AutoNation Inc (AN) 2007 Q4 法說會逐字稿

Welcome to AutoNation's fourth quarter earnings conference call. At this time, all participants are in listen-only mode. After the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) Now I will turn the cull over to AutoNation.

Good morning and welcome to AutoNation's fourth quarter 2007 conference call. My name is John Zimmerman, AutoNation's Vice President of Investor Relations. I would like to remained you that this call is being recorded and will be available for replay at 1-800-759-3449 after 2:30 p.m. Eastern time today, through February 14, 2008. 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, Chief Financial Officer. At the end of their remarks we'll open the call to question. 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 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 risks 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 Relations section of AutoNation's website at www.autoNation.com. And now I will turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Good morning. Thank you for joining us. Today we reported fourth quarter EPS from continuing operations of $0.27 compared to a year-ago EPS of $0.35. The U.S. economic growth drastically slowed in the fourth quarter of 2007, results for the fourth quarter of 2007 reflected a decline in new vehicle retail sales especially in California and Florida, partially offset by continued share repurchases. For the full year 2007 EPS from continuing operations was $1.44 per share equal to a year ago.

The slump in the overall housing market continues to impact consumers' willingness and ability to make large-ticket purchases, especially autos. Housing and retail auto sales have been declining for the past two years. In fact, over the past two years new home sales nationwide have declined 25% and in Florida and California new home sales are down approximately 42%. During this period U.S. auto retail sales have declined 12%. We continued toe have confidence in our California and Florida markets and view them as healthy over the long term especially when housing begins to recover. Typically economic down turns run in 30 to 40-month cycles. The bright spot is that we're approximately 24 months into the current downturn. Further, the recent action of the Federal Reserve to reduce interest rates could improve the auto retail outlook in the second half of 2008. I would like to turn it it the over to Mike Short to provide more details on the financial results.

Thank you, Mike, and good morning, ladies and gentlemen. As make mentioned we reported fourth quarter earnings from continuing operations of $0.27 per share versus $0.35 per share a year ago. For the full year we reported earnings from continuing operations of $1.44 per share versus the same amount a year ago. Full year 2007 results included favorable tax adjustments of $0.06 per share, full year 2006 included charges of $0.09 per share for the debt tender premium and other financing costs, related to our April 2006, recapitalization.

Operating profit for the fourth quarter was $148 million down 16% from $177 million a year ago. For the full year operating profit was $705 million down 11% from $792 million a year ago. Our operating results for the fourth quarter of 2007 were adversely affected by some year-end accounting adjustments. The aggregate impact of these was approximately $0.02 per share on earnings from continuing operations. These adjustments included a favorable finance and insurance revenue adjustment of approximately $4 million. An unfavorable adjustment of approximately $4 million in SG&A driven by various legal and other matters. And a non favorable adjustment and depreciation expense of about $4 million.

For Q4 2007 SG&A as a percentage of gross profit increased 240 basis points to 74% from 71.6% a year ago. This was a result of a deleveraging of our cost structure due to the decline in vehicle sales. For the full year SG&A as a percentage of gross profit increased 120 basis points to 71.9% from 70.7% a year ago with variable costs declining in line with gross profit and fixed costs flat year to year in absolute dollars. Net inventory carrying costs was consistent in Q4 with the prior year period and was $3.7 million higher for the full year versus -- for the full year 2007 versus last year. The unfavorable variance for the full year is primarily a result of lower floor plan assistance due to lower new vehicle sales. That was partially offset by lower floor plan interest expense due to lower new vehicle inventory levels.

Other interest expense was 45.2 million higher in Q4 versus last year and $23.4 million higher for the full year. The unfavorable variance is a result of higher debt levels related to increased borrowings in 2007 and for the full year due to our April 2006 recapitalization. We expect that the recent reductions in interest rates will result in savings for AutoNation in 2008. All else being equal a rule of thumb to help quantify the benefit of the rate reductions is that every 100 basis point improvement in our interest rate results in approximately $25 million in pretax savings.

For Q4 2007 we had an effective income tax rate of 39.1% versus a prior year effective rate of 37.5%. The full year 2007 effective income tax rate was 37.3% versus 38.9% a year ago. We expect our underlying tax rate before adjustments to be about 40%.

During the fourth quarter we repurchased 4 million shares of stock at average price of $16.29 per share for a total of $65 million. For the full year we repurchased 33.2 million shares at an average price of $19.43 for a total of 646 million. Our future share repurchases are subject to limitations contained in our debt agreements. As of January 1, 2008, our basket capacity for share repurchases was approximately $30 million and each quarter we're permitted to add back approximately 50% of our net income after tax and any stock option proceeds.

We reinvested $31 million in the business for capital expenditures during the quarter bringing total capital expenditures for the year to $160 million. The total capital expenditures for the year net of acquisition related spending, land purchased for future sites or lease buy-outs were $124 million. We expect full-year 2008 capital expenditures to be approximately $110 million net of assets sales. Once again that's excluding acquisition related spending, land purchased for future sites or lease buyouts. At December 31, our non vehicle debt was $1.8 billion, and we had unused revolving credit availability of approximately $361 million. Our non vehicle debt-to-capital ratio was 34%. Now let me turn you over to our President and Chief Operating Officer Mike Maroone.

Thanks Mike, and good morning. Unless noted otherwise my comments regarding fourth quarter operational results will be on a same-store basis.

Throughout 2007 the auto retail environment remained challenging. In the quarter pressure on the segment increased with the drastic slowing in economic growth. In addition, consumer concern of a possible recession intensified. As a result, our same-store new and used retail volume in the quarter was off 6% or 7800 units compared to the period a year ago. In gross margin per vehicle retailed was compressed for both new and used vehicles. At December 31, our new vehicle inventory was 62,700 units for all stores, a reduction of 3% or 1900 units compared to a year ago. However, due to a slower sales pace, new vehicle day supply increased two days to 53 days at year end. Days supply for used vehicles was 44 days at December 31, an increase of 2 days compared to a year ago.

We continue to work diligently to optimize our used vehicle inventory. In January we have added dedicated used vehicle resources to supplement our field team and have redoubled our efforts relative to our used vehicle management process. Our objective is to drive more trade-ins and to then retail a greater percentage of those trade-ins. This includes repositioning used inventory based on a store need and highest opportunity for retail.

At 631 million same-store revenue for parts and service reflected a 3% increase. We were pleased with growth of 5% in customer pay parts and service revenue. Our ongoing growth in this area is attributed to extensive training of our field operations associates coupled with our service drive process and service marketing initiatives. Fourth quarter same-store F&I gross profit per vehicle retailed was $1162, an increase of $41, or 4% compared to a year ago. We attribute ongoing solid F&I performance to preferred lender network OEM service contract alliances, and strong product offerings and penetration.

Turning to our store portfolio, during the quarter we completed the acquisition of two stores representing a combined annual run rate of $60 million. They are Griffin Lincoln Mercury in Jacksonville, Florida, which was added to our Mike Schad Ford store and Littleton, Nissan in Littleton, Colorado. We also divested three stores with annual run rate of approximately $83 million bringing divestitures for the full year to 14 stores representing 19 franchises and an annual run rate of $386 million. At December 31, our store count was 244, representing 322 franchises and 38 brands in 15 states. I'm also pleased to share in that in January we completed the acquisition of Don Mackey BMW in Tucson which is now operating as BMW Tucson. Our corporate development team continues to pursue acquisitions that meet our market brand and return on investment criteria.

In closing, in the face of continued economic pressure, our focus remains on containing costs and improving our capabilities across all segments of our business. In addition, we will continue to invest in the development of our associates and in technology and processes to drive outstanding associate and customer experiences. On behalf of our executive team, I thank each of our 25,000 associates for their commitment and dedication during this challenging period for auto retail. With that, I will turn the call back to Mike Jackson.

Thanks, Mike. As we look to the rest of 2008 we believe the market will remain very competitive and very challenging. AutoNation will continue focusing on our cost structure while continuing to invest in our business. We're confident our long-term business strategies and our market. We believe that in 2008 industry sales of new vehicles will he be in the mid 15 million units. However, the recent action of the Federal Reserve to reduce interest rates could improve the auto retail outlook in 2008. That concludes our remarks. Thank you for joining us today. Operator, please open the call to questions.

Thank you. (OPERATOR INSTRUCTIONS) And our first question comes from Mr. Rich Kwas with Wachovia.

Good morning, gentlemen.

Good morning.

Mike Maroone, I wanted to ask about used vehicle sales, margins, at least margins on the business were down pretty significantly year on year. Mannheim just put out their wholesale index and that had declines for the fourth consecutive month what. Are you seeing in that market? Is it supplies or too much supply out there? Then how do you match that with how demand trends are going and what's your sense for the upcoming spring selling season?

Rich, I think would we found is we're in a period of soft demand. I think the housing story has been well told. But the demand is soft, and the supply of used is increasing. There's a lot of vehicles coming off lease, there's a lot of repossessions, and there's particular softness in certain segments. I would call that the pickup truck segment, the large SUV segment, and to a lesser degree the sports car. So you've got a a lot of supply, a it lot of trade-ins, and what we decided to do was to try and retail out of those vehicles we found the auctions to be quite soft, especially in December, and we attempted to retail out. The way we did it was adjusting our pricing. We took some hits on a gross margin basis, but we felt it was the prudent thing to do rather than send them through an auction system that was weak. The auctions had a very low sell-through rate, especially over the last month and a half.

How do you feel your inventory is set here heading into the spring?

Well, we've leaned our inventory up. At the end of the quarter we were at 44 days which is really a little bit of a timing issue. We really would prefer to run in the mid-30s to high 30-day supply, and we feel by doing that we can minimize our exposure to some fluctuations in the market. So we're still optimistic about our used business. I think, as I mentioned in the script, we've added some resources, and really are going to work hard to try and grow that business in the year ahead.

Okay. Bigger picture question, from Mike Jackson, GM's announcement regarding consolidating dealership within metro markets, you would have some presence. Where you possibly would benefit from that longer term seemingly? What's your sense on what they're doing, and how aggressive do you think they're going to be on that end?

Well, of course, we have called out that the greatest opportunity or the greatest competitive disadvantage that the Detroit three is their retail network. They have an overcapacity situation that is causing a flight of capital and talent. The high throughput model is where they need to get to. So they've dealt with their overcapacity issues on the production side, and now they're really getting serious about dealing with overcapacity at the retail level. We know they want to get to high throughput model. We are very much positioned to benefit from this strategy of a consolidation to a high throughput model. We are very much prepositioned for that, assuming that it it would always come. We're more committed than ever, but how fast they will actually be able to move at this point, I don't have a clear view of, Mike. Do you?

I think the pace is not a brisk pace. They have actually said they're going to defer the issue and will not be discussing it at the NADA convention which comes up this week. I think they're regrouping and trying to figure out how to get there. It's clearly the right way to go. We did one of their deals, a deal with them last year, where we combined Pontiac, Buick, GMC, and Saturn under the same site as one of our Chevrolet stores. It was a bold move on their part, and we certainly supported it. It's worked out quite well for both GM and for us. But I'm not sure about what the pace of the consolidation is going to be.

Okay, great. Thanks for the input.

Thank you. Mark Warnsman, with Calyon Securities, your line is open.

Curious as to whether your 65 million in share repurchases was the maximum allowable under your debt covenants?

Yes, at the end of the year we had basically depleted our basket, and it was replenished, and that's the $30 million that I referred to as of January 1. So the Q4 income replenished the basket for Q1 of '08 but we were pretty much completed with the basket availability in Q4.

Okay. And with your non vehicle debt increasing by $200 million for the quarter, how do you think about balancing your debt levels with your share repurchase program? Are you -- do you anticipate continuing to max it out under the debt covenants, or is there a balance point there?

I think you'll see on a year to year basis the amount of share repurchase that we engage in will be significantly lower given the fact that we do have the restrictions on us now that are provided in the -- in our debt agreements, which I mentioned is essentially half of our net income plus option to proceeds. So in 2008 it will be substantially lower than what we saw in 2007.

Okay.

We won't add any debt to do share repurchase, it's driven by a percentage of profitability.

Finally, if I could, cash was down $20 million year-over-year. What do you see as the -- or do you have a benchmark cash and equivalents level that you like to maintain within the business?

We monitor it based on a liquidity measurement, not cash in and of itself. And cash will move as a result of timing, but we're quite comfortable with the overall liquidity level.

Thank you very much.

Thank you. Rex Henderson with Raymond James Associates, your line is open.

Good morning. First of all, for Mike Short, a couple of clarifications on SG&A. You said that there were some legal costs and some depreciation and amortization expenses, I think 4 million and $2 million. What period was that for? Was that for the fourth quarter or full the full year?

In the fourth quarter.

That was in the fourth quarter.

Right.

Can you clarify a little bit about what those expenses were and whether they're recurring or whether they're going forward?

No, periodically we review our levels for legal matters, and so we took a look at that at the end of the fourth quarter and concluded that we needed to increase the reserves a little bit there. On depreciation it was just a result of looking through some of our lease structures and basically cleaning up some of those.

So that is not going to be a recurring expense going forward then?

No, no, not.

Okay, just clarifying. The other thing is, the banks have talked about pulling back from consumer lending lately. I'm just wondering what you're seeing in terms of your lending partners. Have you seen any retreat on their part? It looks, from F&I income it doesn't look like it, but I just want to clarify whether or not you're seeing any pull-back on the part of lenders in terms of either term or in terms of availability of credit?

Rex, it's Mike Maroone. We are not seeing a pull-back in consumer credit. We really believe that especially on the prime side that it's business as usual. Certainly the repo rates and delinquency rates are up slightly. I think ultimately the subprime side could get a little more conservative but it's really not had an impact on our business. We're pretty pleased with our ability to get paper placed and with the job our F&I team is doing.

Okay. And finally, Fed just recently cut rates and it's still early to see an impact but I'm just wondering, did you see any change in consumer mood or close rates or anything after the recent Fed rate cuts?

This is Mike Jackson. If I look at the consumer, we have across the table from us, their credit profile has deteriorated over the last three, four years. A big part of that has been the run up in rates and adjustable rate mortgages has impacted that, and so since we're holding credit standards firm, they would like to buy, but they can't buy. Certainly the change in rates and either the canceling or the absolute reduction of many adjustable rate mortgages will help.

The second thing that we see is a great number of buyers who -- potential buyers who are sitting there saying, I'm not sure if prices have bottomed yet, and I'm going to wait. That's both in housing and automotive. And in automotive they're waiting for the mother of all incentive programs, but I really don't think that's going to happen this time as the industry has proactively cut production and has reduced capacity. So the point is, with these rate cuts, they will begin to psychologically say we're at the bottom, this is it, it's safe to come back in the market, you're not going to get a huge price advantage for waiting, and things will begin to move again. But that's not instantaneous. I would say that whole process takes at least six months to work its way through and to get a turning point. So that's why I say you could see a better environment in the second half of '08, if it takes longer than that, then it will be the beginning of '09. But, that process has definitely started, and will be reflected in the business in six months to a year.

Okay. Thank you very much.

Mr. Maroone would like to add to that.

Rex, if I could, the one thing that we find interesting is, although our showroom traffic has slowed commensurate with the sales rate, our e-commerce traffic and our phone traffic both which we measure with some proprietary software is up, so there appears to be some underlying demand, and I think to Mike's point they're trying to figure out where bottom is on pricing and where the incentives are going, but there is people out there looking, and they're looking in different manners than they have previously.

Okay. Thank you.

Rex, this is Mike Short. I just wanted to make sure, I wanted to clarify a comment I made earlier. When you called out some of the adjustments that we made in the fourth quarter, I just want to make sure we had the numbers right. There were three items that I called out. It one is a $4 million favorable adjustment from finance and insurance revenue, then there was the unfavorable in SG&A which was 4 million, and another 4 million in depreciation. I think you mentioned two.

I'm sorry, I had that number wrong. Thank you very much.

Thank you. John Murphy with Merrill Lynch, your line is open.

Good morning.

Good morning, John.

I just wondered if you could comment on the mix of your customer base in your financing base on prime versus subprime, and it sounds like you're having a little bit of trouble, not you specifically, but there's trouble in the market in financing some of these subprime consumers, but it sounds like they'd still like to buy but if we get rates lower, they may actually be able to come into the market.

John, it's Mike Maroone, our prime is generally 80% or more, subprime is 20% or less. It does vary greatly by market. There is still subprime financing out there. All I was saying is their losses have probably gone up a little faster than the prime portfolios and I would say they're a little more conservative but I don't mean to you insinuate that the faucet has been shut off. There's still financing out there. It's just a little more conservative than it was.

And slightly more expensive for the subprime buyer right.

It's always been expensive for that buyer though.

Then secondly, when you look at the operating leverage in SG&A, it looks like it was a little bit higher than we would have expected. Is that because there's such severe weakness in Florida and California and there's more negative operating leverage there and it's not as bad in other markets or do these charges, these one-time items in the fourth quarter really sway the number?

Since there'sboth a revenue and a cost component to the one-time charges, it doesn't affect the ratios very much but as Mike alluded to there was a meaningful softening of the economy in Q4 and I think that contributed to the Q4 number. Overall what we look for during the course of the year is that we try and manage our variable cost structures in line with gross, and we're aggressive on how we approach our fixed cost structure. As I mentioned in the earlier comment that was flat on a year-to-year basis so we absorbed inflation there. That's how we manage it.

Lastly, you talked about the weakness in California and Florida. Just wondering if you can comment on business in your other major markets? Just wondering what demand in Florida showroom traffic was like there?

John, I would say from the strength side, Texas continues to be very strong especially South Texas. But the whole state is performing at a very high level. The Denver market and the Colorado market continues to be strong. I would say on the weak side, the Florida markets are all weak, the California markets are weak, and we certainly feel a lot of pressure in Phoenix and Las Vegas. It's come a little bit late to the party versus California but those are all those high-growth housing markets are all really feeling it, but it is offset to a slight degree from Texas and Colorado.

Great, thank you very much.

Thank you. Rod Lache with Deutsche Bank, your line is open.

Good morning, everybody. Just want to follow-up on the comment you made on SG&A. Can you just walk through for us what the variable versus fixed component is of your SG&A costs, and are you making adjustments to the fixed part of it?

As you know, there's no cost that's perfectly variable and no cost that's perfectly fixed. Well, very few costs that are perfectly fixed, but primarily the costs that are mostly variable are compensation, variable compensation expense, and we view advertising as variable as well. The fixed components would be more overhead, rent types of expenses, insurance costs, things like that. And we're working on both sides of the equation, both in terms of managing our compensation costs and I think Mike Maroone has mentioned in the past we've put in place new systems that give us greater visibility into that as well as a continued focus which is nothing new for the Company about being disciplined about how we look at our fixed cost structure.

Do you have a rough breakdown of the fixed versus the variable part of that SG&A?

As we look at it, the variable portion of that component is a little bit less than 60% of the total bucket that I just outlined.

Okay. And also to follow-up on your comment on used, in looking at the margins, were you suggesting that the margin this quarter was abnormally low because of the inventory initiative you had? Is it coming back now? What should we be expecting in terms of margins looking forward?

I don't know that we talk a lot about forward look but would tell you that the margin compression in the quarter really was about us desiring to retail rather than wholesale. The wholesale market was very soft and we chose to take pricing action to move those units on a retail basis. Wouldn't want to predict what it's going to be like going forward but that's how we performed in Q4.

Okay. Just one last one. If you look at the parts and service business, it's been pretty stable, which looks pretty good. Are you seeing that kind of stability even in regions like Florida and California, or are you getting some strength elsewhere, like in Texas to offset weakness in some of the weaker markets?

I would say the Texas market is exceptionally strong. The fixed business has been a good performer for us. As I mentioned we're up about 5% in customer pay offset by some slight reductions in warranty. It's a little more brand-specific where you see brands out taking share the parts and service is growing more, so it's probably more brand specific than it is regional at this point.

But you're not seeing any kind of significant drop-off in Florida or California, in that business?

No. Again, it's more brand than it is geographical.

Thank you.

Thank you. Rick Nelson with Stephens, your line is open.

Thank you. Good morning. In the softer macro environment are you seeing acquisition pricing at all come in?

This is Mike Jackson. No, we're not. And I think there is a significant group who would like to sell but they haven't changed their prices whatsoever to reflect where we are in the cycle or what the cycle means to overall valuation. So until we see a break in pricing, it will be a rare deal that we do.

Got you. Thank you for that. Are you seeing any resistance among the luxury car buyers, or is it primarily the domestics and mid-line imports?

The luxury business has weathered the downturn very well. They have simply more flexibility and more resources to deal with the challenges. That's not to say i the next six months as we flirt with a recession or have a recession that it could not be impacted.

Thank you.

Thank you. Edward Yruma with JPMorgan, your line is open.

I know that you had run a test with AutoNation Direct, but I noticed that the test ended. Are you planning on rolling that out nationally?

I don't know that we'll be rolling it out nationally, we are really moving to more of what we call an affinity business so we're using some of the same tools and pricing structure really working it a different part of the business. I would say there's tremendous -- there's a tremendous number of consumers that come on-line to gather information. It's still a small percentage that prefer to deal the entire transaction on-line. So we're working on our capabilities, and our affinity sales, and I think those can translate into the on-line buyer as well.

Great. I know that particularly toward the tail end f last year, the pricing on floor plan had increased significantly relative to swaps. Has that normalized?

Yes, we haven't seen a dramatic change in the pricing on the floor plan side.

Great. Thank you very much.

Thank you. Matt Nemer with Thomas Weisel Partners your line is open.

My first question is typically you've provided some commentary on your performance in California and Florida versus the industry. I'm just wondering if you have any of that data?

I don't have it in front of me. I would say that we're performing fairly much in line with the market. I don't think it's changed a lot. Polk is showing that Florida and California were down 9.7%. We were down 10.2. So I would say we performed in line with the market.

Great. That's helpful. And then my second question is, on expenses, can you give us any sense of your performance in some of those line items? I know you mentioned that your fixed costs were flat, but on comp and advertising, were you able to bring that down? How well were you able to bring that down?

On the comp and advertising side what we try and make sure we do is, since it's a variable costs, we see that those decline in line with our gross profit, in the case of the deleveraging scenario. On a full-year basis, that's what we saw.

Okay. And then my next question was, on floor plan, have you seen any changes in the assistance offers from manufacturers and how should we expect that to change with rates, or is that set early in the year? Is it stickier than the expense side?

It's Mike Maroone, Matt. The only change we've seen at the GM has offered more days of free floor plan. The other manufacturers have not yet adjusted for the changes in rate. So GM is the only one that's responded to this point.

Okay. And then lastly, in the used business, I understand that you are working with Lane Logic. Just wondering if you have any comment on their new product called Car Offer which I think is basically a direct to consumer offer to get trade-ins over the Internet?

We've met with Lane Logic and reviewed it with them. I think it's just too early to say what the consumer demand would be. We have tested Lane Logic products in several of our markets. The consumer button or the consumer offer is something that we haven't used too much. We were using some of their other product. So I think it's too early to say.

Thanks very much.

Thank you. [Colin Langen] with UBS, your line is open.

I just had a question looking at new vehicles, or unit sales actually sequentially were down less than they were year to date. What really drove that? Is that for California and Florida a little better than they were so far this year in terms of year-over-year decline or is it just outside of those regions it was actually stronger?

It's Mike Maroone. I think Mike Jackson called it out. We're in the second year of the downturn in retail, and I think we're beginning to comp against some softer numbers. So I don't think we have seen an improvement in business in Florida and California, but I think maybe a slowing of the declining sales rate.

Okay. So it was just better year-over-year comps. So looking into 2008 is that something we should maybe think about, too, should comps get a little bit easier in those regions, so their rate of decline should moderate? Is that the right way to think of it?

That would be the tipping point, this is Mike Jackson -- that would be the tipping point, indicating that the decline is over, and we're on the journey back. And that's why in my remarks I talked about the fact that we're two years into this. If we were just beginning to go down, that would be another story. But these downturns are usually 30 to 40 months. We're two years into this. For all big ticket items but especially housing and automotive. The medicine is here. So at a certain point, you're absolutely right, the comp is relatively easy and the economic environment has improved. And that will be the recovery that we're calling out that will either begin in the second half of '08, I don't see it in the first half, but in the second half of '08, at the earliest, and I would say the first half of '09 at the latest.

And you said before that outside of California and Florida you haven't seen any weakness yet. Do you have any concern that those regions are going to suffer declines given all the recessionary concern out there in the market, or do they look to be stable?

No, Texas went through the decline before Florida and California. Texas went down with Enron and everything that came with that and was down for, Mike, what was it, about 30 months?

About two-and-a-half years.

About two-and-a-half years. So the typical cycle. Now, they skipped the housing boom because they didn't make that big push in '04 and '05 because they had tough economic times. Therefore, Texas is on a very sound footing today, and the outlook for Texas is quite good for the next two years.

Thanks. That's very helpful. Switching it for a second, looking at parts and services, also a pretty good year-over-year performance. In warranty it sounds a little bit down but not as much of a head wind as in the past. We're looking into 2008. Does comps there get better? Do we still have the same quality improvements? Are there any challenges on that side?

It's Mike Maroone. I think the comps do get better. We have seen a moderation of the decline. There was certain manufacture that had dramatic improvements in quality and dramatic reductions in warranty. Those seemed to have leveled off some. Our focus has always been on the customer pay side. We think the declines in warranty are good for customers. We've just got to get the job done on the customer pay side so we do that with intense training on processes and a really strong marketing effort, including on-line marketing. And we now have service appointments on-line at all of our stores and we're seeing a lot of growth there. So our focus is on the customer pay side and the warranty does appear to be moderating but we don't attempt to control that.

Okay. If I could just shoot in one last question, looking at the SG&A ratio this quarter, it was obviously a little bit high, should that -- is that just a Q4 impact? Because costs are a little bit higher percent in that quarter, or is that going to be an issue heading into 2008? Do you think that ratio is going to tick up a bit, and should this rate be consistent for '08, or is that not the right way to think about it?

I think the way you ought to look at it is, what we aim to do in a deleveraging environment is bring the variable costs down in line with gross, and manage the fixed cost structure very aggressively. Obviously when you have a tough quarter like we did in Q4 that gets a little bit more difficult, but I wouldn't view that as something I would extrapolate on.

Great. Thank you very much for taking my question.

Thank you. Jonathan Steinmetz with Morgan Stanley.

Just to go one layer deeper on the used per vehicle retails, you were down about $175 year on year. I think, Mike Maroone you mentioned the pickup in large SUV categories among others what. What would the comparisons look like in those categories? In other words, was it especially pronounced in those categories on a dollar basis relative to that 175 figure?

I think it causes the bulk of the compression, not all of it, but the bulk of it. There is a lot of big SUVs being traded in and they're not easy to value. So we've got to work our way through that. I would say the other segments didn't have as much pressure.

Do you think that this is a new incentive problem from the manufacturer? Or is there an issue with used demand relative to credit availability, or what do you think is causing sort of the weakness there?

I think it's just an overall demand in the retail sector that Mike Jackson has talked about with big ticket items but it's also exasperated by the increased supply. There's a lot of vehicles coming off lease and certainly the repossessions are coming up. So it's a softer demand, increasing supply, and then those segments seem to be more affected.

Okay. Switching to the CapEx side, do the weak sort of business conditions that you and other dealers are facing does it give you any greater ability to push back on some of the major CapEx programs that some of the OEMs, especially the foreign guys have been pushing hard for lately or does CapEx stay at this level because it's hard to push back?

Well, all the manufacturers will tell you that we're very tough negotiators. Whatever the environment. We only invest our CapEx where we really think it makes sense and we're going to produce the type of returns that we're targeted for. We've become highly skilled at it it over the years in figuring out exactly how to deploy our CapEx, and I would view our continued investment in CapEx during this downturn as a clear vote of confidence in the states of Florida and California. I will observe they still have 2,000 miles of coastline and sunshine. That will carry the day. And the franchises that we're investing in. And our fundamental business model. So our basic -- we knew we were in for a tough cycle if you look at my statement, starting all the way back in '04 and '05, we knew it was going to be a very tough 30 to 40 months in the downturn of this cycle, and our plan was to manage costs very strictly, make sure we have variability, continue to invest in our initiatives, and continue to deploy CapEx, so that when the cycle turns we come out of it stronger than ever. That's been our fundamental plan. We've made it this far. We will not deviate from it at this point.

A perfect segue to my last question which is, Mike Jackson if you come to the view you're not going come to out of this until say the first half of '09 as compared to the second half of '08 what do you do differently operationally if you come to that view, say, I don't know, this spring or something?

That was my view going into '08. That is our plan that we will not see a recovery until the first half of '09. That is our base plan, so we plan and are executing that plan based on that. The interest rate cuts that have accelerated from the Federal Reserve are what caused me to say, well, maybe the second half of '08 we begin to see it, because the Federal Reserve has finally got it, they no longer are trying to walk the fine line between what they saw as inflation risk and downside risk. They are in full prevent recession mode. So strong rate cuts will continue, and I lived through this before when the medicine arrived and it's meaningful recovery will come so that's why I modified my statement to say, well, we may see a better environment in the second half of '08. Our base plan, though, is in '09, so we've, as Mike already called out, we've taken effective steps, everything we can do on the fixed cost structure. We definitely have variability, but we will continue to invest in initiatives and continue to invest our capital wisely.

Thank you.

Thank you. Matthew Fassler with Goldman Sachs your line is open.

Thanks a lot and good morning. Just a couple follow-up questions. Mike, you just touched on this a moment ago. To the extent that January looks like a tough month your forecast certainly is consistent with that and you maybe achieved a bit more expense deleverage than the Street was anticipating in the fourth quarter. Is there room on the traditionally fixed cost side and at this point are you inclined to take more costs out of the business, or are you essentially sticking where you are given that there might be some light at the end of the tunnel here?

No. Our view was in the fourth quarter, as I already described, will not see the recovery until '09, which we had to address the fixed cost structure aggressively. We've done that already. I've taken steps that have already been executed and completed, and now we're working on the variable part of the business. So we think we are prepared for whatever '08 throws at us.

Understood. And then just secondly, the cuts, the Fed cuts hit rapidly and LIBOR adjusted more quickly than it had been. Is there any reason why we wouldn't see that reflected in your floor plan numbers and in your floating rate debt interest as soon as the first quarter?

Absolutely, Matt. This is another thing to call out, is that with these rapid rate cuts, not only will it change the overall environment that we've been in for the last two years, and I'm convinced that will happen. It also gives us a tremendous benefit on the cost side right away. And each 100 basis points, if you combine the floor plan benefit and the non-vehicle set, adds a $25 million benefit. And we already have at least 200 basis points of benefit if you look at the yield curve. So that is there, and will flow through immediately. There will be some adjustments on assistance from certain manufacturers, but we've netted that into the $25 million figure that we have already given you.

Got you. One final question. I know you didn't discuss January in great detail but the industry brand numbers are out and while luxury held in I think quite well in 2007 versus the market, in January at least a couple brands looked like they were a little choppier. Would you attach any significance to that in terms of your earlier comments on the luxury's potential vulnerability?

This is absolutely normal for this cycle. For the first two years luxury goes along just fine, but at a certain point in the 30 to 40-month downturn even luxury will feel some pressure. So I wasn't surprised to see that. With the rapid rate cuts, I can't predict if we'll see more stress in luxury or whether these very adaptable, resourceful individuals will find a way to take advantage of the lower rate environment and feel confident to continue buying. But we're in that phase where luxury can get a little bumpy. Whether it will and how bumpy, I can't say, but it didn't surprise me.

Thank you.

Time for one more question.

Thank you. Joe Amaturo with Buckingham Research, your line is open.

Good morning. I was wondering if you could just give us some detail on your used inventory and what percentage is domestic versus foreign and possibly what percentage is truck versus car?

Our inventory overall is in the neighborhood of 23,000 units. I do not have at my fingertips visibility to that mix.

We'll get that for you.

Okay, thank you.

Thank you very much for joining us today for discussing our business, and appreciate your interest. Thank you.