Group 1 Automotive Inc (GPI) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Group 1 Automotive Third Quarter Earnings Conference Call. [OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded on Tuesday, November 1, 2005.

I would now like to turn the conference over to Mr. Russell Johnson of Fleishman-Hillard. Please go ahead, sir.

Thank you, Kristen. Good morning, everyone, and welcome to the Group 1 Automotive 2005 Third Quarter Conference Call.

Before we begin, I would like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures.

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 both 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 Securities and Exchange Commission over the last 12 months. Copies of these filings are available from both the SEC and the Company.

In addition, certain non-GAAP financial measures, as defined under SEC rules, may be discussed on this call. As required by applicable SEC rules, the Company has provided reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures in this morning’s press release.

Joining us on the call today are Earl Hesterberg, President and Chief Executive Officer of Group 1 Automotive; Robert Ray, Senior Vice President, Chief Financial Officer and Treasurer; John Turner, Executive Vice President; and Joe Herman, Senior Vice President, Operations.

I will now turn the call over to Mr. Earl Hesterberg. Please go ahead, sir.

Thank you, Russell.

Good morning, everyone, and welcome to our third quarter conference call. In a minute, I'll turn the call over to Robert to present our financial results. After Robert is finished, I'll give an indication of some key elements of our strategic direction and then open the call up for questions.

As most of you know, Group 1 was impacted by two major hurricanes in the third quarter. These storms significantly impacted the lives of 524 employees at our six dealerships in New Orleans, and the 205 employees working for our 11 franchises in Beaumont, Texas.

I'm pleased to report that our employees were dedicated and diligent in their efforts to assist our displaced employees and to get most of our dealerships impacted by the hurricanes up and running very quickly.

Relative to Hurricane Rita, our two Beaumont stores suffered only minor damage and were reopened shortly after the storm hit. But the surrounding areas were devastated, and we're only now returning to normal levels of customer traffic.

Additionally, our Houston dealerships lost approximately one week of business due to the evacuation of the city and minor damage to the surrounding area.

In New Orleans, where Hurricane Katrina hit, four of the six stores are again fully operational and selling at above-average rates. We have two additional stores in New Orleans that remain closed. In one of these dealerships, a Dodge store, we terminated the facility lease due to extensive damage and are exploring alternatives to return the dealership to full operation.

After a very strong July and August, stimulated by the domestic manufacturer employee pricing programs, we began to experience significant payback at our domestic stores in September. This has continued in October, and we expect this trend to continue throughout the fourth quarter.

Given these challenges, which significantly impacted our third quarter results, we achieved net income in the quarter of $21,626,000, which equates to $0.88 per share. This level is slightly above our forecasted range from two weeks ago, primarily due to a slight revision in our overall tax rate, which Robert will discuss later. This compares with the loss of $9,615,000, or $0.42 per share, in the third quarter of 2004. There are a variety of unique factors which impacted our performance in the third quarter last year, as well as this year, and we will describe those as we move through our prepared remarks.

Although our revenues of $1,570,169,000 for the quarter only increased 2.5% versus last year, you will note that our gross profit increased by 5.8% and SG&A only increased 1.9%. We'll provide more detail on third quarter financial performance in a few minutes.

During the quarter, we added Chrysler and Jeep franchises to our Beaumont, Texas location, which are expected to add $9.4 million in annual revenue, and we disposed of a Lincoln-Mercury dealership in Edmond, Oklahoma that was generating $21.8 million in revenue on an annual basis.

Year to date, Group 1 has acquired seven franchises with estimated revenues of approximately $118 million, and it is not likely that we will close any additional acquisitions for the remainder of this calendar year.

With these factors in mind, we reduced our full-year EPS guidance on October 14 to a range of $2.75 to $2.80. This guidance is still valid and excludes the impact of future acquisitions or dispositions and any cumulative effect of a change in accounting principle.

Turning to geographic and brand mix --

Based on new vehicle unit sales of 96,900 for the first nine months of the year, our top four geographic markets were Massachusetts, Houston, Oklahoma, and Los Angeles, which together accounted for more than half of our total new vehicle unit sales.

Notable year-over-year brand sales increases include Toyota, up 14.9%; Nissan, up 17.4%; Mercedes, up 84.9%; and BMW, with an increase of 187.5%.

Our brand mix, again based on year-to-date new vehicle unit sales, continues to be led by Toyota, Scion, and Lexus at 28.6%, followed by Ford at 18.8%, for a total exposure to these top two brands of 47.4%.

Our next four largest brand exposures in order were Daimler-Chrysler, Nissan/Infiniti, General Motors, and Honda/Acura, which together accounted for another 45.7% of our new vehicle unit sales.

Lastly, domestic brands represented about 39% of our year-to-date new vehicle unit sales, while import and luxury brands comprised about 46% and 15%, respectively. Luxury brands as a percentage of our total unit sales have increased by 270 basis points over the same period last year.

Now, a quick word about inventories.

Our total new vehicle inventory at September 30 was 57 days' supply. This represents a five-day reduction from second quarter levels, a 13-day reduction from year-end, and a seven-day reduction from the third quarter of last year. Imports were at 41 days’ supply, luxury brands at 52 days, and domestics at 79 days.

Our supply of used vehicles at September 30 was 28 days, which is still a bit tighter than we'd like to see it.

In dollar terms, these reductions represent a decline in our total inventory balances of almost $200 million since year-end.

We continue to make progress integrating our acquisitions from recent years, continue to show significant margin growth, and we made some progress on SG&A.

I'll now ask Robert Ray to go over the details of our financial results. Robert?

Thank you, Earl, and good morning, everyone.

Let me begin by providing a bit more color on the third quarter results we announced this morning.

As reported in our news release, third quarter net income was $21.6 million, or $0.88 per diluted share. Hurricanes Katrina and Rita had a significant impact on our operations and financial results for the quarter. We estimate that the total financial impact of the storms was $0.22 per share. This amount includes insurance deductibles, asset impairments, and other actual operating losses and costs incurred at our New Orleans and Beaumont dealerships.

It also includes an estimate of additional lost profits resulting from the disruption caused by the storms at our New Orleans, Beaumont, and Houston dealerships. Recall that although Houston was not in the direct path of Hurricane Rita, many of the residents evacuated the city, resulting in little or no commercial activity for several days prior to and after the storm.

In the schedules attached to the news release, the investor presentation posted on our website, and in our soon-to-be-filed 10-Q, we have provided some additional information that identifies and quantifies the impact of the storm on our operations.

One additional comment here - As you may recall, on October 14, we announced preliminary third quarter results of $0.83 to $0.86 per share. Our final reported results came in a couple cents higher than the top end of this range. The reason for this was twofold -- one, our final effective tax rate for the quarter was lower than we first anticipated 2.5 weeks ago; and, two, we further refined our estimates of the various hurricane-related losses. It should be noted that these estimates are based on the best-available information at a given time. As such, and given the extremely complicated nature of these particular insurance claims, we will likely be making refinements to our loss estimates for months to come.

Now, let me provide a little more detailed review of our operating and financial results for the third quarter. All of my comments will be on a same-store basis, and it will exclude the results of our hurricane-impacted New Orleans platform unless otherwise noted.

Starting with revenues --

New vehicle sales revenues were up 0.5% as unit sales increased 0.7% and average sales prices per unit were down 0.1% versus the prior year.

In the third quarter, and most notably in July and August, new vehicle unit sales were positively impacted by the most recent round of manufacture incentives. However, as Earl mentioned, this positive trend reversed itself in September, diluting some of our previous volume gains.

Used vehicle retail sales revenues were up 4.6%, reflecting a 0.6% increase in unit sales and a full percent increase in average sales prices per unit.

Revenues in our other businesses were also up, with parts and service up 6.6% and F&I up 2%.

Total same-store revenues, again, excluding New Orleans, were up 1.6% quarter over quarter.

Gross profit for the quarter increased 5% from the prior year to $229.7 million.

Gross margin increased by 50 basis points from 15.1% to 15.6%.

Gross profit from new vehicle retail sales was up 2.5% versus the prior year. This was due to the previously mentioned 0.7% increase in unit sales, coupled with a 1.9% increase in gross profit per retail unit sold to $2,034, resulting in a 20-basis-point improvement in gross margin for retail units sold to 7.2%.

Gross profit from used vehicle retail sales increased 8.8% on a 0.6% increase in retail unit sales and an 8.2% increase in gross profit per retail units sold to $2,010.

We believe these increases reflect, in part, the overall trend in the markets in which we operate. They also reflect the fact that we did a better job managing our used vehicle inventories and reducing our inventory valuation risk in the process.

This, coupled with a 27.6% reduction in our wholesale losses, resulted in an 11.9% increase in total used vehicle gross profit. Accordingly, total used vehicle gross margins were up 80 basis points to 9%. We expect that the profitability of this business will continue to be influenced by new vehicle incentives, by number and quality of trade-ins, leasing activity, and the availability of consumer credit.

Parts and service gross profit was up 6.3% over the prior year even though gross margin was down 10 basis points to 54.3%. This decline in gross margin reflects a small change in our mix among -- a mix of business among parts, service, and collision services. We remain pleased with the position and performance of our parts and service business.

Finance and insurance gross profit increased 2% versus the prior year, while gross profit per retail unit was up 1.3%, from $963 to $951 in the prior year. These increases occurred despite our 2004 acquisitions, most of which are now included in our same-store results and most of which, due to their import and luxury concentration, have lower F&I margins and penetrations than our other stores.

Fee income increased in all product lines except retail finance, which was down 4.4% from last year, due primarily to a changing incentive environment, which, among other things, caused customers to be more selective in their financing decisions.

On the cost side, same-store SG&A was 11.6% of revenues and 74.6% of gross profit, a reduction of 490 basis points from the prior year. This significant decline was due to the previously mentioned 5% increase in our total gross profit, as well as the fact that our total SG&A expenses declined by 1.3% versus the prior year. Contributing to this decline was an 18.5% reduction in advertising expenses, reflecting both tighter controls and better purchasing efficiencies. Also contributing to the reduction in SG&A were slightly lower personnel costs, reflecting the adjustment of certain field-level compensation arrangements.

Also, during the third quarter, the Company recorded approximately $3.7 million in impairments related to the pending disposition of certain of the Company's dealership assets in California. Including these impairments, total operating margin for the quarter was 3.4%.

After combining these results with those of our acquired stores and our New Orleans platform, and including another $1.3 million in asset impairments related to a hurricane-damaged dealership in that platform, our consolidated operating margin for the quarter was 3%.

The remainder of my comments will now be on a consolidated basis unless otherwise noted, starting with floor plan interest.

Total floor plan interest expense increased by $2.5 million for the quarter to $9.3 million. This large increase, about 36%, is attributable to higher average floor plan interest rates, as offset by lower average floor plan balances. Specifically, floor plan interest rates in the third quarter were about 195 basis points higher than in the prior year, and average floor plan debt balances were about $57 million lower. These lower floor plan balances were due to reductions in same-store new vehicle inventories in 2005, offset by acquisitions made in 2004.

Manufacturer floor plan assistance, which we record as a reduction to new vehicle cost of sales at the time of sales, totaled $9.7 million, providing 105% coverage of our total floor plan interest expense for the quarter. This level of coverage was up from 96% in the second quarter but down from 139% in the third quarter of '04.

Other non-floor plan interest expense declined by about $400,000 for the quarter to $4.3 million. This 7.5% decline was primarily attributable to average debt balances under the Company's acquisition line of credit, that were $50 million lower than in the prior year.

Now, turning to liquidity and capital structure.

From a liquidity standpoint, the Company maintains $1.2 billion in committed credit facilities. As of September 30, we had about $580 million of total availability under these credit facilities. Portions of this availability can be used to fund our floor plan, working capital, acquisition, and general corporate needs.

Our availability has increased by about $200 million since June 30. This was due to a significant reduction in new vehicle inventories that occurred during the third quarter, resulting in significantly lower floor plan needs. We expect that our availability will decline over the next several months as inventory levels rise to more normal levels, although still below last year's levels.

Also as of September 30, our total long-term debt-to-capitalization ratio was about 23%, down from 26% as of June 30, as we have continued to repay acquisition-related borrowings with internal cash flow. At this fairly modest level of leverage, we have significant capacity to fund additional growth.

It should be noted that although floor plan obligations and other short-term borrowings are not considered as long-term debt for purposes of this leverage calculation, we have included $25 million of short-term borrowings under our bank revolver. These bank borrowings are currently listed or classified as short term because the underlying bank facility matures within one year, or in June of '06.

We are currently in the process of renewing all our floor plan and acquisition credit facilities, and we expect to close on these new facilities prior to year-end.

Now, a few words about cash flow and capital expenditures.

Cash from operations for the nine months ended September 30 was about $99 million, compared with about $60 million in the prior year. As previously mentioned, the portion of our cash flow has been used to fund debt repayments. In addition, we have used our cash flow to fund acquisitions and other capital expenditures.

Acquisition-related expenditures for the first nine months, ended September 30, totaled about $20 million, while non-acquisition-related capital expenditures, totaled $45 million. Of this amount, about $33 million was for the purchase of land and the construction of new or expanded operations.

After considering sale-leaseback transactions, our net capital expenditures for the year-to-date period totaled about $30 million. As Earl mentioned, we don't anticipate closing any additional acquisitions for the remainder of the year. We expect full-year CapEx to be about $55 million on a gross basis and about $35 million on a net basis after considering sale-leaseback transactions.

For additional detail regarding our financial condition, as well as our consolidated and same-store operating results, brand and geographic mix and other financial metrics, please refer to the schedules of additional information attached to the news release, as well as the investor presentation posted on our website.

Now, I'll turn it back over to Earl.

As you can see from some of our performance metrics, we're beginning to make some progress in reducing our costs, most noticeably, SG&A. This focus on our operations will continue throughout the next year.

Additionally, we will become more aggressive in the disposal of dealerships, which are either under performing or do not fit with our long-term strategy. We would expect to dispose of dealerships with annual revenues of at least $120 million over the next 14 months.

Primary emphasis for GPI as we continue to focus on improving our operations will be to expand our very profitable parts and service and used car businesses. You can see from our performance data that we enjoy highly competitive margins in both areas of the business, and we believe there is significant up-side potential for our Company.

In the used car area, you've seen us relax our inventory days supply target from 30 days to 37 days to better support increased growth. By the end of the year, we will implement state-of-the-art used car computer software in all of our largest dealerships, which will enable us to continually monitor our inventory market value, adjust our inventory mix to the fastest-moving models within the local market area, and facilitate retail selling from all of our dealership inventories within a given geographic area.

Regarding our dealership IT strategy, we have already begun to transition from three major dealership management system suppliers to two suppliers. Although there seems to be a common perception that selecting one supplier is the most cost-effective approach, I've not found this to be the case. We will eventually rationalize our business with two of the leading industry suppliers -- ADP and Reynolds & Reynolds -- and this will be segmented by the geographic clustering of our dealerships and will enable us to maintain a competitive dynamic between the two suppliers to ensure that we always maintain the best possible pricing, service, and introduction of new technologies.

Early next year, we will begin the process of implementing a standard chart of accounts throughout all of the GPI dealerships. This enables us to better compare the performances among our dealerships and dramatically increases the ease of integrating future acquisitions.

To further accelerate our focus on operational issues and implement some of the changes I have mentioned, we are going to revise our management structure to take advantage of some of the unique talent we have within our Company.

Effective January 1, 2006, we will reduce our current 13 operating platforms to five regions. Our new regional vice presidents will include David Rosenberg in the Northeast, Joe Herman in the Southeast, Frank Grese in the South Central, Greg Wessels in the West Central, and Dave Hutton in California. These five individuals together represent more than 150 years of retail automotive experience and will report directly to me. I will rely on them to drive more uniformity in our operating practices and procedures while continuing to maintain key decisionmaking and empowerment close to the market.

Most of you know that we have reduced the pace of acquisitions within GPI over the last year to concentrate more on integrating recent acquisitions. As I've previously mentioned, it appears we will only acquire approximately $118 million of revenues in 2005, which would be well below our $300 million target.

As we move into 2006, we would intend to increase our pace of acquisitions to a significantly greater degree, at least equal to the $300 million per year level in added revenues. Our intentions would be to continue to expand our presence outside of our concentration in Texas and Oklahoma. Additionally, our trend in recent years of growing our import and luxury brands is one that we would expect to continue.

Given our confidence in continuing to improve our operating margin through reducing SG&A and improving our parts and service and used vehicle businesses and returning to a higher level of acquisitions, we believe that we can achieve earnings-per-share growth over the next three to five years of at least 15%.

That concludes our prepared remarks. I'll now turn the call over to the Operator to begin the question-and-answer session.

Thank you, sir. [OPERATOR INSTRUCTIONS]

Rick Nelson, Stephens, Inc.

Can you quantify the savings you expect from the restructuring?

No, I -- this is Earl. I can't give you a meaningful number. I could make something up. I've seen projections from some of our other competitors. But at this point, it's an enabler for us to continue a positive trend, particularly on cost reduction. You'll note there are no one-time charges we're taking, but perhaps over time, we could better quantify it, but I really couldn't give anything that would have any meaning today.

Okay. On the divestiture front, $120 million in revenues, what brands would those be primarily? Are they domestic dealers?

I can't comment on those right now. At this point, there's a mix of both. The only one we've been able to actually announce specifically was the Lincoln-Mercury store at this time.

And are they money-losing operations?

I would expect that most of our disposals would be in poor-performing dealerships that are either losing money or certainly below our average profit levels.

And proceeds you would expect from the dispositions?

We don't have that number right now. Perhaps we can get back with you.

Okay. I've got just a philosophical question. I'm wondering if you and the Company still support the decentralized business model? And are the five regions going to operate independently, or do you expect they're going to adopt common practices?

Well, that seems to be at the heart of the matter, and I've been a little bit concerned that decentralized or empowering people out in various local markets is immediately assumed to be inefficient.

We clearly have some work on -- to commonize our practices and get greater synergies. But the structure that we're going to implement with these five regional vice presidents is designed to leverage the talent and expertise we have. The automotive business is very dynamic, and it's very different in Boston from Los Angeles. So things like the used car market and values, things like advertising, things like pay plans, and so forth, opening hours and how you schedule your business, those require a lot of local expertise. And I do not believe we can make some of those operational decisions from Houston.

So, therefore, I continue to believe I'll empower these five regional vice presidents to have a lot of autonomy in making operational decisions.

I think that's a separate matter from operating efficiency and uniformity of practice. We clearly have as one of our top priorities a much greater standardization of practices we're going to begin with on chart of accounts. I think I mentioned that in the prepared remarks. So I consider empowering people in the local markets to be a different issue from having operating efficiency, and I believe that we can do both.

And you see these five regions sharing best practices to a greater extent than --

Absolutely, absolutely. And we have begun that effort in the last year. Joe Herman has put together internal 20 groups, where we actually take that down to the dealership general manager level. So the momentum behind that type of practice sharing is already underway here within the Company, and we'll certainly continue that.

Very good. Thank you.

You're welcome.

John Murphy, Merrill Lynch.

Just sort of a follow-up on this move from decentralization to centralization. Doesn't sound like you're throwing that baby out with the bathwater there, but what -- you're moving from 13 platform VPs to five regional VPs. What's the impact on the mood in the field, and do you expect any key people leaving or anything going on there? Because it does seem like a pretty big change in philosophy.

This is Earl. It is a significant change, and I have witnessed some of these types of changes before, and I think it always creates a certain level of discomfort for people, and I'm not naive about that. And we've tried to have a lot of internal communication the last day or so upon that.

But that said, we believe that one of the differentiating factors for Group 1 is a lot of our field management talent, much of which we acquired along with the acquisition of our dealerships. And so this change has been made with a conscious effort to retain that talent with our company. Now, I'm not naive enough to think that we'll necessarily be 100% successful, that that was clearly our intent.

Okay. Then just on the brand strategy going forward, I mean I know you can't comment exactly on what's in that -- in the divested revenue, but would it be fair to characterize your brand strategy going forward as more diversification away from the Big Three and towards luxury and imports?

Yes, that would be correct.

Okay. Then on the parts and service business, would you -- are you going to be focusing more on customer pay? Or it sounds like there's a big move or an increasing trend for wholesaling out of dealerships that we're hearing about.

John, Joe Herman. Good morning. How are you?

Morning.

Yes, we are going to be focusing on customer pay. The focus on wholesaling is just part and parcel in the parts business, but it's not a core part of the parts business. It's ancillary to your main business. Your main business is taking care of your retail customer and your warranty business with your manufacturer. So you take care of the retail customers. That's the highest margin piece of your business.

Okay. And then just on the acquisition piece during the course of the year. Are you guys just taking a breather, or is there something going on with valuation out there that's keeping you -- shying you away from the market?

Well, John, you know we intentionally slowed down the target for '05 to take a breather. We haven't seen significant changes in the pricing of acquisition opportunities. We have one acquisition that will close shortly after the first of the year, first week in January. That will get us up to effectively 245 out of the 300 that we had targeted for this year. And a final one that was contracted this year, that, due to some facility issues, will not close until mid-next year. So the three pieces will equate to our 300 target. The closing timing just did not occur in '05.

So there's nothing particularly changing on the valuation front that you're seeing out there?

No, uh-uh.

And just one housekeeping, Robert. On the guidance, the $0.88 that you guys printed in the quarter, that's comparable to the $0.83 to $0.86 guidance you had given before for the third quarter, so this is all on a GAAP basis?

Correct. Our $2.75 to $2.80 was based on $0.83 to $0.86, now $0.88. The range takes care of that differential. So $2.75 to $2.80 is apples to apples with the $0.88.

Okay, so the impairment charges included -- all that's included in this full-year guidance?

Correct.

Thank you very much, guys.

Thank you.

Matt Nemer, Thomas Weisel Partners.

First question is you mentioned that you would move back to normalized inventory levels, and I’m wondering what you consider to be normal and sort of what your targets are?

Hi, Matt. It's Joe. Good morning.

Morning.

Normal would be a 60-day supply across the board, 75 domestic, 45 import.

And then what about on the used car side?

Used car -- our guidance to our stores is 37 days. Continues to be such. We sell --

On that front, can you give us more detail about where you've decided to go with the used car management software?

You know, as you well know, Matt -- you're well versed in this particular area -- of those three contenders, we're going to choose one of the three. I don't think we're ready to release the name right now.

Got it. And then, lastly, on the SG&A goals, I'm wondering if there's sort of a long-term target for SG&A as a percent of gross profit?

This is Earl. At this time, I don't want to give a public target number because as I’m watching our competitors improve, I think that gives us more impetus that we need to go further. But at this point within our Company, we want to now maintain the beginning of this trend we've shown right now.

So we want to continue to trend it downward, which has two parts. One is driving costs out of our system, which I expect these five regional vice presidents to lead the charge on. But the other thing is to continue to grow the business. You work it from both ends. And we believe that we have the ability to work both ends of the equation.

You know, just to follow up on that, are you not able to provide the actual change in -- just on the compensation expense side from the -- going from 13 platforms to five regions?

Not yet because there are a variety of decisions that I would expect these five regional vice presidents to make as they move into the new year. The reason we're taking this timing to make the change is to give these people two months to begin to prepare how they want to approach next year because our business traditionally works on a calendar-year basis.

Got it. Okay, fair enough. Thank you.

Jerry Marks, Raymond James and Associates.

Just actually to kind of follow up on Matt's question, going from the 13 to five, were there any personnel changes? Did you have people leave? What happens with the staffs for those existing regional structures or platform structures, I should say?

This is Earl again. Well, at this point, we've had no one leave. Obviously, when you do a compression from your top management and some people end up with a new boss, you know, today compared to the one they had yesterday, it takes some time to sort things out. And there will be some adjustments, I’m sure, to responsibilities. One thing we need to do with this company is take our talent and spread it over greater areas of revenue in our business. But, again, I’m going to rely on the people who have the most intimate knowledge of our dealership operations to figure out where the efficiencies are. I can assure they'd have no shortage of ideas. Now, it's very clear who the five people are who get to make those decisions.

I mean can you refresh my memory? Your platform had also ran dealerships, and now they're just essentially general managers? Is that kind of how it's going to work initially?

Hi, Jerry. It's Joe. Good morning.

Good morning.

No, we still have platform presidents that run groups of dealerships, and that will continue because we're covering large geographical areas, and you can't have -- I think it doesn't work having a general manager report to somebody 1,000 miles away for day-to-day decisions. Part of the trick here is to retain the exceptional talent that this company has and to improve efficiencies within the individual regions. We've got 60 days to get ready for this, and we should be -- we should hope to be good to go January 1.

Okay, so essentially you've kind of added a layer then? You're still keeping the platforms, but you're also now going to have a regional management structure?

No, essentially, we've taken out a layer between the top management of the Company and the people that will make the final operating decisions out in the field. How the level of management works underneath the regional vice president is what they can determine as we move forward.

Okay.

But just to refer back to one of the points I think they were making in terms of the impact of these local automotive retail management people or a platform president, if you look at some of the data that I believe Robert provided or if you look in our 10-Q as it comes out later, you'll see one of our big areas of improvement has been advertising expense. And that has to be managed very locally. You know, you don't do national advertising or large regional advertising when you're an automotive retailer. And we have already been counting on those people in our local markets, who we've referred to as platform presidents, to start to become more efficient in how we do our advertising spend and our inventory management. And so they have contributed over the last six months to major savings in those areas, and they're going to continue to play a valuable role at the local level as we go forward. Exactly how that will be structured will be determined by these regional vice presidents. But they were valuable before today; they will be valuable after today.

Okay. Last couple questions. Robert, the effective tax rate, if I do this on a GAAP basis, it went from close to 37% to 36.1%. Is that what you were referring to? Or is there some noise in there because of all those charges and everything?

No, it was just the full-year rate is 36.5%, and so the impact -- the third quarter then was kind of a catch-up to get down now to that level.

Okay.

So the quarterly effective rate was about -- it was 36%.

Okay. In looking out to next year, are you going to have to start expensing stock options? And how much is that going to cost you guys?

Yes, we will. We'll adopt on January 1, and we have not come out -- we haven't adopted our methodology yet, so therefore, we haven't come out with that number.

Okay. Last question, I'm sorry. In terms of going to the standard ledger, how long is that going to take you guys to roll that out? Is it going to be a 12-month process? Does it start everybody on the same ledger system on January 1? What's the timeframe on that?

No, it takes much more time than I would like for it to take. It's certainly not -- everyone can't go at once. We have to implement it probably by region and even beyond that maybe by what we had previously referred to as platforms. I would think it will take at least one year.

Is it the TMS system you guys are going to use, or is it somebody else's ledger?

We actually have had our local finance experts from what we formerly called platforms create a standard chart of account for us. And I think they probably started primarily with both the Toyota and the Ford statement and have now come up with one that they believe to be the most user-friendly for basically any brand.

Okay. Thanks a lot. That's all I had.

Marc Irizarry, Goldman Sachs.

My first question is on the fourth quarter. Just can you kind of talk about the incentive environment, what your expectations are, and perhaps, you know, what you expect the sales trends to kind of look like over the next couple months? Thanks.

Morning, Marc. It's Joe. I guess it's pretty honest to say that we're hoping that the domestics come back to the market with something robust sooner rather than later.

I think our expectation is that November, the industry is going to be relatively flat, it'll be slow, and we're expecting an uptick in November as the manufacturers come back to the marketplace with incentives in order to kickstart the sales going into '06.

So have you seen an uptick here so far in incentives that --?

Not yet.

Okay, great. And then on the SG&A, just how much of the gain in advertising and some of the other buckets is what you'd kind of see as sustainable, you know, i.e., how much advertising help did you maybe get in the third quarter from the OEMs?

This is Earl. I think the majority of that is sustainable. Clearly, there was an awful lot of manufacturer advertising out there in the summer and early fall. But in reality, we also had to do quite a bit of used car advertising to handle a lot of the trades that were coming in from those transactions. So while there might be some minor uptick based on seasonality, we believe the majority of this is sustainable.

Okay, great. And then on the used car margins, I showed some impressive gains this quarter. What would you say the kind of targets are for used car margins if you're looking out, say, maybe a year from now? Do you have kind of something, you know, a rate in mind on the used car side of things? Or you think you can -- you ought to be at some point in time or where you think you can go?

This is Earl again. I’m actually fairly satisfied, given what our competitors do with our gross margin percentages, and that's why we'd like to try to do some more volume and hold those margins we currently have. You see, we've also reduced our wholesale losses by a dramatic amount year over year, and that's another prerequisite for us being able to really try to aggressively improve our used vehicle retail volumes. So we're going to try to maintain the types of margins we've achieved and push more volume and hold those margins.

Great. And then, you know, you did talk in the release about a 15% -- above 15% EPS growth over a three to five year basis. You didn't really lay out SG&A targets per se, but can you kind of help me understand how that would kind of break out among the different operating components?

No, I can't really give you -- we've looked at a variety of scenarios, obviously, with internal operational improvements and external acquisitions, but I don't have one number that I would be comfortable giving you.

Okay, great. Thanks.

[Peter Siris], [Guerilla Capital].

Two questions. The first question is -- I'm just trying to understand on the consolidation. I'm not asking for, let's say, projections for this year or even for 2006, but if you were going to look over the long term, how much savings would you guess that would come from the consolidation?

I still don't have a number on that.

I mean you don't make a consolidation like this -- you know, with all your experience, Earl, you don't make a consolidation like this without having a guess as to what it's going to save you, right?

Well, clearly, it's significant or we wouldn't do it, but I -- Robert promised me we'd be asked this question three different ways, and he wanted to make sure I answered it the same way three times. And so, no, I still don't have a number I'm going to give you. Maybe as we move forward, we can put some more texture to that for you, but to just throw out a number, I don't think it's proper.

Okay, Robert's too smart for me. Let me try another question. I know that Robert's going to give you the same -- has given you three answers on.

If I looked at your capital structure and look at what you say you are going to acquire, you have much lower level of debts -- debt at the moment than any of your public competitors. And what I’m curious about is the 15% growth rate that you've staked out for the future. What level of acquisitions does that imply, and what does that imply for the capital structure because sort of as I, back of the envelope, do it, it still looks to me like you're generating a lot of -- even a 15% growth, that you're still in, at worst, a cash-neutral position and that you're staying very unleveraged.

Peter, this is John. You've got it exactly right. The 15% growth rate projection assumes a fairly consistent, yet modest acquisition program, but the leverage will not increase with a modest acquisition program.

So that would -- assuming that you guys are smart, which I assume you are, that would either say to me that at some point in the future, I don't care when, that you would either accelerate the acquisition program or do something to increase the leverage on your -- or increase the debt-to-cap rate on your balance sheet?

You know, I don't know how you do something to increase the debt-to-cap rate.

Well, you buy back stock, pay a dividend, something like that.

Okay.

Those would be two ways to increase the debt-to-cap rate.

Those are the alternatives, yes.

And, Earl, I guess what I’m asking is, where -- if I was looking two or three years out, where would I expect to see that debt-to-cap rate?

If we did nothing but implement the planned acquisition program, you would expect to see it drop.

Well, but I guess what I’m asking is why would you run a business with a 15% debt-to-cap rate when everybody else in the industry's happy with a 45% or 40% debt-to-cap rate?

I don't think you will see us do that.

Okay, thank you. I got an answer. I appreciate it.

Management, at this time, there are no further questions. Please continue with any further remarks that you would like to make.

Okay, thanks to everyone for joining us today. We appreciate your interest in Group 1 Automotive. We look forward to starting to carry out some of the initiatives we discussed today, and we'll begin reporting on those as we have our fourth quarter earnings conference call in February of next year. Thanks again.

Ladies and gentlemen, this concludes the Group 1 Automotive Third Quarter Earnings Conference Call. If you would like to listen to a replay of today's conference, please dial in to 1-800-405-2236 or 303-590-3000 and use the access code of 11041320. Once again, if you'd like to listen to a replay of today's conference, please dial in to 1-800-405-2236 or 303-590-3000 and use the access code 11041320. You may now disconnect, and thank you for using ACT Teleconferencing.