Group 1 Automotive Inc (GPI) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Group 1 Automotive third-quarter earnings conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Tuesday, October 31, 2006. I would now like to turn the conference over to Pete Delongchamps, Vice President of Manufacturer Relations and Public Affairs. Please go ahead, sir.

Thank you, Micea and good morning, everyone and welcome to the Group 1 Automotive 2006 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 provides reconciliations of all such non-GAAP financial measures to the most directly comparable GAAP measures on its website.

I will now turn the call over to the President and Chief Executive Officer of Group 1, Mr. Earl Hesterberg.

Thank you, Pete. Good morning, everyone and welcome to the Group 1 Automotive 2006 third-quarter conference call. In a minute, I'll turn the call over to John Rickel to present our financial results. After John is finished, I will discuss our full-year earnings guidance and then open up the call for questions.

Overall, our third-quarter financial results showed that the strategic initiatives our operations team has implemented over the past nine months are continuing to deliver the anticipated impact. Net income increased to $26.4 million, a 22.2% increase from third quarter 2005. On an EPS basis, we recorded a 25% increase to $1.10 per diluted share.

One of the highlights for this quarter is a continued improvement in our used vehicle business. Same-store used retail revenues expanded 4.9% as compared with third quarter 2005 while total used vehicle gross margin increased 60 basis points.

As you can see from the 15.5% decrease in same-store used vehicle wholesale sales, our used vehicle management software, which we completed installing company-wide in the first quarter, is changing the structure of our business and helping to deliver improved results.

Despite a very challenging environment for domestic brand vehicle sales, our same-store revenues were flat as we experienced strong sales in our Toyota franchises that were offset by weaker domestic store sales.

Our overall same-store gross margin improved 20 basis points while new vehicle gross margin held steady at 7.1% despite an ongoing 300 basis point shift from trucks to cars in our sales mix. Total same-store used vehicle gross margin improved 60 basis points on 0.4% lower revenues reflecting a further reduction in wholesale used vehicle sales. Parts and service revenues increased 1.5% while finance and insurance revenues were down slightly due to lower unit sales and the increased use of some [tenant] financing by the manufacturers.

We also saw continued improvements in our consolidated SG&A expense during the third quarter. SG&A as a percentage of gross profit decreased 130 basis points from the same period a year ago to 75.3%. This decrease was driven primarily by increases in overall gross profit, as well as the improved operating efficiencies we realized this year. I am pleased with the improvements we have made in these areas and look forward to continued improvements in the future.

Turning to brand mix. During the third quarter, Toyota, Scion and Lexus brands continued to be our top sellers, accounting for nearly 38% of total new vehicle sales, followed by Ford with 15.4%. Import and luxury brands increased to 70% of our mix during the third quarter with domestics declining to 30%. This is a significant shift from the third quarter of 2005 when import and luxury brands accounted for 61% and domestics 39% of unit sales.

On the acquisition front, we previously announced that we added one domestic franchise and six import franchises, including one Toyota Scion, one Honda and three Nissan franchises during the quarter. In October, we added an additional BMW, Honda and two Acura franchises. Including acquisitions from earlier this year, we have acquired year-to-date one domestic franchise and 14 import franchises with approximately $732 million in annual revenues, substantially completing the Company's acquisition program for 2006.

Also during the quarter, we announced that we disposed of a Chevrolet franchise in Colorado, Kia franchise in California and a Buick franchise in Oklahoma. These three franchises generated $63.3 million in revenues during the trailing 12-month period. Year-to-date, we have disposed of 13 franchises with $197.8 million in trailing 12-month revenues. That exceeds our $190 million full-year target. Although we believe other dealership disposals are necessary to maximize shareholder value, we do not anticipate closing on any further dispositions this year. Of course, we will update you if this changes materially.

Now a quick word about inventories. Our total new vehicle inventory at September 30 declined seven days from the end of last quarter and two days from last year to 55 day supply. We saw slight declines in our import and luxury inventory day supply. However, our domestic inventory grew to 99 day supply from 93 days in the second quarter and 83 days in last year's third quarter. We are not pleased with this result and are taking steps to bring our domestic inventory in line with our 75 day target, including substantially reducing new vehicle orders.

Our supply of used vehicles at quarter-end held steady from the second quarter of 29 days and was up slightly from 28 days in the year-ago period.

I will now ask John to go over our financial results in more detail.

Thank you, Earl and good morning, everyone. As Earl noted, third-quarter net income increased 22.2% from the same period a year ago to $26.4 million or $1.10 per diluted share on revenues of $1.6 billion. This brings our nine-month results to $73.6 million or $3.01 per diluted share, a 34.4% increase from 2005, excluding last year's cumulative effect of accounting change on $4.6 billion of revenue.

On an overall basis, gross profit for quarter increased 2.8% from the prior year to $249.8 million reflecting improvements in all of our operations; new and used vehicles, parts and service, finance and insurance. These increases, along with 130 basis point reduction as a percentage of gross profit and our SG&A expense, contributed to a 60 basis point increase in our operating margin to 3.6% and a 40 basis point increase in our pre-tax margin to 2.6%.

I would like to now discuss some of our specific same-store results for the quarter. Total revenue at $1.5 billion was essentially flat from the year-ago period. New vehicle revenues were down a 0.1 of a percent as an 8.3% increase in our import and luxury sales was offset by a 17.8% decrease in domestic sales. We believe our domestic performance is about equal to the overall retail sales performance of the respective domestic brands in the marketplace.

Stronger used vehicle retail revenues, which increased 4.9%, and improved parts and service revenue, which increased 1.5%, were offset by a 15.5% reduction in used wholesale revenues and slightly lower finance and insurance revenues. The 1.5% improvement in parts and service revenue included an encouraging 5% increase in customer pay business partially offset by a 6.4% reduction in warranty as several manufacturer quality issues that strengthened our 2005 results were resolved.

As noted previously, used wholesale revenue declined 15.5% on a 12.5% reduction in wholesale unit sales. We continue to see reductions in our wholesaling of excess or slow-moving used vehicles as we improve our used vehicle selection and evaluation process and retail more of the units acquired at higher margins. This shift from wholesale to retail used vehicles primarily explains the 60 basis point improvement in used vehicle margins from 9.1% to 9.7%. This, in conjunction with the 10 basis point improvement in parts and service margins of 54.7%, drove a 20 basis point improvement in total gross margins of 15.7%.

On a consolidated basis, SG&A as a percentage of gross profit, declined 130 basis points to 75.3%. The primary drivers of this decrease were improvements in gross profit and changes in variable compensation pay plans and personnel reductions. We did experience an increase in advertising expense during the quarter as we had a decline in the amount of manufacturer provided assistance recognized primarily on domestic units as a result of the significant decrease in sales and the increased marketing efforts in selected markets.

As you may recall, we significantly reduced our advertising spend at our domestic stores during the third quarter last year during the employee sales programs. We also stopped advertising in New Orleans following the hurricane. Our same-store SG&A results increased 180 basis points from 73.9% to 75.7% as a percentage of gross profit primarily as a result of the increased advertising spend that I just discussed and higher rent and other facility costs.

In addition, same-store results for the three months ended September 30, 2005 were positively affected by a $1.4 million adjustment for our estimated obligations under our general liability policies disclosed last year.

In addition, we have incurred approximately $700,000 in additional compensation expense as a result of our adoption of SFAS 123, the new stock compensation accounting standard. We continue to expect the full-year impact to be approximately $3 million, or about $0.10 a share as we had previously estimated.

Same-store rent and facility costs for the quarter was $22.7 million, an increase of 8.7% over prior year primarily as a result of 2005 sale leaseback transactions in newly completed facilities, about $1.1 million, and rent on facilities under construction, which under prior accounting guidance was (indiscernible) to be capitalized for about $500,000.

Finally, as we discussed last quarter, we are progressing on our conversion to a sole-source provider for our dealer management system software. We are unable to recognize the potential related exit costs until we cease using the existing software. As a result of conversions during the quarter, we increased $700,000 in exit costs. We have estimated that the charge to Group 1 from exiting contracts in the first quarter of 2006 to be in the range of $1.3 million to $1.4 million. Additional charges will likely be incurred in the first half of 2007 as we complete the conversion of the remainder of our stores.

Same-store floorplan interest expense increased by $800,000 for the quarter to $9.4 million. Although we experienced a 218 basis point increase in interest rates, this was more than offset by $133 million decrease in weighted average borrowings between the periods as we benefited by paying down our outstanding borrowings with the net proceeds of our $287.5 million convertible note offering completed in June 2006.

Manufacturer floorplan assistance, which we report as a reduction in new vehicle cost of sales at the time of sale, totaled $9.8 million, providing 104.3% coverage of our total floorplan interest expense for the quarter. This level of coverage increased from the 74.2% realized in the second quarter of 2006 primarily due to the benefit realized from the convertible note proceeds mentioned previously.

With respect to our long-term borrowings, we had $1 million increase in other interest expense due to average borrowings being $237.5 million higher primarily due to the issuance of the convertible notes discussed previously, partially offset by a 341 basis point decline in weighted average rates.

The Company's effective tax rate for the quarter was 36.8% as compared to 36% for 2005. This increase was primarily due to the impact of adopting SFAS 123 and a change in mix in our taxable [state] jurisdictions. Our estimated 2006 full-year effective tax rate is 37%.

Now turning to liquidity and capital structure. As a result of paying down our floorplan borrowings in June with the net proceeds from the 2.5 debenture offering, we had $802 million of total availability under our credit facilities for floorplan financing. We can reborrow approximately $135 million of this amount for acquisitions, working capital and other general corporate purposes after considering the amount spent in the acquisition, which closed in early October mentioned by Earl and we have an additional $184.4 million available under our syndicated credit facility used for acquisitions, working capital and general corporate purposes.

We also repurchased $4.8 million of our 8.25 bonds during the quarter bringing the total repurchase for 2006 to 10.8 million. As of September 30, our total long-term debt to capitalization ratio was 39%, down from 40% at June 30. We continue to expect full-year 2006 capital expenditures, excluding dealership acquisitions, to be about $80 million on a gross basis.

We would note however that going forward, we have begun to shift our strategy on real estate to include owning more of our land and facilities. After careful review, we believe ownership financed by a mortgage facility will provide us greater flexibility and lower cost than our previous approach of entering into sale leaseback transactions for virtually all of our dealership properties.

Under this revised approach, we have acquired approximately $60 million of real estate, land and buildings, in conjunction with our dealership acquisitions and existing facility improvement and expansion actions in 2006, as well as through the selective exercise of lease buyout options.

In total, we presently hold approximately $110 million of land and buildings on the balance sheet. We anticipate having our mortgage facility in place to provide ongoing financing for these assets by early 2007.

For additional detail regarding our financial condition, please refer to the schedules of additional information attached to the news release, as well as the investor presentation posted on our website. With that, I will now turn back over to Earl.

Thanks, John. As I mentioned earlier, the results show we're making real progress as we implement the strategic initiatives we announced late last year. Looking at the remainder of 2006, we are raising our full-year earnings guidance to $3.65 to $3.75 per diluted share from the previous guidance of $3.40 to $3.70.

With respect to the assumptions underlying our revised guidance, we continue to project that the full-year negative impact of SFAS 123 to be approximately $0.10 per share. We are forecasting approximately 24.4 million diluted shares outstanding. Although we believe we will continue to realize significant cost savings year-over-year, we don't expect to attain significant improvement from our current SG&A levels during the remainder of 2006.

Based on the selling pace so far this year, we anticipate industry sales of 16.5 to 16.7 million units. While sales are still good overall, it has become apparent that the pace is running slightly below what we experienced in 2005.

Our guidance excludes the impacts of any future acquisitions or dispositions. It also excludes any potential impairment charges as the Company undertakes its required annual review of goodwill and intangible franchise rights during the fourth quarter.

Group 1's talented operations team has delivered solid year-to-date results while executing our strategic initiatives. We will continue our implementation pace while exploring additional opportunities to improve our business.

That concludes our prepared remarks. In a moment, we will open the call up for Q&A. Joining me on the call today are John Rickel, our Senior Vice President and Chief Financial Officer; Randy Callison, our Senior Vice President of Operations and Corporate Development; Pete Delongchamps, who you just heard from, our Vice President overseeing Manufacture and Public Relations and Lance Parker, our new Director and Corporate Controller.

Lance, who joined Group 1 as Director of Corporate Compliance in 2004, has accepted the opportunity to replace Wade Stubblefield as our Corporate Controller. Wade has accepted an offer to join an energy-related company and we wish him every success in this new venture and welcome Lance into his new position. I'll now turn the call over to the operator to begin the question-and-answer session.

(OPERATOR INSTRUCTIONS). John Murphy, Merrill Lynch.

I had a question on the inventory levels. It sounds like they are high, but just wondering what the mix of '06 is, model year '06s and model year '07s is right now and if there is a problem with developing in general really at large in the dealership base where it is difficult to market new '07s when you are still pretty heavy in '06s.

As Earl said previously, the bulk of our problem is in our domestic inventory where we are high in day supply and definitely high as compared to our target. GM is roughly 102 day supply; Ford, 84 day supply and Chrysler, 100 day supply. Part of that problem is a bulk of those inventories are in '06 models. GM and Ford less so than Chrysler. At the end of September, our Chrysler inventories were about the mid 80s, around 85% to 86% of our total Chrysler inventory. Obviously, we have to work our way through those. That does say though that we do have '07s in stock and we are ordering a few '07s to fulfill customer demand.

Have there been any pushback or what has really been the response from the OEMs as you cut these orders? Are there any repercussions in the short term as far as allocations or anything like that?

They are good business people, John. They would love for us to buy more inventories. But at the same time, they understand our inventory position. We didn't get a 100 day supply by not ordering cars. We have ordered cars throughout the year. Obviously a few more than we should have based on the actual customer demand. It would be better for the manufacturers for those cars to sit in our inventories than theirs, but they do understand the business and they do understand where our inventory levels are.

There is nothing unusual in your non-Detroit three brands, right?

No.

Hello?

No.

The cost to the DMS exit, you guys are moving to all rentals, is that correct?

This is John Rickel. We are moving to all ADP.

The costs that you alluded to, I think it was about $1.4 million in the fourth quarter. Is that included in your current estimates -- outlook?

Yes, it is. It was a range of 1 to 2.4 and yes, the range is included in the estimate.

And that is not an ongoing cost I would assume. That will happen once in the fourth quarter.

Correct.

And this theory on owning more real estate. I am just wondering what your mortgage rates are, what you are seeing for mortgage rate versus your cap rates on your sale leasebacks? Is there a big delta there? Is there something else going on here in your theory in owning real estate versus the sale leasebacks?

John, there's a couple things. One, there is a delta. Basically what we are getting quoted on sale leasebacks is in the high eights to low nines percentage rates and certainly with what we are seeing on a mortgage facility, we think there is conservatively probably a 200 basis point delta. But probably as important, we think this also gives us greater flexibility as we go forward as to what we want to do with certain facilities. Should we decide that we want to exit facilities, it gives us greater flexibility in that vein as well. So we just think for a number of reasons, both cost and operations reason, that having more control over that real estate is going to be better for us.

As we roll forward, that savings will probably show up in the SG&A line? Is that where it would be booked?

Yes.

Rick Nelson, Stephens Inc.

I wanted to follow up on the used-car business, strong performance there, and actually most of your peers are also putting up good used car numbers. I realize you are making some internal improvements, but are there industry factors as well driving the growth?

This is Earl. Yes, I think there's some tailwind we have gotten from the industry, although that may have actually shifted a little near the end of the third quarter because the heavy domestic incentives in some cases started to push down near the end of the quarter on some used vehicle prices. And then also as you start to move into the fourth quarter every year, you know, you get some negative seasonality impact. But yes, it's been a pretty strong used vehicle market this year which has helped us.

But I think the data point is indicative of the change in the way we do business, and believe me, I don't think we have -- we've got everybody mastering our processes and software yet. But it's just -- I think in nine months we have wholesaled $50 million less in used vehicles. And while yes, maybe some quarters you make a little money on wholesale and other quarters you use a little money, a wholesale vehicle transaction is not very productive for people in our business. We are public automotive retailers, not public automotive wholesalers.

So I think that that is the takeaway I have, is that there is something we're doing that is a lot more efficient in the way we trade for cars and the way we manage our inventory. But I don't want to mislead you and think that we have all of our stores at the ultimate level of sophistication in how we handle this business. But clearly, we are getting better and it is not just the market.

I want to follow up on SG&A. Did dealership dispositions impact that number in the quarter?

No, not really, not to any material extent.

And then just want to ask also about October, what you are seeing and is there any signs of weakness at the high end? I know BMW has had some more challenging numbers of late. Any comments there as well as the supply in the smaller, more fuel-efficient vehicles, is that improving?

I need to be a little bit careful about forward-looking statements if that's in the fourth quarter and I think the general point has been in recent months, we have seen BMW come off the boil a little bit, but a lot of that I think is related to their selldown of X5 and the fact they are getting ready to launch a new X5. In fact in a week or so, they have a national meeting on that. We are still very bullish on BMW (technical difficulty) I think our sales for BMW in the third quarter were down between one and two percentage points.

So I think that is more an issue of product lifecycle, where they are with product launch and selldown. Whereas Mercedes was strong for the quarter. I think nationally they were up 7%. We were up 21% Mercedes for the quarter. So I don't think there is any real issue of luxury versus non-luxury.

I did read two things this morning that were probably written by people who are on the other end of the conference call that are predicting a (indiscernible) for October of either 16.4 million, which is better than last year, but it is still not particularly strong. And so I think that we are concerned mostly about our domestic components and our import businesses have been moving strong throughout the year.

I don't see anything different in the months ahead for our import business, in our luxury car business, but the domestics are still 30% of our business and that is our challenge. That is how we manage that. I have to tell you, the domestics continue to be weaker than what we project. In particular when I say domestics, our quarter was challenging for the Dodge, Chrysler, Ford brands and that continues to be below the level we would expect. So that is our big management challenge.

Matt Fassler, Goldman Sachs.

It's actually Robert (indiscernible) from (indiscernible). A couple of questions. The first one on SNI. Could you speak to SNI per retail vehicle and where I guess you see that going in the current environment? Secondly, in the parts and service business, could you talk a little bit about the drivers of that business in terms of the macroeconomic factors and competitive environment? Thanks.

SNI revenues per unit sold for the quarter same-store, we ran 965 a copy, total company 958. Both of those numbers are up slightly from the same quarter last year and both of those numbers are very solidly in the range that we would like to see our SNI production.

So would you say it was more the softness I guess? The reason I'm asking is because I would have expected that rate to be faster than the rate of sales I guess and so would you say that the limit of growth in that is more a unit issue?

It is unit-related and penetration-related. Our finance penetration rate came up this quarter, which was very good. We do very well in SNI overall, but our finance penetration ticks almost to 70%, which is excellent.

And on the parts and service?

Parts and service microlevel, continuation of what we have seen for some time, customer pay up, warranty down. I think you will hear that from everyone. Warranty continues to decline. Specific to us, the domestic cars coming in have probably dropped somewhat. The Mercedes free maintenance program discontinuation impacts us a little and Toyota had a higher level of recalls last year as compared to this year, but a decrease in warranty has been a trend that we have seen for some time.

What is exciting is that is more than offset by increase in customer pay, which is where a retailer really needs to focus. If you look at our CapEx ex expenditures, many of those are in stall additions and a lot of our operating focus is on production techniques and stall utilization. You did hear from Earl that on an overall basis, we had a 30 basis point increase in our parts and service margin, which is really exciting.

Scott Stember, Sidoti & Company.

If we could just get into the parts and service a little bit more. The last couple of quarters, you have made some moves to strengthen this area. Looks like you're starting to see a little bit on the customer pay side. Could you talk about some of the initial -- maybe just a little bit deeper initial traction that you are seeing, whether it is on service advisor training or are you guys working longer versus putting in new stalls? I'm just trying to figure out what are the drivers there and obviously this could be an area of nice growth for you in '07.

Before I let Randy give you the detail on that, Scott, I don't think we can claim a massive amount of traction for new initiatives yet. Although I will let Randy give you some detail on what we are starting to work on because this is more of a longer-term process-driven business.

And on a macro basis, what we have seen in this recent quarter is customer pay is up in the vicinity of 5%, but warranty was down six-ish and those are market trends that we are kind of reacting to, but Randy I think can give you some detail on the things he has been working on with the team, but I don't want you to think that we have gotten a lot of impact in our operations yet from some things we are working on, which is a little bit different than the situation on used vehicles, which it can impact more quickly due to the nature of the business. They have 30 days inventory on used vehicles and so forth.

We are working very closely with our field personnel and our fixed ops council to, number one, analyze the processes we have in place and, number two, to change some of those processes where we have better processes in other stores. Interesting enough, you mentioned training. That is a big focus of what we are doing, both on the service [dry], but also supplementing our factory training programs for technicians and management training for our excellent service, parts and bodyshop managers.

We are also looking closely at our marketing efforts in parts and service. As you would know, we are -- our gross spend on marketing for service pales to our spend on new and used car advertising, but as we get our facilities and people in place, then we will look to spend a little more in marketing for our service activity, which will more than be offset with increases in customer pay.

And the third thing is this continued process improvement. Store-to-store comparison, benchmarking, see which stores are performing better and try to get all of our stores to that level.

That was helpful. And on the used car side, Earl, I know that you guys have been trying to increase your sales of CPOs, certified pre-owns. Can you talk about how that is progressing in the quarter? What percentage of used car sales that was this quarter versus last year?

It is around 15%. Although compared to the third quarter last year, it was only 4%. So I think we are making some progress, but I don't think we are anywhere near the level of what we can do and we haven't pushed that too awful hard as we have been trying to get our processes aligned to the new software, but I think there is good upside for us in the future. 15% is about where we are at the moment.

Would you be targeting where some of your competitors are in the 30% range at some point?

I have been impressed with some of our competitors, but some of the best certified used car opportunities are in luxury brands; BMW, Mercedes, Lexus types of certified programs. I am trying to figure out on a brand weighted average what a good benchmark for us would be. Clearly we are improving our luxury brand mix, but some of those companies that are doing a really great job in that area have a little more luxury brand mix than we do. But that said, I don't think we are best-in-class here and there is some upside for us.

Last question. Could you just -- you alluded to a significant drop in truck and SUV versus cars. Could you give the actual rates, a percentage this year versus last year?

The overall market has gone from kind of 53/47 to close to 50/50 and I know it kicked back up maybe a little bit in this last month, but we are close to the overall market average is my recollection. So give or take 100 basis points, I think we are getting close to 50/50.

Rich Kwas, Wachovia Securities.

Good morning, everyone. Earl, on mix with the fuel prices coming down, have you seen a discernible shift back to trucks?

Not yet. Although I did read something this morning. Hopefully it wasn't in something you wrote. But there is some data, I don't know if it was CNW or what I have seen recently, that some people have seen a slight mix back to crossover vehicles and SUVs, but we haven't seen anything yet. I think it might take a little bit longer before we see that.

And then in Texas and Oklahoma, those are big markets for you. How are the trends in the pickup market there?

Well, I do think the pickup market is probably topical. We clearly had a hit on full-size pickups this past year when the fuel prices got in the $3 range. I know there has been a lot of talk also, even as fuel prices come down, (indiscernible) the housing market and some of these workmen and craftsmen, will that be a drag on full-size trucks. I would think the answer to that is yes as well because there is a significant part of the full-size pickup market, which are these artisans or whatever you call them.

But I think there is some counterweight forces, such as the new Chevrolet or GM pickups. There is going to be a lot of power in the market there. Then as we turn into early next year, the new Toyota Tundra. So I am not so sure that the marketing drive of some of the biggest manufacturers in the world and you know if those two manufacturers are launching new vehicles, Ford is not going to sit there and play dead. So I think we may have enough marketing counterforce from General Motors, Toyota and Ford. Chrysler won't sit on the sideline either.

So I am not sure we are going to see -- it may all kind of balance out. Now when I say balance out, I mean more at a level that we have seen this year; not necessarily returning to the way it was a year or two years ago.

And then just on the '06 mix, I think Randy gave 85%, 86% number for Chrysler, percentage of '06 models. Do you have those numbers for General Motors and Ford for your inventory?

I certainly don't have them in my head. Randy? Randy is looking by the way.

Randy Callison. Ford is 31% and I don't have GM combined. Chevy is about 25%. Buick, 52%. Pontiac, 30%.

And then John, on the SG&A to gross profit, you are saying -- I think, Earl, you mentioned that it would be consistent with Q3 levels expectations for Q4. That is excluding the costs associated with the DMS conversion correct?

Yes, that is correct.

And if I recall correctly, your last guidance assumed the 25 basis point increase in rates. What is the interest rate guidance now?

We think we are basically done with any increases through '06.

Matt Nemer, Thomas Weisel Partners.

First question is could you explain the discrepancy between the consolidated SG&A gross profit ratio and the same-store ratio? Is that just an increasing number of import acquisitions? The year-over-year change was -- they were sort of moving in opposite directions.

That is correct and it is basically the imports as they are coming in, plus obviously some of the stores that we were able to dispose of obviously had some pretty high SG&A with them.

Got it. And then just following up on that same topic. The Q4 or the 2006 guidance that Earl mentioned, are you suggesting that we will not see an improvement on a dollar basis or was that on a percentage basis? And is that year-over-year or sequential?

Sequential. Basically think about the SG&A as kind of that run rate. I think this is consistent with what we have been talking about really for the last few months, but kind of 76% SG&A as a percent of gross profit is kind of the right modeling level to think about. Probably a little bit lower in the third quarter just because the business is stronger and maybe a little bit higher in the fourth quarter.

So in the fourth quarter, you are typically running about 80%. Are you suggesting that we might see a pretty meaningful improvement year-over-year?

Certainly from an 80% level, yes, I would hope to see some pretty meaningful improvement from that level for the fourth quarter.

And then on the DMS conversion, I think initially you were saying $3.5 million to $4 million. So does this essentially shift $1 million or so into the first half of 2007 or does the total pie increase?

No. It is basically a bit of a shift. Randy has done such a great job with the acquisitions that he's forced us to back up some of our conversion timing for the existing stores. We have basically taken the view that as we have bought stores, we are converting them on day one and they go to the head of the line. So it has backed up a little bit of our existing store conversions into the first half of 2007. We still expect to be done by the middle of the year, but it has shifted a little of the cost into the first quarter.

So is that fair, a $1 million or $2 million.

Yes, something in that range.

And then on the OEM add assistance, you mentioned a change. Is that a change in regional co-op advertising? Is it a permanent change or just a temporary change?

It is more of an accounting change. It is basically you book the advertising credit, the assistance when you actually retail the unit and clearly with the number of retails down, we've just had less assistance that we could book. It was obviously a piece of it hung up in the inventory as the domestic inventories have increased, but it is basically a function of the sales.

And then lastly, your GM days inventory is a little bit higher than some of the other dealers and I was just wondering if you participated in their recent program to get dealers to basically over-order on the trucks? I think they are providing $700 if you buy an extra Avalanche or Tahoe. I am just wondering if that is a program you are playing in?

This is Randy. We didn't play at a high level in the latest wholesale drive. Our day supply was pretty much set before that wholesale went out. We didn't take a lot of units on that.

[Charles Vetter], GE Franchise Finance.

Actually I have got one question with 16 parts, but I'll cut it down to three. I see a lot of activity in the acquisition market right now. We have a lot of relationship with the OEMs and the dealership base. What I've seen is obviously a concentration on import acquisitions by Group 1 and others. One question I had was do you see the market for domestic as well that you are pursuing and related to all that, what are you seeing as far as what the price is out in the market for the blue sky piece?

First on the pricing of the various businesses for sale, we haven't really seen that change over the last year. Most of the attractive franchises, the import and luxury franchises, have been highly priced for a long time. So it is a matter of finding a deal that has an acceptable return on investment for us and fits in with our strategy and our geographic location and management talent in the area and so forth. So those have been tough for a long time, but clearly we have been able to find some acceptable acquisitions this year.

The domestic question is much more interesting. I am sure at the moment that there are some very attractive priced domestic brand acquisitions. But from our viewpoint, until we could have greater confidence in the resurgence of some of these domestic brands in terms of retail marketshare and a stable dealer network plan, I think you know that has been under discussion by certainly Ford and both GM and Chrysler have been working on their "channeling" for a couple of years, that is probably not an area that we are confident in despite attractive valuations and the ability to snag some pretty big stores at low prices. We are just not -- the future for those brands in the near term is not clear enough to us yet.

You said ROI -- that seems to use projection, what you can do with it more than --.

It is all about what we think we can do with a store and we target 15% to 20% return on investment and we need to do that to keep providing a good return to our shareholders.

The only other question I have is why ADP over Reynolds?

Well, would you believe that it was the best financial proposition for our shareholders by a significant margin. Some part of that was also that 60% or 70% of our stores were already on ADP, but it was a shareholder value proposition quite frankly. Not that we would say that one had better technology than the other.

[Jerry Marks], autoretailstocks.com.

John, did I hear you right? Did you say there was a favorable adjustment in the quarter? Did you true something up?

No. What we said was that on the SG&A, the reason same-store SG&A was up a bit is that we had a favorable adjustment a year ago in the third quarter that did not repeat.

That's right. And I just want to clarify. The $1.2 million to $1.4 million range that you guys gave, is that pre-tax? That's for the exit costs?

For the DMS costs for the quarter, that is pre-tax, but the range was $1.3 million to $2.4 million.

And then last question. You answered Rick that you might have some -- that the industry might be having some tailwinds regarding the used vehicle market and clearly is a benefit from the American Auto Exchange. I just got off the ADESA conference call where they were saying that the retail industry's -- used vehicle retail industry saw its worst decline in a decade. Is there something going on with the data because of registration data or is there something going on between the franchise dealers versus the independents that you guys see happening in the market?

I think there is a pretty big difference in the franchise to non-franchised dealers and I know a lot of your new vehicle franchise dealer used vehicle is in very, very late model used vehicles, including rental returns and things like 6 to 12 month old Ford Taurus' have been a staple in the business for a long time. There will be a dynamic change in there. I think with General Motors going to their value pricing this year to some degree has changed the dynamics in some of your real one to two year old GM vehicles. So I think it is kind of hard to lump the entire used vehicle market franchise and non-franchised together. But there were some -- when I made the comment to Rick, I was looking at a nine-month perspective on the used vehicle market this year and how it impacted our dealerships.

And maybe it is skewed because of the American Auto Exchange, but have you noticed a pretty big increase in terms of the percentage of trade-ins that you guys are actually making now?

No, we haven't really seen a big change in the number of trade-ins. I think a year ago, a lot of people after Katrina and the first spike in gas prices, a lot of people were bringing in SUVs trying to trade and they couldn't trade because they were stunned by the value or relative lack of value in those SUVs. But that smoothed out early this year and I think the trade-in numbers for us have been stable.

Scott Stember, Sidoti & Company.

Just a quick housekeeping item. John, I wasn't sure whether you said that the incremental cost for the fourth quarter from the DMS conversion, is that in your estimates or not in your estimates?

Those are in the estimate, Scott.

Management, there are no further questions at this time. Please continue with any closing remarks you may have.

Thank you for joining us today. We're looking forward to updating you on our continued progress on our fourth-quarter earnings call scheduled for February 21, 2007. Thank you and have a nice day.

Thank you. 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 call, please dial 303-590-3000 or 800-405-2236 with access code 11073239 followed by the pound sign. Once again those numbers are 303-590-3000 or 800-405-2236 with access code 11073239 followed by the pound sign. Thank you for your participation. You may now disconnect.