AutoNation Inc (AN) 2008 Q2 法說會逐字稿

Welcome to AutoNation's second 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 second quarter 2008 conference call. My name is John Zimmerman, AutoNation's Vice President of Investor Relations. I would like to remind you that this call is being recorded, and will be available for replay at 1-888-562-6304 after 2:00 p.m. Eastern Time today, through July 31st, 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 will open the call to questions. I will also be available by phone to address any follow-up issues.

Before we begin, let me read a brief statement regarding forward-looking comments, and the use of nonGAAP 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 of 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.

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 second quarter net income from continuing operations of $53 million, or $0.29 per share, compared to a year-ago net income from continuing operations of $79 million, or $0.38 per share. After adjusting for certain items disclosed in our second quarter financial tables, net income from continuing operations for the 2008 second quarter was $59 million, or $0.33 per share, compared to $76 million, or $0.36 per share in the prior year. Adjusted EPS was down 8% in the second quarter.

During the second quarter, US industry retail auto sales declined 16% over the prior year according to CNW Research. AutoNation new unit sales declined 12%. The industry is in the midst of the perfect storm. Now that we have encountered $4.00 a gallon gasoline, on top of the continuing housing depression and credit crisis, which has resulted in customers either postponing the purchase of vehicles, or purchasing smaller, more fuel efficient vehicles. In spite of this AutoNation delivered solid profitability in the second quarter.

In the second quarter, we saw two major changes. First, we saw a shift in consumer preference to fuel efficiency. Cars now account for 58% of sales compared to 49% a year ago. AutoNation's average gross profit per vehicle retailed for cars and trucks is about the same.

Second, we saw a 30% decline in new vehicle revenue from our domestic franchises. In continuing response to the ongoing macroeconomic and industry challenges, the Company is executing a cost-reduction, plan with a targeted annualized run rate savings of $100 million.

In the first half of the year, we recognized 25 million of this benefit. In the second half of the year, we expect to achieve 50 million of savings for a full year 2008 impact of 75 million. Our targeted annualized SG&A savings include a reduction in advertising spend of 30 million, a reduction in corporate overhead of 20 million, and reduced compensation and other SG&A expense of 50 million, driven primarily by reduction in store personnel, to align our store staffing with the current market conditions.

For the full year 2008, we anticipate a total reduction of approximately 1,300 positions. We are also targeting a reduction in new vehicle inventory of 5,000 units by the end of the year. We have also reduced our full-year 2008 capital expenditure plan by 50 million, versus prior year. Additionally, we continue to divest underperforming stores to optimize our portfolio. The divestitures are primarily domestic franchises. However, we will retain our high-volume, core domestic franchises. We expect over time that these domestic franchises will constitute about 20% of our new vehicle revenue.

And currently, we continue to make strategic investments to improve our ability to serve customers, and compete effectively in tomorrow's marketplace. Those investments include areas such as the shared service center, to drive back office and purchasing efficiency, as well as e-commerce and customer-facing technologies, to enhance our customer experience. While today's economic uncertainty may compel potential buyers to put off their purchase decisions until a later date, their needs remain. Once customers begin to sense that their economic situation has stabilized, they will be ready to commit to purchase big-ticket items, like vehicles.

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 mentioned, we reported adjusted second quarter earnings from continuing operations of $0.33 per share, versus $0.36 per share a year ago. Our current operating results for the second quarter of 2008 were adversely affected by certain accounting adjustments, the aggregate impact of these adjustments was approximately $0.04 per share on earnings from continuing operations. These adjustments includes a non-cash stock compensation expense adjustment of 5.3 million, that is 3.1 million net of tax in SG&A. This adjustment corrected the amount of expense that should have previously been recognized for retirement-eligible employees.

In addition, we recorded non-cash franchise impairments of $5.1 million, or 3 million net of tax, related to two stores, which is reflected in Other expenses in the income statement. The prior-year period included favorable tax adjustments of $0.02 per share. Excluding the stock-compensation adjustment, SG&A as a percentage of gross profit increased to 74.7%, from 71.1% a year ago, reflecting a de-leveraging of our cost structure, partially offset by our cost-savings initiatives.

New vehicle net inventory carrying cost was 6.9 million lower in Q2, versus the prior-year period. The favorable variance is primarily a result of lower floor plan interest rates, partially offset by a decrease in floor plan assistance, resulting from lower new vehicle sales, during Q2 2008 we entered into agreements to floor a portion of our used vehicle inventory with various lenders. At June 30th, approximately 137 million was outstanding under these agreements.

Other interest expense was 4.8 million lower in Q2 versus last year. The favorable variance is a result of lower interest rates on our term-loan facility, mortgage facility, and floating-rate senior notes, and the decrease in debt level associated with our revolving credit facility, partially offset by an increase in our mortgage facility debt. For Q2 2008, we had an effective income tax rate of 41%, versus the prior year effective rate of 37.3%, the Q2 2007 rate benefited from adjustments for the resolution of various tax matters, which as I have 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 Q2 2008, we had losses from discontinued operations of $800,000 net of taxes. During the second quarter we repurchased 1.9 million shares of stock, at an average price of $13.90 per share, for a total of $26 million. Our future share repurchases are subject to limitations contained in our debt agreements. As of July 1st, 2008, our basket capacity for share repurchases is approximately $35 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 $18 million in the business through capital expenditures during the quarter.

We expect full year 2008 capital expenditures to be approximately $75 million. This represents a $35 million reduction, versus our previous estimate for 2008, and a $50 million reduction compared to 2007. These amounts are net of asset sales, and exclude acquisition-related spending, land purchase for future sites, or on leased buyouts.

At June 30th our non-vehicle debt was 1.5 billion, and we had unused revolving credit availability of approximately 621 million. The availability to borrow under our revolving credit agreement is restricted by the terms of our debt covenants, our non-vehicle debt to capital ratio was 30%.

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

Thanks Mike. Good morning. The auto retail environment deteriorated further in the second quarter precipitated by the rapid shift to consumer demand for fuel efficient small cars, as the cost of gas continued to rise. Compounding factors include the housing and credit markets that are still under pressure, and lackluster consumer confidence. Working through this downturn, we continue to focus on then consistent implementation of Best Practice processes, and expense control across all stores, and expect to benefit as the economy improves.

In the second quarter, AutoNation retailed 73,500 new vehicles on a same-store basis, down 13% compared to the period a year ago, but favorable compared to the industry that according to CNW Research was off 16% at retail in the quarter. We noted pressure on vehicle sales in nearly all of our markets, and the sluggish economy kept the marketplace highly competitive. Compared to the quarter a year ago, revenue per new vehicle retailed was off 4% in gross profit per new vehicle retailed was off 8%. Volume was driven primarily by the decline in truck sales, and margin was affected by a shift in mix within the luxury segment.

Turning to used vehicles, our performance here was favorable relative to new. We retailed just under 50,000 units in the quarter, off 4% compared to a year ago, contributing factors to the decline were, fewer trade-ins due to lower new unit volume, limited availability of high-demand, small fuel-efficient vehicles, and a conservative credit environment. Revenue per used vehicle retailed was down 5%, as consumer demand for value or lower-priced cars increased. Gross profit per used vehicle retailed was down 8%, due in large part to the challenges in truck pricing.

Of note, similar to new vehicles, our used car margins compared to used truck margins are approximately the same. We are working diligently on executing our used-vehicle game plan, this includes balancing our inventory mix to match consumer demand, retailing more of our trade-ins, moving inventory to locations that will bring the quickest and most profitable sale, and growing our certified preowned business. In the quarter we moved 5,400 vehicles to a more optimal location with good success at retail, and increased our certified preowned business by 10%.

A snapshot of our inventory at June 30th reflects a new vehicle days supply of 62 days. This represents an increase of 7 days compared to a year ago, it reflects the slower sales pace in May and June, and compares favorably to the industry at 67 days. Our new vehicle inventory was reduced by about 4,700 units compared to the first quarter, and for the second half of the year, we are targeting an inventory reduction of 5,000 units. We view our days supply as manageable, and are working through the car/truck mix issue. Our used vehicle days supply of 42 days is 2 days lower than a year ago.

At 634 million, same-store revenue for services and parts was off 1%. Our customer pay business showed a modest increase of 1% compared to the quarter a year ago, however, a 6% decline in warranty more than offset the customer pay gain. Parts and service gross profit of 276 million was off 2% in the quarter. In this economy it is clear that consumers have modified discretionary spending, with many putting optional service or maintenance work on the back burner. Even so we are gaining traction on two important customer-focused initiatives. Our online appointment setting feature, and our service-sales process, both drive an improved customer experience, as well as the opportunity to grow customer-pay revenue.

Turning to finance and insurance, same-store revenue declined 10% on lower volume. Same-store F&I gross profit per vehicle retailed was strong at $1,099, and relatively flat year-over-year. In the quarter we noted an increase in chargebacks, which were substantially offset by increased product penetration. Work continues on optimizing our store portfolio. In the quarter, we divested two franchises and terminated one. The three franchises represented a run rate of 38 million. At June 30th our stores numbered 242, representing 319 franchises, and 39 brands in 15 states.

In September we will open Mercedes Benz of Delray at Delray Beach Florida. This add point brings our Mercedes dealership count to seven in Florida, and 14 company wide. As we navigate what continues to be a very challenging environment, we remain steadfast in our focus on the cost side of the business, and are committed to strategic investments that include training and technology.

In closing, I would like to thank each of our associates for their dedication to delivering great customer service, as evidenced by our outstanding CSI scores. We believe that we are operationally stronger today than ever before, and that we will be well-positioned when the industry reaches recovery.

And 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 challenging. We also believe in 2008 new-vehicle sales in the industry will decline to the low 14 million unit level. In 2009, the industry should begin to stabilize and recover. 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.

Thank you. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). One moment, please for the first question. Mr. Rich Kwas with Wachovia, your line is open.

Hi, good morning, gentlemen.

Good morning, Rich.

Mike Maroone, within the new vehicle mix of inventory, or I should say the inventory in new vehicles, what is the mix between trucks and cars, and how do you feel about your truck position as of June 30th?

The well truck inventory right now is obviously the bulk of the inventory. It is about 64% versus about 36% car. So traditionally our sales mix was 60% truck and 40% car. Obviously that has changed. The most recent quarter we were 42 truck and 58 car.

So we are a little bit out of balance right now, but frankly we think there are two things that will help us, one is all of the manufacturers have significantly curtailed their truck production, and secondly, they have increased their incentives that we believe will help us liquidate that inventory. We see ourselves as a little bit out of balance, but moving in the right direction, and the manufacturers are really helping us.

How long do think it will take to get that in balance? Will it take the rest of this year, or could that seep into early '09?

I don't see it seeping in to '09. I think if the aggressive incentives stay in place, and we remain disciplined on the purchase side, and the manufacturers remain disciplined on the production side, I think we can clear those inventories out by the middle of fall.

And then parts and service customer pay up a little bit, margin was down a little bit. What is happening in terms of mix of business are you seeing more, you did mention that discretionary purchases, discretionary repairs are being put off? Anything in particular other than that going on?

Our overall customer pay traffic was down about 2%, in spite of the fact that our revenue was up 1, so we think we did a little better job at the selling process. The real issue is the continued decline in warranty. I think our warranty was off about 5.5%. So that kind of offset the good job and the customer pay side, but certainly consumers are more cautious, and seem to be putting off some of their maintenance-type spend, which we obviously believe that we will recover in the future.

How soon do you think that will recover? Do you think that's a near term, or does it kind of look back, or is there a little more downside here?

I think it really goes back to what Mike Jackson talked about, which is the stabilization of housing, and people just getting an idea of what their houses are worth, and getting adjusted to the revised gasoline prices, hard to say how long that will take, but certainly it is not a long-term issue.

Okay. And finally Mike Jackson, in terms of Florida and California, are you seeing any bright spots in those markets right now?

I would say California went into the downturn first, and we see the first signs of stabilization in California. Florida probably went in it to six months behind California, so it is still in the downward stage. What we do see though, in the numbers is a big disparity between Florida, California, and the rest of the country, has mitigated dramatically with the rest of the country now having a similar situation to Florida and California, with the one bright spot being the great state of Texas.

Great. Thank you so much.

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

Good morning, I wanted to focus a little bit on the cost-savings initiative. How much of that is a structural change that will survive this cycle, and will continue to be a lower cost base going forward? And how much of that is a response to this sales cycle, and will rebound when sales get better?

Rex, Mike Short, I would characterize most of it as a structural reduction. We're looking at, some of it so from optimizing our spending in areas like advertising, to find the most effective model, and the balance of it is what I would characterize as structural.

Okay. And as the role of the shared service centers increased, are you accelerating the shift of the functions into the shared service centers and out of the dealerships?

I would say we are continuing with the shared-service center plan that we have put in place. We now have all of our stores converted to a common DMS, dealer management system. We are largely through the rollout of what we call base shared service center with all of our stores, and we will continue on from there.

Okay. Finally, I want to shift over to sales a bit, and I think Mike Maroone you said that the luxury mix had shifted. What components of luxury vehicles are off? Are you seeing a decline in the Mercedes, are you seeing a decline in the C and E classes, or are you seeing a decline in the S and CL classes?

This is Mike Jackson. I think it is just part of the normal product cadence, namely the big launches in this product cycle are the C class for Mercedes Benz, and the 1 series for BMW, both at lower price points, which I think for the economy that we are in, it is actually quite fortuitous.

Usually the first two to three years of a product launch, sales are very strong, and grosses are excellent, and it just happens these were at the lower price points. That will begin to rebalance with the launch of the 7 series at the end of '08 going in to '09, and I think BMW has really nailed the new 7 series, both from a design and innovation point of view. So it's very much a function of the product cadence cycle.

Okay. And finally, are you seeing any new car buyers, moving down to the late model used? Is there any down-shift in that market? Or are you just seeing the new car buyers just declining to come to the stores?

Rex, it is Mike Maroone. You certainly see a shift from new to used, and I would say the place you feel it most is in the certified preowned business, where we were up 10% in the quarter. We have made a real effort to increase our CPO inventory, and to be very conscious of the price point, so there is a value-conscious buyer out there, that is clearly recognizing that CPO offers a tremendous warranty, an even greater reconditioning package, and is the right decision for many families, for many people I should say.

One final question. The 5,000 unit reduction in inventory, is that going to come all out of new cars? Or is that new and used?

That is a new-car reduction from roughly 57,000, down to 52,000 by the end of the year.

Okay. All right. Thank you very much.

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

Good morning. I apologize, I joined the call late, I just wanted to find out in the one-time expenses of stock comp and the different franchise impairments, if that was all baked into the SG&A line?

We gave some of the geography on that, John. The stock compensation number in is in the SG&A. The franchise impairments are down in other income.

Okay. And then secondly, on the cadence of the savings in the first half of the year from the actions you are taking, you highlighted those at 25 million for the first half, is the bulk of that in the second quarter? Or was there some that was in the first quarter also?

I would say we began the initiatives in the first quarter. So there was some in the first quarter, but a disproportionate amount in the second quarter.

Okay. And then the pressure we are seeing on new margins, which has abated here from the first quarter to the second quarter. Is a lot of that because of the mix shift from trucks towards cars? Or is a lot of that coming from just more competitive pricing environment from the dealers in surrounding areas? I am just trying to understand where that pressure is coming from?

I think there are several factors, this is Mike Jackson, several factors in place. First you have a very competitive marketplace, when you have declines in volume, that is always going to put pressure on margins. Second, in premium luxury, the product cadence is towards the lower end, not the higher end, and also you have the shift from trucks to cars in the volume segment. What is interesting is all-in, when we look at our front-end gross, whether in any past or today, their equivalent, or whether we are selling a car, or whether we are selling a truck.

Okay. And then just lastly on the rationalization of your Detroit 3 exposure. It sounds like you are working away from them to some extent. Are you doing that in partnership with some of the auto makers in their efforts to decrease the dealer base, or at least the roof tops, or is that something you are able to achieve on your own, without any help from the automakers?

John, it is Mike Maroone. We are working really closely with all three of the domestic manufacturers, and it is an effort where at times we are a buyer, at times we are a seller, but we really believe that the dealer, that the whole network is overdealered, and we want to participate aggressively. We are on both sides of it, but working closely with all three of them, and we have excellent working relationships.

Great. Thank you very much.

Thank you. Mr. Colin Langan with UBS, your line is open.

Thank you for taking my question. Can you just comment on your liquidity situation? Are you concerned about violating approaching some of your debt covenants, and does that impact how you use cash going forward, in terms of doing more share repurchases, or making more acquisitions?

Colin, it is Mike Short. As I mentioned, we have quite a bit of liquidity notionally available under our revolver. When you consider our leverage ratio constraint there, we have over $200 million in availability. In terms of how we manage relative to that ratio going forward, I think the business generates very significant cash flow. We have the ability to manage our liquidity situation within, by how we deploy that cash flow.

Okay. And in terms of the goodwill impairment charge seemed rather small. I know you amended your credit agreements in March, to avoid those charges. I mean was it smaller, why it is not given I thought one of the criteria was the decline in your market cap? Can you give any color on how you sort of look at the goodwill charge?

Yes, there are two pieces to that. First is the overall goodwill piece, which is testing goodwill at the corporate level, and second is individual franchises, so the impairment charge that you see there is related to two franchises. We tested the goodwill separately, and found that that was not impaired.

Okay. So the corporate goodwill was not impaired?

Correct.

Okay. And could you also provide color why F&I per unit was flat or down? I mean that usually has been up for as far as I could see. Are people being a little more cautious about what options they take with their vehicle?

Colin it is Mike Maroone. First of all, on a per vehicle retail basis it is flat. On a revenue basis, it is down 10. The down 10 is reflective of the reductions in new and used volume. I would say the flatness where we had been seeing growth, was really related to increased chargebacks from delinquent loans. It is really more than offset by improvement in product penetration.

Okay. And then just to clarify, I know you said earlier, the margins on cars and trucks are the same. You do mean percent margins is that, because that obviously with the lower transaction price your per unit profit is going to be lower?

That was in dollars.

Dollars per vehicle retailed, was what we were referring to. New and used.

Right.

So the gross margin on a --

Right.

is actually as a percent is it the same?

We are talking about the dollars in gross profit per vehicle retail.

We will get it for you as a percent. I will give you a ring back, I don't have it in front of me.

Okay. One last one. There were some questions about parts and services earlier. And you say it looks like people are delaying their repairs, it sounds like you were thinking of the economy. How long can a person actually physically delay the repair of their car? Because I think they take a lot of their more major repairs to a dealer. Can they continue to operate a car for a rather long period of time, or should we see by Q4 people having to bring them in, just because they need to?

[inaudible] The customer-pay business is amazingly stable, and what we are calling out is that we are not growing it like we normally do, but I want to be clear that we are not going backwards on customer pay. Mike?

Well, the distinction really is on a mechanical breakdown item, you certainly can't defer that, but there are discretionary maintenance things can be deferred for a period of time, we recognize and consumers recognize that if you don't maintain your car, you are going to have bigger cars down the road. So we do anticipate that business coming back. But certainly all of the factors that Mike Jackson called out earlier, have put a lot of pressure on discretionary income.

Is there a risk that people are taking those to a cheaper alternative, like some of the more basic type of repairs?

I think that segment of the business is highly competitive, and we are very aggressive in attacking that, both from a marketing point of view, from a pricing point of view, and from a convenience point of view. We fight for that business. But I don't think you are seeing a massive shift to another channel. I think it has always been competitive, and it will continue to be.

Okay. Thank you very much.

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

Hi, good morning, everyone.

Good morning.

I just want to follow-up on the gross profit issue between cars and trucks. Is part of that the mix of vehicles that you are selling, so in other words, if you look at individual franchises like the domestic stores, does that still hold true, or is it that when you add in the Mercedes cars, for example, that are in your mix, it is driving the car grosses higher?

That is an AutoNation mix issue.

Okay.

That is one of our strengths.

Okay. And secondly, can you talk to the quality of your used vehicle inventory right now? Have the stores taken cars to auction that need to go there? Or do you think you are still sitting on some heavy depreciation?

Matt, it is Mike Maroone. We are extremely disciplined on the used vehicle side. You will see that we did incur a wholesale loss in the quarter, which was to liquidate that truck inventory that maybe became out of balance a little bit. We turn our inventory in a very disciplines way, we are constantly reserving for any inventory that might be off the money, and run our used car operations very prudently, use a lot of technology, and keep those inventories on tremendous scrutiny. I am very comfortable with where we are our used vehicle inventory.

Switching to parts and service. I know that this has been a trend, but the warranty decline in this quarter, is there anything in particular, like a comparison that may have caused such a sharp decline?

Mike Maroone. It has been under pressure for quite some time. And it is really a function on the import, or across the business of improved quality, and certainly of some lower sales over the last year or so. But almost every manufacturer has improved their quality, and there is nothing really dramatic in the warranty numbers.

Is there any --

Off 5.5%.

Any evidence that consumers are actually, even though they are not paying the bill, reluctant to bring their car in when it is under warranty for some reason?

I don't think we see our warranty traffic declining any different than it has been in the past. I think it is a quality issue, not a reluctance to visit issue from a warranty point of view.

Okay. On the stores that are potentially up for sale, what is your sense for the value of those? I mean, do you think that some of these still have blue sky? Or will it be minimal? And if that is the case, is there a feedback loop from that back in to your goodwill impairment, or does that really only happen once a year, irrespective of franchise sales in between?

This is Mike Jackson. On divestitures, we either fully recover our money in the real estate, or make actually a profit on the real estate. But you absolutely right as far as blue sky or franchise value particularly on domestic stores, we still get some but it is nominal in this market. And Mr. Short, you want to address anything?

Yes, I don't see I mean that is filtering back in to the goodwill discussion. We do our testing once a year, and then between major test periods we monitor them for triggering events, as far as some fundamental change in the business.

Got it. Okay. Thanks very much.

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

Thank you, and good morning.

Good morning, Rick.

Mike, or Mike can you talk about July sales, sort of what you are seeing to date? Is there any changes in the momentum relative to what we saw in June?

Rick, we have a rule here, we never comment on the current month. I would love to help you there, but we have that rule, and it serves us well.

Okay. I can appreciate that. Can you talk about acquisition multiples on the luxury side? Are there big changes? I know on the domestic side, obviously lots of pressures there, and are we at a point where acquisitions could possibly take precedence over stock buybacks?

Rick, we have not seen a change in pricing on premium luxury stores, or the import stores, that is really necessary to reflect the cycle, so you sort of have a standoff in my view between buyers and sellers. There is certainly a backlog of sellers who are standing firm on their price, and what is going to happen I can't predict, but we have not seen a change in pricing from the sellers, that make it interesting.

And are you seeing an acceleration in store closings among competitors?

Yes, on the domestic side, absolutely, and as I said earlier, we have a core group of domestic stores that are great locations with high through-put franchises, that as painful as the current environment will be long term will be served well by the shakeout that is going on now.

Okay. Thank you. My other questions have been asked.

Thank you, Rick.

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

Good morning, this is actually Dan Galves in for Rod.

Hi, Dan.

How are you? I was wondering if progression through the quarter, in terms of June it appeared that new sales were way off in the industry in June, even compared to May. Did you see a corresponding strengthening in used at all, or was volume off across all of the lines?

I think your characterization of the quarter is absolutely right, and decades from now when I hang up my shoes of doing this stuff, I still will never forget this quarter. We actually began the quarter with a sense that the consumer was somewhat adjusting to dealing with the housing and the credit crisis, and all of a sudden the price of gasoline spiked to $4 a gallon, and the consumer was absolutely shocked, and from one day to the next, we had a dramatic impact, both on volume and the type of vehicle that a consumer would buy.

So it was six weeks of fairly respectable business, and six weeks of a tumultuous situation. So that is what we had to deal with, and my view is all things considered, I have to congratulate Mr. Maroone and his team in dealing with a sea-change, to still be able to deliver solid profitability was quite an accomplishment, and to Mr. Short for continuing leading the charge on our cost effectiveness, that is going to see us through this tumultuous period.

Great. So used was just as weak in June as new?

Yes, in used, we had to deal with the rapid change in values, with the values of cars going up, and the value of trucks going down. And to be on top of that every day, managing that was quite something.

And then, again on the warranty side, I thought that the warranty decreases had been mitigating somewhat, do the comps get easier in the second half?

The warranty declines, Mike Maroone, the warranty declines have has relatively consistent. They do very a little bit from period to period. But I do think that we are not going to be running at a 5 or 6% pace going forward, but I don't see it as a growth opportunity for us.

Okay. Finally, you talked about getting to a 20% domestic percentage of the business. Is that on a franchise basis, or on a revenue basis and when do you think you can get there?

That is on a new car revenue basis, and that will evolve over the next couple of years.

Thank you very much.

Thank you for your time today, we very much appreciate it. And thank you for calling in.

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