Group 1 Automotive, Inc.
Q3 2010 Earnings Call Transcript

Published: 26 Oct 2010

[Operator:]

Good morning, ladies and gentlemen, and welcome to Group 1 Automotive 2010 Third Quarter Financial Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the call over to Mr. Lance Parker, Group 1's Vice President and Corporate Controller. Please go ahead, Mr. Parker.

[Lance Parker:]

Thank you, Lia. Good morning, everyone, and welcome to today's call. Before we begin, I would like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures. Except for historical information mentioned during the conference call, statements made by management of Group 1 Automotive are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve both known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Those risks include, but are not limited to, risks associated with pricing, volume, and the conditions of markets. Those and other risks are described in the company's filings with the Securities and Exchange Commission over the last 12 months. Copies of these filings are available from both the SEC and the company. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on its website. Participating on today's call are Earl Hesterberg, our President and Chief Executive Officer; John Rickel, our Senior Vice President and Chief Financial Officer; and myself. I will now hand the call over to Earl.

[Earl Hesterberg:]

Thank you, Lance, and good morning, everyone. I am pleased to report that our results for the third quarter of 2010 were extremely positive in almost every area. Most noteworthy was the continuation of very powerful sales performance in almost every area of our business. This sales performance generated an overall revenue increase of more than 17% for the quarter, which continues to leverage the aggressive cost reduction actions our company took last year. I am also pleased at our major balance sheet improvements throughout the first nine months of this year. Our current cash position is extremely strong for a company of our size. And our long-term debt to equity position is one of the best in our recent corporate history. John will provide more details during his presentation. As I just mentioned, our sales performance remained strong in the third quarter. Retail used vehicle and parts and service performances were exceptional and well beyond our projections. In the current challenging economic conditions, many customers see more value in used vehicles. We have been capitalizing on this trend as evidenced by our third quarter retail used vehicle revenue increase of 33.7%; 29% on a same-store basis. This substantial increase was driven by a 24% lift in retail used vehicle unit sales on a consolidated basis and 21% more unit sales on a same-store basis. Although our new vehicle sales increase was not as impressive on a percentage basis, we must remember that the third quarter last year was inflated by the government's Cash for Clunkers program. With that comparison in mind, industry retail sales actually decreased slightly during the third quarter whereas our new vehicle unit sales increased 2% on a same-store basis and 5.3% on a consolidated basis. After nine months in the calendar year, our new vehicle revenues are up 17.5% on a same-store basis. The one area of our performance which is below our targets relates to vehicle sales margins. Both new and used vehicle retail margins are lower than we would like to see. New vehicle margins were 5.7% for the quarter, equivalent with second quarter levels, but down 100 basis points from last year's strong third quarter results. Biggest factors currently affecting these margin levels are the overall competitiveness of the market and extremely low vehicle margins for several volume brands. Our used vehicle retail margin of 9.1% was also a bit soft due to the continuing need to supplement our inventory with outside purchases as well as our focus on volume increases. We would anticipate retail vehicle margins to return to more normal levels as new vehicle sales rebound. The strong new and used vehicle retail sales performance was complemented by a nice increase in our finance and insurance penetration to $1,037 per retail vehicle profit. This is an $83 per unit improvement from the same period last year and reflects significantly improved penetration rates for both financing and service contracts. And perhaps the most impressive facet of our sales performance in the third quarter was our same-store parts and service growth of more than 7%. In a market where any year-over-year growth is a decent accomplishment given declining units in operation, we are very pleased with the performance of our operating teams in this key area of our business. Additionally, our parts and service margins increased on both a year-over-year and sequential basis, coming in at 54.3%. This increase in parts and service sales was driven across all categories, including higher sales in customer pay, warranty, collision, and wholesale parts sales. Driven by the overall strong selling performances I just mentioned, our same-store selling, general and administrative expenses as a percent of gross profit reflected further improvement on both a year-over-year and sequential basis, with 75.9%. Our third quarter same-store operating margin remained flat with the second quarter at 3.2%. These operating results drove an overall 15% growth in adjusted net income and John will have more color on that item in just a moment. Turning back to our third quarter new vehicle business, some additional details on our consolidated brand mix, 37% of our unit sales were from our Toyota/Scion/Lexus stores. Nissan/Infiniti remained our second best seller with 14%. BMW moved up into third place with 12% of unit sales. And Honda/Acura came in right behind with 11.8%. Rounding out brand sales for Ford was 7%; Mercedes-Benz 6%; and GM and Chrysler representing 4 and 3% of our unit sales respectively. In total, luxury and import sales gained share in the quarter accounting for 86% of our new vehicle unit sales. Our new vehicle inventory increased slightly to 62 days' supply at quarter end. Generally, we are comfortable with our new vehicle inventory levels given the current and projected selling environment. Looking at the used vehicle business, as I mentioned earlier, our used vehicle sales have continued to strengthen, including our certified pre-owned business that accounted for nearly 35% of our third quarter used retail unit sales. Used vehicle inventory was at a 30 days' supply at quarter end. With that, I will now turn the call over to our CFO, John Rickel, to go over our financial results in more detail. John?

[John Rickel:]

Thank you, Earl, and good morning, everyone. For the third quarter of 2010, our adjusted net income increased to 19.3 million or $0.84 per diluted share. This result excludes $1 million after-tax non-cash asset impairment charges and a 761,000 after-tax gain on the sale of a non-operating real estate holding. On a comparable basis, adjusted net income increased 2.5 million or 14.6% from 16.8 million in the third quarter of 2009, which excludes the following

[Earl Hesterberg:]

Thanks, John. We think the industry is still on track for a full year seasonally adjusted selling rate of 11.5 million units. So we're continuing to plan accordingly. As you've heard on this call, we are confident that we have made the appropriate changes to position the company strategically for growth. Expenditures are down. Improved processes are in place. We are continuing to generate cash. New vehicle sales are picking up slowly. And our balance sheet is well positioned. Our team has worked hard during the last two years to make these improvements and is looking forward to demonstrating the full leverage of these efforts as sales increase in the coming years. That concludes our prepared remarks. I'll now turn the call over to the operator to begin the question-and-answer session. Operator?

[Operator:]

Thank you, ladies and gentlemen the question-and-answer session will be conducted electronically. (Operator Instructions) We'll here first from John Murphy with Bank of America.

[John Murphy:]

Just had a question on new vehicle gross margins, and the margins have remained pretty depressed and we've been hearing from other dealers and throughout the industry that there has been some pricing pressure at the dealer level and there hasn't been a whole lot of help from automakers. I was just wondering if you guys were seeing the same kind of stuff, and with dealers closing, if that competitive environment among the dealership base may ease over time and these margins may increase as demand increases in next year.

[Earl Hesterberg:]

I think the margins will increase as demand increases, but the dealer base that still exists is now reasonably healthy and back on an aggressive footing. So with the combination of Internet shopping, a lot of value conscious shoppers and the remaining dealers being strong and aggressive, there's a lot of margin pressure right now on new vehicles. In the near term, I don't see that going away, but as we would get back toward 14 million and 15 million unit industries, the margins would clearly come up.

[John Murphy:]

Okay. And then a question on used, which is a business that seems to remain reasonably strong, as demand seems to be increasing there, just wondering what you are seeing from these used car buyers and ultimately, if this rise in demand for used cars ultimately will trip into new vehicles, that consumer transferring that demand for travel utility into buying a new vehicle, if you're seeing these consumers coming in wavering between buying a used car and a new car, are they just opting for the used car right now and at some point in the future they might start buying these new cars or is it just really sort of this core used car buyer that's coming in and supporting this market?

[Earl Hesterberg:]

No, I think the assumption you implied is true, over time some of this used demand will morph back into the new vehicle market and price relativities will push some of that as well as increasing consumer confidence, but right now consumers are just very cautious and very practical, and there are a lot of very good high quality customers that are opting for used instead of new right now because of economic uncertainty or housing issues or unemployment issues or whatever the major macroeconomic factors are. But over time, I think clearly some of that demand will get back over on the new vehicle side.

[John Murphy:]

And then just one last question on parts and service. You guys had a good performance in the quarter. And it was I think a lot better than some of your peers to-date. I was just curious what you are seeing in your local markets versus competition and if competition has really been taken out as dealerships have been closed? Because it appears there has been a drastic reduction in the number of service bays even though there might be an aggregate reduction in parts and service business, the cars per service bay may have gone up in some of the markets that you operate in. Have you seen anything like that, are there any other sort of exogenous factors that are explaining the strength in your parts and service business?

[Earl Hesterberg:]

Yes, we have, in areas where dealer count has been reduced and an adjacent or nearby dealer of the same brand has closed or gone out of business, that's the one area where we do see an immediate pick up. It tends to be, of course, on warranty business in particular, and to a lesser degree, on customer pay. So that is a benefit that large groups such as Group 1 have and will receive as dealer counts are reduced. But unfortunately, customers are very price sensitive in the aftermarket as well in parts and service in the customer pay area, and so we've had to market very aggressively against not just other dealers, but aftermarket competitors and we're going to have to continue to do that. So that, that part of the market is very competitive also, which is one of the reasons we're very happy with that 7% growth in parts and service, because that market is very challenging right now also.

[John Rickel:]

And I would add to that, not only the 7% growth but also we grew margins in what is the competitive environment that Earl described at 54.3%. To be able to grow the margins 60 basis points on a sequential basis, we feel pretty good about that.

[Operator:]

Our next question comes from the Rick Nelson with Stephens.

[Rick Nelson:]

Congratulations on a really nice quarter. Can you, Earl, comment on the acquisitions and how you evaluate that versus alternatives of debt pay down, et cetera?

[Earl Hesterberg:]

Well, right now acquisitions would remain our preferred way to invest our cash and to grow our company and there are a significant number of dealerships in the market for sale, but unfortunately, we just haven't been able to find anything recently that meets our hurdle rate. As you know, we're also operating a share buyback program under authorization from our Board. But our preference would continue to be to grow the company through acquisitions. We just, at this point in time, haven't found anything that fits our strategy and our financial return requirements.

[Rick Nelson:]

Thank you. Where do you stand with Toyota today on the acquisition front? Do you have the green light there?

[Earl Hesterberg:]

Well, we thought we had the green light once before and didn't. If we find a Toyota dealership that meets our requirements, we won't be deterred.

[Rick Nelson:]

Curious about October sales as well, we're hearing in the sector that things are picking up a bit versus October a year ago, any comments?

[Earl Hesterberg:]

Well, actually, I've been reading that as well, Rick, so I checked our latest traffic and sales data yesterday, so through the weekend sales and I'd have to say that our data confirms what you've been reading. In particular, J.D. Power has projected a retail SAAR of 10.2 million, which would be up 17% from last year. And our data would be generally consistent with that October appears to be off to a very good start, I guess what 80% or more of the month already behind us.

[Rick Nelson:]

Right. What do you think is driving that? Are the incentives any more aggressive?

[Earl Hesterberg:]

No, actually they're not, Rick, at least not that I can tell, and I'm a bit surprised by it because the demand in the third quarter was fairly, fairly consistent for us. There wasn't any evidence in the third quarter of any renewed consumer strength. So I don't really have a good explanation for you other than we're appreciative and optimistic now after, after 24 or five days of October.

[Rick Nelson:]

On used car side, we've now seen four consecutive quarters of double-digit same store growth there, do you think that sort of growth is sustainable as we look to the final quarter?

[Earl Hesterberg:]

Well, I don't think that type of percentage growth is sustainable for us, Rick, just because we will lap ourselves eventually in the comparisons, the comparisons will be against much, much higher numbers. But I do think that we can certainly grow at or above market growth levels and I think we all see growth on horizon in the overall economy, the new vehicle market and I think that takes the used vehicle market with it. And as I mentioned to John Murphy a few minutes ago, I do think there will be a little bleeding of used demand toward new over time as the economy recovers, but we're still very bullish on the used car market overall, and on our used car business in particular, so I wouldn't expect to be able to do 30% increases quarter-after-quarter, but we certainly will keep shooting for double-digit increases.

[Rick Nelson:]

In margin on used cars, do you think we've bottomed out there?

[Earl Hesterberg:]

I would hope so. I would hope so. The issue, the issue still seems to be the supply of good used vehicles. And there's a lot of us competing at auctions and so forth, to supplement the line we get from trade-ins. Now we will get more trade-ins as the new vehicle market improves and that should help us, but it will be some time before the off-lease vehicle supply improves again. It does appear that rental companies and fleets are buying a lot more cars all of a sudden, and that could put a little softness into some parts of the used vehicle pricing market. But, overall, I would hope we could hold at a minimum somewhere closer to current margins we have and work it up from there.

[Operator:]

Our next question comes from Adi Oberoi with Goldman Sachs.

[Adi Oberoi:]

I just had a quick question on used margins, just following up on some of the previous comments that you have made. So is it fair to say that acquisition, high acquisition cost is the only thing that is holding you guys from the double-digit margins that you guys used to post a few quarters back, on the used side?

[Earl Hesterberg:]

I wouldn't say it's the only thing. It's the primary thing. But as we have mentioned throughout the first nine months of this year, we came out in January with a more aggressive selling posture in our company on new and used vehicles in particular. And so clearly, you don't generate a 20% to 30% sales increase in this market without giving up a little margin for volume. So I think there's a component of that in our business results also.

[Adi Oberoi:]

Got it. And on the collision business, your collision business was up 10% year-on-year. Are you guys seeing some deferred maintenance in that segment coming back?

[Earl Hesterberg:]

Yes, I think it's fair to say that in the deepest part of the recession, it is likely that there were more customers holding onto checks from insurance companies and not repairing their vehicles. But I believe the bigger factor for us is that we have put much more focus on managing our collision repair shops. And very early this year, we put a dedicated experienced person in charge of day-to-day managing operation of our largest shops and we've seen results from that.

[Adi Oberoi:]

So in other words, it's not only the deferred maintenance but some of the actions you took. So we can expect some further growth in this business as we head into 2011.

[Earl Hesterberg:]

Yes. That would be our goal and our priority.

[Operator:]

Our next question comes from Matt Nemer with Wells Fargo.

[Matt Nemer:]

So my first question is, it seems like you're on a path where you've traded a little bit of margin for volume and it's worked out really well for you. Do you think that you continue with that I guess playbook, for lack of a better word, sort of focus on volume, willingness to give up a little bit on dollars per unit?

[Earl Hesterberg:]

For the short-term, yes, Matt. We've not changed any of the instructions to our operating people at this time. However, I am not sure that I would remain comfortable with the new vehicle margins for an extended period of time.

[Matt Nemer:]

Okay. And then turning to parts and service, which was really a great result. What do you think is the main factor that differentiates your warranty growth versus the group? Because I would assume on a constant mix basis, they shouldn't be that far off from each other or does it have to do with consumer marketing or geography or something else?

[John Rickel:]

Matt, this is John. I think it's a combination of those factors. I think Earl touched on one of them. We certainly have seen some nice upticks at some of our domestic brand stores that have benefited from some of the neighboring dealers closing. So that's funneled some additional warranty business to us. Clearly, because of our heavy Toyota mix, we have benefited from the Toyota recalls which continued into the third quarter. If you take the Toyota recalls out, instead of being up 9.9, we are up probably more like 5%, and probably half of it is driven by Toyota mix. The third thing is just the job we are doing and the retention of the customers, the warranty work tends to get done where you're doing your other service work and as we've improved retention rates, I think that's also helping.

[Matt Nemer:]

And just remind us are there any components in service that are variable related to the current quarter new and used vehicle business, i.e., PDI or anything like that?

[John Rickel:]

Matt, this is John again. On a revenue basis, no. The only benefit within parts and service is it does help improve the margin results. But there is no revenue impact for us.

[Matt Nemer:]

Got it. And then just lastly, on the cash balance, is there a reason that some of the cash didn't flow into the floorplan offset account? Or should we expect you to run at a higher balance sheet, cash balance going forward?

[John Rickel:]

It's basically just a mix, Matt, this is John again, of where we think we can get the best returns on the cash.

[Matt Nemer:]

And actually if I could just sneak one more in, as we look to 2011, Earl, could you just maybe give us a quick preview of what your strategic priorities are in terms of maybe operating changes or enhancements that you plan on making to the business?

[Earl Hesterberg:]

Well, at this point, I don't think there is any dramatic difference from the course we've set. We are going to continue to put a lot of emphasis in the parts and service area and both customer pay in terms of promotion and competitive price offers and growing the collision businesses as we've chatted with the previous caller. The question we'll have to answer is one that was just asked also, and that is, if we continue to trade off new vehicle margin for volume, and I won't be able to answer that until we get a little further down the road.

[Operator:]

Our next question comes from Scott Stember with Sidoti & Company.

[Scott Stember:]

Can you just talk about some of your bigger brands, how they performed in the quarter, such as Toyota, Nissan and BMW?

[Earl Hesterberg:]

Yeah, Scott, Toyota sales for the quarter were down 2.9% and were up 10.2% for the year. Our best sales increases were Mercedes at 24.5%; General Motors at 20%; Ford at 13.4%; Nissan up 5%; Honda up 1.8%; BMW up 1.9%. Our Chrysler business was down 10.7%. That covers most of the major brands.

[Scott Stember:]

Great. And can you talk about some of your geographies, namely Texas?

[Earl Hesterberg:]

Texas overall, I would say, was strong with the exception of Houston. Houston is a little tougher this year. Obviously, we are growing in Houston as well or we wouldn't be able to put these numbers on the board. But the Houston economy is a little bit sticky because of energy issues and that deepwater drilling ban and so forth. So Houston is not as strong as the rest of Texas for us, but it's still pretty good business.

[Scott Stember:]

And, John, I missed what the parts and service of the customer pay same-store sales increase was?

[John Rickel:]

Yeah, on a customer pay basis, we were up 4.9%.

[Scott Stember:]

And just last question just going back to some of the things that you guys are doing in parts and service. Obviously, you're significantly outpacing the rest of the space here. Maybe just talk about some of these process improvements again that you've put in place just to better explain why you're doing so well?

[Earl Hesterberg:]

In parts and service?

[Scott Stember:]

Yes.

[Earl Hesterberg:]

Well, there we had the increase in collision, which was mentioned previously of 10%. And that's been actually, we started those efforts quite a while ago in focusing on that part of our business. But our wholesale parts sales were also up, I think, over 9%. Some of that is getting more aggressive again this year, but even more so the wholesale customers that we have were not as creditworthy a year ago as they are now. These are very small businesses, and they're stronger now, and that dynamic is better. So there's been a wholesale parts increase as well. And the biggest thing that we control is the marketing efforts we do in the customer pay area. And our overall ad spend is up pretty much this year as a company because as I mentioned, we are trying to sell vehicles, new and used cars and trucks. We also put more advertising money into parts and service this year. And our goal is to advertise more competitive prices to keep that traffic up in the face of declining units in operation. So it's probably as much a marketing effort as anything.

[Operator:]

Our next question comes from Himanshu Patel with JPMorgan.

[Himanshu Patel:]

I am wondering if you could go back a little bit to the discussion on used vehicle sales outlook going forward. If you sort of assume new vehicle sales do grow at a nice clip of 10% a year or so. Is there a general rule of thumb that you are thinking about as to the pace of used car sales growth in that sort of context?

[John Rickel:]

Himanshu, this is John. There was kind of a historical rule of thumb which tended to be, you know, about half of a used for every new. If you end up with 10%, new growth you'd have 5% used. And conversely, on the downside, you tend to see a bit more stability in used. So if new sales were off 10 you would see only about a 5% decline in used. I think what we're seeing during this period, though, is that that rule is kind of getting blown out of the water. Now some of that's, I think, the factors that Earl talked about, people being a little more conservative when they do need to replace a vehicle, taking a certified pre-owned instead of maybe a new. But I think over time the history is still maybe that half for one is the best thing I could point you to.

[Himanshu Patel:]

Okay. And then separate question, any shift in the last quarter or even in the last couple of months in how deep the various captives are starting to buy now?

[Earl Hesterberg:]

Not that I have been aware of, though the credit performance in the third quarter and so far this month has been fairly stable with our brands. So, clearly much better than it was a year ago, but no step function changes that I have witnessed.

[Himanshu Patel:]

And, I guess, Earl, maybe, if you could just elaborate on the subprime opportunity. I mean do you feel like as it particularly pertains to the new car market, is that a segment where the customer is just underserved right now and should someone get into that market more aggressively? Could that help some of the volumes that you see on the new car side?

[Earl Hesterberg:]

Yes. That market's absolutely underserved right now. There's some question as to whether or not it was over-served once upon a time and I am not sure about that. But, yeah, there are always more new vehicle sales out there for any manufacturer or lender who wants to dig deeper, and buy deeper into the lower quality credit scores or the lower numerical credit scores. It's still 10% or 15% of our business, I would guess. We take that as a given now. We don't focus much on pushing that. It's settled in. There are still subprime lenders. And everyone still does a certain amount of subprime business and some captives still do some. But that has stabilized very much. And those customers will be out there for any lending institution who wants to get more aggressive. But right now, we're not enjoying as much of that business as we did in the days of the 17 million unit industries.

[Operator:]

Our next question comes from Ravi Shanker with Morgan Stanley.

[Ravi Shanker:]

Thanks. Good morning, everybody. For me, the most impressive part of this quarter was the SG&A performance. Do you think that this is something different that you have done in this quarter or is it just you guys getting more traction as sales pick up? What I'm trying to figure out is how sustainable is it because 3Q being a pretty good quarter, SG&A tends to come up a little bit. So are we looking at mid-70s now or is it going back to the high 70s?

[Earl Hesterberg:]

The overwhelming factor was the gross profit we put on the books. And, again, some of it was not done at a high margin percentage rate. But have 30% revenue increases on used and 13% on new and so forth. That was the real key, while not adding the expense back in quite as quickly. I'll let John talk to the sustainability.

[John Rickel:]

Yeah, Ravi, this is John Rickel. I do think that the actions we've taken, as we have described over the last 18 months, that those improvements are sustainable. Now, bear in mind, though, that when you look from any quarter-to-quarter, you do have to take into account seasonality. Second and third are our strongest quarters, it's the strongest quarters for the sector. First and fourth tend to be a little bit weaker. So I think it would be fair to anticipate that on a sequential basis, fourth quarter probably goes up from third just because of the weakening in the sales environment that happens seasonally. But I think if you look over a period of time, you should see us continue to leverage these results and you should continue to expect to see further improvement in SG&A as a percent of gross as the sales return. That's been our assumption and been the track record we've been delivering over the last couple of quarters now.

[Ravi Shanker:]

Right. And then something else you said early in this call was you own about a third of your real estate right now. Do you have a long-term target there and how do you see that evolving in the next few years?

[Earl Hesterberg:]

Yeah, I don't know that we've set a specific numerical target. As we get the opportunity, either with acquisitions or leases come up for renewal, we are going to continue to look at it. Our preference is, where it makes sense, to own the real estate. So we would anticipate over time that that percent will continue to move up. But we haven't set a firm target of 50% or 75%. That's basically kind of where the circumstances take us to. But certainly the preference would be to continue to own more.

[Operator:]

We do have a follow-up question from Adi Oberoi with Goldman Sachs.

[Pat Archambault:]

Sorry, can you hear me? This is Pat Archambault here from Goldman. Just wanted to follow up actually on the geography question, could you just give us a little bit of an overview how California, sort of Florida, you did mention Texas already, but how I guess the Eastern region, Florida and California also trended?

[Earl Hesterberg:]

Well, I can't really speak with much authority on Florida. We only have one dealership there and it's in the Panhandle in Pensacola. But California we can speak with some degree of knowledge on. In the third quarter, new vehicle sales were up 14.6% in the State of California. It's a little unclear to me how much is retail and how much is fleet. So it would appear that there is some automotive sales recovery in California. And we are seeing that again this month. So I wouldn't over-say it in terms of saying it's dramatic, but it appears to be performing better than the U.S. market as a whole. So there is something positive in California at least from what the state dealer association reports and what we see in our business. The Northeast where we do a lot of business, Boston, and say, New York, New Jersey up, that is one of the areas that's really had a lot of the margin competition. It appears to me that they're performing about on par in terms of volume with the market. But you have dealers very closely clustered in those metro areas in the Northeast and there's a lot of selling combat going on in terms of margin pressure in the Northeast right now.

[John Rickel:]

Pat, just I guess to add a little flavor to that, this is John, we saw pretty good strength along the Atlantic Coast, New York, and then the Gulf Coast. We saw good strength in Tulsa in particular. Central Texas, Dallas and California, which Earl mentioned, would be basically the markets I would highlight as areas of strength.

[Pat Archambault:]

Great. And actually one follow-up on used, I guess what's impressive in light of the subprime, I guess headwind is that you're still seeing used sales, obviously, very, very robust, given that it tends to have a much higher subprime proportion are you seeing, is it just that kind of there's fewer people getting bought but demand is still so overwhelming and what you guys are doing kind of in that business is proving successful that it's offsetting that? Or are you seeing just a greater proportion of people coming in and willing to pay cash instead of taking on loans? How is that factoring into what are obviously really good used results?

[Earl Hesterberg:]

Well, you make a very proper point relative to the need for retail financing support to generate 20% to 30% growth in the used car business. The way I would describe that though is a third of our business or more is certified pre-owned vehicles and the captives buy those extremely well. The captives, almost without exception, are doing a great job and in many, many instances today, there are subsidized interest rates, very attractive interest rates. But in that business beyond the world of the captives, we have three great commercial bank lenders, Bank of America, Chase and Wachovia, who do a super job in differing regions of the country for us, supporting our used vehicle retail sales. And so they are a big part of what we're able to accomplish. Now how deep they are buying for us? No bank has ever bought deep enough for us. But they do a very good job for us.

[Operator:]

And there are no further questions at this time. Mr. Hesterberg, I'll turn the call back over to you.

[Earl J. Hesterberg:]

Thanks, everyone for joining us today. We look forward to updating you on our 2010 fourth quarter earnings results in February. Have a good day.

[Operator:]

Ladies and gentlemen that will conclude today's presentation. Thank you so much for your attendance. Have a great day.