AutoNation Inc (AN) 2008 Q1 法說會逐字稿

Welcome to AutoNation's first-quarter earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the call over to AutoNation.

Good morning and welcome to AutoNation's first-quarter 2008 conference call. My name is John Zimmerman, AutoNation's Vice President of Investor Relations. I would like to remind that you this call is being recorded and will be available for replay at 866-463-4964 after 2:30 p.m. Eastern time today through May 1, 2008. Leading our call today will be Mike Jackson, Chairman and Chief Executive Officer of AutoNation and joining him will be Mike Maroone, President and Chief Operating Officer and Mike Short, Chief Financial Officer. At the end of their remarks, we will open the call for questions. I will 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 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 and Litigation Reform Act of 1995. Such forward-looking statements involve risk which may cause the actual result or performance to differ materially from expectations. Additional discussion 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 and as required by applicable SEC rules, the Company provides reconciliation of any such non-GAAP financial measures to the most directly comparable GAAP measures on the Investor Relation section of AutoNation's web site 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 first warning EPS from continuing operation of $0.31 compared to a year ago EPS of $0.39. Prior year results benefit from a favorable tax adjustment of $0.02 per share. Results for the first quarter of 2008 reflected a decline in vehicle retail sales especially in California, Florida, Nevada and Arizona where the housing crisis has clearly impacted overall economic activity and consumer demand for vehicles. AutoNation new unit sales for those markets were down 11% and for the industry, California, Florida, Nevada and Arizona, new unit sales were down approximately 15% according to CNW Research. AutoNation new vehicle sales for the other states were down 4% in the first quarter. We continued to have confidence in our Sun Belt markets and view them as healthy over the long-term, especially when housing begins to stabilize. During the first quarter, U.S. retail auto sales had declined 11% according to CNW Research. AutoNation new unit sales declined 8%.

While today's economic uncertainty may compel certain potential buyers to put off their purchase decision until a later date, their needs remain. Once consumers begin to sense that their own economic situation has stabilized, they will begin to be ready to commit to purchase big ticket items like vehicles. Industry analysts like CNW and J.D. Power forecasted approved new vehicle sales beginning in 2009, due to fleet age and increase in vehicle scrappage and robust line-up of new products. CNW forecast new vehicles as 16.3 million in 2009, 16.7 million in 2010, and 16.9 million in 2011. We concur with this assessment for future new vehicle sales.

I would like to turn it over to Mike Short to provide more details on the financial results.

Thank you, Mike, good morning, ladies and gentlemen. As Mike mention we had reported first quarter earnings from continuing operation of $0.31 per share versus $0.39 a year ago. Operating profit for the first quarter was $147 million, down 21% from $186 million a year ago. The prior period included the benefit from favorable tax adjustments of $0.02 per share.

SG&A decreased $13 million versus Q1 2007 because of the erosion in gross profit, SG&A as percentage of gross profit increased to 74.5% from 71.2% a year ago reflecting deleveraging of our cost structure. Net inventory carrying cost was $3.3 million lower in Q1 versus the prior year period. The favorable variances primarily a result of lower poor prime interest rates partially offset by a decrease in four point assistance resulting from lower new vehicle sales. Other interest expense was $0.4 million higher in Q1 versus last year. The unfavorable variances as a result of increase in debt levels associated with our mortgage facility are, our revolving credit facility and other indebtedness. Partially offset by lower interest rates on term loan facility, mortgage facility and floating rate senior notes.

Q1 2008, we had an effective income tax rate of 40.6% versus a prior year effective rate of 35.8%. The Q1 2007 rate benefited from adjustment from of the resolution of various tax matters which I noted resulted in an EPS benefit of $0.02. We expect our ongoing rate to be about 40%, excluding the impact of any potential tax adjustments in the future.

Also in Q1 2008, we had losses from discontinued operations of $5 million, net of taxes, or $0.03 per share. These losses related to the divestiture of several stores during the quarter. During the first quarter, we repurchased 1.9 million shares of stock at an average price of $14.84 per share, for a total of $28 million. Our future share repurchases are subject to limitations contained in our debt agreement. As of April 1, 2008, our basket capacity for share repurchases was approximately $32 million. Each quarter, we are permitted to add back approximately 50% of our net income after tax and any stock option exercise proceeds. We reinvested $23 .5 million in the business through capital expenditures during the quarter. We expect full-year 2008 capital expenditures to be approximately $110 million net of asset sales. That excludes acquisition-related spending, land purchase for future sites or lease buyouts.

At March 31, our nonvehicle debt was $1.8 billion and we had unused revolving credit availability of approximately $436 million. Our non-vehicle debt-to-capital ratio was 33%.

Now let me turn you over to our President and Chief Operating Officer, Mike Maroone.

Thanks, Mike. And good morning. Thus far in 2008, economic headwinds have been a significant fact for the auto retail industry. Sustaining an environment that is both challenging and increasingly competitive. In the first quarter, AutoNation retail 71,400 new vehicles on a same-store basis. Were down 9% compared to the period a year ago. It compares favorably to the industry that was off 11% in the quarter according to CNW Research. Of note, is a $231 reduction in profit per new vehicle retail. The highly competitive and distressed market along with the tightening of credit are factors that impacted both volume and margin. The same factors impacted our use vehicle results wherein the quarter our same-store used vehicle retail volume was up by approximately 2300 units or 4% compared to the period a year ago. In profit, per used vehicle retail was down to $233. Given the linkage between new and used we were encouraged that our used vehicle volume was off less than new and attribute this to additional dedicated used resources that were put in place earlier in the quarter.

Relative to strength or weakness in the markets where we operate, we already called out ongoing pressures on markets in Arizona, California, Florida and Nevada. In the quarter, Texas continued to perform well, especially South Texas. In the markets of Chicago, Knoxville and Memphis held their ground compared to the rest of the country. At March 31 our new day supply was 57 days, an increase of 5 days compared to a year ago driven by softer-than-expected March sales. We closed the quarter with a used day supply of 40 days, an increase of 2 days compared to a year ago. In the quarter, parts and service same-store revenue grew $5 million to $650 million, an increase of 1% and gross profit held steady at $281 million compared to the quarter a year ago. We remain focused on growing our customer pay, parts and service business. As we transition from a service culture to a service retailing culture, utilizing our customer friendly service sales process.

Turning to financial and insurance, same-store F&I gross profit per vehicle retail was $1183, an increase of $66 year-over-year, this despite a revenue decline driven by lower volume. We attribute continued growth in PVR to increase product penetration, improve returns from our service contract portfolios with third-parties, our strong preferred lender network and ongoing efforts to improve the performance of our third and fourth quartile stores.

In closing, I will note that we are committed to continued investment in our associates through robust training and in technology, along with consistent implementation of our best practice processes across all stores. In addition, managing expense throughout the organization continues to be a priority. In this environment, we remain focused on building our capabilities to emerge stronger when the economy rebounds. With that, I will turn the call back to Mike Jackson.

Thanks, Mike. As we look at the rest of 2008, we believe that the market will remain very competitive and challenging. AutoNation will continue to focus on our cost structure while continuing to invest in our business. We are confident in our long-term business strategy and our markets. That concludes our remarks. Operator, please open the call to questions.

(OPERATOR INSTRUCTIONS). Our first question comes from Mr. John Murphy with Merrill Lynch. Your line is open.

Good morning, guys.

Good morning, John.

I was wondering on the new margin pressure that seems to be ramping up here. It sounds like you are getting more competition from some of your weaker local competitors. I am wondering if that is something you see reversing as the market gets better or more structural as we go forward.

I think it is more cyclical , John. I think we are at the point where you have such tough economic conditions between the uncertainty around housing and what is the value of your housing. Gas prices. We always said sensitivity begins at $3. Now we are at $3.50 with the prospect of $4 on the horizon. So it is a very value-conscious price buyer that we see out there right now. And they are willing to give up size and other capabilities to get to a price point. And so to keep volume moving at all, that puts tremendous pressures on margins. So I think it is primarily cyclical in

Then on the used margin which saw some pretty good strength or relative strength anyway. Is there anything their seeing in that market -- because pricing had been pretty tough and volume sounds like it is tough in that market but you did pretty well with margins. What is going on there?

It is Mike Maroone. We had margin pressure. Up $232 per vehicle. We really say it is the tightening of credit, especially subprime. We are seeing shorter advances. We are seeing more restrictions, tighter verification. Just the credit market is tightening up. We were relatively pleased with our used vehicle performance, but the credit environment is making it tough on margins.

Okay. And then on the cost side, I mean, are you through all the cost cutting you really can do at this point on the structural side and at this point, it is really just getting the gross back up as volumes ultimately recover over time. Anything else you can do in the near term on the cost side to help out the SG&A line?

John, there is Mike Short. I don't think we are ever done with a diligent look at our cost structure. An ongoing process for us at AutoNation. We are working with each of the stores putting in place tactical plans that make sense for the business both in the short and long term to make ourselves as efficient as we can. An ongoing continuous improvement.

Lastly on customer service. Customer pay versus warranty work. Where are we at right now and where is that trending over the last couple of years and where do you see that going forward?

John, it is Mike Maroone. Our customer pay was up 2.4% offset by a 2% reduction in warranty. Warranty is starting to moderate a bit. On customer pay point of view our traffic was down slightly down 1% but dollars per repair order was up. We are still optimistic about our service business. As I mentioned, we are moving to a service selling culture and have got a lot of programs in place. We are working very hard on the East side, and I am pretty optimistic about our ability to grow that business.

Any idea what the average ticket there was on those --

On customer pay ticket, averages about $300.

Great. Thank you very much.

You are welcome.

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

Good morning, everyone.

Good morning.

My first question on the finance availability topic is the decline in used vehicle margins is that just a mix shift away from subprime where the subprime deals generate a lot more margins than the plain vanilla deals. Is that the way to think of that?

I don't think it is that simple. There is pressure through prime and subprime. Less sub-prime lenders. Certainly some conservatism there. There's some bigg fees from the subprime lenders, but it is really a cautious advances both on new and used from all lenders.

Okay. Then on that same topic of financial availability, have you seen any issues either in your own business or in the city where where lenders are becoming more cautious with floorplan lines and any risk there is a chance of some of the terms on those lines change?

We haven't seen that much change on the floorplan side of the business at all.

Okay. Two housekeeping questions. Your new and used ASP, average revenue per unit ticked down sequentially. And I was just wondering what is driving that if you can give us some color on the mix of sales in the quarter.

This is Mike Jackson. It is what I was referring to that this combination of the situation in housing, the credit crisis, gasoline prices. The customers in the market at the moment are very value conscious and they are willing to move to lower price points in order to get willing -- they are asking to get to a lower price point to get in a vehicle. I think that will change with the cycle. I don't think that a permanent change in consumer preference, it is just a sign of economic stress.

Is that within brands or people actually crossing over to value-oriented brands?

I think there's -- it is Mike Maroone. I think it is across all brands. There are a couple of exceptions where the -- for example, in Toyota, the revenue is up slightly, but most brands were down slightly. The growth in segments in the quarter were in small cars and crossover that have a larger price point that tie back to Mike Jackson's comments about the value-conscious price buyer.

Great. My last question on your cash flow statement, it looked like you spent $29 million on acquisitions in the quarter. Can you give us some detail on that?

Yes, we acquired one dealership in the quarter, a BMW dealership.

Which was previously announced.

Got it. Great. Thanks so much

Thank you. Colin Langen with UBS. Your line is open.

Great. Thank you for taking my question. Actually on the M&A front, has the price -- have you seen any changes in the multiples for dealers out there? Has that market gotten any better for acquisition?

This is Mike Jackson. If anything the multiples have gone higher because earnings by and large are down and prices haven't changed. And so you are not seeing too many deals get done, and I don't think there has been a reflection on the part of the sellers. Where we are in the cycle. The fact that the cycle is a reality that has to be factored into the pricing when acquire something. So right now there is a gap between several and buyers. And as of this moment, the sellers really haven't reduced prices.

Okay. And then what do you think about strategically given the market conditions. Would you consider divesting more dealerships or currently pleased with your portfolio mix?

We are always optimizing the portfolio, and we are well into concentrating on throughput stores and divesting marginal stores. There is still to do. But we are probably in the best shape ever as far as our portfolio.

Okay. And then -- on to the -- your performance in terms of sales. It looks like you -- in terms of retail basis outperform the market in general which is something in a down market, I always got the impress you guys tended not to do because you are not willing to give in on the price from where your margins hit, it seems like you are willing to take a little bit on the margin in order to get some volume. Is that a new strategy you or is this going be too change in the way goings forward and how we should look at the margins looking forward?

I would first say overall, that the environment is so tough out there it is really hard to separate the impact between -- of the stress on what part is on volume and what part is on margin. But having said that, Mike, as far as our share performance in quarter --

I think -- I think -- Colin. I think the way to look at it is we started this process about two years ago. California really start to slip about two years ago and we are probably a little ahead of the curve and we focused on an intense training program with our sales associates focused on our three channels of business which is Econ, phone and walk-in and developed very specific processes of how to handle those customers. So I believe we are executing better than we had in the past. But in terms of a change in strategy, no, we still want to go after profitable market share.

The margin in quarter, is that a one-time thing or should we consider that a rate for the rest of the year?

I think it is difficult to say. But I think margins and volumes will be under pressure until we get to a more stable period. We are deep into the cycle now of decline. This is -- and as Mike said we are the tip of the sphere with Florida, California followed by Arizona and Nevada. If you take the declines of '06, '07 and into '08. You are into a 22% to 23% decline in retail. So we are deep into the cycle. As you get this far into it, it is the most difficult. Now medicine is on the way, we have interest cuts. Actions will be taken to stabilize the credit markets, and all that will work its way into the system, but it is probably the fall before we see the benefit of that and in the meantime, I think both volume and margin will be under significant pressure.

Okay. Just one last one. In terms of your parts and services that sales growth, a little bit lower than I had expected. Was that driven mostly by the decline in warranty and their particular brand weak on the warranty side?

It is Mike Maroone. I think we just stated earlier that our customer pay was up 12.4%. Our warranty was down 2%. I don't think there was any brand that really stuck out by a warranty decline. I think all of the manufacturers have worked really hard on their quality and we are seeing it reflected in the last two or three years in warranty declines. Although the warranty declines are less than they have been in the past and that indicates that revenue stream is stabilizing.

How should we think of it -- I guess going into the rest of the year, is the warranty going to still be an issue or not one particular brand?

The trend is more stability in warranty revenue I don't want to predict the next few quarters because reliant on product rollouts and other factors. I do think there is opportunity for us to continue our customer pay business both in terms of traffic and in terms of dollars per repair order and we are working hard in doing that.

Okay, great. Thanks for your help.

Thank you. Will Rick Nelson with Stephens. Your line is open.

Thank you and good morning.

Good morning, Rick.

What are you seeing in April and how might that compare to the March results.

Since March is over, we can talk about March. Usually the last two weeks of March signify the arrival of the Spring market, and you see a strong surge in business. That did not happen this year. And whether it was, of course, the economy, but also everybody freaked out over the Bear Stearns situation or whether Easter moved into March and nobody -- that's not a big shopping day. It is hard to say. But I can tell you, business did not come to life at the end of March as it usually does. It's very uncertain to predict how April will end up and whether that pick-up is now occurring in the beginning of April. I am hesitant to say. The months are simply just too unpredictable and too unstable for me to put a stake in the ground.

Got it. The OEMs have CapEx requirements. Mercedes-Benz with AutoHouse and how do you approach that and can you achieve your return on capital objectives with these CapEx?

Well, everybody knows that we are very tough on CapEx, and we have to hit our return threshold or we don't go forward and there is that -- that creates some stress with the manufacturer, so be it. We are not going to do irrational things. So with each and every one of those initiatives, it is a very intense discussion and negotiation, but we are extremely disciplined and do things that make sense.

Okay. Manufacturers also are talking about consolidating the dealer base. Are you actually seeing any evidence that that's taking place?

Well, yes, of course, Rick, as you know we have been arguing for it since the day arrived here knowing it was essential that it would happen. It finally is moving at a faster pace than just the dribble than we have had the last several years. They have really embraced it as a strategy and understand the implications if they can't get it done to their business. And we are able to do a lot more today than we haven't been able to do in the past. Having said that though, it is a huge gap or a huge overcapacity issue that they are just beginning to address that even with their best efforts, it is still going to take quite some time.

And one final question on the brand mix. It looks like in the luxury segment, you increased your -- your brand proportion of sales with BMW and Lexus, but Mercedes slipped a bit. Is that geography that attributed that that?

That is definitely geography. Our presence is in California a Florida.

Thank you, Mr. David LIM with Wachovia. Your line is open.

Yes, thank you. Several questions. Can you talk a little bit about your CPO performance in the quarter. There was some pressure but I want to know how your certified preowned did?

David, it's Mike Maroone. We don't call it out as a separate line item, but it's a focus of our business we belive there's opportunity on the CPO along with the C-Car side which is the much less expensive product. We are working hard on those. A lot of vehicles especially on the luxury side. We see it as a big opportunity and a big focus in our used car initiative.

Got it. Got it. Now relative to your -- the same-store sales gross profit on the used vehicles, did you see a lift or was it a similar kind of performance for CPOs, I mean, just directionally?

Thing that the CPO business probably goes in line with the balance of the rest of the business, the same factors with the CPO business. I do think it is a bigger -- a bigger share but from a margin perspective, I don't think it is that different.

Got it. From a cost savings perspective on the SG&A line, how much more can you cut on the advertising spend or better rephrase I mean what additional opportunity is there?

It is Mike Maroone. I think there is always opportunity and our basic -- our basic strategy is to measure everything we can and allocate our dollars based on where we are getting the highest amount of traffic and the ability to close that traffic. It's a continual tweaking. Certainly the e-commerce business continues to grow exponentially and we have made significant investment in our web site and our E-capability. That is the biggest trend you are seeing. Certainly there is some mix shift away from print. But I do think there is opportunities there, but we are really looking at returns and measurability for everything we do.

Okay. Understood. When we come to the luxury mix side of it, I mean, are you seeing more of an interlastic demand behavior. All hinges have been hit hard. Relative to mainline imports et cetera how is the luxury side of your business holding up?

This is Mike Jackson. The way the cycle usually plays out at the beginning of the downturn is very much the volume segment that gets hit first. And it is only when you are deep into the cycle that you have an impact on luxury. And that is where we are at now. And I would describe it more as the uncertainty factor as to where all this is going. That customers are hesitating. The purchasing power is still there. So I think once -- once there is a clear line on where the economy is going. The worse is behind us, I see the luxury business resuming the quickest. So it is the last to hesitate and the first to resume.

Interesting. And finally I was wondering when it comes to you ordering right now, are you still backing off on orders especially with the domestic makes or how should we take a look into that granted there is that strike with American Axle in Detroit. I wanted to get an idea of your large GM SUV inventory.

I think there is plenty of availability out there across all brands.

Okay.

We are working hard to manage our inventory. We finished the quarter at 57 days. Would say that is slightly higher from where we have been over the last few quarters. A lot of that because the March sales pace did not deliver as Mike Jackson has already spelled out. We have an adequate supply of GM inventory. The strike has not affected our ability to sell GM products. I think all manufacturers are probably a little bit on the heavy side with the big SUVs or pickups and I don't think GM any different there.

Got it. How is your ordering policy. Are you still hesitating on orders or September what the OEMs are distributing and how should we take a look into that?

We view the marketplaces a remaining more risk than opportunities and managing the business on the conservative side.

Got it. Great, thank you very much. Appreciate it.

Thank you will Darren Kennedy with Goldman Sachs. Your line is open.

Hi there, I am here with Matt Fassler, my first question is -- are you running out of room for expense cuts in this environment. Will we continue to see pressure there or are there opportunities outside of advertising?

Hi, Darren, it is Mike Short. We have seen a deleveraging reflecting the environment's gross declines are more and more gift to extract SG&A savings. Going back to the comments I made earlier, a continuous process for us. We think there is more opportunity for efficiency and we are pursuing them.

Okay. On the inventory side. The highest number in seven quarters and clearly the environment is responsible. Is this mostly focused on specific geographies as you mentioned and can we expect this is also primarily in some of your luxury brands now or spread across brands.

This is Mike Jackson. I would say for the domestics, with this combination of the economic uncertainty and high gas prices for this period of time, you are going to have a real shift towards the value price points, which coincidentally is also the high fuel economy point because we don't charge for fuel economy in this business. Quite the opposite. Restructuring our inventory toward that buyer that is really appearing for the first time to this degree in the first quarter is an issue of us. With the imports, you have the issue that for our geography, is there a sweet spot. So you have Toyota, Honda and Nissan all under pressure and with much more inventory than they traditionally care to carry. And so we are managing that. With luxury, I don't think there is any real issue that the a point, right, Mike?

Luxury inventories have been very stable and disciplined and not much pressure there. The pressure as Mike said is in the domestic.

The restructuring on the domestic inventory and for the first time, there is plenty of availability on the Japanese volume products.

Great. On the tax rate, which is at 40.6, I think it is now over 40. I don't know if it has ever been at any other point. Why is it tracking higher these days and why do you expect it to continue?

Hi, Darren, it is Mike Short. We expect the ongoing rate to been 40%. Prior quarters have as of matter of, of course, seem to benefited from resolution of state tax matters that result in a lower tax rate in that quarter.

Yes. I have never seen it that high in any quarter except for now unless I am missing one. Also -- and then Matt has some questions around credit. $1.8 million pretax loss from other. Can you describe that. If case I missed it. I apologized.

That is largely our deferred comp plan. An asset valuation on that. Thanks, Matt.

Guys, good morning. On the credit front. I listened with great interest on your comments on tightening of credit and you speak of subprime and shorter advances, et cetera. If you can think of prior cycles and way credit typically plays out. I think we are hearing a little bit more about that today than we have in the past that seems like a bit of a lagging indicator, but I wonder do the banks tighten up late in the game and stay tight and exasperate the issue?

Matt, you are right on the point. Let me describe the behavior that we have seen and see right now just to give you a feel for it. I describe it as the banks are in clean-up mode. They are, for instance, accelerating repossessions or any vehicle that they see out there that has a question mark over it. They are proactively trying to deal with it now rather than later. So that is quite the different -- to give you an insight on the mind-set. They are trying to take the losses now. They are trying to deal with the situation now. And at the same time, they are tightening credit standards to get a running start of a very clean portfolio. You have both those factors happening at the same time, and yes it happens deep in the cycle and you get past this and get back to a normal operating state.

How long does it tend to last? Do they sort of stand in the way when natural demands will be coming back because of lower rates or other factors?

I don't think it is going to take too long in auto because we did not make the catastrophic behavioral decisions that happened in housing, where there was a total collapse of any sort of credit standard. The credit standards were pretty disciplined. The stress out there is really related to the economy now. During clean-up mode of let's get all -- anything that is bad out of the way now. Let's get a running start on a clean portfolio and I think later this year we will be more into a more operating environment.

Do you think a couple of quarters before they do what they are going to do.

Right

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

Thank you. Regarding personnel, are you facing any challenges in retaining your top sales personnel that the point? And if you are, what steps are you doing to do so?

Very happy to say that all of our retention initiatives that we implemented years ago are -- are performing very well. And every year we have high retention and lower turnover and that is still the case even starting in '08.

Great.

I mean our training, development, retention programs, they are all working extremely well. And a final irony is we did lose talent in '04, '05, '06 to the housing industry where it was easy to make a lot of money and now they are all coming back to the real world.

So you don't anticipate -- as the economy improves, you don't anticipate any lag as you have to staff up or fill any holes.

No, I will tell you -- it is Mike Maroone, Mark. Our turnover is the lowest it's been. We are always looking for additional talent, but we have taken a lot of steps to grow our own and really pleased with the development efforts of the team here.

Okay. And then on a different subject. Is it fair to says there really two independent but interrelated trends with the economic stress and the gasoline prices? In other words, while the economy might improve, gasoline prices would continue to be a problem?

Well, let's use the word "issue." We all -- you won't really know what the mix impact has been until the economic storm has passed and let's say gas prices remain high but the overall economy is stabilized. Credits available and you are in a more normal operating environment except for gasoline prices. My personal view if you look at stress for the moment I'd say it's 80% the overall economy and 20% gasoline prices. We won't really know. I can guarantee that when the economy approves and housing resumes, pickup sales will come back. So that is real economic stress that is what is affecting those vehicles.

The reason I ask is I am trying to figure out the extent to which we will see the segment shifts from larger vehicles to smaller vehicles continue into the future as a result of elevated gasoline prices and really my question for you is will you see any -- is it evident at this point of people downsizing for fuel economy reasons, but at the same time smaller vehicles more highly because, perhaps they -- while concerned about the operating cost, they still have the disposable income to want to drive around in a more highly although smaller vehicle.

I think as I said earlier, at $3 a gallon, you begin to get a change in behavior around the price of gasoline. At $3.50, looking at the prospect of $4 that really accelerate to -- to full long-term implication of that, you won't really to be able to judge until you are in a normal operating environment.

Thank you.

Mr. Jonathan Steinmetz with Morgan Stanley your line is open.

Good morning, everyone.

Good morning, Jonathan.

Just a few market related questions, the company's specific stuff seems to be covered. Are you guys seeing with the decline in the used values on the full-size pickup and large SUV side, are you seeing it more difficult for consumers to trade in a significant way? Is negative equity a bigger problem and this becomes a vicious cycle. I don't know if you have statistics. How many people come back with negative equity than before. Maybe just some color on that.

This is Mike Maroone. I don't have any specific statistics but it is a challenge in valuing that product. We have really watched our inventories in that product and it is not easy to trade customers out of it if you don't have equity and a lot of negative equity out there. I don't know if there has bane lot more than in the past. Evaluation is a challenge on those two segments.

Okay. I jumped on a little late and heard some of your comments related to tightening of credit and this sort of thing. I apologize if I missed this. Any statistics related to that in terms of approval rates on loans and cost credit and various tiers of credit. Rates have gone down but maybe spreads have gone out. Anything related to data that sort of supports what is a strong antidote.

It is Mike Maroone again. The piece we to focus on is advances, how lenders advance or again the wholesale value off the vehicle. We are seeing the advances across our lender base off between 2% and 4% and we do think that is a significant factor in our used vehicle margin compression. On approval policies, I don't have statistics across our lender networks because the advances are under pressure.

You are saying a much bigger problem on the new side than the used side.

At this point, yes.

We have time for one more question.

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

Good morning, Dan Galatin for Rod. Can you hear me?

Yes.

The F&I per units have been very impressive. Is there a ceiling to those. And also as volumes start to come back, is there any reason we will see F&i mere units start to go down slightly.

It is Mike Maroone. I think we till have some . I don't know dramatic upside. We continue to focus on our third and fourth quartile stores. There is still a decent bandwidth from our best to worst stores. That is really where our focus is going forward. The other pieces that these numbers reflect higher charge backs than we have seen over the last several years and they have if anything kept the margin down. I do think there is upside based on working in the quartiles and overtime a lessening of chargebacks not necessarily in the

Thanks. One other one. Do you see much activity with people coming into the dealership looking for a new vehicle and ending up with a used?

I think that is always an opportunity. And I believe that is happening. Certainly there is a lot of payment buyers. Mike Jackson referenced the value conscious price buyer and that is the person who is coming into our dealerships, and I do think they are looking at all opportunities both new and used and in different vehicles.

Okay. Thanks.

Thank you for your time today. We appreciate all your questions.

Thank you. That concludes today's conference call. You my disconnect at this time.