AutoNation Inc (AN) 2008 Q3 法說會逐字稿

Welcome to our AutoNation's third 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 third quarter 2008 conference call. My name is John Zimmerman, AutoNation's Vice President of Investor Relations. I'd like to remind you that this call is being recorded and will be available for replay at 1-888-567-0381 after 2:00 PM Eastern time today through November 13, 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 questions. I'll also be available by phone to address any follow-up issues.

Before we begin, let me read our brief statement regarding forward looking comments and the use of non-GAAP financial measures. Certain statements and information on this call will constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risk which may cause the actual results or performance to 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 the 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'll turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Good morning, thank you for joining us. Today we reported a third quarter net loss from continuing operations of $1.4 billion or $7.95 per share. In the quarter the company recorded non-cash charges for goodwill and franchise impairments of $1.46 billion after tax. Despite these charges, we remain in compliance with our debt covenants. After adjusting for the impairment charges and certain other items, net income from continuing operations for the 2008 third quarter was $44 million or $0.25 per share, compared to $73 million or $0.37 per share in the prior year. In the third quarter, total US industry new vehicle retail sales declined 31% based on CNW Research data. In comparison, in the third quarter, AutoNation's new vehicle unit sales declined 24%. This performance relative to the US retail total is attributable to a combination of increased market share as well as the benefit of our geographic and brand mix relative to the total markets.

In the third quarter, we want to address four major items. First, in the third quarter, the US economy moved deeper into recession. As the credit crisis escalated to a credit panic in September, a credit freeze ensued, which broke consumer confidence which has been under pressure throughout the year. The industry saw a decline in floor traffic at automotive show rooms, and for those customers who were in the show rooms, credit availability was very tight. We do believe the actions taken by the Federal Reserve and Treasury Department will bring credit back into the marketplace in the near future. The recent total cost of 100 basis points by the Federal Reserve is another sign that all tools are being used to get the US economy back on track. LIBOR spreads have continue to narrow, which has been the case for the last 18 days and we expect this to continue going forward. The recent decline in gasoline prices is another sign of positive news for the consumer. Once the housing market stabilizes, and credit becomes available, we expect to see increased signs of stabilization in US economy.

Second, in continuing response to the ongoing macro economic and industry challenges, we announced in the second quarter earnings release a cost reduction plan with a targeted annualized run rate of $100 million and we are on track with the previously announced cost reduction efforts. We continue to look at future cost cutting opportunities beyond the $100 million.

Next, we have shifted our capital allocation strategy from share re-purchase to debt reduction. So far this year we have repaid $589 million of combined non-vehicle debt and floor plan debt. This is made possible by strong operating cash flow including a significant contribution from working capital improvement. Going forward, we have targeted an additional $500 million of total debt reduction.

Finally, prior to the third quarter of 2008, we operated as a single operating segment. During the third quarter of 2008, in response to changes in the automotive retail market, including the disproportionate decline in revenue and earnings from our domestic franchises relative to our import and premium luxury franchises, we made changes to our management approach and divided our business into three operating and reportable segments -- domestic, imports, and premium luxury. Beginning in the third quarter, resources are allocated and performance is assessed based on financial information from each of these segments. We believe that our segment related disclosures will improve the transparency of our financial reporting. AutoNation continues to generate strong cash flow in this very challenging market, despite the current and possibly ongoing levels of depressed vehicle sales. I would like to turn it over to Mike Short to provide more details on the financial results.

Thank you, Mike, and good morning ladies and gentlemen. As Mike noted, we recorded charges for goodwill and franchise impairments of $1.75 billion before taxes, or $1.46 billion on an after tax basis. These charges resulted from accounting requirements to assess goodwill and franchise rates for impairments as a result of adverse market conditions and the decline in our stock price. I'd note that the goodwill charge and estimate which we'll finalize in the fourth quarter with any adjustments reflected in fourth quarter results.

Let me make a few comments on the impairment charges. First, we tested goodwill at both the single reporting unit level and on our new segment structure. As a result of the testing, the $2.75 billion in goodwill we started with was reduced to $1.15 billion, with approximately 15% of that amount allocated to the domestic unit. Future testing of goodwill will be conducted on a segment by segment basis. I'd also like to note that had we completely written off the domestic goodwill, we would still have been in compliance with all of our covenants.

As we've discussed with you in previous calls, in light of the challenging business environment, we've been aggressively managing our cost and cash flow. Regarding our cost structure, we're on track to achieve the $100 million in annualized cost savings under our previously announced cost reduction plan and we will continue driving efficiencies beyond that point. We've put in place $86 million in annualized savings since starting the initiative. In the third quarter, SG&A decreased $54 million versus Q3 2007. SG&A as a percentage of gross profit increased to 76.5% from 71% a year ago, reflecting the deleveraging of our cost structure partially offset by our cost savings initiative.

Regarding cash flow, through disciplined management of CapEx and working capital, we've generated sufficient funds to reduce non-vehicle debt by $362 million, and floor plan by $227 million for a total of $589 million on a year to date basis. We drove $104 million of non-vehicle debt reduction and $332 million of floor plan reduction in the third quarter. Additionally, we committed to re-purchase an additional $26 million of debt which settled in early October. During the third quarter, we did not re-purchase any shares of our common stock. At September 30th, our non-vehicle debt was $1.4 billion. Of our $700 million revolver, we had covenant limited availability of $197 million. Additionally, we had cash on hand of about $61 million for a total liquidity of approximately $258 million.

Despite the impairment charges, we remain in compliance with all the covenants under our debt agreements. Our consolidated leverage ratio at September 30th, which measures non-vehicle debt to EBITDA, was 2.65 versus the covenant limit of 3.0. Our capitalization ratio, which measures floor plan plus non-vehicle debt divided by total book capitalization, was 61.5% at September 30th versus the 65% cap. We believe that our aggressive cost and cash flow management will enable us to continue to reduce debt and remain in compliance with our covenants. At September 30th, we had reduced new vehicle inventory levels by approximately 6,600 units from June 30th. As compared to prior year, the net inventory carrying cost for new vehicles was $5 million lower in Q3, primarily due to lower floor plan interest rates partially offset by a decrease in floor plan assistance. As we continue to reduce inventory, we expect net inventory carrying costs to decrease.

Other interest expense was $8.7 million lower in Q3 versus last year. The favorable variance was a result of lower interest rates on our term loan facility, mortgage debt and floating rate senior notes and a decrease in our debt level associated with our revolving credit facility, partially offset by an increase in our mortgage debt. Our ongoing deleveraging actions will contribute to lower other interest expense going forward. It should be noted that a one notch reduction in our debt rating would increase credit facility costs by about $2 million annually.

During the quarter, we also recorded a gain of $12 million before tax or $7 million after tax on the re-purchase of $88 million of principal of our senior notes. Excluding the impairment charges, the gain on the debt re-purchase and certain favorable tax adjustments in prior year, we reported third quarter earnings from continuing operations of $0.25 per share versus $0.37 per share a year ago. For Q3 2008 we had an effective income tax rate of 15.8% versus a prior year effective rate of 37.6%. The rate for the third quarter of 2008 reflects the fact that significant portion of the impairment charges was not deductible for tax purposes. The Q3 2007 rate benefited from adjustments for the resolution of various tax matters, which resulted in a 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.

We reinvested $55.7 million in the business through capital expenditures during the quarter. We expect full year 2008 capital expenditures to be approximately $125 million. Excluding acquisition related spending, land purchase for future sites, and lease buyouts, CapEx will be approximately $70 million. Now let me turn you over to our President and Chief Operating Officer, Mike Maroone.

Thanks, Mike, and good morning. The third quarter was marked by extreme economic volatility. In addition to ongoing drastic changes in gas prices, new development affecting our retail where the pull back on leasing, and tightening of credit by traditional auto lenders -- from raising credit standards to providing lower loan to value advances, both of which put increasing pressure on consumers, particularly those with negative equity issues. Its consumers were bombarded with these developments, confidence waned, dramatically affecting store traffic and in turn our business. In spite of this, we delivered a 3.2% operating margin as a percent of revenue, excluding goodwill and franchise rights impairment charges, which illustrates that our operational foundation is sound.

I will begin by providing some additional commentary on the domestic import and premium luxury segments. Please note that segment numbers as presented in our press release are on a total store basis. In the quarter, the import and premium luxury segments accounted for the vast majority of segment income at 81% of the income for the three segments. Combined, the two represented 70% of our unit mix, up from 65% in the quarter a year ago. While the domestic segment accounted for 30% of new vehicle unit sales in the quarter, it disproportionately accounted for only 19% of the segment income, and domestics contributed 54% of the segment income dollar decline. As the industry moves forward, the auto retail landscape will include fewer domestic stores, which should positively impact throughput in both sales and service. As we continue to optimize our portfolio, we will retain well located, high throughput domestic stores. Of note, when compared to the industry, our domestic stores currently have over three times the throughput of the average domestic dealer.

Now I'll provide further details on our third quarter operational results. My comments here will be on a same store basis, unless noted otherwise. First, new vehicles. According to CNW, industry new vehicle unit volume was off 31%. AutoNation compared favorably, retailing 65,000 units, a decline of 24% in the quarter compared to the period a year ago. While we noted pressure across the board in all of our markets, we gained market share in the quarter. Compared to the industry, we benefited from favorable geography and brand mix along with outstanding execution at the store level. We've also gained share on a year to date basis. In these difficult times, our commitment to providing a superior buying and ownership experience for our customers remains a clear benefit. This was further evidenced in the quarter when our company reached a best ever customer satisfaction milestone for both sales and service CSI.

Compared to the quarter a year ago, revenue per new vehicle retailed of $30,000 was off $530 or 2%, primarily driven by a decline in truck pricing that was highly incentivized and a shift in car truck mix. Same store gross profit per new vehicle retail of $1,975 was off $184 or 9%, impacted by compressed truck margins which were pressured by the liquidation of low demand inventory.

We also had margin compression in premium luxury. In premium luxury we noted a continued trend toward entry level or lower price models. The premium luxury product cycle was a factor as well. Consumers will soon be seeing the new E-class from Mercedes-Benz, BMW's new 7 series and the new RX 350 from Lexus. These new models should help improve volume and luxury gross margins.

At September 30th, we had a 62-day supply of new vehicle inventory favorable to the industry at 72 days. At 62 days, our days supply increased 14 days, compared to the quarter a year ago, resulting from a slowing of sales in September. Since June 30th, we've managed our inventory down by 6,600 units, ahead of our target for the second half of the year. We achieved this by adjusting our stocking levels and re-allocating our own inventory among our stores to more accurately match consumer demand.

Turning to used vehicles, we retail just over 45,000 used units in the quarter, off 13% compared to a year ago. Contributing factors to the decline were significantly fewer vehicle appraisals and trade ins due to lower new unit volume and the conservative credit environment. Same store revenue per use vehicle retail was down 7% as consumer demand for value or lower priced vehicles continued to trend upwards. Truck pricing remained under pressure, but began showing signs of improvement as gas prices started to drop. Gross profit per use vehicle retailed was down 8%, or $136, with used cars and trucks having approximately the same margin and each accounting for about half of the margin decline.

In the quarter, we moved 6,600 used vehicles from originating stores to more optimal locations with good success at retail. We also grew our certified pre-owned business by 17%, compared to the same period last year. It's clear that customers recognize the tremendous value of certified pre-owned vehicles, and manufacturers are generally supporting them with strong incentive program. Our used days supply of 41 days at September 30th is two days lower than a year ago. Given the soft selling environment in September, we're pleased to keep our days supply in check.

At $609 million, same store revenue for service and parts was off 5%, with gross profit off 6% at $264 million. The effect of the economic issues facing consumers, impacted all facets of our service and parts business in the third quarter as customers sat on their wallets. We continue to work at increasing customer pay business through our defined and measured service sales process, our on-line appointment program, and aggressive service marketing. Another example I'd like to share is that in May, we began to sell our Value Care program, a pre-paid maintenance program in the service drive. The program has been well received -- in fact, in the third quarter, we sold just over 4,000 plans. Initiatives such as these, coupled with robust ongoing training, will drive both customer retention and financial results.

Turning to finance and insurance, same store revenue declined 21% on lower volume. Same store F&I gross profit per vehicle retailed was $1,071, off $20 or 2% year over year. In this environment we're focused on our performance of our third and fourth quartile stores, improving cash opportunities from contracts and transit, and maximizing our existing preferred lender relationships. In the quarter, we added two new lenders, one national and one regional, and we expanded the foot print of five existing lenders. Today we have 23 preferred lenders offering prime and subprime financing as well as leasing.

As I mentioned, our work to maximize our portfolios stores overall as well within each segment is ongoing. During the third quarter the bulk of our activity was within the domestic segment where we sold one store and terminated four stores. This activity represented an annual revenue run rate of $94 million.

In September, we proudly opened Mercedes-Benz of Delray in Delray Beach, Florida. This is an add point and it's our 14th Mercedes-Benz dealership. Of note, we sell over 80% of Mercedes-Benz in United States.

As the horizon remains challenging for the entire economy, operationally we're focused on heightened efficiency throughout the company, from the execution of our best practices to tight management of cost, cash flow, and inventories. In addition, our commitment to the training and development of our associates remains steadfast. We will continue to take the necessary steps to align the size of our operations with consumer demand. And when the economy recovers, our intent is to emerge as an even stronger company.

In closing, I'd like to specially thank our associates in Texas and our emergency response team that had our stores operational in just 24 hours after Hurricane Ike struck in September. And finally, I'll thank all of our associates for their unwavering dedication to the company during what for many are unprecedented difficult times, and with that I'll turn the call back to Mike Jackson.

Thanks Mike. The collapse in auto sales compares with the peak to trough declines of 1973, 1981, and 1991 recession. Mike Maroone and I have experienced these downturns before and we know how to manage the business through these tough times. We are operationally stronger today then ever before. We will continue to cut costs, redeploy our cash flow to debt reduction, remain committed to strategic investments that include training and technology, be smart on inventories, keep a strong balance sheet to position us opportunistically for when the industry reaches recovery. As we look at the rest of 2008, we believe the market will remain extremely challenging. We also believe that in 2008, new vehicle sales for the industry will decline to the low 13 million unit level. While at this time it is hard to predict new vehicle sales for 2009, the most conservative industry forecasts are in the range of 12 million new vehicle units. Even at a 12 million unit sales rate, AutoNation will remain profitable, and we are confident that we will remain in compliance with our debt covenants. As previously stated, we are targeting a further $500 million of debt reduction including floor plan and new vehicle debt. AutoNation will continue to focus on our cost structure by continuing to invest in our business. We are confident in our long-term business strategy in our markets. That concludes our remarks. Operator, please open the call for questions.

Yes. Thank you. At this time we will begin the question and answer session. (OPERATOR INSTRUCTIONS) Our first question comes from Mr. Rex Henderson with Raymond James & Associates. Your line is open.

Good morning. And I had a couple of questions about SG&A and the asset impairment charges. First of all, Mike Jackson, can you -- you mentioned that there might be some further SG&A cuts. Can you give us any color on where that's going to be, and the magnitude of those?

I would say our concentration at the moment is absolutely to complete the $100 million in cost cuts that we announced in the second quarter and get that fully integrated into a run rate. But you know us, we don't stand pat. We're looking at very challenging environment in '09, and therefore we are hard at work at what next. And I think -- I cannot put a number on it today, it's premature. And I would say as compared to the $100 million that we've already done, that the next tranche, if you will, will be more volume related than permanent related.

Okay.

And I would, this is a very rough estimate -- something like 50/50. At a certain point it becomes more and more simply volume related than what you can permanently take out of the business.

Okay.

But I'm sure by our next quarterly report we'll have a better feel for a number that we can give you that we can stand by.

Okay. And so the $100 million so far you think that's permanently out of the business, and you'll be looking to make some variable cost cuts, but it could bounce back when volume comes back?

I think that's a good characterization of it.

Okay. The other thing was, on the asset impairment. Mike Short mentioned that you did the asset test on both a enterprise wide basis and on a segment by segment basis and I wondered if you can give us some color on what that showed. Would the asset impairment have been smaller had you reported on an enterprisewide basis?

Hey Rex, this is Mike Short. As we went through the testing, we first as you correctly recall, tested the single reporting unit basis. That contributed about $1.47 billion in the pre-tax writedown. As we tested the individual segments following that, the only one that required a further writedown was the domestic segment, which was an additional $140 million pre-tax to get the to balance of the overall charges there was an additional $141 million on a pre-tax basis associated with individual franchise impairments. So those are the various components of it. And I think if you recall, I mentioned in my comments we had the capacity to write off the entire domestic element without coming in range of any of the covenants.

Okay. And one final question. Inventory looks a little higher than I expected it to be. It's down some year over year but not as much as sales. Should we be expecting inventory levels just to be higher on a run rate basis or are you going to get those down further so that the day sales match year ago levels?

Rex, it's Mike Maroone, I think you could guess that we will continue to drive the inventories down to reflect the environment. We're down about 6,600 units from the beginning of the year. The one piece is remember that there was a pretty dramatic shift from truck to car, so we did ramp up our car inventories to take advantage of that. And we've been liquidating our truck inventories. And I think that's why you see them not much up perfectly with the sales rate, we are committed to running even more efficiently with our new vehicle inventory.

Okay. And I said that was my last question and actually I had one more. That is in my market I'm hearing advertisements for a 24-hour a day parts and service offering. I'm wondering how widespread that is, and how successful that's been in driving incremental business in parts and service?

It's Mike Maroone. We're testing seven-day service in one market. We'll probably begin testing in a second market in the spring. We've had really good consumer response. The 24 hours, the ability to come in and make service appointments 24/7, but we've actually opened up one market where we're in full service seven days a week, and again consumer response has been good.

And it's, it's profitable -- you're showing enough volume to make the extra cost worthwhile?

We've actually, this is our fifth week of it, so at this point in time I wouldn't say it's highly profitable, but it's not a drain, and again, our job is to please customers and serve them when they want to be served.

Okay. Thank you.

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

Hi, good morning everyone.

Good morning.

My first question, I may have missed this I apologize -- but coming back to the goodwill write down, what, can you tell us the remaining value of goodwill that's associated with your domestic franchises and were there any changes to goodwill on import or luxury stores?

Tom, this is Mike Short. There were no changes related to premium luxury or import in the segment testing. Obviously the first test was -- didn't really factor in segments at all since it was done at the single unit reporting test. When we tested the individual segments, premium luxury and import passed with substantial cushions. With respect to the domestic segment, the amount that's left on the books is $171 million. So about 15% of the total that's on the books.

Okay. And then my second question is regarding the debt covenants. You made a comment that next year even at 12 million unit level, you would be, you think you would be in full compliance. What -- can you give us some sense of your assumptions on the EBITDA side and the debt side of that equation?

We don't, forecast the EBITDA piece and 12 million is our stress case for what we think 2009 may be in terms of total units for the industry. So what gives us comfort, Thomas, is our ability to generate significant cash and use that cash to pay down debt and stay in compliance with the ratios.

And, obviously, you're, I would assume that you're having pretty frequent dialog with your lenders. Just from a qualitative standpoint, what sort of sense, can you give us some sense of the type of expense associated with, with more flexibility on the covenants? Does it makes sense to try to leave yourself a little more wiggle room or is the expense significant there?

This is Mike Jackson. First, we really like the business model that we have. The service and parts business is basically recurring. It's covering a big percentage of our fixed cost that allows us in this very difficult environment to remain profitable. The second step of the business model that we like, and if you operate correctly, as a business decelerates, you get tremendous cash coming back to headquarters. The amount of working capital that it take to run the businesses goes down dramatically, which puts us in a position to easily pay down debt in times like this.

Now, as far as re-negotiating with the banks on the covenants, I would not be in the mood to go in and do something with the banks right now. Yes, we've spoken to them. Yes, we can get it done. Do I like the numbers that are involved? They're not my favorite, but we could manage it, but why do it? I much prefer the strategy that we are on, and just manage within the covenants, and if in a better environment we ever want to do something different, you could get the covenants changed at a much different pricing cost. To go in and touch the covenants now to me is not the correct time to do it. Especially when we've prepared for a downturn of this dimension all along. If people have been following me, when I first got here, I talked about how we'd manage a 10 million unit market and we have the plans and the models and clearly are able to execute in this tough environment. So this is what we've always planned for, and now that's exactly how we're going to manage through it.

Okay. That's very helpful. And then just two more quick ones on parts and service. Can you give us a breakout between customer pay and warranty? And then secondly, the CapEx looked a little bit higher than we were thinking in the quarter, and I think you may be above your full year guidance on CapEx, so I was just wondering what's going on there?

Matt, Mike Maroone, on the fixed operations, our customer pay was down 4%, our warranty was down 7%. And the customer pay traffic was actually off about 4% as well. So the dollars were off 4%, the traffic was off 4%.

And on the CapEx, within the $55.7 million that I called out for the quarter, there was a substantial portion that was lease buyouts that was just economically the right thing to do, so there was about $20 million of that in that number.

So for next year, any care to give us any sense of where CapEx could be?

It's going to be lower as we continue to manage our cash, but no, I don't think we do any projections next year on that number yet.

Okay, thank you very much.

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

Good morning.

Good morning, Rick.

Can you talk about the regional performance, specifically California and Florida and how those trended versus the chain?

Rick, it's Mike Maroone. I would say California, northern California has shown some signs of stability. Southern California is still in distress. In terms of Florida, Florida is in a lot of distress, I would say, and is probably one of our most challenging markets today.

Okay. Thank you for that color. Mike, or Mike, the weakness in the business overall, how much of that do you think is store traffic and how much of it is the availability of credit, and are you beginning to see any that thawing at all in the credit availability?

This is Mike Jackson. Let's take the industry sales performance in October, which was about a 30% decline. What we had, we're in a cyclical downturn and have been for two years, and that's about a 10% decline in business or about one-third of the decline. Now, you have a credit panic that hit in the middle of September and all of a sudden that 10% decline has expanded to a 30% decline. Half of that additional decline is the breaking of consumer confidence and their deep concern of where the economy is and where it's going. And that, as you know, impacts big ticket items.

The balance of the decline is indeed tighter credit standards. If you look at an additional portional decline of the domestic versus import and premium luxury, clearly it's in credit, because the financing available from the domestics and their companies is under the most stress, whereas the Japanese still have very strong finance arms as do the European. But everybody is tightened. Everybody's made it more difficult. Yes, you can still do business, but I would say in the 30% decline in October, one-third of that then was financing, one-third of it is consumer confidences and the last one-third is the cyclical downturn that we were in already. My view is then that since we're deep into the cyclical downturn and we had this extraordinary event of a credit panic that we're now in overcorrection. We are now -- sales are new dramatically below trend. And we will get a benefit from that on the other side. Now you've got to make it to the other side, which we clearly will, but I think both housing and automotive are in an overcorrection at this point.

Thank you for that color. Are you seeing any that thawing at all in the availability of credit or it's still very tight?

Rick, it's Mike Maroone. Overall I think it's very tight. I don't think we're seeing a thawing. Certainly you can look at specific lenders such as Toyota that are in much better shape than others. I think Mike spoke to that as the Japanese and the European captives certainly are a little looser, but they too have tightened up from prior times.

And the credit crisis, and we talk about how it affects the consumer confidences and traffic. I'm out there in the business community every day talking to colleagues and other businesses that have projects and investments that normally would be greenlighted as outstanding undertakings run very skillfully and very professionally with good returns for all parties including the banks that simply are not getting done. So I know we've passed the rescue package in Congress. I know capital's been put into the banks. But there it sits. So we have a ways to go on the credit side.

Challenging environment. Thank you.

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

Hi, good morning. Couple questions. First, you've cited that there's additional working capital opportunity. I was wondering if you had an estimate to what the working capital opportunity would be from moving to a 13 million store down to 12 million as your initial forecast suggests for 2009?

Joe, I think maybe what I'd cite there is Mike's, Mike Jackson's comment earlier about our ability to pay down debt by $500 million in the future. I think a lot of that is going to come from working capital improvement, which is both the contraction of, assuming the contraction of the business as well as specific initiatives that have been talked about so far to, to really reduce the way we're managing cash or heighten the focus on cash management in the company -- an example of that being contracts in transit, how long those are taking to get collected. And I would congratulate the field as Mike Maroone did earlier in our stores in their ability to accelerate those and help us manage cash in this difficult environment. But actions like that are going to be the things that we do to take advantage of the working capital opportunity we have in the organization.

Okay. That leads me to the next question. Of the $500 million, could you break out how much of the reductions expected to come from floor plan, debt reductions versus capital structure reductions, and how long it will take you to basically reduce your debt burden by $500 million?

We don't have a specific timeline for that, but the floor plan reduction is about 10%. And and the balance will be coming on the non-vehicle debt side.

Okay. So basically over some period of time you'll be able to generate about $450 million of free cash flow?

And just to be clear on that. It's a 10% reduction in the floor plan piece. It's not 10% of the total.

Oh, so that's about $150 million of the $500 million?

Probably a little bit more than that.

Okay. And then lastly, could you just give us the composition of your floor plan debt providers? So, for example, what percentage of the floor plan is represented by GMAC, Ford Motor Credit, et cetera?

It's largely all the captives. About half of it would be in the domestic and half of it from everybody else, but we can follow-up with you if you'd like more detail on that. But that's just general guidelines.

Okay. Great. Then just one last one. Any indication of how service imports did in the month of October? Any color around that?

We never comment on the current month. Other than the industry figures that are out there.

Okay. Thank you.

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

Good morning. I was hoping you could clarify how much of the $100 million cost cut you've completed -- I'm just looking, I'm not sure if I'm reading this right. But if you subtract the segment income that from the EBIT you reported excluding charges, it looks like you've got $26 million of corporate overhead in this quarter versus $27 million last year, so is that right? And should we then conclude that the cost savings are largely outside of the corporate overhead?

The corporate, you'll note that it's corporate overhead and other, so there are other things in that number, including some of the ancillary businesses that we have in lines clearly with one segment collision centers that run into that number as well. So that's not just corporate overhead and we don't provide at this point any additional detail within that for you. In terms of your other question on the -- ?

$100 million.

$100 million in cost savings, we've taken $86 million of that out now on our run rate and expect to complete the $100 million that we had targeted before the end of the year, and we think that there are opportunities beyond that.

Okay. And if you could just clarify the, I believe your floor plan debt would be excluded from your covenant calculation, would that be correct?

It is not included in the leverage ratio test. The leverage ratio test is only on non-vehicle debt The capitalization ratio test is on both nonvehicle debt and floor plan.

What about used floor plan?

That's in the floor plan number in that test.

Okay. And any additional color, on the outlook for the parts and service business? Has, you know, actually been quite, quite stable up until recently? It looks like it's moderating a bit. Is that something that you're expecting to continue to moderate through next year or any thoughts on based on your experience in that business how that should look now?

Rod, it's Mike Maroone. Certainly we feel that there's tremendous pressure on consumers in term of their disposable income, so I would expect some pressure. However at this moment there's got to be some pent up demand, so I think as consumers gain more confidence, we believe that business will come back. It's been a very stable part of the industry for many, many years. Yes, we've got some short-term pressure but I think it will be back and I think we'll be just fine there.

Did the composition of customer pay versus warranty change?

Not noticeably. Customer pay is still about 50% of the total. The balance being warranty and internal. With internal being bigger than warranty.

Right. Thank you.

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

Thanks a lot and good morning to you. I guess my first question for Mike Jackson, given your history in the industry particularly on the luxury side, if you think about some of the macro drivers of the current slowdown, and one implication is they typically would have for luxury versus a more moderately priced cars. I'd be interested for your color on what kind of downturn you think we're in for here and how they might rebound versus the rest of the market as well?

First, Matt, we're in a very extraordinary period where you have this most unfortunate combination of a cyclical downturn all of a sudden combined with a credit crisis. That is a very toxic combination that no segment will be immune from. If I look at the quarter, our domestic business unitwise was down 36%, new cars -- imports 18%, and premium luxury 14%. So that make the point. I do believe, though that the actions that the Federal Reserve and the Treasury have taken are unprecedented. They're going it take time to work, clearly looking at the narrowing of spreads and LIBOR are being set. The measures are working, but it's still going it take more time. I think premium luxury will come back first. As soon as they see that the most dramatic parts of the crisis are past us, I think premium luxury will recover first.

That's helpful. Secondly, given that new car inventories remain a bit elevated, is it your expectation that the industry continues to see some margin pressure on the new car side?

This is Mike Jackson again. First, the inventory on a selling rate basis, you have to bear in mind we calculated that off the month of September, which you had the credit panic in the second half of September, where things came to practically to a standstill as far as a selling rate to calculate a day supply. So that extreme situation on the sales side will slightly elevate the day's supply, but if you can look past that a little bit, you can see where we're in actually very good shape. But to your point, yes, it's extremely tough out there. It's very competitive. The customers that do come in know that they're in the driving seat on price, and, and there will be margin pressure, but I think Mr. Maroone (inaudible) -- we've managed it quite well considering the environment.

I think if you look at a good part of the margin compression comes out of luxury where it's really about mix and where we are in the product cycle. As I mentioned in my comments, is the new products get introduced, they're higher margin products and I think you'll see a little bit less of that. Certainly there's pressure in the domestic and import side and I think we're managing that okay.

Great. And then I guess my final question. On the in store credit dynamic and what you're seeing from your lenders, we've heard a lot about the contrast between flat out turndowns or, and then perhaps some instances rather than that, stricter implementation of LTV ratios. How would you describe the credit tightening being manifested and I'm also interested in your perspective of the timing of this cycle. Is this something that's panicked by the financial institutions that will get their wits about them and ease a bit or does this part of the cycle maybe have some more legs to it?

It's Mike Maroone. I think Mike Jackson used the term over correction, and I think this applies in this case. CNW reported that the approval rate was about 64% versus a year ago at 83%. They also reported one in five subprime loans getting approved. I think that reflects the current environment. Certainly there's a problem in people getting these portfolios securitized, and we feel that pressure, but we believe it's an overreaction, an overcorrection I should say, and I think over time it'll work itself through.

Great. Thanks for your help.

Thank you. Mr. David Lim with Wachovia, your line is open.

Hey, good morning, gentlemen. Just several questions. First on that $500 million of additional debt reduction, what's the propensity for that to increase over a certain number, over the next couple of years?

I'm sorry. David, just so I understand the propensity for the debt?

Yes.

For the debt to increase.

Yes, the debt paydown you're targeting $500 million. At least that's what you said today. Can that number possibly go up?

This is Mike Jackson, you know us by now. When we give you a number, that's a number that we're beyond highly confident that we will go out and deliver. And when that's done, then we'll tell you what happens next. Certainly if you look at the way we run the business. We have, I believe, the choice to pay down more debt if that's what the circumstances call for after we complete the $500 million. In that we will be still making money, positive cash flow in the business, and our skills at managing working capital improves every quarter. So we will have the choice to do more, and if the circumstances call for us to do more, then we will do more.

Understood. Last quarter you guys gave out a composition of your inventory mix as well as your sales mix between cars and trucks. Is that, may I get that for this quarter as well?

It's Mike Maroone. Our current inventory is about 49% domestic, so it's 51% luxury and import, about 61% car, 39% truck.

And how was your sales mix between cars and trucks?

Don't have that handy. What I could tell you is domestic were about 30% of our sales. I'm sorry, the current truck sales were 54% car, 46% truck.

46% trucks. Okay. And just in general terms, can one of you comment about a 0% financing -- that the OEMs have been fairly aggressive or I should say really aggressive, is that really gaining any traction whatsoever with consumers?

It's Mike Maroone. I think the program was very aggressive. They supported it with a great media plan. I think it was extremely well thought out. And it did connect with consumers, although the market was in such stress, I'm not sure that it got everything it could get, but Toyota did take share in a very, very tough market. So I mean, you could argue that they could have waited a month, but I really applaud them for really testing the market and putting forth a very substantial offer to consumers.

Great. And finally, can you comment on what's your normal, I guess normalized maintenance CapEx?

I think, you might think of it, David, just in terms of matching our depreciation levels.

Okay. Matching depreciation. Great that's all I have. Thank you very much.

Thank you. We have time for one more question.

Thank you. Mr. Eric Selle with JPMorgan, your line is open.

Good morning. Thank you. A couple questions, but how do you explain customer pay outperforming warranty during the quarter? Being down 4% versus 7%.

It's Mike Maroone. It's been a trend that's been been going on for quite some time. I think the warranty number really reflects the higher quality vehicle made, both domestic, import, and premium luxury. The quality of vehicles has improved dramatically over the last several years.

And it could be there's a bigger fleet of off warranty vehicles that can drive that number better?

Correct. And remember that the customer pay also includes with the exception of a couple manufacturers, includes normal maintenance. So people continue to maintain the vehicles they made significant investments in.

Because of the aging fleet, that 50% of your parts and service dollars should continue to be fairly stable.

We're very confident about our parts and service business going forward, and it carries nice margins with it.

And then secondly looking at financing, obviously the captive fincos have ratcheted back on leasing and subprime. Are you guys seeing the banks filling in gaps where the captive fincos are retrenching from that business.

It's Mike Maroone. We've got a very large preferred lender base we've got 23 lenders. I think they do fill gaps well. Do they fill all the gaps in this environment? No, I don't think they fill all the gaps. Subprime is still more difficult, but in general we're really pleased with our preferred lender network that includes both the captives and the big banks, and some regional banks as well.

Finally, a question I get a lot, so I'll you guys. Floor plan availability, any concern there? The banks retrenching from that at all?

No, I don't think we have any concerns about that at all. In fact, we're in discussions with some of our lenders about adding more flexibility to the floor plan capability, so I don't see any issues on that right now.

Great, I appreciate your time.

Thank you everyone for your questions today, and thank you for your time.

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