AutoNation Inc (AN) 2010 Q1 法說會逐字稿

Thank you for standing by and welcome to AutoNation's first quarter earnings conference call.

(Operator Instructions).

Now I will turn the call over to your conference host, Ms. Cheryl Scully, Treasurer and Vice President of Investor Relations for AutoNation. Ma'am, you may begin

Good morning, everyone. And welcome to AutoNation's first quarter 2010 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 Chief Financial Officer. Following their remarks, we will open up the call for questions. Derek and I will also be available by phone to address any additional questions you may have. Before we begin let me read our brief statement regarding forward-looking comments, and the use of non-GAAP financial measures.

Certain statements and 0001information on this call will constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Thus 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 could differ materially are contained in our SEC filings. Certain non-GAAP financial measures, as defined under SEC rules, may be discussed on this call. Reconciliations are provided in our press release, which is available on our website at www.AutoNation.com. And with that, I'd now like to turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Good morning. Thank you for joining us. Today we reported first quarter EPS from continuing operations of $0.34, a 55% increase compared to adjusted EPS from continuing operations of $0.22 in the prior year, and 13% increase compared to the $0.30 on a GAAP basis. First quarter 2010 revenue totaled $2.8 billion, compared to $2.4 billion in the year ago period, an increase of 19%, and increased in all of our revenue categories. In the first quarter, total US industry new vehicle retail sales increased 15% based on CNW research data. In comparison, during the same period AutoNation's new vehicle unit sales increased 19%. Our new and used vehicle and finance and insurance revenues all increased 24%, and parts and service revenue was up slightly for the first time since the first quarter of 2008.

Going forward, there are three issues I'd like to address. The first is that we had two quarters of growth in all of AutoNation's regions, with significant year-over-year growth in our largest state of Florida, where we have 54 dealerships that represent 30% of our revenue in the first quarter of 2010. Florida was one of the initial states that saw a downturn beginning in 2007, and a collapse in the middle of 2008. We have now seen two straight quarters of growth in Florida. After increasing 15% in the fourth quarter of 2009, Florida revenue grew 29%, and new units saw a 27% increase in the first quarter of this year. The second issue is the recent recall by Toyota. We saw a no-sale period that lasted nearly all of February, and affected over 55% of our Toyota inventory.

In March, Toyota launched an incentive program who brought customers who had been waiting back into our Toyota dealerships. Toyota has continued to retain the trust of its customers. AutoNation new vehicle unit sales for Toyota in March were up 38%, and 6% for the first quarter. And third, we've begun to see the resurgence of domestic brands, especially at Ford and General Motors. Because of our balance brand port portfolio and the focus on the Ford and Chevy brands, AutoNation is well-positioned to benefit from the recovery of these manufacturers. I would now like to turn it over to our Chief Financial Officer, Mike Short

Thank you, Mike. Good morning, ladies and gentlemen. Let's turn to our financial results for the first quarter. As Mike mentioned, we reported net income from continuing operations of $58.4 million dollars, or $0.34 per share, versus $52.6 million dollars or $0.30 per share during the first quarter of 2009. Part of the (inaudible) results included the gain on senior note repurchases of $0.04 per share, a net gain on assets sales and dispositions of $0.03 per share, partially offset by property and other impairments. After giving the effect of these items, our adjusted EPS from last year's first quarter was $0.22 per share. Adjustments to net income are included in the reconciliations provided in our press release. Comparatively up, revenue increased $446 million or 19%, and gross profit improved by $54 million, or 12%. The SG&A increase of $23 million was primarily related to variable expenses, such as sales, commissions, increasing with higher sales volume and improved gross margin.

As a percentage of gross profit, SG&A was 73.6% That's a reduction of 360 basis points year-over-year, and down 280 basis points sequentially from the fourth quarter of 2009. As has been the case in previous quarters, net new vehicle floor plan continue to be a benefit, for the quarter it was a benefit of $3.3 million, an improvement of $2.5 million from the first quarter of last year. Non-vehicle interest expense was $9 million for the quarter, down from the $11.8 million we reported last year, due to our $76 million lower average debt balance and a decrease in LIBOR rates. The provision for income tax in the quarter was $37.6 million or 39.2%. During the quarter, we repurchased nearly 2.1 million shares for $37.2 million, an average price of $17.91 per share. Capital expenditures for the quarter were $14 million, and we invested $12.5 million related to acquisitions.

We remain within the limits of our financial covenants with a leverage ratio of 2.37 times at the end of the quarter. Our capitalization ratio measures floor plan debt, plus non-vehicle debt divided by total book capitalization. Floor plan debt was $1.427 billion at quarter end, up $46 million from December 31, 2009. As of March 31st, the capitalization ratio was 52.8%, well within the covenant requirement of 65%. The calculation of these covenants are included in the tables of our press release, and do not reflect any changes related to the financings we announced on March 31st. Our quarter end cash balance was $161 million, which, combined with our additional borrowing capacity, resulted in total liquidity of $447 million at the end of March, again, before taking into account the debt transactions announced on March 31st.

I'd like to spend a moment discussing our recent refinancing transactions. With debt maturity scheduled for 2012, 2013 and 2014, AutoNation has been monitoring market conditions to identify an opportune time to enhance its capital structure. In light of mere historic lows in the bond market, a vastly improved banking environment, and the potential for rate increases on the horizon, we decided now is the right time to go to market. We're very pleased with the result, and we believe the market recognized and rewarded AutoNation for managing through the downturn effectively, and positioning the Company to succeed during the recovery. Key accomplishments of the refinancing include, we extended our maturity by issuing 8 year bonds, and moved the extended credit facility maturity from 2012 to 2014. Next we improved our flexibility by increasing leverage ratio covenants, and eliminating the impact of any goodwill, franchise right, property and pyramids subsequent to January 2007 on the capitalization covenant.

Additionally, we were able to issue bonds with investment grade covenants reflecting the market's understanding of the quality of our balance sheet. Thirdly, we achieved improved liquidity from less restrictive covenants, who provide additional access for revolver. Had we calculated our covenants on March 31st based on the revised agreement and our pro forma capital structure, our ratio would have been unchanged at 2.37 time, and the capitalization ratio would have been 40.4% . Additionally, we reduced our exposure to interest rate volatility, by increasing the fixed rate portion of our debt from 33% to 55%. And, finally, we achieved very attractive pricing. At 7% yield to maturity, our bonds were priced at one of the highest high-yield spreads to treasuries this year. Additionally, the increase in our term loan pricing from LIBOR plus 87.5 to LIBOR plus 225 is on favorable terms, relative to market. Remember that absent this transaction, the credit facility would have likely been refinanced prior to the middle of 2011 when it would of gone current.

It includes the table in our press release that provides a pro forma comparison of our previous and our new capital structures. Approximately $20 million before tax will be expensed in the second quarter of 2010 related to these transactions, including approximately $4 million for the write-off of certain unamortized debt issuance costs associated with the old notes and the prior credit agreement. So in summary, we are very pleased with the outcome of these transactions, as they've extended our debt maturities, increased our available liquidity, lowered our exposure to interest rate increases in the future, and provide us with additional flexibility to manage our business and optimize capital allocation in the future. Now let me turn you over to our President and Chief Operating Officer,

Thanks, Mike, and good morning. We're very pleased with our performance in the quarter. Customers were back in the market. Thanks to the tremendous efforts of our associates, we recorded impressive increases in revenue and gross profit dollars across the board, and delivered a strong operating margin of 4%. Our Q1 focus was on driving volume in all areas of our business, and we did just that, both the lighting customers as well as inn investing, reinvesting in the business. We're particularly encouraged by the performance of our Florida region stores, where store revenue increased 29% in the quarter, followed by our Texas region at plus 24%, our Central region at plus 21%, and our Western region at plus 12%. This marks two consecutive quarters of revenue growth across the enterprise.

During the period, we ramp ramped up our new and used vehicle inventories for the spring selling season, maintained our discipline cost structure, and continued to experience very low associate turn over. Relative to Toyota, I'll note that our Toyota stores continue to do a great job of addressing customer concerns related to the recall, and handling the high volume of recall-related business. On the sales side incentives offered by Toyota to attract new and returning customers worked. In fact, AutoNation had increases in both new and used vehicle volume for Toyota in the quarter, driven by an exceptionally strong March .

Turning the detailed results, I'll begin with our segment performance. In the quarter segment income, excluding corporate and other, increased $37 million, or 40% compared to a year ago. Segment income grew for all segments with sizeable gains coming from the domestic and import segments, which bore the brunt of the headwinds in the period a year ago. We saw strong performances from Nissan, Honda and Toyota in the import segment, and Ford and General Motors in the domestic segment. That floor plan benefited all segments.

As I continue, my comments will be on a same-store basis, unless noted otherwise. AutoNation retailed 45,000 new vehicles in the quarter, an increase of 19% compared to a year ago, and favorable to the CNW industry retail number of plus 15% . We were pleased to record new vehicle unit growth in each month of the quarter. First quarter new vehicle revenue increased $282 million or 24% to $1.5 billion on increased volume, and a slight shift in mix towards domestic and import vehicles. Year-over-year revenue per new vehicle increased 4%, with increases across all three segments, particularly premium luxury. At $103 million, new vehicle gross profit dollars rose 40%, or $30 million in the quarter. Gross profit for new vehicle retail was 2272, an increase of 18% or $347. Factors contributing to the increase were AutoNation's performance, relative to strong manufactured dealer incentives, the end of the production push system by manufacturers in the domestic segment, and our inventories being in great shape.

We have the right inventory, including the right mix, with prior year models comprising just 2% of our March ending inventory, compared to 7% a year ago. Same store new vehicle gross profit as a percent of revenue improved 80 basis points to 7%. In March 31st new vehicle day supply was 50 days for 37,800 units, compared to 65 days a year ago, and 54 days at December 31st. AutoNation retailed 37,700 used vehicles in the quarter, a unit volume increase of 12% compared to the period a year ago. Our used to new ratio was a solid 0.83 to 1. Retail used revenue was up 24% to $644 million driven by increased unit volume, as well as across-the-board increases in used vehicle pricing due to a tight supply of used inventory. Revenue per use vehicle retail increased $1600 or 10% to $17,100 dollars, as tight inventories and increased demand moved prices higher.

Specific to AutoNation, we experienced a shift in mix toward premium luxury, which has the highest average selling price of the three segments, as well as a 19% increase in certified preowned units, which have a higher average selling price compared to other used vehicles. Wholesale revenue increased $23 million or 35%, to $88 million as a result of increased volume and very strong wholesale prices in February and March . Same store used vehicle gross profit of $66 million reflected an increase of 6% with wholesale improvement of 1% being a contributing -- $1 million being a contributing factor. Gross profit for vehicle retail was $1680, was off $131 compared to the period a year ago, resulting, in part, from a keen focus on increasing volume through the use of software that enables us to price recently acquired inventory closer to market. Our target is to turn 75% of our used inventory in the first 30 days. This focus optimizes our inventory turn over, and minimizes wholesale loss.

I'll also note that the margin reduction was partially offset by strong gains in F&I PBR unused vehicles. Sequentially compared to Q4 2009, gross profit for used vehicle retail increased $195 or 13%, and gross profit as a percent of revenue improved 120 basis points. We also noted a 24% increase in appraisals, and a 42% increase in trade-ins acquired, compared to the period a year ago, due to continued emphasis on our appraisal process. In the quarter, we moved 5500 used vehicles from originating stores to a more optimal location relative to turn and PBR. We continue to experience good success at retail with this program. At March 31st ,our used vehicle day supply was 39 days.

For parts, service and collision compared to the quarter a year ago, same-store revenue of $538 million, a gross profit of $237 million, both grew 1%. Gross profit as a percent of revenue increased 10 basis points to 44.1%. Excluding Toyota, parts, service and collision revenue would have been flat, and gross profit would have been down just shy of 1%. Relative to gross profit in the quarter, we had a 1% increase in customer pay service gross, and a 23% increase in internal gross, which is driven by current period sales volume. Those increases substantially offset a 4% decline in warranty gross. When we normalized our warranty results for the Lexus recall in the period a year ago, and the Toyota recalls in this quarter, our warranty gross declined 12%.

The warranty decline continues as a result of improved vehicle quality and a declining service base, which we define as the trailing 5 years of our new and used unit sales. Over time as the industry continues its gradual recovery, the parts service collision business will benefit. In the meantime, growing customer pay service business and improving customer retention remain our priorities. Our aggressive approach to service marketing, as well as selling our Value Care Program on the service drive continue. In addition to ongoing training, we've launched a new initiative with our service associates to improve phone skills and appointment-setting capabilities. These efforts and others are aimed squarely at offsetting the impact of the declining service base.

Next, we had very strong quarter in finance and insurance with gross profit of vehicle retail of $1149, an $85 increase, or 8% versus a year ago. We attribute much of that growth to continued improvement of the automotive credit environment, and better execution at the store level. Gradual improvement in the economy also drove reduced F&I chargebacks as a percent of gross profit. In the quarter, there was an improvement in the credit environment compared to a year ago. We noted an increase in approval rates by the majority of the (inaudible), as well as the majority of our preferred bank lenders for prime and near-prime customers. For the higher segment of non-prime, credit recovery continues at a slower pace. The securitization environment continues to improve with spreads versus LIBOR remaining at the lowest levels since the fourth quarter of 2007. With consistent execution of our best practices and continued emphasis on opportunity stores, we expect the favorable F&I performance trends to continue.

Relative to our store portfolio in the quarter, we purchased two stores and gained one store through an add point for an increase of five franchises. We continue to actively pursue acquisition opportunity that meet our market brand criteria, as well as our return-on-investment thresholds. The combined annual revenue run rate for the added stores is $71 million. In the period we divested one store, and terminated another with a combined annual revenue run rate of $45 million.

At March 31st, our portfolio consisted of 204 stores and 249 franchises in 15 states. Finally, our associate productivity is increased, and our team is enthused as our retail selling environment has improved significantly. We're benefiting by leveraging our low-cost base and improved execution from intense training during the downturn. Our industry-leading margins reflect that work, and we are very grateful for the team's efforts. I'd like to thank our associates for their contributions to a strong quarter, as well as their commitment to delivering a superior buying and ownership experience for our customers. And with that I'll turn

Thanks, Mike. As we look at 2010, we believe that gradual improvement of new vehicle sales will continue. We still believe 2010 industry new unit vehicle sales will be in the range of 11.5 million units. With that, we'll open it up to questions.

(Operator Instructions).

Our first question is coming from John Murphy, Bank of America, Merrill Lynch. Your line is open.

Good morning, guys

Good morning, John

I wonder if you could talk about ups or showroom traffic, and where that --where that's going versus your ability to close. I mean, is the increase by both of those factors, or if you could just parse out the 19% increase in the quarter, and really where you see those two factors going?

Well, this is Mike Jackson. Overall, I would say the difference in credit environment this year versus a year ago is the main story. And the way to think about it is last year's number was a grow grotesque distortion of what was going on because of the complete lack of credit. In other words, we had more traffic than we had credit. And that always gave us confidence, that once credit normalized, the recovery would be underway. And, indeed, we see much more normal credit environment this year. Mike Maroone, why don't you call out some of the specifics.

John, on the traffic side our total visits -- and we define visits as walk-in traffic, plus what we call, Be Back traffic, was up about 3% , excuse me, 3% over a year ago, and up about 6% versus the fourth quarter. The other thing that we measure, of course, is our Ecom traffic, and that's up about 5% versus a year ago, and 11% versus the prior quarter, which I think emphasized Mike Jackson's point on a better credit environment, as well as the fact that we think we've got much better inventories. Our inventories are cleaner and better balanced and really reflect

That's very helpful. Then on parts and service, how much of the Toyota work do you think was done in the first quarter, and is there a lot more to be done in the second quarter?

In terms of the recalls, we've completed 58,000 recalls. And at the peak time, John, it was running at about 10,000 a week. It's now at about 2,000 a week. So it continues, and there's more recalls being released on lower-volume models every week or two, but it's at a very manageable level. And, frankly, it will allow us to get back to trying to grow our customer pay revenue in Toyota.

Great.

Impacted by the recalls.

That's great. And then lastly, just on the debt repurchase here, it looks like there's a little bit of the floaters still out there, and a little bit of the 7% notes. If those are taken out, are there any -- is there any place else in your credit agreements where there's a restricted payment basket? I'm just trying to understand, if you get those two completely taken out, if the RP is no longer an issue, and you would be much more free to buy back stock or increase dividends beyond sort of the growth in that traditional RP basket.

Yes, there is no other restrictive payments basket, John, and the restricted payments basket that used to be effective based on those older notes no longer exists. That's been changed.

So there is no basket, there is no restricted?

Even though there's a little bit of these guys out there.

Even if there is a little bit of those left.

Great.

We took out 50% of those notes, the restricted payments basket was eliminated.

The way to think about it is the leverage ratio, which is now the restriction, which is 3.25

Fantastic, thank you very much.

Our next question is coming from Rick Nelson, Stephens. Your line is open

Thank you. I'd like to follow up on John's question, and ask about capital allocation. You're sitting now on a big pile of cash. The business generates lots of free cash flow. How do you rate alternatives that are out there, acquisitions, stock buybacks, debt retirement?

Hi, Rick, how are you doing, it's Mike Short. I think that when we talked about this in the past, is that the first thing we look at is what we need to do to keep our stores front-line ready. What is the capital that our existing store portfolio requires, to make sure that we can maintain and grow our earnings base. Beyond that, we look at all other capital allocations decisions opportunistically, in terms of which generates the highest share holder return, whether that happens to be a, acquisition or share repurchases at that time, those are made solely based on levels of return. And I think as a result of this refinancing, we've expanded our flexibility, in order to be able to respond to opportunities as they are presented to us.

Thank you. Also I'm wondering if you can comment on how -- what you're seeing in April, how long you think the new vehicle sales incentives,Toyota and others, have stepped up incentives in March, how long do you see those continuing? And do you think we're going to see any pull-forward if A&D back off the incentive peddle?

This is Mike Jackson. I think if you look at our results, it gives you a lot of confidence that this is a real recovery, in that our new-vehicle revenue was up 24%, our unit volume for new vehicles was up 19%, our content per vehicle sold increased. And overall, in total manufacturer inn incentives are down from a year ago. I think that specific Toyota incentives to address their difficult period are appropriate. And I would also observe that their incentives are still significantly lower than the domestics. So when you see higher volume, higher content, higher front-end grosses for us, that's a real recovery . And I think there could be no question, there is some impact from Toyota's incentives, particularly for them, but I don't think it is going to be dramatic. And, when we made our forecast of 11,500,000 units for the year, that's what we thought was going to happen.

And now with the first quarter you look out and say, "Well, that's going to happen." So our level of confidence is much higher. And if there's any movement from month to month or quarter to quarter around incentives, so be it. But this is a real, genuine recovery. And, of course, I think the Florida figure of plus 29% is also meaningful, because people don't go out and spend $30,000 for a vehicle without feeling much better overall. So they -- even though the housing hasn't recovered in Florida, it is stabilized in the sense the unit sales are up and pricings have stopped going down. They feel more secure about their job. They know the worst of the unemployment is over. And when they come in, we have a much better credit environment for them. So we feel good about the year, and I think the incentives are very much on the tactical side of

Thank you. Also, to follow up on the regional impressive growth in Florida, if you could comment on some of the other regions, I guess in particular California, what's happening there?

Rick, it's Mike Maroone. As we said earlier, we're pleased that we got revenue growth in all regions. We have Florida up 29, we had our Central region up 21, Texas was up 24, and our Western region, that includes California, was up 12%. So we had double-digit growth in the quarter across all regions, and it's the second consecutive quarter that we've had growth in the regions

That's great. Thank you very much and good luck.

Thank you.

Our next question is coming from Matt Fassler, Goldman Sachs. Your line is open

Thanks a lot. Congratulations on the nice showing here. A couple of questions. First of all, the wholesale business looked terrific in terms of both volumes, and in particular, profitability. I know it's not a massive driver, but it was a standout relative to our expectations. Any color on what's helping to propel that, please?

Matt, it's Mike Maroone. Obviously, it's the overall tight inventory. There's a lot of demand for wholesale product. And our goal is to wholesale less, and retail more, and we're working really hard to do that. But overall, the market was just strong there. We've done a good job of managing our inventory. And, as we've mentioned in prior calls, we've begun to change our -- we have changed our risk profile, and are stocking more aggressively. And, again, trying to wholesale less, and again, we think we've made nice improvements in our used vehicle operation

Got it. A second question I guess for Mike Jackson, a little more philosophical, higher level, your forecast for the year, for the SAR looks quite prudent relative to what we're seeing. Who knows, perhaps, a bit conservative. Given the traffic declines that we had a year ago, and I look back and they're upwards of 20%, and we're only getting some of that back, what do you think that the triggers are going to be, to get the numbers back up, understanding that the growth has been quite solid off the press numbers. But as we think about the potential path, the 13 or 14 or 15 million, what do you think it is that consumers need to see, to get the behavior back where it had been?

Well, I think we've been pretty good at calling which way the market is going to go. And I would observe for us it's not an academic conversation. We act on this outlook. And the biggest factors that we look at are housing, I've been saying it for -- strongly since 2005 -- and to get back to 16 million, and to really get full stride in this recovery. You've just got to watch these housing figures closely. And when you see the combination of increased unit volume plus recover -- the beginning of valuations going up, and the resumption of new housing construction, which will be crucial for truck sales, that's what we are watching for, that is what we are waiting for. The employment situation, obviously and there it's not the unemployment number. We know the unemployment number is going to remain high. It could even go higher as people return to the workforce. It's simply that the total number of people employed is going up. The credit situation we've talked about at length, and in premium luxury, which is what has made the difference this year. And what we watch, is the equity market and the bond market, because the clientele is heavily invested there,

And how they feel about that determines whether they're willing to buy an expensive vehicle. And also in the premium luxury, the employment numbers, in the sense that many of them are entrepreneurs and small business people, and they really don't want to buy a new, expensive vehicle, when they're laying people off. As soon as they have to stop doing that, they told us they're going to return to the markets. So those are the big issues that we really watch state by state, and roll up and make a judgment call. We think they are all moving in the right direction. We call it recovery. I call it a fat V,in the sense that the collapse took 2 years, and I think we're looking at 3 to 4 years to get back to 16 million units.

However, I think the journey back is going to be very rewarding for the industry, in that it's a new business model at the manufacturer level, more about sustainability, profitability and viability. And so much cost, so much irrational behavior it's been squeezed out. I think the profit opportunity during the recovery period is significantly higher than it was on the downward spiral.

Got it. Thank you so much.

Our next question is coming from Michael Ward of Soleil. Your line is open.

Yes, good morning.

Hi, Michael

Two things. What are the percentages that those regions, Florida, Texas, and the West Coast, represent of your total?

Florida is about 30%. I think Texas is about 20, and California is probably in the 20 range as well. So I think the three of them together are around 70%

Wow. Okay. The second thing, when you mention your liquidity before you did the debt offering, what is it now? Is it as close to $1 billion? Is that about what it is?

It has -- it's improved a bit, Michael. And I'll get you a number on that here in a second. I'll come back to you on that one

We'll come back to that, Michael

Okay. And then just lastly, Mike, you've talked in the past about how you thought luxury was a good leading point for the rest of the overall market. Do you still feel that way? It looks like luxury now, this is two consecutive quarters where it's turned positive.

Yes, it has. And, indeed, I believe that. Luxury did not go down to the same extent that import or domestic volume went down, because that clientele had more choices around financing a car. So it did not go down as much, so it's not going to rebound off of such an extreme bottom. However, we had healthy recovery for two quarters in a row in premium luxury.

Thank you very much.

Our next question is coming from Rod Lache of Deutsche Bank. Your line is open.

Hey, guys, this is Dan Galatin for Rob this morning

Hey, Dan

Hey. I had a question on SG&A. You have guys have done an incredible job on cost. In the past you've talked about $200 million annualized reduction in fixed cost, and that 75% of that is permanent, which would imply that at some point there's going to be $50 million of costs coming back into the business. It's probably tough to answer with as big a business as you've got, but do you know -- has there been any of that cost that's come back in this quarter?

I would say some of it is. You know, you can't die cast each of these dollars, Rod, so it's a little bit, it's a little bit tough to dial each dollar. But the way to generally think about it, is if you look at our SG&A buckets, we're about -- and fixed and variable do divide classifications very cleanly. But directionally about half of our costs would be fixed. and about half of them would be variable. And our variable costs did, indeed, move in line with gross. Our fixed costs perform performed-- we were very well controlled during the quarter. That is as we had expected, but I would also say that that's not a given, that that will perform that way. And we continually thank and congratulate our store associates for their ongoing diligence on the cost front. But in terms of the specific answer to you, the $50 million. Yes, I do believe that some of that is beginning to come back in, as we said it would once volume came back 0030

Okay. Got it. Thanks. On parts and service, it's been awhile since we've seen a 44% plus gross margin. I missed some of the split out. Did Toyota help -- did Toyota recall repairs help the gross margin in the quarter? And also, as the internal part of the business becomes kind of a year-over-year positive, does that hurt or help gross margins?

In terms of Toyota, Toyota definitely helped overall. But even without Toyota, I think the business performed pretty well. The internal margins are generally a little bit less than our customer pay, so I think that that is internal increases, it does impact your overall margin percentage.

Okay. Thanks. And last one, on the used business it sounds like there's a lot of good things going on. Over the long term some of your competitors have talked about certain portions of the used business that may be permanently impaired or permanently gone. I'm talking about used subprime. Are you seeing any movement in that area of the used business? And I guess, over the long term, is there potential for the used business, maybe on a used sales per store, to get back to where it was historically? Or is there a part of that business that you think is permanently gone?

This is Mike Maroone. Again, I don't see the business being permanently gone. Certainly the subprime market is recovered at a slower pace than the, than the prime and near-prime financing. The availability of product out there is limited. But we've really put a lot of effort in defining unique ways to source product. And we're testing some different ideas, including some centralized buying teams because there's more online buying going on than ever before. I think there's a lot of opportunity in the used business. Our used to new ratio at 0.83 is one of the best performances we've had.

And we're really doing a good job of understanding what the market pricing is, and pricing the market, and trying to get quick turn, and trying to create less exposure as vehicles age. So I think there's opportunities. There's opportunity in the CPO business. There's opportunity in what we call the C-cars, which are the higher mileage cars. And I think it is about execution. It's about finding ways to corner supply. Thanks a lot for taking my questions. Your welcome.

Our next questioning is coming from Ravi Shanker, Morgan Stanley. Your line is open.

Thank you. Can you talk about the current inventory situation for new vehicles? We've heard of some of these incentives (inaudible) coming off, because of very low inventory for certain product, especially on import side, and 50 day supply for new. It sounds pretty low. Are we in danger of getting a post Cash-for-Clunkers situation where low inventory hurts SAR?

This is Mike Jackson. First, the industry is well on its way to making a transition from production push to customer pull. And Cash-for-Clunkers was crucial to clear the old inventories. And I would say the structure of the inventory is probably the best ever. And manufacturers react much faster to stop producing something that's not selling. And really try to configure vehicles the way they are selling. And that is probably the biggest change coming out of the big, disruptive period that we've been through. So, Mr. Maroone, you can talk about some of the specifics.

Ravi, I agree with Mike Jackson. There's a nice cadence of inventory. There's always a few models you're short of, but all in all our inventories are in really good shape. Each of the import inventories is in the 45 to 50 day range. The domestic inventories are in good shape, in the 60 to 70 range, premium luxury continues to be tight. We're especially tight on Mercedes and Lexus. I know Mercedes is ramping up their production in the second quarter. So I think, all in all, we're very pleased with our ability to manage inventory. We've added a lot of capability centrally to work with our stores to be sure we have the right inventory. We move a lot of inventory from store to store. But I don't see long-term, big shortages that are going to impact it. We really like the way we're performing now. As we mentioned in our call script, only 2% of our inventory right now are 2009 models. That's the best we've ever been. So, all in all, inventories are in good shape. And as far out as we can see, it looks like production is going to stay steady. And as Mike Jackson called out, doing a really nice job of reflecting consumer demand.

Mr. Short, would you want to update us on liquidity?

To get back to your question we noted in the script that 447 is where we were today. If you did it on a pro forma basis for new capital structure, it would be almost $700 million.

Got it. Thanks. On the used side, I mean, have you seen record high prices for used vehicles. And in the past, you said there's been an issue with passing that through completely to customers. Can you update, I mean, how things stand right now and what that means for the used vehicle margin in the near SAR?

If you look back at February and March, used car prices are all-time high at year-over-year comparison. We look to the Mannheim index there. We anticipate used inventory continuing to be tight. There's not as the as many vehicles coming off lease. The lease are carrying their vehicles longer. I think the inventories are going to continue to be tight. And that's why we're testing some new ideas as to how to acquire inventory, and how to create a competitive advantage on the used side .

But are people willing to pay for that? Are you able to pass through all of that higher pricing onto the consumer?

I wouldn't say we're able to pass through all of it. Certainly, there's some margin pressure. But if you look our margins have been pretty constant over the last three quarters. I think there's always more you can do when you have -- continue to improve our execution, but I think there's pressure. One of the things that really could put more pressure on is if new vehicle incentives increase. The good news is, that new vehicle incentives are actually down year-over-year, and appear to be stable at this point.

I would say it's -- the issue isn't the customer's willingness to pay, it's the bank's willingness to finance.

Right

It is the restrictions.

Got it. And, finally, the CapEx seemed a little low compared to what you indicated the full-year rate is going to be. Can you just talk about the puts and takes there, please?

Yes. Our expectation for the full-year is about $150 million, as we called out earlier. We have greenlit some projects. So we did get off to a sore start. People will spend that this year

So the full year number remains unchanged?

Right

Thank you so much

Our next question is from Matthew Nemer, Wells Fargo Securities. Your line is open

Good morning, everyone.

Good morning, Matt

Just I want to start with Florida, I thought the commentary was very interesting about the performance in that market. I'm assuming that there were some relatively comparisons. And I guess what I am wondering is which markets in your opinion have highest relative opportunity, whether that's back to actual peak, or maybe a more realistic peak?

I'm not sure I really understand the question.

If you look at the extreme downturn in certain markets, like Florida and California, does that essentially mean that those markets could be relative outperformers for the next few years, or do you think Texas and -- yes

That's what we're saying.

Okay. And then in the used market, you clearly went for volume, but your gross profit dollars, the growth lagged some of the other segments in the business. Are you -- do you feel like you're optimized in this segment? Or is there a chance you'll actually go back for some more margin to get the gross profit dollar growth higher?

Right now I would say, Matt, our focus is on volume. Certainly there's room for improvement in what we call the front-end gross. But if you look under the coverage, what you'll see is our F&I dollars have increased, as we move to a more expensive used product. We've got a higher percentage of certified preowned than before. So our total gross dollars, including F&I, were up about 9% on 12% increase in volume. The other piece is their internal gross, in parts and service has been positively impacted, as we've done more reconditioning and more CPO.

So if you put all of that gross together, we're performing, we think, at a pretty high level. Is there room for more on the front end side? I think there is some. And we'll continue to work at that. But our focus in the quarter was really to drive more top line growth, to turn our inventory quicker, and to wholesale less products. So yes, I think there's always a little more. You can never be satisfied. But if you put the whole package together, a front end gross, F&I gross, and recon gross, I think we did a really good job.

Great. That's helpful. And then on the Toyota recall, the mix of service work that you've done, related to the recall, can you give us any indication of how much is related to the sticky peddle, and how much is related to the more profitable pedal entrapment job?

I don't have all of that. but I will tell you that the pedal entrapment is less than the sticky pedal. The sticky pedal is more of the volume. It's probably double the volume of the pedal entrapment. And that's a relatively easy repair. So right now we are performing those at a much lower rate, a third of where they were at peak. And, actually, less than a third of where they were at peak. So I don't anticipate it's going to be a huge impact on our business going forward

This is Mike Jackson. The way to look at it is the sticky pedal just required the insertion of a shim. The shims were easy to make, and quickly, we had full availability on shims. So we really moved very fast through the sticky pedal. The pedal entrapment is a much more labor intensive, complex repair. And the number of units involved is much greater, and it's going to take quite some time to get through. Mike, what percent of pedal entrapment have we completed?

I think we've completed about 20% of the pedal entrapment, and about 45% of the sticky pedal. And that's of the total database, and that doesn't mean all of those customers are going to return. But to Mike's point, the pedal entrapment has moved at a slower pace, and they're releasing a model by model. We're now into the lower volume models.

So we might conclude that the, that profitability of this Toyota recall business could improve over the next few quarters, as you pick up some of the entrapment business, relative to the sticky pedal business?

Yes, it depends, it depends what customers do. And I'll go back to my manufacturing days. It's fascinating to watch behavior around these recalls. You have -- when a recall is announced, even on something like Toyota with all of the media coverage, you have about 5% to 10% of customers who absolutely, positively want to have it instantaneously, and then you have another 30% to 40% who are very open to come in, and schedule. And they'll come in on their scheduled appointment. And then the last 50% it's almost like a marketing campaign. And you can literally call people up and say, "This is it. You -- you must come in. It's life or death." And they'll say, "Yes, as soon as I finish my shopping. I'll call you, and schedule an appointment." So it's really hard to say how it plays out, and what the completion rate ultimately is. It's really a marketing campaign past 50%.

Got it. And then just, lastly, could you provide a little more detail on the acquisitions that you completed? I may have missed it if you put it out. I apologize. But where, what brands? And then is the $12.5 million primarily goodwill,so we could just kind of take a multiple, a blue sky multiple of that to the $71 million in revenue, to get a sense for what you're paying? Or is there some real estate in that number?

The $12.5 million is about a deal that we closed in January in Spokane, Washington that was a Honda and Acura store, that our separate facilities on the same site. Within that $12.5 million, there's a mixture of real estate and goodwill. I don't think we've ever in the past split that out. But there's a combination of those. Those stores happen to be a great fit for us because they're right across the street from a big complex we've had that's operated at a very successful level. The other add to our portfolio was an add point that was a multiple franchise add point in the Denver market.

Great. Thank you so much.

Our next question is coming from Himanshu Patel, JPMorgan Chase. Your line is open.

Hi, this is Ryan Brinkman for Himanshu Patel. I know you alluded to outlook for sequentially stable new vehicle incentives, but I was just wondering with the Toyota led increase in new vehicle incentives in March and April, how sustainable do you think your strong first quarter used vehicle ASP performances, as we progress into the rest of the year 2010?

This is Mike Maroone. I think it is sustainable. I mean, you've read both JDPower and others talking about April continues at a strong rate. We're right in our selling season, and May, June , July, August are very strong selling months. So I think the pace is sustainable. It will be interesting to see at the end of April how Toyota responds, and how the competitive manufacturers respond. But Mike Jackson has clearly called out that the incentives are down about 12% year-over-year, volumes is up, revenue on a per vehicle retail basis is up, and gross margins are up. So I think it really says it's a true recovery. It's not just

Great. I appreciate that. And then also, just lastly, do you have a view on April SAR that you can share? And what are leasing penetration rates looking like for the Detroit three versus where they were at the worst point, maybe in like fourth quarter 2008 or so?

I'm not smart enough to give you an April SAR, or maybe I am smart enough not to give you an April SAR. We don't call that by month. And the other question was?

Lease penetrations.

Mr. Maroone?

Leased penetrations for the domestics, and I really focus more on Ford and GM where we have bigger positions, are about 9% to 10% right now. And I say that's up from a minuscule level at GM, and I don't have the Ford number in my head. I know they're up, but they're not a major factor the way they are in premium luxury and, to a lesser degree in imports.

Okay. Thanks, guys. Great quarter

Thank you.

Thank you. Our next question is coming from Langan, UBS. Your line is open.

Oh, good morning.

Good morning

Could you give an update on your outlook for parts and services? I think the last quarter you said you expected it to be flat for the year. You're obviously up in the first quarter, and obviously benefiting from the Toyota recall. I mean, do you -- are you more bullish on that or are you still expecting to be flat for the year?

Colin, it's Mike Maroone. Wow anticipate that we're going to be flat for the year. And you have to work very hard to be flat, at a time that you've got tremendously improved quality and a decline unit in operation. So that the head wind is really on the warranty side, where the warranty numbers continue to drop for the reasons I just mentioned, with the benefits and the offset being the internal. So our focus really is on customer pay, and on customer retention. And we continue to test some very innovative ideas of how to retain our customers, and to make ourselves more convenient and more price efficient for our customers. But I think the overall outlook for the year, I think we stay with our outlook of flat.

Okay. And positives, I may have missed it, but what was the warranty and customer pay for the quarter?

The warranty was minus 4, the customer pay was plus . But we really believe you've got to take Toyota and Lexus out, because of some unusual comps, a year ago at Lexus, this year with Toyota. If you take Toyota out, our customer pay was up 2.2%, and our warranty was

We have time for one last question.

And our last question is coming from Brian Sponheimer, Gabelli. Your line is open

Hi, Brian.

Hi, good morning. I was wondering if you have metrics for FICA scores for your customers during the quarter?

We do. Mr. Maroone?

I actually don't.

We'll get those for you, Brian.

All right. I appreciate that. And then just very quickly going back to Florida, you're clearly coming off a fairly easy comp. Maybe you can just comment qualitatively, what drove the pickup in this, in this particular quarter, and whether housing is starting to play a role in the Florida market?

It's Mike Jackson. First and foremost, the credit environment, but that was everywhere. But absent that, nothing would have been able to improve. The housing situation in Florida is stabilizing. The downward spiral has been broken. Unit volume is increasing with stabilization around pricing. Everyone's come to terms with the fact, that it's going to be a long, long journey on the recovery of valuations. But people have have come to terms with that, and have adjusted to it. Now, we still have a long way to go because the downward spiral in Florida was dramatic. But, I've said it before, that I fundamentally believe that Florida will recover, and recover strongly. Also, something to keep in mind, is as the housing market improves in the rest of the country, it helps Florida. In other words, if people can't sell their homes and move to Florida, that's a problem.

And that's been the situation for the last couple of years. And the growth that you normally see in Florida was not able to occur, because people couldn't sell their home and move here. I think that is also going to change, and that will be a big help to Florida. And Florida is going to be more attractive than ever, when you look at the valuations here to attract people to move here. And, we still have great coastlines and sunshine . So I'm optimistic that the recovery in Florida is real, and Florida probably will be one of our leading markets going forward for quite some time.

Brian, the FICA score, I apologize, our team just came up with the number. Our average FICA score is 680. We will dig around and find a prior year's score, and get back to you today.

Thank you very much

You're welcome

Thank you, everyone, for your time today. Thank you.

This will conclude today's conference. All parties may disconnect at this time.