Monro Inc (MNRO) 2003 Q3 法說會逐字稿

Welcome to the Monro Muffler Brake third-quarter earnings conference. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded on January 15, 2004.

I would now like to turn the program over to Melissa Myron of Financial Dynamics. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us on this morning's call with Monro Muffler. If you have not yet received a copy of today's release, please call Financial Dynamics at 212-850-5776.

I would just like to remind you that on this morning's call, management may reiterate forward-looking statements made in today's release. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, I would like to call your attention to the risks and uncertainties related to these statements, which are more fully described in the press release and the company's filings with the Securities and Exchange Commission. These risks and uncertainties include, but are not necessarily limited to -- uncertainties affecting retail generally, such as consumer confidence and demand for auto repair; risks relating to leverage and debt service, including sensitivity to fluctuations in interest rates; dependence on and competition within the primary markets in which the company's stores are located; the need for and cost associated with store renovations and other capital expenditures. The company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The inclusion of any statement in this call does not constitute any admission by Monro or any other person that the events or circumstances described in such statements are material.

With these formalities out of the way, joining us for this morning's call from management are Rob Gross, President and Chief Executive Officer, and Cathy D'Amico, Chief Financial Officer. I would like to now turn the call over to Rob Gross. Rob, you may begin.

Thanks, Melissa. Good morning. Thank you for joining us on this morning's call and for your continued support of Monro Muffler Brake. I will begin by giving a brief overview of the third-quarter which ended December 27, 2003. And then I will turn the call over to Cathy, who will provide additional detail on our financial results. After Cathy's comments, we'll be happy to answer any questions you may have.

I would like to begin by saying that once again, we've achieved record sales and earnings results during the quarter. Sales rose to $64.5 million and net income climbed 26 percent. In addition, we experienced our sixth consecutive quarter of comparable store sale increases -- a solid 4 percent, on the heels of a 3.8 percent increase in the same quarter last year. Our strong comp store sales can be attributed to increases across key categories, including brakes up 10 percent, scheduled maintenance up 25 percent, and commercial sales up 12 percent. In addition, we posted a solid 2 percent increase in the exhaust category. The years of decline in our exhaust business seem to be behind us, and the category continues to show improvement and is positive over the 12 months ending December 2003.

Our results reflect consistent execution of our strategy and serve to validate our business model. We strive to be the trusted leader in the vehicle service industry. By generating store traffic via a discounted oil change, and then using that oil change to gain consumers' trust and raise their awareness of our wide range of offerings, we create customer allegiance to our products and services, brand, and company as a whole, which over the long-term drives increased sales of our large ticket items.

This strategy has proven effective, as evidenced by the consistent, year-over-year increases in store traffic and oil changes for the last four years -- which in turn drive the sales increases we've experienced over the past year and half. Plus, as traffic and oil changes increased, we were also able to raise the price of those oil changes to the current 21.99 value. While our oil change offering is still competitive, and remains a vehicle to drive store traffic, our ability to raise the price has grown our top line and bottom line, as we perform approximately 1.4 million oil changes a year.

Finally, we are fully leveraging our traffic increases by constantly considering ways to diversify our service offerings, while at the same time raising our customers' awareness of these offerings via direct marketing and point-of-sale tactics. For example, our scheduled maintenance services grew at a double-digit rate for 10 of the last 11 quarters, and 25 percent this quarter, in large part due to our initiatives to raise consumer awareness of the services. In addition, we posted a 3 percent comp increase in tire sales this quarter that was a result of the traction we have gained in the category thanks to our learning and leverage from our Frasier and Kimmel acquisitions. Tires accounted for 14 percent of third-quarter revenue compared to 6 percent two years ago.

As our top line continues to grow, we are also proud of our cost control, efficient infrastructure, and robust cash flow, which have created leverage and driven bottom-line growth in excess of sales growth. These synergies were achieved despite the growth of certain lower margin categories, such as tires, in our sales mix. We were able to accomplish this primarily due to our company-owned business model that allows us to centralize purchasing and distribution operations as well as utilize performance-based pay plans that have helped improve employee productivity, which has improved 31 percent over the last six years and reduced turnover to the lowest levels since 1992.

Our growth through expansion will continue to accelerate. We continue to execute on our expansion opportunity with BJ's Wholesale Clubs by opening five new locations this quarter for total of 10 as of December 27. And we anticipate having 15 by the end of the fiscal year. Overall, these stores are exceeding our sales and profitability expectations, and we look forward to expanding our relationship with BJ's in the coming year to an additional 20 locations. For the quarter, we opened five BJ stores I referred to and closed two stores, which brought our total number of stores to 565.

However, over the next couple of years, acquisitions will be our primary growth vehicle. As I have discussed before, completing acquisitions remains contingent on us finding cost-effective acquisitions that will strengthen our geographic presence, increase our market share, and diversify our product line, while also being accretive to earnings in a reasonable time frame. That said, we have numerous opportunities we are currently working on and would hope to announce a transaction before the end of our fiscal year.

We continue to be enthusiastic about our business and the traction we have gained. Looking ahead, I believe Monro will continue to grow not only internally -- by seizing opportunities to drive traffic, diversifying our revenue stream and improving productivity -- but also externally, through increased market share, new store additions -- both BJ's and Greenfield locations -- and strategic acquisitions. We're seeing the positive trends of this year continue into the fourth quarter thus far, and we currently anticipate a 4 percent increase in comp store sales in the fourth quarter on top of a solid 7 percent increase in last year's fourth quarter. As such, we are comfortable with our previously stated guidance for the fourth quarter of diluted earnings per share in the range of 14 to 17 cents, split adjusted.

While it's too early to address our next fiscal year, our goals remain the same -- minimum 10 percent top-line growth, minimum 15 percent bottom-line growth, and 4 percent comparable store sale increases. In April, as in prior years, we will provide you with our forecast for fiscal 2005 prior to releasing this year's full financial results in mid-May, so that you are aware of our progress as we move forward.

I would now like to turn the call over to Cathy D'Amico, our Chief Financial Officer, for a more detailed review of our financial results.

Thanks, Rob. Good morning, everyone. As Rob stated, sales for the quarter increased 6.3 percent. Comparable store sales increased 4 percent. And new stores, which we define as stores opened after March 29, 2003, added $1.5 million in sales. As a reminder, Kimmel stores are included in the comparable store sales numbers because they have been open one full fiscal year. And that is compared to a comparable store sales increase of 3.8 percent in the third quarter of fiscal 2003.

Year-to-date sales increased 8 percent. Comparable store sales increased 5.6 percent, and new stores added 4.8 million of sales. And that compares to a comparable store sales increase of 1.6 percent for the first nine months of last year.

Gross profit at 39.1 percent of sales for the third quarter ended December 27, 2003 increased as a percent of sales when compared to the same quarter last year, which showed a gross profit of 37.8 percent. The increase is due primarily to the buyout of the synthetic lease properties which occurred on June 27, 2003. As a result of this transaction, approximately two -- point two (ph) million dollars of expense which was formerly recorded as rent expense and included in cost of sales is now recorded as interest expense in the quarter ended December 2003. This amount last year was closer to $0.5 million of rent (ph) expense because of an existing interest rate swap agreement and additional fees associated with the syn (ph) lease. This reduction in cost of sales was partially offset by approximately 0.1 million of additional depreciation expense recognized in this quarter now that the related synthetic lease -- or former synthetic lease properties are recorded on the company's balance sheet. Additionally, with strong comparable store sales, the company was able to obtain some leverage in occupancy costs which are largely fixed expenses and are included in cost of sales.

Gross profit also increased due to a reduction in material cost, related primarily to the recognition of barter income in the third quarter of fiscal 2004, as well as the recognition of some vendor rebates in accordance with EITF 02-16. In the prior year, these rebates were recorded as cooperative advertising income as a reduction of SG&A expense. As you may be aware, EITF 02-16 for more recent vendor agreements required the company to record cooperative advertising credits and other vendor rebates primarily in accordance with inventory turns, and primarily as a reduction of cost of sales.

Technician labor as a percent of sales was relatively consistent between the two quarters. As Rob stated, however, productivity as measured by sales per man-hour improved approximately 5 percent over the same quarter of last year and about 31 percent since we first started tracking this statistic six years ago -- or seven years ago, excuse me.

Operating, selling, general, and administrative expenses for the quarter ended December 2003 increased to 31 percent of sales as compared to 30.3 percent in the same quarter of the prior year. The increase in SG&A expense as a percentage of sales is due primarily to a reduction in cooperative advertising credits recorded in the quarter ended December 2003 -- in part, due to timing, as well as the company's implementation of EITF 02-16, as previously discussed. For the nine months ended December 27, 2003, these expenses decreased as a percentage of sales from the comparable period of the prior year and were 29.7 percent as compared to 31.2 percent. Year-to-date SG&A expenses declined primarily due to decreased store advertising, decreased field (ph) support expense primarily related to Kimmel and the integration of that business, and decreased cooperative advertising income. Additionally, in fiscal 2003 the company recorded a one-time $1.6 million charge to recognize the vesting of the Chief Executive Officer's performance-based stock options, and this charge did not recur in fiscal 2004.

Operating income for the quarter ended December 2003 of 5.3 million increased 17 percent as compared to operating income for the prior-year quarter and increased as a percentage of sales from 7.4 percent to 8.2 percent for the same period.

Moving to interest expense -- for the quarter, it decreased by approximately 0.1 million dollars as compared to the same period in the prior year. And it decreased from 1 percent to 0.8 percent as a percentage of sales for the same period. Net interest expense for the nine months ended December 2003 was flat with the prior year at approximately $2 million, and decreased as a percentage of sales by about 0.1 percent.

The weighted average debt outstanding for the quarter ended December 2003 increased by approximately $14 million due to the buyout of the synthetic lease, moving to debt from off balance sheet to on balance sheet. And this is partially offset by a reduction in revolver debt. Additionally, there was a decrease in the weighted average interest rate for the current year quarter of approximately 300 basis points as compared to the prior year due in large part to the expiration of higher interest rate swap agreements that had fixed the interest rate on a large portion of the company's debt, including the synthetic leased.

Also, just as a reminder, due to our performance for the 12 months ended June 2003, the company qualified for a 25 basis point reduction in its interest rate spread over LIBOR, which should remain in effect for the remainder of this fiscal year and into next year. Currently, the company is borrowing at LIBOR plus 125 basis points, or at approximately 2.4 percent. This equates to an annualized interest rate savings of about $100,000.

The effective tax rate for the quarters ended December 2003 and 2002 was 38 percent of pre-tax income.

Net income for the quarter ended December 2003 of $3 million increased 25.6 percent over the prior-year quarter, and for the nine months, net income of 14.8 million increased 31.7 percent.

Fully diluted earnings per share for the quarter were 21 cents as compared to 17 cents for the same quarter a year ago, a 24 percent increase. And for the nine months ended, diluted earnings per share increased 28 percent to $1.02 from 80 cents for the first nine months of the prior year after adjustment for the 3-for-2 stock split.

Moving onto the balance sheet -- our balance sheet remains very strong. Our current ratio is comparable to year end and a year ago December at 1.5. Inventory is up about $1 million from March 2003. And turns were slightly improved from last year December and our year end.

Our debt balance increased due to the buyout of the synthetic lease, which moved existing debt for 86 Speedy properties onto our balance sheet. However, overall, we are in a net repayment position with our banks based on our strong results year-to-date. Additionally, we continue to negotiate terms with our vendors to shift more financing from banks to vendors. Our debt-to-capital ratio including the synthetic lease in all periods is 24 percent at December 2003, down from 34 percent at March 2003 and 35 percent a year ago.

For the first nine months of this fiscal year, we generated approximately 28 million of cash from operations, and received $1 million from the employees' exercise of stock options. We've spent approximately $11 million on cap-ex, and paid down about $17.6 million of debt.

Depreciation and amortization totaled approximately 9.5 million for the first nine months.

To reiterate our previous guidance, we expect earnings for the fourth quarter to be in the range of 14 cents to 17 cents, as compared to 17 cents last year, as adjusted for the 3-for-2 stock split. As a reminder, the reason for the shift of earnings away from the fourth quarter, as well as the wider range of the estimate, is due to a few things. First, the tire business is typically the weakest in the first calendar quarter of the year, or Monro's fourth quarter. The second reason has to do with the recent accounting changes for vendor rebates and cooperative advertising credits, which will shift income to stronger sales quarters based on faster inventory turns, moving it out of slower sales quarters, such as our third and fourth quarters. We are still coming to grips with understanding the exact impact on income recognition for fiscal year '04 versus fiscal year '05, which could fluctuate by a penny one way or another depending on the strength of our business and turns for the remainder of the year.

In other words, this is all just a timing issue, because our arrangements with our vendors are as good or better than a year ago with regard to rebates and cooperative advertising credits. However, as a result of the accounting change, the timing of the income recognition is less predictable than in the past.

Third, you are all aware that we have been looking at several acquisition candidates. If deals are successful, our due diligence costs will be capitalized as part of the cost of the transactions. If not, we may have some additional one-time expense this quarter as we close out the year.

And with that, I'll turn the call back over to Melissa -- or to the operator for questions.

(OPERATOR INSTRUCTIONS) Scott Stember, Sidoti and Company.

Good morning. Could you maybe talk about -- with oil changes, where you stand compared to some of your competitors pricewise? And how much more room do you think that you have to keep increasing prices before you have to basically pull back a little?

Well, I think as far start as our oil change price point of 21.99, that's going to be it as far as raising the oil change price. We think that's a good price point. It's very competitive against most of the guys that do what we do -- the Midases, the Meinekes. It's less than the Jiffy Lubes and the Valvolines, and certainly the dealers. But in various markets, we do what the competition requires. I mean, in a lot of our markets, Firestone's there at 12.99 or 15.99. And we'll go to meet that price point. So I don't see us -- as typical, in March every year, we raise our prices. We will do that pretty much across all of our categories this coming year with the exception of oil changes. I think 21.99 is probably where we stay -- and move the other categories, like exhaust and brakes and some of those, a little bit higher to, you know, get the leverage we have.

And with regards to BJ's, could you maybe quantify -- you say in the press release that the stores are operating above your expectations. Is there anything you can give us to maybe quantify it?

I think what we said overall for the BJ's locations -- in total, we expected a new location in year one to lose between $25,000 and break even. What we -- so we were planning on a negative profit hit the first year of expanding this program. As it turns out, collectively, the BJ's stores are profitable right out of the chute. And their sales are anywhere from 50,000 to 100,000 more than we had budgeted. And obviously, collectively, they are not losing 25,000 to break even. So it's been profitable year one, which bodes very well, obviously -- because next year, the year one stores are going to be moving up the maturity curve. They will become more profitable. And now we have a feeling that, as we layer in the new stores, instead of it being a drag on earnings, it will be neutral or slightly positive -- consistent with the experience we have on the 10 stores that are currently open.

And what would you expect a typical mature store to do in sales per year?

I think best case, we can probably get these stores to somewhere between 550,000 and 650,000. They will never have the opportunity to get to be million-dollar stores, strictly because of our obligation to perform a lot of the tire mounting and balancing and work for BJ's, which will limit the amount of other services we can do.

Okay. And one last question is on the acquisition front. The last couple of acquisitions have focused on tires. And you've done a good job, obviously, of cross-levering (ph) the businesses across the way. Are you still leaning in that direction? Can you give us some kind of feel on that?

I don't -- certainly, the last two acquisitions were tires. The recent for it is the pricing was more attractive than some of the muffler shops we were looking at. As of today, there are more tire opportunities than there are muffler opportunities. That being said, both are possible. I am not sure which one is going to come across the finish line first.

That is all I have. Thank you very much.

Brett Jordon, Advest.

Good morning. A couple of quick questions. One -- back to the comp -- I guess as far as the 4 percent -- the composition price versus traffic on that?

And then another quick follow-up on the acquisition -- I guess, geographically, do you want to give any color as to where you're looking the hardest?

As far as -- traffic was up 2 percent, and we probably got 2 percent in price. That's where your 4 percent comes from. And as far as where we're looking, we are looking within our 16 states or contiguous -- and contiguous isn't Texas.

You stated your minimum goals for this year -- you weren't giving much color on the out (ph) fiscal year, but you -- refresh us as to what the minimum goal was?

Sure, the minimum goal that we would expect -- and, you know, what we say by that is we are obligated internally to get to those numbers without doing an acquisition -- is 10 percent top-line growth, 15 percent bottom-line growth, and 4 percent comparable store sales. And again, come April, as we usually do, we'll be able to fix some better numbers to at least break out the year for you.

Thank you.

Jerry Heffernan (ph), Lord Abbott.

Good morning, everybody. In regard to pricing, could you just dive into the whole aspect of where you believe your pricing power is currently? I know that you gave us a pretty good -- pretty accurate statement regarding oil change specifically. I guess where I'm coming from is I'm seeing commodity prices of all types increasing. You know, there was a day when those things -- it was very common for them to be just priced right through. How do you see these things affecting you?

With our growth, we don't have some of the increases in pricing pressure maybe some of our competitors do. Our vendors see us growing. We're one of the few guys that are expanding. So that helps us specifically on tires. Certainly raw materials have been going up. Tire costs have been going up. What that means for us is basically some of the improved pricing we get because our tire business is growing so quickly is offset by those cost increases. Not a net negative position, or not a net margin hit, but we certainly will not be getting the benefits of our buying power as it continues to expand -- and it will -- over the next year versus that being offset by the raw material increases.

As far as the other categories, any minor increases we are getting, we are more than able to offset with price increases, really, throughout all the categories. We want to be competitive. That being said, unlike oil changes, which is our major traffic driver -- and we're very focused on being competitive in the marketplace -- I am not so concerned about being $20 or $30 more than my competition on a brake job. Number one, we'll be in business a year from now; number two, we'll do it right. And number three, probably most important to the customers out there is they're a lot more concerned that you're not performing work that doesn't need to be done, so you're not paying 400,000 -- $400 for a brake job that doesn't need to be done versus paying $430 for one when it needs to be done and it's done correctly.

Thanks. You know, those $400,000 brake jobs are killers.

Yes, that's great for the margin, if we could actually get that. We're probably not quite looking for that, Jerry.

Good thing. Help us understand something. In regards to your statement on acquisitions, and understanding that it has always been an aspects of your corporate plan -- corporate strategy -- the information you gave us on the BJ's locations -- expected to be a loss of 25 to break even in the first year. At this point, collectively, they are breaking -- they're profitable in the first year. Adding to that, the thought that with each incremental unit, Monro as a group gets better at knowing how to handle these locations and how to open them up. Why is it better to look for other acquisitions as opposed to an effort to accelerate the growth of BJ locations?

Good question. You know, certainly, with the BJ's locations -- number one, initially the thought in setting out what we did this current year and what we anticipate doing next year is we were very mindful. We did want to protect the bottom-line. And when you do your projections and you think potentially year one it's going to be somewhat of a drain on your earnings, you want to stage the stores so that it's not a major impact.

As it turns out now, they are looking better. They are looking profitable quicker. We are stating we think we'll open 20 next year. Might that be 25, potentially? Sure. Why is it not 50? I think BJ's that is remodeling a lot of stores. I think BJ's wants to get comfortable with the deal, as do we. And you know, I think the stepped approach works within all of our parameters, number one.

And number two, these things take some time to get done through zoning, you know, in the various marketplaces. We just opened a couple of locations down in North Carolina. Initially, the game plan wasn't to go down that far. It was to stay in the Massachusetts area, and in the Rochester, New York area, where we could stay close and keep an eye on these things. Might it accelerate? Yes.

Regardless, even if we were going to do more BJ locations next year -- 30 to 35, say -- we would still want to be looking at acquisitions, because at some point that window of opportunity is going to close. And the acquisitions that we're either currently talking about or feel we'll be able to accomplish next year -- the price is going to go up. And we think there's that window to buy things reasonably, to grow our business. So regardless of what we would do with BJ's, we think both pieces of the strategy are important to grow the business.

Okay, I appreciate that. And I guess this question is more towards Cathy. If you could you -- actually, probably save me some effort here of digging through the file. When do we begin comparing like methods in accounting here? If I'm correct here, the fourth quarter still will not be a similar comparison in accounting methods. Am I correct there? Or (multiple speakers) has anything been restated?

No, you are correct. Are you talking about the change in the vendor rebate accounting?

Yes.

It really doesn't become fully comparable until all -- any agreement signed before December 2002 is under the old accounting rules. Any new agreements are under the new accounting rules. And we have a big percentage of our agreements that are still under the old accounting rules. Just some are under the new. So they will be evolving, because we enter agreements for anywhere from one to five years. And we still have some that have a couple of years to go. So we probably -- within the next 18 -- 12 to 18 months, most of them -- the accounting will be a lot more comparable. But --

Okay, so even this year, the seasonal effect that is being affected by the change in accounting is still in place somewhat, just not to the extent that it was in the '02 year.

That's correct. That's really correct. There's just a -- right now there's probably about, I would say, maybe 10 to 15 percent of our purchases are affected by the new accounting rules and are starting to move -- that revenue is starting to move up into cost of sales. But until all the agreements evolve and are renewed, you're still going to have some of that income in cost of sales and some of it down in cooperative advertising.

What will have occurred, Jerry, is this year really will have created a baseline. So if the question is more, you know, are we going to continue to see huge fluctuations quarterly? The answer is no. The baseline will have been set this year, you know? And I would not expect next year to be running the fourth quarter flat while the first three quarters are up 30 percent.

Okay. That's good. And Rob, my final question, if you would -- I think you mentioned in your beginning comments that the turnover is at a low. Could you just give us some more details on that? Comparatively, where is it? Is that just something that just spiked down? Or has it been something trending for the last several quarters --?

It has been trending down. Last year was the lowest it has been since '92. This year, it's better. I'd rather not get into tons of detail. I think what we have commented on on our turnover is that a program we have called the President's Challenge has done a wonderful job. It's a program where we give the top 25 percent performers of our store managers an 18-month employment contract, a minimum raise of 5 percent, and 325 stock options. Obviously, the stock options' vesting over four years has a tendency to improve retention. And year over year -- we're now in the fifth year of this program -- that group of employees, which are our best store managers, turns at a 10 to 15 percent rate, which is significantly better than technicians or the other group of store managers we have.

It would be interesting to hear if you can consider some sort of metrics that you would be willing to discuss on that, because as -- per my understanding from our earlier conversations, one of the things that you're really looking for is customer satisfaction, customer stability. And one of the leading aspects of that is the customer consistently seeing the same peer (ph) person at the store.

That is absolutely correct.

So it would be nice if you guys can give some thought to an acceptable means of putting out some metrics for us to follow on that in that area.

Okay.

Thank you very much.

Larry Raider (ph), LAR Management.

Good morning. Two things -- you've pretty much answered the question on the BJ expansion and the logic and the metrics there. In terms of your own acquisition, what sort of -- at this juncture, minimum size, maximum size -- and given what you just commented on acquisitions, that prices today are less than they are likely to be a year or two out -- and I would like to know the rationale why. But given that comment, are you likely to make two, three acquisitions in the next 12 months? You know, size level of acquisition, min, max, and the explanation of why acquisitions today are likely to be cheaper than they will be a year and half out?

Sure. You know, the range of things that we're currently looking at are anywhere from 5 to 60 locations -- you know, more likely than that, somewhere between 20 and 40 locations. As far as why we think the window of opportunity over the next two years might be better is -- as all the industry trends are positive and continue to get better, a rising tide lifts all boats. So guys that might be on the verge or might be more concerned about their cash flow or the profitability of their company -- while Munro might be the first one out of the gate on exhaust and some of the other things we have done to really fundamentally drive our traffic and build the business correctly, others might get stronger over this period and not be as willing to sell as they are today.

Got you. Thanks. Keep up the good results.

(OPERATOR INSTRUCTIONS) Jack Velots (ph), Midwood Research (ph).

Hi. Cathy, I was wondering -- in the SG&A category, to what degree did the 02-16 negatively impact SG&A? And if you took that out, what would the comparison be in terms of gain, year-over-year?

I don't think we're getting specific on that, Jack. I think as far as we said, we took less cooperative advertising credits. I think we gave that number, and we're happy to give that to you again. I think net net, short of that, is it ends up being a wash, because all we're doing is transferring dollars from the SG&A line --

I understand that. What I'm saying is, what would -- you have an increase of 8.5 percent year over year for the total SG&A. What I am wondering is -- it would probably be a lower number (multiple speakers) excluded the impact.

Okay, we took 1.2 million less in SG&A cooperative advertising income this year -- year-to-date so far this year versus last year. How it impacts quarter by quarter is a very complicated calculation, which if I could do it, I have to disclose in my 10-Q. And we haven't quite figured out how to do that yet. But year-to-date, I can tell you that we -- just in SG&A, it's 1.2 million less, and there was a much smaller number that went up in cost of sales somewhere in the $150,000, $200,000 range went up to cost of sales. So total, we're $1 million down from last year in recognition of that cooperative advertising income that will eventually move into succeeding years, mostly FY '05.

Since the timing of this depends on inventory returns -- (technical difficulty) and since you're turning your inventory this year -- you know, what are the turns -- like 2 something?

Yes.

Okay. So going into next fiscal year with those turns behind you, there should be much, much less of an impact, I assume, in fiscal 05 from the 02-16 impact.

It is, except that I -- I have a little different view than Rob -- a slightly different view. It won't be as dramatic. But because most of our agreements have not switched over to the new accounting method, we're still going to see a little bit of shifting -- a little more shifting into Q1 and 2 as those new agreements fall under the rules. Now, the old agreements can be recognized pretty much straight-line over the course of the year. So you still have a big chunk of income that's straight-lined. And as they fall into the new accounting rules, you'll see a shift of maybe 60 percent in the first half and 40 percent in the second half, or however the turns shake out. It depends on the product and how fast it turns and where the seasonality lies in that particular product, because we have to figure for each product line. That's one of the reasons this whole thing is very complicated.

Okay. Rob, on a year-over-year basis, regarding oil changes -- what was the comparison for this quarter versus a year ago?

Are you talking about units?

Or dollars. In other words, what was the comp sales gain for oil changes in dollars or units, however -- whatever is easiest for you to know?

6 percent this quarter. Units.

6 percent units?

Correct.

Wow. So it must have been higher in terms of dollars.

Sure. Prices are going up. And that's obviously a piece of the miscellaneous category and driving scheduled maintenance, which was up 25 percent.

Right. There was something you mentioned in terms of -- there was a decrease in store advertising. Is that correct?

Yes.

And what area was that? And why did that occur?

It basically occurred -- and I think we talked about this last call, that it would occur -- is that with a lot more of our resources going to direct-mail, one-on-one consumer marketing, using our database, and as far ahead of the curve we are on that with our systems, we don't -- we no longer do any television or radio advertising. So it's much more efficient -- obviously, significantly cheaper, and we have been able to drive traffic and comparable store sale increases with a reduction in advertising.

I see. So does that mean that next fiscal year, it will be comparable advertising in dollars compared to this fiscal year?

With the exception of, obviously, we plan on having more stores. (multiple speakers) As a percentage of sales, we would expect advertising to go down. Dollars will probably increase, because we certainly expect to open more than 25 stores next year.

One last thing regarding acquisitions, and that is I would assume -- I just want to -- (indiscernible) seems obvious, but just to be sure -- given your strong balance sheet and your ability to borrow that if you made an acquisition, you would do it for cash as opposed to stock.

That's correct. (multiple speakers) we think the price of the stock fairly reflects the company's value.

Thank you.

Jim Larkins, Wasatch.

Cathy, did you give a D&A number for the quarter?

Yes, it's 9.5 million. I'm sorry, for the nine months -- not for the quarter. I'm sorry. The quarter, it's about $3 million.

And it would probably be 12 to 13 million D&A for the year.

Yes.

Okay. And your cap-ex expenditure -- does that reflect the reversal of the synthetic leases?

No. That's without the synthetic lease.

Okay. And so if I look at statement of cash flows, the cap-ex I see in there is just spending on your existing stores?

Right.

Okay, fine. Is there any current portion of long-term debt in your current liabilities?

Yes, it's very small though. It's about $0.5 million. Because most of our -- and it's just on a few small notes payables. Our entire revolver is -- there's no principal payments required on our main credit facility, either under the old synthetic lease part of the revolver or the current -- you know, the regular revolver.

Okay. And then, Rob, just to pile on (ph) to Larry's question --a little bit about the range of acquisitions. If we assume, say, there's an average of 30 units per opportunity out there, would you hope to do two or three a year? Could I get some range there on what you think is potential -- is your potential?

I have a hard time getting into specific store accounts because I don't want to put a number out there and then feel obligated to overpay to hit the number. But with what's out there, if they're priced right, the organization -- with the infrastructure we now have in place and have built-up -- certainly -- in a perfect world, if they were 25- or 30-store deals, we could -- and if they were priced right, would hope to do two or three of them a year. That would not scare us.

Okay. I think all my other questions have been answer. Thanks a lot, guys.

Jeff Nixon (ph), MCM.

Good morning. What percent of -- maybe you mentioned this in the opening remarks (ph), what percent of sales is scheduled maintenance?

I didn't hear -- I'm sorry --

What percent -- what share (ph) of sales -- how much of your sales come from scheduled maintenance now?

We haven't broken that out. I'd think scheduled maintenance is a subset of our miscellaneous services category. And that's running about 25 percent of our business. And scheduled maintenance is a piece of that. We haven't gotten that deep into breaking out especially that category because it's three years old. Obviously, some of the growth rates, while we have been running plus-20 for the past three years, it is off a (ph) smaller component. But I'd just as soon not make all my dealer-competitors more nervous than they already are.

Because if it's -- it's at 16 percent of sales of that -- in other words, if it's more than half of your miscellaneous services, then that provided -- a 25 percent boost there would have provided all of your comp store (multiple speakers)

No, it's nowhere near that.

Much smaller?

Absolutely.

Okay. And are you seeing any material change? It seems like, you know, Midas in particular has been through a lot of changes recently. Are you seeing any material change in their competitive (ph) approach as it affects you?

No, but I think certainly all those guys -- you know, they have new management. They're doing a better job. It's not a zero-sum game. The industry trends create opportunities for all of us. Obviously, with our comps -- comp performance the last six quarters, we are grabbing market share at the expense of some of them. They will continue to perform better. Obviously, their stocks have performed better.

But I am not so much focused on like a Meineke corporate or a Midas corporate. I mean, we compete down to the customer level. So my business model -- being company-owned versus a franchise model -- is a huge competitive advantage, both on health-care costs, both on acquisition, cost of goods. And my concern needs to be that we are outperforming the individual Midas or the individual Meineke in, you know, Verona, Pennsylvania, as opposed to worrying about what their corporate strategy might be.

Okay, I appreciate it. Thanks.

(OPERATOR INSTRUCTIONS) Jim Larkins, Wasatch.

Yes, Cathy, just to follow-up on my question about cap-ex and the reversal of the synthetic leases. I'm trying to understand by looking at your previous Q's (ph) and statement of cash flows what type of cash flow the business is generating -- kind of on a percentage of net income basis -- free cash flow (multiple speakers) before acquisitions?

Now just so you know, the synthetic lease number is considered a noncash transaction for presentation in the cash flow. That might be confusing a little bit. It's not actually in the statement of cash flow, because all we did was take -- assume the debt and the assets of that entity that had the synthetic lease. So you don't really count it as -- and we really have been using the assets before, so it's considered noncash. So -- does that help you, or --?

A little bit. And I guess what I'm trying to get to is -- and maybe I've got something wrong in my numbers, but I'm trying to understand is -- is your free cash flow roughly equal to your net income, or --?

Are you defining free cash flow as like cash --? I define it -- cash from operations plus D&A, and then any changes in my balance sheet items, which net a couple of million bucks --?

Yes, roughly -- (multiple speakers)

That's about $28 million in total. Does that make sense?

Yes.

Because you have got, you know, 14, 15 million of year-to-date of -- and now, we're talking year-to-date -- 15 million of net income, adding about 10 million of depreciation, and then a couple of million dollars change in my, you know, current assets and liabilities, because I increased payables. So I shifted some of it -- I shifted some of my financing to the bank instead of (ph) from the vendors. So I picked up a couple of million dollars there.

All right. And what were payables for the quarter? Do you have that?

The payable number at the end of the quarter, do you mean -- is $21 million, compared to 17 million in March of last year.

Right. And then you said your run rate on your interest rate right now is what?

What are we paying? LIBOR plus 125 basis point. So it's about 2.3, 2.4.

Perfect. Thanks a lot.

At this time, there are no further questions. I'd like to turn it back over to management for concluding comments.

Great. Thank you for joining us on today's call and your continued support. I believe our company is best positioned to capitalize on the industry tends and to continue to outperform, grow our business profitably, and post superior results for our shareholders. So thanks. Bye.

Thank you. That does conclude today's teleconference. Thank you for your participation, and have a great day.