suggesting about 3 cents a share per every 100 million. And that seems about half of (INAUDIBLE) Miller. Is that kind of a correct way to look at it?

Well, let me tell you what we've always kind of talked about from a high-level standpoint. This is a fairly high-level. We announced acquisitions of about $350 million. Okay?

Yep.

We generally pay, generally, somewhere between 15 to 18% of revenues. Obviously we really do return on invested capital computation. But if you run through the numbers, the margins are going to vary by deal. You come up with 15 to 18% of revenues. Let's call it 16% of revenues. So you would guess a purchase price of about $56 million. We have told you that our return on invested capital target is a 20% return on invested capital. You know, I've got the money sitting and earning some interest now. And let's call that 3%. So the net of those two is 17% incremental. Give me a couple of percentage for overhead increases because my business gets bigger. And usually I look at it that I net 15% to the bottom. I'm going to take 15% and apply that to our guesstimated purchase price of $56 million. And I'm going to get a pretax number of $8.4 million of what you would get these acquisitions are going to achieve. You would tax effect it. We're going to multiply it times 62.5. And you would get an after-tax number of $5.2 million. And then you would apply the 23 million shares number I gave you. And you would guess, I think, based on what we normally talked about, these acquisitions would contribute a little more than 20 cents per share on an annual basis. But our guidance only went up a dime. So what I was foreshadowing to Rick was don't think we overpaid for the acquisitions. What we really did, and what we're telling you is, the operations have not been extremely robust. That Atlanta has not turned around as quickly as we would have liked. So we have shaved what we normally raise our guidance to compensate for the fact that Atlanta hasn't performed. And the recovery, we see signs of it. But we aren't feeling a row bust recovery yet.

Okay. So the guidance , essentially does incorporate all of these acquisitions in part it reflects a little bit of cautiousness about the environment?

Correct.

Okay. And then finally, Scott, this is your last conference call, isn't it?

Yes, it is, Jerry.

Well, you'll be missed a lot.

Thanks.

And Ben, can you give us a little bit of an update? I think you have a couple of management slots open. Is there some sort of time frame you're looking at to fill some of those slots.

Sure, Jerry. Scott is going to be with us through the end of March. So it may not be his last conference call.

Oh.

And he'll be with us and sign off on the 10(K). My goal for the CFO position is to have someone in place by the end of March, which would be good with Scott's timing. We are also interviewing for manufacturer relations position, and my timetable for that is the same. So we hope to have both of those positions filled by the end of March. We've been interviewing the last two or three weeks, quite extensively. I have spent a lot of time in the interview process. We've looked at some -- we've looked at some very attractive candidates for both positions. So to go forward with that, we should have those positions filled some time in March. I'll add since we're all together here, we will certainly miss Scott. He's done a fabulous job for Group 1. And we appreciate all of his efforts and contributions and are also very understanding of his situation and admire him for what he's chosen to do. So stay posted, and we'll keep you up-to-date on what we're doing as far as filling those positions.

Okay. Thanks a lot.

Thank you.

Thank you, sir. Our next question comes from Justin Timelin with Morgan Stanley. Please go ahead with your question.

Good morning, everybody. Can you hear me?

Good morning.

A couple of questions. The first one is regarding this reversal on the used car side. If we were to get another large round of incentives on the new side, would that have an impact of depressing used values, does that mean we might get sort of a rise again in this reserve?

It is possible. But it is on a car-by-car basis. Just the fact the used car market becomes choppy doesn't necessarily mean you'll get an increase in the reserves. If our associates in the field don't value cars well, is really what happens is where you get increases in the reserve.

So what was the typical level? I think you said this was under a million now, and it has been above four. If you look back on the past five years, what is normal?

If you go through the history of the company since '97, the highest the reserve has ever been is probably a tad north of $5 million. The lowest has been probably half a million.

Okay.

As I mentioned, you know, at the end of January, the cars that were on the year-end inventory are sold. We had a 26-day supply at the end of January. And we generally run a 30-day turn in used cars. So we pretty well were able to compute exactly the loss of the year in inventory. But if your question is, is there volatility and is it possible to have more used car losses in the future, yeah. We've always said that the used car market is the riskiest part of our business. And the value in used cars is one of the most difficult things we do.

Okay. I might have missed this, but on the parts and service, can you talk a little bit about what the comp was on the customer pay side specifically and how that might have broken down between domestic and import?

I don't have those exact figures. I can give you kind of a generalization. We were benefited by a warranty work in total, because warranty work was up same-store sales 5%, and customer pay was up but I don't know the exact percentages.

Okay. Thank you very much.

Thank you.

Thank you.

Thank you. Our next question comes from John Tomlinson from Prudential Equity Group. Please go ahead with your question.

Good morning, can you hear me?

Good morning.

Following up on the warranty question, can you guys talk about -- I think you mentioned the warranty work was up on the import brands. Are there any brands specific that you notice an increase on? Or is that a function of labor rates, or is that just quality being as good as expected.

Well, I wouldn't dare say a brand on an open call. But I think what you really have here is the imports have more models than they had in previous years. And has been our experience, as manufacturers expand their product line and add more models, usually those new models have increased warranty work. That's certainly part of the driver on the import side. And also as you probably know, more of the import vehicles are being built domestically. And that may have an impact on the warranty work, also.

Okay.

One of the positives, depending on which way you look at, but one of the positives on the domestic side, particularly Ford, warranty work has declined significantly. They've been doing a much better job in the area of quality. And I should highlight that one. But other than Ford's doing much better, I prefer not to go the other way and talk about my manufacture partners' warranty work problems.

And on domestics, it is not just a function of the number of hours they are allowing? It is actual warranty frequency going down?

Number of claims is the big driver. There is no some change occasionally in rates and hours, but those are minor changes. It is claims that is the big driver.

Okay. Can you also mention on what your -- this is kind of a micro question. But what your customer reaction has been to the new Titan into your market. F-Series is so big in the market drop rate?

It is a fabulous product. Well received. We have actually big Nissan store right here in Houston. Greg Truck Market. We have them in Austin and Dallas. And the Titan is a full-size pick-up truck, fully powered, and it has been very well received and will be formidable competition for all of the other pick-up truck manufacturers.

And one last question, vehicles, new vehicle sales, have they been kind of lukewarm in February as we're seeing in I guess the overall market? In your markets?

Yeah, we aren't really going to update January and February, but the macro information that I've seen, probably the same information you've seen from manufacturers, would indicate that January and February was a little less robust than probably the manufacturers anticipated.

Okay. Thank you very much.

Thank you.

Thank you, sir. Mr. Hollingsworth, at this time we appear to have no additional questions. Please continue with any further statements.

Okay. Thank you very much. We appreciate all of you joining us here today. In closing, as always, to accomplish our vision, we need the continue commitment of our dedicated 7,600 coworkers and the support of our 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 good-bye.

Thank you, management. Ladies and gentlemen, at this time, we will conclude today's teleconference presentation. If you would like to listen to a replay of the Group 1 Automotive 2003 fourth quarter and full-year results conference call, please dial 1-800-405-2236. You may also dial 303-590-3000. You'll be asked to enter an access code of 568505. Once again if you would like to listen to a replay of today's presentation please dial 1-800-405-2236. You may also dial 303-590-3000. You'll be asked to enter an access code of 568505. On behalf of Group 1 Automotive, we'd like to thank you for your participation on the teleconference. At this time we will conclude and you may now disconnect. Thank you.