車美仕 (KMX) 2010 Q2 法說會逐字稿

Good morning.

My name is Celeste, I'll be your conference operator today.

At this time I would like to welcome everyone to the second quarter fiscal year 2010 conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions) Thank you.

Ms.

Kenny, you may now begin.

Good morning.

We are calling from happy CarMax this morning.

My name is Katharine Kenny, Vice President of Investor Relations.

Thank you for joining our fiscal 2010 second quarter earnings conference call.

On the call with me today as usual are Tom Folliard, our President and Chief Executive Officer; and Keith Browning, our Executive Vice President and Chief Financial Officer.

Before we begin, I need to once again remind you that our statements today regarding the Company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements are based on management's current knowledge and assumptions about future events that involve risks and uncertainties that could cause actual results to differ materially from our expectations.

In providing projections and other forward-looking statements, the Company disclaims any intent or obligation to update them.

For additional information on important factors that can affect these expectations, please see the Company's annual report on Form 10-K for the fiscal year ended February 29, 2008, filed with the SEC.

Tom?

Thank you Katharine, good morning everyone.

Welcome to our second quarter conference call.

We are pleased to report today our record level of quarterly earnings despite what is still a very challenging economic environment.

We are especially pleased that the strength was broad-based with contributions from all major areas of our business.

The government's Cash for Clunkers program certainly had -- certainly helped drive consumers into the market in late July and August.

Similar to the Employee Discount For All from a couple of years ago and Keep America Rolling from 2001, Cash for Clunkers had far reaching appeal that dove not only new car traffic, but also created enthusiasm for used cars.

However, our traffic improvement was only partially due to this program.

Traffic has gradually trended higher since late last winter, but before the spike from the Clunkers program in late July and August.

We also experienced an improvement in sales execution this quarter which was even more impressive given that CAF further tightened its lending standards at the start of the quarter, reducing our used unit cost by a few additional percentage points.

We believe that several factors contributed to our higher sales conversion rate, including our new sales training initiatives and having a better overall inventory position.

In this economy we believe there's also been an increase in the percentage of motivated buyers and fewer customers who are just looking.

Now let me review some of our key financial highlights.

First on sales.

In the second quarter total revenues increased 13% to $2.08 billion.

Used revenues climbed 16% in the quarter due to a 10% increase in unit sales and a 6% increase in average selling price.

Comp store used units increased by 8%.

The higher selling price reflected the continued appreciation and used car wholesale value that's occurred since the start of the calendar year.

Wholesale revenues increased 6% on a 5% increase in unit sales and a 1% increase in average selling price.

While our appraisal traffic improved sequentially, it remained below last year's level.

However, our buy rate improved significantly which more than offset the lower appraisal traffic.

This was partially due to the stronger wholesale industry prices which allowed us to make more attractive buyers to customers, as well as the increase in motivated buyers.

On to gross profit.

In the second quarter our total gross profit per unit increased by $363 to $3,116 per unit compared with $2,753 per unit in last year's second quarter.

Used vehicle gross profit per unit increased by $250 to $2,120 per unit from $1,870 per unit last year.

The dollar amount of the year-over-year increase was similar to the improvement posted in this year's first quarter and it resulted from a combination of factors.

The continued appreciation in used car wholesale values and a robust sales environment both supported the strong gross profit per unit, as did having a fourth consecutive quarter where we improved our inventory turns.

Our wholesale gross profit per unit remained strong at $826 per unit this quarter, although it dipped from $897 per unit reported last year.

We continue to have strong dealer attendance at all of our auctions.

Now I'll ask Keith to review the CarMax Auto financial results.

Thanks, Tom.

Good morning.

We experienced a significant rebound in cap income to $72.1 million in this year second quarter versus a loss of $7.1 million in last year's quarter.

The results for both periods were affected by adjustments related to loans originated in prior periods.

$36.2 million of favorable adjustments in this year's quarter and $28.2 million of unfavorable adjustments in last year's quarter.

This year's adjustments included a $28.5 million of marked-to-market write-ups in the value of our retained subordinated bonds, another $5.6 million more from favorable funding terms and cost for loans that were funded in the warehouse facility at the start of the quarter and $2 million of other net favorable items.

The marked-to-market write-ups reflect significant narrowing in the automotive ABS spreads that has occurred over the last few months.

At the start of the quarter we implemented additional tightening in cash lending standards.

We thought that it was prudent to do so in order to increase the financeability of our new cap loan originations and reduce cash credit enhancements associated with future cash securitizations.

We expect loss rates on new originations will be significantly reduced, which will in turn lower our required capital enhancements --or credit enhancements.

As a result of our capital preservation strategy, cash to loan penetration rate net of three-day payoffs was below 30% for this year's second quarter versus a penetration rate in the mid 30s in last year's second quarter.

On a combined basis this tightening, together with the tightening cap implemented in the second half of 2009, adversely affected our second quarter used unit comps by several percentage points.

During the quarter we also renewed our warehouse facility agreement.

The facility limit was reduced to $1.2 billion from $1.4 billion, primarily reflecting our reduced originations.

While the funding cost spread increased from the previous agreement, it was considerably lower than what we originally anticipated.

Our funding cost spread assumption on the new warehouse facility is approximately 270 basis points above the applicable benchmark rate.

At August 31, we had $625 million available warehouse capacity.

Excluding the adjustments related to prior period originations, cap income still climbed more than 70% versus last year's quarter, primarily due to an increase in the gain origination and higher interest income.

The gain percentage was 4.2% this quarter versus 1.8% in last year's second quarter, and it benefited from both lower benchmark funding rates and from lower enhancement requirements resulting from the tightening of our lending standards.

Cap interest income includes the interest that we're earning on the retained subordinated bonds, and we are currently holding roughly twice the amount of the sub bonds compared with a year ago.

Now, I will turn the call back over to Tom.

Tom?

Thank you Keith.

On to SG&A, we are able to reduce our SG&A spending to $218.1 million from $225.1 million last year, and this is despite a 10% increase in used unit sales.

The reduction in total spending primarily reflects decreases in advertising and growth related expenses such as relocation and preopening costs, as well as benefits from our ongoing waste reduction initiatives.

Together the improvement in sales, gross profit per unit, cap income and SG&A leverage drove our net income to a record $103 million from $14 million in last year's second quarter.

Diluted EPS was $0.46 in this year's quarter versus $0.06 last year.

Even excluding the $0.10 per share of favorable cap adjustments this quarter, we had a record level of earnings per share, notably higher than our next best quarter which was $0.30 per share in the first quarter of fiscal '08.

Again, while Cash for Clunkers had a positive effect on our sales this quarter, it was only one of many elements that drove our success.

So in summary I'd like to emphasize how well I think our associates have performed over the last several quarters during the most challenging environment our Company has ever faced.

We've been able to improve our sales execution.

We have done a nice job controlling inventory, managing through successive periods of both record depreciation and appreciation in used vehicle values while steadily improving inventory turns year-over-year.

We've kept our inventories closely aligned with sales trend which has allowed us to optimize gross profit per unit while still offering great values to our customers.

We have managed through one of the most challenging credit environments in recent history and positioned CAF to be a continuing strong contributor to our business going forward.

We've made substantial progress in our key initiatives and increasing operational effectiveness and reducing waste.

We've also been able to reduce SG&A cost to adapt to the changes in sales levels.

We will continue to focus on improvements in all these areas and on making permanent business enhancements that will serve us well in all economic environments.

In closing let me thank you all of you for your interest and support of CarMax, and as always I'd like to also thank the more than 13,000 CarMax associates for all you do every day.

Now Keith and I would be happy to take your questions.

(Operator Instructions) Your first question comes from the line of Matthew Fassler with Goldman Sachs.

Mr.

Fassler, your line is open.

Sorry about that.

Good morning and congratulations on your performance here.

A couple of questions if I could, largely on credit.

Could you just go into a little more color on the increase in the underlying gain on sale of loans sold to 4.2%, talk about funding cost.

You spoke about credit enhancement.

Just a little more color on what exactly went on, and also on how sustainable you think that 4% rate would be?

We saw a measurable decrease in the benchmark rates.

So that's the principal reason.

And then based on our current outlook, our enhancements are down significantly.

And then the other piece that goes into that, Matt, is the fact that the losses will also be substantially lower based on our projections.

All that's baked into the increase.

Whether we can sustain the -- what used to be called the normalized range of 3.5 to 4.5%, obviously will depend on what the consumer tells us.

As you know, we are very cognizant of three-day payoffs and will adjust consumer rates accordingly.

But as far as those elements, it just depends on what happens to benchmark rates in the short term and we wouldn't expect any material change in the loss rates -- in the enhancement levels that we assumed in this quarter.

Keith, was the tightening in credit standards during the quarter incremental to the second quarter, or is it something that you've been implementing kind of over the past couple of quarters?

We did some testing in the first quarter what we ended up rolling more broadly in the second quarter.

So we've been doing some incremental tightening actually since the second half of last year.

Early last year we were basically focused on capital preservation, and as I think we described it we were talking more about what is the level of equity a consumer had to be, and then as time progressed we ended up starting declining customers that we previously approved.

In the first quarter this year, we actually were testing further declining customers that we would have previously approved, and based on the results of that we rolled that out at the beginning of the quarter.

And we had noted in your latest securitization funds, for the past couple months looked a little bit rougher from a delinquency perspective relative to typical seasonal trends than we had seen earlier in the year.

Is that part of what led you make this move?

Well, the delinquencies are up across most polls versus history.

The last two polls had some very unique circumstances related to them.

The first one that we did this year basically was much more seasoned, and so when we compare that to the relative -- versus the other polls prior to that, given the stressed economy, actually the delinquencies are in line with our expectations.

And the same thing is true of the one we did most recently.

It has a little bit different twist on it.

While it isn't as seasoned because there was some noise around Texas, we have a larger concentration of Texas loans in that particular securitization, and they typically do perform worse.

That is baked into our loss assumption and baked into the delinquencies there.

So again, in all honesty all the polls are performing in line with our expectations, and the good news is that we believe we have the losses baked accordingly.

One final question.

Where are your marks right now on subordinated bonds retained on the balance sheet after the markup by this past quarter?

I don't know the full book value.

Hang on a second.

I might have it.

Just trying to get a sense if you bring it back to par with the additional gains in the day?

Well, for the nondiscounted bonds, I think that you can say that we basically got them back to par.

For the large tranche that we did where we discounted them, and then -- they obviously have long way to go and obviously all of that is going to be subject to volatility and what happens to spreads going forward.

Great.

Thank you so much.

Your next question comes from the line of Ivan Holman with RBC Capital Markets.

Good morning, guys.

Congratulations on a very solid quarter.

I'm sitting in for Scott.

I was just wondering if you could comment a little bit of color with regard to sustainability of increasing gross profit dollars per unit.

You suggested in the past that $2,000 was a tough number to sustain for used vehicles.

Do you still believe this to be the case?

Yes.

I would say the same thing, which is it's a tough number to sustain, but as always it's a balancing act for us between margin and retail margin and wholesale what we are able to make at CAF, and what total sales turn out to be.

We happen to be operating in an environment where we have a pretty significant tailwind with appreciation where you know if you sell a car and you turn around and go buy it back next week, you are going to pay more than what you just had in that car.

That really helped us in the quarter, we talked about that same phenomenon in the same quarter this year.

And so I think we were able to do what we did this quarter, and at the same time still feel like we were passing on a great deal to the consumer because again, each time we sold a car we had to go back and replace it at a higher value.

In terms of sustainability it's always going to be a balancing act for us.

But this was a pretty good quarter for us.

Thank you.

A second question if I may.

Sorry if it's already been asked, my line blanked out.

Can you please try to size the impact of the Cash for Clunkers program just to try to figure out what a real run rate would be ex-Cash for Clunkers.

It hasn't been asked, and I'll tell you it's impossible to really figure out the total impact of Cash for Clunkers until some more time has gone by.

Before Cash for Clunkers started, there was a lot of publicity around it and I think that had some impact on consumers mindset.

Clearly when it happened, it created a spike for us, which we talked about.

And now we are only a few weeks into its end, and I think some more time has to elapse before we can really quantity the exact impact of it.

And it's very difficult for us too.

If you saw our traffic numbers for the quarter, they are actually down slightly year-over-year.

So it's hard to say that Cash for Clunkers helped our traffic in the quarter.

So although it created a spike during the five or six week period when it ran, the total impact is yet to be seen.

So are you saying that after the five to six week period there was a drop off, or was there a gradual deceleration in traffic trends?

The five or six week period ended at the end of August and that was only three weeks ago.

We're in the middle of -- this is just the beginning of our quarter so we are not going to talk about this quarter at all.

That's fair.

Thank you very much.

Your next question comes from the line of Jaison Blair with Rochdale.

Good morning.

Bravo.

Congratulations on getting through a very challenging environment.

Thank you.

Can you provide additional color on the potential to streamline refurbishment?

My understanding is that the cost is currently about $1,500 per vehicle and that you've already pulled out about $100 per vehicle versus an average operating margin of about $800.

Can you talk about how you are thinking about that opportunity going forward?

Could you reduce refurbishment by another $100?

We talked about the $100 that we achieved at the end of the first quarter.

It was a similar number in the second quarter.

We believe there's more to be had there, but with a bunch of moving parts there it's difficult to really say exactly what that number is.

But we actually believe that there is more that we can get, and our operations teams are working very hard to figure out how to streamline operations in a number of different ways and to get those costs lower if possible.

Like I said, we believe there's more but we have yet to quantify it.

I guess the follow up would be you've taken your SG&A down pretty meaningfully.

I think you have gone from 180 employees per store to 130.

Can you talk about philosophy to add SG&A as sales increase and how you balance out, maintaining a lean cost structure with potentially preparing to restart growth, and what we might expect to see over the next 6 to 12 months assuming that we, at current trends, are sustainable?

Well, we don't really look at our employees per store basis across the broad number, but I will tell you that almost all of our dropoff in employees on a store by store basis is directly related to our sales volume.

So at the end of the year we were down on a run rate basis -- our comps were down 26% at the end of the fourth quarter and our employees were down accordingly.

If you look at our SG&A number this quarter compared to the last two quarters is down year-over-year but it's up some sequentially, and that's because our sales have moved back up.

So in terms of our employees per store, a big key for us as a retailer is to match our employees with our sales rate, which I think we have done a pretty decent job of over the last year.

And I would expect we would add that piece of SG&A back as sales come back.

And we are hopeful that we can do that.

As far as restarting growth, we aren't going to get too excited over one quarter in this environment, and we are going to let some time pass.

And when we start evaluating when we would restart growth then we'll talk more about the SG&A associated with that.

Great.

Then just one final question if you don't mind.

Have you achieved any additional insights into the implementation of FAS 166 and 167 and the potential for restating your financial statements?

We are still navigating that as the deeper we get into it, the more quirks we find.

And so it's not as easy as it might appear on the surface.

We have to work our way all the way through that and make sure that when we do it, we do it right and we disclose it appropriately.

And so when we are ready, we'll absolutely tell you exactly what we plan on doing.

But obviously the clock is ticking, and we only have six months to get it done.

Thanks so much.

Your next question comes from the line of Scott Stember with Sidoti and Company.

Good morning.

Good morning.

Can you guys talk about supply of used cars right now, lots of reports out there about supply constraints, and how you would expect that to impact your gross margins going forward?

There have been a lot of reports, and supply is down, and it's largely down because new car volumes have been so down for well over a year now.

Ultimately the supply is going to be driven by what the new car run rate is going forward, and without knowing what that's going to be, it's very difficult to predict supply over the next few years.

What has happened over the last couple quarters is with supply being down, we've seen wholesale prices continue to appreciate.

It's just a basic supply and demand model.

The good news for us is we still represent a very small percentage of total used cars sold.

So in terms of our ability to go out and acquire inventory that's attractive for our customers, it's really not that much of an issue.

We've talked about our market share being less than 2% of one to six year old used cars, and we are only in 45% of the US market.

So that number is still true today.

But trying to predict the supply going forward without really knowing what the new car rate is very difficult.

Could you anecdotally just quantify where you stand with inventory at the end of the quarter?

We feel very good about our inventory being aligned with our sales rate, which is what we've been focused on over the last -- during this really, really tough time for the country and for our company, we've been very focused on making sure that we can keep our inventory in line with our sales, keep our turns up, allow us to manage our margins better, allow us to keep our inventory fresh and allow us to carry what the consumers really want to buy.

So I am very proud of the fact that over the last four quarters each quarter compared to the prior year's quarter, we've improved our inventory turns now for four consecutive quarters in a row.

And where we stand right now is we feel pretty good about our position as it relates to our sales rate.

Okay.

Can you touch on, do you think or have you seen any proof that you are gaining any share from some of the domestic new car dealership closures?

At the end of the last quarter we talked about share being a -- it's not an exact science and there's not a lot of great data out there.

Again, we feel great about where our sales came out for the quarter, but we are only going to report share now at the end of each year.

In the short term it's been so volatile and so inaccurate, I just don't think it makes sense to keep reporting it on a short-term basis when we are not very confident in the accuracy of the numbers.

So we'll report that at the end of the year.

Last question on store openings.

Obviously with a little bit of light at the end of the tunnel there and things improving, are we still in a holding pattern?

We are.

We consider the light at the end of the tunnel to still be dim.

It was bright for a little while.

Got you.

Thanks a lot.

That's all I have.

Your next question comes from the line of Bill Armstrong with C.

L.

King & Associates.

I had a question on gross profit.

With higher wholesale prices for vehicles, I would have expected your cost of supply to be detrimental to your retail gross profit, and conversely it would have been beneficial to your wholesale gross profit.

Yet that seems to be the reverse this quarter.

I was wondering if you could drill down on that a little bit for us?

The dynamic with retail is if you have heard how we talked about managing our inventory in the past, as inventory ages we mark it down.

So if we are improving our turns year over year, then there is less need to mark inventory down.

If -- the other thing that is going on at the same time you have record appreciation, then each time you sell a car, as I mentioned earlier, when you turn around and go reacquire that inventory you have to pay more for it, which makes even less sense to have more aggressive markdowns.

That is the dynamic in the tailwind for margins that we have seen really since the beginning of this year and continued through the summer.

If you look at any external data from Mannheim or [Odessa] or any of the auction chains, it's continued through the summer at really an unprecedented rate of appreciation.

And I understand your question, but it actually creates -- it helps us with margin on retail.

As far as wholesale is concerned, our volumes are up in the quarter and our margin was down -- I think 60 or $70.

We said that that last year second quarter was a really high profit margin for us and again where we are focused there on is turns, and we turn our inventory dramatically faster at wholesale than we do at retail.

If we are within $50 or so, then we think that is pretty good.

So the 50 or $70 that we were down in wholesale profit is not a number of concern for us.

Okay.

Turning to comps, I know new vehicles are a very small piece of your business, but new vehicle comps were down 19% while your used comps were up 8%.

And you think with the Clunkers you'd get a direct benefit on the new vehicle side.

Why were new vehicle comps down so much?

It's a very small percentage of our business and -- is that the right number?

In the big scheme of things, it's such a small number for us.

We did less than 700 Clunker deals in all of our new car stores combined.

It's not a big number.

I'm not sure why the difference is year-over-year.

And last question.

Just in your CarMax used superstores, what actions did you take, if any, to drive traffic into your stores knowing that the Clunkers traffic was going to be all around?

Did you run any specific promotions or advertisements to get people to come into a CarMax store?

Well, a couple of things.

One, we have shifted our campaign towards the conditions in the economy, and we've been calling that our Smart campaign and trying to make the point that now more than ever CarMax is the smart place to shop.

We had some traction in that campaign through the first half of this year, and I think that message resonates with the consumer even through the Cash for Clunkers program.

We also upped our ads -- our mix of advertising on appraisals, and I think when people are out there -- we talked about this before, but when there's any promotion that drives demand and drives enthusiasm around new cars, oftentimes consumers will get out there and realize that they didn't qualify the way they thought they would for that particular promotion.

And you find out that some of the new car dealers aren't as willing to buy whatever the car is that they are driving, and that sometimes can generate appraisal traffic for us.

We did shift towards appraisals in terms of our mix in our campaigns in anticipation of that -- kind of that excess customer being out there who finds out that the incentive they thought was good for them just wasn't.

So telling people come on in and get an -- a preappraisal from CarMax and then see what you can get.

Is that the idea?

That's the mix of the campaign.

Of note is that we still lowered our advertising expense significantly in the quarter year-over-year.

Right.

How much did you lower it by?

Can you disclose that?

I don't know.

Have we talked about that?

It will be down -- hopefully it won't be done because we see things change in the first half of the year.

But it would be down 30 to 40% year-over-year at the end of the year.

For the full year?

Yes.

Thank you.

Thanks.

Your next question comes from the line of Craig Kennison with Robert W.

Baird.

Good morning and congratulations.

Could you discuss the recent appetite for securitizations out there, and how the market might look without TALF at the end of the year?

I'd say the market is looking a lot better.

In fact most recent deals, with the exception of the three-year paper, are getting done without TALF because the spread is actually 90 or lower.

So it's feeling better, and we are optimistic that having the additional three months will allow us to basically get our deals done without TALF.

And we are not even certain whether our next deal will need TALF or not, quite honestly.

How many would you expect to do by the end of the year?

Well, we certainly will have to do a minimum of one, and whether we get the two done by the end of the fiscal year or not remains to be seen.

But at least one, probably two.

So with the securitization market functioning better, you feel like you have the right size in the warehouse to deal with your sales even though sales are clearly better than expected?

Yes.

Relatively speaking, our sales are still down year-over-year in aggregate based on what we've seen.

So we have plenty of cushion.

We stepped up to $1.4 billion last year to give ourselves plenty of room for unforeseen events in the securitization market.

So looking at the place where we were, we felt like we still had the same additional capacity to weather any disruptions should they materialize.

But like you said, right now it doesn't look like anything is coming.

And lastly, are there any changes in the origination fee structure you get as you tighten your credit policies?

Not currently.

Great.

Thank you.

Your next question comes from the line of Rod Lache with Deutsche Bank.

Good morning.

A couple of questions left over.

I was wondering whether you've had any ability to quantify the impact of appreciating used vehicle prices on your margin?

You mentioned a disinclination to discounting, and I would imagine that just the time period between purchasing of inventory and selling it in an appreciating environment is helpful.

If you can just give us a little color on that factor and the sustainability of higher margins, as I would imagine that's going to be affected by the consolidation of some of your competitors?

Yes.

I mean I've already talked about that, but I think that is still yet to be seen.

Some of our -- the profit of this quarter is really the sequential starting point from the first quarter as well.

Our comparisons to last year, although it's pretty significant, it's not that big a comparison compared to the first quarter.

And if you look back at last year, the numbers -- they're harder to move sequentially in big chunks.

Some of it's just a comparison to last year.

But in terms of predicting margin going forward, we have no idea.

But supporting north of $2,000 per vehicle, you mentioned $100 improvement in your cost structure but is there some quantifiable amount that is related to an inflationary used car environment?

Or is that not possible?

As I've said, it's impossible to predict.

And as I said earlier, it's always a balancing act.

I couldn't tell you right now if we had another $100 of savings and reconditioning that we wouldn't put into lower margins to try to drive the incremental sales if the external environment and all the other factors that we utilize in deciding what to shoot for in margins, if that environment changes.

And we feel it would be best to lower margins to drive sales, then we would do that.

Understood.

Okay.

And lastly, on this 4.2% gain on sale, could you just give us a little color on what your average loss assumption and retail rate would be on this, or what was the amount of enhancement that is factored into that, and any additional color on the new accounting scheme and how that would have affected what you would report as profitability in this business?

Well, the loss rate assumption will be less than 2%.

Hopefully that will help.

And as far as 166 and 167, again we still have a lot of work to do.

In general, as I've said before, it is going to add $4 billion in assets on the balance sheet along with $4 billion nonrecourse debt.

And then we'll earn the income evenly over time, but there's a lot of details to be worked out as far as whether we can restate, how we can restate, et cetera, et cetera.

Okay.

Thank you.

You bet.

Your next question comes from the line of Jordan Hymowitz with Philly Financial.

Hey guys, congratulations on a good quarter.

Thank you.

Two quick questions.

Most of them were answered.

First of all, with the wholesale vehicle gain per vehicle, was there any operating change in that, or was it just the function of volume?

In other words, did you deliberately try and sell more cars through wholesale or not really?

The amount of cars we sell through wholesale is directly related to the amount of wholesale cars we buy and the appraisal lane.

We don't shift the, we have pretty stringent retail standards, and we buy everything that we -- we make an offer on every single car we buy, whatever the consumer wants to sell us, and whatever of that mix comes out to wholesale, that is what our volume will be.

We didn't change anything about it.

That's just the way it came out.

Second question is -- with the new accounting next year what is being debated, the way I understand is, how to quantify the historical balance.

But there will be no gain on sale, correct, next year?

You are going to earn them on an interest income methodology, so it's not whether it will be 3.5 or 4.5, there will be no gains next year, you just earn as the income comes in.

Correct?

That's correct.

So what will happen is at the beginning of the year the first entry will be to basically take the majority of the retained interest and run that through OCI, and you will be earning the income from all the prior year's originations that are still out there that haven't been recognized.

And so whether that's a net positive or negative we have to work through the math.

In other words, we will have a whole different set of questions to answer, but one of them won't be gain on sale.

Correct.

You said there was a 2% loss allowance, that is a lifetime allowance for the new pool?

Yes.

Less than 2%.

So mathematically it's about a 2.2 year average life, that will be about 1% loss reserve per year on your new stuff?

Less than that, correct.

Thank you.

Your next question comes from Jeff Feinberg with JLF.

They've been answered.

Thank you.

Thank you.

(Operator Instructions)

With no more questions I want to thank you everybody for joining us today and I want to give one last thanks out to our --

We've got one more question.

Oh, I'm sorry.

Your next question comes from the line of Willis Taylor with Gagnon Securities.

You mentioned earlier that your sales execution improved because of some new training programs.

Could you elaborate more on what those were, please?

It's a number of different things.

One thing we talked about at the end of the year was that without growth, it gives us an opportunity to focus substantially more on execution in the stores and on waste reduction initiatives.

And sales execution is more of a broad based -- various training programs and things of that nature that we've been able to I think make some progression in the first half of the year.

But there are a number of factors that go into execution, and that is just one of them.

Thank you very much.

Thank you.

We have no further questions at this time.

Okay.

Once again, thank you for joining us, and I want to give one last thanks out to all of our CarMax associates in our stores, our home office, and our CarMax Auto Finance.

It's a direct result of their dedication and commitment that has allowed us to perform fairly well in this very difficult environment.

Thank you once again and we'll see you next quarter.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.