Sonic Automotive Inc (SAH) 2002 Q2 法說會逐字稿

Excuse me everyone, we now have Theodore Wright in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of Theodore Wright's presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you would like to ask a question. At this time, I would like to refer to the safe harbor statement under the Private Securities Litigation Reform Act of 1995.

During this conference call, management may discuss financial projections, information, or expectations about the company's products or markets, or otherwise make statements about the future, which statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made.

These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission. I would now like to turn the conference over to Theodore Wright. Mr. Wright, you may begin.

Good morning and welcome to Sonic's second quarter 2002 conference call. I'm Theo Wright, the company's Chief Financial Officer, joining me are Bruton Smith, the company's Chairman and Chief Executive Officer, and Jeff Rachor, the company's Executive Vice President of Retail Operations.

I'll begin the call with comments on our financial reporting practices, industry trends, strategic initiatives, financial position, and a number of other forward-looking topics. I'll then turn the call over to Mr. Rachor for further commentary on our operations and finance and insurance.

We're pleased to report earnings of $0.71 per share for the quarter, versus $0.63 per share in the same quarter of the prior year on a comparable accounting basis. We experienced solid EPS growth, not from accounting changes, but from execution of our strategies. Ordinarily, financial reporting practices are only of interest to us accountants. Right now, the environment is different for obvious reasons.

We wanted to comment on several matters. Both Bruton Smith and I are prepared to execute the statement attesting to the accuracy and completeness of our reports, and we'll do so with the filing of our form 10-Q early next month. As was expected for all Fortune 500 companies in 2002, Sonic was selected for review of its filings by the SEC. This review is substantially complete and is not expected to result in amendment of any previously filed documents.

We are being requested to reclassify one balance sheet item in this quarter and future quarters. That is in fact reflected in the press release that has already been issued. This reclassification will not affect significant financials such as working capital or debt to equity. We believe our reported earnings are generally of high quality. has recently published on characteristics of high quality earnings.

Key characteristics include, cash has been received for goods or services. Amounts are based on fixed amounts, not estimates. Amounts are generated from recurring transactions and from consistent application of accounting principles. On these points, Sonic and the other auto retailers without consumer financing businesses or other non-core businesses all have high quality earnings. We've completed our benchmark analysis of goodwill and have identified no impairment, indicating our acquisition strategy has been disciplined, and based on cash flows generated by the acquired businesses.

Turning to our view on industry trends, the following brief tale is, we believe, instructive. April incentives were down year over year and sales were up in April for the first time in that circumstance for quite a while. Manufacturers further reduced incentives sequentially and year over year. May sales were down sharply from year ago, and the , seasonally adjusted annual rate, was down.

June incentives were down year over year, but up sequentially. Sales were down year over year, but the was up sequentially. incentives appear up sequentially and year over year. Sales and the both appear headed up on a sequential as well as year over year basis.

The manufacturers have the liquidity and financial capacity to continue to provide strong incentives to support sales rates well above break even. It appears by manufacturers' behavior, industry break even is around 16 million units. Current trends do not yet -- currency, I'm sorry -- currency trends do not yet appear a significant factor. We have experienced no significant changes in pricing.

However, incentives from some of the more incentive oriented Japanese manufacturers, such as Nissan and Toyota, have been reduced in certain months, which may be a form of currency adjustment. We are not expecting significant changes in pricing due to currency changes in the current highly competitive, price-sensitive or, in other words, incentive-sensitive market.

Vehicle affordability remains high and product introductions continue to create additional demand. The combination of high-incentive spending, affordable vehicles and reasonably high consumer confidence are expected to support vehicle sales rates of 16 million units on a run rate basis or higher for the remainder of the year. We have based our forecasts on a 16 million unit for the remainder of 2002, or approximately three percent below the rate for the first half of the year.

Current zero percent financing programs are having a positive impact on traffic, as well as sales. We note that the benefit is seen more clearly in our Chevrolet stores, than Ford and Chrysler stores. And will comment more on brand performance.

Credit availability to consumers also effect sales performance, particularly in our domestic lines than in used cars. And will have further comments on this topic.

To discuss our brand performance, as well as market performance, our actual percentages of revenues by brand and market are detailed in our press release. Particularly strong brands were BMW, Lexus, Toyota and Cadillac. Cadillac with a particularly strong performance in the quarter. Weaker brands for us during the quarter were Ford, Volvo and Chrysler and Dodge.

Some new product offerings that have been in short supply, or for which we have sold orders of vehicles not yet delivered, include the Cadillac ; a newly-launched ; the Volvo new sport utility, which isn't due for some months, but for which we have a lot of interest; and several Nissan offerings, particularly the new car. Notably, not on this list would be the Ford Expedition, where demand has been somewhat soft for this latest version of that product.

These brands' performance were influenced by the local market. I've listened to conference calls from a number of public companies in our sector and noted some differences in view on relative strength of markets. I believe this is largely due to differences in brand representation, but also the relative strength of the local managers. Toyota stores, for example, have been reasonably strong in virtually all of our markets, even markets that overall are weak.

Weak markets for Sonic were Northern California, we see no clear turnaround here yet, particularly in San Jose; Dallas and Houston. Strong for us were Southern California, the D.C. market area and nearly all of the South, with the exception of North Carolina, Georgia, Florida, Tennessee and Alabama, all strong for Sonic Automotive.

To put a finer point on regional performance and provide some substance to our anecdotes, Northern California was down 11 percent for the quarter on a same-store sales basis. Southern California up 15 percent, Dallas down 15, Houston down four. Our entire Southern division, which includes those states I mentioned, was up two percent, and the D.C. market area was up 16 percent.

To comment on North Carolina, a region that has given us significant difficulties over the last several quarters, we have seen signs of improvement in this market, both in sales and in margin. And we are anticipating continued improvement in this market over the next several quarters and for next year.

also provide some objective support for our identified areas of market weakness. I wanted to provide some unemployment data. San Jose, June 2001, 3.6 percent unemployment rate. June 2002, where the latest data we have available, 6.7. Dallas, 4.5 to 7.1 percent. Houston, 5.2 to 5.5. But for the full year, Houston was at a 4.3 percent unemployment rate in 2001. And for the last several months in Houston, we've seen a strong acceleration in trend to higher levels of unemployment.

Clearly, in these markets, our performance is indicative of conditions generally, not our performance specifically. To comment on our financial position, debt to total capital was 49.4 percent, or slightly below our target of 50 percent. Current availability of borrowings was 280 million-plus. We completed an approximately 150 million convertible bond offering with a 7-year maturity in the quarter, which substantially enhanced our financial flexibility and has positioned us to take advantage of acquisition opportunities, both large and small, as they present themselves.

With our convertible bond offering and an additional $100 million interest rate swap executed in the second quarter, a $100 million interest rate swap executed in the first quarter, and the $75 million high yield add on bond offering in the first quarter of 2001, we have substantially reduced our exposure to variable rates. The swaps at the moment do not appear a stroke of genius but do minimize our future earnings volatility and we do not expect rates to decline further from current levels.

Fixing of rates did negatively affect the quarter by approximately $0.03 per share compared to what they would have been otherwise if we had left those rates variable. But because of declines in our variable rates, and the low rate on our convertible bonds, interest costs as a percentage of revenue were unchanged, and interest coverage actually improved from a year ago to 6.4 times.

Our exposure to variable interest rates is as follows. Long term debt, 90 percent fixed. Real estate leases, 72 percent fixed. borrowings, 62 percent fixed. A 100 basis point increase in rates, based rates generally, decreases earnings per share by approximately $0.02 per quarter. Capital expenditures were $31 million year to date, proceeds of sale lease backs were 13 million. We have 21 million currently in construction in progress, of which we expect to refund the majority through sale lease back financing.

We still expect 12 to 15 million in net capital expenditures for the full year. Our working capital continues to be in excellent shape. supplied new vehicles 56 days versus 55 a year ago. Used vehicles, 39 versus 38. Parts, 52 versus 55. Used units over 60 days old, 3.5 percent. These are substantially all luxury brand units, with significant investment in certification and reconditioning. For these units, retaining the unit for as long as 90 days is a sound business decision.

New units over 180 days were 1.75 percent. We're tightening our aging standards on new units to 120 days, with an objective of having less than 5 percent of our total new units over 120 days. Returning to the theme of financial reporting, we don't have significant risk of unexpected loss in inventory, in used cars, we take our mark downs at the auction. We turn those cars into cash, reinvest that cash in units we can sell at retail for attractive profits.

Talk about our acquisition activity and plans. Activity continues. We expect shortly to be in a position to announce the planned 200 million in revenues to be acquired for the remainder of the year. We discussed the nature of the auto retailing market at length in the past. We wanted to provide some quantitative evidence of how this market behaves, and we've begun gathering data. In the second quarter, we were presented acquisitions representing 71 franchises and $2.3 billion in annual revenues. That's in the second quarter alone.

We visited and carefully considered 12 of these franchises. We have active contract negotiations underway with one franchise and made an earnest effort to buy one other. We hope several of the franchises we evaluated will become available at fair value, but are not currently pursuing because of value differences. In July, we've seen an additional $1 billion in annual revenues and 48 additional franchises from this July business. We have three letters of intent under discussion and are scheduled to visit and carefully review seven other franchises.

The market for automotive retailing acquisitions is so large that transactions are not competitive, and we do not see pricing pressure, and hope this objective information on the level of activity is helpful in your understanding of our acquisition market. Our financial resources are not the limiting factor in our acquisition plans. We believe human resources, people, and integration effort is more of an issue. We're making excellent progress in integrating dealerships and believe we can more aggressively pursue additional acquisitions likely to close late in this year at the earliest without over-stressing our management resources.

We will, however, consider the relative returns to shareholders from stock buy backs versus acquisitions, and this may impact our rate of growth from acquisition. On the divestiture front, we continue pruning our portfolio, with two dealerships sold in the quarter. We've generated cash of approximately 10.5 million from the divestitures year to date. The board of directors have approved an additional five dealership disposals, which are included in discontinued operations.

These are expected to be completed in the third or fourth quarter and generate an additional $10 million in cash. Evaluation of underperforming dealerships will continue, and we expect to always have some level of disposal activity in a portfolio we expect to exceed 200 franchises, ultimately. In comments on other modeling issues, share count is expected to decline based on lower stock prices and share repurchases to approximately 43,500,000 shares for next quarter.

Option dilution has had an impact on share counts, but we believe these are valuable incentives to our personnel and want to emphasize that our option grants last year touched 252 total employees. Income tax rates are expected to -- are not expected to change materially. Margin trends are expected to be stable, with the exception of advertising expenses, which Mr. Rachor will address further, and margins in certain of our regions, including North Carolina.

With the exception of advertising, selling, general and administrative expenses as a percentage of gross profit have been remarkably stable if you consider the impact of floor plan assistance on cost of sales and gross margins, and on this basis, personnel expenses are unchanged for the quarter compared to a year ago.

Same store sales, gross margins, and specific information about gross margins on a same store sales basis. New vehicles, 7.8 percent versus 7.9 percent a year ago. Used vehicles at retail, 11.4 versus 11.5. Parts, service, and collision repair, 47.9 versus 46.5. Same store sales, service and parts and collision repairs, specifically, were down approximately 10 percent. This also impacted wholesale part sales, as this collision repair decline seems to be symptomatic of the industry as a whole. We also had lower same-store sales associated with our service and parts activities in the area of used vehicle reconditioning.

If you look at our core service and parts business to retail consumers, customer pay, same-store sales and service and parts were up four percent. And warranty same-store sales were up seven percent, indicative of the strong selling rates we've seen in the market over the last several years and their impact on warranty.

Returns on equity for the quarter on a trailing 12-month basis were 18.1 percent, but that doesn't include the full impact of the change in accounting for goodwill. Quarter-to-date annualized, which does, reflects returns on equity of slightly over 20 percent or 20.4 percent. We continue to generate strong returns on investment, and we anticipate future acquisition investments will generate similar returns.

To comment specifically on estimates, our estimates for the remainder of the year are based on same-store sales of new vehicles down five to seven percent; used down three to five; service and parts up two to five; and finance and insurance performance consistent. As a comparison on a comparable accounting basis, the last 12 months indicate earnings per share of $2.44. We do assume in the current quarter a positive contribution from the recently completed and Acura acquisitions.

We're forecasting for next year $2.95 to $3.05 per share. This forecast is based on no additional acquisitions. Fifty to 100 basis points of interest rate increases between now and the end of 2003. No additional sale repurchases and cash from operations used to repay borrowings. We expect absent an execution problem or worsening sales rate, as we have in the past, raise estimates as we execute acquisitions or share repurchases.

With those comments, I'll turn the call over to Mr. Rachor - Jeff.

Thank you, Theodore.

I'd like to focus my operational comments on three main areas today: used vehicle sales, advertising expense and the finance and insurance business climate.

First, same-store used vehicle sales trends continued to be impacted by tightened credit standards, fewer sub-prime and near-prime lenders and competitive pressures from strong manufacture incentives and rate subsidies on new vehicle sales. For example, , Ford's secondary arm, has been out of our stores since March. We do, however, see recent improvements in credit availability from earlier in the year. We believe if sustained, these improvements in financing conditions will positively effect our used vehicle sales.

Our same-store average use car price increased $421, despite lower auction prices, confirming weakness in the low-cost, sub-prime end of the market. Per unit same-store sale wholesale losses also increased, indicative of softer auction prices. We expect this trend to continue, and it is normal to experience seasonal declines in pricing for used cars in the third and fourth quarter.

In addition, Sonic management has made new vehicle sales our highest priority. Clearly, this new car emphasis took resources away from maximizing used vehicle retail.

It is important to note that the moderation used in used vehicle sales is highly concentrated. For instance, 56 percent of the total company decline was derived from just 10 dealerships. Seventy-three percent of the total company decrease came from our domestic stores, while luxury dealership used vehicle sales were essentially flat, led by meangful increase at our BMW and Volvo dealerships, as those manufacturers further enhance their certified pre-owned programs.

Management has recently taken steps to correct this trend. We've successfully piloted a model inventory technology in our northern California reason, which will be launching nationally in the third quarter. Every Sonic dealer-operator has undergone intensive training to participation in a recent used vehicle management workshop. Most importantly, we have promoted our strongest used vehicle retail manager, Mr. to the newly created position of Senior Vice President of Staff Operations.

Most reently, Mr. servered as the regional vice president in northern California, where he led the successful recovery plan that yielded the performance improvement that Theo described earlier in that economically challenged area. In his new role, Mr. will personally oversee our support staff specialist, including increased resources in used vehicle training, inventory management, and on-site trouble shooting.

I am confident that under Mr. leadership, used vehicle sales trends will show immediate improvement in the third and fourth quarter. Second quarter advertising expense on a same-store basis as a percentage of gross profit, increased from 6 percent in 2001 to 6.7 percent in 2002, impacting margins and ultimately costing hthree pennies per share in second quarter EPS.

After stronger than expected April sales, Sonic management directed our dealers to develop aggressive marketing plans in anticipation of continued momentum. In addition, our strategic focus on driving same store sales led to an executive decision to experiment by consciously overinvesting in some areas in hopes of moving a stubborn market. In fact, this dealership level strategy was supplemented by corporate co-op assistance in several key target markets as part of our marketing assistance program initiative.

May and June saw lower manufacture incentive support and a more challenging sales environment than expected. Advertising expense control issues were also highly concentrated. In terms of brand, our traditional volume marks, both domestic and imported, contributed the majority of the increase, while luxury store advertising expense remained stable.

Texas, Oklahoma, North Carolina, and southern California were the geographic sources of the increased expense. However, our Southeastern Division, the company's largest, most mature area, actually showed a decrease in overall spending, in large part due to that division's successful pilot of a CRM technology supporting an emphasis on non-buyer follow up. Once again, we're in the process of rolling out this showroom technology company-wide, with expectations of similar results.

Finally, when faced with temporary spikes in advertising spending in the past, Sonic management has demonstrated a proven ability to quickly gain control of this expense. That initiative is already underway and third quarter advertising expense should be in line with our historic standards, positively impacting overall margins.

A handful of Sonic Automotive dealerships have been featured in recent media reports on finance and insurance practices. It should be noted that like many large, decentralized organizations, Sonic Automotive is not immune from responsibility for the actions of a handful of rogue employees. Please note that the specific dealership situations featured in the articles go back to our earliest acquisitions, when we retained ex-owners, before our professional management structure allowed for total integration with the benefits and discipline of our standardized best practices.

Over two years ago, we implemented a comprehensive training and auditing process to ensure the highest standards of integrity and professionalism in Sonic finance and insurance departments. Those steps have included, first, background checks on all key dealership employees and F&I department employees. For example, in the recent integration, we lost over 200 employees as a result of this discipline. Had this practice existed in 1998, we would have avoided our recent pitfalls.

Number two, on-site internal audits focused on F&I compliance. Number three, telephone customer surveys conducted by internal audit staff to support finance and insurance compliance. Number four, mandatory rate and profit caps on all finance and insurance products. Number five, we have piloted a toll free hotline with a third-party vendor to handle anonymous reports of inappropriate activity at the dealership level, and we'll roll this out nationally by year end.

Number six, mandatory laws and regulations training for all key management. In addition, we've recently further invested in this zero tolerance philosophy. First, I'm making our 100 percent menu presentation, , a mandatory policy with customer acknowledgement subject to audit. Secondly, we've produced a finance and insurance compliance training videotape to be viewed and acknowledged by all dealership level employees. And lastly, we've empowered dealership level controllers and their staff to reject any retail transaction that does not fully comply with documentation and disclosure requirements.

Once again, recent press highlights focus on an isolated case. Sonic Automotive remains an industry leader by taking the high road through practicing and promoting an ethical business philosophy. Finally, dealership finance and insurance departments provide invaluable products and services for consumers. First, we assist consumers in arranging financing that might not be available to them otherwise at competitive rates and terms. Secondly, product offerings such as extended service agreements and insurance products help protect consumers from financial hardship.

In closing, finance and insurance remains a critical component of the retail automotive business model. We have seen no negative impact on finance and insurance performance as a result of these recent industry press reports. That concludes my prepared comments, and at this time, executive management will be glad to entertain questions.

Thank you, at this time, we will open the floor for questions. If you would like to ask a question, please press the star key, followed by the one key, on your touch tone phone now. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the questioning queue, press star, two. Please limit your questions to one at a time.

Again, to ask a question, press star, one now.

Our first question comes from with .

Thank you. Good morning.

Good morning.

How do you explain the comp sales decline of 11.7 percent? Is that pulling back on some of these employees or...

No, that - , this is Theo. No, we don't believe that that's reflected there. The principal reason that we see is the impact of rates and similar programs that are in the market that is having an impact on the amount of finance reserve income that we receive. Although zero percent was more aggressively launched in July, we've still seen a lot of rate-based incentives, which do have an impact on our finance and insurance income.

It seems to run contrary to the per unit statistic. You showed a nice increase there, but yet the comp was down.

On an overall basis - on an overall basis...

, this is Jeff Rachor. Perhaps I can comment on that. You were referring to the compensation paid out on finance and insurance income, is that correct?

Well I'm asking about the same-store decline. And then we'd look it up in per unit, and it looks like you showed an increase over the prior year, 954 versus 903? They don't seem to - those two numbers don't seem to jive, the same-store decline with the improvement in per unit.

Let me - I'm going to do a little more research on that, but I do believe that a significant part of that impact relates to the recent acquisitions that we completed in the Southern California market. And in that market, historically, you see much higher per unit finance and insurance income, where we recently completed the dealership acquisitions, the dealership acquisitions. And we also completed some very significant acquisitions in the Dallas and Houston markets, where, again, you see higher than normal finance and insurance income.

The other interesting point I would make is that in terms of the performance, our dealerships actually performed very well in finance and insurance. And they did not have a negative impact on our overall finance and insurance performance.

But, , I'll dig into that further and get you a better answer. But I do believe that the driver there is regional differences in performance.

OK. On the non-comp dealers coming into the base, it sounds like...

That's correct.

You know at current share price levels how do you evaluate the return on capital via acquisition versus that of buying back your stock? And what are you leaning toward at these levels?

We evaluate share repurchases based on the returns on capital we can get from share repurchases, compared to the returns on capital we would anticipate from acquisitions. And we also consider that from a strategic standpoint, share repurchases don't really accomplish much. But we consider as well that there's no execution risk associated with a share repurchase.

So on balance, we're going to look at the multiples that we're currently trading at compared to the multiple that our company trades at in the market, and if those two things are pretty close, we're going to lean towards share repurchases. If our multiple is higher than the market multiple for private market transactions, we're going to lean more towards acquisitions.

One point to emphasize, though, is acquisitions are not something you can turn on and turn off like a spigot. There is a long lead time on these acquisitions, so there would continue to be acquisition activity at some level, even during a period of time when our share price was somewhat lower. I think the share repurchase activity that Sonic has conducted over the last several years is fairly indicative.

When share prices were very low, acquisition activity was extremely limited, and when multiples crept up towards the double digit range, you saw much more aggressive acquisition activity by the company.

OK. How about operating profits out of northern California, year over year. Were those up, down, sideways?

On a same store basis, you're just going to have to bear with me while I turn to the right page. We did an excellent job in northern California. Overall, the performance there on a margin basis was exemplary. Our profitability for the quarter, overall profitability, was actually up despite the declines in same store sales.

And the comparisons get easier as we move forward.

They do, but as I've said on the last several conference calls, although the comparisons do get easier, it is not clear to us yet that the economy in that market has really turned.

OK. Thank you.

Thank you.

Thank you, our next question comes from with .

Hey, good morning.

Good morning, .

A couple of questions. First, on your parts and services, I think that you mentioned that much of weakness there was -- or that the slower growth was from the weakness in the collision repair business. Could you expand a little bit upon that? How much was it down and what is going on there?

Collision repair -- our collision centers on a same store basis were down 9.5 percent. And our wholesale parts sales, which are generally related to collision repair activities were down -- hang on, if I can get right to that number -- were down about 2 percent, indicating that that's not just a phenomena related to us. I've also listened to conference calls from some of the other public companies, indicating that they've experienced similar things.

We don't have, in our view, a clear understanding of why collision repair business is off. We've heard mention that the Ford tire matter was something that affected collision repair business in this quarter a year ago. I'm not sure that that's entirely the case. I'm not sure that it isn't. I just don't have any basis to quantify that. And in addition, we've seen some dry weather in a number of our markets, which does affect collision repair activity. That's been particularly true here in Charlotte and some of the southeastern markets where we've been experiencing dry weather. So that's my best understanding of collision repair performance. The other point I would make is that is reflective of a very small same store base, and highly concentrated by market, so it may not indicative of raw market conditions. It may reflect just certain markets that our company is in.

OK, and second question, related to your Ford stores. Could you just talk about they performed in the quarter relative to the industry, which I think -- I think they were off 10 percent overall, and did they see particular weakness on the parts and service side?

We did not see particular weakness on the parts and service side in our Ford stores, and our Ford stores actually outperformed the industry by a meaningful amount during the quarter. That was one of our better performing brands, relatively speaking.

Have margins held up there?

Have net or gross margins held up?

Have the -- is the change in same store gross profits at the Ford stores been similar to the change in sales?

Yes, actually, gross margins have -- are -- they're actually a little better than sales, and overall profit margins have actually increased just slightly for our Ford stores on a same store basis.

Thanks very much.

Thank you, now.

Thank you. Our next question comes from with .

. Good morning, guys.

Good morning, Scott.

Good morning.

As far as the inventory, can you just give on a day's outstanding, new and used? I don't know if you gave that .

Yes, I did. Hang on just one second and I will get to the correct page for that. New, 56 days, used, 39 days, parts 52 days.

What was the parts unit, sir?

52.

OK. And also acquisition revenues that were closed on in the quarter, and number, do you have that?

The acquisitions that were closed on during the ...

During the second ...

... quarter ...

Yes.

... really, there was only one dealership, which was Honda that closed during the quarter and Honda will contribute about $50 million in annual revenue, but closed during the quarter, was not very significant. What has closed subsequent to the end of the quarter is actually more significant and represents approximately $300 million in annual revenues.

OK. And , on the used car front, you mentioned some things you guys are putting in place to enhance that area. You know, given, you know, some of the pricing pressure given with the zero percent discounting going on in new cars, would you guys consider, you know, maybe trying to sell older vehicles with holder ages?

Yes, we are going to ship some of our strategy to a focus on a lower cost of sales unit, and as we mention, now that we are seeing some improvement in the credit environment that would support that lower cost of sale piece, we think that that's an opportunity. And many of our dealerships that have been more successful in used care retail have in fact embraced a lower cost of sale average inventory.

OK, and currently, what is the average age of your used cars being sold?

The average age? Right now we had, as Theo pointed out, just 3 percent of our total inventory over 60 days, and as he mentioned in his earlier comments, that's largely limited to used vehicles at our luxury stores, where we have a more significant investment in reconditioning to support manufacturer certifications programs and, therefore, see that as a prudent decision.

No, I was referring to the actual age of the cars that are being sold, the used cars.

We do not have an average age; we don't track that systematically of the vehicles that are sold, . But based on the average price, which is quite nearly $15,000, I would say the average age is probably two to three years.

OK. That's all I have. Thanks guys.

Thank you.

Thank you.

Our next question comes from with Merrill Lynch.

Good morning.

I'd like to ask Bruton or Jeff, it seems like you never before have been able to look at the number of acquisition opportunities that you're looking at now, from what Theo is describing. Can you tell us what's the major reason for most of these people selling today still? And, secondly, what's the major reason for your passing up on acquisition opportunities?

, I'm going to refer that to Theo, who is more directly involved in our M&A activity - Theo.

As a person who, along with Mark Iuppeniatz, our Vice President of Corporate Development, who meets with these dealers, I can say that the principal reason for selling is the principal reason that you would logically expect in individually owned businesses, which is that the principal owner is old or is ill. And that represents the majority, the vast majority of the transactions that we see.

In terms of the reasons that we turn down transactions, the number one reason or really reasons would be the brand or location or market. Some combination of those things causes us to conclude that we believe that the dealership is fundamentally undesirable. It's too small, it's in a bad demographic area, the brand is not well matched to the market. It's a Hyundai dealership in a high-income market, or it's a luxury dealership in a low income market.

Something fundamentally about the dealership makes it unattractive. And that would be the number one reason for us passing on an acquisition opportunity.

The second most common reason for us passing on an acquisition opportunity is value. We see a dealership that we like, we think that it has great return potential, but we can't come to an agreement with the seller on value.

And the third most common reason is that in our own evaluation of our managerial strengths within a particular market, we conclude that acquisitions in a particular location may stress our management resources. So we would defer, delay or avoid acquisitions in those markets for a period of time. And often, in that case, we've seen those acquisition opportunities stay in the market and we're able to execute them at a later date.

OK. And then, secondly, Jeff, if I heard you right, I think you said you lost 200 people in the acquisition due to just background checks. Is that right, number one? Number two, is that a high percentage of the total employee base? And, generally, what was wrong with these employees?

Well, yes, that 200 was accurate. Keep in mind the number of dealerships. We're talking about a retail organization that had over $1 billion in revenue and 16 plus actual separate operating units and over 1,000 employees. Closer to 2,000, in fact.

So let me tell you about our process. We now have very disciplined standards in terms of drug testing, criminal background checks, as well as driving record checks, and yes, that would be a higher than normal percentage of the total employee base. In fact, we've never had that kind of attrition as a result of our mandatory background check policies. But as we've acknowledged earlier, there is an unsavory element in the retail automotive business, and that's an element that we work hard to eliminate from our organization, and we have done that in the organization, and I think as Theo commented earlier, you can see that despite that high level of turnover, we've been able to successfully integrate those dealerships and achieve a very high level of performance in just our first few months of ownership. And we believe that as that employee core stabilizes, that there are additional opportunities in upside to improve performance in the Dealerships.

OK, and Jeff, also, if you could clarify -- were you in your presentation suggesting that you used car sales were below your expectations because of an inability to secure financing for some of your buyers?

Yes, that's correct, , that we -- over the last, the first half of the year, credit standards tightened both in our conventional lending resources, but we also saw a number of the key players in the sub prime arena exit or dramatically change their lending programs and tighten their criteria, and that has had a negative impact, as I pointed out, on the lower end of the used vehicle market, and in some cases, a small percentage of our new vehicle business as well.

The good news is that just recently, we are seeing a wider availability of credit, and we think that going forward, that will have a positive impact on used vehicle sales particularly.

OK, thank you, good luck on the next quarter.

Thank you.

Thank you, our next question comes from with .

Good morning.

Good morning, .

Just a couple of quick questions. Theo, I kind of missed what you were saying in terms of the balance sheet adjustment. Could you just, you know, give me an idea in terms of what that is?

Related to the SEC review?

Correct.

It is a reclassification of what we refer to in the industry as contracts and transit from the cash line to accounts receivable, and it has the impact of raising our accounts receivable balances and reducing our cash balances.

OK.

And by the way, the average collection time on those contracts in transit, if you want to call them receivables, is less than seven days.

OK. And they're classifying that as a receivable now?

Yes.

OK. Not to belabor too much your F&I number, but, I guess, you know, the unit volumes, particularly on the used side, could help to explain kind of why your same store F&I number was down, but I guess is that indicating that you guys had a greater percentage of your F&I business in the used side of the business?

No. The percent -- the per unit amounts are similar for new and used. And our unit counts were down more in used than in new, so the used decline had more of an impact on same store sales and finance insurance than did new. Let me -- the 11 percent decline, and you've been very helpful here in focusing my attention on the correct number, the 11 percent decline is total. On a per unit basis, the decline was considerably less than that, at 5 percent.

OK. And in that kind of 954 number that it looks like on an F&I per vehicle, did you guys have any one-time -- what do they have, those annual bonuses that I think you get from some of the finance ?

Not in this quarter, no. There were no significant one-time items, and really no one-time items that I'm aware of in this quarter. That does occur from time to time, but not in this quarter.

OK. And then finally, I guess, in terms of the advertising expenses, I didn't totally catch. Was that an increase as a percentage of gross profits, and how long do you guys think that's going to take to bring that back to your historical norms?

Yes, that was an increase in expenses as a percentage of gross profits, and an increase as a -- on a per unit basis as well for new and used vehicle sales. We expect to have that back in line -- or certainly more in line, assuming normal vehicle selling rates, this coming month, August.

OK, and then last, I just wanted to check -- I noticed you guys went up to like 50 million in that other category right below advertising, and you guys had been running at like 42, 43. What's kind of included in that, and why did you have that spike up by about 7 million?

That may relate to -- are you looking at the historical numbers? That relates to acquisition activity, principally.

OK.

And again, looking at our SG&A expenses as a percentage of gross profit, if you ship interest to cost of sales in a manner similar to , you'll see our SG&A expenses as a percentage of gross have been very stable, including that other line.

OK, thanks.

Again, they'd been stable, except in advertising, which did increase significantly in the quarter.

Thank you. Our next question comes from with Asset Management.

Good morning.

Good morning.

Could you reiterate what you said about how July sales were looking so far?

July sales appear to be -- based on the published reports that we've seen and our own experience, they appear to be trending better than the last several months on a seasonally adjusted basis, and they do appear to be trending slightly ahead of last year. That's the indication that we have so far. I just want to emphasize, though, that there's a lot of business in auto retailing that's done right at the very end of the month, and so those indications are definitely still preliminary, but indications are positive for unit sales.

Positive comps are the outlook you're seeing right now?

Yes.

OK, and with regards to the item on the balance sheet -- excuse me -- that was reclassified, is there any risk in the contracts in transit of non-collection?

No, those are simply contracts that for consumer financing with Bank of America, Ford Credit, GMAC, and they're all collected generally within a period of days.

OK, so there's no allowance for uncollectables for those at all?

No.

OK. Thank you.

Thank you.

Thank you, and if you'd like to ask a question, press star, one now. Our next question comes from with CitiGroup.

. Just had a question about the pricing per unit on new vehicles. If you could just talk about, you know, the $33,000 figure. How much of that is perhaps, you know, new dealerships in the mix, versus the overall, you know, changes in brand focus and...

Well you have - , you have two elements there. One is a shift within our same-store complement towards the higher priced spectrum: BMW, Mercedes and Lexus, because of their gaining of share. But you also have a very significant impact from the recently completed acquisition. And the average price per unit in our Cadillac stores in the $50,000 range for new units.

So that alone is the majority of that change. It's mix.

OK. And just to follow up, can you add a little bit more history on the Northern California situation? I know the comps were negative this quarter. There was some discussion earlier about comparisons getting easier. Do you happen to have any quarterly data with you on, you know, how long they've been negative and when we start to lap those comparisons?

I don't. I know Northern California has been negative for at least since the beginning or the second quarter of 2001. And we are lapping - currently we are lapping negative comparables. And I believe in the third quarter of last year negative comparables were dramatic, down quite nearly 20 percent in Northern California. So comparables should be, relatively speaking, easier beginning this quarter.

July indications from our preliminary indications for Northern California on unit sales, which is what we have available currently, would indicate that our declines for the month of July would be lower - from unit counts, would be lower than we've experienced over the last several quarters. But that's just one month of the quarter.

Thank you.

Our next question comes from with .

Hi, can you hear me OK?

Yes. Hey, .

Hey, how are you doing?

Good.

I was wondering if we could quantify the impact of a couple of things. First of all, running at about to 17 and your model is for 16. First of all, for next year, is your model also for 16, or is still for 15?

Sixteen.

Well, in effect, 16.25, because 16.5 for the first half of the year and 16 for the second half, based on our forecast. So 16.25 for next year.

OK. So that's actually up a little bit from where it was before, isn't it?

Yes.

Yes, our forecast is higher than what it was before. That's correct.

OK. And, secondly, the impact of sales revenue is $17 million, versus $16 million, which is where they are in July, what would that do to earnings this year?

The earnings, assuming no difference in regional impacts, should increase proportionally, . Should be a fairly direct relationship. And I don't think it's...

percent higher?

Yes.

OK. And the benefits of falling interest rates, you said interest rates should benefit you guys by about two to four cents if we don't have additional rate increases this year?

No. I don't believe it would be as much as four cents, . I think two cents is more reflective, since we have forecast fairly modest increases for this year, really quite minimal, with larger increases in 2003.

OK. Thank you.

Thank you.

Thank you.

Our next question comes from with Gardner Lewis Asset Management.

Thank you.

Theo, can you tell us whether or not you purchased any stock in the second quarter or if you've purchased stock so far in the third quarter?

We purchased stock - don't remember the exact dates, but we have purchased some stock late in the second quarter or early in the third quarter. And total repurchases roughly 430,000 shares to date.

OK. And was it the convertibles or is it stock?

Stock.

Thank you.

Thank you.

Again, to ask a question, press star, one now.

Our next question comes from with Arnhold and Bleichroeder.

Good - thank you.

Just a follow-up to the questions about the peso business in July. I mean given the factors that have been dragging down used car sales; namely, the new car incentives offered by the manufacturers, and also some of the finance companies pulling back from the market, are we seeing no improvement in used cars so far this quarter? Or are we, for some reason?

We actually are. We have a couple of regions that have shown some meaningful improvement in new cars so far this month. Northern California being a particular example, where we do seem to be seeing some improvement in used cars.

We have a couple of our markets in Texas that are showing some signs of life in the used car arena. Alabama, conversely, is showing a negative trend in used cars. But, overall, I would say we do see some improvement in July in the used car arena.

So since there is no change in new car incentives, and the finance companies are not really any more aggressive now than they were last quarter, you would have heard stronger demand relative to last year?

No, I think that in the used car arena we are seeing a number of the finance companies, particularly Ford Credit and GMAC, being more aggressive in the used vehicle arena compared to where they were earlier this year. Not more aggressive compared to a year ago, but more aggressive than they were earlier this year.

So they're tiptoeing back in?

Yes. And I think a lot of that has to do with the fact that they've undertaken a number of measures to improve the quality of their portfolio. And they have relative - even with wider spreads, a low cost of funds, where they can compete in that used car arena and price for the risk and still earn an attractive return.

OK, thank you.

Thank you.

Thank you.

At this time, there are no questions, Mr. Wright.

Thank you.