AutoNation Inc (AN) 2010 Q4 法說會逐字稿

Thank you for standing by and welcome to AutoNation's fourth quarter and full year 2010 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. I will now turn the call over to Ms. Cheryl Scully, Treasurer and Vice President of Investor Relations for AutoNation. Ma'am, you may begin.

Good morning and welcome to AutoNation's fourth quarter and full year 2010 earnings 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 to open up the call for questions. I will also be available by phone following the call to address any additional questions you may have.

Before we begin, let me read 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 the actual results of performance to differ materially from expectations. Additional discussions of factors that could cause actual results to 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 now, I'll turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Good morning. Thank you for joining us. Today we reported record adjusted EPS from continuing operations of $0.45 for the fourth quarter, a 55% increase on a per-share basis as compared to $0.29 for the same period in the prior year. Fourth quarter 2010 revenue totaled $3.2 billion compared to $2.8 billion in the year ago period, an increase of 16% driven primarily by stronger new vehicle revenue. In the fourth quarter, total US industry new vehicle retail sales increased 6% based on CNW Research data. In comparison, during the same period, AutoNation's new vehicle unit sales increased 15% or 12% on a same-store basis. For the full-year, adjusted EPS from continuing operations of $1.56 was a record, up 36% over prior year. Revenue for the full year was up 17% over prior year.

This morning we reported our January new vehicle retail sales which increased 24%, continuing to demonstrate that the auto industry recovery is solidly underway. The January seasonally adjusted annual rate was $12.6 million which was the highest since Lehman Brothers bankruptcy in September of '08 excluding cash for clunkers. We continue strength in Domestic sales which were up 40%, Imports increased 23%, and Premium Luxury was up 5%. During the downturn our aggressive cost reduction and asset management strategies resulted in a lower cost structure and more efficient inventory management. We continue to invest in our stores and in our shared service center where centralized our store level accounting and administrative activities. We also selectively added to our portfolio by acquiring several new stores including our announcement today that we've entered into an agreement to acquire one of the country's largest Toyota stores, Fort Myers Toyota on the west coast of Florida. AutoNation has an optimal brand and market mix that positions us for a strong performance in new vehicle sales as the market rebounds. We have been consistently demonstrating our ability to perform in what we expect to be a multi-year recovery in auto retail.

Thank you very much. Turning it over to Mr. Short.

Thanks, Mike, and good morning ladies and gentlemen. For the fourth quarter, we reported adjusted net income from continuing operations of $68 million or $0.45 per share versus $50 million or $0.29 per share during the fourth quarter of 2009, a 55% improvement on a per-share basis. During the third quarter of 2010 conference call, we mentioned that we expected to earn approximately $20 million in performance-based manufacture incentives over the next two to three quarters, primarily related to Premium Luxury vehicles previously sold. In Q4, operating income was favorably impacted by approximately $11.8 million due to the recognition of these incentives. We expect to recognize an additional favorable impact of approximately $9 million in operating income related to these incentives over the next two quarters.

Our fourth quarter 2009 results excluded a favorable tax adjustment of $12.7 million or $0.07 per share and there were no adjusting items in the fourth quarter of 2010. For the full year, our adjusted EPS was $1.56 as compared to $1.15 in the prior year. Adjustments to net income are included in the reconciliations provided in our press release. Fourth-quarter revenue increased $452.2 million or 16% compared to the prior year. Gross profit improved $71.4 million, or 15%, while SG&A was up $32.5 million or 9% for the quarter. SG&A as a percentage of gross profit was 72.1% for the quarter. This benefited from an improved gross profit due to the manufacture incentives previously mentioned. Excluding that impact, SG&A as percentage of gross profit would have been in line with third quarter of 2010 and approximately 240 basis points lower than Q4 prior year.

Net new vehicle floor plan was a benefit of $2.8 million for the quarter, a decrease of $1.5 million from the $4.3 million benefit in the fourth quarter of last year due primarily to higher average floor plan balances during the quarter. Non-vehicle interest expense was $16.3 million for the quarter, up from the $10.2 million we reported in the fourth quarter of 2009 due to our refinancing which closed in April 2010. Our percentage of fixed rate debt was 33% prior to issuance compared to 47% at the end of the fourth quarter. The refinancing also increased the pricing under our revolver and term loan facilities from LIBOR plus 87.5 basis points to LIBOR plus 225 basis points. During the quarter we paid down $30 million under our revolving credit facility, resulting in $180 million of outstanding borrowing on our revolver at the end of the fourth quarter. Our fourth-quarter non-vehicle debt balance was $1.349 billion, an increase of $236 million compared to the fourth quarter of 2009, but a decrease of $32 million compared with the third quarter of 2010. LIBOR rates were relatively flat compared with the fourth quarter of 2009.

The provision for income tax in the quarter was $41 million or 37.7%. This reflects the benefit of certain favorable tax adjustments. During the fourth quarter we repurchased approximately 731,000 shares or $17 million at an average price of $23.38. For the full year, we repurchased 26.6 million shares for $524 million at an average price of $19.70. We ended the fourth quarter with 148.4 million shares outstanding and $233 million of borrowed authorization remaining for future share repurchases. Capital expenditures for the quarter, excluding operating lease buyouts for $72.7 million resulting in full year 2010 capital expenditures of $150 million net of operating lease buyouts as we continue to invest in our facilities.

For 2011, we expect CapEx to be approximately $140 million excluding proceeds from related asset sales. Floor plan debt was approximately $1.9 billion at quarter end, up approximately $233 million from September 30, 2010 and in line with inventory levels.

Our balance sheet continues to be industry-leading and we remained well within the limits of our financial covenants. Our leverage ratio was 2.41 times at the end of the quarter compared to the limit of 3.25 times. Our quarter end cash balance was $95 million which combined with our additional borrowing capacity resulted in healthy total liquidity of over $550 million at the end of December. Our cash flow generation combined with our strong balance sheet and streamlined cost structure positioned the Company to continue to benefit from the improving SAR and to maximize the value of the Company and shareholder returns.

Let me now turn you over to our President and Chief Operating Officer, Mike Maroone.

Thanks, Mike, and good morning everyone. Our entire team is committed to outperforming the market as the economy recovers and in 2010 we did just that. We're very proud of our strong operating results for both the fourth quarter and the full year 2010 that netted an impressive 4.1% operating margin for the quarter and an industry-leading 4% operating margin for the full year. Our performance was achieved with elite levels of CSI, increased associate productivity, and the lowest associate turnover in the Company's history. In the quarter, we grew new vehicle unit volume 15% on a total store basis and 12% for same stores comparing favorably to the industry which according to CNW was up 6%. Performance was also impressive for used vehicles, where in the quarter we achieved growth of 21% for total stores and 19% for same stores. Contributing to the lift in volume was strong performances in our three largest states of California, Texas, and Florida where our brand mix, locations, and operating team's execution were a clear benefit.

Looking at segment performance, at $122 million total segment income for the fourth quarter grew 42% or $36 million compared to the period a year ago. Segment income for the Domestic segment increased $13 million or 55% to $37 million, Premium Luxury increased $17 million or 36% to $66 million, and Import segment income increased $5 million or 11% to $46 million. For the full year 2010, total segment income of $454 million was up $82 million or 22% compared to 2009 with year over year growth in all three segments. As I continue, my comments will be on a same-store basis unless noted otherwise.

In the fourth quarter, AutoNation retailed 52,000 new vehicles, an increase of 5,500 units or 12% compared to the period a year ago. The Domestic segment accounted for just over half of the unit increase, driven primarily by Ford where new units sold increased 30%. The Import segment accounted for about 40% of the new unit increase, and Premium Luxury accounted for the balance of the increase in volume. Gross profit for new vehicle retail increased $129 or 6% to $2,416 per vehicle compared to the period a year ago. Gross profit as a percentage of revenue increased 30 basis points to 7.2%. Excluding the special performance based manufacturer incentives, in the quarter gross profit for new vehicle retailed was $2,163 off $124 or 5% and gross profit as a percent of revenue was off 50 basis points to 6.4%. We attribute this primarily to year over year margin compression in the Import segment due in part to increased inventory compared to the post cash for clunkers period a year ago where Import inventory was depleted.

Sequentially from Q3 to Q4, again excluding the special performance-based manufacturer incentives, we were pleased to increase PVR by $168 or 8% with all three segments contributing to the growth. December 31, our new vehicle day supply was 63 days comparing favorably to the industry at 68 days and with 48,500 units, our year end inventory represented what we consider a more normalized level.

Turning to used vehicles, we delivered a strong 19% growth in used units retailed for both the quarter and the full year. Focusing on Q4, retail used vehicle revenue was up 22% on the sale of 38,000 used vehicles with revenue per vehicle up 2% to $17,500. Gross profit per vehicle retailed of $1,572 increased $80 or 5% with gross profit as a percent of revenue increasing 20 basis points compared to the period a year ago. Our used to new ratio in the quarter was 0.74 up from 0.70 a year ago. Ended December 31, our used vehicle day supply was 42 days.

I'd like to provide a quick update on our value vehicle outlets or VVOs where to address inventory -- to address industry supply constraints and meet market demand, we are retailing value priced vehicles that we would have traditionally wholesaled. In the fourth quarter, VVO sales accounted for 6% of our used vehicle volume and at an average selling price of $7,800. Today we have 19 VVO locations in operation with five more scheduled to open in the current quarter.

Our parts, service, and collision business drove growth in both revenue and gross profit in the quarter. Revenue of $546 million represented an increase of $32 million or 6% with customer pay revenue, warranty, and internal all contributing factors. We were very pleased to recognize a 4% increase in customer pay revenue compared to the period a year ago, our strongest performance in three years, as well as an 8% increase in warranty and a 19% increase in internal. Service, parts, and collision Q4 gross profit of $236 million increased $11 million or 5% compared to a year ago, driven by an 11% increase in warranty related to large-scale recalls that were announced earlier in the year, and a 13% increase in internal. Our F&I team turned in strong results with F&I gross profit per vehicle retailed of $1,164, an increase of $36 or 3% compared to a year ago. Our preferred lender network, OEM service contract alliance's strong product penetration and strong store level execution continue to drive our performance in F&I.

In the quarter, we relocated Mercedes-Benz of Miami, Mercedes-Benz of South Bay in Southern California, and BMW Mini of Dallas to brand new large facilities. We also opened Audi of Peoria, a flagship Audi store in [addpoint] in Peoria, Arizona. At December 31 our store portfolio was 206 stores and 242 franchises in 15 states. To reconcile to the count at the end of Q3, during the fourth quarter we divested one store with three franchises and terminated seven Pontiac franchises. These actions represented a combined annual revenue run rate of $77 million. And as you now know, we have an agreement to acquire Fort Myers Toyota on the west coast of Florida, the 35th largest Toyota store in the nation in 2010 ranked by new vehicle unit sales. We expect this transaction to be completed by the end of the first quarter and look forward to welcoming the store to AutoNation and our Florida region. I'd like to note that we have 16 major facility projects slated for completion this year. Six are new stores needed for additional points awarded to us by manufacturers and the remaining 10 will significantly upgrade existing stores or be Greenfield sites.

Looking ahead, we continue to seek acquisition opportunities that meet our market brand and return on investment criteria. In closing, we are very proud of our performance in 2010 and thank each of our 19,000 associates for their contributions. Our formula for success remains continuous improvement of our best practice processes, intense focus on retaining our low cost base, and investing in training and developing our people. We believe these efforts and our store portfolio position us well to take advantage of an improving market.

With that, I'll turn the call back to Mike Jackson.

Thanks, Mike. As we look at 2011, we believe that the gradual improvement in new vehicle sales will continue. A planning assumption for 2011, industry new vehicle unit sales is 12.8 million units and a retail selling rate of 10.2 million, both of which would represent 11% improvement over 2010.

With that, I'd be happy to take any questions.

(Operator Instructions)The first question is coming from Patrick Archambault, Goldman Sachs.

Hi, good morning.

Good morning, Patrick

A couple ones here, can you give us an overview of how the competitive environment is playing out in new -- you know your grosses there came in I guess ahead of our expectations, even -- and I guess, part of that was -- well, I don't know, actually maybe the incentives were probably in SG&A books so they might not have impacted grosses, but they seem to be pretty strong there nonetheless. And I know that in the past, you had talked about trying to take share in that environment which had compacted margins a little bit and it seemed like a number of other large dealers were following suit. How has that changed since last quarter? Has the behavior there become a little bit less aggressive on the discounting side?

This is Mike Jackson. If you look at our sales results, we definitely, in our big states, California, Texas, and Florida, where for the industry the retail increase was in low single-digit, we had double-digit increases. So we had an excellent performance from our stores on the volume side which we're very satisfied with. We told you, in the third quarter, that we would make an effort on the front-end margins. Mr. Maroone, report please.

Well if you exclude those special performance-based incentives, we increased our PVRs by $175 and it was a focus throughout the Company. It was a -- we really felt there was more opportunity in new vehicle margins, and frankly, we see the margins stabilizing going forward. So I think Q3 was a little bit of an aberration, but we drove the improvement in Q4 and I think going forward we'll see a stability in margins.

Okay, great. And I wanted to focus on parts and service. That was another area where you did better than I think a lot of expectations with that growth rate. Could you maybe just give us a little bit of a overview of how you expect those three sub-segments to trend on a go forward basis in 2011?

Patrick, again, it's Mike Maroone. We have put a lot of time, effort, and resources behind the customer pay and really feel that, that's the key. That's the one that's most in our control. So we had positive growth in the quarter, it's our best performance in three years, and I think going forward, I think we can expect to see somewhere between 3% and 5% revenue gross in customer pay -- revenue growth in customer pay. Internal, as you know, clearly moves with volume. In an improving market, I think you'll see continued strength there, hopefully double-digit strength. And the warranty is a bit of a wild card, because there was a fair amount of recalls especially on the Toyota Lexus side that were certainly an influence in the warranty, but we're not seeing that double-digit decline in warranty that we've seen in the past. So again, I don't that we can make predictions on what the recall environment is going to be like, so our effort is really focused on customer pay.

This is Mike Jackson. On recalls for the industry, there was about 20 million last year which was the third highest ever, the peak is 30 million recalls, second-highest is 25 million. So, a considerable level of recalls. I don't have any idea whether that level would repeat this year or not, and overall quality still gets better. Mr. Short, you wanted to add something?

Yes. Patrick, I just wanted to go back to your earlier question because it sounded like you had a question about where the incentives are booked. Those special incentives that we received from the manufacturers, the $20 million that we called out last quarter, the benefit of that is booked in gross profit. There is, when you do the ratio obviously, because gross profit goes up and there's not much expense associated with those incentive dollars. You do see a corresponding lift -- or improvement in the SG&A as percentage of gross.

Okay, great. Thank you very much, and congratulations on a good quarter.

Thank you.

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

Rick, good morning.

Thank you, good morning. Mike, congratulations as well and greetings from snowy Chicago. The industry sold 3 million actual units in the fourth quarter. AutoNation made up $0.45 in the fourth quarter. If we annualize both of those numbers, it implies a $1.80 and a 12 million unit environment. Is that the right way to look at earnings power or do we need to make adjustments for these incentives that came in the fourth quarter?

I think we've been clear very that the fourth quarter includes $0.05 of special additional incentives of which there is still another $0.03 to $0.04 to come in the first and second quarter, and then after that, there will be a normalized run rate on front-end gross along the lines of what Mr. Maroone called out.

Okay. Thank you, Mike. The OEMs are talking about higher commodity and other costs. If they raise prices to offset those higher costs, how do you see that playing out for the dealer?

I don't see it as a serious issue. We -- you know the consumer has demonstrated a willingness to pay for more content. So, and we don't hear anything from the manufacturers about significant precipitous price increases. To me, if I look at the year, the wild card is gasoline prices. If we have a spike in gasoline prices up above $4 a gallon, well I think the industry is better prepared this year to handle it than they were in '08. It's still something that is disruptive for a couple of months. And -- but I think inventories are so much lower and every manufacturer has fuel efficient vehicles, and I think the freak-out point for the customer is higher than it was in '08. I think we're better able to handle it, but I think to me, that's the wild card for the year, not pricing.

Thank you. Also, the used-car comps have been terrific. We're starting even -- anniversary some really tough comps a year ago. When do you see that customer switching from used to new and I guess how sustainable do you think that used car growth is?

Rick, it's Mike Maroone. I think that there's a portion of the customer base that moves from certified pre-owned to new. Today, certified pre-owned is about 30% of our mix, but there's strong demand on the used vehicle side. We haven't seen that fall off at all. The real issue on used is supply and we're working really hard on the supply side. We're very optimistic that we can continue to grow the used at least in line with the new, maybe more, and are very pleased with our value vehicle outlet, that's performing I think, at a high level and is incremental business to the Company. So I think there's still more opportunity in used, and we've got a great used car team that's working very hard at it.

Thanks so much and good luck.

Rick, this is Mike Short. I just wanted to follow up on your question on EPS. I -- I think clearly we as car dealers clearly believe that nothing happens until you sell a car, but I think it might be a little bit over simplistic to say that you can look at SAR number, extrapolate it out to what that necessarily means for EPS. Remember that our fixed operations gross profit represents half of the overall gross profit stream for the organization. So I would just probably -- I think you can get some rough ideas generally about that, but I would temper it with obviously the level of modeling that you typically do in a lot more detail.

Great. Thanks, Mike.

The next question is coming Matt Nemer, Wells Fargo. Your line is open.

Good morning, everyone.

Good morning, Matt.

My first question is I guess more of a housekeeping question, but can you just remind us what's different about this luxury incentive program versus a typical stair-step program, and should we expect that we might see more of these going forward or do you think this is truly a one timer? I'm trying to figure out whether we should take this out of the model or not.

Because it was a multi-year commitment, over a very extended period of time that had many performance hoops on it before you would earn the money and you didn't know for sure until you dotted every I and crossed every T, that indeed you would get it, therefore it couldn't be recognized even though it was over an extended period of time. And there are no manufacturer programs in place that mirror these programs at the moment, that I would sit here and say, well, if I look at 2012 this is going to occur again. So in that sense, I can't say we've got another one of these things in progress. So these programs are coming to their completion and they have not been reformulated by the manufacturers.

Okay. So typically, a stair-step program would, even though you may not know you're going to hit your target until the following quarter, you do accrue for that.

This is not stair-step. It's performance, other performance metrics, long list, no reason to take you through it. It's not stair-step, but it is retro in the sense that you have to achieve all of these performance targets and then you can receive the money that you've earned over an extended period of time.

Got it, okay. And then turning to the used vehicle business, should we expect that as the outlets become a more successful and as there are more of them out there, that you're at your average price per vehicle sold will go down a little bit and your gross profit per vehicle sold will also see some pressure, obviously offset by higher units?

Yes, Matt, it's Mike Maroone. I think that's correct. The average selling price of our VVO units in the $7,500 range. It probably has an impact of about $50 diminishment in our gross margin, but again we look at it as all incremental. And on top of the gross margin you see, there's reconditioning profits and there's finance profits. So we think they're an important part of the business, I think it's going to be a growing part of the business, and we'll see how far it goes, but so far, so good.

And then just lastly, I'm just wondering if you can comment on what you're seeing in terms of floor traffic that might be impacted or mix that might be impacted by higher crude, higher gas prices, and the weather that we're seeing around the country.

Nothing yet. If you look at January sales, no impact on truck vehicles whatsoever, even though we've had a 50% in -- $0.50 increase in the price of gasoline over the last 90, 120 days, breaking through $3 a gallon, we've seen no change in consumer behavior.

On the service side, first of all, we're primarily sun belt so we're probably less affected than some. We seem to catch up to sales side after the disruption. The service side, you do lose a couple of days here and there, but I don't think it's going to be a major impact in the quarter for us, and again, as a sun belt operator, we've been fairly immune to that, although we have been affected in a couple of markets.

Okay, great. Congrats on a great quarter.

Thank you. Sitting in Florida, it's 72 degrees. Watching the Weather Channel can make you feel very smart. I'm not saying you are smart, but it can make you feel smart.

Your next question is coming from John Murphy, Bank of America. Your line is open.

Well, Mike, sitting in New York, that's kind of a mean comment to us. We're sitting in a tough environment here, so I'm not feeling so smart sitting in looking at the snow outside. First question for you, on California, Florida, and Texas, you mentioned that you'd outperformed those markets, those are strong markets, but you also outperformed the markets. And we're seeing pretty strong grosses coming from you across the board on new vehicles. I'm just trying to understand how you're gaining market share and improving gross margins at the same time. Are we just finally seeing the benefits of consolidation in a dealer base coming through? Or is this just a much stronger fundamental level of demand that is allowing you to raise grosses? I'm trying to understand how those two factors are working in unison.

Yes, John, I would say first, as an overarching statement, and I said this before, but maybe now the significance of it is coming out. We were in a very defensive posture '05, '06, '07, '08. I mean we really were concerned that there was more downside than upside, and in that sense you had to manage everything assuming things were going to get worse. And then when they got worse you had to assume they were going to get even worse. So, that really changes how you approach the market. As soon as we saw that the worst was over, that would have been June of '09. We switched from defense to offense, where our risk profile changed on every category from inventory levels to marketing to initiatives. And that combined with throughout that period we always invested in our initiatives around process and technology, but if you combined the power of those initiatives now with a lean forward posture, you can see the payoff. So Mr. Maroone what would you like to add?

I just think that we've got a very experienced team out there, we've got great stability, and have really focused on execution. And I think Mike really said it, we continue to invest in people and technology in the downturn although we were conservative in certain parts of the business, and I think we're now seeing the payoff.

Now we don't always get it right if you look at the third quarter, we said we were unhappy with our front end gross and that we would address it. What the fourth quarter says is that when we give direction, we can achieve it at the store level. And we'll make these constant refinements as we go forward and see where the opportunity is in the marketplace, but by and large, we think we are going to outperform in the marketplace.

Okay. And then a second question, just trying to square two factors again, inventory levels seem to be fairly lean at this point. Yet there's been a lot of concern, in January the GMA have ramped up incentives and other auto makers may have ramped up incentives. And it sounds like Toyota is on the verge of ramping up incentives even further. I'm just trying to understand, are you seeing these incentives at the dealer level as really a net change or increase in incentive spending by the auto makers or are they just refocusing and re-shifting their old or their previous incentive dollars around and more effectively advertising those? Because it just seems odd that they're going to ramp up incentives with inventories so low.

You know John, it's door number two, you've got it right. We don't see anything significant in the marketplace that's different than fourth quarter or even different from a year ago. It's a constant refinement process, but there's no significant change in the level of incentives that we see at the store level. The only incentives that we think, and we always believe there will be incentives and tax incentives are fine, the only incentives that we dislike intensely are stair-step programs which create a lot of chaos and mistrust in the marketplace and really don't have a place in today's internet world where basically with stair-steps you're telling the customer, unless they shop to death, they might not find where the stair-step is hidden, and that has no place in today's marketplace. But other than that, I think the manufacturer incentives are pretty much in line and it's more a repackaging and re-communication than anything that's really changed significantly.

Got you, that's helpful. And then just lastly, these 16 major projects that you have underway, as we think about the six new stores ramping up and the 10 upgrades anniversary, I mean is this more a first half event, second half event, how should we think about it in the context of full year 2011?

John, it's Mike Maroone. It's really spread out over the full year. There's a lot of big projects, both [Fiat] stores, import stores, domestic stores, it goes right across the board and is spread throughout the year. So I think what it really says is that we're -- really believe in this business and we continue to invest aggressively and we hope invest in the right spots.

Great, thank you very much.

Thank you John.

Your next question is coming from Gary Balter, Credit Suisse. Your line is open.

Hi, Gary. Welcome to the call. You're not sitting in Boston are you?

It's actually [Simeon], I'm sitting in New York, but he's actually in an equally sunny spot I think.

I'm actually in San Diego, but I'll let Simeon ask the questions.

There you go. How you doing, Gary?

Doing fine, congratulations on the quarter.

Thank you. What can we answer for you?

One quick one, just following up on that incentive question. I was going to actually get your prognostication on whether you think that would maybe influence the manufacturers to maybe intensify some incentives in the next several months, which you kind of answered but wanted to hear your thoughts again.

You mean am I advocating for more incentives?

No, no, I don't think you'd have a problem advocating, but do you think GM's actions may spur some of the other manufacturers to --?

No, I really don't. I don't see GM throwing down the gauntlet. I would describe the GM improvement this way. GM launched some very exciting products in the last year and dramatically misjudged the demand-supply equation, so GM is trying not to overproduce and they dramatically underproduced the -- vis a vis the demand they created for the new products. Now the production is much more in line with demand and you're seeing that in their sales. And I view the incentives as tweaking nothing really that dramatic. Mr. Maroone, do you see it any different?

No, I see it the same way. I think it is they're just tactical tweaks, and we have a lot of confidence that they understand that the old push system in dead. And we don't have a lot of pressure to buy unwanted inventory. I think they found they right balance, and I don't think incentives will be a bigger part of the industry.

I meet on a regular basis with Alan Akerson, and Sergio, and this is the most remarkable thing I see at the top of these companies, there is a feeling of never again. These are smart, shrewd businessman that are in this to get a return on their capital and produce sustainable profits, and they know they have to produce vehicles that people actually want to buy for that to happen. So I am a completely convinced that this is a new business model and I assure you, when we see behavior that is not in alignment with that, we will speak out. And really the last legacy of production push is stair-step. It has no place in this new world. It unleashes the worst behavior. It's lose for the manufacturer, lose for the dealer, lose for the consumer, that's the last thing has to be stamped out. And it's ironic, Detroit is not the practitioner of stair-steps. There's a certain irony there. So, I think Detroit's in great shape.

And second -- thanks for that. And second on operating leverage, we spend a lot of time trying to figure out how much you'll get how much will drop to the bottom line. And I think the third quarter, it may have created some skepticism out there with regard to the aggressive stance and what that may mean for 2011. This quarter, clearly it's back. But I'm curious how you're measuring those returns. I guess it sounds like this quarter you're pleased with both the market share gain and the operating leverage that you got, but has -- are you going to get incrementally more aggressive, I guess depends on the market, but what is the posture there in general?

I think in terms of the overall cost structures, we did a lot of heavy lifting in the end of '07 and early '08 timeframe to take out the structural costs. We continue to invest in productivity enhancing initiatives, our shared service center being probably the best example of that. And we're going to continue to do that. So over time we look for continued operating leverage in the organization -- in the business. We had an SG&A as percentage of gross profit below 70% at one point in the past and there's a goal for us out there in the future.

Okay thanks.

We have time for one last question.

The last question is coming from Ravi Shanker of Morgan Stanley. Your line is open.

Thanks guys. Just a quick question on the SG&A. It looks like seasonally you have a pretty big spike in SG&A gross in Q4, and this quarter, even if you adjust for the incentive accruals, it was flat, up slightly. Can you help me understand what's going on there, was it just a Q3 being unusually high or was it just the profitability in Q4 being better or do you have any programs going on right now?

So Ravi, just to make sure I communicated the numbers correctly, the SG&A as percentage of gross for the quarter was 72.1% which is a significant improvement versus what we had seen in the past. And when you extract out the manufacturer incentive that we discussed, that number is in line with where we were last quarter. So, I don't see the type of erosion that you described and again --

No, that's exactly my point, that typically in previous years and in Q4, your SG&A to gross goes up versus Q3, when it did not this quarter. So, I'm just wondering if there's something fundamentally in the efficiency in the SG&A or if it's something with your timing versus Q3?

Well, I point to the comment I made to Simeon about the continued focus on productivity initiative improvements, it's just part of the DNA here. And we'll continue to see that play out over the next several quarters.

Okay. And can you give us a little more color on the geographic breakup of what you're seeing in the east region and where you think California and Florida are in terms of the recovery?

It's Mike Maroone. We're seeing strength across the country on a full year basis. Texas, we're up about 13%; California, we're up 10-ish; Florida, up 13%; Colorado up 16%. Still feeling some pressure in Arizona and Nevada, but our key markets really have started to come back. Certainly there's a long way to go back especially with the housing and unemployment situations, but we are seeing the markets recover and we're seeing more consistency across markets than we've seen in the past two or three years.

Do you think those markets are at a point where they are growing faster than the rest of the country at this point?

They seem to be growing about in line with the country, roughly.

Okay.

I think the most important thing is we continue to outperform, as Mike Jackson called out, we continue to outperform in our big markets of California, Texas, and Florida.

Got it. And finally, any thoughts on credit availability, what it's like out there? And in the last quarter we've seen some activity in terms of (Inaudible) and there's some talk about Allied. So, anything you see out there that may spur sales?

This is Mike Jackson. As an overview, the underpinnings of the results for last year were very much credit related and the healing of credit, particularly in near prime and prime. Except for the level of down payment, they're just about normalized. We expect the underpinning of the recovery this year to be credit improvement and subprime in leasing, as well as those customers in near prime and prime having saved up their down payments, since they can't use home equity anymore, but all that's going to come along. And then we'll need, for 2012 and 2013, a stronger employment story and a stronger housing story, both of which I believe will unfold this year but that remains to be seen. Mr. Maroone, anything you want to add?

No, I think you covered it well. I think, as we look forward, leasing and non-prime are going to be our higher growth opportunities and we're seeing some progress in both of those right now.

Very good. Thanks, guys. Great quarter.

Thank you everyone for joining us today. We very much appreciate it. All the best.

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