AutoNation Inc (AN) 2008 Q4 法說會逐字稿

Welcome to AutoNation's fourth quarter earnings conference call. (Operator Instructions). Now, I will turn the call over to AutoNation.

Thanks, Pat, and good morning, everyone. I'd like to welcome you to AutoNation's fourth quarter, 2008 earnings call. My name is [Derek Febig], AutoNation's Vice President of Investor Relations. I'd like to remind you that this call today is being recorded and will be available for replay later today. Leading our call today will be Mike Jackson, our Chairman and CEO, joining him will be Mike Maroone, our President and Chief Operating Officer, and Mike Short, our CFO. At the end of remarks, we will open up the call to questions and I'll be around for the rest of the day to answer any follow-up questions you might have.

Before we begin, let me readout a brief statement regarding forward- looking comments and the use of non-GAAP financial measures. Certain statements and information on this call will constitute forward- looking statements, within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks which may cause actual results or performance to differ materially from our expectation. Additional discussion of factors that could cause actual results to differ materially, are contained in our filings with the SEC. 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 reconciliation of any such non-GAAP financial measures to the most directly comparable GAAP measures, and you can see these on our website. And now, I'll turn the call over to Mike Jackson.

Good morning, thank you for joining us. Today, we reported fourth quarter EPS from continuing operations of $0.40 compared to a year ago EPS of $0.28. In the quarter the company had net benefits from tax and other items. After adjusting for these items, net income from continuing operations for the 2008 fourth quarter was $0.12 per share. Fourth Quarter, 2008, revenue totaled $2. 7 billion, compared to $4.1 billion in the year-ago period. Driven primarily by lower vehicle sales. In the fourth quarter, total U. S. industry new vehicle retail sales declined 49% based on C& W research data. In comparison, AutoNation's new vehicle unit sales declined 40%. In the fourth quarter, AutoNation continued to remain profitable, even with the U. S. selling rate near 10 million new vehicle units, a 27 year low.

I would like to address two items today. First, is in regard to the U.S. economy and credit, and how AutoNation responded. The fourth quarter was negatively impacted by the credit panic triggered on September 15th by the bankruptcy of Lehman Brothers. Automotive retail sales collapsed from one day to the next by an additional 25%, with credit for our customers was withdrawn from the market. Credit from (inaudible) finance companies and prime lending institutions declined over 40% from Q-3 2008, to Q-4 2008. At AutoNation, we saw 99% decline in December '08 versus December '07 from G Mack and Chrysler financial services. This panic continued to erode consumer confidence and accelerate decline in the U.S. economy in the auto retail market.

Second, I'd like to address the action we have taken in response to the events of September 15, when Lehman Brothers went bankrupt. In July, we announced our plan to reduce costs by $100 million on an annual run rate basis, and have successfully achieved this goal, a significant accomplishment in its own right. As market conditions collapsed in the second half of September, additional actions became necessary to further reduce costs. We have successfully implemented an additional cost reduction program of another hundred million. Taken together, AutoNation total annual cost saving is $200 million, an unequivocal demonstration of our company's adaptable business model.

For the full year ended December 31, 2008, the company reported net loss from continuing operations of $6.89 per share, compared to net income of continuing operations of $1.44 a share, in the prior year. After adjusting for the impairment charges and certain other items as disclosed in the attached financial tables, net income from continuing operations for the full year ended December 31, 2008, $1.02 a share, or $1.38 per share in the prior year. The company's revenue for the year ended December 31, 2008 totaled $14.1 billion, down 19% compared to $17. 3 billion in the prior year. 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. (inaudible) financial results for the fourth quarter, as MIke mentioned, we reported net income from continuing operations of $70 million or $0.40 per share. We recognize the gain of $24 million after tax, or $0.14 per share in the quarter related to the repurchase of $145 million notional value of our senior notes. We also had net favorable tax items of $32 million for $0.18 per share and $8 million of after tax impairment charges worth $0.04. After these items, adjusted net income for the quarter was $22 million, or $0.12 per share compared to $0.28 for the fourth quarter of 2007.

For the full year 2008, we reported a net loss of $1.2 billion after adjusting for the $1.5 billion goodwill and franchise impairment, and other items including tax settlements and gains on senior note repurchases, net income was $181 million, or $1.02 per share, compared to $277 million or $1.38 per share last year. The adjustments to net income for the fourth quarter and full year are included in a reconciliation in our press release. Mike pointed out we were early to recognize the head winds facing the industry in 2008, and in response, we began significant cost and debt reduction initiatives. We've exceeded our cost savings target of $100 million and have achieved a run rate of $200 million in annualized savings. During the fourth quarter 2008, we reduced SG&A by $102 million, a 21% reduction from fourth quarter 2007. SG&A percentage of gross profit increased to 79.9% from 73.6% a year ago reflecting the deleveraging of cost structure, partially offset by our cost savings. Also, we finalized our estimate for our goodwill writeoff in Q-3 and determined that no additional adjustment were required. .

New vehicle net inventory carrying costs of $8 million for the fourth quarter was down $2 million from last year. The decrease primarily a result from lower LIBOR rates partially offset by a decrease in floor plan assistance. Other non-vehicle interest expense was $20 million for the quarter, decreasing $12 million from last year as a result of our debt reduction initiatives and lower interest rates. Income tax for the quarter was a benefit of $9 million resulting from the $32 million item I mentioned earlier. Going forward, we expect our ongoing rate to be about 40%, excluding the impact of any potential future tax adjustments.

Turning to our cash flow and balance sheet items, we are very proud of the work done by our team to maximize profitability and generate cash during the quarter through disciplined management of CapEx and working capital. This success enabled the company to reduce non-vehicle debt by $155 million during the fourth quarter, primarily through the repurchase of $145 million of our senior notes at an average discount of 30% to face value. Of this amount, $50 million related to the floating rate notes, $95 million to the fixed rate notes. Also, before the end of the quarter, we entered into trades to repurchase an additional $11 million notional amounts of fixed notes that settled to January. For the full year, our non-vehicle debt was reduced by over $.5 billion dollars. Turning to our financial covenance. Our debt reduction and cost savings initiatives enabled us to reduce our leverage ratios to 2.45 times at the end of 2008.

A couple of points on the calculation. The trailing 12 month adjusted EBITDA of $544 million include the gain on our note repurchases, funded indebtedness was $1.33 billion The indebtedness number is not on a net debt base, so we don't get the benefit of our $111 million year end cash balance which was up from $33 million last year. I think it is worth noting that the leveraged ratio improves significantly from the end of 2007 when it was 2.78 times. Our capitalization ratio which measures floor plan debt plus non-vehicle debt divided by book capitalization was 59.7% at December 31, compared with 61.5% as of September 30, and a covenant requirement of 65%. The calculation of these covenants is included in the tables of the press release. Our strong year end cash balance combined with $300 million in covenant limited revolver availability brought our total liquidity to more than $400 million at year end.

Our total debt reduction and cash balance increase in Q-4 was more than $200 million. You may recall that last quarter, we announced our intention to reduce debt, reduce total debt by an additional $500 million and as you can see, we are well on our way. We reinvested $20 million in the business through capital expenditures during the quarter, and $117 million for the full year. We estimate spending of approximately $90 million in 2009. Excluding acquisition related spending, land purchases for future sites, and lease by outs, CapEx was $14 million for the fourth quarter, and $65 million for the full year. Now let me turn you over to our president, and chief operating officer, Mike

Thanks Mike, and good morning. I'll begin by saying that given all the external challenges, we record a solid 2.3% operating margin in the quarter, and also delivered solid profitability. This was encouraging in light of the steep decline in volume for the industry. We believe this further validates our business model. In 2008, we made tremendous progress on the cost side and as Mike Jackson and Mike Short both said, we will realize annualized cost savings of $200 million. We reduced inventories, improved cash flows, and gained market share. We also recorded the lowest associate turnover in our history, and during the year, we achieved our best ever customer satisfaction levels for both sales and service. The ability of our team to continue to fight through the issues and deliver outstanding service-- this result was definitely impressive. Our associates remain dedicated to sharpening the delivery of customer focus best practices, controlling expenses, and improving cash flow with the goal of emerging even stronger from this downturn than when we entered it.

I've been in the car business all my life and cannot recall the environment ever being more difficult than it was in the second half of 2008. The skyrocketing fuel prices of the summer months made trucks and SUVs undesirable, and demand shifted quickly to fuel-efficient cars. In the middle of September, the crisis that was brewing in the financial community spread to Main Street. Mike Jackson mentioned credit evaporated, consumer confidence all but disappeared, driving showroom traffic down. This led to a weak selling environment in both new and used vehicle sales. Trucks drove most of the decline in sales for the first part of the year where car sales remained more robust.

Though the movement towards the 10 million units are in the fourth quarter was driven by the credit panic, underneath that fuel efficient car sales literally collapsed, while truck sales which had been lagging picked up some ground on a relative basis. As falling fuel prices, coupled with aggressive incentives, made them an attractive product. for consumers. Falling over all demand levels and shifting mix within that demand made for a difficult environment to say the least. At $43 million our total segment income was down $73 million or 63% compared to the quarter a year ago. The contribution to the decline was approximately 30% domestic, 40% import, and 30% premium luxury. A clear illustration that no segment was immune to the collapse of retail sales in the quarter. Mike mentioned that industry new vehicle sales were down 49% in the quarter, which is the most severe decline we've ever seen. The used vehicle market, which is usually less volatile than new, was also significantly impacted in the quarter.

For new vehicles our same store performance was favorable to the overall market as we retailed 45,000 vehicles, a 40% decline from the fourth quarter of last year, but better than the 49% industry decline. Revenue for new vehicle sold decreased by $562 to $31,300, this decrease was less than we experienced in the first nine months of the year. Our gross margin for new vehicle retail was off $216 to $2,027. We attribute this to continuing over supply, a competitive environment, and issues around credit that include reduced lender advances. December 31, our new vehicle day supply was 84 days. An increase of 32 days compared to a year ago and significantly lower than the industry at 119 days. Despite the collapse of industry sales which drove day supply up on an unit basis, we ended the year with 54,000 units compared with 61,000 units a year ago, a reduction of 11%. Day supply ended higher than we would like it, but as previously mentioned, the shift to and from fuel efficient cars was a factor as was the weaker than expected sales environment. Our first quarter orders to date will be down 55 to 60% from a year ago, and are also down significantly from the fourth quarter. This will reduce our inventory by approximately another 9,000 units.

Turning to used vehicles, the industry saw the weakest annual retail volume in well over a decade. AutoNation retailed nearly 36,000 same store units which represented decline of 22% compared to a year ago. Factors were the overall macro economic conditions, along with significantly reduced trade-ins compared to the prior period. In the quarter, our used to new ratio was .8, a best ever metric at AutoNation. Revenue for used vehicle was off $1200 or 7%. Driven by a decline year over year in used vehicle values, as well as ongoing consumer demand for lower priced vehicles. $1436 gross margin per used vehicle retail was off $180 or 11%, resulting in part from our willingness to accept lower margins to avoid the extremely volatile wholesale market. We grew our certified pre-owned business by 30% compared to the same period last year, and during the quarter, we also moved of 4600 used vehicles from originating stores to a more optimal location with good success at retail. At December 31, our used vehicle inventory stood at 30 days, this was a conscious, prudent effort to keep inventory lean in the volatile market we've described..

Next service and parts. We are at $568 million, same store revenue for the quarter held up much better than the variable business with the decline of just 9%. Even in a down economy, vehicle maintenance is a necessity. We remain focused on growing customer pay business which was off about 3% in the quarter, efforts include ongoing training and certification of our associates on a retail based service sale process, our online appointment program, and aggressive service marketing. Our Value Care or prepaid maintenance program which also serves as a customer retention tool is a good example of how we're expanding our offerings on the service drive. In the fourth quarter, we sold nearly 12,000 plans. We experienced some pressure throughout our service and parts business and in particular, in internal and warranty. The internal drop was driven by a decline in vehicle sales volume, and we attribute the warranty decline to the continued trend of improved quality. Gross profit of $246 million was down in line with the service revenue decline.

In the area of finance and insurance, same store revenue declined 41% on lower volume, same store F&I gross profit per vehicle retail was $1,024. A decline of $127 or 11% compared to the quarter a year ago. Credit availability, increasing lender conditions on approvals, reduced advances, higher charge backs, all impacted our F&I performance in the quarter. This challenging environment, we remain focused on the performance of our third and fourth quarter stores, the sale of F&I products, and improving cash opportunities from contracts in transition. Our work to optimize our portfolio of stores overall as well as within each segment, is ongoing in the quarter, we sold or terminated a total of six stores representing an annual revenue run rate of $142 million. We also acquired two domestic franchises that we tucked into existing stores. December 31, our portfolio consisted of 232 stores, and 302 franchises in 15 states.

As we navigate what continues to be a very challenging environment, we're committed to providing a supportive workplace for our associates, and a great place for customers to purchase and service their vehicles. We will continue to work diligently on the cost side of the business and on the consistent delivery of our best practice processes in all areas of our business. We believe that we're operationally stronger today than ever before, and will be well positioned as the industry recovers. With that, I'll turn the call back to Mike Jackson.

Thanks, Mike. As we look at the rest of 2009, we believe 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. We believe that in 2009, industry sales of new vehicles will be in the range of 11 million units. With industry new vehicle sales in the first half of 2009 continuing the trend, we saw in the fourth quarter of 2008.

For the U. S. auto industry to recover, we need the restoration of credit for customer, which means success of the launch of the term asset (inaudible) facility program which will begin in February of 2009. This coupled with the comprehensive stimulus package which should include tax and purchasing incentives for autos. Finally , it is vital that the Detroit Three continue to have access to bridge loans to support their recovery. With that, I look forward to your questions. Pat, if you could please open the

Yes, thank you. (Operator Instructions). Mr. Rex Henderson, with Raymond James and Associates, your line is open.

Thank you. First of all, I wanted to return to some comments by Mike Maroone about inventory levels. I missed a bit of it, but in addition to that, I wanted to focus on-- based on some of your recent comments, it appears you think that inventory levels were too high, and I'm wondering where you think an appropriate inventory level is and how long it takes you to get there.

Rex, it's Mike Maroone, our inventory level right now is about 84 days, we definitely believe that's too high, and as a result, we have reduced ordering by between 55 and 60%. We believe that our day supply on a weighted average basis could be in the 50 to 55 day supply. We're at 84, so we definitely want to move it down and see an opportunity to do so.

And second part of my question, how long does it take you to do that? And what kind of push- back have you gotten from the OEMs in cutting orders that much?

This is Mike Jackson. Obviously, any time you have such a precipitous decline in sales from one day to the next with the selling rate declines your day supply going to go up dramatically, so in absolute terms, we've continued to take our inventory down. We are forward- looking assuming a selling rate of 10 million open ended.

We do believe that there's the possibility of an improvement in March if credit really begins to thaw, but we are taking a wait and see attitude, we want to see it before we'll stop at that level. There's definitely push-back from the manufacturers, several manufacturers on inventory, I would say. The most extreme case would be General Motors, and Chrysler, both of whom have implemented wholesale incentive programs where they basically say to get the incentives for the inventory you want, you have to buy more inventory. I think this is the wrong thing to do. I think it's appropriate that retail inventories be adjusted to this selling rate, and that has definitely created some friction, but we are not playing that game.

Okay. Well, thank you for your frank comments. That's very interesting. And the second part of my question, really, relates kind of an evergreen question I ask about your SG&A cut, and that is can you cut 200 million in SG&A reductions annualized, how much of that is structural, and how much of that is variable in response to the lower sales volumes?

Rex, this is Mike Short. As we made out these initiatives plans, we've tried to focus the reductions on elements that we're going to permanently take off out of the system. That said, there are some of those areas that are going to be variable and will come back a little bit as conditions improve. Ballpark, I would say I think 70 to 80% of the cost that we've taken out is of the structural variety.

Okay. Very good. All right. Thank you very much. I'll pass the questions on to somebody else.

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

Good morning, everyone. On a sequential basis, your floor plan assistance looked like it fell, but the expense was up sequentially, even though LIBOR fell, I was just wondering if you can give us more color on the inventories down. Are the OEMs adjusting floor plan assistance what is that related to?

Sequentially, the assistance (inaudible) is not down that much, but we are seeing in certain cases, there is an attempt to adjust some of those programs. The bigger issue for us is the balance.

This is involved with the lower volume. So the assistance goes down because of collapse of sales. Also with the collapse of sales, your selling rate is lower than what you've expected and what you stocked for so during the course of the quarter, we had to correct for that. And by the end of the quarter, we actually had inventory down in absolute terms, but on a - - on a (inaudible)

Okay. But why would the floor plan interest expense be up sequentially with lower inventory and lower LIBOR rates?

This is Short. I don't believe our inventory was lower in the quarter.

Okay. At the ends of the quarter, but not - -

On a dollar basis.

On a dollar basis.

Okay. All right. When do your floor plan lines renew? Is there any pressure upward pressure on spreads there?

Over the course of this whole process, the spreads have increased from LIBOR plus one to about LIBOR plus two. now, but I think they've been fairly stable.

Okay. But there aren't any lumpy maturity on these lines over the course of this year? Or is it pretty steady over the course of the year.

Pretty steady over the course of the year.

Okay, and can you maybe just talk a little bit about expectations for the parts and service business into 2009? Obviously it's come off a bit here, but what generally are you expecting? Would it be more similar to the levels that you are experiencing in the fourth quarter? Would you expect that to improve a bit?

Rod, it's Mike Maroone. The last two quarters, we've clearly seen consumer sitting on their wallet, and certainly, there's a reluctance to spend. On a customer pay basis, our traffic is down about 2. 5%, our revenues down 3.3%. Where the real pressure and fix comes from is warranty is down. Internal is down dramatically from our sales volume, so I think you are seeing a reluctant consumer and I think at least for the next quarter or two we will see a similar type trend. But the business is certainly more resilient than the variable business.

Okay. Lastly, just looking forward, would you expect the used business to begin recovering in advance of the new business? Any thoughts on how the cadence of the year is likely to look?

We're obviously more optimistic on the used business and feel that it's a little bit more in our control. We are seeing strength at really two end of the business, one is the CPO business, certified pre-owned was strong in the fourth quarter. We were up about 30% year over year, and we see more progress on that part of the business. The other end of the business is the 6 to $10,000 vehicles where there's a very short supply and a very high demand. The challenge to the business, frankly, is what Mike Jackson has been referring to, that's the credit side of the business. So I think we do feel there's more opportunities there and we will work really hard at it. We are especially prudent with our inventories, trying to get very lean, so that we could escape that volatile used market and position ourselves to be buyers at the right time.

Thank you.

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

Thank you. Good morning. Congratulations for navigating a very challenging environment. Question on service and parts. Can you provide the warranty and customer pay numbers?

The customer pay was down 3%. The warranty was down 6. 6%.

How about the premium luxury segment? About are the comps holding up better there than in the other two segments? Service and parts?

They are. And actually, the import and the premium luxury is stronger than the domestic segment on customer pay. The majority of the customer pay decline came out of the domestic business.

Thank you for that. Question also about the content of inventory. I know you talked about the 84 days supply. Where do you stand now with trucks and SUVs versus the fuel efficient versus where you need to be?

Rick, it's Mike Maroone again. We actually are perfectly balanced, which we were not a quarter ago. We have 56% of our inventory in cars, 44% in trucks, our sales almost match that identically. So we think we are well balanced. As Mike Jackson said earlier, we are looking forward in our ordering, but I think we are in pretty good shape. We're also in good shape on the '08 versus '09 mix, We're, I think, at 81, 82% 2009. So, we are in very good shape, and we just need some help on the credit side.

And the TARP funds that GMAC received, are you seeing any sign there or have they indeed not received those funds at this point?

If they have received the funds, we have not been the beneficiary. We still see a lot of challenges and credit, we've not seen any loosening of credit. We are hopeful and we move into February that there will be more, but we have not experienced any noticeable change.

One final question as it relates to the covenants, could you provide the fixed charge coverage ratio where you stand now?

Yes. We're in compliance with that. We don't provide details on it because the other ratios are tighter than the net ratio. But we can provide that to you.

Got it. Thank you.

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

Good morning, guys. Just wonder if you could talk about your exposure to GM and Chrysler, and your opinion of how that situation is going to shape up for your dealership specifically. And also, if you're seeing any opportunity here in the short run as some of those weaker dealers in those brands are dying off and if you see any conquest business on the new and used, maybe in parts and service business.

It's Mike Maroone. Let me talk about the changes in the market. Certainly, with the closing of some stores and the industry consolidation, I think there's some long- term benefit to it. Short- term benefit has really been outweighed by the macro economic factors that have depressed the industry, so I don't think we've seen a short run left on the variable side. Certainly, we've seen some on the fixed side of the business.

Then also, in, in the fixed business, in parts and service, we've been hearing that Chrysler is lowering labor rates on some of the warranty work. Is that something that is providing incremental pressure to the parts and service business? Is that something you are seeing from other automakers or is that very specific to Chrysler?

It's Mike Maroone, there's an ongoing effort in the industry to tighten some of those labor rate times. I don't think it's a material event at this point in time, but it is something we monitor, it definitely puts pressure on our (inaudible) and their income as well as our labor rate, but it's not material today.

Then just lastly, on acquisitions, it's a tough environment. I imagine there are a lot of dealers that may be looking to exit the business, do you see any opportunities as we chug through 2009 for enriching the mix of your portfolio or just opportunities in general?

I think there's opportunities with the domestics,but I don't see any big deal we'd want to do with domestics and pricing for the sellers of import and premium luxury is, they consider the currents market an aberration and a major dislocation and will not adjust prices considering the environment whatsoever. Which in principal, I have some understanding for, but I think the idea that we're not in a cyclical business, and you don't have to factor in bad years with good years in your pricing, is unrealistic. So I would say there's a gap in valuations between sellers and buyers, that I'm not sure it's going to be closed any time soon.

Great, thank you very much.

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

Thanks a lot, good morning. Just a couple follow ups on parts and service.. Can you discuss the mix between customer pay warranty and internal and also the relative profitability of each of those revenue trends?

It's Mike Maroone. The customer pay business is generally 50% or more of the total. I don't have an exact mix on warranty and internal, we can get back to you, but obviously that is the other 50%. The customer pays the area that we really focus on, both with our service merchandising and our service drive processes.

And in terms of the profitability of the different revenue trends?

I would say customer pay and warranty are equally profitable, and we price our internal that way too, so I would say the profitability is close.

So to the extent that you are down high single digits, in the aggregate, customer pay was down only 3%? I guess internal that would have been the bulk of the drag on your business?

Yes. Internal was down 26%.

And that would, I imagine, more or less parallel your new car sales?

It aligns very closely with vehicle sales primarily, it is prep income we pick up from manufacturers or internal labor from reconditioning our used vehicles.

And, Mike, to what degree is the customer pay revenue stream tied in the lagging way, if at all, to the SAR. Or new car trends? Does the stream of customers that you sign on or that you renew have any relationship over the years to the amount of follow up business you do, or do you find that's independent of that factor.

I don't think it's independent. We call them UIOs, or units in operation, and declining UIOs ultimately impact you on the warranty and the customer pay side, so we see trends by different brands and they really follow the industry trends. In many cases, lag two to three years.

One other question on the used car market. What are you seeing of late kind of real time in terms of the used car markets adjustment for pricing perspective? We obviously have some very, very steep price declines that we saw in the auction market in the fourth quarter. . You all kept your inventories very tight. At this point in time, is that market starting to stabilize or is the pricing still

It's clearly strengthened. It's more difficult to buy vehicles at the price levels we would like. We're specifically seeing some strength in the SUV side, some of GM and Ford's big SUVs are very desirable due to the drop in fuel prices that Mike Jackson talked about, so often. So overall, the market is a different market than we saw in November and early December, and that's why we're glad that we're lean and are able to respond to the changes.

Thank you so much.

Thanks Matt.

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

Good morning everyone. My first question is just a followup to the last one on used vehicle pricing. Given the strength, or the strengthening we're seeing in wholesale auctions with conversion ratios much higher, are you seeing-- do you feel like used vehicles have turned the corner and we are actually starting to see some strength in that market? And do you have any data on potentially people trading down from new to used? They went to buy new and got talked into buying a new car instead?

This is Mike Jackson. I think what happened over the past nine months, and certainly accelerated towards the end of '08, is used prices adjusted very quickly in the marketplace in a velocity of the business and the market conditions. Whereas new have lagged even though incentives have been changed somewhat. Meaning the price differential from a consumer point of view between used and new has widened since the consumer is very value oriented at the moment, they are saying I can get more vehicle for my money on the used side, why pay the premium on the new side. You have this transfer of new customers over (inaudible) customers.

This is Mike Maroone. It really shows up in the growth of the CPO business to have your certified pre-owned business being up 30% in, where the new vehicle market for us was down 40%. I think it just speaks to exactly what Mike Jackson just described.

Given that, do you feel like your inventories are aligned with where the market is right now? Your used day supply is low, obviously, the sales rate was much better than new, but does it make sense to shift farther in that direction and maybe stock up on used?

I certainly think coming into the spring market, we are aggressively pursuing trade ins, and we definitely want to build those inventories, but we are being very prudent. We want to be able to take advantage of the things that Mike Jackson just described, and that's the real short-term adjustments in the market so I'm comfortable where we are, but we certainly will be looking to build the inventories prudently.

My next question is for Mike Jackson. Just wondering on TALF and I guess TARP and maybe the stimulus package, is there something in there that you think really gets the asset backed securities markets going, or do you think more is needed to recharge that market?

I think really the whole ballgame itself is something that's going to make a difference. Clearly, the banks need to continue to be stabilized, and they will do that, but I don't see banks opening up without someplace to securitize the loans, and the idea that the private (inaudible) back to life-- it's not going to happen in foreseeable future. The TALF is really it, and if Federal Reserve executes it well, you could really see a difference in the business. If we have a 40% decline in our new vehicle sales with a 20% decline in traffic, the other-- doubling of that decline is the lack of normal credit I don't call it loose credit, I meant the lack of normal credit for very good customers. So I don't care what you do with stimulus, new products, pricing, incentives, marketing, to simply drive more traffic when there's not credit available for the traffic, makes no sense.

You have to fix the credit first and then go from there. So we could have a lift in the selling rate of 10, 15, 20% in a very short period of time if we could get some level of normal credit. So the key moment is in February and how well the Federal Reserve executes that and whether they do it in a meaningful way. If that doesn't happen, and we still don't have credit in March, then, of course, people become more discouraged, there's more layoffs, unemployment goes higher, and it becomes a self fulfilling downward spiral at a certain point, triggered by the lack of credit. So I see a tipping point here in the first quarter in February with TALF, and we're going to be watching it very closely.

That's helpful. My last question for Mike Short, on capital expenditures, the $90 million is a bit higher than some of your peers. Obviously you're all different sizes, but is there a downside potential to that number, and how much-- what's in there other than maintenance, are there specific projects in that number?

There are some expenditures associated with some land purchases, and M&A capital associated with those specific dealerships that we bought, so if you pull those out, we'd be a done A, a reconciliation of for example the full year number of 117 would get you down to-- excluding all those items., If you were to do that, on our 2009 callout, we would be more like in the 75- ish range on that basis.

Great, very helpful. Thank you.

Thank you. Mr. Rich Kwas with Wachovia your line is open.

HI, good morning. On-- just following up on that question, Matt;s question, with CapEx, is 75 a number, how much more leeway do you have to cut that?

We think that's pretty skinny. We worked really hard to get to that level. It would depend on the conditions and what was demanding. We think that's a fairly skinny number as it is right now.

Okay. Okay. And Mike Jackson or Mike Maroone, F&I per unit declined year over year. Do you think the current run rate on a PVR basis is the way to-- what your budgeting for the business, or you think there's more potential for it to come down?

I don't think--it's Mike Maroone, I don't think we're concerned that it's going to go down a lot further. I think we think there's opportunities on the upside. It's really about credit tightening and lender advances, and I think with the anticipation that the TALF money will help loosen the credit markets, I think there could be some upside. What we really work hard on is our product penetration, 'cause that's in our control. Lender advances at this point are not in our control. We've also got slightly higher charge-backs year over year, but the big issue really is credit availability, lender advances, lender conditions on the loans that are being approved.

Do you think the market is fully adjusts to lower LTD ratios? Have consumers adjusted? Is this all the way through? Do you think there's more to go on the bank side-- just going to have to adjust further..

I think the banks are more informed than ever before, and they are very careful about what they do and got a lot of data at their hands in order to figure out how much to advance.

Okay. On the (inaudible) incremental 100 million, on the SG&A, two quarters ago you broke out the buckets where you were taking it out. Can you provide detail on the buckets you going to take this incremental 100 million?

Sure, Rich, If you look at a fe hundred all in, I'm not splitting it between which is and which bucket, but if you look at the 200 al in, we think about 45% is coming from compensation, about 25% from advertising, and 30% from other SG&A, and again, all of those, we are targeting the structural elements behind each of those, and so when you hear about an advertising reduction, those are, less about reducing working media and more about being effective (inaudible) our ability to take share in spite of their reductions.

Okay. Finally, Mike Jackson, on the dealer consolidation with the Detroit Three, GM has provided a fair amount of disclosure regarding what their plans are by 2012. What's your sense do you think there's more, it seems like there's more to go if they are trying to get to a group level of some of the imports. What's your sense of it, do you think there's going to be incremental on that?

I think it's an historic opportunity for consolidation that should not be missed. You have the unique combination of the dramatic decline in volume with a credit restraint for small business, and usually, the finance companies-- automotive finance companies bridge their dealers through periods like this, whether wisely or unwisely, and they are not in a position to do it. Whether they will take full advantage of the opportunity, I don't know. One of the things that they have to deal with is they have to repurchase parts and inventory every time a dealer closes: That's still a burden for them, even though there's no other cost involved in closing the stores. I think it's a stark opportunity, I urge them to take full advantage of it. Whether they will, or won't , we'll have to

Okay. Great. Thank you.

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

Thank you. Can you just comment a little bit about your cash flow generation in the quarter? Like how much came? I would assume a lot came from working capital? Was that mostly from liquidation from accounts receivable? Or was there any impact from-- I know there was a charge related to tax adjustment.

Quite a bit of it came -- We have no break out the elements of it specifically, but quite a bit of it came from a number of efforts around the accounts receivable, around our contracts in transit management getting the days down. Significantly, a big component of it, managing our used inventory and import vehicles. Mike Maroone and I teamed on an effort with our field associates and they really answered the call on all fronts. Those elements that generate that cash flow.

Is that, going into Q1, next year, is there any seasonality? Or is that rate sustainable? Should we continue to expect more working capital, or have we kind of reached --

In terms of the days and reduction of those efforts, I think that those are sustainable rates. obviously as the business begins to recover, you obviously expect us to begin to use working capital in those areas.

Okay.

Thank you. We have time for one more question

Thank you. Mr.Himanshu Patel of JP Morgan, your line is open

I just have a couple of followup questions. On the parts and service business, the-- I think you mentioned the domestic portion of customer pay was down more than the other portions. What is the split within customer pay? Between domestic, foreign and import?

It's Mike Maroone. I don't have those exact numbers. We can come back to you but my comment was I believe there was a $7 million reduction in customer pay overall, and I think $6 million of it came out of the domestic which goes back to that operation issue in addition to the consumer confidence. We can come back to you with that split.

Okay. Then last question, just housekeeping, can you give us the CPO business rates for the first three quarters? us the CPO business rates for the first three quarters? I think it was up 30% in Q4?

I can't give it to you off the top of my head, again, we can come back on a full year basis, I believe we were up 18%. I don't have the quarterly split.

Thank you.

Thank you for your time today. Very much appreciate it.

I'll be around the rest of the day to answer questions. Thank for joining us.

Thank you for participating in today's conference call. You may disconnect at this time.