Monro Inc (MNRO) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake first-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS). And as a reminder, ladies and gentlemen, this conference is being recorded and may not be reproduced in whole or in part without permission from the Company.

I would now like to introduce Ms. 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. I would just like to remind you that on today'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 year 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; and 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.

And now I would like to turn the call over to Rob Gross, President and Chief Executive Officer. Rob, you may begin.

Thanks, Melissa. Good morning and thank you for joining us on today's call. I will begin with a brief overview of the quarter, provide an update on our recent acquisitions and other strategical initiatives, and review our outlook for fiscal 2007. I'll then turn the call over to Cathy D'Amico, our Chief Financial Officer, who will provide additional details on the financial results.

The first quarter was challenging and we are not pleased with our results. That said, we were up against a tough environment with high gas prices and other economic concerns causing customers to continue to defer major maintenance and repair purchases. Overall, we see our first-quarter results as a bump in the road and part of the inevitable cyclicality of our business. We remain very confident in our business model and are optimistic about our long-term future growth prospects.

Sales for the quarter increased 4%, including a 2.9% decline in comparable store sales. Our strongest categories were tires and service, while the softest categories included exhaust and shocks. Even during an uncertain economic environment, people need to have their state inspections, get their oil changed and perform the regular maintenance that will help them avoid major repairs down the road. However, consumers continue to defer major ticket items, especially those unrelated to safety, like exhaust and shocks.

Maintenance services are our bread and butter, and the fact that this category continues to comp positively is encouraging in that it indicates we continue to grow our customer base. We believe we have built a reputation as a trusted service provider and believe the same customers that are coming to us now for service will also choose us when it is time for their bigger-ticket repairs. We are also doing a great job in the tire category, and as we gain more knowledge and experience in this area, we believe it will continue to grow for us. I think it is also important to highlight that we outperformed the industry in these two key categories. Increasing our market share in these traffic-driving businesses positions us well to capitalize when the environment improves.

Our operating margin declined on a year-over-year basis, primarily due to the impact of lower comps and changing sales mix on our fixed cost base. The inclusion of ProCare also weighed on our margins, as did the increase in advertising spending related to ProCare and various other traffic-driving programs we are testing in June and July.

We're pleased with our progress on the ProCare integration. And during the quarter, this new store group performed slightly better than we anticipated. During our first two months of ownership, ProCare's comps were down approximately 30%, with July improving to minus 25%. And we lost $0.01 on the bottom line. Remember that once ProCare has the benefit of Monro's proven cost structure and business model in place, we do not need to see an improvement in sales in order for these locations to be profitable.

Even now, with depressed sales, primarily due to a letter sent by ProCare to all their customers announcing their bankruptcy, ProCare is running at about 425,000 per unit. With Monro's operating model, we make good money at this level. So we view the sales growth component, which we think we can run up double-digit comps for a number of years, as additional upside. Therefore, our first focus for ProCare is to get their expense structure and overall business model aligned with Monro's.

During the quarter, our team made strides to accelerate margin improvement and generate labor cost savings. Our POS system, uniforms, initial inventory and temporary signage are up in all locations. Required racking and shop trucks to transfer parts, a key component of margin improvement, is 80% complete. And we expect to have permanently replaced the damaged ProCare name by the end of August.

We have not undertaken any grand reopening initiatives on the sales side of the equation because we do not want to spend time or ad dollars to promote the new locations until the rebranding is complete and we have the proper people and operating model in place. As such, we are expecting only marginal improvement in ProCare's sales to minus 20 comps over the next quarter as our focus will remain on the expense side.

In sum, we reported a diluted earnings per share of $0.50 for the quarter or $0.47 excluding a one-time tax benefit, which is at the high end of the range we outlined at the end of Q4.

I would now like to discuss our outlook for the remainder of the year. For the full year, we expect earnings per diluted share to be between $1.68 and $1.76, compared to $1.51 earned in fiscal 2006. Obviously, there might be some upside when including the one-time $0.03 tax benefit, but we will wait for more visibility before adjusting our forecast. This range assumes comparable store sales of 1 to 3% for the full year.

On a quarterly basis, our results will differ from last year in that Q2 will be approximately flat with last year with the second half significantly higher than the year-ago period -- Q3 up 20 to 25%, Q4 up almost 100%, due to the timing impact of our new oil supply contract effective this quarter, which will increase our cooperative advertising fund starting in Q2, the effect of the ProCare integration, improvement in consumer purchasing patterns and the extra week in Q4. EBITDA should be approximately 66 million for the year versus 58 million last year.

For the second quarter, we expect earnings per diluted share to be between $0.48 and $0.52, with comparable store sales between flat and an increase of 2%. Our '07 outlook obviously assumes we will experience an improvement in comps as we move through the year. Thus far, we ran down 4.5% in April, down 2.1% for May and June combined, and July is now trending at minus 1. So, while we are not where we think we can be, we're certainly moving in the right direction.

Also, as I stated before, consumers can only defer maintenance so long, as purchasing a new vehicle is clearly more expensive than properly maintaining and repairing an existing one. We have not run comp numbers like we did in Q1 for more than a quarter in the past seven years, and we don't plan to start now.

Our operating model is absolutely working, and we remain as confident in it as ever. We are proactively working to drive traffic and closely monitor expenses to mitigate the impact of slow consumer spending. As always, we remain committed to taking advantage of attractively priced acquisition opportunities presented by the difficult market conditions, which typically impact our smaller and poorer-performing competitors to a greater degree than us. We also continue to work on getting a deal done with Strauss and expect to have something to announce by the end of September at the latest.

As further endorsement of our long-term prospects, we have increased our quarterly dividend. This decision not only reflects our commitment to enhanced shareholder value and encourage long-term investment in Monro, but also underscores our confidence in the future prospects of the Company. Given our strong financial position and cash generation, we have the flexibility to both pay dividends and continue to invest in growing our business.

All that said, as we look ahead, we are confident in the position we have established for Monro Muffler Brake in the marketplace and are optimistic about the long-term effectiveness of our operating model and our future growth prospects. We remained committed to growing our business and increasing profitability over the long run. We look forward to a solid fiscal 2007. Further, given our opportunities with ProCare and Strauss, we're even more optimistic about our opportunities in 2008 and beyond.

This completes my overview. And now I'd like to turn the call over to Cathy for a more detailed review of our financial results.

Thanks, Rob. Good morning, everyone. As Rob said, sales for the quarter increased 4%, with comparable store sales down 2.9, offset by an increase in sales from new stores. And we define new stores as stores that opened after March 26, 2005, which added $7.4 million, including $5.5 million from the ProCare stores which we acquired on April 29, 2006. And that compares to a comparable store sales increase of 1.7% in the first quarter of last year.

There were 77 selling days in both quarters. And at the end of the first quarter of 2006, the Company had 701 Company-operated stores as compared to 625 stores a year ago. During the quarter ended June 2006, the Company added 75 ProCare and three other stores and closed two.

As you know, the new ProCare stores acquired at the end of April were purchased out of bankruptcy. As Rob stated, these stores suffered significant declines in the months prior to Monro ownership and are improving, but are not yet performing at a level where they are profitable. The ProCare stores lost approximately $0.01 per share in the first quarter of fiscal 2007 and their performance negatively impacted gross margin by 0.7%, and store direct costs, which are a component of SG&A, by 0.4% in the quarter.

Gross profit for the quarter ended June 2006 was $41 million or 41.7% of sales as compared to the prior-year quarter, which was at 43% of sales. In addition to the decline that was attributable to ProCare, the decrease in gross profit for the quarter ended June 2006 as a percent of sales is primarily due to a shift in mix to the lower-margin tire and maintenance service categories, as well as the impact of fixed occupancy costs against decreased comparable store sales. As you may recall, we include rent and depreciation in our cost of sales numbers.

Partially offsetting these factors was an increase in vendor rebates recorded as a reduction of cost of sales as compared to the prior-year quarter. As we have stated in the past, as more vendor agreements are renegotiated, such as the Valvoline contract, we will continue to see a shift of vendor rebate credits from SG&A to cost of sales. Under the accounting rule EITF 0216, these rebates are recognized in concert with inventory turns, essentially reducing inventory cost.

Additionally, the timing of the recognition of barter credits as compared to the prior-year quarter also helped to reduce cost of sales. In the current-year quarter, the Company was successful in its negotiations with vendors to use the remaining barter credits that we received in prior years related to real estate transactions. Therefore, we were able to recognize an additional amount of barter income as compared to the prior-year quarter.

Moving on to SG&A expenses, for the quarter ended June 2006, they increased by $2.7 million to 29.6 million from the prior-year quarter and were 30.1% of sales as compared to the prior-year quarter at 28.4% of sales. The increase in SG&A expense in addition to the ProCare factor is primarily due to the impact of fixed costs such as manager pay and store support costs against decreased comparable store sales. Additionally, advertising costs as a percentage of sales increased as compared to the prior-year quarter.

Net interest expense for the quarter ended June 2006 decreased by approximately $200,000 as compared to the same period in the prior year and decrease from 0.9% of sales to 0.6% for the same period.

There was an increase in the weighted average interest rate for the current-year quarter of approximately 170 basis points as compared to the prior year due to the increases in prime and LIBOR interest rates, as well as some new capital leases that carry higher rates than the Company's bank facility. Partially offsetting this was a decrease in the weighted average debt outstanding for the quarter of approximately $6.2 million as compared to the prior year and an increase in interest income of about $200,000.

Other income increased 1.1 million as compared to the prior year, primarily related to the relocation of a Mr. Tire store. The owners of the property paid the Company $900,000 to relinquish the lease. We were able to relocate the store just a short distance away in a good location at comparable rent.

The effective tax rate for the quarter ended June 2006 and June 2005 were 33.7% and 38%, respectively, of pretax income. Offsetting the current-quarter tax provision of 37.5% of pretax income was the recognition of a $400,000 one-time income tax benefit primarily related to the favorable resolution of state income tax issues.

Net income for the quarter ended June 2006 of 7.6 million decreased about 2.4% from net income for the prior-year quarter. Earnings per share on a diluted basis for the quarter ended June 2006 were $0.50 as compared to $0.52 for the same quarter a year ago.

Moving on to our balance sheet, again, our balance sheet is very strong. Our current ratio is comparable to the same quarter of last year and year end. Inventory turns are improved slightly as compared to the year-ago quarter. And current liabilities are up, primarily due to an increase in income taxes payable.

Monro generated approximately 13.3 million of cash from operations during the quarter. We received approximately $2 million of cash from option exercises and paid $700,000 in dividends.

Depreciation and amortization totaled approximately 4.6 million. We spent 4.6 million on CapEx as well, and 12.9 million to complete the ProCare acquisition. Our net borrowings for the quarter were approximately $1.3 million.

As a reminder, our debt to capital ratio is 0.19 to 1, and we have $89 million of availability under our credit line and plenty of headroom under our debt covenant, making it easy for us to do acquisitions. Our free cash flow also was $8.7 million.

That concludes my formal remarks on the financial statements. And with that, I will now turn the call over to the operator for questions.

(OPERATOR INSTRUCTIONS). Tony Cristello, BB&T Capital Markets.

Rob, I wonder if you could comment a little bit on ProCare coming in a little bit better than it seems expected, than the $0.02 to $0.03 loss you were looking for. And should we expect that the sort of 5% hit this year may be a little bit less than that as things progress, and maybe talk about a little bit some of the initiatives that may have come onboard a little bit faster?

Sure. I would like to see a little bit more visibility. And again, I think we said ProCare would be even to a minus $0.05. Certainly the $0.01 this quarter, we were anticipating maybe $0.02 to $0.03. I think most of the improvement came from gross margin, material and usage, where we got some of our parts in quicker. And the ProCare folks in concert with the current Monro stores were doing a very good job of transferring parts, even without all the racking and the shop trucks being in. So that was the biggest improvement on that front.

We did some reductions in staffing in the stores and had that implemented towards the end of the quarter, which will help us going into the second quarter. Certainly, I would think if July, we said, was minus 25 and next quarter gets to minus 20, with that kind of sales run rate, if we continue to make the progress we are making, potentially there might be a nice surprise on ProCare. But at this point, just like the earnings forecast for the year, I would much rather be seeing the business environment improve before we stare going out there and moving up our numbers.

But the team is working hard. The ProCare integration is a relatively easy one, with the exception that after we get the business model in place, which we are very familiar with, we need to take advantage of the opportunities to improve sales, and while they're profitable at the current run rate, once our model is in, obviously knowing that there is such huge upside on the sales side, we want to start attacking that, but we don't want to spend our time and money until we are sure we can deliver the same quality product we do out of all our locations before we start spending effort driving traffic.

Another question, then. Last night, the CEO of Pep Boys resigned. With Monro's success on the service side, your stock price trading where it is, do you think that Monro is now an acquisition candidate to [simply given] the expertise that you have, and/or are you happy where you are and if they wanted you, they would have to buy the whole Company?

I guess the second part first. I am happy where I are. And I certainly would not leave Monro to go to Pep Boys. As for the stock price, you guys are better at assessing relative value than I am. We will continue to run the business and make money and grow the business. You guys can figure out what we are worth.

I know what TDC was taken out for last year.

Okay. Next.

And then lastly, I guess, Cathy, when you look at the ProCare dilution, how was that spread across the gross profit -- or gross margin side versus the SG&A? Is there a way we can look at that where it could impact one greater than the other?

Yes, it was 0.7% -- it caused gross margin overall to be down 0.7%, so if we didn't have ProCare in there, and then gross margin would have been 0.7% higher, and SG&A costs would have been 0.4% lower had we not had ProCare.

Scott Stember, Sidoti & Company.

Could you maybe talk about exhaust comps and brake comps in the quarter?

Exhaust comps were down 19. Brake comps were down 6. Shot comps were down 13.

And within that July number that you guys referenced, same trends, or --

I would think with comps better, the trend would be better. But why don't we let the month be complete?

Sounds good. And can you talk about the three new locations that you added outside of ProCare, where they were and what stores they will be?

I can tell you whether they were tire or service. I am not sure I can tell you where they are. One replacee -- one was in Maryland, that we replaced a store that we closed and we got the 900,000 payment on. And the balance were -- actually, they were all tire stores that were added, one in eastern Maryland, and I don't know -- where's the third one? I don't know where the third one was. But I could get back to you on that, Scott.

That's fine. And maybe back to ProCare. Can you maybe talk about -- obviously, you guys have got your hands full with just the overall integration, but talk about scheduled maintenance is in the fold, if at all, yet, and would that only come in once the advertising starts to kick in as well?

That would certainly come in to a higher degree once we start promoting it and advertising. Again, we're trying to get the old customers back in. We are doing mailings to them, letting them know we are not broke anymore. And by the way, I can tell you where the 75 ProCare stores are located, if you want to know.

But we are going to hold off. I think that the biggest opportunity is to get things running right before you drive the new folks. I would expect when the permanent signs are up by the end of August and our operating model is in place, we would expect September to be the right time for us to put together a grand reopening campaign and look to drive the business further forward.

Certainly, tires is a huge opportunity for these locations -- as you mentioned, maintenance services. And again, the big easy money is going to come from cost of goods sold and just instead of all of their purchases coming from buying outside, whether it be NAPA or Advanced or whomever provided them before -- having some semblance of a parts inventory, as well as with our POS system, having the seven closest stores to them with full complements of inventory, those being Monro locations, gives us a big opportunity to improve the expense side significantly, quickly, and that is where the low-hanging fruit is -- get the operations in place and then look to drive the sales.

And are you guys still relatively comfortable that you will have the majority of the heavy lifting from ProCare done in time for when Strauss comes online?

Absolutely.

And just any anecdotal comments on how Strauss is doing?

Moving forward. Nothing beyond what we have said. We have until September 30 to consummate that transaction under the original agreement. And we would expect to have a transaction to announce before then.

Good enough. Thanks a lot, guys.

Jack [Balos], Midwood Research.

Regarding Strauss, I was wondering, since Advance Auto Parts mentioned that they got softer sales toward the end of June, if you have noticed any softer sales at Strauss either in June or July so far?

Sure. Obviously, they are a private company that we have a minority interest in. I think what we can say about the environment in general is that is if we have been consistently running plus 2 comps and we go to a minus 3, having the best business model and the most consistent sales in the service category, you can expect similar declines in any of our competitors off whatever their run rate was.

But I think Strauss has more of a parts business.

I think it is a similar business model. And you know, if they are running down a certain number five months ago, I think it is safe to assume that their numbers are different with the rest of the industry from that point forward.

Okay. Regarding inventory, you have 76 more stores than you did a year ago. And yet I think, if I have the right numbers, Cathy, that you're actually lower inventory total dollars now than you were a year ago. Is that correct?

Are we lower dollars overall? Yes, slightly, but we did just get a transaction with ICON where we got rid of slow-moving inventory in the fourth quarter of fiscal year '06. So we wanted to -- we haven't just replaced that. We're looking to replace it with the right sort of item. ProCare is not fully stocked yet. We are in the process of stocking them.

Jack, you're not telling me after five years of telling me to reduce inventory, now you are saying why is our inventory so low?

No, there is a big difference if you have 12% more stores.

[audio drop-out] that we would want to to start fully taking advantage of the gross margin improvement that they will have, not to mention the customer convenience they will have by having the parts on hand.

But certainly you can expect with the ProCare acquisition, those 75 stores, many of them being in our current markets and being able to draw off of Monro's inventory and what they have in their stores, that the expectation would be that certainly this would be an event that would help inventory turns and lower the average amount of inventory in our total of 701 stores going forward.

Yes, it was about flat, Jack, from a year ago June. But compared to March, it was up slightly. We did think last fiscal year to reduce slow-moving inventory. But we are up from March, where it had already been -- the slower-moving inventory had been eliminated or reduced.

Cid Wilson, Kevin Dann & Partners.

Any comments on cash flow? What has been free cash flow at this point, and any comments in that area?

Yes. What I said, Cid, was free cash flow was $8.7 million.

Okay, I missed that.

That's okay. It was 13.3 from operations less 4.6 million of CapEx. Did you need the depreciation number?

That was my next question. You know me too well.

That was also 4.6 million.

Great. And then my other question is that have you had any conversations with some of your vendors in terms of any anticipated increases in prices, given the rise of oil prices?

Well, certainly, we just announced a new oil agreement with Valvoline. So we're probably pretty much under control, although with oil, while we are certainly getting a lot going forward with the cooperative advertising, which you will see as a reduction of costs of goods sold starting in Q2, fully in Q3 and Q4, which is part of the improvement in the numbers the second half of the year off the typically lower sales base, certainly tire manufacturers continue to raise prices.

I guess the good news or the bad news with tires is we're growing so fast that our vendor rebates are keeping pace with whatever increases are coming along. So from a competitive situation, it is not necessarily negatively impacting our margins. The bad news about that is that we are still relatively small enough that we've got a lot of room to grow to get the kind of pricing that much bigger players get.

Gerry Heffernan, Lord, Abbett.

A little bit on ProCare, if we could. Average tenure of the 75 managers at ProCare -- do you have some information on that?

Don't. I know it is less today than it was two months ago. I can certainly get that for you.

Fair enough. Of the 75 units, can you take a stab at how many of the managers are still with you from two months ago?

A number of them -- again, I don't have the exact number. Certainly over 50%. But while they have some opportunities to improve the store management team there, it is not necessarily what drove them into bankruptcy.

If you go back over the history, like many companies, if you're failing, it's not always the people in the stores. It usually starts with the top of the house and bad strategic decisions. We can spend some time offline if you want to talk about opening stores in Texas and California off the base that is in Ohio and Pennsylvania and bleeding the profitability of your company. While the teams in the ProCare units we purchased might have been larger than they should have been, the people that are there are quality people, and for the most part, we expect to help us move forward and make that group of stores very successful.

Actually, I was -- the line of questioning was actually approaching this from more of a positive than my usual cynical in that it seems to me that in two months of ownership, if A., the profitability/loss that you experienced was better than you had expected, and B., part of the reason for that was the uptake on the -- what I will term networking of inventory, networking of parts via the other Monro stores in the area, you had to have people buy in as opposed to resist change and be kind of a solitary island. That seems rather impressive, that you have a group of people there that have been willing to buy in after only 60 days.

I think that is a fair statement and a positive way of saying it. And people that don't buy in have other alternatives of where to work. But most people want to win. And certainly it is tough to be in an organization that is losing money for a number of years.

And the opportunity I think to join a successful organization where there is a career path and business is growing is usually -- usually, the folks at the store know what's wrong before the guys in the ivory tower do. And hopefully, you build credibility. And people like to win. No one likes to spend 40 or 50 hours in a store losing. And hopefully, we bring the opportunity for these people to be successful and grow with our organization as we are counting on them to lead the charge.

Okay. What can you tell us about the compensation opportunity of the store managers, the guys that are actually doing the work, what their compensation potential was under the ProCare operations compared to what it will be under the Monro flag?

I think based on their performance, if they perform well, their compensation will be better. If they perform poorly, they won't be employed. Short of that, I think where we layered the store managers' compensation is at where they were initially, evaluate them and give them opportunities based on their customer service and performance and the buy-in things that you were talking about, to grow with the business.

I think where we made some changes were they typically had two sales managers in all their stores. And we typically run with one sales manager in our store and an assistant manager who is usually the best technician in the store. And we feel it unnecessary to have that as a redundant position to basically cover a manager's day off as opposed to either a floating manager to cover a number of stores or potentially rewarding the manager for working more hours to cover the store.

If the store is successful, the carrot or the opportunity for compensation improvement for the manager -- is it a -- he could probably get 5% more, he could get 10%, he could get 50% more? What is the magnitude of the improvement in compensation for the successful manager who buys in and really works it?

Sure. The base salary is about 80% fixed and salaried. 20% is variable. About 10% of that is tied to customer service and driving store traffic, i.e., oil changes. And then the other 10%, whatever it is, is tied to sales, four-wall profitability, things like that. And that is a financial compensation including the bonuses, not including things that we would run twice a year like sales contests or the President's Challenge, where the best 25% of our store managers get stock options that we've run for eight years. That certainly helps our turnover with our best-performing store manager group.

Okay. In regards to the same-store sales for ProCare, and I apologize if I am starting to cut these things too finely, it had been negative 30%. You said so far it looks like it is improving somewhat in July to minus 25. Sequentially, are the sales at the unit -- do they seem like they are improving? Or are these numbers just the result of the change in the comparable number from the year before?

I would not do that to you, Gerry. They are sequentially getting better. And they are better versus last --

You have done it to people far better than me. Sequentially getting better?

Yes.

Okay. That's good. Jumping topics -- BJ stores -- they had been running, as of last quarter, at a pretty good -- just over the double-digit comp level. Are we still there?

No. We are just about plus 3%.

Okay. So they're feeling -- there's no reason why those stores are not feeling the same impact that the stand-alone stores are?

That is true.

Very good. Thank you for all your hard work.

Jim Larkins, Wasatch.

I've got a number of questions. I wanted to know if you could break out the current mix -- I don't know if you want to do it by your existing 701 stores -- but give me the mix of muffler versus tire stores.

Service versus tire, yes.

Yes, we would call it service at this point versus tire, but --

Do you want each category?

He wants the number of stores first.

You want the number of stores? I'm sorry. The numbers of stores is 589 service versus 112 tire at the end of the quarter.

112 tire. And then is that tire mix going to go up as you decide -- I mean, where are you putting the ProCare stores? Are you putting those as service stores?

They were split. About --

Approximately 44 service stores. 31 of them will be tire stores. So it will be branded --

You have already tagged them as tire or service stores?

Sure. And they already have the temporary -- on the tire side, it is Mr. Tire will be the brand name, consistent with what we do in Maryland. On the service side of the business, they are Monro Muffler Brake and Service.

Okay, great. On the acquisition of ProCare, was there any goodwill generated in that transaction?

Yes, there was.

Do you know about how much that is?

It is about $7 million.

And would you anticipate that that goodwill is pretty safe as you turn the comps around and there won't be any writedown on that?

Absolutely.

Do you have a payables number for the quarter?

Payables was down slightly. It was about $24 million.

Was there anything significant in current long-term debt that doesn't show up on what you released on the balance sheet?

No.

How about new stores for the rest of the year?

I think we're looking at a few BJ's, about 15 in total -- some BJ's and some greenfield tire service.

So 15 in total -- that would include the, I guess, two this quarter?

There were three this quarter.

Three this quarter. Okay. And what should we look at for a normalized tax rate for the entire year?

37.5, not counting the 400,000 one-time benefit.

And that benefit is occurring when?

That was in the first quarter, this quarter we just ended. So it was 37.5% this quarter, less that $400,000 one-time --

So it would be pretty stable, then.

Yes.

On your signage, the expense that you've incurred so far for signage and that you will incur the rest of the year -- will that be expensed through operating expenses or will that be capitalized?

That is capital. There might be a little bit of writeoff of existing signage, but a lot of that stuff is old, anyway, and fully depreciated. On ProCare, there is no value assigned to the acquired signs, since we are going to replace them right off the bat. So there won't be any writeoffs on ProCare.

And can you talk about just the average -- you talked about 425,000, I think you were running at, 430,000 you were running at, of ProCare. You said at that level you make good money on your service stores, I think you're saying. Can you just talk about sort of average revenue per store service or at the tire stores, just to kind of get an idea?

Sure. The average revenue per store in a tire store is between 1.1 million and 1.2 million. The average revenue in a service store is between 500,000 and 550,000. As far as getting a feel for $425,000 run rate, the average Monro store breaks even at $360,000.

That's helpful. And given that -- is it fair to assume that the tire mix does put pressure on the gross margins, but the overall operating model should not be different going forward if we see a heavier mix toward tire stores?

That is correct, as long as tires isn't the only thing leading the charge. But [audio break].

All right, thank you. [audio break]

Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold and the conference will resume momentarily. Thank you for your patience.

Mr. Monro, you may continue.

Thank you.

Mr. Monro here. I guess that's what happens when you don't pay your bills. Sorry, folks. Jim, you still there? Hello? Any questions left? Sorry for the technical difficulties.

Jamie Wilen, Wilen Company.

Hello, Mr. Monro. Following up on the other commentary, it is kind of amazing that ProCare has $7 million of goodwill, considering the way they torched the business before you acquired it. Not a question. When you talked about ProCare's numbers of 425 a unit, that was for both the service stores and the tire stores, correct?

Correct.

So I would assume that both the tire stores, the ProCare and the service at this point, are still below the breakeven levels that you need to get to volume-wise.

Well, no. If the current run rate is 425, take 425 times 75 locations and that is kind of what they are expected to do on a 12-month run rate. You can assume that if currently they are at that level, we would expect to improve them over the next eight months.

But remember, ProCare didn't have tire stores. It was 75 locations. So it is not going to turn into a base model of a tire store overnight. And rents are not going to be higher than they were before, and typically in a 1.2 million tire store, your rent is a little bit higher, the store is a little bit bigger. All of that is baked into the numbers.

So we would view the upside being off of where we currently are, certainly encourage that. The first two months, which as you know with any integration or acquisition are usually the most hectic, and if they are going to be unprofitable, usually the profitability gets better. We are encouraged about the potential of ProCare even this year, but certainly next year.

So I guess the breakeven for a service store was 360. I assume the breakeven for a tire store is a good bit higher than that because the volumes eventually get to be a lot higher than that, where you would have everything at the tire store.

Right.

And lastly, you're making a lot of progress toward your ultimate goal of 1000 service, 1000 tire stores. And I assume that there are great opportunities in getting a lot of volume rebates, not just in Valvoline, but whether they are shocks, tires, brake pads or what have you. How are those deals structured? Do you get upfront money and then vendor rebates at the end? And how large are the opportunities in that area?

You kind of cut out. You're just saying how large are the opportunities with future co-op?

Right, especially with ProCare, and when Strauss comes in, does that automatically get you a bump-up on things?

Sure. We would expect, like anything we do, as we get bigger -- we are financially stable; we are the only guy out there that is really growing -- to work with our vendors and grow our business. And as our sales grow, we would expect the support of our vendors to grow right along with it. It has occurred over the last eight years with significant increases in vendor co-op. And there's no reason to think that as our vendors make more money, because we are buying more, we should get more support from them to continue to grow our business.

Does the support come in upfront cash dollars or just totally in volume rebates?

A lot of it comes in upfront cash dollars. But remember, with the new accounting rules, whatever you get in upfront cash gets spread over the life of these new agreements anyways. A lot of it is advertising funds. A lot of it is price reductions. A lot of it is upfront cash for signing an agreement and committing to work with the vendor going forward. A lot of it is training dollars for our people, whether it is in tires or shocks or struts, things like that.

And if you had 1000 tire and 1000 service, what is the opportunity vendor -- getting vendor funds? How much are you talking --

Jamie, you cut out -- I lost you after what is the opportunity? Or was that the end?

No. If you hand 1000 service and 1000 tire stores, the opportunity dollar-wise in all these vendor programs -- are we talking the millions, the 5 millions, the 10 millions? What is the magnitude of the opportunity here?

5 millions to 10 millions. And again, with our business model, we would expect if we are 700 stores now and we get three times bigger, we would expect our co-op to get three times bigger.

Thank you, Mr. and Mrs. Monro.

Sir, there appears to be no more further questions at this time. I will turn the floor back over to Rob Gross for any closing remarks.

Thanks, operator. Sorry for the technical difficulties we experienced. We appreciate your supporting Monro. And we plan on delivering performance both this year and building for the future. So any further questions, feel free to call myself or Cathy, and we will continue on. But have a great day. Bye.

This concludes today's Monro Muffler Brake conference call. You may now disconnect.