Monro Inc (MNRO) 2008 Q4 法說會逐字稿

Ladies and Gentlemen, thank you very much for standing by. Welcome to the Monro Muffler Brake fourth quarter and full year 2008 earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session an 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 like to introduce Ms. Caren Barbara of FD. Please go ahead ma'am.

Thank you. Hello everyone, and thank you for joining us on this morning's call. 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 now 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 related to leverage and debt service including sensitivity, fluctuations, and interest rates, dependence on and competition within the primary markets in which the Company stores are located, and the need 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, Chairman 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, Caren. Good morning, and thank you for joining us on today's call. We are pleased that you are with us to discuss our fourth quarter and fiscal year 2008 performance. I will also provide you with an update on our business, as well as our outlook for the first quarter and fiscal year 2009. I will then turn the call over to Cathy D'Amico, our Chief Financial Officer, who will provide additional details on our financial results. Our performance for much of fiscal year 2008 was impacted by a challenging economy and weak consumer confidence.

As a result, our customers delayed big ticket purchases, and we experienced declines in store traffic of approximately 3.5% adjusted for days, however, our performance did improve at various points throughout the year, during times when external pressures may have temporarily lessened, or our customers could no longer postpone needed repairs, and returned to us as their trusted provider. Also, because we own and operate all of our stores and are committed to being a low cost operator, we are well-positioned to produce solid results in both strong and weak economies, and especially during challenging times, we are able to outperform many of our competitors.

Now I would like to review highlights from both the quarter and the year starting with the fourth quarter. I should begin by reminding you that the fourth quarter of fiscal 2007 was our best ever fourth quarter on sales and earnings, with comps up 7.3% so we were up against a difficult comparison. Additionally, we had one less selling week in the fourth quarter of fiscal 2008 than in '07, which impacts year-over-year comparisons of our sales results and leverage of fixed operating costs, including distribution and occupancy costs that are included in cost of sales.

Net income for the fourth quarter was 1.9 million, and earnings per share were $0.10, compared with $0.18 for the fourth quarter of last year. These fiscal 2008 results are net of a charge of approximately $900,000, or $0.03 per share, for the settlement of a previously disclosed class action wage and hour lawsuit, related to headquarters personnel. Quarterly comparable store sales grew 0.8% adjusted for days, and declined 5.3% on a reported basis, due to one less selling week in 2008. We generated total sales of $107.2 million, compared to $107.7 million for the prior year fourth quarter.

Total sales included an increase from new stores of $5.3 million, $4.8 million of which was generated from the 19 former Craven and Valley Forge stores we acquired in July, and $700,000 from the seven Broad-Elm Group stores acquired in January 2008. Comparable store sales for our ProCare stores decreased 6.8% from the reported period, and 0.8% adjusted for days. As we have previously mentioned, we will begin to include ProCare sales in our comp store base in fiscal year 2009.

For the year, net income was $21.9 million, and earnings per share were $1.00, compared with $0.97 for fiscal year 2007. Excluding the impact of the aforementioned lawsuit settlement charge, earnings per share for 2008 were $1.03, and at the low end of the Company's previously announced EPS range. Comparable store sales grew 3.1% adjusted for days, and 1.2% on a reported basis. We achieved a total sales increase for the year of 5.3% to $439.4 million, compared to $417.2 million for the prior year.

Our major sales categories for the fourth quarter included brakes which comprise 21% of our mix, tires which comprised 26%, and Maintenance Services which comprised 32% of our mix. On an adjusted for days basis, fourth quarter comparable store sales for brakes increased approximately 7%, which is ahead of industry trends, and helped us to drive up our average ticket. We are particularly pleased with our comparable store sales increase for the brake category, and it is one of our larger and higher margin categories. Further, we are pleased that customers who may have deferred the purchase of brakes for some time, increasingly sought our service when they could no longer delay the purchase.

With regard to other product categories for the fourth quarter, comparable store sales adjusted for days for our mid-margin maintenance service category increased approximately 1%. Lower margin tires were flat, while our higher margin alignment category, which is closely associated with tire sales was down 3% comp, versus a 33% increase in the fourth quarter of last year.

Finally, comparable store sales for exhaust were down approximately 3% for the quarter. For the last 10 years, we have been able to raise our prices with little or no pushback from our customers, because they trust us and perceive value. During the last three years, we have raised prices in both March and September by 2% for an annual total of 4%, however, the last five years have seen 60% of the materials portion of our cost of goods, oil, and tires, increase 50%, and we have received multiple increases in both tire and oil costs during this calendar year. Therefore, our last price increase to our customers effective in April 2008 was 5%, and more recently we increased our oil change price is by $2 in most markets, in addition to the $2 increase last year.

And what fun would a Monro conference call be without an update on our underperformance of ProCare? Fiscal 2008 sales were $39 million. Comparable store sales were up 3.8% adjusted for days. Gross profit percent was up 110 basis points. Operating income was $1.4 million at 3.6% of sales, versus $500,000 and 1.4% of sales in 2007, and our pre-tax loss was $1.2 million this year, versus $1.8 million last year. April comps were up 9.7% this year. May up 5.3 month to date.

Just for some perspective, including our two years of losses , cash investment for ProCare is $67,000 per bay, whereas the Mr. Tire acquisition was $158,000 per bay, and a greenfield service store is $100,000 per bay, so with two years of underperformance, we are still at a 33% discount to new, but obviously still disappointed.

I will now briefly update you on our strategy to grow both organically and through reasonably priced acquisitions. We are pleased with the contributions of the acquisitions that we made during fiscal 2008. The integration of the 19 Craven and Valley Forge tire stores that we acquired in July 2007 are proceeding as planned, and essentially complete.

Additionally, the integration of the more recently acquired Broad-Elm Group is going well, and the business is contributing in-line with our expectations. We are excited about the significant increase in market share that we have is gained in the Buffalo, New York area as a result of the purchase of this business. We are planning for Broad-Elm's re-Grand Opening as part of the Mr. Tire chain to take place in June. Separately, our strategic partnership with Auction Direct USA is yielding the expected levels of incremental revenue.

Turning to our long term goals, as you may know, a challenging macro environment often creates opportunities for us. We find that during times when our smaller competitors are facing increasing difficulties, our low cost operations provides us with a competitive advantage and greater opportunities for purchasing businesses at value prices. We are continuously reviewing potential targets that are for sale. As is usually the case, price is the issue that has not yet been resolved. While our strong preference is to use our capital to grow the business through acquisition, we will not overpay.

Additionally, our Board has shown the willingness to buyback stock should that become our best alternative. And our current stock price and interest rate a $30 million buyback would be $0.07 accretive.

Turning to organic growth strategy, we made solid progress with our Black Gold program during the quarter and fiscal year. As we have mentioned the goals of Black Gold program are to expand our market share, and increase the sale of tires and services in our service stores, by training our store sales personnel, and to broaden the range of tires available for sale. During Fiscal 2008, Black Gold stores outperformed non-Black Gold service stores in tire unit sales, and more importantly, overall comparable store sales. Black Gold stores increased tire units and overall comp sales by 16% and 4.5% respectively, versus 3% and 1.2% from non-Black Gold service stores.

For fiscal year 2008, we set a goal of doubling the number of stores included in our Black Gold program to 120. We are pleased to say that we exceeded that goal, and now have a total of 150 Black Gold stores. You may recall that we began our program in New York State, and have since expanded it to include locations in Philadelphia, Pittsburgh, and Baltimore, in order to make the most of the tire stores we have in those markets, including the Valley Forge locations acquired in July 2007.

Given the solid success of this program in increasing our market share, and advancing our two store format strategy, we have decided to include 25 to 50 additional stores in our Black Gold program by the end of fiscal year 2009, and will focus our expansion in the Cleveland and Columbus areas, where we have existing tire stores.

Beyond our Black Gold program, our marketing efforts also encompass a highly effective yet low cost advertising campaign, that bolsters our reputation as a trusted service provider for a wide range of automotive needs. Back in November of last year, we tested several radio, print, and internet advertising initiatives in our high density markets. Since we were satisfied with the results of the test, we fully expanded the program during the Spring of this year, and have been very pleased with the programs positive impact on our ability to drive sales thus far. Especially when taken into account the difficult market conditions, the fact that we raised our prices significantly, and advertising as a percentage of sales is still less than 4%.

I would now like to briefly discuss our outlook for the first quarter and fiscal year 2009. First, we are encouraged by our solid start to fiscal 2009, and by our strong comparable store sales growth of 8% for April, and approximately 4.5% in May to date. Additionally, April traffic was up approximately 5.5%, while May currently is up 2.4%. As I just mentioned we believe that our effective advertising campaign is contributing to our growth as are our price increases.

That said, we remain cautious in our outlook for the first quarter and the year, in light of the weak macro conditions and continued cost pressures. Given these external pressures, we are continuing to seek opportunities to take costs out of the business, even though we are already a low cost operator. As we mentioned on our last call, we aim to save approximately $1 million in largely back office expenses during the fiscal year. We anticipate no impact to our customers, or our ability to execute our business model as a result of of these reductions. We expect the $1 million in cost savings to be realized in roughly equal increments over the four quarters of the fiscal year.

Additionally, there is no impact on continuing costs from the wage and hour lawsuit that we just settled. Further as I discussed earlier, we have raised our prices 5% in April, versus our normal 2% April price increase, to try to counteract the impact of oil and tire cost increases on cost of goods. While our next scheduled price increase will occur in September, we will continue to closely monitor the impact of commodity prices on our business, and will evaluate additional price increases before our normally scheduled time.

Before I turn the call over to Cathy, I just want to reiterate our committment to remaining the low cost operator, which when combined with our strong reputation as a trusted service provider, has enabled us to weather this difficult economy, and solidly positions us to extend our long term growth trend.

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. Cath?

Thanks, Rob. Good morning, everyone. Starting with sales as Rob mentioned, they decreased 0.5%, or $0.5 million. Comparable store sales decreased $5 million, or 5.3%, due to five less selling days in the quarter versus the prior year. There were actually 77 selling days in the quarter ended March 2008, as compared to 82 selling days in the quarter ended March 2007. Adjusted for days, comparable store sales increased by 0.8 of a percent.

New stores which are defined as stores opened after March 2006, and which include ProCare stores acquired in fiscal year '07, as well as the Valley Forge, Craven, and Broad-Elm stores acquired in fiscal year '08 added $5.3 million in quarter. The Valley Forge and Craven stores contributed $4.8 million of this increase, and Broad-Elm accounted for 700,000 of the increase. Sales in the ProCare store decreased by approximately $700,000, or 0.8 of a percent, on a comp store basis adjusted for days. There was also a decrease in sales from closed stores of approximately $0.8 million, and this compares to a 7.3% increase in comparable store sales in the fourth quarter of the prior fiscal year.

Year-to-date sales increased 5.3% or $22.2 million. comparable store sales increased $4.3 million, and 1.2%, or 3.1% adjusted for days. There were 306 selling days in fiscal Year 2008, as compared to 312 in fiscal year 2007. New stores, again stores opened after March 2006 added $21.3 million, including $14.5 million from the former Craven, Valley Forge and Broad-Elm tire stores, and ProCare stores increased $3.5 million.

On a comparable store basis ProCare increased 1.8%, or 3.8% adjusted for days. Partially offsetting these sales increases was a decrease in sales related to closed stores of approximately $4.2 million. For the year, barter sales increased $0.8 million, and this compares to a comparable store sales increase of 3.2% for the year ended March 2007.

Gross profit at 37.3% for the fourth quarter ended March 2008 decreased as a percent of sales when compared to the same quarter of last year, which showed a gross profit of 38%. The decline in gross profit as a percentage of sales is due to a couple of factors. The primary reason is the decreased leverage in distribution and occupancy cost included in cost of sales, resulting from one less selling week in fiscal 2008 versus fiscal 2007.

Adjusting for this factor, gross profit would have been approximately 0.8% lower in the prior year quarter, or essentially flat with the fourth quarter of this fiscal year. Gross profit for the 12 months ended March 2008 declined slightly as a percent of sales from 39.9% to 39.7% of sales, primarily due to the decreased leverage in distribution and occupancy costs, related to the loss of six selling days between the two fiscal years.

Moving on to operating expenses, as we mentioned last quarter, you may have noticed that we have changed the presentation of this section of our P&L from last year, in order to better conform with GAAP. We moved both amortization and gains in losses on property disposals, from other income and expense, up to income from operations. In the past, this section of the P&L only consisted of Selling, General & Administrative expenses. That line still exists, but we have added the other two lines to arrive at total operating expenses.

So focusing on SG&A expenses for the quarter ended March 2008, it increased from 32% of sales to 34% of sales. This increase is primarily attributable to two factors. First is the decreased leverage in SG&A cost, resulting from one less selling week in fiscal year '08 versus fiscal year '07. Without this extra week of sales in the prior year, SG&A would have been approximately 34% of sales, or flat with this year.

Additionally the fourth quarter of fiscal year '08 includes the settlement of the wage and hour lawsuit that Rob mentioned, that we reached this past week amounting to $0.9 million, or 0.9 of a percent of sales. Factoring out the lawsuit and extra week of sales this year, SG&A would have been down approximately a full percentage point from last year, as we continue our focus on controlling costs, and reducing expenses where we can, in the areas of store support and headquarters expenses.

SG&A expenses for the year-ended March 2008 were 31.2%, as compared to 30.3% for the prior year, again factoring out the lawsuit, settlement and the extra week, SG&A would have been virtually flat at 31% of sales, as compared to 30.9% last year. The other significant component of operating expense is the gain on disposal of assets. For the quarter ended March 2008 this line increased 0.4 of a percent of sales, to a credit of 0.8%, versus a credit of 1.2% in prior year quarter, strictly as a function of lower gain on property disposals in the current year quarter, as compared to the prior year. This was true for the full year also where this line was a credit of 0.4 of a percent of sales, versus a credit of 0.7 as a percent of sales for the full year 2007.

Moving on to interest expense, net interest expense for the quarter ended March 2008 increased by $600,000, to $1.8 million and 0.6 of a percent of sales to 1.7%. The weighted average debt for quarter increased by approximately 61 million compared to last year, primarily due to our stock buyback. This is partially offset by a decrease of approximately 200 basis points in the weighted average interest rate. Excluding capital leases, the weighted average interest rate decreased by approximately 300 basis points.

For the full year, interest expense increased by 0.2 from the prior year to 1.3% as a percent of sales, and $1.2 million. Weighted average debt for the year increased by approximately $18 million, the weighted average interest rate was relatively flat with the prior year. For income tax expense, the effective tax rate for the fourth quarters of fiscal 2008 and 2007 were 22.5% and 35% of pre-tax income respectively.

In the fourth quarter of fiscal 2008 the Company recorded a net benefit relating to the favorable settlement of older outstanding tax matters, partially offset by the true-up of deferred taxes. Without these items the effective tax rate in the fourth quarter of 2008 would have been 34.4%. For the full year 2008 and 2007, the effective tax rates were 34.8% and 35.8% respectively. The items I just mentioned reduced the effective tax rate by approximately 0.8 of a percent for the full year.

Going forward for fiscal year '09, we expect our tax rate to be at approximately 37.7% of pre-tax income. Other income for the fourth quarters of both years was flat as a percent of sales. For the full year, Other Income increased $3.3 million as compared to fiscal 2007, primarily due to the write-off of the companies investment in Strauss of $2.8 million in fiscal 2007. Also contributing to the increase was the Company's recognition of $300,000 of income in the current year, in connection with the settlement of all outstanding legal claims with Strauss.

Diluted earnings per share for the quarter ended March 2008 were $0.10, as compared to $0.18 for the fourth quarter of fiscal '07. For full year ended March 2008 diluted earnings per share increased 3%, and were $1.00, or $1.03 before the lawsuit settlement, as compared to $0.97 for the year ended March 2007.

Moving on to the balance sheet, our balance sheet remains very strong. Our current ratio is 1.6:1, and comparable to last year at 1.5. Inventory is up $3.8 million from March 2007, due primarily to the addition of Broad-Elm, Valley Forge and Craven stores, the addition of product to the ProCare stores, to reduce outside purchases, and the expansion of the tire assortment offered in all service stores.

In addition, we continue efforts to improve stocking levels and mix of inventory, to reduce outside purchases chain wide, however we were able to keep turns flat with last year, with our focus on reducing store moving inventory, such as exhaust, and our interest and improving inventory turns, in order to be able to more quickly recognize the cooperative advertising credits recorded under the new accounting rules.

During Fiscal 2008 we generated approximately $37 million of cash from operations, and received 1.5 million from the exercise of stock options and warrants. We spent $20 million to acquire Broad-Elm, Valley Forge and Craven stores this year, and paid approximately $5 million in dividends. We realized approximately $1 million from the sale of fixed assets, and spent $21 million for CapEx. Depreciation and amortization totaled $20 million. For the year, we also spent $60 million to buyback our stock.

Our net borrowings on our revolver were approximately $67 million for the fiscal year, with $30 million available today, before the 75 million accordion feature that we have on our revolving credit agreement. With regard to that, we are currently finalizing a transaction with our lenders to move some of the 75 million of the accordion to the committed amounts. As of last night, we had commitments from our lenders for at least $38 million of the 75 million, bringing our total facility to $168 million, and our current availability to 68 million.

Our debt-to-capital ratio was 42% at March 2008, and we still have plenty of room under our covenants for further borrowings. We currently borrow at 75 basis points above LIBOR. This combined with our strong balance sheet well positions us to continue to buy attractively priced acquisitions as they become available.

I also wanted to give you a little bit more on guidance for fiscal Year 2009. Our earnings range is $1.08 to $1.18 per share, based on weighted average shares outstanding of 20.4 million. comparable store sales are expected to increase between 2 and 4%. As a reminder the ProCare stores will be included in comparable store sales in fiscal 2009 for the first time.

CapEx is expected to be approximately $22 million, including $7 million for new stores. Approximately $14 million will be for maintenance CapEx. We expect depreciation to be approximately $20 million, free cash flow to be approximately 22 to $24 million, and operating cash flow to be between 44 and $46 million. EBITDA should be in the range of 62 to $65 million, as compared to $60 million in fiscal year '08.

We expect operating income as a percent of sales to improve 50 to 100 basis points as compared to fiscal year '08, which was 8.8%. This improvement will come primarily from gross profit. Interest expense should be flat as a percent of sales in fiscal year '09, as compared to fiscal year '08. Our expected tax rate is 37.7%.

This conclude my formal remarks on the financial statements. With that I will now turn the call over to the Operator for questions.

Thank you. (OPERATOR INSTRUCTIONS). First question comes from the line of Tony Cristello with BB&T Capital Markets. Please go ahead.

Thanks, good morning, guys.

Hi, Tony.

Rob, when you look at sales trends, and obviously they have been strong over the last two months, and you noted the 5% increase in April, so it seems like sales are certainly being helped by price, but I am interested a little bit more in what you are seeing on the traffic side of things, you said April and May traffic has been up, and I am assuming that that has been up for the first time in a while.

Are those new customers to you that you can tell? Are those existing customers that are coming back to perform maintenance that they have deferred? Can you give any more color on what you are seeing with respect to that?

Sure, I think it is a combination of both. Obviously, when we were running really mediocre numbers since July of last year, that is more than the normal deferral period of four to five months, so what happens once you you get beyond that, when people come back after that period, they are our old line customers that trust us, that just are trying to defer the purchase, it ran the course of a normal oil change, they are back in there buying potentially with bigger repairs.

That being said, there are still long time customers that are going to be walking into our stores today and deferring, but the normal deferral period is four to five months. Once you get beyond that, which we were in Q4, you then start to get new customers still deferring, and old customers coming back. That being said with April and May, to your point, we have been seeing store traffic increases, certainly haven't seen a plus 5, and plus 2.5 in May is very very unusual also, so we are obviously, some of the whether it is the digital advertising, the internet, some of the additional direct mail we are running, or some of the radio tests that we ran successfully in November, which we said we would put in our quiver of arrows to bring out in April or May, obviously have helped drive the traffic.

The price increases, people understand and you put that together, and at least for a two month period, whether it is an aberration or a trend, we look pretty smart right now, and are pretty encouraged. If you would have asked me, March, what I thought April through June would have brought, I probably would have fallen in somewhere around the plus 1, plus 2 comp number. So hopefully it continues.

We are in Q1 up against our toughest comp number of the year. We are doing these numbers against a plus 6 last year, and once we get into the Summer driving months in the second half of the year, we are up against some really soft numbers, and hopefully it ends up well, but obviously, I continue to be concerned with record low consumer confidence numbers, $4 gas, foreclosures, and anything else that someone like me can be concerned about.

And you talked about your going back to what you thought comps would look like back in March, how did the quarter progress January, February, March, from the same-store sales standpoint?

Sure. January was down 2.2%. February was up 1.5%. March adjusted for days remember we lost the week was up 3.7 %, so for the quarter we were at 0.8.

Okay. And maybe, Cathy, real quick, do you have the days for the full year for how they will match up year-over-year?

For '09 versus '08?

Yes.

It will be 306 days again, and every quarter is exactly the same, so it makes life a little easier.

Okay, because I think in the September quarter of last year you had one less day as well if I am not mistaken, is that correct?

The December quarter actually.

Okay. And then one last question. Rob, from a seasonality standpoint, is there anything that is done differently in the months of April, May, and June, as people prepare for Summer travel, that if they are going to travel less, which category would that impact the most for you?

We hear a lot of folks in our industry talking about the $4 gas tied into the miles driven. March was the worst miles driven month I think it was down 4.3. Last year, miles driven in total was down 2%. The first time since 1980.

While I subscribe to people not liking $4 gas, and cutting down on their driving, to put it in perspective, and I think this answers your question, that I basically think it is in total a non-event for the Summer, is I don't subscribe while consumer confidence stops people for making purchases, if you say the average driver is reducing their driving by 7%, which is the latest number I saw, it is less than that, because there are more cars on the road, but the average individual is driving 7% less, on an average miles driven a year of 13,000 miles, that is 800 miles a year.

That is effectively one-fourth, one-fifth of an oil change, that is 800 miles off 50,000 or 60,000 miles that someone might get their shocks or struts replaced, brakes 20,000 to 30,000 miles, so in the realm of actually negatively impacting our business and leading into the Summer driving months, you are probably not going to hear that as one of our excuses.

We might try and pull everything else out, but that is not a reason for our business, at least we feel to fall out of bed, and if anything, we probably think a more compelling thing that might be helping us is new car sales being down, where you go from 17.5 million units a year to 15 million units a year, the key driver there is once someone decides not to buy a new car, they aren't deferring one or two months buying a new car.

They say I am going to keep my old car for a year. It usually needs repairs, and they probably get the work done to have their old car carry them another year. We think that might be a trend. Albeit we are only seeing March got a little better, April and May are great, especially compared against tough numbers, but I will retract all that when June turns into a plus 2.

Thanks, I appreciate it.

Thank you, sir. The next question comes from the line of John Lawrence with Morgan Keegan.

Good morning.

Hi, John.

Just quickly, Rob, just sort of to follow-up there a little bit, I don't know if you can talk about sort of the mix of product you are seeing out there now, whether it is a tire change, or the tires, or specifically about Black Gold, and then how that process has really worked, as far as the training aspects, and being able to get that incremental sales. Can you talk about that a little more, and how much is really involved to roll it out to another group of stores?

Well I think certainly on Black Gold front, it is a mind set, it is training, it is pulling out exhaust, it is putting racking in, it is adding tire sales, it is getting the service stores to communicate with the tire stores, and be cooperative in transferring the tires back and forth, and can't underestimate the knowledge between being an order taker for tires with one product line, to being able to approach good, better, best with numerous product lines, and do a better overall job with the customer.

So more extensive than one paragraph that we might put in a press release or a conference call script. That being said, you learn as you go along, which is why Year 1, we had 60 stores, and Year 2 it is 150, and we will add another 25 to 50 next year, but not before we continue to fine tune what we are doing to make sure we are providing the best service for the customer, and not hurting ourselves on margin, and we are certainly satisfied with what that brings to the table.

I think in summary, we said our Black Gold stores for the year ran 3.5% better comp than our non-Black Gold service stores, so we are encouraged that we are not trading off business, which is always your concern when you layer on additional things for a store manager and a store to execute, that they trade off tire sales for brake sales. I mean brake sales are performing beautifully, and the guys in the field are doing a great job with our Brakes Forever campaign, and certainly we feel we are picking up share there, as well as on the tire front, delivering something to the customer that we didn't before, that keeps them in their store for all of their services, and delivering at a high level, and most importantly, creating incremental business for our stores not trading off tires for brakes, or other categories.

Yes, thanks for that update and secondly, you talked about how much pressure the cost has been, the raw material cost on the business. Walk us through the last couple years obviously has been tough in that category. What are you seeing today? Is it changing as oil prices continue to go up, has is it moderated at all and with the price increases?

Well, in general, I think a good rule of thumb, and those of you that own manufacturers and are vendors should feel good. Every price increase is always passed along quicker than if it goes the other way, and they reduce their prices to us. So we are looking which is incorporated in all of our estimates, another 8% on tires, pretty much across-the-board in June.

We have already seen oil, and as I said in my remarks, we have incorporated both of those increases, as well as something further which I am not looking to help along my vendors from charging me more down the road, but we are certainly in a position where with the price increase to our customers, we made in April, and I think they understand with all of these raw material costs affecting every part of their lives, that the services they buy from us are typically every two or three years, and they aren't as apt to object to what we try and recoup from them.

But on the cost of goods side, we will continue to see pressure under our estimation included in our numbers all year across-the-board on cost of goods, and we are committed to do a better job of recapturing it, maybe than we have the last couple years, as it started to spike up, similar to health insurance.

Great. Thanks.

Thanks, John.

Thank you, sir. The next question comes from the line of Scott Stember with Sidoti & Company. Please go ahead.

Good morning.

Hi, Scott.

Rob, could you give the contribution from ProCare again, the operating contribution in 2008 versus 2007?

Sure. Operating income for ProCare was $1.4 million, or 3.6% of sales in '08, it was $500,000, or 1.4% of sales in '07.

And within your guidance for 2009, what are you baking in there as far as operating contribution? Roughly speaking.

Well, I mean, I wish I could get this number right at some point. We are certainly, with April at 9.7 up, May at 5 up doing better than the core Company, we are budgeting them to at some point be able to run a consistent plus 10 comp, and deliver the kind of returns that we would have expected to get last year.

I mean we are conservative in our budgeted numbers. If I said we would hope to be $0.05 accretive, that would be great. I would still be disappointed with that number, with that being said, if $0.05 turns into $0.02 accretive, that wouldn't surprise me either.

We are working hard on it and there are additional benefits, don't forget that we do get from those stores, because without turning a lot of those ProCare stores into tire stores, it wouldn't have afforded us the opportunity to roll Black Gold out in various markets, like Pittsburgh, and this year Cleveland and Columbus, and it makes distribution more efficient, but I mean, at this juncture, continue to be disappointed with our performance. It is getting better. It is not where it should be. It is a broken record, and we will fix it as quick as possible.

Okay, fair enough and as far as plans on what to do with free cash flow, excluding any acquisitions that might take place, could you talk about your plans to repay debt?

Yes. Our plans are to repay debt. Short of if the acquisitions don't materialize, the way I would look at the next year is we would fully expect in this marketplace over the next six months to either close, or at least announce an acquisition.

The definition of announcing an acquisition for us, would be that we have agreed to the price finally, and just have due diligence to work through. Should you not hear anything by the end of Q2 along those lines, and stock performance continues to weigh in, and interest rates are where they are, we might address another stock buyback with the understanding that over the last six months, we probably would have generated free cash flow of over $20 million, that we would have already paid down debt with.

That being said, in the short-term, if we don't do an acquisition, you will see every dollar of cash flow for the next six months go to pay down debt.

That is great. And last question, Rob, can you just maybe get a little bit more granular on this new electronic advertising, compared to the way that you used to do advertising, maybe just talk about any cost savings associated with doing it the new way?

Well again, our advertising last year was about 3.3% of sales. We are bringing it up to 3.7% of sales, adding various new programs, which we will be running as long as they work. One of those is digital advertising, internet advertising. It involves in some markets buying key words, doing various things, in other markets, it involves increasing the span of our direct mail drops, until they stop working I would rather not get into a ton of detail, beyond giving you you the financial impact of the cost of the advertising.

Certainly, you can see some of the sales numbers, the traffic numbers certainly support that some semblance of it is working, but as long as I have got something that is at least working temporarily, I would rather not share it if you can understand that.

No problem, and just again, what is the previous to this program, what is the most used form of advertising for Monro?

Direct mail, and it will always continue to be direct mail. We think the systems we have established not only create a better mouse trap from the standpoint of lower cost of goods, because we have less buyouts, our labor productivity which is up 45%, but significantly lets us be effective in advertising, picking up 100 to 150 basis points as a percentage of sales versus most of our competitors.

And as we have said before, that 80% of our advertising outside of Yellow Pages is one-on-one direct mail, so even with some of these programs that we are talking about, you are probably still looking at while maybe not 80%, certainly we are never going to move down to something like 50 or 60%. It will run somewhere in there.

That is great. Thank you.

Thanks.

The next question comes from the line of Cid Wilson with Kevin Dann and Partners.

Good morning. My first question is just a clean-up question. Your depreciation and amortization, was that about 5 million, am I calculating that correctly?

For the quarter, yes.

Okay, good. All right, thank you. And one question going a little deeper on brakes. Can you give us some sense in terms of what you are seeing not only in the current quarter, but what is happening differently between you and Midas, because Midas they reported that their brake sales were down 9%, so it is quite a contrast between your brake sales and theirs.

It is difficult to say. I would think that they would probably say that the Northeast is doing better, and their Northeast brake sales are better than the overall chain. I think our $99 Brakes Forever campaign, I think our field people with a focus, are better than anyone out there, and when we put our mind to something whether last year it was alignments where we ran up 30% comp, whether it is the Black Gold program where there is always opportunity to improve but we roll that out better, and whether it is the Brakes Forever campaign and executing at store level there, plus the years of building up trust and perceived value with our customers, pays off in a business model of Company owned and operated stores. I think it is a lot of things and I think our guys deserve a lot of credit for getting it right, until next quarter they run flat, and I tell you how stupid they are.

Okay. And then my last question is are you seeing change in terms of the average age of vehicles that are being serviced? Are they getting younger, or any changes there?

Well, sure. I mean the overall data says that the average vehicles are getting older, 9.6 years versus 9.4 for light vehicles, but if the question relates to new car sales slowing up, and is that driving it? Maybe some of it was baked in last year, but we would not have that close realtime data to see it move.

We can look at an annual basis and see it skew towards, again, people holding their cars longer or a piece of that is certainly the economy. A piece of that as we talk about is a positive macro trend of demographics and baby boomers children driving now, and more cars per household works to the benefit of what we all do for a living.

Okay, all right thank you very much.

Thank you.

Thank you, sir. The next question comes from the line of Tom Spiro, Spiro Capital Management. Please go ahead.

Tom Spiro, Spiro Capital. Good morning.

Hi, Tom.

I am new to this story. I guess Question 1, if new car sales weaken, have you seen, or do you expect to see dealers become more aggressive at getting servicing business?

Well I don't know how much more aggressive they can become than they have over the years. I think they used to drive 70% of their income from new car sales, and 30% from repairs. The numbers I see now are 50/50, and certainly if you listen to the radio or watch TV, you go through various fits and starts of half of the commercials running are for repairs.

I think the inherent difficulty they have in competing with us is for a starting point you have to drive by two of my locations to get to them, so it is convenient, and finally you are typically paying anywhere from 33% to 50% more to go to them, so they are more expensive, and will always be, because they pay more for parts.

Their fixed cost overhead is more expensive. Their labor is more expensive, yet no more qualified to do the type of high velocity, low technical repairs that we do. Certainly for transmissions and front engine work, which we don't do those services, they have the tech any call expertise where we don't, but we don't need to pay for knowledge. We pay for execution, so our labor productivity will always be better.

Our fixed cost structure will always be better. Our advertising cost will always be better, and we will always be more convenient. That being said, if you track 10 years going back and currently, and then 10 years going forward, what it shows is small, independent guys are going out of business, and that share is being grabbed by the dealers doing a much more effective job, as well as the repair specialist and tire stores doing a much more effective job, so we are not so much battling each other any more. We are battling for the guys that are going out of business share.

Thanks. Secondly, on the subject of of acquisitions, do you typically find that you are one of several buyers for a prospective deal? Are you the only guy? how does that work?

Over the last three years we have been the only guy on any deal we have done, or any deal we are waiting to do, and the holdup is not a motivated seller, or someone that is fearful of giving us information. We have the information to make the decisions.

The holdup is similar to what you see in the real estate market now, which is we might have three to five properties on our desk that we are willing to pay a certain price for, and that is a fair price in today's market, but no one wants to take the hair cut that is representative of a tough economy.

Their earnings going down, their sales being challenged, their cost of goods going to up, so we haven't agreed to price yet, but in every case where we are currently involved, and anything we have accomplished over the last two to three years, it has all been us, versus what we view as the sellers unrealistic expectations, which haven't been bridged yet.

And have these tended to be companies in trouble, small shops in trouble, or are they sort of healthy, thriving operations?

I mean, various levels. Some are in trouble. Some are still profitable, but less profitable than they would be, and a lot of times in some of the 20 and 30 store chains, what you have is a business that has been in the family for 50 or 60 years, father started it, guy currently running it, no children to take it over, but they have started with owning the real estate.

So they started 60 years ago with one property, owned the real estate, of the 20 or 30 stores they might own half of the locations, and where the disjoint a lot of times is, forgetting about the emotional aspects of either selling your home or selling a business, that has been in the family is, they are stuck with the real estate costs, underburdening the business with the rent they charge, versus what they could achieve if they just held the real estate, and leased the property.

So there is some confusion in what the cash flow and what the business is really producing, and we run into trouble because their professionals, either are not explaining it well enough, or are not motivated to explain it well enough that they are missing the boat, that they can keep the real estate, as an example, make a million dollars straight profit on the real estate, but combined, they are only making $ 500,000, and they don't realize that what they have is a business that is losing money, and is deteriorating to the extent that until they go into negative cash flow, they don't get it quite as well.

Lastly, on the subject of co-op advertising, can you tell me how large a dollar amount that was in the fiscal year now over?

Oh, large.

Like ballpark number?

No.

Is it available on kind of all product lines, brakes, tires, et cetera? Does it vary with your volumes?

Sure. It absolutely is volume generated. The recognition of co-op is tied to inventory turns, and certainly, it is netted to tie out to the advertising percentage, which we certainly are willing to give.

We can't break down a lot of this stuff because a lot of times, a given category there is one vendor, and it would become apparent what these numbers are, and we think we treat our vendors very well, and are one of the few guys that are growing the business, and certainly wouldn't want them to share our cost structure with our competitors, and I am sure they don't want us comparing with all of their other customers, what they might or might not be doing for us.

For a given level of volume, does the percentage or the dollar amount change? That is, for example, when you budget for fiscal '09, if you assume your volume and brakes for example? Can you get comfort that the co-op is advertising rebate associated with that is going to be why?

Yes, absolutely.

Thank you very much.

Thank you.

Thank you, sir. The next question comes from the line of Jack Balos, Midwood Research. Please go ahead.

Hi, I just want to get a little more clarification on the change in the advertising, because you have increased radio and internet ads, and so forth, but at the same time, I think you said you increased direct mail drops, so I am not clear as to whether the percentage that you spend of 80% for direct mail has that gone down?

Yes. I mean not significantly, Jack, you are not going to see us at 60%. Maybe we are at 75% now we increased direct mail in various markets, where direct mail works very well.

We have added some radio in markets where we have a lot of density, and radio is cheap, and in a lot of markets, we added some internet advertising, and buying key words and things, in markets that have high internet usage to see how that might serve us. We are never going to get away from direct mail.

We think it is a huge competitive advantage, based on our database and our systems. That being said, we think there are also pockets of things that we can do that are very smart, and we said the degree to which advertising increased was from about 3.3% to 3.7% in total.

Okay. Is the area that ProCare is in, those stores, are they benefiting in particular from certain new advertising that is new for that area?

Well I think new for that area, but remember what we said last year. Part of the problem is we needed to replace a bunch of people. We needed to do a complete name change which we didn't really intend to do, and until you get your operations running well, you don't invest in advertising to drive customers.

Right.

So we held back on advertising in a lot of areas, that it would behoove us to advertise a new name and a new entrance into a marketplace, but you don't want to spend money driving new customers to an operation that you don't think is delivering the kind of service to the customer that you want customers initial view to be.

We said we tried some things in November, we think our operations are under control there and running better, and now I think are fairly comfortable with a 9.7 in April, the 5.5 in May, in a tough marketplace that some of the advertising, really they have seen for two months back to back for the first time in two years is hopefully benefiting, but as you know Jack, two months is not a trend. It is a good feeling right now.

Right, but the important thing I guess from what you are saying is that operationally speaking in terms of management and operations and systems, is that you are where you want to be with ProCare?

Yes. We are doing better at the store level and now we have got to, our difficulties in ProCare at this juncture are, we need more sales volume out of these stores, and you don't get it without advertising, and we feel the stores are in a position to handle it, we will deliver a good customer experience, we need to drive more traffic.

Right. Okay so you have got the operations performing like they should be, so therefore you can advertise, and be comfortable that the customer coming in will get a good experience.

Correct.

Fine. Thank you very much.

Thanks, Jack.

Thank you. The last question comes from the line of Mark Cooper, Wells Capital. Please go ahead, sir.

Hi, Bob and Catherine, thanks.

Hi.

Did you say that your cash flow from operations for the year was $37 million?

Yes.

So does that mean here in March it was at 0? I calculated that for the first nine months.

Well, I mean, it could have netted to, because Q4 is our softest quarter. I don't have the 10-Q in front of me. If you have it in front of you for December, it is just the line cash flow from operations. It could have been flat with March, yes.

Okay.

Because March is a soft quarter, and we had one less week, so the pluses and minus could have netted to zero.

Sure, it is the first time I think since I followed the Company that you actually have ever had a --

Well I don't think that is necessarily true. Really, we paid down a lot of debt in the first six months, and then the next six months it is sort of pretty flat, in terms of cash available because the first two quarters are our strongest quarters.

I understand that. I am just looking at that line you just cited cash flow from operations, I don't think I have ever seen the Company report less than $5 million in any given quarter, so it just surprised me a little bit. At least that is what the 10-Qs say.

Well it is year-to-date and I can get back to you if you want after the call, and once I have the other Q in front of me.

Sure, that would be fine. And then the CapEx number is approximately 8 million in the quarter. Does that sound about right?

Yes.

Thank you.

You are welcome.

Thank you, sir. At this time I would like to turn it back over to management for closing remarks. Please go ahead.

Great. Thanks everyone for your continued support of the Company. We are working hard to work our way through a difficult period, are encouraged about where we are, and how we are performing, and we will continue to strive to make April and May repeat themselves throughout the year, and look forward to talking to you again with an update in July. Thank you.

Thank you. Ladies and Gentlemen, this does conclude the Monro Muffler Brake fourth quarter and full year 2008 earnings conference call. You may now disconnect, and thank you for using the teleconferencing center.