Group 1 Automotive Inc (GPI) 2009 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Group 1 Automotive Incorporated Q4 2009 earnings call. Please be advised that this call is being recorded. I would now like to turn the conference call over to Mr. DeLongchamps, Vice President of Manufacturer Relations and Public Affairs. Please go ahead, sir.

Thank you, Caryn, and good morning, everyone, and welcome to today's call. Before we start, I would like to make some brief comments and remarks about forward-looking statements and the use of non-GAAP financial measures. Except for historical information mentioned during the conference call, statements made by management of Group 1 Automotive are forward-looking statements that are 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 not are 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 and Exchange Commission over the last 12 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. Participating on today's call, Earl Hesterberg, our President and Chief Executive Officer; John Rickel, our Senior Vice President and Chief Financial Officer; Lance Parker, our Vice President and Corporate Controller; and myself. I would now like to hand the call over to Earl. Thank you very much.

Thanks, Pete, and good morning, everyone. Let me start with comments on the full year. This past year was one of the most challenging in recent memory for the automotive industry. At Group 1, we saw a 20% decrease in total revenues versus the prior year, including 25% drop in new vehicle revenues and a 15% decline in used vehicle revenues. One of the strengths of our operating model was shown through the relative stability of our high margin parts and services businesses, where revenues were only down 3.8%. The second strength of our model was highlighted by our ability to quickly adjust our cost base. In late 2008, we began lowering our cost base in preparation for this extremely challenging business environment.

Thanks to the hard work of our field management team and effort and sacrifices made by every employee in our Company, we were able to reduce costs by over $118 million. This exceeded our goal, which was a $120 million target based on a 10 million unit industry. But the final industry sales number at 10.4 million, the $118 million plus cost reduction, exceeded our objectives and was the key factor to remaining solidly profitable in 2009. We believe that many of our cost reduction and efficiency improvement actions have made us a more streamlined efficient Company that is ready to reap the benefit of improving volumes going forward. These actions should allow us to deliver results above historical levels as volumes return. One benefit from this recession is the opportunity to prove the strength of the automotive retailing model. This is the first recession that has affected the automotive retailing industry since the automotive retailing groups went public more than ten years ago, and it's given us the opportunity to prove what we have been saying for years about the stability, flexibility and resiliency of our business model.

During this past year of economic turmoil, we improved our gross margin by 90 basis points as the relative stability of the parts and service business delivered and improved revenue mix. We decreased SG&A as a percent of gross profit by 80 basis points, as the flexibility of the cost structure was demonstrated. We remained profitable on an operating basis in each quarter, and we generated positive cash flow from operations and strengthened our balance sheet by paying down more than $110 million of noncore plan related debt. In short, we've now proven that our business model works across a wide range of economic conditions. Turning to the fourth quarter, new vehicle sales were slightly stronger than expected. According to J.D. Powers, the full year [SAR] came in at 10.4 million units, which was more than the 10.2 million level we predicted in October. We believe that part of the stronger fourth quarter new car demand was the result of customers switching from late model used vehicles to new, as price relativities change due to used vehicle valuations increasing significantly during the course of the year. The monthly payment difference between new and used vehicle purchases was further reduced in the quarter as a number of manufacturers introduced aggressive lease incentives. Some of the new vehicle strength came at expense of our used vehicle business opposed to a significant uplift in retail traffic.

Consistent with this improved new car sales environment, we saw new vehicle revenue, gross profit and gross profit per unit improve compared with the same period a year ago. This was also supported by a richer mix of luxury brand sales, which were up 2.2 percentage points to 29.5%. Our top selling brands for the fourth quarter were Toyota, Scion and Lexus at 38%; Nissan Infinity 13%; Honda Accra and BMW each contributing 11% to our new vehicle unit sales. Rounding out our new vehicle unit sales were Ford with 9% Mercedes Benz 7%, and GM and Chrysler unit sales were 4% and 3%, respectively. In total, luxury and import sales now account for more than 85% of our new vehicle unit sales. We rebuilt our depleted new vehicle inventory levels following impact of the CARS program in August, from 44 days supply of September 30th, to a more comfortable 56 days at December 31st. In general, we were comfortable with our inventory positions for all of our brands.

Turning to the used car business, although used car sales volumes were up in the quarter compared with the same period a year ago, we did see retail used margins soften. While the fourth quarter is generally weaker for used vehicles, the margins were down more than the seasonality would explain, and generally reflected the weakening demand in lower auction results we saw at wholesale. In this environment, we made the decision to reduce margins to make a profitable retail sale whenever possible, instead of taking the risk of a wholesale loss as we watched auction prices deteriorate. We would anticipate retail used margins returning closer to historical levels of new vehicles sales growth as we move towards the spring selling season. However, it's important to note that CPO unit sales are likely to continue to register significant year-over-year declines. As we predicted, the slowdown in used vehicle market price appreciation hit our used wholesale results for the fourth quarter, and we lost $147 per unit. We would expect our profits from the wholesale to trend towards breakeven to a small loss going forward. Our used vehicle inventory remains lean at 31 day supply.

Turning now to our other business segments, I mentioned earlier our parts and service business continued to perform well, showing margin improvement, particularly in customer base segment. Our finance and insurance business also had a good quarter, reflecting higher finance penetration rates, as well as lower chargebacks. A partial offset was lower service contract penetration, primarily explained by the higher mix of leasing in the quarter. Same store revenues were up across the board as well. In fact, it's important to note that for for the first time since the third quarter of 2006 when auto sales started their long decline, that both our consolidated and same store total revenues grew, with every business segment posting positive same store growth this quarter. Hopefully, this is the start of a long pattern of sales growth. 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 2009, our adjusted net income from continuing operations was 10.3 million, or $0. 43 per diluted share, which excluded the following; an 11.6 million non-cash aftertax impairment charge primarily related to our real estate holdings that are held for sale, and a 651,000 aftertax loss on dealership dispositions. On a comparable basis, adjusted net income from continuing operations increased 9.7 million from 548,000 in the fourth quarter of 2008. Our results for the fourth quarter of 2009 were positively impacted by the continued success of our cost savings initiatives. We reduced SG&A expenses by 5.6 million from the same period a year ago. Our consolidated personnel related expenses declined 4 million, while all other SG&A expenses declined 1.6 million. As Earl mentioned, after adjusting for the higher volumes, we exceeded our cost savings target of 120 million for the full year. As we have discussed previously, we believe that about 30 million of these cuts are permanent.

During the fourth quarter on a consolidated basis, revenues increased 16.7 million or 1.5% to 1.15 billion compared to same period a year ago, primarily reflecting increases in new and used vehicle revenues. Our gross margin remained constant at 16.5% as compared to the same period a year ago. New vehicle margins improved 30 basis points to 6.2%, while total used vehicle margins increased 30 basis points to 7.2%, and parts and service margins improved 40 basis points to 53.8%. Our gross profit improved 3 million or 1.6%, which coupled with the decrease in absolute SG&A expenses allowed us to reduce our SG&A expense as a percent of gross profit by 420 basis points, from 85.4% in the fourth quarter of 2008 to 81.2% in 2009.

Floor plan interest expense declined 2.7 million or 25.5% in the fourth quarter 2009 to 8 million, as compared with the same period a year ago, primarily reflecting a $351.1 million reduction in weighted average floor plan borrowings. Our new vehicle inventory stood at 14,300 units at year end, with a value of 427.9 million, compared to 23,100 units a year ago, valued at 692.7 million. Other interest expense decreased 1.6 million or 18%, to 7.2 million for the fourth quarter of 2009. Compared to the prior year quarter, our weighted average borrowings of other debt declined 88.1 million. The decline in weighted average borrowings primarily reflects the cumulative buybacks of 41.7 million of our 2.25 convertible notes executed in 2009, as well as a $50 million reduction in our acquisition line borrowings from December 31, 2008. For the fourth quarter of 2009, our consolidated interest expense included 1.4 million of non-cash interest expense related to APB 14-1. As a reminder, our covenant calculations exclude the impact of APB 14-1. Manufactures interest assistance, which we record as a reduction of new vehicle cost of sales at the time the vehicles are sold, covered 62.6% of total floor plan interest expense, up from 49.9% in the fourth quarter a year ago, primarily as a result of reduced inventory levels and faster inventory turns.

Now turning to fourth quarter same store results, in the fourth quarter, we had revenues of 1.15 billion, which was a 4.1% increase from the same period in 2008. Our new vehicle retail sales improved 3% to 657.4 million, on 1.8% less units. New vehicle unit sales increased in each of our major luxury brands, as well as in our Toyota and Nissan brands. These increases were more than offset by decreases in our major domestic brands. As a result of this continued mix shift in our portfolio towards luxury brands, our revenues per unit sold improved 4.9% to 32,539. Our luxury mix has grown to 29.5% of our total unit sales. Generally, 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. Continuing with same store results, retail used vehicle revenues increased 10.3% to 239.8 million on a 2.5% increase in units. We also experienced an increase in our wholesale used vehicle revenue of 5.5% on 4.7% fewer units. Our parts and service revenues increased 4/10ths of a percent, reflecting primarily a 2.8% improvement in our customer paid parts and service business and 1.5% increase in our wholesale parts sales. These improvements were partially offset by a 2.4% decrease in our collision revenues and a 4.8% decline in our warranty parts and service revenues.

In the fourth quarter of 2008, our collision business in the Houston market benefited from the nonrecurring repair work in the aftermath of Hurricane Ike. In addition, our 2009 collision revenues were negatively impacted by the closure of one of our collision centers in the Northeast. Our F&I revenues were up 495,000, or 1.5% compared to the same period a year ago. We saw improvements in our finance penetration rates, particularly our lease penetration rates, as a number of the manufacturers offered favorable leasing deals in the quarter. Leased units increased over 18% from the fourth quarter a year ago. Our F&I business also realized a benefit from lower chargeback costs. These improvements were substantially offset by declines in our vehicle service contract penetration rate, which are typically lower on leased vehicles. Overall, our F&I income per retail unit increased $17 to $1,034 from the same period a year ago. In the aggregate, our same store gross margin for the fourth quarter remained consistent at 16.5%, reflecting 30 basis point improvements in both new and used vehicle gross margins, as well as a 50 basis point improvement in our parts and service business, with the offset explained by an increasing mix of lower margin new vehicle sales.

On the new vehicle side of the business, both car and truck gross margins showed improvement in the fourth quarter of this year. This improvement is primarily explained by the improved luxury mix that I mentioned earlier, as well as the beneficial effect of lower new vehicle inventory levels across the industry. Total same store used vehicle margins improved 30 basis points from 6.9% in the fourth quarter of 2008 to 7.2% in 2009. Within the total used vehicle business, used retail margin declined 50 basis points to 8.8%. As you will recall from our third quarter call, Earl noted that we were starting to see a softening in October used vehicle market, and that trend did in fact continue through December. And as we mentioned earlier, we saw a deterioration in the price relativities between new and used vehicles throughout the fourth quarter, which further pressured used vehicle margins. In addition, as auction results weakened, our floors focused on more aggressively retailing used vehicles to avoid the risk of potential wholesale losses if the unit had to be auctioned. Consistent with the weaker auction environment, we did see a wholesale loss this quarter, with the average wholesale unit losing $147. Our same store parts and service margin improved 50 basis points to 53.9%, primarily reflecting the mix shift towards the more profitable customer paid parts and service segments of this business.

Now turning to liquidity and capital structure. During the fourth quarter of 2009, we generated cash flow from operations on an adjusted basis of 7.4 million, and for the year 108 million. In addition to the cash used for acquisitions, we used 50 million of the cash generated in 2009 to pay off all borrowings under our acquisition line, 20.9 million in the redemption of our 2.25 convertible notes and 24 million to repay real estate related borrowings. We also used 21.6 million of the cash generated in 2009 for capital expenditures and invested another 26.7 million into our floor plan offset account, which we used to temporarily hold excess cash. As a result, we had 13.2 million of cash on hand and 71.6 million invested in our floor plan offset account, bringing immediately available funds to a total of 84.8 million at year end. In addition, we had 158.2 million available on our acquisition line that can also be used for general corporate purposes. As such, our total liquidity at December 31, 2009, was 243 million.

We've updated the financial covenant calculations within each of our debt agreements. As of December 31, we were in compliance with all such covenants; and based upon our industry outlook for projected earnings for 2010, we would expect to remain compliant for the foreseeable future. With regards to our real estate investment portfolio, we owned 379.9 million of land and buildings at year end, which represents approximately one-third of our total real estate. To finance these holdings, we've utilized our mortgage facility and executed borrowings under other real estate specific debt agreements. As of December 31, we had borrowings outstanding of 192.7 million under our mortgage facility, with 42.3 million of available for future borrowings. With regards to our capital expenditures for the fourth quarter, we used 9.8 million to construct new facilities, purchase equipment and improve existing facilities, bringing our total capital expenditures for the year to 21.6 million.

We will continue to critically evaluate all planned capital spending for 2010 and work with our manufacturer partner to maximize the return on our investments. We anticipate that our 2010 capital spending will be less than 40 million. For additional details regarding our financial conditions, 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'll now turn it back over to Earl.

Thanks, John. Looking ahead now, obviously we are closely monitoring the quality issues that Toyota currently faces. Their decision to suspend the retail sales of almost two-thirds of their unit volume, which equates to approximately 20% of our new vehicle sales, will be a negative for our first quarter results. And while the longer-term impact on the Toyota brand remains to be seen, we remain steadfast in our commit to Toyota as one of our key business partners. We are working closely with them and our customers to execute the existing recall campaign as quickly and as efficiently as possible. On a positive note, the recalls and repairs resulting from Toyota's product quality issue should result in a lift of our warranty parts and service business over the next couple of quarters. Too early to forecast what the full impact will be, but we will update you as we have more experience with the repair process and customer throughput.

We predict that it is likely to take a number of months for all of our customers to schedule their repairs. Turning to 2010, for 2010, J.D. Powers currently has the SAR estimated at 11.5 million units, just the assumption we are using for planning purposes. Clearly, this projection assumes a much stronger market later in the year. Longer-term as we move back towards more normalized sales levels, we see new vehicle gross margins at about 6.5%, retail used vehicle margins at 10% to 11%, wholesale used vehicle margins returning to about breakeven as new vehicle sales rates improve. Finance and Insurance profits for retail vehicle will continue to be pressured until lending becomes less constrained. So we believe modeling in the $925 to $950 per unit range is an appropriate assumption. Parts and service margins should have some upside as customers begin addressing discretionary repairs. As for our cost control, we anticipate SG&A as a percent of gross profit to improve as we benefit from the topline leverage of growing revenue again. Our capital expenditures are estimated to be less than $40 million during 2010.

Finally, we will continue to monitor the market for reasonably valued attractive acquisition opportunities that will add shareholder value, while reviewing our current portfolio to improve or dispose of any underperforming stores. After all the hard work these last 18 months, the Company is well-positioned with a leaner cost structure, more efficient processes and a stronger balance sheet that should allow us to take full advantage of any sales rebound. That concludes our prepared remarks. In a moment, we will open the call up for Q&A. I'll now turn the call over to the operator to begin the question-and-answer session.

Thank you. (Operator Instructions). We'll take our first question from John Murphy with Banc of America Securities, Merrill Lynch.

Hi, guys. This is actually Elizabeth Lane on for John Murphy. How are you?

Good morning, Elizabeth.

Good morning.

I just had a couple of quick questions. I know you can't really give guidance on the potential impact of Toyota, but I was wondering if you thought it was a reasonable assumption to say that the parts and service work might offset the near-term sales loss?

I think over the long-term that's likely to be the case.

Okay.

It's probably not the case in the first quarter. It will remain to be seen. We have, I think this week, gotten back in the business of selling most of the models that were temporarily on sales hold because we have been able to perform the repair process on most of those in-stock units. But I would guess that we probably lost two-plus weeks if not three weeks of some pretty good volume. Toyota sales -- and we don't really know how the overall Toyota traffic will rebound, and it's a little hard to tell right now, because February is always a weak month, and then there is some bad weather over much of the country, which seems to be depressing the overall retail activity. So we can't really say much more than that.

Okay. Great. If I can just ask one more, I was wondering how the acquisition environment is looking and if real estate values are playing in to the equation, especially given the change in strategy to owning versus leasing?

Actually, that's a brilliant question, because it is the real estate values which are probably one of the big mitigating factors on acquisition activity right now. There are, clearly -- because of economic pressure and so forth -- dealerships on the market for sale. But there doesn't appear to be much activity, which is the combination of the fact that when buyers -- potential buyers -- such as our Company look at the near-term earnings potential in an $11 million unit industry, it's just not anywhere near what it was in the 17 million unit industry, so there is a little price discrepancy there between what the sellers would like and what the buyers are willing to pay. But probably even more so now is the commercial real estate reality, and that is the commercial real estate market -- these values are down probably on average 25% versus a couple of years ago, and not all sellers have come to grips with that yet. So you are right. That's a big factor right now. So if people come to grips with that, we may see that acquisition activity improve later in the year. But right now, there seems to be a disconnect between buyer and seller valuations.

Okay. Great, thanks very much, guys.

Our next question will come from Matthew [Fasler] with Goldman Sachs.

Thanks a lot, and good morning.

Good morning, Matt.

Couple of questions if I could. First of all, if I could comment on the anticipated trajectory of used margins? Are you seeing auctions, and I guess bank lending standards adjust already, such that the used car margin should go back to typical seasonal trends?

I would think that margins will not be too far off. The biggest thing that will help used car margins will be more new car sales so there is more used car trade ins. And that's been a damper over the last year. Just the supply of trade-ins forced more people to auctions which forces up the price to a certain degree, and which reduces the retail margin because we don't tend to have as good a margin on auction purchased vehicles as we do on vehicles we source via trade-in. So if we get this steady increase in new car SAR -- the new car market recovery -- then that should give us a little better support for used vehicle margins.

My second question, guys, relates to our F&I guidance. You just finished the year where your F&I per vehicle retail was about $1,000. And I believe, Ear, in your comments you spoke about 925 to 950, that would actually be guiding down if essence. If you could just give a little color as to what would lead to that? If you were able to generate $1,000 in the environment that we just had, why would it start coming down at this point in time?

Some of that, Matt -- some of that per unit, is a benefit and runoff of some previous years' activity. So the actual new business that's being generated in the new revenue stream is just down a bit over some of the money we have earned in previous years.

Got it, and then my final question --

I don't know if I articulated that properly. I'll let John --

Yes, Matt. This is John Rickel. Earl described it right. I mean, basically we get paid -- in particular on vehicle service contracts, we get a share of the back-end money as well if the contract performs better than expected, and that's based on the pool of units in operation. And as the volumes have come down, there is kind of less of that pool that's out there. So it's really kind of the volume for us in the last couple of years.

And then my last question, guys, relates to geography. If you could just go into a little more detail on what you are seeing by market. And with that in mind, to what degree are the mixed numbers that we see in your release kind of year-over-year a function of performance versus just mix of business with divestitures, et cetera.

Matt, this is John Rickel. The story has kind of been consistent for most of 2009. Houston continues to be a good place to sell cars. Boston has held up fairly well. California remains challenging. And the Southeast part of the US is still, I think, facing some headwinds. I think the mix improvements that you see are really, I think, indicative of what the brands are performing in the market by and large with kind of the geographic mix then mixed in with that. There's really not a lot of dispositions of stores.

So specifically, if we think about Florida and California, you would say that you haven't really seen it turn the corner, or would you say that's true on a relative basis or an absolute basis? Just to give us some context for how those markets, which obviously have been high profile, are shaping up for you.

Matt, this is Earl. We certainly haven't seen any measurable improvement in California, and we don't have enough business in Florida where we would be a very good source on that. We only have two Ford dealerships in the state of Florida. So I couldn't really give you good input on Florida, but we certainly haven't seen any significant uptick in the California market yet for us.

Got it. Thank you so much.

We'll move on to Rick Nelson with Stephens.

Thank you, and good morning.

Good morning, Rick.

I wanted follow up on that Toyota recall. If you could ballpark a revenue opportunity in the service area for the recalled vehicles on a per vehicle basis? Perhaps the parts and the labor associated with the recall?

Rick, it's Pete DeLongchamps. What we have seen so far -- you've got two different recalls, and if you have both campaigns simultaneously, it's about $250 of revenue on each ticket.

(Speakers Overlapping). Rick, this is John Rickel. The other thing I'd add is (inaudible) labor on both of these campaigns, there is really not a lot of part sales.

So the bulk of it is labor?

Correct.

How about the attachment rate that you seeing to other services as these people bring their recalled cars into the dealer?

It's too early to tell, Rick. We are just ramping up. The last three days we have done, 1,000 -- 1,350 of repairs on the steel spacer plate, and we're up to about 450 a day on the floor mat recall. So we are still ramping up on that, and I don't have any data yet that would say what the non-recall repair dollars are per ticket.

Okay. On the acquisition front, I know you hired Mark Luppenlatz to spearhead that. If the deals were there, how much revenue would you like to acquire? How much revenue do you think your balance sheet would support?

Well, our planning projection would be we think we could handle about $150 million of revenue in terms of acquisitions this year within our current balance sheet structure.

Thank you for that. Good luck.

Thanks, Rick.

And our next question will come from Derrick Wenger with Jefferies and Company.

Yes, thank you. A three part question. First on the impact of the Toyota recall, what does that mean for writedown of inventories at gross margin pressure in terms of lowering prices and increasing incentives to get them sold? And in particular, the used vehicles, whether they're losing value -- Kelly has said they have been losing value -- what impact will that have? The second question would be on the covenants, the current ratio appeared to be the the tightest limiter -- you're at 1.34 versus the 1.15 minimum. Do you envision coming close to violating any covenants? And then lastly, just on the availability on the bank facility and letters of credit drawn against it?

Okay, I will take the first couple of Toyota questions and I will turn it over to John for your last couple of questions there. Relative to Toyota new vehicle sales, I don't expect any significant impact on our new vehicle margins. In fact, the non-impacted units are selling actually better than we would have expected. And Toyota is always a pretty competitive business. They actually, as you know, shut down the factories for some period of time, so there is no real inventory imbalance for us as we get all of our impacted units back on front line ready with the repair done. So I don't see any margin impact. It's strictly a volume impact on the new vehicle side.

And we just checked last night with all thirteen of our dealerships, and one or two mentioned that there could be a $500 to $1,000 per unit impact on some of the trade prices on Toyota used vehicles; but the vast majority of our dealerships told us no impact at all, and in fact said there's a shortage of good used Toyota vehicles, I assume because they aren't going through the auction until the repairs are completed. So I believe the used vehicle impact on Toyotas maybe quite a bit less than what we have been reading in press. I was very pleased to hear that from our people last night.

This is John Rickel. On your other two questions, you're correct, the current ratio was at 1.34 versus 1.15. It takes a lot to move that number. We are comfortable we have plenty of cushion around the current ratio and don't foresee any issues with that. On availability versus the bank line, start with what you asked on letters of credit, we've got $18 million of letters of credit outstanding. That's against our acquisition line, which is acquisitions for general corporate purposes. We can have as much as 350 million drawn on that line at a point in time. However, we are also governed by a borrowing base, and at the end of the year, the borrowing base would have limited that borrowing to 158.2 million. So the 18 million is part of that. On the general floor plan line, there is plenty of capacity. We've got $1 billion available, and there was something less than 500 million drawn on that with the Ford line -- the Ford Silo, which is specific to new Ford units, total capacity of 150 and we had about half of that drawn. So there is plenty of capacity on the bank lines.

Thank you very much.

You're welcome.

We'll move on to Matt Nemer with Wells Fargo Securities.

Good morning, everyone.

Good morning, Matt.

My first question was on the new vehicle business. You -- C&W, I think, was out saying that retail sales were up sort of mid-single digits, and you tracked below that for the quarter. I'm assuming that's your markets, but can you just help connect the dots between sort of your new vehicle sales, unit volume and the market?

As far as I can tell, Matt, we are competing and performing at a competitive level in all of our markets, so I assume it's some kind of geographic mix. I doubt its really brand mix, so I would think it's more geographic mix. We are pretty heavily weighted in Texas and Oklahoma, and while business is still on an absolute basis pretty good there, those markets were late into the recession, and the new vehicle market in Houston, for example, was down almost 30% last year. So I expect geography related more than anything.

Okay.

We don't see anything that's atypical in our performance.

Okay, that's helpful. Just following up on Rick's question, that's helpful to have the revenue on the Toyota recalls per vehicle. What -- and I guess the fact that it's all labor would suggest that the margins should be -- the gross margins should be nicely higher than your average parts and service gross margin. How do you feel about the incremental margin or the flow through of that to EBIT? Is there any variable SG&A related to these recalls, or is the flow through relatively high?

Well, it's hard for me to say there, but there is some variable SG&A. We've had to -- and Toyota is supporting us with some of that, too -- you've probably read about the checks that they've sent to their dealers. And I don't know how long that money lasts, but clearly we're opening a lot of extended hours, paying technicians above average, or above their normal pay rates to work later hours -- Saturdays, even Sundays, and things like that. There is loaner car expenses, car wash expenses, things like that. So we haven't been able to quantify that yet because we are only really ramping the last three or four days into a high number of recalls per day. So I don't have a good feel, but there is some extra SG&A associated with running this many incremental vehicles through our operations.

Okay. And then as the new vehicle market improves through the year, as expected by some industry folks, how do you feel about the expense dollars -- the variable expense dollars -- coming back into your model? Are there items that you have underinvested in during the downturn that you have to come back and invest in from a P&L standpoint? What's the variable attachment rate on expense dollars?

Yes, Matt, this is John Rickel. I mean, I think it's consistent with the story that we have been talking about over the last few quarters, and there are clearly some things that we did that were restoring -- I mean, there were some benefit cuts and pay cuts. But that's part of -- when we parsed out the 120 million, we talked about 25% of it being permanent, should never come back, which is about 30 million. There's about 30% that is basically completely variable -- it will come back almost dollar for dollar as the volumes come back, things like like sales commissions. It's really that 45% that's the semi-variable. That's where we would put things like the pay cuts. There is also pieces of that, though, that are -- things like efficiencies where we took out a new car manager and a used car manager and the volumes will need to come back more before we put that back. So I think it's still around that story. As to kind of the direct piece, on a variable basis, I think the numbers we have talked about before are in line with that parsing I've just taken you through, and I don't think it's changed much.

So on an incremental sort of one million units, I guess, year-over-year, in terms of industry unit volume, one point I think you were saying that the impact to your EPS would be $0.50, $0.60. Are we still in the ballpark?

What we've said is, they are in the $0.60 per share basis for every million units of SAR, all else being equal, I think we are still comfortable with that.

Okay, great, thanks so much.

You're Welcome.

Our next question will come from Scott Stember with Sidoti & Company.

Good morning.

Good morning, Scott.

I missed what the customer pay increase was for the quarter.

I think it was 1.8%.

Let's check -- they are flipping through their books. I seem to remember 1.8% on same store.

2.8.

Excuse me, 2.8. I undersold us there, Scott, sorry about that.

That's fine. And within that number, can you talk about whether you are seeing some of these higher ticket services getting completed now that we are pretty much anniversarying a year from when people might have been delaying some of those services?

No, I haven't seen that yet. We expect to see that some point later in the year, Scott, but we have not seen that yet.

Okay, and just on Toyota -- on the (inaudible), some of the other brands that could see some impact like Scion and Lexus, can you talk about how those brands have fared over the last few weeks?

Well, actually the Scion brand has kind of been at a lull the last year or two. We actually expect that to get better later in the year because they have got, some new product coming but I don't think Scion is a significant factor one way or the other in this matter. And thus far, I know one of the hybrid recall campaigns impacted one of the Lexus models the other day; but again, I don't think there has been or I would expect there to be a significant Lexus impact.

Okay. And last question, some of the higher end brands have actually performed better than one would expect in this environment, like Mercedes and BMW, which is big to you guys. Could you just talk about what you're seeing there? Is it just new models, or just the customer base?

Well, the luxury brands had a very good close to the year in December. You normally do see that, because historically a lot of leases expire in December. Mercedes has the new E-Class, which I think has given a noticeable lift to Mercedes sales. But we saw good activity in Lexus, Mercedes and BMW in December. They have very aggressive marketing support, and it's traditionally a good time of the year for luxury brands, and that was the strongest part of the market in December.

All right. That's all I have, thank you.

Your next question will come from Charles Vetter with KeyBanc.

Good morning, everyone.

Good morning, Charles.

Couple of quick questions. You mentioned you expected about a 30 million permanent cut in SG&A expenses. I was curious what those were related to? And the second one was about asset impairment -- obviously, it's down significantly. Do you predict 2010 to have any fluctuation from 2009?

Charles, this is John Rickel. On the first one, examples of things that would be permanent reductions in SG&A, we have continued to consolidate our accounting activities. We had accounting center in both Atlanta and in Boston serving the East region during 2009. We consolidated that and moved all of the transactional accounting basically up to Boston. Saved us several millions of dollars. Similarly, we were then in the process of consolidating some of our payroll functions. It's examples like that where those are kind of permanent improvements and it will never go back to having the distributed accounting that we did. So those are examples of some of the things that make up the permanent process improvement. On the asset impairments for 2009, they were primarily around valuing real estate that's held for sale -- surplus dealership real estate -- to present market conditions. That was the main charge, and in 2008 it was primarily a round franchise impairment. It's hard to predict impairments. If you could predict them you would be basically required to take them at the time. I guess the main risk would remain on the real estate fees. You are writing at the current market value, and it depends obviously on what happens to commercial real estate. At this point ,I'm reasonably comfortable that we have got all the assets fairly valued, but you do have to react to market conditions, so it is a difficult area to forecast.

Great. Thank you.

We have no further questions at this time. I will turn the conference back over to Mr. Earl Hesterberg for any closing remarks.

Thanks to everyone for joining us today. We look forward to updating you in April on our 2010 first quarter earnings results. Thank you, and have a nice day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation