Sonic Automotive Inc (SAH) 2002 Q3 法說會逐字稿

Excuse me, everyone, we now have Theodore Wright in conference. Please be aware that you put your lines in a listen-only mode. At the conclusion of the 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 market 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 Automotive, Inc.'s third quarter 2002 conference call. I'm Theo Wright, the Company's Chief Financial Officer.

Joining me on the call are Scott Smith, the Company's President and Chief Operating Officer, and Jeff Rachor, the Company's Executive Vice President of Retail Operations, who is joining us on the call from Dallas. Scott Smith will begin the call with introductory comments; I'll then cover financial highlights and update you on a number of strategic items; then Mr. Rachor will cover operating highlights. I'll now turn the call over to Scott Smith. Scott?

Thank you, Theo.

Good morning, ladies and gentlemen. Let me begin by saying that we're pleased to have reported earnings of 73 cents per share in the third quarter of 2002 compared to 53 cents per share in the third quarter of 2001. It was a record quarter for us by growing our EPS by 38 percent, net income grew by 43 percent, total gross profit was up by 32 percent, and total revenues increased by 37 percent. In addition, our same-store sales grew by three percent. While we always believe that there's room for improvement, we are very happy with these financial results.

We'd like to thank our manufacturer partners for the powerful incentive programs that consumers and dealers continue to enjoy. We do not expect our manufacturers to give up market share easily; therefore, we expect these programs to continue as long as they're successful. In addition to strong incentives and affordability, exciting new vehicles like the Nissan Z and Altima, the BMW Z4 and Seven Series, the Cadillac CTS, Mercedes E Class, and the new Honda Accord are helping to drive traffic into the showrooms. Jeff Rachor will have additional on our retail operations in his remarks.

Sonic Automotive continues to demonstrate that our automotive retail model is less cyclical than general perception and that in fact earnings are relatively stable. It's important to remember that the financial model of the automotive retailers is significantly different from that of the manufacturers. Several of our manufacturer partners have been struggling with earnings due in large part to high fixed costs. Conversely, Sonic Automotive enjoys a variable cost structure that is flexible with the ebb and flow of the economic cycle.

September was estimated to be above 15.4 million units. Our company's break-even point is in the range of a 10 million unit . This means that even in a tough economy, we're well positioned to make money.

Although we are forecasting a decline in year-over-year and industry sales for the fourth quarter, we are raising our earnings per share target for the full year from a range of $2.56 to $2.60 to a range of $2.58 to $2.62 due to better than expected earnings for this past quarter. We're targeting earnings per share of 62 cents to 66 cents for Q4 of 2002. At the bottom end of our guidance, this is an increase of nearly 22 percent in projected earnings per share Q4 of 2002 over Q4 of 2001.

We remain comfortable with our previously announced earnings targets of $2.95 to $3.05 for the calendar year of 2003, and based upon last evening's market close, that would give us a forward P/E multiple of less than five times 2003 earnings. The S&P is currently trading at approximately a 16.2 times the multiple. This why we believe that Sonic Automotive and the other automotive retailers are grossly undervalued. We have been in the market buying our stock and have additional capacity under our current stock repurchase plan.

Also, our management team continues to produce one of the highest returns on equity in our sector. We believe that 2003 looks bright. We want to thank all of our shareholders and let you know that we're working hard for you and appreciate your support. At this point I'd like to turn the call over to Theo Wright for additional insight into our numbers. Theo.

Thank you, Scott. Our earnings per share growth in the quarter was driven by exceptional performance from our recent acquisitions, control over our inventories and consistent, strong performance from our luxury and import brands.

Recent acquisitions performed well with the acquisitions, and adding significantly to earnings. The acquisition in particular has demonstrated our ability to effectively integrate large acquisitions with diverse geography.

We generated 66 million in EBITDA after interest expense for the quarter with EBITDA margins of 3.3 percent. These margins are up eight basis points from Q2 of 2002. covered 6.2 times despite the impact of higher fixed rates -- from fixing variable rates over the last year.

Our overall gross margins declined from 15.8 percent to 15.1 percent, representing the impact of a higher proportion of vehicle sales, higher wholesale losses on used cars and low gross margins on new vehicle sales. The declining gross margins on new vehicle sales was due largely to declines in floor plan assistance from the manufacturers, which vary with interest rates.

These vehicle margins at retail in a softer market were down only 10 basis points. These declines in margins have been offset by declines in floor plan interest paid due to lower rates and lower relative balances. Same store new vehicle gross margins decline 40 basis points, but were down only 10 basis points after considering the impact of foreign interest.

Same store used vehicle margins at retail were unchanged. Again, in a softer market. Same store service and parts gross margins were up 150 basis points, which Mr. Rachor will discuss further. Our tax rate was up in the quarter due to income distribution between the states we operate in. Particularly declines in income in Texas and the increased in income in California. We expect the tax rate to range from 38.2 percent to 39 percent in future periods.

Our diluted share count declined to 43,300,000 from 44,500,000 in the prior quarter -- consistent with our forecast. The decline reflects both reductions in option dilution and share repurchases. We expect share counts for Q4 to be approximately 42,200,000.

Our strongest regions for the quarter were Southern California and Nevada, Alabama, Tennessee, Atlanta, our Florida markets, Washington, D.C., and Northern California, which provided a strong profit performance. Areas of weakness were Dallas, Ohio, Houston, Charlotte, and our Oklahoma markets.

Brands with particular strength were Honda and Toyota and all the luxury brands including Cadillac. Weaker brands were Ford and Chrysler Jeep/Dodge. Brand impacted regional performance and vice versus with our Texas, Charlotte, Ohio and Oklahoma store portfolio dominated by domestic brands. We have a strong import and luxury sales mix in California and the Southeast.

Our overall market share in new vehicles sales, looking at that market share market by market, was stable for the quarter. Returning to Norman, California, we believe this is a clear case study of the performance of automotive retailing in a vehicle sales cycle. Norman, California particularly San Jose where we have a strong presence, has endured two years of declining employment with no clear turnaround in sight. Comparing Q3, 2000 before the the Q3, 2002, or same store sales of new units declined 20%, used unit sales were down 12%, but our service and parts revenues were actually up 12%, reflecting the benefits of vehicle sales in earlier periods. Finance and insurance per unit was up 16%, the total finance and insurance revenues were down 5%, reflecting lower unit counts.

Our same store profits were down 17%, reflecting gross margin pressure on vehicle sales and the impact of fixed cost. This decline in new vehicle sales is consistent with an industry decline from a of 17 million units to a 13.4 million units. Despite a 20% decline in new vehicle unit volumes, dealership profit margins were 4.04% in 2002 versed 4.16% in 2000. We believe this large-scale example with multiple brands gives investors further comfort that our performance will not the manufactures, and we have the ability to generate cash flows even in a much weaker market. concerns have been expressed by some analysts regarding potential buildup in new vehicle inventory as sales slow related to declines in it's .

Mr. Rachor will comment further on our current inventory position. One very significant change from earlier periods is that is now below 2%. To the extent, inventory the carrying costs associated with this inventory, is extremely low by historical standards, which substantially mitigates any risk associated with inventory buildup. Turning to our balance sheet, we ended the quarter with 185 million available under our acquisition credit facility, and 89 million available under our real estate lines. Capital expenditures for the quarter were 40 million, and 70 million year-to-date, with 18 million refunded year-to-date in sale-lease backed transactions. The substantial increase in activity in Q3 includes 20 million in land acquisitions, principally for relocation projects.

We have 20 million impending sales, or sale-lease backed transactions expected to close in Q4, 2002, or Q1, 2003, which will further improve our liquidity. We also have a number of pending dispositions, which will generate additional cash in Q4, 2002, and Q1, 2003. Part of our recent acquisition strategy has been to seek opportunities to create value for our shareholders and the manufacturers by identifying opportunities to use our extensive development experience and outstanding facilities development group as a means to create value. Some examples include the recently relocated Honda West dealership in Las Vegas, where profits are up year-to-date 28% on a 34% increase in unit sales volume.

At our significantly enhanced Pensacola Honda dealership, profits are up 101% on a 25% increase in volume. In global imports, our Atlanta BMW dealership, which completed a significant enhancement last year, profits are up 70% on a 33% increase in volume. We generated over $35 million in cash from operations in the quarter, our cash generation for next year's forecast to be over $110 million. However, we have not included additional unannounced acquisitions in our forecasts nor have we included additional share repurchase activity. Our balance sheet strength combined with cash generation from operations gives us more than sufficient capacity to execute our strategies. Current acquisition activity is limited as we fully integrate the $2 billion in annual revenues acquired that have closed or been announced this year and the $443 million acquired in just the last four months. Included in our third quarter earnings release are examples of the types of acquisitions we expect to complete in the near future. These are smaller transactions that serve a strategic purpose and offer high returns on investment.

Going into 2003, assuming a higher stock price, we would expect to become more aggressive in our acquisition pace consistent with our past practice. Our return on equity for the last 12 months is 18.8 percent. Our return on investment from acquisitions has increased over time, reflecting both our valuation discipline and the lack of pricing pressure in the acquisition market. We added approximately 300 million in revenues from acquisitions late in Q3 and Q4. To date we still have three announced acquisitions pending closure. These announced acquisitions are included in our estimates, but did not impact third quarter revenues or earnings significantly.

The comment on the West Coast port situation has negatively affected several of our West Coast luxury stores with low days supply of inventory, but assuming vehicle catches us, we expect this impact to be mitigated. Our estimates assume the following same-store sales trends for Q4: new vehicle sales down over 12 percent, used vehicle sales down seven percent, service and parts up five percent. For the full-year 2003 new vehicles sales down five percent. We believe this equates to an estimated SAR of 16 million units. Used vehicle sales flat against weak comparisons this year and service and parts up approximately five percent. We firmly believe incentive spending by the manufacturers will continue and point out many of our largest manufacturers, such as BMW, Toyota, Honda, Lexus, et cetera, have low incentive spending levels and record profitability. To quote Gary Cowger at GM, "I don't see any letup on the incentive front." Please note our original estimates for full-year 2002 were $2.15 to $2.20. As we completed acquisitions and share repurchases, we have increase our estimates to the current level of $2.58 to $2.62.

I'll now turn the call over to Jeff Rachor. Jeff?

Thank you, Theo. Today I will be reviewing Sonic Automotive's third quarter same-store sales performance and commenting on some specific operational trends.

Third quarter revenues increased three percent versus third quarter 2001, producing basically flat total gross profit. Used vehicles same-store sales revenue declined six percent versus Q3 2001, which represents a positive trend from the two most recent quarters. The used vehicle market continues to be challenged by two factors. First, the exceptional manufacturer incentives on new vehicles are attracting many traditional used car buyers to new vehicle purchases. Secondly, used vehicle credit, particularly in the sub-prime arena, continues to be less available. On a positive note, we are beginning to see improvement in used vehicle retail demand as wholesale pricing declines have created a compelling value proposition for consumers. In addition, as a result of leveraging manufacturer's certified pre-owned programs, same-store certified retail used unit sales increased 49 percent from Q3 2001. Our luxury import line certified business increased 27 percent, while our Honda and Toyota lines realized an increase of over 85 percent in certified pre-owned sales.

Strategically, we advocate certified programs and look for our dealerships to better capitalize on this growth opportunity in the future as pre-owned programs are a competitive advantage that are not available to non-franchise new vehicle dealers or independent used vehicle dealers.

Our Service, Parts, and Collision repair business once again demonstrated its resiliency and stability with combined total same-store sales revenues up 1.3 percent over Q3 2001 despite difficult comps versus last year's period, which included the Firestone recall. Service same-store sales were up 5.2 percent, while parts sales were up almost one percent.

Sonic Automotive's execution of best business practices yielded outstanding performance in margin expansion and increased gross profit as follows. Service gross margin was 69.1 percent for the third quarter versus 67.4 percent in 2001. Total Q3 Service gross profit increased 7.8 percent versus a year ago. Parts gross margin was 32.1 percent for the third quarter versus 31.3 percent in 2001. Total Q3 Parts gross profit increased 2.6 percent versus a year ago. Body shop gross margin was 52.1 percent versus the 51.5 percent in 2001 despite the challenging collision repair industry environment.

Sonic Automotive maintained strong Finance and Insurance performance through our continued focus on training and menu selling. Strategically, Sonic's F&I focus increasingly centers on the sale of extended service agreements. The third quarter performance reflected this emphasis with a significant improvement in extended service agreement penetration, confirming the F&I model's profit flexibility in a 0.0 percent financing environment. Extended service agreements offer outstanding value to consumers and serve as a customer retention instrument that ultimately results in increased service and parts revenue at Sonic dealerships.

Sonic Automotive has continued to manage our inventory assets with discipline to maximize our flexibility and mitigate the risk of an uncertain economic climate, seasonal business trends, and a volatile manufacturer incentive environment. At the close of Q3, I'm please to report that our inventories are in great shape.

New vehicle inventory is at a 47-day supply compared to a 50-day supply in 2001 with only two percent of our entire new vehicle inventory over 180 days old. Used vehicle inventory is at a 37-day supply compared to a 38-day supply in 2001 with only six percent of our total inventory over 60 days which is principally certified vehicles in our luxury inventories. Parts inventory is at a 50-day supply compared to a 53-day supply in 2001.

Sonic Automotive's determination to main our inventory management discipline while reducing aging did not come without some cost. Increased wholesale losses as a result of used vehicle pricing pressures due to industry oversupply cost us about two pennies a share in the quarter. However, this strategy has positioned our company with clean inventories heading into the challenging winter season serving as a competitive retail advantage and minimizing the perceived risk of a depressed, wholesale used vehicle market.

Quickly, I wish to note the increase in SG&A is in part due to a conscious increased investment in sales personnel compensation to the sell down in inventories, resulting in the strong inventory status that I just described.

Post acquisition integration continues to go well in the stores acquired in 2002. Our largest acquisitions, the organization and the Center, have benefitted from the implementation of Sonic Best Practices in finance and insurance, fixed and expense control, resulting in significant net profit increases in both cases. We are optimistic about the future sales growth in these dealerships, creating additional margin expansion opportunity.

In closing, Sonic Automotive management remains committed to investing and leading the industry in the training and development of people through the expansion of our Sonic academy program. We look forward to launching a comprehensive training initiative in 2003, introducing an even higher level of standardized Best Practices to our dealerships and better leveraging the efficiencies of technology.

That concludes our prepared comments and at this time we'd be happy 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.

Our first question comes from with .

Thank you. Congratulations.

Thank you, .

Theo or Jeff or Scott, can you comment on the tone of business during the quarter? And also what you're seeing in October?

Jeff, if you could take that question, please.

Sure. Well, the tone of business, of course, Theo reviewed relative brand performance. Luxury business remains very strong. Our import business is very solid. And we did see some softness in September in domestic lines in part due to the model change over sell down, leaving us with some of the less desirable 2002 inventory and the slow ramp up of 2003 inventory.

In terms of October business, we're seeing slightly stronger trends than what September indicated in terms of both sales and profitability.

All right, great. If Theo's fall below your assumptions for 2003 three percent unit decline. Can we extrapolate the entire example you gave in Northern California to those new -- or those same targets of 295 to 305? What that might look like in a meaningful unit volume decline environment?

I believe given a longer period of time you can. I'd say consistent with what we saw in the fourth quarter of 2000 and first quarter 2001, if there is a sharp rate of decline, performance might deteriorate more than I indicated in that example for a period of time, a quarter or so. But overall, I believe that that example in Northern California is something you could extrapolate from, that our overall profitability would decline, largely in line with the decline in sales from new vehicles.

And one of this question, if I may, if you could comment on practices, new controls, that have been put into place, and how you see that affecting F&I per unit.

This is Theo Wright, and I will ask Jeff to follow with some color, but I think that the results for this quarter are indicative of what we can anticipate, which is no significant downward pressure on finance and insurance per unit, from our revised practices and controls there. What we are seeing is decline in profit - maximum profitability from an individual transaction, but better levels of penetration, particularly in the area of extended warranty products as well as GAF insurance. Jeff, could you comment further?

Yes, Rick, and of course we have implemented very comprehensive controls, and I am very pleased that you can see we continue to produce very consistent strong results and F&I performance on a per unit basis. We were up $14.00 for the third quarter, despite unprecedented focus on compliance. As Theo mentioned, we are putting more emphasis on noncancellable products that do not include charge back exposure, and particularly putting focus on the increased penetration of extended service agreement products as I described in my comments, which are really a terrific value for the consumer, and a great driver of future service and parts revenues.

OK, thank you.

Thank you Rick.

Our next question comes from with Salomon Smith Barney.

Thank you. You may have covered this, but - because I missed part of your presentation, but I will ask it again. Could you give us the split between the - your luxury, domestic, and imports, and also give some idea of the same store sales of those three, and possible the gross margin on those three, and so the - what percentage of luxury or domestic takes F&I that you get for parts and service? Thank you.

OK, I will - this is Theo Wright. I will try to answer as many of those questions as I can. Our brand diversity and the brands that we represent is disclosed in the press release under Brand and Geographic Diversity, where we detail our top ten brands, which includes a break out between luxury and domestic as well. So I'd refer you to that. In terms of same store sales performance, overall we saw a broad divergence between luxury and other brands, and we also saw a fairly substantial divergence between same store sales, domestic verses import. And I will try to give that to you in - trying to find the right page - give you the domestic verses import breakdown, because I think that that's the most revealing overall--hold on just one second, I've got to--for the quarter to date, domestic versus import, our domestic same-store sales were up one percent with a more significant decline in used vehicle sales and our import sales were up 4.8 percent. And overall profitability was actually up in our import lines versus down in our domestic lines. And I'd say that's consistent with the overall performance of luxury versus our domestic lines--or luxury versus non-luxury because our import portfolio is dominated by luxury brands.

And can you give us, if not some numbers, some color on how much of domestic versus import flows through into warranty business and into , if there's a significant difference?

Yes, I can answer that precisely. There's almost no difference between our luxury and import brands and domestic brands. I would say, generally, penetration rates are somewhat lower in the luxury arena, but because the financed balance is considerably larger in the luxury arena, when we do penetrate and sell a product to a consumer, our profit on that item is generally higher in the luxury end so, per unit finance and insurance amounts are almost identical, import versus domestic.

And you said these were--for the third quarter, would there generally be any difference over time?

No, there really wouldn't be.

OK, thank you.

Thank you.

Our next question comes from with City Group.

Hi, everybody.

Hi, Mark.

this may seem like a dated question, but I'm curious about Internet-based initiatives. A little bit of an update, maybe, if anything has shifted at all and, maybe, just walk through any examples if they apply from some of the companies, not necessarily these companies, but similar to what, you know, may be a does or an does and how, maybe, some of the money flows between you and any of these folks as far as if you pay, you know, for leads or if you pay on--any of these people on a success basis and how that impacts business.

OK, Jeff, if you could handle the sales aspects of that and then I'll follow up with some on technology.

Yes, the Internet we view as a great marketing tool and communication device that really exists as a lead generation source and we have a state-of-the-art Web site in each of Sonic's dealerships and we receive a number of lead opportunities directly through our own sites. We're also linked directly to many of the OEM sites and receive leads from them at no cost. We do have relationships with a handful of other national or regional lead providers and, in those cases, we do pay them on a per-lead basis and it's a very cost effective source of leads. But just want to confirm that there has been no successful direct model in the Internet space. Again, we see it as a terrific marketing resource, a source of additional sales leads, and we treat it as such. We are in the process of integrating our Internet lead management practices with a more comprehensive commitment to customer-relationship management technology which serves as really a showroom traffic control owner follow-up and non-buyer follow-up resource. And we'll incorporate our Internet lead management into that technology and support that with comprehensive training in terms of sales practices in our showrooms. Theo?

Yes, I would - you covered the technology element that I wanted to mention which is integration of those leads into our sales processes. The only other comment I would make is we see over time more and more of the traffic and more of the interaction with consumers coming from our own Web sites and the manufacturers' sites and less from the third-party sites.

OK, if I could just follow up on - with a different question - have you noticed any changes in the trends relating to leasing mix because I know the last couple years, there's been a high leasing mix and that's impacted - or I guess a high number of cars coming off lease, and that's impacted used car pricing. With the incentives on new cars, have you seen the leasing mix decline and seeing any, you know, early indications about that having less of a negative impact on used cars?

This is Theo Wright. I'll answer that question.

It varies somewhat by brand, but generally we have seen in the domestic lines a very substantial decline in the rate of leasing GM, Ford, and Chrysler. Ford, particularly, was heavily reliant on leasing, and their leasing penetration rates have dropped substantially. GM and Chrysler were less dependent, but nevertheless, their leasing penetration rates have dropped significantly. In the luxury arena, we still see very high leasing penetration rates.

One change over the last several years is to the extent leasing is occurring, it's almost all through the manufacturer's captives as a form of incentive and support to vehicle sales. The rate of leasing turn-in will continue to be high in 2003, and we believe will begin to decline in 2004 and beyond. So in terms of impact on used vehicle prices, there should be positive impact in the future, but that's well into the future at this point because of the initial terms of these leases in the two-and-a - two to four-year range averaging I think closer to four or so. There's a tail on the leasing impact in terms of the rate of lease turn-ins, and we'll start to see those lease turn-in rates decline in 2004.

Thank you.

Thank you.

Our next question comes from with .

Hi. The pre-tax flow target for next year of 110 million - can you just walk us through the broad strokes how you get there?

Yes. Roughly 130 million in net income plus depreciation of 10 less forecasted capital expenditures of somewhere in the 30 million - 20 to 30 million range which was - is somewhat higher than we had previously forecast. But in looking at our Cadillac dealerships principally acquired with the Massey Group and the planned image enhancements for those dealerships, we think our capital expenditures will be somewhat higher next year. So, that's our general view on cash flows.

I do want to point out that most of our capital expenditures we ultimately expect to have refinanced off balance sheet and sale lease back transactions. And these sale lease back transactions are normal, commercial lease arrangements. They're not synthetic lease arrangements and they include no future buyback obligation or similar elements.

And you guys also have earn out liabilities to some of these acquisitions you've made?

We do not. We have used earn outs from time to time in the past, but we currently have no significant earn out liabilities. And given the nature of the transactions that we're pursuing at the moment, we don't anticipate significant earn out liabilities in the near future.

OK. And are you guys comfortable giving out what your penetration rate is on units for the ?

Yes, the penetration for last quarter was 71 percent, which is consistent with our past experience.

OK and last question. Your forecast to get to the 295 to 305 assumes, what? A three percent decline . Do you basically just say all your dealerships are going to have three percent down vehicle sales? Or do you make any other sort of adjustments to what kind of market share you think you're going to be getting?

In terms of modeling, we're just forecasting vehicle sales down for our overall models. We do forecast each individual dealership. And in those cases we focus on market share for the manufacturers. So, the answer is to a certain extent it reflects market share expectations, but the overall model is really driven by a decline -- an overall decline in new vehicle sales.

OK, so you guys are anticipating three percent decline in overall sales in both the industry and for your dealerships?

That's correct.

OK, thanks.

Thank you.

Our next question comes from with JP Morgan.

Yes, hi. Thank you. Quick two questions: first, declining gross margins for new vehicles to 3.5 percent. Is that entirely as a result in of reduction in floor plan assistance? And if so, where do you see the trend going to 3.5 margin is a good number to look for '03 or should it be lower?

And the second question is about the increase in sales force incentive. Could you quantify that in terms of incentive per car? Or in the current quarter compared to 3Q '01?

This is Theo Wright. I'll answer those questions. On an historical basis, there's a 60 basis point decline in new vehicle gross margins. Thirty basis points of that decline represents the impact of flooring assistance and floor plan interest. So most of the decline, in our view, is due to changes in the flooring environment, generally.

The remainder of the decline reflect both market conditions and our aggressiveness in selling those new vehicle to address the inventory concerns that Jeff mentioned. So not all the decline relates to floor plan interest changes and assistance changes, but most of it does.

We do think in the current interest rate environment that the seven and a half percent gross margin is a realistic expectation going forward. I do want to point out that that decline -- the offset to that decline is largely reflected in the decline of floor plan interest, which is another category on our income statement.

Automation -- another company in our sector -- combines floor plan assistance and floor plan interest in the same line as gross profit and new vehicle sales and gets, I think, a clearer comparison of the impact of interest rates on gross margins for new vehicle sales.

If you could just remind me of your second question, please?

Yes, the increasing sales force incentive during the current quarter, can you point -

We could not, I don't believe, accurately quantify the impact of those incentives, because they are imbedded in the sales compensation line, and they are what we refer to in the industry as spiffs. And we don't, with care, separately track those incentives verses our standard sales commissions, because spiffs are an ongoing part of the business. It is just we had higher levels of what we call spiffs this quarter than would be normal. Jeff, could you comment further on that?

Yes I can, and I can quantify it as a percentage of gross profit. We had an increase of about 4% in total new and used sales commissions, and as Theo noted, that was a conscious investment that we made to incentives the sale bound of aged inventories and we think that that was a good decision strategically, because we clearly have an inventory position that is in great shape as we head into what is a seasonally difficult time of year and an uncertain economic climate.

Thank you.

Thank you.

Our next question comes from with .

Hello, can you hear me OK?

Yes.

OK, sorry I just headset off. First I just want to ask one housekeeping question. On the - then I will get into my question. On the units that you report on - do these include vehicle sales from the sole dealerships, or these are just from continuing operations?

These are just from continuing operations.

OK, great. Then my question is on the - I wanted to understand the free cash flow a little bit better in the fourth quarter, or actually the - let me see if I have this right - I mean, it looks like we've - we - we did $65.8 million in the third quarter, in the Eva-Dow. The interest was 16.6 million and the taxes are - was 20.5, so that should have led to cash increase of $28.7 million. The notes payable is debt of increase by 111 million, and long-term debt is up by 120, the long-term liabilities are up by 12, so that's a use of cash of an increase of 243. Inventories went up 147, so is a source of cash, which is ok, and so net - lets say, and then there is some change in accounts receivable. So it looks like cash consumed has been about 106 million on the debt side, and - while free cash at least for the quarter is 29 million. So that's 135 million. But our cash is basically flat. So I am just trying to I want to make sure that I am seeing where the cash is going, because - is that being used in the buyback, or is that being used for the acquisitions, so the dealers - can you help me understand that a little bit?

Sure. The cash is being used in the buyback.

OK

-- that we expended roughly 23 million in the quarter for buyback.

OK. wright: The cash is being used in acquisitions as well.

OK.

Those are the principle uses of the cash, and when we talk about cash generated from operations, what we are referring to and it's consistent with our past practices. Net income plus depreciation ...

Right.

... and amortization plus we had very significant deferred tax benefits associated with taxable goodwill and amortization.

OK.

So when we're referring to cash generated from operations, that's really our definition.

But will I see the deferred taxes on the balance sheet, I mean?

You'll see it in the cash flow statement.

OK. On the balance sheet you provided that would be--let me see--that would be--increase in deferred taxes would be a liability, I guess, right? So that would be the other accrued liabilities?

Well, it's deferred income taxes and other long-term liabilities.

OK.

We have many--we have many income tax liabilities there related to and other matters.

Oh, I see, you actually do break it out. OK, I'm sorry, I got it. OK, because that looks like that's--deferred income tax has gone down the year, right? So does that--does that mean the use of cash?

No, without having the cash flow statement in front of me it's hard for me to answer that precisely, but, again, we're talking about deferred income tax and the impact that that has on our cash flow during the quarter. We're referring there specifically to the tax benefits associated with faster amortization, or amortization versus no amortization, on goodwill, as well as the effects of faster depreciation on fixed assets and other items. We have a number of tax liabilities that may be associated with that could be driving that--payments associated with and conversions from predecessor companies that are affecting that.

OK. So the--it looks like you have about 25 to 30 million left on the authorization from the Board. Are you guys planning to go back to the Board and ask for more authorization?

We will consider that based on the use of the existing authorization as well as the price of the stock over time. We currently do not have a proposal in front of the Board, but depending on the trend in stock prices and the use of our existing authorization, we may seek additional authorization.

OK. OK, thank you very much.

Thank you.

Our next question comes from Ellis with Micro Capital.

Good morning, gentlemen, and I just want to say thanks for doing a good job on a number of the operating challenges you've had over the last year.

Thank you.

Some very quick results in Q3. Can we just kind of talk about acquisitions, I mean, at these prices I think all of the longstanding shareholders of the other company and other companies in the group are likely to be supportive of share repurchase, but while the history of the stock trading in the past has shown that when the group delivers the business model as promised in a weak sales environment, the stocks take off. And you can very quickly be seeing stocks at a price and a valuation which would make sense to be issuing some stock in acquisitions. So I don't see it's too premature to kind of open up the discussion as to what the acquisition environment is like right now given that, you know, these deals take time to get your arms around.

Well, as we mentioned in the call in our prepared comments and our acquisition activity right now is very limited and, frankly, we have more current divestiture activity than we have acquisition activity, which should generate net cash from acquisitions and divestitures combined. Our acquisition activity to the extent we have any is focused on transactions that include some meaningful strategic benefit to us. For example, the dealership acquisitions that we discussed in this press release include both the opportunity for very high returns on investment - 30 percent pre-tax over a longer period of time. They also accomplish other objectives.

In the case of , there's considerable real estate value associated with that transaction that will support our other operations in that same market. And the dealership includes a relocation much as I discussed in our prepared comments that has significant strategic value both to us because it will be directly across the street literally from our existing Honda dealership in that market enabling us to share a body shop between two operations as well as strategically benefit Toyota, the Toyota distributor in that market.

So, those are the types of very limited transactions that we'll be doing in the near future, and we would expect near-term, much more of our capital be allocated to share repurchases rather than acquisitions.

Right. No, I understand that I'm just kind of curious about where the acquisition opportunities are out there - whether pricing is coming down or whether there's just a big void right now in terms of private - the private value's still holding up or the price at which dealers are prepared to trade.

The price - the prices I would say are perhaps down modestly, but generally holding up in the private market because right now a owner of a performing dealership is evaluating the value of selling that dealership versus earning really in a typical entrepreneurial setting, huge returns on investment from that dealership on an ongoing basis. And at a certain point, it doesn't make sense to sell a dealership. So, pricing in the private markets is maybe down slightly.

Availability in the private market is way up. We have a full pipeline. We have many more acquisitions than we are in a position to realistically pursue at this time. In fact, it's a point of frustration for all us, the fact that right now we have a lot of acquisition opportunities available and it doesn't necessarily make sense for us to pursue them. We see positive mix in terms of the availability of import and luxury franchises as you saw with our recent announcement with an import Toyota franchise as well as an import luxury line or near luxury line with Infinity.

So, assuming market conditions turn around as you've described based on auto retailers performing in a down cycle, we have an outstanding pipeline of availability and I believe could very quickly ramp up our acquisition efforts once again.

Great. That's good to hear. Thanks, .

Our next question comes from with .

Good morning, Gentlemen, and congratulations on a very good quarter.

Thank you.

I just - a question about the goodwill on your - on your balance sheet. Under what type of circumstances would have to happen that impairment to goodwill?

The market value of dealerships in both the public and private markets would have to decline significantly from market values that we see today, or our operating performance would have to experience a sustained decline. I would say those are the two situations that could potentially lead to an impairment of goodwill. Based on our impairment testing that we completed in the second quarter of this year, the market value of our dealerships on both a private market basis and a public market basis at that time was substantially higher than the book values.

Thank you.

Thank you.

Our next question comes from with Bank of America.

Hey, good morning.

Hey, Nate.

The question on the service and parts business. I was just wondering if you could expand upon your comments. It sounds like you're pretty optimistic things are going to get back to their historical type growth rates. What kinds of trends are you seeing on the collision repair side? And, you know, what kind of trends at the Ford dealerships that have been dragging down those results?

Jeff, if you could answer that question, please.

Yes, we actually experienced a negative trend, again, the in third quarter in terms of collision repair revenues. And that is in large result due to over, climate and shortage of severe weather that really drives the collision repair business to a certain degree.

We've also seen a change in some insurance company policy trends whereby insurance companies are totaling vehicles completely in many cases at a higher degree than they had in the past, which has impacted that business as well.

In terms of our Ford dealerships, the same store sales were down this past quarter in our Ford dealerships. And we start to run into easier comparables in the fourth quarter. I would also emphasize that the decline in collision repair business, we believe is effecting independent collision repair shops as well as ourselves based on the declines that we've experienced in wholesale parts sales, which are largely related to the collision repair business. For the quarter we were down a little over one percent in wholesale parts sales, again, largely related to declines in collision repair business.

If I could also add, Theo, that we had recently added two collision repair specialists. A divisional director for both the Eastern and Western operations of our organization. And those individuals are providing training and support and serving as a catalyst to share Best Business practices across our collision repair center base.

OK. And secondly, Theo, I was just wondering if you can give us a breakdown of your various debt incentives at the end of the quarter?

I don't have an exact breakdown of that right in front of me, . Why don't we get back to you with that answer. But it's largely unchanged from the prior quarter, other than repurchase of some of our convertible debt instruments during the quarter. As well as a very minor amount of our long term, straight debt. And then the remainder of the balances are related to our credit facility. If you wait just a second I think I can give you answer to what's included in the credit facility, specifically -- 282,516,000 in our revolving credit facility. And then in the construction and mortgage lines, 11 million outstanding there.

All right. Thank a lot.

Thank you.

Our next question comes from with .

Good afternoon guys. Good morning, that is. Could you just maybe just talk about the buyback, Theo. What was the amount of shares that were actually bought back in the quarter?

The number of shares reacquired during the quarter were - and the fourth quarter to date were 1,203,000 shares at an average price of $19.50. $23,460,000 expended.

OK, and we should see that - some of that flowing through, obviously into the fourth quarter? And you - what was the share count that you gave - the diluted. Was that 42. -- ?

42.2.

OK, and that that includes the fully to that number?

Yes sir.

OK, and also, what was the F&I per vehicle on the year-over-year basis between the two quarters?

You looking for a same store basis or overall?

Both.

Let me give you an overall number first. 895 last year verses 894 this year, on a same store basis. 892 verses 906 this year.

OK, and I hate to make you guys go through this again. I think I only caught a small piece of it, but you were giving that example of Northern California over the last couple of years, and you gave the various drops in and different pieces of the business. I missed the last piece. What did that all come down to when it is all said and done, on a profitability basis?

Our profits, on a new vehicle sales, decline of 20%, and used vehicle sales, decline of 12%. Our profits at the store level were down 17%, and our overall margins went 4.16% to 4.04%. So margins very stable. The profitability declining in a similar fashion to the declines in vehicle sales, in spite a pickup in service and parts business that was offset by the impact of our fixed costs and pressure on vehicle sales margins.

So when you are talking overall margins, you are talking about the operating margins?

Yes.

Alright, so basically you guys were able to stay pretty stable in that environment?

That is correct.

And that so, if once again, if we were to see a - lets say, a 10% drop in sales next year, you - we would assume that at a minimum, that we could probably see flat comps on the year-over-year basis, on the bottom line, worse case scenario? Or at least on the operating line?

I think flat in - or near flat in terms of margin, but the total profitability in the 10% range, call it 8 to 12, or something around that 10% decline. So margins relatively stable, but profits down because sales are down.

Alrighty, and one more thing. The assumptions for the fourth quarter. Once again, we are looking at 12% drop in new for the fourth?

Yes.

7 for used, and parts and service was at a plus or minus on this -

Plus.

And next year, there were two numbers that you said. I think you said 5% drop in same store for new? Is that what we are looking for, or 3?

Let me get my notes just to make sure. speak here. New down 5%, used flat, service and parts up 5% for next year.

OK, that's all I have. Thanks guys.

Thank you Scott.

Our next question comes from with .

Good afternoon.

Hi Jerry.

Just a couple quick follow-up questions. The 3% that you quote, I think was on a Q&A. Was that regarding '03 guidance, is that regarding maybe the overall sales, or was that just kind of a nick up?

That, overall that should be pretty close.

OK.

But I think it may have been a mix up.

OK.

To reiterate, five percent down in new, flat in used, up five in service and parts. That's our forecast.

OK. And with your you guys have done what? A couple of billion in acquisitions year-to-date, how much of that spills over into 2003 in your guidance that you're assuming?

Could you rephrase that question so I fully understand it.

How much of the, you know, year-to-date acquisitions and annual revenue that you guys have done in it so far is going to, you know, going to spill over into next year. In other words, some of that's hitting this year, some more is going to remain--it's not going to be a full, like, two billion that's going to go into next year's results, right?

Right. It's based on the time of acquisition of each one of those individual acquisitions, Gary, so it's hard for me to--it's hard for me to answer that question directly in the sense that it depends on each--when each one of those individual acquisitions was completed.

OK.

So, for some of them, we'll add three months worth of revenues for next year. For others, they aren't going to close until next year so the full amount of the revenues associated with those announcements will impact next year and none this year.

OK. I just wanted to make sure because I know but I know there's been some, you know, divestitures and everything else and make sure the revenue amount that I'm assuming is for acquisitions next year is kind of up to date with you guys.

OK.

And then finally, your per vehicle on a same-store basis was up about one percent. Theo, when you guys acquired Don Massey you indicated that their is something like $4 to $5 hundred per vehicle, you're still, you know, doing the comparison compared to last year, I guess you would have expected some dilution in your per vehicle or is that because it's not included in the same-store sales data and there was some dilution in the overall results?

Massey would not be included in the same-store sales data.

Right.

Massey would be included in the overall results which show no dilution and, essentially, we have very quickly gotten those dealerships up to our overall average.

OK, thanks a lot.

Thank you.

Again, if you would like to ask a question, please press the star key, followed by the 1 key, on your touchtone phone now.

Our next question comes from Adam with Interest Capital.

Hey, it's just a quick follow-up on that Massey comment. How were you able to get that number up so high? Was that just increased penetration or do you just get much better rates than Massey was getting on its own? And then also, on your acquisitions strategy, is there any--what's the longer terms strategy in terms of are you trying to move up to more luxury or more import or what's that--what kind of acquisitions are you looking for on a brand or import basis? Thanks.

Jeff, if you would answer the question about , I'll cover the acquisitions.

Sure. The real impact is not an increase in finance penetration, it's a focus on training and development and accountability. We implement our best practices, such as our menu selling process, as well as our performance-based motivational compensation schematics and those things, along with the support of comprehensive trainings, are the real drivers of the improvements in Massey's performance. Theo?

Yes, and I'd just add to that, we also do pickups and benefits of scale in terms of incremental commissions from providers of finance and other products. So that's also a factor that - that's a benefit that we get essentially automatically once we take over a dealership group. And that averages about $100 per unit retail.

To address the acquisition strategy, we continue to focus on import and luxury brands. We are bullish on luxury brands long-term because of the changes in demographics as well as enhancements in the product offering from the luxury brands. They've significantly broadened their product offering to add light trucks, and this has enabled luxury brands overall to take very significant market share. And we do also like Honda and Toyota and a number of the import brands.

We would - in the right market and the right circumstances, however, pursue a domestic line acquisition because we believe particularly in markets where trucks are the predominant vehicle purchase that the domestic lines are going to continue to have strong performances long-term.

OK, great. Thanks a lot, guys.

Thank you.

Mr. Wright, there are no more questions at this time.

Thanks, everyone, for joining our call.

Thank you very much.