Monro Inc (MNRO) 2004 Q4 法說會逐字稿

Welcome to the Monro Muffler fourth-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 Thursday, May 20, 2004.

I would now like to turn the program over to Ms. Melissa Myron of Financial Dynamics. Go ahead, please.

Thank you. Hello everyone, and thank you for joining us on this morning's call with Monro Muffler. 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 repairs; risks relating to leverage and debt service, including sensitivity to fluctuations of interest rates; dependence on and competition within the primary markets in which the company's stores are located; the need for and costs 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 an admission by Monro or any other person that the events or circumstances described in such statements are material.

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

Thanks, Melissa. Good morning and thank you for joining us on today's call. We've completed another record year and are here this morning to share the results with you in greater detail as well as discuss our outlook for the future.

I'll first give a brief overview of our results and strategy and will then turn the call over to Cathy who will provide additional detail on the financial results.

2004 was a solid year for our company. For the third consecutive year, we posted record sales and net income. We delivered a very strong, industry-leading 11 percent operating margin and 6 percent net income margin and maintained a flexible, strong balance sheet while significantly growing the company. We also generated one of the largest comparable store sales increases, 4.7 percent, in the automotive service category.

With our operating margin and our net income margin at approximately twice our competition, and the fact that we have not benefited from the maturity curve and ramping up of new locations, our comparable store sales growth is even more impressive. These results further confirm our superior business model based on driving store traffic, retaining customers, and delivering profitability through operational excellence and low-cost in our network of company-operated stores. Further, we expect our acquisition strategy to continue to deliver faster earnings accretion, usually in year one, and more accelerated earnings in year two, then is the case with opening new stores. Acquisitions will represent a cost-effective growth strategy that, in most cases, reduce real estate costs and risk.

We're pleased by our performance in fiscal '04, and we expect to build upon this success in '05. In fact, we are currently projecting that we will experience the most significant combined sales and income growth in a decade during '05, with top and bottom line growth of at least 20 percent for the full year, not taking into account future acquisitions.

The strong growth we're projecting for fiscal 2005 will be driven by a continuation of the same factors that contributed to our success this year, including continued increases in store traffic, implementation of additional price increases, diversification of our product and service offerings, favorable macro-economic factors, further penetration of our existing and contiguous markets, and solid execution from our entire team.

Now, I would like to provide a bit more color on each of these factors and how they impacted 2004. Throughout fiscal 2004, our oil change offering continued to act as a vehicle to drive store traffic, given its competitive price point. We continue to capitalize on the traffic generated by our discounted oil changes and are driving further sales by offering a broad range of products and services. This strategy is working well, as evidenced by the fact that our comparable store scheduled maintenance services were up 20 percent for the fourth quarter, the 10th consecutive double-digit increase.

We also successfully instituted a $2 price increase for our oil changes during the year. And at approximately 1.4 million oil changes per year, this has contributed nicely to our top and bottom line growth. I can say with comfort that our customers have accepted these price increases, as evidenced by the 9 percent growth in the number of same-store oil changes performed this year.

Additionally, we have been successfully implementing price increases in our other products and services. We increased our prices in fiscal 2004 by approximately 3 percent while continuing to increase same-store traffic. Average ticket was up 2.5 percent for the year, providing evidence that our price increases are sticking and that we are gaining traction in higher ticket services, such as brakes, which were up 5.9 percent.

That said, we have already implemented price increases of 3 percent this year on all services other than oil changes, which should more than offset rising oil and tire costs. We are also driving traffic sales and profitability through continued improvements and in-store execution and productivity. In fact, our labor productivity has improved 32 percent over the last five years.

We are particularly pleased with the benefits from our powerful POS direct marketing database, which provides consumers' customized printouts of maintenance services their cars will require over the next several months, as well as generates customized reminders and coupons that are mailed to the customer just prior to their need for a specific service. This system has proven to be a cost-effective way to improve customer awareness of our broad range of products and services, build stronger relationship with our customers, and drive additional store visits per customer per year. It is worth noting that our 4.7 percent comp store increase was generated spending less advertising dollars. As usual, we continue to selectively test a variety of other new services that'll not only provide additional convenience for customers, but also further improve overall store productivity.

Our commercial segment, which was up 19 percent for the year, on the heels of a 15 percent increase last year, continues to perform well as we continue to see increased business from existing accounts as well as additional customers.

Over the past six years, the exhaust portion of our business has been one of the few offsets to our positive momentum. That said, I am very pleased to report that comparable exhaust sales were flat for the year. Additionally, the exhaust category represents an ever-declining percentage of our business as we grow our other service offerings, including tires, a trend that will continue to offset any softness in exhaust.

In addition to our initiatives to proactively drive the business, we believe we are poised to also benefit from certain favorable external factors. For instance, from an overall industry perspective, there are many positive trends. There are increasingly more cars on the road, and older cars are still being driven more miles, even with the rising gasoline prices. The number of vehicles six to 10 years old are forecast to increase 15 percent over the next five years. Demographics are in our favor. With baby boomers aging, vehicles are more complex, and there's less competition. The economy and industry environment continues to impact many competitors and this should provide us with solid opportunities to further our acquisition strategy as we move forward.

With the completion of Mr. Tire acquisition in early March, we are continually reviewing prospects that fit our criteria. As I have said in the past, we definitely will not do deals just to do deals. Rather, we are intent on 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.

Along these lines, the integration of Mr. Tire is going very well, thanks to the tremendous effort of the Mr. Tire and Monro teams. And we are pleased with the performance of these new locations. Comparable store sales are strong, and as we have previously stated, we expect to generate earnings per share of $0.06 to $0.10 this first year. We have completed the process of phasing out the Kimmel and Speedy names in Mr. Tire's Baltimore market in order to solidify our presence and name recognition in this key geographic location.

The two surviving brands in Baltimore are Monro and Mr. Tire. This will be a common theme in integrating future acquisitions as it gives us market dominance and further pricing power. Additionally, based on the success of our initial locations, we plan on opening in approximately 20 new BJ's Wholesale Club locations this year throughout our trading area. Our agreement with BJ's provides access to their prime real estate, facilitates a cost-effective strategy, by which we can expand our service bays and fill in our existing markets and tap a different demographic customer. We also plan on opening five new green field stores, two of them being Mr. Tire locations.

In summary, we are very proud of the results we achieved in the fourth quarter and full year. And most importantly, we've seen this positive momentum continuing in the first quarter of fiscal '05. Our comparable store sales remain up approximately 3 percent on the heels of a 5.9 percent increase in the first quarter of last year. We are very optimistic as we move forward, and as such, we remain comfortable with our previously-stated first-quarter guidance for earnings per share in the range of $0.48 to $0.52 versus $0.41 last year, and our full-year EPS forecast of $1.40 to $1.50.

This completes my overview, and I'd now like to turn the call over to Cathy D'Amico, our Chief Financial Officer, for a more detailed review of our financial results. Cathy?

Thanks, Rob. As Rob stated, sales for the quarter increased 9.4 percent. And new stores, which we define as stores opened after March 30, 2002, added 5.1 million to sales including 3.5 million from the acquired Mr. Tire stores.

Comparable store sales increased 2 percent from last year, and that is compared to a 7.3 percent increase in comp store sales for the fourth quarter of fiscal 2003. Year-to-date sales increased 8.3 percent. New stores added 10.9 million, again, including 3.5 million from Mr. Tire. Comparable store sales increased 4.7 percent as compared to a 2.9 percent increase for the year ended March 29, 2003.

Gross profit at 38.5 percent for the quarter ended March 27, 2004 declined as a percent of sales when compared to the same quarter last year, which showed a gross profit of 39.3 percent. The decrease in gross profit as a percentage of sales is primarily due to an increase in material costs, partially offset by a decline in labor and occupancy costs as a percent of sales.

Material costs increased for several reasons -- in part, there was a shift in mix. On a consolidated basis, tires represented 14.8 percent of sales in the fourth quarter of fiscal '04, as compared to 12.4 percent in the prior-year quarter. Additionally, there was an increase in costs related primarily to one-time adjustments as follows -- first, as you may recall, we changed from the LIFO to FIFO method of valuing inventory last year and recorded a one-time benefit in the fourth quarter of fiscal 2003 when we reversed the LIFO reserves. Second, in the fourth quarter of this year, we recorded an adjustment to our bulk supply inventory to write off some older, obsolete items. There was not a similar entry in the fourth quarter of last year. Last, there were some increases in material costs, largely in the area of oil and oil filters, as compared to the fourth quarter of last year. These increases were partially offset by a decrease in outside purchases for the quarter as compared to the prior year.

Offsetting this increase was a decrease in technician labor costs as a percent of sales. The shift in mix to tire sales helped to reduce labor costs, which are generally lower in the tire division as compared to the service division. Also in the fourth quarter of fiscal year '04, there was a heightened focus on labor control by operations.

Occupancy costs were down as a percent of sales, largely due to the Company's purchase of the entity holding the synthetic leased properties. Since July 2003, the company now records interest and depreciation rather then rent expense for these stores.

On a full year basis, gross profit for fiscal 2004 was 41.1 percent of sales, as compared with 40.9 percent of sales for fiscal 2003. The improvement in gross profit is primarily attributable to a decline in technician labor costs as well as distribution and occupancy costs, which are included in cost of sales.

Technician labor costs as a percent of sales improved due to better operational control and improved productivity as measured by sales per man hour. Since the Company began formally tracking the statistics over the last seven years, productivity has increased every year, and since fiscal 1988, it is up 32 percent.

The decrease in distribution and occupancy costs as a percentage of sales, again, is largely due to the buyout of the synthetic leased properties. As a result of this transaction, approximately 1.8 million of expense, which formerly was recorded as rent expense and included in cost of sales, is not included in this line in fiscal year '04. 800,000 of expense was recorded as interest expense during fiscal '04, and approximately 1 million of expense was eliminated, primarily due to a decrease in interest rates with the expiration of swap agreements mid-year.

The reduction was partially offset by approximately 400,000 of additional depreciation included in occupancy costs, now that the related 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.

These decreases were partially offset by an increase in material usage for the year, partially related to a shift in mix as previously discussed, which included a greater percentage of higher-cost tire sales, as well as an increase in outside purchases. The bulk expense previously discussed also contributed to the increase in the material cost. Going forward, there is still an opportunity for improvement in material costs as the Company continues its efforts to reduce outside purchases and implements planned price increases.

Operating, selling, general, and administrative expenses at 32.1 percent of sales for the quarter ended March 2004 were flat, as compared to the same quarter of last year. For the year, SG&A costs were 30.2 percent of sales, as compared to 31.4 percent last year.

Gross expenditures were up for the quarter by approximately 1.9 million, of which $1 million was attributable to Mr. Tire. Increases primarily occurred in utilities expense, insurance, and manager pay for the quarter.

For the full fiscal year, SG&A increased by approximately $3.7 million, and as a percentage of sales, decreased by 1.1 percent as compared to the prior fiscal year. The increase in expenditures is primarily due to increased store manager wages to improve the quality and retention of this highly-important position for the Company; increased worker's compensation costs; increased cost in our efforts to comply with Sarbanes-Oxley requirements; and increased utility costs. These increases were partially offset by a planned reduction in advertising expense as the company shifted dollars from more expensive radio, newspaper, and electronic advertising to more efficient and cost-effective direct-mail marketing. Additionally, there was a $1.6 million charge in fiscal year '03 for the vesting of performance-based options for the Company's Chief Executive Officer, which did not recur in fiscal year '04. There was also a reduction in expense for field management.

As a percentage of sales, the non-recurring CEO option expense reduced SG&A by 60 basis points. The reduction in store advertising accounted for 70 basis points of the decline.

Moving to interest expense, net interest expense for the quarter ended March 2004 increased slightly from the prior year, but was flat as a percent of sales. The weighted average interest rate for the current year quarter was approximately 4.4 percent, or 230 basis points lower than the rate for the same quarter of last year. Additionally, the weighted average debt outstanding in the quarter ended March 2004 increased by approximately $21.1 million from the quarter ended 2003. The 30-day LIBOR rate decreased approximately 20 basis points between March 2003 and March 2004, and prime was flat.

For the full year, interest expense decreased slightly as a percentage of sales from 1 percent in fiscal 2003 to .9 percent in fiscal 2004. The weighted average debt outstanding for the year ended March 2004 increased by approximately $9.2 million from fiscal 2003. Largely offsetting this increase was a decrease in the weighted average interest rate for the 2004 fiscal year of approximately 130 basis points from the rate of 6.8 percent for the prior fiscal year, resulting in a slight decrease in expense between the two years. As a reminder, however, that all being said, our incremental borrowing rate on new debt is 125 basis points over LIBOR, or all-in at about 2.5 percent.

The effective tax rate for the fourth quarters and fiscal years 2004 and 2003 was 38 percent of pre-tax income. With regard to other expense, it increased approximately 250,000 from the prior-year quarter, primarily related to amortization expense. For the year, other expense increased by approximately $300,000, largely due to losses on the sale of fixed assets.

Diluted earnings per share for the quarter ended March 2004 were $0.15, as compared to $0.17 for this same quarter last year, or a decrease of 12 percent. For the year ended March 27, 2004, diluted earnings per share increased 22 percent and were $1.18 as compared to $0.97 for the year ended March 2003.

I would like to move on to the balance sheet with some comments. Our balance sheet remains very strong. Our current ratio has improved slightly from last year at 1.7 to 1. Inventory is up 2.8 million from the prior year end, of which Mr. Tire accounted for $3.9 million. Therefore, on an apples-to-apples basis, inventory was down slightly from the prior year and turns were slightly better than last year.

Our debt balance increased $32.5 million, due to our purchase of the entity holding the synthetic leased properties, which moved approximately 27 million of existing debt for 86 Speedy properties onto our balance sheet. Additionally, we increased debt for the $25.5 million purchase of Mr. Tire. Our debt balance did not increase as much as the total of these two transactions because of our strong operating results, which allowed us to pay down on debt during the year. Additionally, we continue to negotiate terms of our vendors to shift more financing from banks to vendors. Our debt-to-capital ratio is 33 percent, down slightly from 34 percent at March 2003 with the synthetic lease considered in the calculation for both years.

In fiscal 2004, we generated approximately $33 million of cash from operations and received $1 million from the employees' exercise of stock options. We spent about $14 million on CapEx and 26 million for the acquisition of Mr. Tire. We received $2.2 million of proceeds from the sale of property and equipment, primarily closed Speedy Stores. We borrowed a net of $6 million. Depreciation and amortization totaled approximately $13 million.

To reiterate our previous guidance for fiscal year '05, we expect earnings for the first quarter to be in the range of $0.48 to $0.52 as compared to $0.41 last year, as adjusted for the three for two stock split. EBITDA should be about 53 million, with net cash generated from operations of about $37 million. CapEx, including the cost to open 25 new stores, 20 of them being BJ's Wholesale Club locations, should be about $20 million. Depreciation and amortization should be about $16 million, and we will pay down about $17 million of debt.

We expect gross profit to be comparable to fiscal year '04 at about 41 percent of sales, and SG&A costs to be in the 30 to 31 percent range. Interest expense should be in the range of 2.7 to $2.9 million, assuming no new acquisitions. Other expense, primarily reflecting amortization from our recent acquisition, should be approximately $1.3 million.

And that concludes my formal remarks on the financial statements. Operator?

Very good. (OPERATOR INSTRUCTIONS). Scott Stember, Sidoti & Co.

Good morning. Can you talk about in the quarter maybe just a little more detail in the segments from a comp basis? Commercial, brakes, exhaust -- I might have missed some of that.

Yes, let me just grab.

We had said just that some of the highlights was -- scheduled maintenance was up about 16 percent, Scott. Brakes were up about 6, and commercial was up about 19 percent.

Okay. And exhaust -- was that up in the quarter? You said if was flat for the year, right?

Yes.

I think it was down for the quarter, actually.

Okay.

Let me just check there. Yes, it was down for the quarter.

Okay. And Cathy, did you say how much you guys paid down debt in '04?

Yes, we paid down -- well, we (indiscernible) a net borrowing of a net of 6 million.

Okay.

Remember the 25.5 that went out in March for Mr. Tire.

Okay. And Rob, you had mentioned that you are looking into some new services that you can put into the fold. Anything that you care to talk about, or is it just working off of what you already have?

It is expanding scanners to all of our stores where we did not have them in all of our stores, and expanding the test of Mitchell-on-demand, which was in about 50 stores last year, will now be 100 stores this year. And testing some other minor services that we will be happy to talk about a little bit later.

Okay. And last question, Cathy, I missed -- what was the contribution from Mr. Tire in the quarter?

Mr. Tire was about at a breakeven for the one month they were open with us.

And from a sales perspective -- you said --

3.5 million on sales, yes.

Okay. That's all I have. Thank you.

Cid Wilson (ph) of Whitaker (ph) Securities.

Congratulations on the strong quarter. My question is regarding your -- I think you mentioned that you see some opportunities to raise prices in this quarter. Is that something that you have already started in this quarter? Or is that something that you're planning on doing? And can you give us some sense as to how that's going to impact margins?

Sure. For the last five years, basically, we have raised our prices 3 percent a year. We implemented a 3 percent increase in the middle of March. We are seeing no problems with that increase and certainly would potentially look to raise prices throughout the year if the opportunity exists. Usually in 3 percent increments, so if we do run into any resistance, we can pull it back quickly. But you should certainly see those price increases offsetting some of the margin decrement from oil obviously going up, tire price increases. And we will monitor that and certainly view further opportunities throughout the year, usually in the 3 percent range when we do it.

Okay. And for the fiscal first quarter coming up -- are there any other shifts or any other timing issues that we should be aware of in terms of how we should time our -- as we're modeling for the first, second quarter?

No, obviously our business will be shifting again in March. Mr. Tire operation, that's going to do sales of 50 to 55 million the first quarter, is a very important quarter for them. And remember, we only had one month of their sales incorporated in the fourth quarter. So I would think you would certainly see the first quarter running more tire sales as a percentage of sales. That being said, with the price increases, we should be able to maintain our margins. And that's where you will see the 48 to 52 versus the 41 last year.

And then for future quarters, Cid, we will give guidance as the year goes on. We don't expect any major shifts, but we're still working in the accounting change for the cooperative advertising as we sign our new agreements.

Right. But you won't see as pronounced an effect as you saw in the fourth quarter of this year, which we hopefully did a good job of making everyone aware throughout the year that that was going to occur. What you should typically see, regardless, going through every quarter of this year -- obviously dependent upon our sales increases -- is a like improvement in earnings every quarter, fairly consistent with our anticipated 19 to 27 percent increase for the year.

Okay. And with regard to your 25 store openings, is that going to be spread out throughout most of the year? Or is that in the front or any guidance in terms of the timing, in terms of --

Most likely, that will be spread equally throughout the year.

Okay. And my last question is just a cleanup question. What was depreciation for the quarter?

It was about --

It was 13 for the year --

I want to say about 4 million, 3 to 4 million for the quarter. I can give you the exact number later, Cid. I don't have it here in front of me.

Okay. Great. Thanks a lot.

Thanks, Cid.

(OPERATOR INSTRUCTIONS). Jerry Heffernan, Lord Abbott.

Good morning, and thank you so much for some good results. Hey, I'd like to talk a little bit about the store managers, if we could. I'd like to just review the turnover levels at the store manager level. And I believe I heard you stay, in regards to the SG&A line, that part of the SG&A increase is due to higher salaries to these people, which actually I find encouraging that they are earning more money. So, could we just review that topic, please?

I think they find it encouraging also. In general, we have a program called "the President's Challenge." It runs for six months -- from October first to the end of March. The top 25 percent of our store managers that win that challenge -- and it's based on store contribution and sales -- get a guaranteed 5 percent minimum raise, 325 stock options. This is the fifth year we have been doing it. So on average, that has a tendency to move our salary requirements up. Over the five years, we have shifted to -- now about 80 percent of a manager's pay is tied to salary; 20 percent is incentives, versus five years ago when it was closer to 50-50. That emphasizes that there's not the incentive to do bad things to our customers, which is what has been driving our customer service up.

So the managers' pay, then, for the group that I just talked about, every year that qualifies for this President's Challenge, the turnover in that category, which are obviously our best employees, runs between 10 and 15 percent. The rest of the management group as a whole runs and varies between 30 and 40 percent. But understand that approximately 80 percent of our managers don't turn at all. That 30 to 40 percent of the manager group is tied to that 20 percent that turns three or four times a year, as either they are dissatisfied with the work requirements of Monro, or more likely, Monro is dissatisfied with their performance. So that includes voluntary as well as involuntary terminations. And 80 percent of our group does not turn. The best managers turn significantly better than the industry. The rest of the management group, company as a whole, turns pretty similar to what the rest of the industry is doing.

Okay. Could you just compare this to what our numbers were last year -- the President's Club group, is that 10 to 15 percent turn?

Hasn't moved. Same.

Okay. Very good. Anything -- special efforts by management to review that 20 percent that has the high turn percentage to push that down further?

Sure. We've done some things, you now, we've incorporated criminal background checks. The problem is, most of it has been hiring and we are going to make mistakes. It is always going to be a certain percentage, as I'm sure you know. Things like foodservice run over 100 percent at the manager level, 300 percent throughout. There's going to be a certain level of turnover that is just going to be inherent in the business and inherent in a company like ours that wants to reward its employees for superior performance. But also if you're going to do that, in order to have credibility and the right culture, you need to take a real hard look, which we do, at the bottom 20 percent performance every year and be proactive rather than let problems continue to perpetuate. Because then, very quickly, the bottom 20 percent turns into the bottom 30 percent and you can't move forward.

That's right. That's right. Okay. In regard to the comment that you made regarding new services in '05, just putting scanners in more stores, not in all currently. I believe you said the scanners are used to do the maintenance, the warranty service.

Maintenance, and you now, gives us better diagnostic tools, ABS brakes -- just to expand our service category.

Now I imagine the tire-only stores right now, that's really not necessary, but of the stores that it could make sense, what percentage of them have it?

It will be all of them, and in fact, most of the Mr. Tire stores now have flush and fill machines, and we have added some of the additional services that they previously did not have, that they will now be able to perform the full complement of auto services that a typical Monro Muffler Brake would be able to do. And that's, obviously, some of the leverage we get by expanding in other tire business, because typically they do not do as good a job in mechanical services as a Monro. In addition, we have the additional leverage of very smart management and very smart execution on the tire side of the business, which they bring to our organization. And we can spread throughout our 520 non-tire stores.

Okay. So it is fair to say that by the end of '05, you'd expect to have updated scanner diagnostic machines in all stores?

That is correct.

Okay. Very good. The store count -- was it 595? And that's up 30 in the quarter?

I think it might be up 35, not counting the 10 kiosks we have currently in the automotive dealerships owned by Mile One in Baltimore.

Okay. Of that 35 Delta, how many of those were -- can you just break out that 35 Delta? I know that Mr. Tire is a big number of those, but --

Yes, there were 26 Mr. Tire, obviously, of that. And then, there was 12 BJ's in the quarter. We closed --

We closed three stores. So 26 plus 12 minus 3.

Great. Thank you very much. Please continue doing the good work.

Jamie Wieland (ph), Wieland Management.

Nice job, fellows. First, in regard to the competition, what's happening price-wise at NTB, the merchants owned by TBC, the Pep Boys, the Midas -- what are they doing with their pricing?

In most cases, they are following us up if they know we're raising our prices. The way we are operating now is about 15 percent of our customers are price shoppers. The other 85 percent are tied into really two factors. Number one, they care that you do the job right, and that is a vital importance to them. And then secondly, they don't want to pay for brake work or other services that they don't need. So there's 15 percent of at least our customer base that is price-focused. We have consistently raised our prices for the last five, six years. I know in the few markets we compete with NTB and Merchants, they are raising their prices. We're looking to peg ourselves above them. We're not embarrassed and are not looking to be the low-priced guy on anything except potentially oil changes. Short of that, we think we offer a value equation, that at least based on the years of doing it, as long as we're doing it right and doing it with integrity, we're not embarrassed about making money. And again, as strong as we are and with our margins twice the competition, I don't think it's an exorbitant profit with the risk of investing in a business to expect to make a minimum of 6 cents for every dollar of sales bottom line. And I'm not embarrassed as I move that number up to 7 or 8.

Rob, do you track repeat business and the average ticket on the repeat business?

Yes. Obviously, our repeat business, the average ticket is growing. And you would think that would be the case. It probably shows up most pronounced in last year's brakes number, which was up 5.9 for the year. Because you drive the oil changes, and initially remember, we're now five years into this strategy, but we keep accelerating driving traffic through oil changes. The thought being, if we do a good inspection, we do a good job for the customer, the customer will continue to bring their oil change business back to us as well as their state inspection business, as well as their miscellaneous services. So up until this year, our average ticket has been going down because the influx of new customers at these lower price services was significant compared to our repeat customer base, which runs at about 80 to 85 percent.

What is happening now is, our database has grown to the point where all those oil changes and good work the guys have done in the shops, building this customer base and the repeat business, we are now getting the higher price services coming in the door for brakes and other things, which are then raising our ticket average this year 2.5 percent.

Also on the consolidation of the Kimmel and Speedy stores, to changing the names to Monro and Mr. Tire, obviously you don't get all the synergies from day one. How much is left on the table if nothing happens in the next fiscal year from various cost savings that are generated but not fully implemented during the course of this one?

You mean in '06?

Correct.

Boy, a guy with a long-term perspective. As we've said, we would expect to do $0.06 to $0.10 this year. Certainly all of the benefits and economies of scale, especially in margin, adding new services and getting training done, our management team at Mr. Tire now having significant clout with vendors to negotiate for all of Monro's tire business and improve the margins on that, creates huge margin opportunities, we will better leverage our synergies and distribution, logistics. Certainly there will be some corporate opportunities that will flow through in year two. And the significant savings in advertising dollars as we mesh Monro's POS system and database minding to one-on-one correspondence with the Mr. Tire customer base. So, you should expect very significant growth between year one and year two. Not to mention the fact that Mr. Tire's comparable store sales are strong.

Okay. You're not going to quantify what that growth could be?

Well, the problem quantifying -- while we want to be as forthcoming as possible, obviously, Mr. Tire is in one market, and while we give a lot of information, I don't want to lay out what we are doing in the Baltimore market -- because that makes it too easy.

Very good. Nice job, fellows. Thanks.

(OPERATOR INSTRUCTIONS). John Walthausen, Paradigm Capital Management.

Hi. Good morning and congratulations. Most of the questions have been asked already, but one which I did not hear if it had been -- on the year-end balance sheet, we have a fairly significant increase in other long-term assets. Is that all goodwill? Or are we still in the process of allocating Mr. Tire assets?

That is goodwill and other intangibles from the acquisition of Mr. Tire. We have not finalized that completely, John, but that shouldn't change a whole heck of a lot from what we're showing here.

Okay. Can you give us a sense of what the breakdown between goodwill or intangibles, which should amortize over time?

There was about $17 million of goodwill that was just not amortizing, and then about 5 or $6 million -- I'm sorry, about $4 million -- of amortizable assets.

Okay.

Things like customer name and relationship, that kind of thing.

Right. And the conversion from Speedy and Kimmel to the names we're going with. Is that capitalized? Or is that expensed as we do it?

Most of it is capitalized -- its signage and things like that. There's some painting and just making the stores look a little nicer, refurbishing. There's a little bit of expense, but most of it is capitalized.

Okay.

And that is included in our normal budget numbers for the year.

Right. Okay. Thanks.

(OPERATOR INSTRUCTIONS). Jerry Heffernan (ph), Lord Abbott.

Yes, thank you again. I believe you touched on this, I'm would just like to review for clarity. Rob, I think you commented that you expect to see a fairly consistent earnings -- I have written down EPS growth for each quarter throughout '05 versus '04. And Cathy, I wanted to just follow up with you, verify with you that we really don't see any changes in accounting in the fiscal year '05 year as compared to the fiscal year '04 year that are really going to require some detailed focus by the followers of your company to understand what's going on.

No. There won't be any changes in accounting. The only comment that I had made, and maybe was a little confusing, was that the 0216 pronouncement that affects us at the corporative advertising credits, not all of our agreements are under that new accounting yet. So you may see a little bit of tweak from one quarter to the next, but we will, as we sign new agreements, we'll give you guys full update on how we think that would impact the quarter. For the year, it should make no change. And most of the impact was in the fourth quarter of last year.

Right. Okay.

Okay?

Could you just give us a frame of the percentage of the deals that you already have converted over to the new method?

It's about 25 percent of the deals that are under new contracts, which would be contracts signed after December 2002.

Okay.

But some of the bigger ones that we have, have run out or have Evergreen provisions so that it could be two or three years before all contracts -- or even longer -- before all contracts are under the new rules.

Okay. Thank you, Cathy. Bob, if you would, one issue that I do think needs to be addressed here, and it's in regard to insider sales. Certainly our Chairman, Mr. Solomon, has been doing a lot, and I'm wondering if there's any indication that he has made to you or could be presented to the public, in regard to what is his longer-term view here. You know, insider transactions are a piece of fundamental analysis. And when you see a Chairman selling on a very continuous basis without any real public statement as to what the plan is, it can be disconcerting.

Yes. I think, first off, I think Peter Solomon bought the company in 1984, took it public in '91, and these are his first fails. As far as when it ends, it is public information. He filed -- I believe it is whatever the planned selling program is, 10b --

Is there a 10b-5(1) plan -- ? (multiple speakers)

Yes.

Yes, there is, and he is either in the last month of it -- that being May or in June. I think it is public information that there are 60,000 shares, or something like that, left for him to sell. And a little bit more detail, which I'm sure he won't mind me giving is, these sales -- he has three children, they are in their 30s. They have held the stock for 20 years. It is the three children's trust funds that were set up and those are the shares that he is currently selling. It was a total of 390,000. It went up because of the stock split, but there's either one or two months left. You can look at the filing, it is filed, and that is the only shares that he has sold in 20 years. You now --

Any indication if he will renew the 10b-5(1) plan?

We have got no indication, and he has not mentioned that that is his game plan.

All right. Thank you very much.

Derrick Irwin, Advest.

Hi, guys. Nice quarter. I got cut off a little earlier on the question, so I apologize if this has been asked already. But I'm assuming that, given the way your quarters work that we should see a little more effect from the EITF 0216 in Q1 than we did in Q4 -- am I thinking of that correctly? As you work through inventory and those purchases?

Yes. A positive effect, you're saying?

Yes, a little more effect on your gross side.

You're right. The first and second quarters is where we will see the more positive affects from that accounting change. And the third and fourth, because they're slower quarters, we will have less co-op in them than in the past.

Yes, it will be tight, obviously, into inventory turns. And you're going to get quicker inventory turns when you do significantly more sales. That being said, as I said, every quarter this year, the '05 quarters will show consistent improvement unless there is a sales problem.

Right. Right. No, that is fine. I just want to make sure we were dialing in the right numbers for that. The other thing, could you also give just a quick update -- I know you rolled out late last year and the last quarter the maintenance program for vehicles under warranty, warranty maintenance? And how that is going?

Again, the scheduled maintenance work we said was up 20 percent, it's the 10th straight quarter of double-digit increases. We do not see that slowing up at all. Again, it is an offshoot of driving store traffic, the oil change strategy, and diversifying our product offerings to grow the business. And we would hope to continue to report similar numbers. And down the road, as I have said before, you will see the service category, which includes oil changes, scheduled maintenance, state inspection, that will eventually be our biggest category, followed by brakes, followed by tires, followed by front end, which is shocks and struts, and then exhaust. So exhaust will continue to decrease and up somewhere about 10 to 12 percent of our business in the near future.

I've been hearing anecdotal evidence from service guys that they have been having more and more trouble getting information on the newer models out of the original equipment manufacturers, in terms of being able to diagnose and fix problems. Have you guys seen any of that? I think that's tied into the right-to-repair bill that is going through Congress.

We have not had trouble getting the information to do the repairs. The vendors, not the dealers, are a little bit slower than we would like in getting us information in catalogs and what not, which negatively impacts our material usage, because we're slower to add those parts. For example, SUVs, to our stores. And that puts pressure on our margins, so we are constantly looking for them to do a better job in forecasting the usage and how quickly brake wear out, so we can have the parts on our shelves, as we normally like to do, both for customer convenience and for cost advantage, as opposed to having to buy the product out from NAPA or AutoZone.

Got you. Thank you very much.

Cid Wilson, Whitaker Securities.

With regards to the (indiscernible) quarter, I know that last month you mentioned that you though you were not going to see much in terms of gross margins and SG&A. But I guess, as we model for the first quarter, any sense of what your assumptions are in that $0.48 to $2.52?

Again, what we're saying is you should see similar gross margins versus last year. Maybe a little bit more pressure on margins, but only relative to the fact that, as I mentioned, Monro is running plus-three comps and Mr. Tire is doing better. So, the tire business and the negative impact on margin percentage might be seen in the first quarter, but certainly offset by the gross margin dollars that those additional sales will generate. But we would model fairly close to what you've seen quarter by quarter throughout the year, just ideally with more sales and us continuing to do the job we have done in all of our locations and all of our brand names -- controlling expenses and getting the leverage out of payroll and some of the other things.

And if you remember, Cid, the first quarter is typically a pretty strong quarter on gross margins -- in like the 43, 44 percent range. If that is helpful.

Yes it is. Thanks a lot.

(OPERATOR INSTRUCTIONS). And it appears we have no further questions. I will turn the program back over to all or hosts.

Great. I just want to thank everybody for their continued support. Appreciate your support of Monro and our strategy. We have never been more confident going into a new year with the prospects for growth. The prospects are bottom-line improvement and the execution of all of our new associates as well as all of the old ones that have just been doing a fabulous job moving the company forward and generating the kind of result that we are very proud to deliver to you. And we look forward to future calls and sharing our progress with you throughout the year. So thank you very much.

This concludes our conference call for today. You may now disconnect your lines. And thank you for participating.