AutoNation Inc (AN) 2009 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.

will now turn the call over to AutoNation.

Thank you, Mary Ann and good morning, everyone. This is Derek Fiebig, Vice President of Investor Relations, and I'd like to welcome you to AutoNation's second quarter 2009 conference call. Leading our call today will be Mike Jackson, our Chairman and CEO, Mike Maroone, our President and Chief Operating Officer, and Mike Short, our CFO. At the end of their remarks, we'll open the call to questions. I'll be available by phones to address any follow-up questions you may have.

Before we begin, I want to remind you that during today's call we may make some forward-looking statements. 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 expectations. Additional discussions of factors that could cause actual results to differ materially are contained in our SEC filings. We also may use certain non-GAAP financial measures as defined under SEC rules, and reconciliations for those are provided in our press release which is available on our website at www.autonation.com. And with that, I'll turn the call over to Mike Jackson.

Thank you, good morning. Thank you for joining us. Today, we reported second quarter net income from continuing operations of $55 million or $0.31 per share compared to a year ago net income from continuing operations of $56 million or $0.31 per share. After adjusting for certain items that closed in our second quarter financial tables, net income from continuing operations for the 2009 second quarter was $51 million or $0.29 per share compared to $59 million or $0.33 per share in the prior year.

During the second quarter, US industry retail order sales declined 40% over prior year according to CNW Research. AutoNation new unit sales declined 38%. The industry is in the midst of a historically low new vehicle sales environment driven by the ongoing prolonged recession, rising unemployment, and the continuing credit crisis. This has resulted in the continued postponement by consumers of the purchase and servicing of vehicles. In spite of this, AutoNation delivered solid profitability in the second quarter.

The second quarter was a pivotal moment for the automotive industry. We saw three major events. First, the bankruptcy and government-lead restructuring of General Motors and Chrysler. These companies will now be in a stronger position to be profitable with lower cost structures, significant and long overdue dealer consolidation, and new labor agreements. We saw this shakeout coming over five years ago and developed a strategic plan that would reduce our exposure to the domestic manufacturers which as a percent of new vehicle sales has been reduced from 60% to 30%.

As the selling rate drastically declined in late 2008, starting with the economic Pearl Harbor caused by the bankruptcy of Lehman Brothers and precarious liability of domestic automakers, it became evident we chose to accelerate our final phase to close or sell domestic dealerships. These final steps, which in a normal course would have taken a couple of years to implement, were also accelerated by the consolidation implemented by General Motors and Chrysler.

We are well prepared for the moment and with the actions completed, we have addressed the strategic needs of our portfolio and position our business for increased profitability and operating strength going forward. We are satisfied with our brand mix and store portfolio, and we expect our divestitures going forward to be minimal. I do not anticipate much need for divestitures in the future.

Second, we saw a stabilization in the selling rate or SAR, which had declined significantly since the third quarter of 2005 and had not seen a sequential quarterly increase since the fourth quarter of 2007. Stabilization is a first important step toward a gradual recovery. And finally, we have seen a recovery of residual values in demand for trucks and SUV, which suffered declines during the rapid rise of gas prices over $4 in the summer of 2008. With much lower fuel prices than last summer, the industry also saw recovery of large vehicles in the quarter with used vehicles and SUVs showing a price recovery year-over-year of 25%. The price recovery has helped to stabilize the domestic business, which was disproportionately impacted by the higher gas prices in the prior year.

While today's economic uncertainty may compel potential buyers to put off their purchase decisions until a later date, their needs remain. Once consumers begin to sense that their own economic situation has stabilized, they will be ready to commit to purchasing big ticket items like motor vehicles. We expect to see a gradual recovery in the second half of 2009 and have seen a dramatic consumer response to 'cash for clunkers' which began officially on July 24th. Our traffic has surged sequentially 35%, and we expect a sequential lift of over 10% in new vehicle sales for the month of July. Customers responding to the program have better credit scores than our average customers. With that, I'd like to turn it over to Mike Short to provide more details on the financial results.

Thank you, Mike. Good morning, ladies and gentlemen. Turning to our financial results for the second quarter, as Mike mentioned. We reported income from continuing operations of $54.8 million or $0.31 per share. We had a net after-tax gain of $3.7 million on asset sales and dispositions which increased our EPS by $0.02 for the quarter. After adjusting for this item, net income was $51.1 million for the quarter or $0.29 per share. The adjustments to net income are included in the reconciliation provided in our press release.

Included in our adjusted results was a benefit during the quarter in our finance and insurance reserves, related to chargebacks, to reflect lower exposure in this area. The amount was about $5 million pre-tax. We continue to benefit from the $200 million cost reduction program that we implemented during 2008. SG&A as a percentage of gross profit improved for the second consecutive quarter and remains the lowest of the public dealers. It was down 110 basis points to 76.4% from first quarter's 77.5% and a decrease of 350 basis points to the 79.9% we experienced during the fourth quarter of last year. On a year-over-year basis, SG&A was reduced by nearly 20% to $364 million. However, it did increase as a percentage of gross profit, reflecting the deleveraging of our cost structure. Net new vehicle floor plan was a benefit of $2.9 million for the second quarter and an improvement of $3.7 million from last year. This improvement was the result of lower floor plan interest expense as we decreased our inventory levels and benefited from lower LIBOR rates. These were partially offset by a decrease in the floor plan assistance. Other non-vehicle interest expense was $10.5 million for the quarter, less than half of the $21.6 million we reported last year as a result of about $400 million lower average debt balances and a decrease in LIBOR rates.

The provision for income tax in the quarter was $32 million, or 37%, which was slightly favorable from our estimates. For the full year, we expect our ongoing rate to be about 39%, excluding the impact of any potential future tax adjustments. Mike described our portfolio optimization strategy and the acceleration of the sale or closure of a number of our domestic stores. I thought I'd spend a moment discussing how that activity has affected discontinued operations in our reported numbers. Discontinued operations reflects the results from stores that were sold or closed during the quarter as well as stores that we identified for the sale or closure in future periods. During the first half of this year, a total of 28 of our stores were added to discontinued operations. As of June 30th, we had either sold or closed 21 of these locations. Total revenue associated with discontinued operations was $105.5 million for the second quarter and $244.9 million for the first half of 2009. In total, our discontinued operations had pre-tax operating losses of $5.6 million during the second quarter, and we reported $18.1 million in largely non-cash, pre-tax losses related to the disposal of these assets. About half of the operational losses and about 85% of the transactional losses during the quarter were related to the stores included in the dealer consolidation announcements by Chrysler and General Motors which Mike Maroone will discuss.

For the first half of the year the operating losses associated with DiscOps were $6.6 million pre-tax, and we recorded $42.2 million of non-cash, pre-tax losses related to the disposal of these assets. During the first half of the year, we received more than $40 million of net cash proceeds, related to discontinued operations, which represents less than one half of our expected ultimate proceeds. We expect future quarters will have a minimal amount of activity.

Turning to cash flow and balance sheet items, during the second quarter our cash balances doubled to $128.9 million. We reduced our debt by $7.9 million during the quarter including the repurchase of $6 million worth of senior notes. We remain well within the limits of our financial covenants with a leverage ratio of 2.45 times at the end of the second quarter. This is up slightly from a ratio of 2.35 times at the end of the first quarter. However as you likely know, our indebtedness number is not on a net debt basis. If we had applied the cash on our balance sheet plus cash available from used inventory [pouring] at the end of the second quarter to reduce debt, we would have lowered the ratio to about 2.1 times. We also completed our annual goodwill impairment testing as of April 30th and determined that no goodwill impairment was needed. One franchise impairment for $1.5 million pre-tax was reported.

Our capitalization ratio which measures floor plan debt plus non-vehicle debt divided by total book capitalization was 51.2%. That compared with 54.9% at March 31st, and 59.7% at December 31st, and it covered its requirement of less than 65%. This ratio benefited from the reduction in our inventory levels which we discussed earlier. The calculation of these covenants are included from the tables of the press release.

Floor plan debt was $1.2 billion at June 30th, a sequential reduction of $300 million as we lowered our inventory during the quarter. You may recall that we announced last fall that we intended to reduce total debt by an additional $500 million. As of June 30th, we reduced debt by nearly $1 billion.

Our quarter-end cash balance combined with our additional borrowing capacity resulted in total liquidity of nearly $450 million at the end of June, which is ample cash and liquidity to invest in our business and stay well within our debt covenants. We reinvested $13.8 million in the business through capital expenditures during the second quarter. Excluding acquisition-related spending, land purchases for future sites, and lease buyouts, capital expenditures were $6.1 million for the quarter. We expect our full year 2009 unadjusted amount to be about $90 million. Now, let me turn you over to our President and Chief Operating Officer, Mike Maroone.

Thanks, Mike, and good morning. We are pleased to report an operating margin of 3.9% for the second quarter. This is a 20 basis point improvement compared to the period a year ago and leads the peer group. At 2%, our net income margin also leads the peer group and is double that of the closest public competitor. These results were achieved in an environment of very challenging industry conditions and the bankruptcy proceedings of Chrysler and General Motors. The key drivers of our solid profitability were highly disciplined management of our new vehicle inventory, and the entire organization being focused on maintaining and building upon the savings we've achieved relative to our low cost structure. We found the sequential improvement in industry light vehicle sales from the first quarter to the second quarter encouraging. We also view the 'cash for clunkers' program as a clear positive, even though it likely impacted our second quarter new vehicle volume as consumers were waiting program details in launch. The program got off to a brisk start. Our observations are that the majority of our 'cash for clunkers' volume is incremental. A larger percentage of the trade-ins are domestic and on the sales side, the majority are imports. In aggregate, credit scores for our 'cash for clunker' customer are better than normal, and the program has not negatively impacted our used vehicle business.

Turning to detailed results, I'll begin with our segment performance. At $93 million, our total segment income was off $21 million, or 19%, compared to the quarter a year ago. Imports were the greatest contributor of the decline follow by premium luxury and domestic. In the period a year ago, domestic segment was first to field the brunt of increasing gas prices. In the current quarter, the domestic segment fared better year-over-year as truck and SUV values rebounded, and lower gas prices resulted in higher demand for large vehicles. Also in May and June, we are successful at liquidating the inventory of our seven stores that were closed as the result of the Chrysler bankruptcy. I'll also note the General Motors approach to winding down affected stores is much more orderly and provides ample lead time.

Segment income as a percent of segment revenue increased for all segments compared to a year ago due to a shift in mix toward higher margin service and parts business and a reduction in OSGA expenses across all three segments. As I continue, my comments will be on a same store basis unless noted otherwise. According to CNW Research, the industry was down 40% in the quarter at retail. Our performance was moderately favorable with a decline in new vehicle sales of 38% in the quarter. It goes without saying that a volume decline of this magnitude impacted all areas of our business. However, on a gross profit per vehicle retail basis, we realized improvement in new vehicles, used vehicles, and finance and insurance. Revenue per new vehicle retailed was $31,000, an increase of $1,150 or 4%, compared to the period a year ago. As consumer preference shifted to larger vehicles due to lower gas prices. Gross profit per new vehicle retail increased $33, or 2%, to $1,987 per vehicle. Revenue per used vehicle retailed was $16,000, an increase of $350, or 2%. Gross profit per used vehicle retailed was $1,656, an increase of $5 compared to the period a year ago.

Finance and insurance gross profit per vehicle retailed at $1,148 increased $37 versus a year ago. And as Mike Short mentioned, our performance here benefited from favorable chargeback reserve adjustments due to reduced exposure. Without the adjustment, our F&I gross profit per vehicle retailed was $1,080, off $31 compared to the quarter a year ago, driven primarily by lower commissions on vehicle financing that was partially offset by solid F&I product sales.

In the quarter, we noted some improvement in the lending environment with many captives and bank lenders increasing prime and near prime volume and approval rates slightly. That being said, volume and approval rates remain substantially below the levels of a year ago. I'll note that subprime financing remains especially difficult and according to JD Power, leasing as a percent of total industry sales hit a 10-year low in the quarter.

Turning to inventory at June 30th with approximately 31,000 new units in inventory, our new vehicle day supply was 53 days compared to 60 days a year ago. This represents a year-over-year reduction of nearly 22,000 units, or 41% on our total store population. Sequentially compared to March 31st, we're down about 8,000 new units, or approximately 20%. We clearly managed our new vehicle inventory very conservatively and have benefited from a net floor plan credit as a result. We are now starting to increase our orders and are doing so with a two-pronged approach. First, based on core model needs, and second, in anticipation of sales volume increasing in the back half of the year. I'll note that we increased our mix of fuel efficient vehicles in preparation for 'cash for clunkers'.

Relative to used vehicle inventory at June 30th, our day supply was 35 days. A reduction of six days compared to a year ago. While appraisals and trade-ins were both down roughly 30% compared to a year ago, sequentially from Q1, we noticed a 10% increase in appraisals and a 20% increase in trade-ins. In the quarter, we moved 3,900 used vehicles from originating stores to more optimal locations with good success at retail. I'll also note that certified pre-owned sales represented 30% of our used volume in the quarter, compared to 23% a year ago.

At $533 million, same store revenue for service and parts was off 8% compared to a year ago as was gross profit at $234 million. Lower vehicle sales, declining units in operation, and improvements in quality are all factors. Once again, we're pleased with the resiliency of our customer pay business, where it performed at 98% of the prior year and grew 3% sequentially compared to the first quarter, which equated to 1.4% growth when adjusted for selling days. We continue to work on strengthening our customer pay business through our defined and measured service sales process and enhanced service marketing.

In the quarter, lower retail sales volume impacted internal sublet and warranty revenue. Internal and sublet was off roughly 25% compared to a year ago, and warranty, which was also impacted to a lesser extent by improved vehicle quality, declined 7%. Efforts to grow service customer retention include the sale of our value care program. We've been offering it on the service drive in addition to the F&I department since May of 2008 with growing success. In the quarter we sold a total of 43,000 of these prepaid maintenance programs with 24,000 of them being sold on the service drive. This is a key link to service growth and customer retention.

Turning to our store count at June 30th, our portfolio consisted of 210 stores and 264 franchises in 15 states. Related to the Chrysler bankruptcy, seven stores were closed in early June. We retained many of our best associates from these stores. And as I mentioned earlier, we were successful at liquidating the inventories of these stores in the very compressed time frame provided by Chrysler. Relative to the General Motors bankruptcy, three of our stores will not transition to the new Company. These stores are currently included in our portfolio count. When these stores are closed, AutoNation will operate 36 General Motors stores in 10 Chrysler stores.

In closing, we are operating successfully in what remains an unprecedented environment. Our net margins are strong, associate turnover is the lowest in the Company history, and customer satisfaction is extremely high. We are committed to the ongoing training of our associates because our work continues to emerge from this downturn as an even stronger Company. Finally I'd like to thank each of our associates for their efforts and dedication to delighting our customers. With that I'll turn the call back to Mike Jackson.

Thanks, Mike. The industry in the second quarter stabilized which is the first step to recovery. As we look at the rest of 2009, we believe the new vehicle market will improve. AutoNation will continue to focus on our cost structure while continuing to invest in our business. We are confident in our long-term business strategies and our markets. That concludes our remarks. Please open the call to questions, Operator.

(Operator Instructions) Our first question comes from Rick Nelson of Stephens.

Thank you, good morning.

Good morning, Rick.

Nice quarter. Can you talk about the sequential improvement that we saw in the new car margin? And whether or not you think that's sustainable given your own inventory reduction efforts as well as that of the industry?

This is Mike Jackson. I'll start first. I think what is truly remarkable, and at first is -- despite the precipitous decline in sales, the industry has cut production faster than the rate of decline of sales. And the industry has gone from an inventory of over 4 million units down to just over 2 million units,about 2.1. And you have to go back to 1975-1976 to find a comparable number. So the industry is really in a good position going forward. We have increased our forward orders by 45%. That's a combination of the fact that we like where we are in the production cycle. Meaning it's the beginning of a model year, inventories are low. There's going to be an improvement in sales. We don't know exactly when and how much, but it's definitely going to be an improvement. And it's safe to put in an aggressive forward order. But, I think the industry is going to keep the inventory in line. I think one of the big historic facts of the second quarter is the depth of production push, and it's all about sustainability, viability and profitability for both manufacturers, suppliers, and retailers. And I think there will be more opportunity on the front end growth side. And from an operational point of view, Mr. Maroone, why don't you talk about that?

Well Rick I believe that the liquidation of Chrysler and to a lesser extent GM product did impact the margin. So I think there is upside opportunity and very much support what Mike Jackson said. With the inventory showing the discipline in not having oversupply, I think there's opportunities to expand our margin. We're pleased with what we did in the quarter, and I think there's more opportunity there.

Do you think, in fact, you may have missed some sales opportunities with that 53 day supply?

I think the benefits outweighed what could have been missed. When we look at our market share, we think we performed well from a market share point of view. So I don't feel like we missed a lot. I'm sure we missed a few deals, but the benefit and floor plan year-over-year was about $4 million. So that impact was very positive for us.

Okay, thank you for that. Turning to the used car side, I see the gross per unit fell sequentially from first quarter to second quarter. Are you seeing any resistance there to the rise in prices?

Rick, I think the used car grosses are more normal to some of our prior periods. Certainly, we had a spike in Q1. And in Q2, we found rising used car prices, very limited availability, not enough trade-in. So I think there was a lot of competition to buy vehicles externally, and I think it had some impact on our margins although we're certainly not unhappy with the margins where they are.

And Rick, I would add I think the critical path on used car margins to a great extent is the financing and the banks, not necessarily the customer. The customer would be willing to sign a contract for more, but we can't get a bank to advance more. And that seems to be what we hit up against.

I got you. And finally, I can't let you off with some more commentary on 'cash for clunkers'. This talk of suspension of the program, and I guess the White House is re-thinking. What do you think the future is for 'cash for clunkers'? And what's really going on?

My sense is that the $1 billion was always viewed as a first traunch. To put it out there, see what the reaction is and what happens. With the possibilities ranging all the way from you get a surge of subprime traffic that you would look at and say, is that really healthy for the industry or not? And the reality has turned out to be that this is a genuine stimulus package that's brilliantly conceived. That is absolutely, positively spot-on. So I think there will be a considerable effort on the part of the Administration to marshall significantly more resources for 'cash for clunkers'. This is exactly what the stimulus programs are supposed to do. And really, you can't talk about the recovery in the US economy without the recovery of the American automobile industry. And this is certainly a stimulating factor, and it's driven traffic beyond just 'cash for clunkers' traffic. It's really been almost a permission sign that it's safe for people to come back in. And it's lifted volume beyond just clunkers. So it's full green on all lights. Obviously, there's concern they've gone through the first $1 billion too fast and whether there will be a pause while they get more money. Or they are able to keep it going without a pause is open to question. But my view is they're going to move heaven and earth to get more resources for 'cash for clunkers' because this is a stimulus program that is spot-on and is working perfectly.

And Mike, if it is upsized. Do you see it as a pull-forward program? And how do you see it affecting the used car business?

I do not view it as a pull-forward. It's certainly incremental. It's not sustainable incremental, but it certainly is incremental. In the traffic we're looking at, Rick, these are people who were in these cars and were going to stay in these cars forever. And the only reason they're coming in is because this program exists. So in that sense, it's truly incremental. And the overall business activity that it's generating -- this second factor of telling people -- hey, it's safe to go out and buy a car again. That is what will be sustainable. So it's really working as stimulus should. The other fascinating thing is, it has had no impact on the used car business. And that may seem counterintuitive. Except if you look at this customer -- this frugal, conservative customer that stays in this car so long. It is not really actively out there trading in the business day-to-day. It's really something new to the market. And you can only trade the clunker to get the incentive on a new vehicle. So it's a unique transaction that has -- at this point, is not affecting the rest of the business. And we saw no impact on our used vehicle business in July whatsoever.

Good to hear. Thank you, and good luck.

Thanks.

Our next question comes from Matthew Fassler of Goldman Sachs.

Thanks a lot. Good morning to you. Two questions. First of all, while we're on 'cash for clunkers', I know tha traffic is up 36%. Does a high proportion of the customers you find walking in incrementally actually have a clunker to sell you? Or is it just simply -- or in addition to that, stirring up general interest in the category? It's definitely both, Matt. It is people who have a clunker, people who think they have a clunker, and people who wish they had a clunker. To get a sequential 36% boost in traffic, and by the way, we're going to be very interested to see what happens this weekend. But the trend line is still upward. So we'll see where that goes, but it's really across-the-board in the volume mass market. There has been no lift in the luxury business from 'cash for clunkers', but for the volume market, it's -- people who have them, people who think they have them, and people would wish they have them. And the fascinating thing though is that even if they think they have one, and we inform them that they don't. They are not walking away. The conversation continues, and we have an excellent closing rate on what is quality traffic. And following up, if some brands, I guess, are getting less traffic from that presumably maybe the domestics and some of the lower end import brands, if you will might, be up more than 36% on a dealership by dealership basis. Would that be a fair read?

As far as traffic, it's pretty much who has -- the numbers by brand. We'll get that for you, but it's pretty much across the board.

Got it.

The majority of the trades are domestic trades, but if you think about it that's logical. Because if you go back 10-15 years, the domestic had 60%-70%-75% share, and these are vehicles with poor fuel economy. So domestic by definition. The majority of the purchases so far are, indeed, imports, but there's also excellent traffic at the domestic stores and incremental sales at the domestic stores. Oh, I've got the numbers. There's really no dramatic bandwidth there.

Got it. My second question relates to the financial model as you see volumes stabilize and then ultimately recover. Not 'cash for clunkers' kind of a spurt, but on a more sustainable basis. What do you think the proportion of gross profit that you can pass through would look like? What do you think the marginal expense rate is on the incremental new car sale given what you've done to your cost structure? If you think about SAR going from nine or 10 today up to something in the low to mid-teens over time?

Yes. This is Mike Short, Matt. I think one of the things you need to consider is as new vehicles grow in the overall mix of the business. You have got a margin. You have a mix difference, and that's relative to get in [fixed ops] which is obviously the more profitable side of the business. But in terms of the actual flow through on the new vehicles the 40%-50% plus what you get in F&I which is very high -- . So in other words, we would look at the new car gross, and take 40% or 50% allocated to marginal SG&A and the rest flows down? That's

That's great. Thank you so very much.

Our next question comes from John Murphy of Merrill Lynch.

Good morning.

Hi, John.

Mike, just looking at the inventory situation here. Obviously, we've gotten a lot of fat out of the system, and I think it's something you've been talking about for a long time that the industry just needs to take a one-step backwards and actually just cut production to get inventory in line. Obviously, it took the fear of God to get the automakers to do that. As things recover and we go forward, do you think that you, combined with everybody else in the industry, are going to be able to enforce that discipline as things get better? Or do they start overproducing once again as demand starts to recover -- that the fear of God is lost in their memories?

I think Dracula is in the coffin with a stake through the heart. And I'll tell you why. As far as GM and Chrysler, the only way they can pay back the federal government is through profitability and creating entity that the equity is worth something that can be sold. And that's going to have to be a very rational business model sell. And the underpinnings to get to that was a very painful restructuring that costs that have been sitting there for decades finally had to be dealt with. And these companies have really taken their breakeven points from a 16 million SAR down to a 10 million SAR with really agonizing pain. And so, it's all about the viability, profitability, and sustainability going forward. So this is really a pivotal, historic moment for the industry. And whereas in the past, the fixed costs were simply so high relative to marginal cost that they would always overproduce. And so, I think everybody is going to be -- everybody is committed to this. And I travel in the industry. Everybody sees it as a pivotal point. I look at the irrational players that were squeezed out in the shakeout even at retail. So this dramatic period of time has really crushed all irrational players. They really got killed. So I really see it as a different time. So what's going to happen going forward? I think you're going to see steps back from extreme incentives, and that's going to be something we have to manage. And how the customers are going to like that or not going to like that is going to be interesting. And whether we're able to improve our front end margins at the same time that incentives are being scaled back is a challenge to us. So it's not a cake walk, but I think it's a new world.

And final point on your comments here, Mike. You are operating -- it looks like 10 Chrysler stores after you had gone through the closures and 36 on the GM side. Obviously, you have more exposure to Ford which seems like it's a good thing. It seems like you are though looking at a bifurcation in those -- in what's going on in Detroit. It seems like you're giving more of an endorsement just based on your business mix to Ford than you are GM and Chrysler. Do you think that's going to continue? And that you may actually even further work down those Chrysler and GM stores going forward? Are you comfortable with what they've done so far? And their product offerings going forward? That those are stores you want to keep in the portfolio?

I think your statement is very insightful. And it's not coincidence. How's that? That's where we're at, and I have to emphasize with Ford, we are with Ford brand. And with GM, we're with Chevy brand. And if I look at the spectrum, you really have a different quality of traffic in a Ford showroom today than Chrysler all the way on the other end of the spectrum. And if I look at the product cadence, I think Ford has the best with the least disruption and Chrysler with the biggest technical challenge to execute on their product development. So I think that's a fair statement, and we'll see how it develops. But we are basically satisfied with our footprint, and don't foresee much dramatic change there. And I would say at the right price, I would definitely be interested in a Chevy or a Ford store. I think it's a new world. This moment has been decades in the coming. It's been here. I think the auto task force did a brilliant job in restructuring these companies and changing the industry and creating this new world, which we're happy to be in, by the way.

Then just lastly, you have been pretty good stewards of shareholder capital and generating it for a long time with a good record of actually returning it to shareholders through share buybacks. Obviously, there has been a pause in that here as the world has been turned upside down. How do you think about that going forward? Are there going to be more opportunities to start making acquisitions again that might drive higher shareholder value where you looking at debt pay down as a better way to return value? Or do you get back into the share buyback game here in the near-term?

So clearly, we were in a debt-defensive position for the past period of time. I think that was entirely appropriate, and I think we moved defensively early enough that we can manage through the challenges extremely well. I think you see the cash position that we have today which signals -- let's rethink. We're entering a new world, and we certainly are going to opportunistically consider acquisitions, debt repurchase, and share repurchase. And see where the opportunities develop that will bring the most shareholder value.

Okay, thank you very much.

(Operator Instructions) Our next question comes from Colin Langan of UBS.

Good morning. Can you give an update on your restructuring? How much of the $200 million is left? And I think in the past you've commented, but if you could just update us on how much of that will be variable, and how much of it is actually going to be fixed going forward?

Sure, Colin. It's Mike Short. We've accomplished the $200 million. And in fact, some of that -- we have actually grown that a little bit and some of that was transferred into stores that were put into discontinued operations. So we continue to build on it. But $200 million is the number that we're at right now. Of that, about 45% or so -- and that is coming out of compensation areas. About 30% of it is coming from what we call other SG&A. It's generally store-related expenses, like travel and meetings and things like that, and the balance is coming from advertising. In terms of the amount that is structural versus what we expect to come back as the market improves. What we called out in the past is about three fourths of it is structural, and I think we would stay with that number.

Okay. Even though ads and comp are a pretty big portion? When you say comp is that just from a lot of that just actual headcounts out of the system?

When you actually look at how much total SG&A is down. It's down by $400 million, and that was the number we called out in the past. So all we are really targeting in the $200 million that we've identified our initiatives that we put in place. So in terms of the comp number that we're calling out, that's largely through headcount reductions. Not just because volume is down, you're paying lower sales rates out. So the comp number that we're calling out is largely headcount driven, and that's why we consider it structural.

Okay, that makes sense. And then in terms of parts and services, what was the breakdown between customer pay and warranty?

Colin, it's Mike Maroone. In terms of the performance, the customer pay was down 2% on a revenue basis. Warranties down 7%. Internals down 24%. If you look at the weight of those businesses, customer pay is about 62% of the labor gross, warranty 22% and internal 16%. So the bulk is customer pay. The customer pay business is quite stable compared to the variable business. And we've got a lot of initiatives in place to drive that as we move forward.

So what is your outlook for parts and services, do you think you could continue to see some sequential, lower declines here?

Well I think as volume comes back you see the internal gross go up. You see the warranty gross go up, and I think you'll see some growth in the customer pay side. So I do think we've got an opportunity as the economy recovers and the industry recovers to grow that business.

Okay. And in terms of parts and services, it seems like a lot of your competitors were down year-over-year. I think you called out $5 million reserve adjustment there. Is that really why? Is it more flat when you take that adjustment out?

Colin, on a PBR basis, I think the number that Mike had called out was about $5 million within the adjustment. And when you pull that out that lowers the PBR. But that's in F&I, not parts and service. It's the finance and insurance number, and that is a result of year-to-year changes in our -- versus the prior period changes -- in our reserve, largely related to chargeback [adherence].

Okay, I'm sorry I must have misspoke. I meant F&I. Because a lot of your competitors -- that was down. When you take that out, it still looks about flattish. So is there a reason why you were doing so much better there?

We've always performed at a high level in F&I. Our emphasis has really been on product sales, and we have continued to have good product penetration offset a little bit by some rate pressure from lender conditions.

Okay, and then just one last one. Why aren't there any -- I expected charges related to the GM and Chrysler store closing. Are they all within discontinued ops? Is that why there are not special items for that?

That's correct, Colin. All that is put into discontinued operations with one or two exceptions, but your comment is correct.

Okay, alright. Thanks.

That was our final question, and I now turn the conference back to AutoNation.

Thank you for your question. Thank you for joining us today.

That concludes the call. I'll be around for the rest of the day to answer your questions. Thanks a lot.

This does conclude today's Conference Call. You may disconnect your phone at this time.