AutoNation Inc (AN) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the AutoNation Second Quarter Earnings Teleconference. [Operator Instructions] I would now like to turn the teleconference over to the host for today's call, AutoNation. Please go ahead.

Good morning, ladies and gentlemen, and welcome to AutoNation's Second Quarter 2004 Conference Call. My name is John Zimmerman, AutoNation's VP of Investor Relations. I'd like to remind you that this call is being recorded and will be available for replay at 1 800 475 6701, access code 738524, after 12:30 p.m. Eastern Time today, through July 27th, 2004.

Leading our call today will be Mike Jackson, Chairman and CEO of AutoNation. Joining him will be Mike Maroone, President and COO, and Craig Monaghan, our CFO. At the end of their remarks, we'll open the call to questions. I'll also be available by phone to address any follow-up issues.

Before we begin, let me read a brief statement regarding forward-looking comments and the use of non-GAAP financial measures. Certain statements and information on this call will constitute forward-looking statements within the meaning of the federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risk which may cause the actual results or performance to be materially different. Additional discussions of the factors that could cause actual results to differ materially are contained in the company's SEC filings. Certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by the applicable SEC rules, the company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on the investor relations section of AutoNation's website, at www.AutoNation.com.

And now, I'll turn the call over to AutoNation's Chairman and CEO, Mike Jackson.

Thank you, John, and good morning. Our second quarter earnings were disappointing. Today we reported earnings of 35 cents per share from continuing operations, down from 37 cents per share for the second quarter of 2003. Much of this is due to the fact that, for the second quarter, we targeted our cost structure on significantly higher retail volume than we achieved. We stocked inventory, spent on advertising, and merchandising, and calibrated vehicle unit gross margins to achieve this increased volume level. Most of our miss occurred in June and can be attributed primarily to performance at our General Motors and Ford locations.

There are a number of important issues related to our second quarter performance that I'd like to address. First, as you know, the American economy reported an overall decline of 1% in retail sales in the month of June, the largest drop in 16 months. This general consumer trend was magnified in the auto retail sector, and AutoNation's same store new vehicle sales volume dropped 3%, roughly equivalent to industry performance, when adjusted for our brand and market mix.

Our markets that are traditionally Ford and GM strongholds, and particularly Texas, were hit especially hard. Overall, we saw a June volume decline of 17% for Ford and 15% for GM. I would like to note that both manufacturers have subsequently raised incentives for July, but it's too early to say how this will impact sales.

Second, with the sales miss, our inventory increased to a 75-day supply, which is above industry average by three days. The industry is too high, and we are too high. We are lowering our future orders to bring our inventories to more prudent levels.

Third, our new vehicle gross margin compression from 7.3% to 7.0% also reflects excess inventory in the industry. It's important to note that even when we bring our inventories in line, if the entire industry does not bring its inventories down, gross margin pressure will continue.

Fourth, our used car traffic mirrored our new car traffic, resulting in a disappointing volume for used cars.

Finally, our costs were simply not in line with the disappointing volume of our business we realized during the quarter. AutoNation has built a reputation for operating at high efficiency. We did not do that this quarter. Going forward, we plan to reduce our inventories and align our costs.

With that, I'll turn it over to Craig Monaghan, our CFO.

Thank you, Mike. Mike has covered the major operating points for our financial results for the second quarter. I will now review selected other financial items. In the quarter, in addition to the margin pressure and cost issues Mike mentioned, we also compared unfavorably to the second quarter a year ago due to some one-time benefits we recognized last year.

In the second quarter, 2003, we had approximately $7m pre-tax, or two cents per share, of favorable items related to the wind-down of the ANFS financing portfolio and a gain on the sale of our equity investment in an auto parts recycling company. This unfavorable comparison was partially offset by a low effective tax rate in the second quarter of 2004. We had net favorable adjustments in the quarter related to various tax adjustments and resolutions, and the resulting effective tax rate was 37.8%. As we have mentioned in the past, we expect additional tax adjustments, both positive and negative, over the next 12 to 18 months, as we continue to work through these tax matters. As such, our tax rate for Q3 and Q4 of this year could approach 39.5% to 40%. As previously discussed, once we resolve the bulk of our open tax matters, we expect our base tax rate to be approximately 39%.

Also in Q2, we had losses from discontinued operations of $3.5m, net of tax, or one cent per share. These losses relate primarily to the divestiture of several stores during the quarter. These include stores we have sold or closed, or for which we have a definitive agreement to sell. We are continuously evaluating the performance of the stores in our portfolio and may have additional divestitures in the future.

As for cash flow, during Q2 we repurchased $50m worth of stock, reinvested $33m in our business through capital expenditures, and spent $67m on our acquisitions.

We remain disciplined on our cash outlays, and are targeting 2004 capital expenditures of approximately $140m, excluding any acquisition-related spending on opportunistic lease buyouts. As you know, we review acquisitions and share repurchases opportunistically. Our full-year 2004 target for combined spending on acquisition and share repurchase remains the same, estimated to be approximately $400m.

As for capital structure, at June 30th, our non-vehicle debt was $820m, essentially unchanged from where we ended the first quarter. Our cash at June 30th was $60m, up $30m from March 31st. We have incremental bond capacity in excess of $550m, and a 17% debt to capital ratio. The strength of our balance sheet is evidenced by the credit upgrade we received from S&P during the second quarter, with both the corporation and our debt instruments now carrying an investment grade credit rating from S&P.

Lastly, I'd like to address a change we have made to our financial reporting, as disclosed in the supporting tables to our press release this morning, commencing with the second quarter of 2004, we've begun making an adjustment to revenue and cost of sales of both new and used vehicles related to our parts and service department performing work on these vehicles. Also, we have revised amounts previously reported to be consistent. The adjustments have no impact on gross profit, operating income, income from continuing operations, net income, earnings per share, cash flows or financial position for any period, or their respective trends.

In conclusion, while we were disappointed with our earnings this quarter, we believe that our strong balance sheet, combined with our best-in-class operating and net margins, puts us in great shape to capitalize on opportunities in the market today.

Now let me turn you over to our president and COO, Mike Maroone.

Thanks, Craig. As I touch briefly in each area of the business, please note that my comments will be on a same-store basis.

Starting with new vehicles, same-store volume was 105,000 units, with gross profit per vehicle retailed at $1,976. Both volume and PVR were off 3% compared to the prior year. Our performance in the quarter was impacted by market mix, brand mix, and inventory levels.

For the quarter, the Las Vegas, Southern California, and Phoenix markets were strong for the brands we represent, while the Texas markets, as well as the Denver, Memphis, Baltimore, and Seattle markets were all off.

Relative to new vehicle inventory, we closed the quarter with our new vehicle day supply at 75 days, an increase of 10 days compared to the industry that increased nine days, to 72 days. Our current inventory levels are higher, due to the combination of our deliberate build-up to match seasonal summer sales peaks, while capitalizing on richer incentives, along with the second quarter shortfall in domestic sales. That said, we are currently adjusting our ordering and anticipate that we will bring our inventory levels in line with expected sales forecasts.

Turning to used vehicles, same-store volume of 62,000 units was off 5% compared to the period a year ago, and gross profit per vehicle retailed of $1,644 was off just less than 1%. Our used vehicles day supply was 41 days as of June 30th. The combination of the industry's soft June, and the brands that we represent and our markets being down, had a ripple affect on our used business. Looking ahead, we believe that our used vehicle management system and ongoing training efforts will allow us to make positive strides in this area.

Moving to service, parts, and collision, we're pleased with our continued progress. On a same-store basis, we recorded revenue on $620m and gross profit of $274m, increases of 1% and 2%, respectively, compared to the period a year ago.

Underneath the numbers, customer pay service and parts revenue grew 2% in the quarter, and warranty revenue was up 1.5%, despite continued reductions in domestic warranty revenue. The increase in customer pay and warranty revenue more than offset a decline of 5% in collision revenue. In the quarter, service, parts, and collision gross profit as a percent of revenue improved 40 basis points, to 44.1. We remain focused on opportunities to increase customer pay revenue in service, parts, and collision, and the continued implementation of best practices is driving our results.

Examples include our Service Drive process, a customer-friendly maintenance menu, and our service marketing program. In addition, work continues on optimizing our in-store pricing models and training our service associates on customer-focused initiatives.

Our finance and insurance team delivered gross profit of $931 per vehicle retailed on a same-store basis, a $27 increase compared to the period a year ago. Total F&I revenue was down slightly due to lower unit volume. Preferred lender and product penetration also continued to improve in the quarter. Work is ongoing to optimize our finance and insurance results. At the forefront is our focus on the customer, including ongoing associate sales training and emphasis on compliance with our full disclosure, customer-friendly F&I sales process.

On the acquisition front, during the quarter we finalized the acquisition of John Roberts BMW and Mini in Dallas, Texas. To date, the annual revenue run rate of our 2004 acquisitions is approximately $350m. Our corporate development team continues to actively pursue acquisitions that meet our market and brand criteria, as well as our return on investment thresholds.

Also of note in the quarter, AutoNation announced that Houston Astros star and future Hall of Fame member Roger Clemens is the new spokesperson for our Champion Brand in South Texas, that encompasses 21 locations in Houston, Austin, and Corpus Christi. We're excited to add him to our spokesperson line-up that includes sports legends Dan Marino, John Elway, and Wayne Gretzky.

Now I'd like to speak about the AutoNation pledge. In recent months, the desire for greater transparency in consumer finance transactions has been growing. The sentiment of some consumer watch groups is that the income dealerships receive from lending institutions for marketing, offering and processing vehicle financing, is unfair or unjustified. We strongly disagree with this. In fact, we believe that financing a vehicle through a dealership offers the customer a number of advantages, the foremost of which access to a wide variety of attractive lease and financing options at competitive rates. This, coupled with superior flexibility, customized payment options, and the increased convenience of financing at the point of purchase makes the case for dealership financing and why it is the method of choice for the vast majority of vehicle purchases. Beginning August 1st, the AutoNation pledge will be included in all F&I transactions. Through it, AutoNation pledges to offer our customers competitive loan and lease financing, and to enhance their ownership experience by offering an array of products to protect their purchase. Our pledge also informs customers that they may obtain their own financing, that interest rates may be negotiable, that we may retain a portion of the finance charge or other compensation for arranging financing, and that the purchase of protection products is not required to obtain financing or a lower rate.

In addition to being prominently displayed in our stores, the AutoNation pledge will be reviewed with every customer. We're proud to lead the industry in taking this important step forward.

In closing, while our second quarter performance was not up to expectations, our game plan moving forward features a narrowed focus on the fundamentals, as well as a renewed vigor on our cost control and cost reduction efforts. To reiterate what Mike Jackson said earlier, we remain confident that our strategy is sound. Further, we believe that the best practices that we've established on sales and service and finance and insurance, coupled with leaner inventories, moderated ad spend, and a keen focus on the fundamentals of our business, will allow us to continue to deliver net margins that lead our peer group. With that, I'll hand the call back to Mike Jackson.

Thanks, Mike. We will take to heart the lessons learned in the second quarter. There's no question that AutoNation is structurally as strong as ever, and our strategy is fundamentally sound. Certainly a prudent and conservative outlook has served this company well over the years, and will continue to do so in the quarters and years to come. We will reduce our inventory and align our costs carefully.

I would like to note that despite the difficulties our industry experienced this past quarter, industry new vehicle performance through the first half of 2004 is still ahead of what it was a year ago. If the second six months match last year's second half, 2004 will end with slightly more than last year's 16.6 million units being sold.

Based on Q2 results and our view of the market, we expect third quarter EPS from continuing operations in the range of 36 to 38 cents per share. As previously reported, our guidance for full-year 2004 EPS from continuing operations is in the range of $1.35 to $1.40. Thank you. Now we'd like to take your questions.

[Operator Instructions] The first line we'll open is the line of Charles Grom with JP Morgan. Please go ahead.

Good morning. Given June's weakness and the industry's high inventory levels, have you begun to see any heavy discounting by any of the independent dealers in your markets, and if so, what are you doing in response?

You mean by the private caps?

Right.

Well, the market has been intensively competitive during the entire second quarter. Inventories were high for the entire second quarter, so it remains just as competitive as the second quarter. The-- Ford and GM, particularly, increased incentives, sequentially, going into July. As you know, most of the intensity in the business occurs towards the end of the month, so it's too soon to say what the impact of those incentives will be. So we really need to see where July's results, sales results, industry sales results, come out to get an idea of what's happening vis a vis June.

OK, second question is with regards to your guidance, and more particularly, the fourth quarter implies some heavy, solid EPS growth, and I thought in the beginning of the year that you guys stated that the fourth quarter was going to be tough, given the election in November, and I was wondering if you could just elaborate on that point and also speak to how the company fared during the fourth quarter of 2000, the last election? Thanks.

We are going to move aggressively in the cost side of the equation. We've re-examined the risk/reward ratio, considering-- even though we have a recovering economy, the environment remains very tough, so we're going to go back to a cost approach, and the benefit from that will be more reflective in the fourth quarter than what we can achieve in the third quarter.

As far as your view as to the overall retail environment, I would agree that presidential elections have a negative impact on retail activity, but as far as we're letting out the second half of the year, it's more a cost story than a revenue story.

OK, I understand. Great. Thanks a lot.

Thank you. The next line we'll open is John Casesa with Merrill Lynch.

Thanks very much. Mike, I just wanted to follow up on this discussion of cost structure. I mean, I can't imagine that sort of one crummy month in June changes your fundamentals. I mean, do you feel that-- I guess my question is, what are the cost categories that you're looking at? I mean, I assume inventory is totally dependent upon on your sales expectations, so if we put that aside, what are the cost categories? And it just-- so if you could address that one; I guess I'd like to understand, what, in your mind, what you think has changed?

You know, as we went into this year, John, we said that '04 would not be a traditional AutoNation year in that we would be looking for both revenue and gross profit growth, in an improving economy, as well as continuing our cost work. I would say the conclusion that we've reached after the first half of the year is that the environment is just as tough as ever and that you run the risk of a double-lose, that you make the cost investment to go after revenues when the revenues do not occur. You still have those costs. So I think we're coming to the conclusion that the moment is still not right to move into that new equation that we have laid out, and we are going back to a more conservative view, whereas as we know we can take out costs skillfully without disrupting the business, and bring those cost savings to the bottom line, and the revenue will be whatever the environment is there to give us. And I would say that is a shift from where we started the beginning of the year.

OK. Then I guess would you agree with the thesis, which is really my thesis, that the industry probably got a little bit, I think of the OEMs, they got a little too optimistic about pricing this year, and that they've had to back off a bit. Do you think that's one of the things that didn't play out, as we were hoping, at the beginning of the year? I mean, it seems like sticker prices went up, along with incentives, and that that's probably hurt volumes, or do you not agree with that?

No, I agree with that, John. I think you always have to focus on net pricing, and for the first time in years, according to my calculations, you may know more, net pricing is actually increasing, meaning that they're asking the consumer to pay more, net of incentives.

Right.

And the demand, relative to the inventory, at that net pricing, is simply not there.

OK. And just a couple of follow-up questions. I mean, what cost categories are you focused on, and does this experience at all make you rethink the brand mix question, or is that sort of a long-term strategy that doesn't change?

As you know, we had talked about being able to take out another 200 basis points in costs over the next several years. We had a plan for that. We will accelerate that plan, and Mike and Craig can talk about various specifics there.

As far as our brand mix, we do not change our strategy of running high throughput stores in metro markets with a nice mix of premium luxury.

OK.

Craig, you want to talk about--

Yeah, John, it's Craig. You know, we still run essentially 275 independent stores, with 275 independent back offices, and I think you're well aware of the work we're doing in trying to build our shared resource centers. That work will continue and accelerate and that will drive out costs just in the base business. On top of that, I mean, Mike can talk to inventories and some of the other areas that are being worked on more directly on the operating side.

John, it's Mike Maroone. You know, the three areas that we're focused on are right-sizing our inventories, as we come into the fourth quarter, and we're working very hard on that and I'm confident we can do that. I would say moderating our ad spend slightly, really aligning it with the variable gross we're generating, and then a continued work on the cost side, where we're probably, you know, our efforts are really in our new and used car costs, from a compensation point of view, and ensuring that they're variable and ensuring that they reflect today's market. Our focus on the compensation side is always on the productivity of our associates, and we continue to build store staffing models and continue to fine-tune that effort.

OK. Just in closing, what's your view on acquisitions versus buybacks, as you look ahead, given this environment and given your stock price?

I wouldn't say that there's any fundamental change there. We will behave exactly as we always behave, when we see an attractive buying opportunity on share repurchase, we will move to take advantage of that opportunity. And we're always looking at acquisitions, and when they hit our return thresholds, we will act on them, when they fit within our existing infrastructure and existing footprint.

And Mike, do you-- my impression is that private market value at the dealerships have held up probably better than public market values have right now. Is that true, or do you-- you have a view on that?

Well, there's no question that valuations have come down from the peak years of '97, '98, '99. We see a much more rational market out there than we did during years like 2000. And they're somewhere between what they-- for the privates what they were before publicly traded companies existed and the peak land rush years of '97, '98, '99, and 2000. Again, it's always a combination of what we bring to the table, combined with what we negotiate on price, and if it doesn't hit our 15% after-tax return threshold, with a prudent business plan over the next several years, we don't make the acquisition.

Thanks very much, guys.

Thank you. The next line we'll open is the line of Rick Nelson with Stephens. Please go ahead.

Thank you. Question on inventories, Mike. Are there specific manufacturers where you're heavy, and we hear from others about their desire to prune inventories, only the inventories don't seem to get pruned. I'm wondering how much ability the dealers have to say ``no'' to the inventories?

Yeah, Rick, that's a fair question. It's all a matter of having the discipline to say ``no,'' since we still buy these vehicles one at a time. You know, sitting at retail, inventories are actually far higher than the industry numbers would indicate, since the industry calculation still includes fleet, but there's no fleet inventory. So to get the true retail inventory, you should take retail sales and divide it into retail inventory, and they're much higher than the industry figures would indicate, and they're particularly higher with Ford and GM. And if you calculate it out, something has to happen here. Either there has to be a dramatic increase in volume, or there's going to have to be a production cut, and you know, I can't say-- I would say, in this- what we've seen so far, it's hard to imagine a tremendous sales spike that's going to sell us out of this, so retailers are going to have to push back and buy less vehicles and manufacturers then are going to then have to determine what to do with the situation.

I can certainly assure you this -- AutoNation's inventory is coming down.

OK. And a question on the performance of your Toyota dealers-- there was one other public group that indicated profit pressures had-- in their Toyota dealerships.

We had no issues--

--there--

We had no issues with Toyota.

Thank you.

The next line we'll open is the line of Gerry Marks with Raymond James. Please go ahead.

Good morning. Mike, just kind of following up on Rick's question, usually we've seen kind of really strong summer months and then weaker winter months. The pattern seemed to break this June. Do you have any thoughts about why that pattern broke? Is it because that net price, the automakers thought they could ease of incentives a bit?

You know, we've discussed this very question intensely, internally, and have come to the conclusion that we don't have the wisdom to give you the answer, quite frankly. So, it's a bit puzzling, because as you say, all the ingredients were there for a good month. I think going back to what John said earlier, it would seem to be that a pricing opportunity was taken, net pricing opportunity was taken, and the marketplace pushed back. Incentives have now changed for July, so we have to see where July comes out.

OK. And then in terms of-- Craig, could you remind me, last year, did you have any one-time stuff that you're going up against, year-over-year, like gains from LKQ, in the second half?

Sure did, Gerry. We had about $7m worth of one-timers last year. There's gains on--

Talking about second half.

Oh, second half?

Yeah, second half.

I'm sorry, let me dig into second half; I'll get right back to you.

OK, thanks. And then two other quick questions. One was, why depreciation kind of seemed to jump up sequentially, and I was wondering if it was due to the lease buyouts, and also if you can comment on your mix of '04s versus '05s in terms of your inventory?

Craig, you want to talk about capex?

Let me come back on capex.

Gerry, it's Mike Maroone. In terms of the inventory, our inventory is almost all '04s. We have been very conservative on the '05 inventory. As we said in our call earlier, we did ramp up our '04 inventory, really focused it on core models, to take advantage of what we believe are going to be aggressive incentives in Q2 and Q3. We intend to be conservative in our '04 start up, and as Mike Jackson said, we will bring our inventories down, the '05s, that is-- be conservative on the '05s.

OK, in terms of ordering those new vehicles?

Yes.

And Gerry, Craig. Second half of last year, we had about $6m of LKQ gains.

OK.

Depreciation, I don't have any one-timers or any unique explanation on depreciation. It's not driven by these [files]. It's in part a reflection of the capital spend going through the depreciation line.

OK, so just capex is moving up a little bit?

Yeah.

Thank you.

The next line we'll open is Jeff Black with Lehman. Please go ahead.

Yeah, good morning. Can you give us some targets on what level of inventory in new and used we need to see or like to see by the end of the quarter, and secondarily, what kind of July number gets us worried or makes us feel comfortable in terms of sales?

I think on the inventory, you will see in absolute unit levels a downward trend, starting in the third quarter. It's difficult to peg it to a day supply because that's always calculated on what the last month of a quarter's sales are, so I would rather say you're going to see our inventory come down in absolute terms. And as far as July sales, I think we're looking sequentially for an improvement over prior year, and if you don't have that, then I really don't see how this inventory for the industry is going to come down without production cuts.

Mike, you know, talking-- just two other questions. First is sort of gross profits -- I mean, you consistently maintain the 7%, but you know, do you see a situation evolving in the near-term where you might just cut that to 6.8, 6.7, whatever it is? I mean, do we see margins going below 7 for any period of time this year?

It's difficult to say. I would-- in the second half of this year, as we bring down inventory and it remains as intensely competitive as it is, that's entirely possible, that they could dip below 7% for the first time. That is one of our concerns and one of the reasons why we're so determined to bring down inventories, because if this level of inventory remains for us and for everyone else, then this margin compression issue will stay with us. So, inventories have to be aligned to a more rational level. These level of inventories is not bringing any incremental business in the marketplace; it is a pure inefficiency and a pure burden. So, we're going to push back, and it's either going to have to be sold off or production cuts. Don't know which way that's going to go.

So, I think in the second half of the year, it's possible, as we bring down inventory, that that could happen, but on a longer-term view, that's not where we want to be and is the reason we're bringing down inventory.

And just to follow-up on incentives, I guess I heard you earlier talk about, you know, net pricing being the real factor here, but why are incentives having less bite, in your opinion? Are they not on the right models? You know, where are they more effective or less effective, and would you agree that incentives are having less of a bite than we've seen in the past?

You know, I think the consumer is pretty smart and can sense the net pricing equation and also the consumer has learned to wait, that these-- the call to ``buy now'' to get an incentive because it's going to go away lacks any credibility because the record is that there's no price to wait. As a matter of fact, you can be rewarded for waiting with an even higher incentive. So the call to action component of incentives is completely gone, in my view, and that then brings you to a net pricing equation as being a more realistic way to look at what's going to happen in the marketplace.

OK, fair enough. Thank you very much.

The next line we'll open is the line of Jonathan Steinmetz at Morgan Stanley. Please go ahead.

Good morning, everybody.

Good morning.

Good morning.

A few quick questions here. The first one, if you look on a comp store basis, it looks as if the average new vehicle transaction price was up a little less than 1%, which is substantially lower than what you've been seeing. I wonder if you have any color on whether that's a brand mix type of issue that's playing into that, or whether you feel like the consumer is sort of less willing to grow average new vehicle spend, year-over-year here?

I think for us -- for us -- it would be a brand mix issue in the second quarter, that our average transaction price on domestics is higher than it is on imports, since it's a heavier truck mix with the domestics. So probably would be the factor there.

OK. And you talked a little bit about used, but I'm just curious, was used also a lot weaker in June, and was it weaker on the brands where new was weaker?

Jonathan, it's Mike Maroone. Yes, that's the case. June was probably the weaker month of the quarter, and certainly reflected the challenged brands, so I think what you saw new was fairly well mirrored in used.

OK. And finally, if you could just talk a little bit on the F&I per vehicle retailed, what were some of the actual components that led to the increase, in terms of product penetration?

Well, the increase was relatively modest. I think it was $27 on a same-store basis, but we continued to gain benefit from our preferred lender network and we continue to see growth there, and we put a lot of emphasis on selling products such as extended warranties and pre-paid maintenance packages, which we think offer real value to consumers, and continued to moderate our reliance on rate.

Great. Thank you very much.

Thank you. The next line we'll open is [Eric Celli] at Wachovia. Please go ahead.

Hey, guys, a lot of my questions have been answered, and real quick, just wondering if you guys calculated the room on the restricted payments test? I'm at about $43m at the end of the second quarter?

Eric?

Yes, sir?

You're in the ballpark.

OK. Secondly, and I know inventories are definitely the discussion of the day, and you guys said almost all of our inventory is '04 and no '05. I mean, it is it going to be-- it seems like with all the model rollouts that are coming from Ford and Nissan, amongst others, it's going to be kind of a tightrope to walk, you know, managing down your '04s and definitely getting the hot-selling '05s. Is that-- I mean, have you had discussions with the OEs and you know, are they delaying rollouts? Is there any discussions around there?

No, the-- there is-- first, we've had discussions with all the OEs. No one will be surprised to hear that we're bringing our inventories down. And they have no plans to change their '05 rollouts. We will have room to participate appropriately with the '05s that are hot, and really don't anticipate having any trouble getting anything else that we need. We don't view getting product as an issue in the second half of this year.

OK. And then looking forward, you know, I know this has been somewhat of a deflationary environment over the last five years. We hear of steel and resins and other input prices rising, and starting to impact the suppliers. Have there been any discussions between you guys and the OEs and the suppliers, saying, ``Hey, if we get a little inflation here, it would be a positive thing for all parties?'' Has anybody started talking about the other side of the coin?

You know, I don't think there's anything wrong with net pricing power for the OEMs. But the thing that's being missed is the balance between supply and demand. If you bring your supplies down to a selling rate, which, by the way, is not that bad, as we discussed, it's still going to be in the high 16 million, if you bring inventories in line with that, you can have an orderly market and you can talk about net pricing activity. But to talk about net pricing activity with the type of inventory that's sitting out there and the kind of production plans that are in place, that doesn't box. Something doesn't add up; either the sales rate is going to go through the roof, or production cuts are going to have to be made, and that's the issue, in my mind. But I agree with you -- there's nothing wrong with net pricing power in an industry that has balanced the equation. But the equation is out of balance at the moment.

Sounds like we-

--significantly.

--over the next six months, we rebalance that and we can revisit that, maybe in December.

Exactly.

Thanks a lot for your time, guys.

Thank you, Eric.

We've got time for one more question.

Thank you. Our final question will come from Matt Nemer at Thomas Weisel. Please go ahead.

Good afternoon. Just a quick question on day supply. Can you break out Ford and GM, you know, days, versus the prior year?

I can tell you they're-- they're the highest day supply, and they're significantly higher than the overall company. I don't know if we have them right here. Mike, do you have them?

I do not have it. I'm sure we can get back to you.

We can get back to you and give you that. But I can tell you directionally, they are our highest.

OK. Then on the used car side, your inventories were up a little bit, year over year. I'm wondering if you're seeing any advantage yet from using the Auto Exchange software, building ideal inventories at your stores, and then as a follow-up to that, do you think you're gaining or losing share in the used car market?

It's Mike Maroone, Matt. I think that we're just in the process of completing our Auto Advantage rollout. We believe that it's a product that will help us get the right mix. We're really focused on driving up our core inventories. I don't think we've seen the full benefit of it in this past quarter, but I do feel confident that it's really a tool that can add value for us.

And then just finally, on the change in the way you're accounting for reconditioning, just curious what the catalyst is there -- was that a management decision or is that something that came from your accountants, just kind of wondering where that came from?

No, that's a management decision. It's better accounting and we felt it was something we should do and we should explain to people. That's what was done in the notes on this earnings release.

OK, great. Thanks very much.

Thank you.

Thank you. Appreciate everyone joining us today.

Ladies and gentlemen, that does conclude your teleconference for today. Thank you for your participation and for using the AT&T Executive Teleconference. You may now disconnect.