Monro Inc (MNRO) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Monro Muffler Brake third-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. (OPERATOR INSTRUCTIONS) 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. I would just like to remind you that 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; 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.

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 would 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. I will begin with a brief overview of the quarter, provide an update on the ProCare acquisition and other strategic initiatives, and review our outlook for fiscal '07. I will then turn the call over to Cathy D'Amico, our Chief Financial Officer, who will provide additional details on the financial results.

We produced a very solid quarter, which was in line with the guidance we outlined on our last call. Comps were up 2.9% on top of a 4.7% gain last year. Sales increased 15%, and net income grew 20% over last year. We're very pleased to have generated record results on both the top and bottom line, even as we continue to face higher raw material costs and work to integrate the recently acquired ProCare locations.

As we have previously discussed, high gas prices and overall economic uncertainty caused our consumers to defer certain automotive maintenance and repair purchases over the past few quarters. During this time, we purchased ProCare's 75 locations and focused on retaining and growing our customer base, so that we would be well positioned to benefit when consumers can no longer defer major purchases.

This strategy began to pay dividends in the third quarter. As gas prices eased, consumers began to return to more normalized spending patterns and looked to Monro to provide many of the major maintenance services that had been deferred. In fact, for the quarter, comparable store sales were strongest in our major repair categories such as shocks, brakes, alignments, as well as continuing consistent performance in the service and tire categories. This was the first time in several quarters that our comps had been led by the major maintenance categories.

During the deferral period, our tire stores outperformed and drove our growth. However, during the quarter and particularly in December, it was our service locations that delivered the strongest performance, a testament to our strategy to diversify our business by operating both tire and service locations.

Monthly comparable store sales for the quarter were up 2.4% in October; 0.8% in November against a solid plus 7% last year; and a very strong 6.5% in December. It was the month of December when we saw the strongest demand for the major repair services. That said, the unseasonably warm weather in our markets during the quarter as well as a challenging year-over-year comparison dampered our tire store sales.

I'm also very pleased to report that traffic was up 3.1% during the quarter. This is our strongest traffic increase in two years and underscores the overall health of the business. We have always maintained that driving traffic is key both in the short term and long term. Traffic helps drive sales in the current period and also helps us build a loyal customer base to ensure our future success.

I would now like to give you an update on the 75 ProCare locations we acquired at the end of April. As a reminder, when we acquired ProCare, their comps were running down 30%, which we improved to down 20% during the second quarter. I am pleased to say this trend continued during the third quarter, with comps improving to down 10%. While we are not yet where we ultimately need to be, we are making steady progress.

With the new signage in place and Monro's proven operating model rolled out to the stores, we held grand reopening events in November designed to raise our visibility and drive traffic. The response was positive, and we are pleased with the trends we are seeing.

We continue to invest in store staffing and advertising to support the rebranding and build a platform for long-term growth. We probably did not to as good job as we could have in terms of managing labor to correspond with the level of business, which resulted in a $0.02 loss for the third quarter. That said, we chose to have the additional labor in the stores to ensure customers visiting us for the first time had a very positive experience and will become loyal customers. We expect the recently-launched sales-driving efforts to result in continued improvement in ProCare's results.

I would now like to provide a brief update on the test we launched in October that is designed to grow our service store sales and profitability. As I mentioned on our last call, our aim is to better leverage the success we have achieved and the knowledge we have gained in our tire stores. Specifically, we're testing changes in our service store model in our Rochester and Syracuse markets that will increase the mix of tire sales in these locations. Right now, tires represent approximately 10% of sales in our typical service store, up from 8% last year. We believe that we can significantly increase that percentage by using what we have learned about marketing and selling tires in our tire stores, without losing any service business.

Thus far, we have had enough positive feedback to roll the program out to approximately 30 additional stores in Buffalo, which will bring our test up to 60 locations. In our initial months of the program, we have been pleased with our unit gains and are still working on refining our tire sales training and in-store execution in order to get the bottom-line returns we think we can achieve.

In addition, we continue to pursue our stated acquisition strategy. We believe the recent challenging environment will provide opportunities for us, and we're actively evaluating various options.

Now I would like to turn to our outlook for the remainder of the year. Sales trends for the first three weeks in January are outpacing December, and we currently expect comparable store sales growth for the fourth quarter adjusted for days to be in the range of 6 to 7%, and earnings per diluted share to be $0.37 to $0.40, including about a penny accretion from the ProCare stores. You should note that we will benefit from an additional four days in the fourth quarter due to fiscal 2007 being a 53-week fiscal year.

We now expect our range for earnings per diluted share for the full year to be $1.66 to $1.69, excluding the $0.11 impact of the onetime impairment charge recorded in Q2. This compares to $1.51 earned in fiscal 2006. We adjusted our full-year range to reflect a bit more dilution from the ProCare business than we had expected at the beginning of the year.

We plan to provide our formal outlook for fiscal 2008 sometime prior to reporting our full-year results in May. However, I would like to provide color on a few trends that we are expecting for 2008.

We expect comparable store sales adjusted for days to be up 3 to 5%. We expect ProCare to be accretive by at least $0.10 per share. We won't have an $0.11 Strauss write-off.

While we are encouraged by our performance in December and January, we still have various headwinds to overcome. For example, our material costs continued to trend up, and we will not benefit from the extra week as we did this year. That said, our team is aligned and we're ready for the challenge. We see nothing at this time, both with the acquisition pipeline and our business model, that would preclude us from hitting our previously-stated goals of 15% top-line and 15% bottom-line growth.

As announced in the press release, our Board of Directors approved a share repurchase program authorizing the Company to purchase up to $30 million in common stock. I would like to reiterate that our priority remains seeking attractively-priced acquisitions, and the buyback program will not lessen our ability to do so.

The stock buyback program was put in place to give us the flexibility to be strategic with our capital and take advantage of the opportunities the market may present. I can assure you that we will evaluate purchasing our own stock the same way we assess acquisitions. That is, we will be opportunistic. I am pleased to announce this repurchase program, as it provides us with more options for our capital and which in turn will allow us to provide maximum value to our shareholders.

Finally, as we look ahead, we are confident in the position we have established in the marketplace and are optimistic about the long-term effectiveness of our operating model and our future growth prospects. We remain committed to growing our business and increasing profitability over the long run. We look forward to a solid fourth quarter.

Further, given our opportunities with ProCare and the favorable acquisition environment, we are even more optimistic about our opportunities in 2008 and beyond. This completes my overview, and now I would like to turn the call over to Cathy for a more detailed review of our financial results.

Thanks, Rob. Good morning, everyone. As Rob stated, sales for the quarter increased 15.1%, with comp store sales increasing 2.9%. New stores, which we define as stores opened after March 26, 2005, added $11.9 million, including $9.9 million from the acquired ProCare stores. There were 77 selling days in both the third quarter of fiscal 2007 and 2006.

Partially offsetting this increase was a decrease in sales related to closed stores amounting to $1.5 million. The comps this year compare to a comparable store sales increase of 4.7% in the third quarter of fiscal 2006.

Year-to-date sales increased 10.4%. Comp store sales increased 3/10 of a percent. New stores added $31.4 million, including $25.4 million from the ProCare stores. Partially offsetting this was a decrease in sales from closed stores of $4.5 million. There were the same number of selling days in the first nine months of fiscal 2007 and 2006.

Moving on to gross profit, for the quarter ended December 2006, it was $40.4 million or 38.9% of sales as compared to 38.7% of sales for the same quarter of last year. The ProCare stores increased consolidated cost of sales and increased gross profit by 4/10 of a percent as a percentage of sales during the quarter ended December 2006. This occurred in the areas of materials, labor, and occupancy costs, all of which are included in cost of sales.

Even in times of declining sales, technicians receive a minimum base wage when they're not fully productive. This subsidy of wages raised labor cost as a percentage of consolidated sales. Additionally, due to negative comparable store sales at these locations, fixed occupancy costs created pressure on gross margin. However, partially offsetting the pressure on occupancy costs as a percentage of sales was the reduction of occupancy costs related to the recording of 44 capital leases for the ProCare stores in connection with a true-up of our acquisition accounting for those stores. This reduced rent expense by approximately $1.2 million and increased depreciation expense by approximately $0.4 million in the quarter, both of which are components of cost of sales. Without ProCare, gross profit was 39.3% of sales as compared to 38.7% in the prior year.

There was a shift in mix during the quarter ended December of 2006 as compared to the prior year to the lower margin maintenance and tire categories, as well as tire and oil cost increases. However, this negative pressure on gross profit was offset by an increase in vendor rebates recorded as a reduction of cost of sales as compared to the prior-year quarter. Excluding ProCare, labor and occupancy costs declined as a percentage of sales during the quarter ended December 2006 as compared to the prior year. Positive comparable store sales improved labor efficiency and created leverage against fixed occupancy costs.

Gross profit for the nine months ended December 2006 was 40.5% of sales as compared to 41.1% of sales for the same nine months of last year.

Operating, selling, general, and administrative expenses for the quarter ended December 2006 increased by $2.8 million to $30.3 million from the prior-year quarter, and were 29.2% of sales as compared to 30.5% of sales in the prior-year quarter. ProCare stores negatively impacted store direct costs, which are a component of SG&A, by 0.5%. In addition to the percentage increase attributable to the ProCare stores, a shift in cooperative advertising credits from SG&A to cost of sales in connection with the accounting for new vendor agreements under EITF 02-16 caused SG&A expenses to increase approximately 1 percentage point as compared to the prior-year quarter.

Offsetting these increases, however, was a decrease in several other expenses as a percentage of sales, including benefit costs, which decreased primarily due to favorable claims experienced for healthcare and changes in plan design; management bonus expense, which decreased due to the Company not attaining minimum profit goals; and advertising cost as the Company trimmed spending in reaction to consumer cautiousness about the economy and rising gas prices.

For the nine months ended December 2006, SG&A expenses increased $10.9 million and were 29.7% of sales as compared to 28.9% of sales.

Operating income for the quarter ended December 2006 of approximately $10.1 million increased 35.6% as compared to operating income for the same quarter of last year, and increased as a percentage of sales from 8.2% to 9.7% for the same period.

Net interest expense for the quarter ended December 2006 increased by approximately $1 million as compared to the same period in the prior year, and increased from 9/10 of a percent to 1.8% as a percentage of sales for the same period.

There was an increase in the weighted average debt outstanding of approximately $13.3 million quarter-over-quarter primarily related to the aforementioned capital lease entry for the ProCare stores, offset by a decrease in revolver debt. There was an increase in the weighted average interest rate for the current-year quarter of approximately 500 basis points as compared to the prior year. Without the onetime ProCare adjustment, the weighted average interest rate increased by approximately 150 basis points due to increases in prime and LIBOR interest rates as well as the ProCare and other new capital leases that carry higher rates than the Company's bank facility.

However, as an aside, any new borrowings for the stock buyback or acquisitions would be at the bank rate, which is LIBOR plus 75 basis points.

The ProCare acquisition accounting entry increased interest expense by approximately $0.8 million in the third quarter of fiscal 2007. However, with the reduction in occupancy costs as part of cost of sales that I previously mentioned, the net entry for the ProCare leases had no impact on net income for the quarter.

Other expense for the quarter increased $0.4 million as compared to the same period in the prior year, primarily consisting of several items. Amortization expense increased approximately $100,000. There were some additional write-offs related to Strauss of $100,000. There was a decrease in consulting fees from Strauss of approximately $100,000, and increased loss on sale of assets of approximately -- or disposal of assets of approximately $100,000 as compared to the prior year.

The effective tax rate for the quarter ended December 2006 was 37.5% as compared to 38% last year. For the nine months ended December 2006 and December 2005, the effective tax rates were 36% and 38%, respectively of pretax income. Offsetting the current nine-month tax provision of 37.5% was the recognition in Q1 of $400,000 income tax benefit primarily related to the favorable resolution of some state tax issues.

Net income for the quarter ended December 2006 of $4.9 million increased 19.8% over the prior-year quarter. Fully-diluted share earnings per share for the quarter were $0.32 as compared to $0.27 for the same quarter a year ago or an 18.5% increase.

For the nine months ended December 2006, diluted earnings per share decreased 9% to $1.18 from $1.30 for the first nine months of the prior year.

Moving on to our balance sheet, again, our balance sheet remains very strong. Our current ratio at 1.6 to 1 is comparable to year end and a year ago December. Inventory is up $3 million from March 2006 and about $1 million from December 2005, due primarily to the addition of the ProCare stores and other new store openings, along with our continued efforts to improve stocking levels and mix of inventory to reduce outside purchases.

However, turns were slightly improved from year end and last year December, due to our focus on reducing slower-moving inventory such as exhaust and our interest in improving inventory turns in order to be able to more quickly recognize the cooperative advertising credits recorded under the new accounting rules.

For the first nine months of the fiscal year, we generated approximately $30.5 million of cash from operations and received $3.3 million from the exercise of stock options and warrants. We spent $12.9 million to acquire ProCare this year and paid $2.8 million in dividends. We realized approximately $2 million from the sale of fixed assets and received our $5 million loan back from Strauss.

We paid down $11 million of debt. Depreciation and amortization totaled approximately $14.7 million. Total CapEx so far this year is approximately $17 million.

As mentioned in our press release, we just amended our revolving credit facility to allow us to do the stock buyback with relatively no restrictions, other than to meet our covenants. Our banks extended the already-favorable agreement another 18 months to January 2012, and increased our accordion feature to $75 million, which increases our total credit facility to $200 million. As a reminder, our debt to capital ratio is 21%. Before the accordion feature, we have $100 million of availability under our credit line and plenty of room under our covenants, making it easy for us to do acquisitions or do the stock buyback as the opportunities present themselves.

That concludes my formal remarks on the financial statement. With that, I will now turn the call over to the operator for questions. Operator?

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

Rob, I guess, with the way December and January started off, you must be sleeping a little bit better at night. You are surprised?

Certainly, I think that the traffic increase is the most encouraging thing. Surprised? I don't know about surprised. I think certainly with the deferrals and the weakness we saw last year, but really nine crumby months -- yes, we anticipated recovery. I guess not surprised. Encouraged that it's coming through.

Hopefully it shows that we kind of understand the business. That being said, it is difficult when you have eight straight months of crumby performance to be super thrilled that things are going to turn around. But no, not surprised.

Certainly, in our budgeted numbers for the fourth quarter, we anticipated that we would have a very strong quarter, especially against a minus 0.4 which we had last year, and are doing these numbers really with no help from the weather. So we are happy and we think we have built the organization to weather the storms and take advantage of them.

In looking at really some weak quarters behind us, probably would not have been able to get the ProCare deal done if we weren't given that kind of market environment. The biggest opportunities for us, both with our financial strength in the market and now the increasing cash flow produced by what we anticipate to be a pretty good run for the next year against soft numbers, you know, take advantage of what the market has to bring to us.

When you look at the categories, you're seeing strength particularly on the service with brakes and, surprisingly, on shocks and struts, something that is very much a deferred category. You track your customers fairly well. Are you seeing a lot of return or repeat customers coming in for things they may have put off? Is there any amount of time or mileage that you have seen in general that some of these categories had been pushed out more than usual?

Sure. I mean, whenever someone is deferring the typical deferral period -- as we have talked numerous times, based on our repeat customer business -- is from the time we tell them they need, whether it is shocks or brakes or tires, the customer that is strapped and wants to defer the purchase will typically come back to us in three or four months for their oil change. At that point, they won't defer it any longer.

So for example, shocks in the quarter were up 12% with them being up 26% in December. Brakes for the quarter were up 3.5%; they were up 12% in December. Certainly, I think the consumer has pushed it as far as they could and going into the winter months, even though it's been a mild winter so far, have been anxious to get the repairs done. Certainly on the safety front as well as shocks that typically might be done at 50,000-mile intervals, maybe they pushed those to 60,000 miles.

Okay. You have got to be encouraged because it seems like this is maybe a trend that might have some legs to it as you go into '07.

We certainly expect that for Q4. Going into our fiscal '08, I think the 3 to 5% comp number we put out there for '08 is typically stronger than we have projected before. So we certainly created a good opportunity for us in '08 through what we have built in our infrastructure, and how we go to market, and focusing on traffic, and getting names in our database. We should also get the benefit of really going up against, frankly, some pretty poor performance the last three quarters prior to this one.

Okay. Then just shifting gears then toward ProCare, you noted that maybe you were add a little bit off in terms of the cost or at least expectations; and that was a function of labor in general. It sounds like sales trends at ProCare continue to track according to plan, or maybe a little bit better.

Yes, I think our sales trends are right where we would have expected. As I said, probably didn't do as good a job on labor, which hurt us a couple pennies this quarter, which we weren't counting on. I think that we have that under control.

Frankly, it is tough to figure out. Where do you go from a minus 30 comp in buying a company out of bankruptcy? Probably missed that by $0.02 or $0.03, so I think that is the difference in the numbers.

Where is the average sale now per store unit, or is it better per bay, or however you want to give it, relative to where you -- when you picked up ProCare?

Well, obviously, the trends are positive if you're going from a minus 30 comp to a minus 10 comp. We would hope that the fourth quarter does better than the minus 10 comp. Then as we said, once May 1 rolls around, which is the first time we go year against year against those numbers, remember the way we do comps, those will not be incorporated in our comp store sales in '08. That being said, the profitability -- and we will report on ProCare comps -- we would be surprised if we do not see ProCare comps running up 10 to up 15% starting May 1, when we anniversary when we took over some of the less than stellar numbers they were running.

Okay. So are those stores now around $450,000 a store, or better, or a little bit worse?

Again, seasonally adjusted, remember Q3 and Q4 would be our weakest quarters. We got the run rate for the first six months getting us to the 450, 470 level. Certainly, we are comfortable with the $450,000 to $500,000 number annualized. But a little bit of weaker going into this quarter.

Okay, that's great. Well, encouraging stuff. Keep up the work because I think you guys are doing a good job. So thanks.

Thanks, Tony. Appreciate it.

Scott Stember with Sidoti & Company.

You gave a couple of the items or the categories from a comp standpoint, shocks and brakes. Could you give some of the other items like tires and oil changes?

Sure. Exhaust in the third quarter was down 8%; in December, it was flat. Service was up 2.5% in the third quarter; in December, it was up 6%. Tires were up 7.6% in the third quarter; in December, it was only up 4.1%. Anything else?

That pretty much covers it. Cathy, can you just -- ? I think I missed the part where you talked about the contribution from new stores and from ProCare. Can you just give that again?

In terms of the sales?

Yes, the sales, please.

The sales for the quarter were up 2.9% on a comp store basis. The new stores added 11.9; and out of that, 9.9 represented the ProCare piece.

Okay. Rob, could you maybe talk about price increases, what you are coming off of the last six months, and what we could look forward to heading into fiscal 2008?

You are looking for price increases that we are going to implement or price increases that they are implementing to us?

I don't know, maybe both.

Typically we raise our prices 3% in March, and we would anticipate doing that again. We incurred a 3% price increase on oil in August; another 3% price increase on oil in November. And you know, tires, obviously, have been steadily going up. So for all of fiscal '07, oil price cost to us increased 12%.

As you know, we raised -- at least the last couple years in the weaker environment, have continued to raise our prices 3% twice a year to try and counteract that. But we do not raise our price on oil changes, again getting back to the importance of that as our key strategy to drive traffic, to build our database, and build the business to carry us forward.

Okay. As far as the fourth quarter guidance goes, could you maybe just clarify just a little bit as far as the 6 to 7% comp? Is that an apples-to-apples number or is that a just a number that includes the extra week of business?

No, we wouldn't game it like that, Scott. That is apples-to-apples. In our fourth quarter, there is a total of four extra days due to the extra week. Remember, we will lose two days in January due to the calendar with Christmas. Remember, our third quarter ends December 23, so Christmas and New Year's this year fell on a Monday versus a Sunday; so we lose two like days in January. We pick up an extra six days in March due to the 53-week calendar. That effectively will give us an incremental four days.

The 6 to 7% comp increase just incorporates like days. The official comp number with the extra four days will run something in double digits. But again, just benefited by the calendar.

Okay, and last question. Have you guys -- anything new on Strauss or any of the stores that are hanging out there that you guys could possibly be interested in? Would that be in your plans possibly for acquisitions going forward in '08?

I think anything that we can buy attractively that will be accretive quickly and fits, and our markets are contiguous, would be in our plans. Last I know, Strauss is still working through bankruptcy and planning on fixing their business. Should that not occur, we would certainly be interested in some of those assets.

That's all I have. Thank you.

John Lawrence, Morgan Keegan.

Yes, Rob, most everything has been asked. But let me just go through a couple things. Remind us on the ProCare just a little bit; how is the communication with -- I know the signs are up. Talk about the marketing program at ProCare. When did it start and what continues going into the spring?

We certainly started it in November, where the permanent signs were up. The databases were incorporated and sent out mailings, basically along the lines of either ProCare is Monro or ProCare is Mr. Tire. Remember, we converted 31 of those locations to tire stores. So a lot of it was getting the word out, focusing on the fact that we are now starting our 50th year in business.

So to a customer base that was told stores are in bankruptcy but keep coming back, you need to get a lot of correspondence out there, which started in November, letting them know that we are around to handle their needs, their warranties are good, come back. And to start build the credibility back that you lose when you tell a customer in a high-service, low-trust business, that you're not going to be around any longer.

So the rackings in the stores, the inventories in the stores, we have sold through most of the higher, more-expensive inventory that was left to us. That was bought out prior to the purchase, which had a negative impact on margins. We are in a position to move forward, and have gone from a minus 30 to a minus 10, and look to get even and, again as I said last year, run the positive comps and control labor.

But you will see us continuing to advertise to build those stores. Remember, one of the benefits of where they were located is not only do we get some advertising to drive the ProCare business, but with the same name recognition in Columbus and Cleveland and Pittsburgh, where we already have stores in place, those should also help the comps of the older Monro stores that are already in those markets with the additional advertising efforts.

The mix was about what you expect?

Yes, again, we did not execute as well as we would have liked, and it cost us a couple pennies this quarter. We certainly do not strive to make the same mistakes twice.

Just a last question on the test. What did you really find that you like the best about it, other than you think it is worth rolling out? But can you give us a little more what your fact-finding was on that?

Sure. I think we really liked the unit increases and selling more tires. I think we didn't like the fact that, I think in a lot of cases, the stores became order takers and didn't use the same kind of skill set on items like brakes and shocks that they are very accustomed to, to filling the customers' needs better and selling the benefits of maybe a better product.

So we were happy with the sales. We were dissatisfied with the margin, and potentially should have done more alignments and rotations off the tire sales that were generated. You know, happy enough to basically double the test and just focus on getting the rate of return and margins that we think we deliver in our tire stores who are training these stores to be better tire salesman.

So from a marketplace standpoint, strategic, you like the traffic. Everything is just an execution on your end?

Yes.

Great, thanks. Good luck.

[John Ridolson] with [Partisan] Capital Management.

Good morning and congratulations. A quick question; I guess it is probably more for Cathy. I didn't understand exactly what you were saying about the switch from SG&A to interest on the ProCare leases. Had we refinanced them? Or was this the auditors digging in there and wanting to reclass? And I guess then does it have any restatement or balance sheet implications?

It is part of the acquisition accounting, John, and we have a year to true those up. When we did the due diligence initially on ProCare, we only had a short window. So what we didn't realize is that they had taken all the capital leases off the balance sheet. They had 44 of the 75 locations that they had refinanced, which fell under capital lease accounting.

So as we dug in over the last few months, we determined that we needed to record those as capital leases. We had been recording them as operating leases.

The net P&L impact of fixing that was zero. Basically we decreased rent expense for those 44 locations and increased depreciation and interest. You know, capital lease goes on the balance sheet as if you own it. So we also added about $21 million worth of debt to the balance sheet in the form of capital leases this quarter, also.

So since we are in that one-year window there is no restatement; it is strictly all balance sheet. There is no P&L impact. But it did shift -- the components of the P&L lowered cost of sales, increased interest expense.

Right. I guess you're not going back and restating the first two quarters you had it; or did you?

That's correct.

Okay. (multiple speakers) While debt goes up, you also have an offset increase in your capital accounts?

The fixed asset account, right, for land and buildings. Yes.

Okay, okay, good. I understand. Thanks much.

Cid Wilson with Kevin Dann & Partners.

Okay, most of my questions were answered, but just a few. I'm not sure if I heard this, Cathy, but what was appreciation for the quarter?

Appreciation was a little over $14 million for the quarter. $14.7 million.

$14.7 million, okay. Any thoughts on cash flow year-to-date and for the quarter?

Well, we generated approximately $30 million from operations. Free cash flow net of CapEx would have been $13 million. Is that what you are asking?

Yes. That's what I was asking.

That's year-to-date, that is nine months, just to be clear. I'm sorry.

Yes. The $14.7 million of depreciation, Cid, was for nine months.

Right.

Oh, that's nine months? Okay.

I'm sorry, I thought that's what you were asking (multiple speakers).

No, free cash flow; but I'll ask for depreciation and amortization for the quarter.

It was about a third of that, so about $5 million, $4.5 million.

Okay, great. With regards to the sales that you're seeing, how much of that do you believe is Company-specific and how much do you think might be a sign that this may be an industry phenomenon that is benefiting you as well as the industry? (multiple speakers) Particularly with the strong December sales and the seeing of the pent-up demand that we're seeing coming back?

I think, certainly, I think you will see other service providers -- and I have no information on this, Cid -- but I would be surprised if you didn't see strong numbers from some of our competitors, also. I think we might have been hurt a little bit so far with the mild winter, and being Northeast and mid-Atlantic based. That being said, our service stores in December were up close to 10% comp. January is better than December, because the service stores continue to perform at that level; and now the tire stores have gotten back into the act.

So I think we are smart. I think we are good operators. We are not that good that we are going to have a monumental spread between what our service stores do comp and some of our competitors. I would expect things have gotten increasingly better for them, also.

Okay. My last question is, as you are still looking ahead towards or going forward with some of the rising costs in oil and tires, I guess what's your thoughts in terms of, I guess, any either hedging strategies or anything to help to try to counter the rising cost in oil and tires? Do you see that moderating? Any thoughts there?

I think the only thing we work on to hedge is our utilities and try and protect against that. I think the costs are going to be what the costs are. Certainly, we have not commented on '08. When we do roll out those numbers, we would kind of express what we would be looking to occur in the marketplace.

But oil is going to do what it is going to do. We were a little bit surprised with November's price increase. That being said, if things continue along the same trends they have recently, we would expect at some point that to go the other way.

I think overall, any price increases, as long as everybody is getting it, while it might have short-term negative implications and create headwinds, I don't get too concerned about. Because I think it gives us an opportunity to accelerate growth, because others are a lot closer to breakeven; don't have the operating margins and net margins we do. Anything that negatively impact the industry as a whole, I think we are uniquely positioned to take advantage of it and grow at an accelerated pace, and I would expect that to occur.

Okay, thank you very much. Congratulations on a good quarter.

Graham Tanaka with Tanaka Capital Management.

Nice quarter. Just on the vendor rebates, if you could just educate us a little bit on that, what that typically is; and what happened in the quarter; and what the outlook is for them coming up?

Do you want to take that?

No, go ahead.

You are talking about the accounting that I referred to, the shift between SG&A and cost of sales, Graham?

No, I think Rob was talking about vendor rebates, which helped margins. Or was that --?

Previously under the old accounting rules, we used to record vendor rebates as a reduction of SG&A. As we enter into new agreements with our vendors, the new accounting rules say that that becomes a reduction of inventory cost; so you recognize it through cost of sales as the inventory turns.

So we are seeing a shift. For instance, this quarter there was about 1 point of vendor cooperative advertising rebates that used to -- otherwise would have been recorded in SG&A, that now are recorded as a reduction of cost of sales.

Okay, so it didn't improve operating margin?

Yes, well, overall, our vendor rebates compared to last year, whether in cost of sales or in SG&A, are up, yes.

Okay, they are up?

Yes, we will -- as we grow and continue to buy more tires and expand oil, we will get more cooperative advertising credits. That's the way our contracts are written.

Net-net, it is really a reclass of SG&A offset to advertising going up and improving our gross profit margin. Operating margins don't typically change. Gross margin will look better, and SG&A will look worse.

There might be some slight timing [vagarities] due to now we don't get to take the advertising credits that are a part of cost of goods sold until the inventory turns. So it might stretch out the recognition of some of the income; but for the most part, it is just a reclass from SG&A. You know, moving it up as an offset to cost of goods sold.

But the volume efficiencies of the greater discounts are small, it sounds like. Or are they in the --?

No, they will continue to improve. Again, remember, we commented when we signed the new oil supply contract that that would incrementally add to our earnings; was incorporated in our estimates last year; is incorporated in what we will tell you about next year.

Again, intuitively, as we get bigger hopefully we become more important. We are one of the few folks that are growing out there. So as you buy more, you would expect to get more back from the vendors. And we are doing that.

Great. The other thing was on the warmer weather; you had a positive and negative. Negative on the tires. What is the net effect either this quarter or the nine months, on the warmer weather?

You know, we get hurt by warmer weather, but we certainly were helped by gas prices coming down, Graham. So I don't think we are looking to say -- woe is me; you know, high single digits in January and 6.5% in December, and blame the weather. It is six of one, half-dozen of the other.

Certainly a tougher winter would have driven more business. That being said, if it was a tougher winter and gas prices were $3, my guess is we wouldn't be real happy.

Okay, so you are saying that the weather may have hurt, but the gas helped more, net? You had somewhat of a positive?

Sure.

Okay. Now in terms of the ProCare, as you are probably recalibrating your expectations yourself in terms of what you can do and what is there to fix. You have talked about it, you know, crossing them from minus 10% to breakeven comps at some point. What is the timing of the breakeven comps? At that level, what would that do to operating margins for Monro?

I have not tied it all into the operating margins for Monro. I think the guidance we gave on ProCare for our fiscal '08, which again starts April, would be that for the year that group of stores would run plus 10% to plus 15% comps; and that earnings, bottom-line, would be accretive at least $0.10, to be incorporated in anything you folks are working on for '08.

That's great and I applaud you for another terrific acquisition, and good execution if you achieve -- when you achieve it. But I just was wondering is that going to --? At that point, how much of a drag will that be on corporate margins? In other words, there is still potential for it to improve?

I think this past quarter, it was a drag of like 0.4 or something. I would expect getting back to those sales levels with our operating model being in place and the transaction being accretive, I would hope that next year you would not hear us talking about a drag on margins. It should be insignificant to overall Company margins.

That would be fabulous. Great. Now the other last question I had was on the consumer recovery sort of rebounding from the higher gas prices and deferring purchasing or deferring maintenance. Typically, in prior cycles like that, how long was the recovery period? In other words, would it take one or two quarters for the consumer to sort of catch up and their cars to be in better shape? Or is it stretched out, or what?

We would certainly expect getting the benefit, based on the depth of what occurred -- and again, we hadn't seen a 2.9% negative comp, which we saw in the first quarter of this year, like in ages. Certainly not in my time with the Company.

We would expect to get the benefit in Q4 and Q1 of next year. And then maybe easing into more normalized spending patterns, depending on what is going on in the economy. So it was pretty pronounced and pretty well delayed.

Certainly, again for us to get a 3% traffic increase for the quarter, including two not necessarily stellar comp months, says that the traffic is coming back significantly. We would be disappointed if that didn't continue at least at those levels in Q4 and beyond.

Then if you take that traffic number, layer in some of the price increases we have talked about, it is pretty easy to see where at least for the fourth quarter you get to a 6 to 7% comp.

Thank you and, again, congratulations.

(OPERATOR INSTRUCTIONS) [Jack Bullast] with [Midwood] Research.

Regarding ProCare again, I was wondering, at the $450,000, (technical difficulty) $500,000 level that they might be annualizing at, how does their profitability compare with a Monro store that is going at that rate as well?

Right now, it would be slightly worse. Because you have, as I said, maybe there were some staffing issues last quarter. Long-term, long-term being '08, there will be no difference between what a ProCare store does at $500,000 and what a Monro store does at $500,000.

Good. Okay, okay. You had also mentioned that you had cut back a bit in advertising. But now that business is picking up, do you have any plans to try and pick up your advertising?

Again, typically, during the winter months, even if business is good, you know, you want to fish when the fish are biting. Our Q1 and our Q2 are our biggest quarters, are the biggest opportunity, where people are driving more, they are spending more on their cars. That is not to say you totally walk away from Q4; but as you know, Jack, Q4 is historically our weakest quarter, with the winter driving months.

Q3 used to be just as weak, but with the shift into tires, November being a very strong tire month, Q3 now outperforms Q4 always. Never as good as our Q1 and Q2, the summer driving months. And Q4 this year will be better due to, number one, coming up against really soft numbers; but more importantly we have those extra four days helping us drive the earnings.

Right, right. By the way, did the warm weather in December help any categories? Or is it just negative all around? Maybe people drove more.

Certainly, but we have had that in the past. I think that gas prices going down helped.

Right. By the way, regarding ProCare again, for the month of December alone, were their comps down less than 10%?

We are not going to get into the monthly numbers. I think it was minus 10%. I think if we talk about them running minus 10% comps in the fourth quarter, that would be disappointing; and we will certainly give you that number.

Okay, and one last thing. In terms of the $30 million you have allocated to a possible stock buyback but being -- looking at it in terms of valuation, in terms of buying the stock versus an acquisition and so forth, there is one other factor I was wondering if you might consider. If, given how well the stock is doing, the valuation of the stock goes up, whether you might -- what is your consideration in terms of your paying a dividend policy?

Didn't we increase our dividend last year 40% or something?

Good; can we look forward to another 40%?

I think we certainly started the dividend at a level that we were committed to continuing it. As far as the increases, I'm sure the Board has proven in the past that they are very focused on shareholder value. We started with a $0.20 dividend the first year we did it. It went to $0.28. I'm sure the Board will look to evaluate our dividend policy at the point where we annualize against it. Certainly, you can expect that it will be at least continued.

For as long as the taxes on dividends are only 15%, it's a very attractive area to look at.

Say you're commending us on what we have done so far?

Absolutely.

Well, thank you.

I'm looking forward to the future of more. Thank you very much.

All right, Jack.

Jamie Wilen with Wilen Management.

Great quarter, fellows. Most have all been answered. Just one quick follow-up on ProCare. You said that the number was $450,000 to $500,000; but obviously you have two levels of stores. Could you tell us what the volume is currently on the tire side versus what your tire stores do outside of the Midwest; and what it is on the service side?

Secondly, are the dynamics of those markets different at all from your East Coast markets?

The dynamics are not different. I think, certainly, in our long-standing East Coast markets the name recognition might be a little bit higher. As far as the specifics, again converting the ProCare stores, the 31 of them, into tire stores, they were doing similar volume, maybe slightly higher because they are a little bit bigger, than the core ProCare stores. But obviously, nowhere near the typical tire store, which runs for us anywhere approximately $1.1 million to $1.3 million. Those stores were not doing that.

Obviously, we would hope we could take those directionally from what might be $600,000 on the tire side of the ProCare stores, moving them closer to that kind of number, with the thought in mind that it won't get all the way there, because the stores don't have the storage area for tires and just won't get that high.

But directionally, you'll see the ProCare tire stores performing much better overall on the sales line. Again, we will still have the margin challenges you have with the cost of goods of tires being lower. The ProCare stores in these markets, there is no reason to think that they don't typically run the exact same business model as a Monro store would, with the same operating margins long-term, and sales at least approaching what the average Monro store is. Hopefully higher, based on the fact that these ProCare stores -- prior to some of their difficulties in running down big numbers -- on average were running a better sales number than the Monro stores were.

Got you. Okay, great. Thanks, Rob.

Thank you. At this time, there appears to be no further questions. I will turn the floor back over to Jamie Wilen for any closing remarks.

Okay, maybe I will just take this one, Jamie. Thanks very much for your support. We continue to focus on maximizing shareholder value and improving our operating margins, and we will continue to do so going forward.

Certainly, are not through making the improvements. Much happier with this quarter than what we have been running say the last three quarters, but still feel there is room to move forward. We look forward to talking to you in the beginning of April with our outlook for '08, and mid-May with our year-end numbers. Thanks very much for your support. Bye.

Thank you. This does conclude today's Monro Muffler Brake conference. You may now disconnect.