Group 1 Automotive Inc (GPI) 2008 Q4 法說會逐字稿

Good morning ladies and gentleman, and welcome to the Group 1 Automotive Incorporation, fourth quarter 2008, earnings results call. Today's conference is being recorded.

Now, I'd like to turn the conference over to Mr. Pete DeLongchamps, Vice President of Manufacturer Relations. Please go ahead.

Thank you, [Jennifer] and good morning everyone and welcome to Group 1 Automotives' 2008 fourth quarter conference call. Before we begin, I would like to make some brief remarks about forward-looking statement and the use of non-GAAP financial measures. Except for historical information mentioned during the conference call, statements made by the management of Group 1 Automotive are forward-looking statements that made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve both known and unknown risks and uncertainties which may cause the Company's actual results in future periods to differ materially from forecasted results.

Those risks include but are not limited to risks associated with pricing, volume, and the conditions of market. Those and other risks are described in the Company's filings with the Securities & Exchange Commission over the last twelve months. Copies of these filings are available from both the SEC and the Company. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, the Company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on its website.

I would now like to turn the call over to our President and CEO, Mr. Earl Hesterberg. Earl?

Thank you, Pete, and good morning, everyone. After I cover what we observed during the fourth quarter, I will turn the call over to our CFO, John Rickel, who will provide details on Group 1's financial results including the asset impairment charges recorded for the quarter. Then I will address guidance and open up the call for questions

First let me begin by telling you what we observed during the last three months of 2008. As we reported on our third quarter earnings call we were hesitant to predict where sales were headed in the fourth quarter. We knew things were significantly worse starting with the Lehman Brothers bankruptcy in mid-September but hoped that similar to the earlier financial blow-ups, this would be a somewhat temporary reaction. By the end of October we realized that the quarter was in a much deeper decline than we had anticipated. Seasonally adjusted selling rates for October, November and December were each down more than 35% for the industry on a whole. Looking back at history in prior recessions, we don't believe anyone could have realistically predicted the rapid decline to the levels we saw in the fourth quarter.

As the extent of the declines became clear it led us to revisit the $35 million cost-cutting measures we began implementing in October. In doing so we determined that had we needed to cut costs more aggressively and on January 14th we announce that had we were putting additional measures in place that would reduce our 2009 SG&A expenses by a total of $100 million from 2008 levels. These actions include pay reductions for everyone in our corporate office, as well as our regional Vice Presidents and our Board of Directors. We have defined plans in place to achieve these savings and are making good progress on implementing them. I will let John update you on the details of the additional cost-cutting measures we're taking.

None of us are enjoying what we have to do, but all of us realize these actions are necessary and it will take the efforts of the entire organization to successfully manage through this challenging environment. The biggest issue continuing to impact us is reduced traffic in our dealerships. As consumers are faced with uncertainty regarding the country's financial situation, concerns about their own employment security, and significant wealth reductions in the form of lower 401(k) balances, and reductions in the value of their homes, it is no surprise that consumer confidence has dropped to historical lows and that customers are staying away from auto dealer show rooms.

This sharp fall off in vehicle demand coupled with a shift in customer preference back towards truck from small cars and hybrids as gas prices rapidly fell, left most dealers in the country with too much inventory in total as well as an imbalance or too few trucks and too many cars. The result was margin pressure across the board as dealers every where scrambled to unload and rebalance both new and used inventory. Although used vehicle inventories have adjusted it is likely to take most of the first quarter for new vehicle inventories to adjust to current market conditions. Additionally, both new and used vehicle sales continue to be hampered by the restrictive practices of captive and independent auto retail lenders.

46% of our new vehicle unit sales were trucks in the fourth quarter up from 44% in the third quarter and down slightly from 47% in the fourth quarter of 2007. Our Parts and Service business remains solid. Same store revenues fell 2.4%, and gross margin contracted 100 basis points, but this business remains stable. The revenue decrease was a result of the declines in our wholesale parts and domestic brand customer pay business. However, our warranty business was up for the quarter and our collision repair business grew significantly. The profits earned from this segment cover approximately 75% to 85% of the Company's total fixed costs and certainly support the business model during the present challenging new vehicle selling environment.

Over half of our capital expenditures in 2008 were put towards either new or expanded service or collision centers. These facility actions include the new Beverly Hills Mercedes Benz and [Follsom] Lake Toyota service centers and expanded collision centers in Houston and New Orleans. The finance and insurance business continues to be a major profit contributor, but has been impacted by sales volume declines and more restricted lending practices. Due to sales declines same store F&I revenues were down 32%. Gross profit per unit decreased $96 to $1,014 per retail unit, due to a reserve for potential chargebacks from credit life insurance vendors as well as lower finance penetration and reduced amounts financed for contract.

Now let's turn to inventories. Inventory management in this environment was very challenging. In the second quarter of 2008 we saw a shift in customer preference from trucks to fuel efficient cars. But in the fourth quarter we saw a shift back to trucks. As a result Group 1's truck inventory levels improved during the quarter. However, we're now heavy in new car inventory. At the end of the fourth quarter we had approximately 23,000 new vehicles our lots, valued at $692.7 million. We have reduced our new vehicle orders in the first quarter of 2009 and anticipate reducing new vehicle inventory by $150 million by the end of the first quarter.

On the flip side, as lower gas prices spurred truck sales are supply of used vehicles at quarter end stood at 25-day supply with trucks a bit lower than usual. We are sourcing used vehicles both internally and externally to bring the inventory closer to the targeted 37 day supply. Turning to fourth quarter brand mix, Honda, BMW and Mercedes Benz all increased their share of our new vehicle units sales from the prior year period. Toyota Scion and Lexus accounted for 36% of our sales followed by Honda Accura with 13% and Nissan with 11%. Ford came in fourth at 10% with BMW right behind it. Rounding out the mix was Mercedes Benz with 7%, Chrysler at 6%, and GM accounting for 4% of new vehicle unit sales. Luxury brand sales grew 360 basis points from the prior year period to account for 27% of our unit sales while import brands accounted for 53% of our unit sales. Domestic brands contributed 20% of total unit sales a 290 basis points decline from 2007.

Now let me give you a corporate development recap of our 2008 activities and outlook for 2009. During the first six months of 2008 we acquired a total of five franchises that are expected to generate $90.2 million in estimated annual revenues. We did not acquire any franchises in the second half of 2008 and do not anticipate completing any acquisitions in 2009. As for dispositions, we disposed of 14 franchises with twelve-month revenues of $146.4 million during the first nine months of 2008 and have not disposed of any franchises subsequently.

Before I turn the call over to John I wanted to say a few words about the dividend suspension we announced in the press release. When announced the reduced dividend in November we were looking at a difficult economic environment with some economic analysts predicting we would begin to see slight improvement around mid-2009. Since that time there have been indicators that the challenging economic environment could last throughout 2009. Given the uncertainly of how long it may be before the economic environment begins to improve, our Board of Directors determined that it was prudent to suspend the dividend and reserve the cash in order to protect the balance sheet.

I will now ask John to go over our financial results in more detail. John?

Thank you, Earl, and good morning, everyone. For the fourth quarter of 2008 our net income from continuing operations was $1.8 million or $0.08 per diluted share after adjusting for noncash asset impairments and gains on debt redemption realized during the quarter. On a comparable basis net income from continuing operations decreased $14.7 million from $16.5 million in the fourth quarter of 2007. Our fourth quarter 2008 results included a $67.2 million after tax asset impairment charge related to intangible franchise rights.

During the fourth quarter we performed our annual impairment test on our indefinite lived intangible assets, in other words goodwill and franchise rights. As a result, we recognized an impairment charge primarily attributable to one; the use of a higher discount rate reflecting increased risk premiums evident in the market over the last three to four months. And, two, a further reduction in the projected industry selling rate reflecting the significant deterioration in the fourth quarter which adversely impacted the forecasted operating results for many of our franchises, particularly in our western region. Also during the fourth quarter we recognized $20.9 million of after tax gains from the redemption of our long-term debt. Including these noncash asset impairment charges, and the gains from debt redemption, we recognized a loss of $44.5 million from continuing operations in the fourth quarter of 2008 or $1.96 per diluted share.

Our fourth quarter consolidated revenues declined $366.4 million or 24.4% to $1.13 billion compared to the same period a year ago. Our new vehicle sales declined $283.4 million or 30.2%. In addition, our used vehicle retail and wholesale businesses declined $41.8 million and $30.7 million, respectively. While revenues from our finance and insurance business decreased $14.8 million reflecting the impact of lower new and used retail volumes. As a partial offset our Parts and Service business increased $4.3 million or 2.5%. Our new and used retail margins declined 60 and 110 basis points respectively in the fourth quarter 2008, and margins in our Parts and Service business declined 90 basis points to 53.4%

However, even though margins declined in each segment, our consolidated gross margin improved 120 basis points to 16.5% in the fourth quarter of 2008 compared to the same period a year ago more than explained by the shift in revenue mix towards our higher margin Parts and Service business. In absolute dollars we made a good started on our cost reductions by lowering our consolidated SG&A expenses by $20.5 million or 11.4% to $159.8 million. However, because our consolidated gross profit declined $42.8 million, or 18.6%, SG&A expense as a percent of gross profit increased 690 basis points from 78.5% in the fourth quarter of 2007 to 85.4% in 2008.

Consolidated floor plan interest expense decreased 9.9% or $1.2 million in the fourth quarter of 2008 to $10.7 million as compared with the same period a year ago. This decrease was primarily attributable to a 120 basis points decline in our weighted average floor plan interest rate including the impact of our interest rate swaps. This was partially offset by an $87.5 million increase in our weighted average borrowings. Other interest expense increased $400,000 or 6.2% to $6.8 million for the fourth quarter of 2008 as our weighted average borrowings of other debt increased $36.3 million. The increase in weighted average borrowings primarily reflects the continued execution of our strategy to own more of our real estate associated with our dealership operations.

The increase in interest expense for the mortgage facility and other real estate related debt was partially offset by the aggregate redemption of $176.3 million of our long-term debt over the past twelve months. Manufacturers of interest assistance which we record as a reduction of new vehicle cost of sales at the time the vehicles are sold was 49.9% of total floor plan interest costs for the fourth quarter of 2008, a 22.8 percentage point decline from the 72.7% level of coverage experienced in the fourth quarter a year ago. The decline stems primarily from the impact of our $550 million of fixed rated swaps that we had in place at December 31, 2008, at a weighted average interest rate of 4.7%. We reflect the monthly contract settlement of these swaps as a component of floor plan interest expense.

Now, turning to same store results, in the fourth quarter we had revenues of $1.07 billion which was a 27.7% decline from the same period a year ago. The economic recession and declining consumer confidence resulted in significantly lower automotive sales nationwide in the fourth quarter with total industry sales declining 35% from the same period a year ago. In that environment our same store new vehicle unit sales declined 30.7% and our new vehicle revenues declined $306.4 million or 33.1%. The new vehicle volume declines in the fourth quarter were proportionate, impacting car and truck sales relatively evenly. In addition, we experienced decreases in sales with each of the major brands that we represent. We believe that our new vehicle results are at least consistent with the retail performance of the brands that we represent in the markets that we serve.

In our Retail Used Vehicle same-store sales slipped 19.6% or $51.7 million to $212.5 million on 14.5% fewer units. Tighter underwriting guidelines with reduced loan to value ratios requiring more money down, negatively impacted our retail used vehicle sales and margins. In addition, we also were not stocked optimally as customer demand shifted away from small cars and hybrids during the quarter following a rapid drop in gas prices. We believe that we have now addressed the inventory mix issue and are beginning to see improvement in used vehicle demand. One partial offset was continued growth in our certified preowned business with the mix growing from 29% in the fourth quarter of last year to 34% this quarter. We anticipate continued strength in this area as more budget conscious consumers substitute certified preowned units for new vehicles.

Our wholesale used vehicle sales were down $32.5 million or 46.4% compared with the same period a year ago as we continued to optimized our used vehicle business, do a better job selecting units and push more volume towards the retail business. We did see an uptick in wholesale losses to $376 per unit, as we moved to adjust inventory to reflect the shift in customer demand away from small cars and hybrids.

Our Parts and Service business held up relatively well in the fourth quarter of 2008 with same store revenue down only 2.4%. Increases of 4% and 1% in our collision and warranty Parts and Service businesses were more than offset by 3% decline in customer pay parts and service sales primarily explained by lower sales at our domestic stores as well as a 7% decrease in revenues from Wholesale Parts. The increase in our collision revenues is primarily attributable to three new facilities that began operation in our Houston, Boston, and New York markets.

Our same store F&I revenues declined $15.6 million in the fourth quarter or 31.8% compared to the same period a year ago to $33.4 million. This decline primarily reflects the decrease in new and used sales volumes that I previously mentioned, as well as the decline in our income per contract for the arranging of customer financing. The income per contract decline was primarily related to used vehicles where the tighter lending standards are being particularly felt and we're seeing lower penetration rates and lower amounts financed. In addition, subsidized financing offers by the manufacturers which pay flat amounts, negatively impacted our new vehicle finance income per contract. Also, we provided a reserve for potential charge backs from our credit insurance vendors during the fourth quarter which negatively impacted our F&I profit for retail unit by approximately $25.

Our same store new vehicle margin declined 60 basis points to 5.9% in the fourth quarter while total used vehicle margin decreased 40 basis points to 7% and our Parts and Service margin declined 100 basis points to 53.3%. However, aggregate same store gross margins improved 120 basis points to 16.5% reflecting the favorable shift in our business mix. On the new vehicle side of the business gross margin declined primarily as a result of the rapid drop off in consumer demand during the quarter which generally created excess inventory throughout the market and resulted in an extremely competitive selling environment.

We continue to experience margin pressure in our retail used vehicle business which declined 14.6% to $1,593 per unit. Aggressive new vehicle pricing and incentives coupled with reduced loan to value levels negatively affected our margins. In addition, we were aggressively rebalancing our inventory during the quarter to clear small cars as demand dropped. As a result, retail used vehicle margins declined 100 basis points to 9.4%.

In our Parts and Service business we experienced positive margin improvements in our warranty Parts and Service and collision segments, as well as our wholesale parts segment. However, our same store Parts and Service gross margin declined in aggregate from 54.3% in the same period a year ago to 53.3% in the fourth quarter of 2008 attributable to a decrease in customer pay Parts and Service margins as well as a mix shift reflecting faster growth in our collision business. Margins from our customer pay Parts and Service business dropped in the fourth quarter primarily driven by the performance in our domestic brands. Our same store F&I revenue per retail unit declined $96 in the fourth quarter to $1,014 per retail unit reflecting the reserve recorded for potential credit insurance chargebacks, lower amounts financed, and a lower used vehicle finance penetration.

As the economic downturn has accelerated, we're challenged to further reduce costs. We continue to see traction in the key initiatives that we have launched to accomplish this critical objective. Same store SG&A expense declined $26 million or 14.7% to $150.8 million in the fourth quarter of 2008. Our personnel related expenses declined 15.2% in the fourth quarter or $15.7 million, while our advertising expenses decreased $4.1 million or 30.1%. Unfortunately we were not able to fully offset the decline in same store gross profit that we experienced in the fourth quarter and as a result same store SG&A as a percent of gross profit increased 740 basis points to 85.4%.

Because our projections for 2009 do not indicate any substantial improvement in the overall economy or the retail automotive business, we continue to make the difficult, but necessary decisions to further reduce our costs. As we previously announced, our team has identified additional cost reductions that we estimate will save us approximately $100 million in SG&A expenses in 2009 as compared with 2008 levels. Included in this total is $65 million of personnel costs reductions, $20 million of reduced advertising spending, and $15 million of other costs primarily lower outside service costs. We're in the process of implementing these reductions and should have most in place by the end of the first quarter of this year.

Examples of these actions include; 10% pay cut for executive management team, regional Vice Presidents, and Board of Directors, 5% pay cut for the remainder of the corporate office, additional pay cuts and adjustments to pay plans at the regional market store levels, and reducing our head counted by 16% or 1,450 positions from the beginning of the year 2008 levels. In addition to the SG&A expense reductions, we're also lowering vehicle inventory levels. We reduced inventory levels during the fourth quarter by $31.7 million from third quarter levels to $760.7 million though much of this was back loaded so the quarter average was unchanged. We have additional plans to reduce inventory by another $150 million by the end of the first quarter of 2009 and are making good progress towards this target. For the quarter same store floor plan interest expense decreased 12% or $1.4 million to $10.3 million.

Now, turning to liquidity and capital structure, we had $23.1 million of cash on hand as of December 31st, 2008. In addition to our cash on hand, we use our floor plan offset account to temporarily invest excess cash. These immediately available funds totaled an additional $44.9 million at quarter end bringing immediately available funds to a total of $68 million. Further, we had an additional $106 million available on our acquisition line bringing total liquidity to $174 million at December 31, 2008. As I previously stated, we used available cash to repay $176.3 million of our long-term debt during 2008 including $63 million in the fourth quarter.

With regards to our real estate investment portfolio, we owned $387.6 million of land and buildings at December 31, 2008. To finance these holdings, we have utilized our mortgage facility and executed borrowings under our other real estate specific debt agreements. As of December 31, 2008, we had borrowings outstanding of $178 million under our mortgage facility with $57 million available for further borrowings. In addition, we had $52.7 million of borrowings outstanding under other real estate related debt agreements excluding capital leases.

As a reminder about our capital structure, we do not have any near term liquidity pressures. Except for the floor plan facility, we face no significant debt refinancing decisions until March 2012 when our revolving credit and real estate facilities expire. Our Ford floor plan facility has an Evergreen arrangement just renewed in December for 2009. Further, our 8.25 senior subordinated notes mature in 2013 and our 2.25 convertible notes are [liquidable] in 2016. We updated financial covenant calculations within each of our debt agreements, and as of December 31, 2008, we're in compliance with all such covenants. In fact, many of the ratios improved from third quarter levels reflecting the significant debt repurchases we accomplished during the fourth quarter.

With regards to our capital expenditures for the fourth quarter, we used $12.2 million to construct new facilities, purchase equipment, and improve existing facilities. This amount excluded the purchase of land and existing buildings. For the full year of 2008, our capital expenditures excluding the purchase of land and existing buildings totaled $53.4 million. Although we are confident in our balance sheet, and our ability to meet our covenants under a wide range of economic scenarios, we believe it prudent to continue to further strengthen our balance sheet. As a result, we are closely reviewing all planned future capital spending and working closely with our manufactured partners in this area. As a result, we anticipate our 2009 capital spending will be less than $30 million, down significantly from this year's level.

We also do not plan any additional real estate purchases in 2009. In addition, we are also reviewing all additional uses of cash for opportunities including as Earl mentioned suspending our acquisition activity for 2009. Our top priority at this time is to use the cash we generate to further strengthen our balance sheet by paying down debt. We believe our present financing arrangements are valuable assets that we intend to protect. Also, as Earl previously mentioned, given the economic uncertainty the Board has decided to spend our quarterly dividend. For additional detail regarding our financial condition, including the specifics regarding our covenant calculations, please refer to the schedules of additional information attached to the news release as well as the investor presentation posted on our website.

With that I will now turn back over to Earl. Earl?

Thanks, John. On our third quarter earnings call we said that we would review conditions to see if it would be feasible to reinstate earnings guidance. We've determined that it is still not feasible to issue earnings guidance at this time given the continued uncertainty surrounding the overall economy, consumer lending, and the automotive industry. However, we are planning our business on the following key assumptions for 2009.

Industry seasonally adjusted annual sales rate of 10.5 million 10.8 million vehicles. SG&A expenses as a percent of gross profit at 80% to 83.5% excluding any one-time items as lower sales revenues are expected to offset cost improvements. A tax rate of 38.5%. Estimated average diluted shares outstanding of 23.2 million, capital expenditures of $30 million or less. On a same-store basis new and used vehicle margins consistent with 2008 fourth quarter levels, Parts and Service revenues 1% to 3% lower, and finance and insurance gross profit at $1,000 to $1,025 per retail unit.

That concludes our prepared remarks. In a moment we'll open the call up for Q&A. Joining me on the call today are John Rickel, our Senior Vice President and Chief Financial Officer; Peter DeLongchamps, Vice President of Manufacturers Relations and Public Affairs, and Lance Parker, our Vice President and Corporate Controller. I will now turn the call over to the operator to begin the Question and Answer Session. Operator?

Thank you. (Operator Instructions) We'll hear first from John Murphy of Banc of America- Merrill Lynch.

Good morning, guys.

Good morning.

Just a question on the cost cutting and cost saves. The $100 million is completely incremental in 2009 meaning the $20 million or so that was achieved in the fourth quarter, I mean this is an incremental to that?

No, it would include that, John. It expanded the original $35 million target of which that $20 million was in response to some of the actions we took to $100 million, so the $20 million is inclusive within the $100 million.

Got you.

John, this is John Rickel. Think about it this way. The reason we set up the target this way is because of the incremental nature of the reductions that we are identifying. The easiest way is it's a $100 million reduction off of the full year 2008 levels.

Got you. ANd then if we think about -- look at this, the $65 million coming from personnel, I mean is that a structural reduction or is that the kind of cost that will creep back in over time as sales hopefully at some point later this year start to recover?

It is both. Some of that is variable in nature and is volume sensitive. I couldn't tell you what the percentages are exactly, but I would guess that at least around half is volume related.

Okay. And then as you work through the process of cleaning out some of the weaker dealerships through disposition, you mentioned there might be some costs associated with that. I mean how -- what kind of payback period are you looking at on those kinds of dispositions?

John, this is John Rickel. When we've been able to do those in the past couple of years, the paybacks are actually reasonably quick, I would say on average probably two years, maybe even a little less.

Got you. I am sorry I am jumping around here on the collision repair shops, three new shops opened. When were they opened? Were they opened late in the quarter or when did they start impacting results?

They were dramatically expanded shops actually. For example, we took an individual Toyota and Lexus, two small shops and made them into a large one here in Houston. That became active in September, so really fourth quarter was the first real impact of that. We had a very small shop on Long Island with BMW and made it a much larger shop. That was also probably fourth quarter in terms of first full quarter of impact. So I would say most of the impact was fourth quarter.

Yes. The third one was earlier in the year it was basically because this is a fourth quarter to fourth quarter comparison, the other one came on earlier in the year.

And do you foresee any other opportunities in other regions or locations to make those kinds of expansions?

Yes. We're doing it on a very measured basis because of our desire to keep CapEx minimized. We have one in New Orleans that should open any day or certainly within a couple of weeks that would be dramatically expanded from our Ford dealership there. And we're looking to kind of keep one or two projects at a time under way. Body shops aren't real expensive so do, but again we're trying to minimize CapEx. But we think collision repair is a good return on investment for us and we'll expand it in the future.

And then just lastly, there seems to be a little bit of a loosening or short of a more congenial approach being taken by auto makers towards the larger group, particularly the publics. I mean just wondering, Earl and John given both your past experience, do you feel that there is a shift in the approach here and that the tide might be shifting to a even greater partnership approach by the auto makers?

Well, I am not sure we reached congenial yet. But I do think you're making a valid point, that as we see the financial pressures going forward, that the value that we bring to the party and the automotive retail distribution network with capital and expertise and some strength is starting to and will be more valued at by the manufacturers. Let me see if Pete has any comments. He deals with the manufacturers every day as part of his job.

Yes. This is Peter DeLongchamps. I would say that over the last six months the discussions that we've had with manufacturers surrounding capital expenditures has become much more transparent, seamless. And I am pleased with the discussion we've had with all of our manufacturers surrounding capital expenditures.

Great. Thank you very much, guys.

Thank you.

We'll hear next from Sidoti and Company's Scott Stember.

Good morning.

Good morning, Scott.

Could you maybe talk about on the used side of the business you said you're seeing a firming up or traffic so far this year. Can you maybe talk about that in pricing and how that could possibly help reduce some of the wholesale losses?

Yes, Scott. This is Earl. The phenomenon is fairly straight forward. In the fourth quarter there were some I would say atypical or above average wholesale losses that reflected the shift back to trucks because gas prices dropped. Whenever it is they dropped in September, October, November. And that seems to be behind us now, but the new paradigm is with new vehicle sales being so reduced, 35% say in the industry, that we're not getting as many trade-ins to fuel our Retail Used Vehicle operation. But we do have good customer demand. In the reduced market there is certainly more used vehicle impact than there is new, and you can see the Used Vehicle sales have probably dropped half of what new vehicle sales have.

But there are more people at the auction now buying vehicles. And the prices very quickly get to book value which wouldn't normally be a problem, but now with the restrictive lending practices you buy too many vehicles at auction, at above book prices, and you will come back and see the banks won't lend above book on them. And so that's more the new constraint we have on the keep inventories pretty lean. So now the issues are more acquiring merchandise and lending practices.

But the relative activity in the used vehicle market is pretty good right now for the overall economic levels. So there are some opportunities for us in the used vehicle market. But the margins still are likely to be under pressure just because we will have to acquire more vehicles outside of our normal trade-in process. So I wouldn't forecast the wholesale losses being from any market shift, but we have to be very careful about how we manage externally sourced used vehicles in this environment.

Okay. And California, can you talk about any progress there? I know you have before the recent cost cuts you have been doing a lot of things over there? Can you talk about some of the profitability issues over there?

Yes. We actually have improved our profitability in California strictly because we have now completed two years of on going cost cutting. The California market is still very weak, but I would have to say that at least the last few months on a revenue basis it has been relatively flat. Now, we thought we found a bottom there about three times before, so I wouldn't want to predict a bottom, but we've started to make progress in California just because we have been relentless in our cost cutting. So our California business as it contributes to our Company has been a bit better in the last four months.

Okay. And John, just going back to the comments that you made about any maturing debt this year, you talked about the Ford silo that you renegotiated in December. Is there anything coming due at all in 2009 that we need to be aware of?

There would be some minor amounts on the mortgage facility, Scott. It is probably in the order of $10 million to $15 million, just kind of the normal quarterly amortization on that. But that would be the only sort of repayment at all in the year.

Okay. And John, one last question. Would you happen to have what the free cash flow figure was for 2008?

Not handy. I will have to get back to you with that.

Great. Thank you.

Thank you.

Moving on to Rick Nelson of Stephens.

Thank you and good morning.

Good morning, Rick.

I would like to ask about regional strength and weakness follow-up and I have a question about California. How is the Texas market performing relative to the chain and the Northeast? And any other color you might provide would be helpful.

Okay, Rick, this is Earl. The Houston market in particular as well as most of Texas is still relatively better than the rest of the country, but it has been weakening, particularly on the new vehicle sales side. I expect that has to do with the energy business being under pressure now for three or four months with particularly low oil prices and they have started to have some reduction in force at some of the energy related companies. So we can see the new vehicle business decline here in the last certainly the last quarter of the year being more significant than the previous two years. But it is still better than other places.

Boston is holding up. Our New England area probably better than average, but it, too, has been weakening. The new significant weakness for us is in New York and New Jersey as you might expect because of the financial centers there. And beyond that I don't think there is any change in terms of relative strength or weakness regionally.

And how about from a brand standpoint, we are starting to hear about Honda potentially getting softer?

Quite frankly, the weakness, the sales weakness of all the brands in the fourth quarter was pretty much uniform, whether it was luxury, whether it was Honda, Toyota. I can no longer tell you that there is any brand that is appreciably better than any other in the last few months. Everyone's general order of magnitude, someone may only be down 20 or 25% a month, but relatively speaking, it is bad across all brands and all regions right now on the new vehicle side.

Got it. Got it. And another question on disc ops. How much revenue is in discontinued ops and what sort of brands are there and is there a market for these dealerships?

The only thing we had in discontinued ops was what we reported in the third quarter which related to Albuquerque disposition we made. We put nothing else in discontinued ops.

Okay. Thank you for that. Good luck.

Thank you.

We'll hear next from Matt Nemer of Thomas Weisel Partners.

Good morning.

Good morning, Matt.

My first question is back to John's question early year on SG&A, the cost cuts. Is there a way to sort of look at how much of that $100 million bucket would sort of would you get assuming flat gross profit dollars year to year? I am trying to understand how much of that is coming from variable and how much is fixed?

Yes, Matt, this is John. We have tried to mention that. Rough estimate is there is probably about $75 million-ish of the reduction is basically related to actions that we're taking. There is $25 million-ish that comes from the drop off if you will in gross profit.

Okay. That's very helpful. Then the second question is if we're seeing a mix shift from new vehicles to nearly new, and it sounds like that may be happening in the market given the strength in CPO and the relative strength in used, what sort of an impact does it have on your model in general terms? How much dollar profit per unit do you make on a new including F&I versus a nearly new including F&I?

Trying to see if we can get some data for you.

I guess I am just curious, just generally do you think a one-year-old CPO can deliver a similar profit level to a new or perhaps it is even higher because you've got the baked in extended warranty?

Well, I think obviously if we looked at the entire revenue stream including the warrant, I think it would be higher. What's different right now in the used vehicle business, typically our F&I on used would be stronger than it has recently been just because of these lending practice shifts in the last three or four months. John is trying to find some data here.

Yes. The used data that we have doesn't really split out CPO. CPO on a front end basis tends to be maybe a little less than an average used, but you pick up the basically the service stream that goes with it. The actual kind of front end dollars are not far off, Matt. They're reasonably close. What I don't have handy is the F&I split, and drilling into the difference on CPO definitely don't have that at hand. But the front end numbers are not far off.

But off the top of your head, a shift from new to nearly new, if there is tradedown in the market and that's kind of what's happening here, doesn't necessarily have a significant impact on the profitability of the overall business?

I don't believe it does. We also need to remember that the CPO volume, the companies do like ours tends to be heavily shifted to luxury brand. The best CPO programs in the market tend to be the luxury brands. Now Toyota has a great one also. We do a lot at Toyota. You don't do nearly as much CPO business typically in the volume brands as you would with Lexus, BMW, Mercedes, they all have very powerful plans. So and they're obviously higher dollar cars.

Got it. Next question is I know you're not giving net income guidance for '09, but do you have -- can you give us a sense what sort of working capital benefit we could see in '09 based on your industry volume guidance? I am just trying to get a sense how much you will be able to take out of working capital in a down environment this year?

Yes, Matt this is John. We obviously made good progress there in 2008. It is an area we're very focused on. I don't have a kind of a dollar millions that I can give you, but we certainly think there is further opportunities there.

Okay. And then lastly, in terms of uses of cash for free cash flow in '09, it seems like it is essentially debt paydown, and you took out some converts this quarter. What's the thinking behind the converts versus paying down other lines or taking out other debt just given that it is a little bit longer term paper even with the put than some of your other maturities?.

Yes, Matt, this is John. We look at all the elements of the balance sheet and we're trying to manage among them. We've bought 8.25's. We bought converts. We look at the mortgage debt. Just basically where do we get kind of the best bang for the buck and what's available to pay down.

Okay. Great. Thanks very much and good luck.

Thanks.

We'll hear next from Wachovia's David Lim.

Good morning, gentlemen.

Good morning, David.

Hi. Just a question on the $100 million. If the [SAR] happens to dip below your forecasted guided levels, what kind of additional opportunity is there?

Well, we have to be a little careful with the SAR because I know a lot of people reacted to the sub $10 million SAR last month, and in reality retail actually went up in January from December, and it's the retail portion of the SAR that impacts retailers like ourselves. So for the last four months we have seen very consistent albeit very low retail levels. But if retail did drop another million, then we have to find more costs. There is always more costs there. We would at some point get to a situation where we will be getting dangerously close to bone, but I have never worked anywhere where I couldn't find more costs when I had to. If we have to find more, we will find more. I assure of you that.

Got it. Now, I know that there was no guidance on acquisition nor are you really looking to acquire more dealerships in '09, but given some of the depressed valuations out there, namely Southern California, I mean, would that line of thinking change possibly in the second half if things did turn around?

I don't see that happening at this time, David. You're right, there are distressed sellers of dealerships out there, and they're going to be in places like California who are now two years into the economic downturn. But I really even at reduced levels acquisitions of dealerships in California because they tend to be big import dealerships and/or have big real estate associated with them, just tend to take an awful lot of money. And it would be unlikely that things would improve enough to make that magnitude of an acquisition in this calendar year. I guess you never say never, but I think it is unlikely.

Got you. Thanks. Thank you very much, and good luck to you.

Thanks.

We'll move next to Joe Amaturo of Buckingham Research.

Good morning. Just one quick one. Are there any limitations how much public debt you can buy back?

Joe, this is John Rickel. No. There is really not.

Okay. And then I guess one other one. Could you just give us the performance of like internal service and parts during the quarter?

Joe, this is John. Internal work was definitely down. The way we account for that is we strip the revenue out, so it is not really easy to give it to you in revenue terms, but down probably 10% to 15%.

Okay. All right. Thank you.

(Operator Instructions). We'll move next to [Charles Vetter] of KeyBanc.

Good morning, guys. How are you doing today?

Good morning, Charles.

My question has to do with real estate. If I heard right you have a $57 million available under your real estate line. With the -- excluding places like Texas where I think the peaks and valleys definitely haven't been affected, do you see an opportunity to continue to buy real estate, franchises you own?

Charles, this is John Rickel. Basically tried to address that in the earlier comments. Yes you're right, that is available capacity, but right now because we're trying to reduce leverage, not really intending to pick up any more real estate this year at present.

Great. And then to wrap up with that, do you see some value impairments on the properties you currently own?

No, not beyond what we took in the third quarter.

Great. Thank you.

Thank you.

And Mr. Hesterberg with no further questions I will turn the call back to you for any closing or additional remarks.

Thank you for joining us today. We're looking forward to updating you on our 2009 first quarter earnings call in April. Thank you and have a nice day. .

Again, that does conclude today's conference. Thank you all for your participation and have a great day.