AutoNation Inc (AN) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. And welcome to your fourth quarter earnings call and webcast. [OPERATOR INSTRUCTIONS] I would now like to introduce your host for today's conference, AutoNation.

Good morning. And welcome to AutoNation's fourth quarter 2006 conference call. My name is John Zimmerman, AutoNation's Vice President 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, 859958 after 2:30 p.m. eastern time today through February 14, 2007.

Leading our call today will be Mike Jackson, Chairman and Chief Executive Officer of AutoNation. Joining him will be Mike Maroone, President and Chief Operating Officer, and Mike Short our recently appointed Chief Financial Officer. 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 our brief statement regarding forward-looking commenting 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 differ materially from expectations. Additional discussions of 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 applicable SEC rules, the company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on the investor section of AutoNation's web site at www.autonation.com. And now, I'll turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Good morning and thank you for joining us. Today we reported fourth quarter net income from continuing operations of $74 million or $0.35 per share compared to $82 million or $0.31 per share in 2005, an increase in EPS of 13%. Revenue in the fourth quarter increased 2% to $4.5 billion, with an increase of 2% in new vehicles, 5% in parts and service, and 8% in finance and insurance. The retail environment was challenging compared to a year ago, especially California and Florida, where the housing markets are soft and the marketplace remains highly competitive. For the full year 2006, AutoNation reported revenue of $19 billion, a 1% increase over last year. Full year 2006 net income from continuing operations was $331 million or $1.45 per share compared to $397 million or $1.48 per share in 2005. After adjusting for certain items, full-year 2006 EPS from continuing operations increased 7% [sic--see Press Release] to $1.54 from $1.43 in 2005. For 2006, new vehicle retail units for the industry declined 6.4% according to CNW research, while AutoNation saw a same-store sales decline of 3.5% for the year.

On the management front, I would like to welcome Mike Short, our new CFO, to AutoNation. We're pleased to have him on the team. I also want to thank Alex McAllister for his service as interim CFO over the last five months. Now, Mike Short will provide detail on the numbers and Mike Maroone will follow with comments on our operational results.

Thank you, Mike. And I'm excited to be part of the great AutoNation team and look forward to our opportunities ahead. As Mike mentioned, we reported fourth quarter earnings from continuing operations of $0.35 per share versus $0.31 per share a year ago. Operating profit for the fourth quarter was $177 million, down 1% from $179 million a year ago. SG&A as a percent of gross profit increased 10 basis points to 72.1% from 72% a year ago, driven by a 50 basis point impact from stock option compensation expense related to the new accounting standard. Stock option expense was $0.01 per share in Q4 and $0.04 per share for the full year 2006.

Floor plan interest expense net of OEM assistance was $6 million higher in Q4 versus last year and $35 million higher for the full year 2006 versus 2005. While the year-over-year negative impacts will diminish going forward as long as interest rates remain stable, we expect to continue to have unfavorable comparisons to the prior year during the first half of 2007. However, our focus on lowering inventories will help mitigate that negative impact. Other interest expense was higher in Q4 versus last year due to the increased debt levels related to our April 2006 recapitalization. However, the EPS impact of higher interest expense was more than offset by the 19% reduction in shares outstanding resulting from our 50 million share equity tender offer. For net benefit of $0.03 per share in the quarter from the recapitalization. For the full year we recognized approximately $0.09 per share of benefit from the recapitalization.

For Q4, 2006, we had an effective income tax rate of 37.5% versus a prior year effective rate of 39.4%. The Q4 2006 rate benefited from adjustments for the resolution of various tax matters. The full year 2006 effective income tax rate was 38.9% and we expect our ongoing rate to be in the mid 39% range.

During the fourth quarter, we repurchased 2 million shares of stock for $43 million, reinvested $39 million in the business through capital expenditures and spent $78 million on acquisitions. For the full year 2006, we repurchased 61 million shares of stock for $1.38 billion, reinvested $176 million in the business through capital expenditures, including $30 million on land for future store sites, and spent $166 million on acquisitions. We expect full-year 2007 capital expenditures to be approximately $140 million, excluding acquisition-related spending, land purchase for future sites or lease buyouts. As you know we view acquisitions and share repurchases opportunistically and anticipate full-year 2007 combined spending on both of approximately $300 to $400 million. At December 31 our nonvehicle debt was $1.6 billion and we had unused revolving credit availability of approximately $413 million. Our nonvehicle debt to capital ratio stands at 30%. Now let me turn you over to our President and Chief Operating Officer, Mike Maroone.

Thanks, Mike. And good morning. The new vehicle environment remained challenging for the industry and for AutoNation through the the year. Given this on a full-year basis, we held revenue flat despite a drop in total unit volume, delivered an increase in total gross profit dollars and recorded an industry-leading operating margin of 4.2%. Now I'll touch briefly on each area of our business. My comments will be on a same-store basis unless noted otherwise and will focus on the fourth quarter performance.

Starting with new vehicles. AutoNation retailed 83,000 new units in the quarter generating same-store new vehicle revenue of $2.6 billion. New unit volume reflected a decline of 2% compared to the period a year ago, while revenue held steady. Though off, our new vehicle volume was in line with the industry decline of 2% at retail. We attribute our ability to hold revenue with a drop in volume to an increased revenue contribution from our premium luxury stores. Year-over-year, our new vehicle gross profit per vehicle retailed was relatively flat at $2248. At December 31, our new vehicle inventory stood at 66,500 units and 52 days, reductions of 9% and three days respectively compared to the period a year ago.

Turning to used vehicles on a same store basis, fourth quarter retail used revenue of $800 million was down 2% on the sale of nearly 50,000 used units, a decline of 5% compared to the period a year ago. During the quarter we noticed softness in our used business in the southeast and in California. And while we are disappointed in our used volume, when compared to data published by CNW, franchise dealers in our markets were also off 5%. In the quarter, retail used vehicle gross profit declined 9% to $88 million, and gross profit per vehicle retailed was $1767, down $85 on a year-over-year basis. Our used vehicle day supply was 42 day at December 31, even with a year ago.

At $622 million, same-store revenue for parts service and collision increased 4%. We continue to grow our customer pay business and realized a 4% increase in the quarter compared to a year ago. Gross profit was relatively flat at $269 million. And gross profit as a percent of revenue declined to 43.3% compared to 45% in the period a year ago. The decline in the quarter can be attributed to a shift in mix where we experienced a reduction in higher margin warranty business and an increase in lower margin wholesale parts. Gross profit as a percent of revenue at 43.3% for the quarter, was in line with our full-year performance of 43.8%.

In the area of finance and insurance, our stores delivered outstanding results. Same-store revenue in the quarter increased 7% to $148 million compared to the period a year ago. Also in the quarter, F&I gross profit per vehicle retailed increased $102 to $1,114, a record for our company. We attribute continued growth in this area to ongoing associate training, increased product penetration, strong performance in used vehicle F&I PVR, higher returns on our service contract portfolios with third parties, and an increasingly strong preferred lender network. In addition, our focus on third and fourth quartile stores has been heightened through the implementation of action plans that utilize best practices and stress accountability.

As Mike mentioned at the top of the call, work also continued relative to the optimization of our store portfolio. During the year, we acquired five stores with an annual run rate of $430 million, including a Mercedes Benz and Land Rover dealerships in Florida and a BMW store in California. Divestitures for the year totalled 17 stores with an annual run rate of $468 million. At December 31 our total number of stores was 257, representing 331 franchises and 37 brands in 16 states. Our corporate development team continues to actively pursue acquisitions that meet our market and brand criteria as well as our return on investment threshold.

In closing, in 2006, our commitment to leading the industry in transaction transparency for customers was strengthened with the introduction of Smart Choice, our sales menu that puts the customer in control. Coupled with the AutoNation F&I pledge, our customers are guaranteed a fully transparent process. We are currently utilizing Smart Choice in 40% of our stores, the rollout to all stores is ongoing and should be completed by year end. We thank our 26,000 associates for their efforts in 2006 and are looking forward to 2007, where our work to provide customers with a superior buying and ownership experience continues with great vigor. With that, I'll turn the call back to Mike Jackson.

Thanks, Mike. As we commence 2007, I'd like to comment on the progress of our brand mix strategy which drives our acquisition and divestiture program and is focused on increasing our volume import and premium luxury brands. In1999, AutoNation's new vehicle revenue was 60% domestic and 40% import, which of course includes premium luxury. In 2006, we are shifted the mix for AutoNation to 62% import and premium luxury compared to 38% domestic. We expect the shift to continue in this direction over the next few years. For 2007, we believe that the market will remain challenging and that full-year industry sales of new vehicles will decline to the low 16 million units level.

That concludes our remarks. I'd like to open it up for questions. We seem to be having a technical problem. We'll hopefully have it resolved in a moment.

[OPERATOR INSTRUCTIONS] One moment for our first question. Our first question comes from Rick Nelson.

Thank you. Thanks for waking me up there. Question on the used car margin. Can you provide more color, one of the Mikes, on what contributed to that decline?

Rick, it's Mike Maroone. As we mentioned in the call, we did have some softness in our markets. We were particularly soft in California and Florida and really in the southeast United States in general. You know, as offset, we add some strength in Texas and Colorado, Arizona and some of our other markets. In terms of the PVR, we were off on a PVR basis about $85 and the biggest contribution was some softness in the used truck market. Our used truck grosses were off well over 100 bucks a truck. As we tried to benchmark our performance, we looked to CNW, and CNW for the markets that we compete in, showed a decline for franchise dealers about 5. So it looks like we performed in line with market but we certainly had some regional softness.

Yes. And you know California and Florida represent almost 50% of our revenue. Both these markets went through a speculative housing market which they're now adjusting to, which has been, has made the environment very difficult. Strategically long-term we're very confident about our positions in California and Florida. But in the near term we're going to be working through this speculative housing market and the disruption it's caused.

And, Mike, any overall comments on inventory for the industry, how you see that shaking out as the new year progresses?

First, we're satisfied that our inventories are in line at around 52 days. The inventories remain high for the domestics around 100 days at retail. However, I'm more hopeful than I have been in the past. There's really been a lot of very constructive discussion that the inventories are a symptom or a barrier to moving close to the, closer to the retail customer. And that they have to win these retail customers. And so we've, have had a lot of constructive discussion that gives me the feeling that in '07, the industry will begin to make progress on this issue.

That's encouraging. And then just a final question on the F&I here at record levels now, how much upside do you see there, or is that more limited from this point forward?

Rick, it's Mike Maroone. The up side that we've experienced is really not rate-driven. Our income from rate averages about 1 point. It really comes from our performance of our service contract business and our preferred lender network. I think we can do better as we tighten the bandwidth, but I do not see tremendous growth opportunities above the 1100. I mean, I think there's some opportunity but I think it's going to be a smaller increments.

Thank you.

Thank you. Our next question comes from Mike excuse me if I pronounce this wrong, Geoghegan of Bear Stearns.

Mike Geoghegan. Thanks for the attempt. Looks like you picked up a penny or so at the other income line. Can you put some color around that?

Yes. That primarily had to do -- this is Mike Short -- with a property sale that occurred, Mike.

Okay. So it was a gain on that sale?

Yes.

But we should expect that type of ongoing activity so it's less of a one-time item than continuing?

No, I wouldn't say that. I would just view it as a one-time item in that quarter.

Okay. And can you describe the, is there anything we should know about the tax, the tax rate, the lower than expected tax rate, these favorable resolutions? Are there any more that we should expect in the future?

No, I wouldn't expect anything dramatic in the future. As you know from time to time we resolve issues that are outstanding, but I think the guidance that we've given on our ongoing tax rate in the mid 39% range is about right.

Okay. And last question, on service and parts, you made a comment about wholesale parts sales being up and that being one reason for the lower margins. Can you just provide additional comments on that? I guess I'm not too clear on what would drive that.

Sure. Mike, it's Mike Maroone. I think it's a mix shift. The warranty business, which was down some, is a much higher margin business. We did see some strength on the wholesale side. And it really sticks out in the year-over-year quarterly comparison. When you go to the full year, I think you'll see that our current margins are fairly in line with the full-year number.

Okay. But there's nothing, you didn't see anything in the quarter to suggest, I mean, last quarter, there was some comments about improving vehicle quality potentially being a reason for, you know, a deterioration in the service and parts business. We shouldn't expect to see any sort of secular trends in service and parts going forward, should we?

I think that in this quarter again, our customer pay business was up about 4%. Our warranty business was down about 8%. So I think we are seeing improving quality. It does not spread evenly across all manufacturers. But we have seen some declines in the warranty revenue. And I would expect to see improving quality. I don't know if it will be as dramatic as these year-over-year comparisons.

Okay. Thank you very much.

Thank you, our next question comes from Rex Henderson.

Good morning. First of all, a question on the inventory follow-up. You commented a few minutes ago about inventory in the industry, and the industry levels for the domestics. I'm wondering if could you drill down a little bit in your own inventories. Overall, they look okay, but how do you feel about your domestic inventory? You still feel as you have reduced your order rate, there, have you gotten your own domestic inventories in line with where you want them to be?

Yes, our inventories for the domestics are far below the rest of the industry retail inventory. We are at 67, 68 days with our domestic inventory. We're could probably -- we're going to try to work another 4 or 5 days out of that. But overall, that's a very good figure.

Okay. And as you slowed your order rate, do you feel your sales suffered at all for lack of some product that may have been selling better in those domestics?

We certainly gave up no profitable share whatsoever. There will be situations when you have that kind of disparity that the industry's at 100-day retail supply and we're at 67, where competitors will have to liquidate at a certain point. Their high inventories. And of course we won't match that pricing or that unprofitable business. So in that sense, we are willing to let that type of business go by. We don't think we're leaving any profitable business on the table.

Okay. A follow-up. Mike Jackson was talking about the expectations of a low $16 million [sar], I'm wonder if you could you parse that out a little bit about how much of that decline versus 2006 you think is fleet, how much of that is retail, and what that retail expectation means for you in terms of your same-store sales numbers.

Certainly. We've made very clear over the last several years that retail was declining at a rate much faster than fleet. And the fleet was actually going up as a percent of business, meaning that the overall economic situation was weaker than the top-line number would indicate. And at a certain point that fleet number is no longer sustainable. And then when it falls, you get closer to reality. So what's happening now is just the confirmation of what we have said in the past. Now, since the traditional big three have made the hard decisions to take out capacity, they're now in a position to decide to walk away from that unprofitable to marginal profitable fleet business. Long-term, I think that's very healthy for retail as they will be in a better position to support residual values.

Now, how exactly all that's going to play out this year is difficult to predict. But I would say that my expectation is that in '07, it will be fleet that is taking the hit on the buying decline. That retail has already taken a lot of its hard knocks. But it remains to be seen. The economy is tough, as I said. And housing still hasn't sorted itself out, particularly in some very big markets. So it's a little bit difficult to predict. Certainly the first half of the year is going to be more difficult than second half of the year.

Okay. Thank you and congratulation on a pretty solid quarter and a difficult environment.

Thank you.

Thank you. Our next question comes from Matt Nemer of Thomas Weisel.

Good morning. Thanks for taking my questions. First is regarding the used business, I'm wondering if you feel like you're getting the return that you were looking for on the inventory management technology. It doesn't seem to be moving the numbers that much this year or maybe it's not implemented fully yet.

It's Mike Maroone, Matt. We actually implemented it about two years, maybe three years, before some of our peers. So we did get some lift then. I think what we're reflecting, and it is in all of our stores. I think you can always execute it better and better. And we're certainly a company that's focused on execution. I really think the story is more of the softness in a couple of our key markets. Our used to new ratios are still holding at about 0.6 to 1, that's used to new, which is about 800 basis points better than the peer group. So we think our used performance is okay. Obviously we had some soft markets and we were disappointed with that, but appears to be in line with what the third parties are saying what the market performed. It's not tool related. We've had our tools in place much longer than competitive group.

Got it. And staying with used, do you have any thoughts on the impact of the reduction in program cars into rental? Does that impact you in terms of sourcing used vehicles?

It's Mike Maroone again. There doesn't seem to be any shortage of used at this point in time. I think as these cycles play out, it may have some impact on the business. But there seems to be plenty of inventory out there and that's just one segment that each of the retailers attack. It's not, it's not the dominant piece of the business.

Okay. And then turning to F&I, you mentioned the drivers and I just wanted to make sure, are there any changes in assumptions that are impacting the profit there, either on early payoffs in the finance business, or service contract reserves? Anything that we should be aware of?

No. Our service contracts are all written through third parties. We just had a favorable experience. But I don't see any major changes that would influence those numbers. Certainly, when you go through all of the 0% financing, you don't have that reserve charge back that we had at prior times. So we'll work our way through that, but no major changes in the assumptions, just a good favorable market with service contracts and again we continue to use a preferred lender network very profitably.

Okay. And then moving to acquisitions, just looking at the numbers that are reported, it seemed like you paid about $78 million in the quarter for $137 million in revenue. Is there something that we should be aware of that would actually bring that ratio down a little bit? Or maybe you can just comment on the what you're paying in terms of percent of revenue.

Well, the acquisition happened near the end of the quarter. So I think it's more of a timing issue.

Okay. And I noticed on acquisitions, that you are, it seems like you're out hiring some new employees to work in your acquisition department. Can you comment on that? And is there sort of a renewed or more significant interest in stepping that up going forward?

You know, we continue to try and add talent to our team through the the company where it's applicable. I don't think our posture has changed. We're still out looking for the right deals in the right markets that will give us the appropriate return on investment. I don't think anything has changed markedly.

Okay. And then last question, maybe for Mike Jackson, on the inventory side, I noticed that Audi is running an experience in the northeast where they're holding inventory at some kind of a central warehouse to reduce floorplan expense for the dealers. Have you been following that? Do you think there's any chance that that becomes more widespread?

No, I'm not aware of it. I have not been following that. And I'd have to look into it, whether that's, would be something that's useful. I think our focus is much more on the simplification of the configuration and then having flexibility within the factories to make sure you can produce to that configuration and the discipline to react to what's happening in the marketplace in a relatively short period of time. And to be able to make that model work, you have to lean out the inventories. If you have a huge amount of finished goods between and you the marketplace, it's very difficult to run that model. And so that's where we're working with the manufacturers. And as I said, I'm encouraged by the level of discussion and the commitment to find ways to get there.

Great. Thank you very much.

Thank you. Our next question comes from Rich Kwas of Wachovia securities.

Hi, good morning. Just a follow-up on the F&I, Mike Maroone. Was there any benefit from performance bonus from your lending network this quarter?

We always have, every quarter, we have some benefits. I don't think there was anything extraordinary from the lending network, although we continue to put more and more emphasis on that network.

Okay. And then on the SG&A, looks like you pushed out the expectation another year in terms of getting that 100 basis points. What do you -- I guess Mike Short, what do you think the cadence of that potential saving or those potential savings are over the next three years?

Well, we'll have to get back to you I think on a specific number what the savings rate will be on that. We're continuing to address productivity issues throughout the company but specific guidance on which is going to pay out what and what timing we'll have to circle back with you on.

Okay, And then Mike Jackson. What's your outlook for the used vehicle market? Wholesale prices have held up very well or help up very well in 2006. What's your expectation as '07 progresses?

Yes. I always start with the consumer. And from that demand point of view and again we're somewhat colored with our market mix with a difficult economic environment in California and Florida. So for us, I think the used vehicle volume component is going to be difficult.

Okay. So do you think wholesale prices will soften -- and just generally speaking for industry, do you think the likelihood of wholesale prices softening is realistic?

I think wholesale prices could very well be okay because of the ratio of leasing has declined over the years and with fewer vehicles going into fleet, meaning the turn ratio in fleet will extend. Meaning fewer of those cars are coming back to market quicker. So I think wholesale indexes should be okay. But I'm not so sure about the retail demand component from an overall volume point of view. So I'm sort of looking at lower supply, but with that, lower demand, meaning the index is probably okay.

Okay, great. Thank you.

Thank you. Our next question comes from Jonathan -- excuse me if I pronounce this wrong -- Steinmetz of Morgan Stanley.

Great, thanks. Good morning, everyone.

Good morning.

Just a couple of follow-ups here on the F&I and the SG&A to gross. First on the F&I, with it up about $100 per car on a comp basis, Mike Maroone, can you just talk about the mechanics when you say favorable service contract experience, if it's all third party, just how is that impacting it in terms of any car and what it might be adding per vehicle?

We have not broken it out and I'll ask John Zimmerman to look and get back to you on the dollar breakout. But in our arrangements with third party, we share in the benefit from their experience. It's not just an up front commission. There is some sharing based on experience. And as I mentioned in the prior question, we have received some favorable benefit there.

So there's basically an accrual and then as these things come in with less usage, so to speak, you share in the gain?

That's correct.

Which is very different though than when you were actually underwriting these and you were sort of booking the full item.

Correct. We have eliminated the risk and we have upside opportunities based on performance.

Okay. On the SG&A to gross, to follow up on the target being flat with where you were at 100 basis points, can you just talk about first of all, what is the assumption on gross there? You're really forecasting two items. Is this on a flat gross? And secondly, you didn't really make a lot of headway on it this year. Were there things masking the progress? And maybe Mike Jackson, what are doing this year to make sure that you guys start to show some movement in that line just tactically?

Jon, This is Mike Short. I do think that there's going to be two thing that is will drive the SG&A to gross over time. One is going to be improvement in the gross and we do expect to see that pick up over time. And then the second is going to be continued focus on productivity improvement, and that's going to be coming from a number of sources including purchasing initiatives, compensation, the leveraging of our shared service infrastructure, so there will be both a numerator and a denominator effect to that, if you will.

Mike Maroone, why don't you talk a little bit about compensation?

Yes. Jonathan, it's Mike Maroone. You know, we are working really hard on our store expense control. We've made significant investments in some software to help manage our compensation. We also have put common element pay plans in most of the key positions in the store that reward productivity, longevity and customer satisfaction. So those are being put throughout the the entire network, and we now have some visibility and it makes it much easier to manage. We also are working hard on our marketing mix. We're a big advertiser in the markets that we compete in because we've got great critical mass. And we are shifting some of those marketing dollars around and really focused on efficiency and measuring everything we're doing. So we're really attacking the cost side both from a comp and an advertising point of view, as well as really hard work on optimizing our inventories, as Mike Jackson had talked about earlier.

And would I say that you should also factor in that the difficulties in California and Florida are masking some structural progress that's being made. And when that cloud clears from those two markets, which is inevitable. I think the progress that we're making will become clear.

And would you say there was any unusual spending against that progress on any of the shared service center and that kind of thing or is that just an item that just persists and it's not unusual.

That's correct. We continue to invest in those long-term initiatives. And until those investments stop, it's really hard to see the progress that we've made. And that's still a couple of years away on those projects.

And Jonathan, I'd say that our investments are both in the shared service center and in our overall technology platform so that we can manage the business more efficiently.

Okay. All right. Thanks, guys.

Thank you. Our next question comes from Kelly Dougherty of Calyon.

Hi. Thanks. Most of my questions have been answered but I have a few quick ones. On the last call, you mentioned that there was a significant decline in truck demand and I was wondering if you saw that persist in this quarter as well and is if there were any particular segments or models that were impacted more meaningfully.

There's no question that there's a direct linkage between housing starts and pickup trucks sales. You can look at it for the last 25 years. And with the dramatic decline in housing starts, you have all kinds of contractors who are postponing pickup trucks, pickup truck purchases. And we really don't see the pickup truck market coming back until the housing situation regains its footing.

I assume that's a big factor in the low $16 million unit [sar]. Are there any other particular segments that you expect to be weak in 2007?

Whatever is being produced for rental car fleets will be weak. That will be the other big factor. And no, other than that, I think it's just product, product introductions that will determine what's strong and what's not.

You guys remain rather bullish about premium luxury sales next year -- or 2007 as well?

Yeah. We're long-term extremely confident about premium luxury.

Okay. Thanks very much.

Thank you. Our next question comes from Matthew Fassler of Goldman Sachs.

Thanks a lot. It's Matt Fassler and [Daren Carradine]. And good morning. My first question to you, I guess Mike Jackson, relates to your comments on the geographic or regional trends within the used business. Were those paralleled essentially in the new business as well or do you think those macro economic factors that colored used are more restricted to used?

No, it's absolutely also in new, used, even in service and parts.

Gotcha.

California and Florida are going through a difficult period. Just to give you a little color in Florida, if you go back two, three years ago, somebody be would announce a 30-story building and within days, it would be sold out to speculators with many of them taking multiple units who really had no intention of ever closing on the unit or living in the unit and they would remarket the unit while the building was under construction. While the first step back was they had to start closing on units. And that was a difficult adjustment. And then they started looking for renters. We're now in the phase where a very large percent are walking away from their deposit saying, I can actually make money by not closing. So that's another difficult period that we're going through. Meanwhile, the supply hasn't stopped yet. There are still buildings that were under construction that are coming up on completion that, that was too late do anything about. So the bottom really hasn't quite been found yet on that type of speculation which also happened to a certain extent with housing in California. So that's a difficult adjustment that we're going through. It was necessary, the market was overheated so we'll all be better for it in the long run that it's been addressed, but it's going to be disruptive for a period of time.

Gotcha. The second question, I'd like to ask relates to the introduction of Smart Choice. Mike Maroone, you indicated that's in about 40% of your stores now. Can you just talk about the impact that you see and which operating metrics attempts to move the needle for when it's introduced?

Matt, I think the most important operating metric for us is customer satisfaction. And we have seen a dramatic increase in our customer satisfaction scores from the manufacturers over the last year, especially in those markets. So what we're really doing is we're trying to take time out of the transaction and provide more transparency. We've also done some research post launch, and both our associates have reacted very favorably as well as our customers and that's really what prompted to us do our national rollout. And I think we're done in most part of Florida, Denver, we're working in Arizona right now, working in California. And are very optimistic about the way customers have responded to Smart Choice.

Thanks, Mike. And finally, you cited in your discussion of the parts and service business kind of the split between wholesale and or customer pay, rather, and warranty. Sounds like customer pay was up mid teens this quarter and I hadn't heard the specifics of those numbers before. Is that an acceleration from where you were and you know those are pretty big numbers in absolute terms. I'm curious what's driving that magnitude of increase there.

Matt, I called out a 4% increase in customer pay, not mid teens.

I misheard it.

And over the last several quarters it's gone, it's generally in the 5% to 7% range. We've got a common service drive process that we've implemented and trained to and certified to in all of our stores. We're really pleased with the results there. I think the progress is masked a little bit by the reduction in warranties.

Understood, thanks for the clarification.

Thank you. We have time for one more question.

Thank you. Our final question comes from Chris Struve of Deutsche Bank.

Good morning, gentlemen. Good morning. I have two quick questions. The first is, you talk a lot about your view on the '07 demand picture in the United States. Do you have, can you discuss your longer-term view, like '08, '09? I mean, is this going to bounce back?

Well, you know, it's pretty perilous to try to call the market, even a year at a time, let alone going beyond that. Overall, if you look at the demographics in the United States, you can make a case for a marketplace that goes back over 17 million units. It would be very premature today to actually call that as a prediction. But there is a scenario that that could happen. But there's a lot of contravering forces that it might not happen. So it's just way too soon to say.

Okay. My final question would be, you commented on the link between housing and pickup trucks. Another potential issue with at least the '07 pickup trucks is the new diesel engines that are substantially more expensive than the previous generation of diesel engine. Are you guys, I know it may be too early to tell, but are you seeing any impact from the higher price point on the new diesel pickup trucks?

It's going to be extremely competitive in the pickup truck market because the market in and of itself is under stress and you have a lot of new product there. So it's going to be a very tough competition. Mike, do you have any specific comments on diesel?

No, I think diesel in the superduty segment or the three-quarter ton segment is a much bigger factor than it is in the half ton segment. But I think most people that buy diesel really look at the total ownership cost over time. And it looks very favorable. So if there's a also bit more up front cost, I think people look at it as a payoff. I'm not sure it's going to be a major driver of the market at this point.

Okay. Thank you.

Thank you, everyone, for joining us today.

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