Group 1 Automotive Inc (GPI) 2004 Q3 法說會逐字稿

Good day, everyone, and welcome to the Group 1 Automotive Third Quarter Conference Call. As a reminder, today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Russell Johnson with Fleishman-Hillard. Please go ahead, sir.

Thank you, Candis. Good morning, everyone, and welcome to the Group 1 Automotive Third Quarter Conference Call. Before we begin, 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 in future periods to differ materially from forecasted results. Those risks include, but are not limited to, risks associated with pricing, volume, and the conditions of markets. Those and other risks are described in the Company's filings with the SEC over the last 12 months. Copies of these filings are available from both the SEC and the Company.

I'll now turn the call over to Mr. B.B. Hollingsworth Jr, Chairman, President and Chief Executive Officer of Group 1 Automotive. Mr. Hollingsworth, please go ahead.

Thank you, Russell; and good morning, everyone, and welcome to our conference call. This morning, we will discuss our operating results for the third quarter and first nine months of 2004.

First, to the highlights. We announced, this morning, a third-quarter net loss of $9.6 million, or 42 cents per diluted share, on revenues of $1.5 million for the three months, ended September 30. These results include a non-cash after-tax charge of $29.4 million, or $1.26 cents per diluted share, related to the impairment of goodwill at our Atlanta platform. Excluding the impact of the impairment, third-quarter net income was $19.8 million, or 84 cents per diluted share, compared with net income of $21.7 million, or 92 cents per diluted share, in the prior-year period. Total revenues increased 23.6%. New vehicle revenues increased 24.5%. Parts & Service revenues grew 26.7%. And gross profit increased 18.2% to $229.9 million.

The quarter reflected market challenges that we've seen throughout the year, and we continued to experience margin pressures. Despite this challenging environment, we had solid performances from our New England, Dallas and Los Angeles platforms, as well as our Honda and luxury brands. Unfortunately, our Atlanta platform has continued to struggle and, while we are working diligently to resolve the problems there, it was appropriate that we take the impairment charge.

I would, now, ask Robert Ray to go over the details of our financial results as well as our brand and geographic mix. Robert?

Thank you, Ben, and good morning everyone. Let me begin by providing some additional color on the $41-million impairment charge that we announced today. As you may be aware, certain accounting rules required us to assess goodwill and other intangible assets for impairment on an annual basis. Or as such, other time of events or circumstances indicates that an impairment may have occurred. In connection with the preparation of our quarterly financial statements this month, we determined that recent events and circumstances at our Atlanta platform forwarded such an assessment.

Specifically, these events and circumstances included -- 1) continued weakness in the Atlanta market, in general; 2) recent changes in platform management, including the platform president; and 3) and most importantly, the further deterioration of the platform's financial results as evidenced by an operating loss that more than doubled than Q3 versus Q2. As part of our initial assessment, we estimated that the fair market value of the Atlanta platform, using traditional valuation techniques, and allocated that value to all the platform's tangible assets, such as PP&E, and intangible assets, including previously unrecognized intangible franchise value and goodwill.

Ultimately, we concluded that the carrying value of the platform's goodwill and certain other long-lived assets, which primarily include leasehold improvements, exceeded the fair value by an estimated 41.4 million. Accordingly, we recorded a charge in the same amount. As a result of this charge, the carrying value of goodwill and these other long-term assets associated with our Atlanta platform has now been reduced to zero. Finally, note that we plan to confirm our initial assessment by obtaining a third-party valuation and any required adjustments of the third-quarter impairment charge will be made in the fourth quarter based on results of this valuation.

Now, back to brand mix, geographic mix, and our operating results. Due to our acquisition activity this year, our geographic mix has changed a bit since our last report on June 30. Based on these vehicle unit sales for the year-to-date period, our mix now includes California at 14.5%, which has moved from fourth to first as a result of our recent acquisitions in San Diego, Sacramento and Beverly Hills. Following California is New England at 13%, Oklahoma 12.5%, Houston 11.8%, and Central Texas at 8% -- for a total of 60% among these top five geographic areas. Nine other areas make up the remaining balance of 40%. And for break down of these, you can see the schedule of the additional information attached to the news release.

Our brand mix, again based on new vehicle unit sales for the year-to-date period, continues to be dominated by Toyota / Scion / Lexus at 27.5% and Ford at 21.1%. The total exposure to these top two brands is 48.6%. Our next four largest brand exposures include Daimler-Chrysler, GM, Nissan / Infiniti and Honda /Acura, which together comprise 45.5%. Also as Ben mentioned, we experienced solid performance from our group of luxury brands. For the year-to-date period, these brands represented approximately 12.7% of our business based on new vehicle unit sales, up slightly from 11.6% in the same period last year. However, as a result of our recently completed acquisitions of BMW, Volvo, Mercedes-Benz and Maybach franchises, our mix of luxury brands have increased about 16% on a pro forma basis.

For the nine months ended September 30, domestic brands represented 43.2% of our new vehicle unit sales, while imports comprised 56.8%. Again as a result of these recent acquisitions, this has also increased to around 59% on a pro forma basis. Finally, trucks and crossover vehicles continued to be top sellers for Group 1 and the industry. Specifically, trucks and crossover vehicles represented 57.5% of our new vehicle sales for the year-to-date period, while cars represented 42.5%. For the quarter, we realized same store unit growth in trucks of about 2.7%, while we had a slightly less than 1% decline in cars for same store -- on a same store basis.

Now, turning to the operating results for the three months ended September 30. During the quarter, we retailed over 51,000 vehicles, up about 15%, and serviced about 4,000 vehicles, up about 26%. As a result, revenues for the quarter were 1.5 billion, an increase of 23.6% from the prior year. Unfortunately, these increased volumes in revenues did not translate into increased profitability, as lower growth margins and higher costs served to produce bottomline results that again were less than expected.

Our total gross profit for the quarter was 230 million, up 18.2% over the prior-year period, due primarily to acquisitions. Same store gross profit was down about 8 million, or 4.2%. Gross profit as a percent of revenues decreased by 70 basis points from 15.7% to 15.0%. This decline in total gross margin percentage represents a cumulative effect of margin declines across our operations. Specifically, gross margin for new retail vehicle sales declined by 40 basis points from 7.3% to 6.9%. This decline was due in part to 4.3% increase in the average selling price of vehicles to about $28,300 and, more importantly, to an increase in competition for sales. This competition was fueled at least in part by the continued influence of manufacturer incentive.

Our new vehicle units -- our new vehicle inventory at September 30 was a 64-day supply. This compares to 62-day supply at September 30 last year and 78-day supply at June 30 of this year. Although the current level is slightly above our target, we're nevertheless comfortable with our position. Used vehicle retail gross margins were up about 50 basis points to 114%; however, total used vehicles gross margins were down 20 basis points to 8.2%. This primarily reflects the impact of a significant increase and lower margin used vehicle wholesale sales, which increased about 15.4% on a unit basis and 47% on a revenue basis. Our used vehicle inventory at September 30 was 30-day supply, which was right at our target. Parts and Service gross margin was down from 55.5% to 54.6%, while a 26.7% increase in revenue. On a same store basis, Parts and Service revenues were actually up slightly, and we remain pleased with the position and performance of this business.

Finally, F&I margins was down about 5% to $948 per retail unit, as we experienced lower finance and service contracts penetration rates on our used vehicle sales. Our newly acquired franchises have also put downward pressure on our F&I margins, as most of these, especially the luxury franchises, particularly have F&I margins that are lower than our typical dealers.

Income from operations was $1.4 million. Excluding the $41-million impairment charge, income from operations for the quarter was $42.7 million, or 2.8% of revenues; and that was down from 42.9 -- down slightly from 42.9 million, or 3.5% of revenues, for the same period last year. This decline largely reflects the fact that SG&A grew at a faster rate than gross profits. As a result of our -- as a result, our SG&A to gross profit ratio increased to 79% -- 79.4% for the quarter versus 76.1% in the prior-year period, a decrease slightly from 80.5% in the second quarter. On an absolute basis, SG&A increased $34.7 million, or 23.4%. So, say, if all this increase is attributable to acquisitions, same store SG&A was actually down $4.9 million to -- or about 3.4% with, firstly, all that decline coming from the more variable areas of personnel and advertising. Finally, corporate SG&A was slightly higher due to higher audit and professional fees associated with our assessment and testing of our internal controls environment.

Moving to interest expense. Floorplan interest expenses increased by $1.7 million for the quarter to 6.6 million. This increase was largely attributable to higher average floorplan debt balances, resulting from acquisitions, and the general re-leveraging of the balance sheet that has occurred since the company's August 2003 issuance of $150 million of senior subordinated note. Also, manufacturer floorplan interest assistance for the quarter, which was reported as a reduction of vehicle cost to sale, then realized as the vehicle for sale totaled 9.5 million. This level of floorplan assistance covered the company's total floorplan interest expense by a factor of about 1.4 times.

Other interest expense increased by $0.5 million, due, in part, to an increase in the average outstanding balance of our non-floorplan debt. Specifically, since June 30, the borrowings under our acquisition line of credit have increased from 22 million to 116 million. Conversely, our average senior subordinated notes outstanding have declined from last year due to the March 2004 redemption of one of those series of notes. Our year-to-date effective tax rate has increased from 37.5% to about 48.4% due to the fact that a portion of the goodwill impairment charge is non-deductible for tax purposes. In summary, net loss for the quarter, including the impairment charge, was $9.6 million, or 42 cents per diluted share.

Now, turning to liquidity and capital structure for a minute. From a liquidity standpoint, the company maintained 1.2 billion in committed credit facilities. As of September 30, we had about 380 million of total availability under these facilities. This availability can generally be used as needed to fund the company's floorplan, working capital, acquisition and general corporate needs. As of September 30, the company had $164 million of working capital. This is significantly lower than our working capital level, at the beginning of the year, and reflects the fact that we have re-leveraged our inventory to more normal levels.

In so doing, we've used substantially all our excess working capital to redeem the senior notes issuance that was redeemed in March and to fund our year-to-date acquisition activities. Also as of September 30, the company's long-term debt to capitalization ratio was 33%, up from 24% at June 30. As you may recall, during the quarter, we incurred additional debt as needed to fund the recently announced acquisitions in Houston, Beverly Hills and Los Angeles. Even at this moderately higher level of leverage though, the company has significant capacity to fund the growth.

Then, finally, total capital expenditures for the quarter were 7.5 million; of which, approximately, 4.1 million was for new or expanded operations. Year-to-date, capital expenditures have totaled about $35.4 million. And as we said before, our maintenance CAPEX has historically served as a good property for depreciation. For additional detail regarding the company's operating results, financial conditions, individual product margins, same store sales, and other financial metrics, please refer to the scheduled additional information attached to the news release as well as the updated investor presentation, which has been posted on our website.

So with that, I'll turn it back over to Ben, and he'll provide you with an update on our acquisition activity and our diluted earnings per share guidance for the balance of the year.

Thank you, Robert. As announced on September 9, 2004, Group 1 acquired the Hassel Auto Group in New York and opened the Ira Nissan Woburn add-point dealership in the Boston market. Year to date, Group 1 has added 23 franchises with expected annual revenues of approximately $1.2 billion. The aggregate consideration paid for these acquisitions was approximately $221.7 million in cash, net of cash receipts, the assumption of approximately $109.7 million in inventory financing, and 394,313 shares of Group 1 common stock. The cash portion of these transactions, as Robert mentioned, was funded with a combination of cash on hand and borrowings under the Company's revolving credit facility. We have surpassed our full year acquisition target of $1 billion of expected aggregate annual revenues, shifting our brand mix by our client, primarily, import and luxury franchise. The brand mix of these acquired franchises is 24% domestic and 76% import, including 39% luxury. We do not anticipate closing any additional platform acquisitions for the remainder for the year.

Now, for management outlook, we are reaffirming our revised full year 2004 earnings guidance announced on October 21, 2004 of $2.70 to $2.80 per diluted share. This guidance includes a 9 cents per diluted share and weather-related losses. It excludes the 17 cents per share -- per diluted share charge from the March 2004 notes redemption to $26 per diluted share charge from Atlanta impairment and any future acquisitions. As we navigate through this challenging automotive retailing market, our priorities for the reminder of the year include integrating the dealerships we've acquired, remedying the situation in Atlanta and improving our margins.

And now, turning to Group 1's top selling models for both the quarter and year-to-date. Number one, again - the Ford F-series Pickup Truck; number two - the Toyota Camry; number three - the Dodge Ram Pickup; number four - the Toyota Corolla; and number five - the Honda Accord. Group 1, today, owns 95 automotive dealerships comprise of 141 franchises, 33 brands and 32 collision service centers located in 11 states with 15 platforms. We'll be -- we'll now be happy to entertain your questions. Russell? Russell, we're ready for questions now.

Thank you. The question and answer session will be conducted electronically. If you wish to ask a question, please press "star", followed by the digit "one" on your touchtone telephone. We will proceed in the order that you signal us, and take as many questions as time permit. Once again, if you do have a question or any comment, please press "star" "one". And our first question comes from Rick Nelson with Stephens.

Thank you, and good morning.

Good morning Rick.

Ben, how long do you think can that gross margins can go where you actually start losing money selling new cars, if you load in all the SG&A, and is that a strategy Group 1 or your competitor and dealers have only to employ to grow a higher margin piece of the business?

Well, that wouldn't be a strategy that Group 1 would imply, Rick. Certainly we meet competitive pressure in different markets on different brand, actually, with different models within those brands. And that's one of things we're seeing that as of an extremely competitive market, lot of inventory in the markets, so a lot of dealers willing to sacrifice gross profit in order to move that inventory. But, it wouldn't be -- so you need those competitive players, ensure that you get the units in operation that you hope to retain the service. But the strategy is to make a decent return on selling a new car as well as obtaining the trade end, making a little better return on the used vehicle sale, capturing that service and parts business in the collision service centers, and, basically, having those customers rely. You want to be able to make some in every one of the areas. So that, certainly, wouldn't be a strategy. We would pursue, although, as I mentioned, in a competitive environment, with a lot of inventory. It does put pressure on those margins.

How do you see that kind of margin pressure get alleviated?

Well, supply and demand, I guess, would be the simple answer. It takes care of the inventory bubble, I guess?

Hello?

I'm sorry, everyone. One moment please. Everyone, please stand by.

Pardon me. I'm sure, everyone, our speaker has disconnected. Please standby, while we get him back on line.

Gentlemen, you're back in conference.

OK. Thank you. We're back, ladies and gentlemen. Sorry, we had a transformer blow, here in Houston. I hope you can hear me. And the folks from ...

Rick, are you -- can you hear us still?

Can you hear me?

Yes. Good, Rick. Thanks. Sorry, we -- as I'd hope, you heard, we blew a transformer here or somebody did. So we lost our power. So we're back on auxiliary with a substitute phone. I think your question was, "How do we get that back, kind of, in line?" And it's -- as I was starting to say -- just a supply and demand issue. It's either the manufacturers -- you know, particularly, the domestic car production and let its economy continues to recover, let supply rise up to that demand and that capacity they have -- or what they've been doing is using incentives to drive that in order to try to hold market share. I think most of us see that incentive gains continuing as the -- primarily, the domestics fight for market share among themselves and with the imports. So, you know, I think we all can see -- we'll continue to see margin pressures on some brands. We certainly don't see any change in that through the end of -- through the rest of this year. If you'll recall, on the second-quarter conference call, I believe, I actually said this that, you know, we anticipated a little improvement in the second half of the year -- others have said that too; I'm actually not the only one -- and that really didn't happen. We were thinking we'd see on our core stores slightly improved same store performance, kind of a little bit of a return to normalcy in the marketplace. That has not happened at all and now I don't see that happening at all through the rest of this year.

When do you see that supply-demand balance, getting corrected?

Yes, I was wrong, I thought it was going to start getting corrected in the second half of the year, which obviously has not happened. You know I think it's going to happen when the manufacturers decided they are going quit using their balance sheet, drive the whole market share. And kind of try to bring production more in line with true demand or conversely demand actually catches up with that supply, the really other way.

What is your mix of '04, '05 vehicles look like today compared to a year ago?

Today, Rick, we're about 54% of our new vehicle inventory or '05 models, 46% '04 that's about, you know, where we want to be, that's good. Last year at this time, the new models, we were about 57% versus 43% for what would have then be the '03 model. By just remember last year was also a big change over year for the new F150, so there was kind of some unusual things going in marketplace with a very large volume vehicle that's an important vehicle to Group 1. So, we're in, I think, solid shape on new vehicle inventory, and as Robert said, we're also in good shape on days.

Got it. And how about strategies to turnaround Atlanta and what line don't you discontinue the operation like so many of your peers seem to be doing?

I guess, when you say discontinue, are you speaking just of accounting for it that way?

Yes. Put it in discontinued ops.

You know I have had that discussion. You know my view is that's kind of part what we do. We're in the acquisition business. We've go 95 dealership, they are not all running the way they should be. Unfortunately, that's just the nature of the game. So it's our job to fix the one that aren't running right. And if we have some, what we think are not strategic fixed then it's our job to dispose those in efficient manner, which we do from time to time. We will some times buy a platform and there will be a dealership and that doesn't really fit. And so we will strategically dispose of that. So Atlanta for us, let me just speak to Atlanta specifically, one of the things certainly taken as impairment, any time you get ready to dispose of dealership, you always look at what you have, what is your cost is in that dealership and that was always a hindrance in Atlanta, if we ever wanted to do anything over there. And remember that's not a platform that we bought as a platform that was built as one-off acquisition with single leaderships. And so, it's not an entity that existed in that market for a long time. And so, what the -- by doing the impairment charge, it's kind of -- there is a way with those shackles, if you will, in addition to worrying about what might happen if you do strategically sell one of the dealerships in that market, because we perceptively written off all the goodwill. So our strategy over there is to get good people in place in the store, part of it is traffic and volume issue, we're building that. We think we have some outstanding dealerships in some great locations over there, but we struggle with brand issues in that market, we struggle with management issues in that market. As Robert mentioned, we've had changes in management. We are in the process of brining in a new platform president in Atlanta. We have interviewed some really outstanding candidates. We feel very positive about that. In the end, does that mean, everyone of those dealerships over there fit and stay with us for a long-term? Not necessarily. Everything is open for examination right now.

Got it. Thank you.

Thanks Rick.

We'll move next to Matthew Fassler with Goldman Sachs.

Thanks a lot. Good morning.

Good morning, Matt.

A bunch of questions to ask you, first of all, this is probably an intuitive answer related to the industry, but can you talk about the increase in wholesale activity, you know, how that doesn't -- what do you see happened in more broadband space?

Too many. You mean our wholesale activity?

Exactly.

Yes. Certainly it's part of that for us. You've seen that trend with us this year. It's our reaction to evolve for used car market, and the answer is keep the inventories lean. So we're running at about 30 days and have all year in used car inventory. And what that has caused is, you see from my numbers really, our number of wholesale units have increased, but interestingly the dollar amount of the wholesale used has increased even more meaning more wholesaling lighter model vehicle, more experience with used vehicles.

I'm sorry, Ben, go ahead.

And so that is -- what you have said is that in order to eliminate the volatility in the used car inventory, we may have cut that too deep and we are looking at. In other words, 30 days, you know, certainly eliminates any valuation risk or most of it but it also cuts into quick to the retail sales. In other words, in order to keep the turn really fast you maybe wholesaling some vehicles that you could normally retail. So, we're looking at that, but we are also rather apprehensive about the risk involved in used vehicles today.

And how do you see the value proposition evolving between the late model used vehicles and new vehicles? It sounds like the reason you're blowing out some of those cars is because perhaps new centers are creating a tough environment for the late model used?

Yes, that's exactly right. It's kind of like Rick's question earlier, I thought in the second half of this year, it appeared that we might be moving towards a more normal value equation between particularly late model used and new, which we haven't seen, you know, really in two or three years. And we do not see that in the second half at all, so I don't so far. So I don't see it happening for the rest of year. I think we'll continue to see aggressive incentives. I think that will continue to make used vehicle market volatile and make it very difficult to hold on to that inventory very long.

So are you saying that your buyers are not relating to wholesale market just at this point to nearly to serve late model. Cars and competitive prices still make your numbers?

Well, what we're seeing is -- seen a couple of things, on the supplier side, and the auctions side, as I know you follow, because of fewer cars coming of lease on the supplier side of that late model vehicle is kind of driven up cost on the auctions before we get some of our vehicles, not the majority of our used vehicles.

Sure.

But that -- but I think more importantly what's happened when an incentive is put on a, let's just say a light, a new truck or SUV in all those light model vehicles immediately, depreciated value in sort of percentage come in. Just for example, if you brought in a light model SUV for a trade-in, and they just put a big incentive on it, your car is worth a lot less than you thought it was. That makes that trade difficult.

And are you seeing anything on the production side coming out -- coming from the OEMs that -- do you believe that there is light at the end of the tunnel, or do you think the responses are still slow in coming?

You know, I do -- I'm -- I think products, everything in this business, and we all have our favorites. I'm very partial and optimistic about Ford's new 500 and the Mustang. We desperately need cars in our Ford liner, and I am optimistic about those two models being latest cars. Honda, for example, new Odyssey has been really good. And then, on the luxury end, we got a hybrid SUV coming from Lexus that everybody's very excited about, and then Mercedes has a fabulous new line-up coming late this year and only into 2007. Then we positioned ourselves really well. I think for those kinds of products that were part of our strategy on the acquisitions issue. Zack, I think a great new product coming and certainly that could be your answer in '05, probably, not before '05, but should be an answer for maybe getting the supply-demand back in line a bit and maybe getting the new, the used value equation back in order.

That sounds like you are more excited by the quality of the new product. Do you think it will be similar to -- than you are by production cuts in terms of just taking some plan of assistance?

That would be a good assessment on your part.

OK. Just a couple of other -- another couple of questions on a couple of other topics. On the floorplan side, you are still getting coverage. It sounds like it's more than a 100%, that's despite the fact that that industry inventories are still that -- are still a bit elevated . What's the outlook on the floorplan side, as Vyborg (ph) has obviously increased the debt end, and do you see those coverage ratios remaining as high as that then?

Yes. Matt, this is Robert. I don't see a change there. I mean, the formula is all still in place, and we do have the ability on some of our -- depending on manufacturer, of course, to go to float or fix in some cases. And -- so, we are managing that. But the numbers are such that we're trying to position ourselves accordingly when we can or usually in annual elections with respect to those, primarily that the metrics that offer a fixed or floating type option, and it's not perfectly floating or either. But, we're positioning ourselves appropriately such that I don't see a big risk of -- about -- of the fact assistance going to decline in any material way.

So, it sounds like to the extent that the forefront numbers topped to be year-to-year, it has more to do with the way you are leveraging the balance sheet than with -- a meaningful rate increase of any sort.

Yes. Because the bottom line is that you really boil it down. I mean the floorplan assistance is volume based. In term of your cars, you going to get covered.

I think the other thing Matt to keep in mind is that forward -- we are right in the middle of this '04, '05 model change over. We're -- I gave our mix on that 54% 05 is right now. One of the reasons for this manufacture assistance is to move out those '04s and get everybody to buy the'05 models, and they don't really aggressive get it where to go in, or we don't get aggressive orders in '05. So, we have cleared out the '04s, and so with assistance like that is one of the ways they drive their sales and their market share.

Two other very quick ones. Park and Service seems to itself, came under a little bit of pressure versus where they had been. I realize that that's not unique to you, if you think about the whole kind of a maintenance market place. Are you seeing that business turn at all?

The revenues were actually up. Yes, it had. What else -- well, they were basically flat at a 0.2% increase I believe...

OK.

...and with our other business being a down on the revenue basis. The margin was down slightly. But, you know -- as you know, there is nothing that I can point to. They have those materials. Our margin at 55% area has, historically, been fairly strong, and so, nothing -- no way they are our concern.

I guess, common point that you observed of 0.2% seems that our revenues, you've been tracking positive for, basically, the prior six quarters. Did you think that there -- do you think it's a market-wide lot dynamic that you're seeing a little bit of pressure on the parts and service business? Or do you view this as kind of an aberration, we should return to growth in the upcoming quarters?

Yes. I don't know that. Well, I guess that you got to address Nick on acquisitions and all that...

Sure.

So, I don't know that. I'm really kind of -- all kind of neutral matters go. I didn't really get -- nothing popped out of note.

OK. Thanks so much.

Thanks Matt.

We move next to Matt Nemer with Thomas Weisel.

Good morning, gentlemen.

Good morning, Matt.

A couple of questions. First is just to clarify on Atlanta. Did you say that there was a possibility you might reverse part of that charge after an evaluation of the goodwill there in the fourth quarter?

Yes, Matt. This is Robert. The impairment is an estimate. The management did an assessment and just like any -- just like other types of accounting accrual, just want to give an estimate based on our determination of fair market value versus book value. And due to the nature of the assessment, we think the prudent thing is to go engage a third party to come behind us and do a similar valuation. And we will then take that into consideration and through-up our estimate, if we will. So, it's a mechanical item, and we just to be prudent about that.

Ok. Got it.

So, yes, I did say there would be -- could be an adjustment.

Could be. Right.

Next question is on SG&A. Historically, back in 2000, I think, you reported under 75%, and then in '01, kind of in that range. It ticked up pretty significantly in '02 -- I guess, I'm just trying to figure out, is there a change in mix in your acquisitions that's driving the SG&A, and what are your targets for SG&A, if we look out a few years? Can you take out 30 to 50 basis points a year?

Yes. Well, I mean, you are right. The historical number has been in the 76 area. I think that's maybe been up. I don't know how much part of the target that's been, but interestingly, I did -- if you say internally there's been, I think, in our current numbers, that have been around closer to 80 than 76 lately. There is some, not noise, but certainly Atlanta is having an impact, and we've also got a couple of our new, and probably integration of acquisitions has had an impact, and we've also had some add-points that have had an impact. And in all those cases you're -- an add-point is not a free deal for some one like us. It's -- some of the cost of an add-point is the money you lose to get that thing going, and if you -- interestingly, if you take out Atlanta, and the few add-points that we've started up here in the last six months, I think for the quarter our SG&A ratio would be right on top of that 76 area. So, that has a data point meaning that you know our, we think our, we're not uncomfortable with our core businesses in that sense.

And any sense on what you might be able take out going forward, as you've finished integrating these acquisitions and assuming Atlanta improves?

Yes, well Matt, what you target probably with, specifically the two add-points that Rob has talked about, you just let those ramp up. I mean, basically you have, if you will, sweat equity is your goodwill. As you build those businesses, they have no parts and service to start with, remember. These are brand new green fields, new locations, great brands, they're both Nissan stores by the way. And, so you just, those just have to ramp up in a normal process several, several months. From the acquisition front, kind of the same thing on some of those cost areas. We have seen that, and that's just an integration process, and as we've said we're going to be focused on integration as one of our goals to do, rest of this year is to get all those new dealerships, up to speed into our culture, get your SG&A more in line where it should be in this specific instance. So, I think what it does for us as we examine that number, you can't just look at the overall numbers what it tells us, certainly Atlanta is probably our primary focus. Joe Herman is officing over there, Senior VP of Operations right now. And he is in the saddle, if you will, the Acting Platform President. And so, we're very focused on getting Atlanta where it needs to be, not now that we've taken this next step with this impairment charge. So, it makes us think that our core businesses, as we will call them are kind of OK, on the SG&A to gross profits measurements. We just need to keep an eye on these other areas that we've identified, bring them in line and that think will bring down that percentage to our more historical level.

I wonder if part of what's going on in that number is a change in basically, the higher rent in some of these, some of your more recent acquisitions in New York and Beverly Hills. Is that -- is it possible that rent is playing a factor there?

You know rent is factor in that certainly. I don't think that's what is driving it in this instance.

OK. And then one last question, I agree with you on the fact that all the new products coming out might stimulate some demand. I wonder if, I read recently that Mercedes was offering $400 per vehicle incentive for certain dealerships that maintain standards as they come up to their big product rollout. I wonder as virtually every OEM rolls out a substantially new product line over the next couple of years, is it possible that we could see a change in the balances of power where they need their dealer networks even more than they do now, because they've got a lot of investment on the line. And how could that play out in terms of additional space for dealers or something on those lines?

Well, I think that's a good point, and I don't think that's new really, Matt. I mean you might see a change from OEM to OEM from time to time as they try to reach certain goals. Mercedes is -- they're trying to clear out the older inventory, get ready for all these great new products that's coming. So, I think that anytime the OEMs need to move the product, they need the dealers. They need the dealers to service those products to get those ready, delivering to their customers, or take care of the warranty working done on them. And so it's very much a partnership and it may have in flow what the priorities are among various manufacturers, but in hand that partnership pretty nose-to-nose. OEM is very important going both ways, your point is well taken.

Thanks very much.

Thanks Matt.

We will move next to John Murphy with Merrill Lynch.

Good morning.

Morning, John.

How are you?

Good.

Actually I had a bunch of my questions here, but just real quick on Atlanta, if you could just remind us what the brand mix is down there in that platform?

Yes. The brand mix in Atlanta is about 80% Ford / Lincoln Mercury, and about 20% Toyota / Scion.

OK. The second question is on gross margin, sort of across the board, you don't seem to have exact numbers, but among the different brands, are you seeing pressure across the board or is it more concentrated at the Detroit's way?

You know, that's a great question, because we had this discussion in our disclosure and in the press release, and if you all noticed, in the press release I've graded the way we said it. We just said we have margins, margin pressure, I don't think we said across the board. But we didn't identify any particular brand, and the reason for that is we really studied that and it was -- it's pretty much across the board. You got even some of your leading import badge manufactures who -- we're having margin pressure with those right now as there is a lot of product in the market. And then, certainly you're having a margin pressure with the so called Big Three's that's' fight for market share. And so it's -- I have to say it's pretty well across the board.

And just one last question. On the capacity utilization in your service bays where are you right now? I would imagine like you say, you know, with this Nissan add-point, that the caveat there is obviously very low. How much was there in our existing bays and what plans do you have in the near term to add capacity on that side of the business

Yes. That's a great question. And Nissan Woodland Hills is a great example because I was just in that service department about three weeks ago, lots of great service bays, everything is brand new, not a whole lot of customers yet and not a whole lot of technicians and have reduced ever service bays not filled with the technicians. It will be eventually as the demand ramps up on that but that's just a getting units out in operation and building your customers base. So, certainly, in all of those new add-points, very large capacity. You know, we have had a fairly stately program of adding service bays in dealership where we have -- where we wanted that. Our big Toyota store, Nissan, we doubled the service bays from 50 service bays to 100. Purely it's a function of units and operations. We even have some service bays that are in place but not have - may not have lived, since all the dry day we call it. And so certainly that is a capacity that can be utilized in the future. I don't have an exact count for your math, I can get that for you, if you want to call back we can dig into that a little bit, but it's a -- if you talk about same store, we've been growing that over the last four years on a same store basis that we've added capacity and focused on that higher margin portion of our business.

You generally characterize the situation where you install capacity; there is still lot of room for growth within that installed capacity?

Yes.

OK.

There absolutely, yes.

All right. Thank you very much.

You're welcome.

We'll move next to Sherry Wu with Morgan Stanley.

Good morning. It's Jonathan Steinmetz from Morgan Stanley. Can you hear me?

Yes. Good morning, Jonathan.

Hi, Jon.

A few questions. You talked about margin pressure by brand. Can you just make a comment on margin pressure geographically, is there something that's fairly uniform or there are few metro areas other than Atlanta that will be sticking out and sort of dragging things down?

I think that going back, if we just looked at that pretty closely yesterday, we do have -- it's really interesting in this business, you always have under performers and you have star performers. And certainly our performances in Dallas and New England had been really, really outstanding, and I think its in Los Angeles, so we have two coast, by the way predominantly import. And then Dallas which I think is perhaps more for us, more dealership and brand specific, because we have new quite large Chrysler Alpha store up there. Dallas Dodge has done very well, as we've consolidated that market, so that's probably more brand specific for us. So certainly, those markets have been leading performers for us in the third quarter. Others have done -- a lot of it is driven by brands certainly. But when you look at the margin pressure, just using that measurement -- we have seen that pretty much the cost across brands and across geography with the -- I think with those acceptance for those three outstanding.

OK. On your acquisition, you noted that, you think your acquisition target don't intend to do anything in the rest of this year. Just on a rough cut basis, do you expect to slow things down at all next year or - and sort of try to integrate things here or do you expect servicing more level?

Well, I think that we've not given guidance for '05 either on earnings or on acquisitions and probably won't until end of December, where we'll have hopefully some more clarity in what's going on this market. But right now, I think its clear; our priority is integration of these great dealerships that we acquired. Our priority is getting our core businesses operating the way they need to be operating and getting Atlanta where it needs to be. And so certainly, until we do that we're going to be very focused on that. And then once we've achieved those goals, we'll reexamine what we're going to really look at from an acquisition standpoint. But right now, we're really not focused on these other areas.

OK. And finally, I may have missed this, but have you commented on how October is going?

We did -- we have not - October is -- I think, I did comment on -- we really didn't see any change in the business conditions of the auto retail sector. We didn't see in the third quarter, and certainly, not expecting to see anything in the fourth quarter. So, again in this October traffic is that, it's pretty much more of the same of what we've seen over the -- really this year, not just in the third quarter but really pretty much what we're seeing this year.

Great. Thank you very much.

You're welcome.

We'll move next to Jerry Marks with Raymond James.

Hi, Ben.

Morning, Jerry.

A lot of you guys reporting today.

Yes. This is the day.

You are going to be busy.

Yes. Few questions. Did I miss deferred revenues, how come that seem to decline so much?

Differed revenues?

Yes. If I look in your balance sheet, December 3, you are at 40.8 million, it's like, and now you are at 33.3, how come that is?

Yes. You didn't miss that.

Because I believe that deferred revenues are in conjunction with some of the F&I contract that you guys have. I'm just curious what -- how that work?

I think it's just a normal amortization of activities.

Yes. Jerry, what that is start, with you can't we're going through the balance sheet, there is an hour and half ago Jerry. But what that is the states that were - they were dealer obligor on our F&I products. Thus last change; I want to say two to three years ago. And so those are no longer dealer obligor, so that just business that running out of box if you will.

Yes, and again kind of -- just a tail of that and it's going to rollout probably in an increasing rate here on?

Exactly.

OK. And then in terms of your PPA and you seems to go up. Are you guys still mostly sell lease packing or is some of that company own that?

Yes. It's acquisition related not a change in our strategy on real estate.

OK. So that was just -- that is all FF and you like the furniture, fixtures and equipment.

Yes. First we are constructing. You know, we were constructing have a pretty decent construction program going on this year too, but these add points and so forth.

OK. And then, I guess, when you were talking with, Rick you've mentioned Joe been in the kind of a - bandaid solution to kind of go and might put out that fire in Atlanta. Is he still able to focus on developing some of the benchmarking systems and start to over, get in a handle on what's going on that all of your platform.

Yes. That's a great question. Wish Joe was here to answer that, but I would -- let me first characterize, Joe being in Atlanta, is not a bandaid.

OK.

That's in our number one guy over there to get that thing, get the right people in place to assess that market for us. What our strategic alternatives are in that market? What the potential there is? And he is in the midst of the interviewing process over there, and has a -- actually has an operating committee of some of the other platform President to our also assisting in Atlanta and in fact I believe next week Joe is hosting 20 group meeting of all the general managers of every dealership all 95 dealerships in Group 1 here in Houston. I had a long conversation with Joe yesterday, he is absolutely -- certainly primarily Joe right now is in Atlanta, but it's certainly on top of the other platform and is really is that the why we typically do things, marshalling all of our assets with other platform Presidents and platform CFOs to assist him and the task at hand in Atlanta.

OK. So -- and maybe a bandaid wasn't the right word, but temporary is it better...?

Right.

OK. Last question and you guys were discussing discontinued operations, I guess, that's in the group, that everybody's in the business are buying and selling dealerships but I also remember, that you guys had an issue and some of your peers said that this is well -- because of your tax accountant, if you start to classifying things, as discontinued operations, wouldn't you have to go back into re-audit and spend a lot of money on that, is that ruled off now?

Not an issue with us. We've never accounted for our miss-discontinued so we've never had a question.

But when does that anniversary, is that this year or next year in terms of when that...

I wouldn't know Jerry, because we don't do that.

OK. Thanks, Ben.

OK. Thanks, Jerry.

And we'll take our final question from Karen Aldrich with Goldman Sachs.

Hi. Looking at your -- the evaluation of the assets that you've completed -- the acquisitions that you've completed year-to-date, it does looks like that the multiples are a little higher than what you did historically. Is that a case and can you give us a sense of the EBITDA multiples that you were paying?

Sure. I may not give you a sense of the exact multiple, we try to -- but I will give you direction because of the luxury mix and certainly the import in luxury mix of those particular acquisitions. We probably paid at a little maybe, what I would say, a click higher than we normally have historically just our regular acquisition mix, if you will. And that is the case, in luxury brands, Mercedes, BMW, Volvo that's absolutely, what you're going to see especially flagship stores a lot of Mercedes-Benz in Beverly Hills, Advantage BMW here in Houston. David Michael and Freehold Hassle in Long Island, all of those are really premier high line stores and then Chuck Peterson platform in California, is the top 30 Toyota store in the nation. So, when you're positioning yourself with those kind of dealerships and some of those are located really once in a lifetime type opportunities. We do reach for those, we do analyze though and expect to receive achieve our normal returns, it might not be in the first year, when I see, for example, a very large fixed operations or service opportunities, some of those are particular dealerships or new facility opportunities, we are weak and separate a couple of brands that are combined such as David Michael, where there are actually three brands combined in that one dealership and we're going to -- we're separating those out. We see some really large upset, so we may pay up a bit to get our position in that market. But we expect to achieve our normal returns within a year or two years sometime from the market there.

Great. Thank you very much.

Thank you.

And that does conclude our question-and-answer session. I will turn the conference back over to our speakers for any additional or closing remarks.

OK. Great. Thank you very much. We're appreciated by this time and participation. And in closing, to accomplish our vision, we need to continue the commitment of our dedicated 8,800 co-workers and the support of our 33 manufacturer partners. We thank them for their contributions and look forward to their 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 morning.

That does conclude today's teleconference. Thank you all for your participation. You may now disconnect.

CONFERENCE CALL ENDED