AutoNation Q3 Earnings Call Transcript

123jump.com Staff
01 Dec, 2008
New York City

AutoNation, the largest auto retailer reported third quarter revenues declined 22% to $3.5 billion and net loss from continuing operations of $1.4 billion or $7.95 per share. In the quarter the company recorded noncash charges for goodwill and franchise impairment of $1.46 billion after tax.

AutoNation, Inc. ((AN))
Q3 2008 Earnings Call Transcript
November 6, 2008 11:00 a.m. ET

Executives

John M. Zimmerman - Vice President, Investor Relations
Mike J. Jackson - Chairman of the Board & Chief Executive Officer
Michael J. Short - Chief Financial Officer & Executive Vice President
Michael E. Maroone - President, Chief Operating Officer & Director

Analysts

Rexford Henderson - Raymond James & Associates
Matt Nemer - Thomas Weisel Partners
N. Richard Nelson, Jr. - Stephens, Inc.
Joseph C. Amaturo - Buckingham Research
Rod Lache - Deutsche Bank
Matthew J. Fassler – Goldman Sachs & Company
David Lim – Wachovia Corporation
Eric Selle – JPMorgan

Presentation

Operator

Welcome to AutoNation’s third quarter earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question and answer session. To ask a question, please press “*1”. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the call over to AutoNation.

John M. Zimmerman

Good morning and welcome to AutoNation’s third quarter 2008 conference call. My name is John Zimmerman, AutoNation’s Vice President of Investor Relations. I’d like to remind you that this call is being recorded and will be available for replay at 1-888-567-0381 after 2:00 pm Eastern Time today through November 13, 2008.

Leading our call today will be Mike Jackson, Chairman and Chief Executive Officer of AutoNation. Joining him will be Mike Maroone, President and Chief Operating Officer, and Mike Short, Chief Financial Officer. At the end of their remarks, we’ll open the call to questions. I’ll also be available by phone to address any follow-up issues.

Before we begin let me read our brief statement regarding forward-looking comments and the use of non-GAAP financial measures. Certain statements and information on this call will constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks which may cause the actual results or performance to differ materially from expectations. Additional discussions of factors that could cause actual results to differ materially are contained in the Company’s SEC filings.

Certain non-GAAP financial measures as defined under the SEC rules may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on the Investor Relations section of AutoNation’s website at www.autonation.com.

Now I’ll turn the call over to AutoNation’s Chairman and Chief Executive Officer, Mike Jackson.

Mike J. Jackson

Good morning and thank you for joining us. Today we reported a third quarter net loss from continuing operations of $1.4 billion or $7.95 per share. In the quarter the company recorded noncash charges for goodwill and franchise impairment of $1.46 billion after tax. Despite these charges we remain in compliance with our debt covenants. After adjusting for the impairment charges and certain other items, net income from continuing operations for the 2008 third quarter was $44 million or $0.25 per share compared to $73 million or $0.37 per share in the prior year.

In the third quarter total US industry new vehicle retail sales declined 31% based on CNW research data. In comparison, in the third quarter AutoNation’s new vehicle unit sales declined 24%. This performance relative to the US retail total is attributable to a combination of increased market share as well as the benefit of our geographic and brand mix relative to the total market.

In the third quarter we want to address four major items.

First. In the third quarter the US economy moved deeper into recession as the credit crisis escalated to a credit panic in September as credit freeze ensued which broke consumer confidence which has been under pressure throughout the year. The industry saw a decline in floor traffic at automotive showrooms and for those customers who were in the showrooms credit availability was very tight.

We do believe the actions taken by the Federal Reserve and Treasury Department will bring credit back into the marketplace in the near future. The recent total cuts of a 100 basis points by the Federal Reserve is another sign that all tools are being used to get the US economy back on track. LIBOR spreads continue to narrow which has been the case for the last 18 days and we expect this to continue going forward.

The recent decline in gasoline prices is another sign of positive news for the consumer. Once the housing market stabilizes and credit becomes available, we expect to see increased signs of stabilization in the US economy.

Second. In continuing response to the ongoing macroeconomic and industry challenges, we announced in the second quarter earnings release a cost reduction plan with a targeted annualized run rate of $100 million and we are on track with the previously-announced cost reduction efforts. We continue to look at future cost cutting opportunities beyond the $100 million.

Next. We have shifted our capital allocation strategy from share repurchase to debt reduction. So far this year we have repaid $589 million of combined non-vehicle debt and floor plan debt. This was made possible by strong operating cash flow including a significant contribution from working capital improvements. Going forward we have targeted an additional $500 million of total debt reduction.

Finally, prior to the third quarter of 2008 we operated as a single operating segment. During the third quarter of 2008 in response to changes in the automotive retail market including the disproportionate decline in revenue and earnings from our domestic franchises relative to our import and premium luxury franchises, we made changes to our management approach and divided our business into three operating and reportable segments - domestic, import and premium luxury.

Beginning in the third quarter resources are allocated and performances assessed based on financial information from each of these segments. We believe that our segment-related disclosures will improve the transparency of our financial reporting.

AutoNation continues to generate strong cash flow in this very challenging market despite the current and possibly ongoing levels of depressed vehicle sales. I would like to turn it over to Mike Short to provide more details on the financial results.

Michael J. Short

Thank you Mike and good morning ladies and gentlemen. As Mike noted, we recorded charges for goodwill and franchise impairments of $1.75 billion before taxes or $1.46 billion on an after-tax basis. These charges resulted from accounting requirements to assess goodwill and franchise rights for impairments as a result of adverse market conditions and the decline in our stock price. I’d note that the goodwill charge is an estimate which we’ll finalize in the fourth quarter with any adjustments reflected in fourth quarter results.

Let me make a few comments on the impairment charges. First, we tested goodwill at both the single reporting unit level and on our new segment structure. As a result of the testing the $2.75 billion in goodwill we started with was reduced to $1.15 billion with approximately 15% of that amount allocated to the domestic unit. Future testing of goodwill will be conducted on a segment-by-segment basis. I’d also like to note that had we completely written off the domestic goodwill, we would still have been in compliance with all of our covenants.

As we’ve discussed with you in previous calls, in light of the challenging business environment we have been aggressively managing our costs and cash flow. Regarding our cost structure, we’re on track to achieve the $100 million in annualized cost savings under our previously-announced cost reduction plan, and we will continue driving efficiencies beyond that point.

We’ve put in place $86 million in annualized savings since the starting of the initiative. In the third quarter SG&A decreased $54 million versus Q3 2007. SG&A as a percentage of gross profit increased to 76.5% from 71% a year ago reflecting the deleveraging of our cost structure partially offset by our cost savings initiatives.

Regarding cash flow, through a disciplined management of CapEx and working capital we’ve generated sufficient funds to reduce non-vehicle debt by $362 million and floor plan by $227 million for a total of $589 million on a year-to-date basis. We drove $104 million of non-vehicle debt reduction and $332 million of floor plan reduction in the third quarter. Additionally, we committed to repurchase an additional $26 million of debt which settled in early October.

During the third quarter we did not repurchase any shares of our common stock. At September 30th our non-vehicle debt was $1.4 billion. Of our $700 million revolver we had covenant limited availability of $197 million. Additionally, we had cash on hand of about $61 million for a total liquidity of approximately $258 million.

Despite the impairment charges, we remain in compliance with all the covenants under our debt agreements. Our consolidated leverage ratio at September 30th which measures non-vehicle debt to EBITDA was 2.65 versus the covenant limit of 3.0. Our capitalization ratio which measures floor plan plus non-vehicle debt divided by total book capitalization was 61.5% at September 30th versus the 65% cap. We believe that our aggressive costs and cash-flow management will enable us to continue to reduce debt and remain in compliance with our covenants.

At September 30th we had reduced new vehicle inventory levels by approximately 6,600 units from June 30th. As compared to prior year, the net inventory carrying cost for new vehicles was $5 million lower in Q3 primarily due to lower floor plan interest rates partially offset by a decrease in floor plan assistance. As we continue to reduce inventory we expect net inventory carrying costs to decrease.

Other interest expense was $8.7 million lower in Q3 versus last year. The favorable variance is the result of interest rates on our term loan facility, mortgage debt and floating rate senior notes, and a decrease in our debt level associated with our revolving credit facility partially offset by an increase in our mortgage debt. Our ongoing deleveraging actions will contribute to lower other interest expense going forward.

It should be noted that a one-notch reduction in our debt rating would increase credit facility costs by about $2 million annually.

During the quarter we also recorded a gain of $12 million before tax or $7 million after tax on the repurchase of $88 million of principal of our senior notes. Excluding the impairment charges, the gain on the debt repurchase and certain favorable tax adjustments in prior year we reported third quarter earnings from continuing operations of $0.25 per share versus $0.37 per share a year ago.

For Q3 2008 we had an effective income tax rate of 15.8% versus a prior year effective rate of 37.6%. The rate for the third quarter of 2008 reflects the fact that a significant portion of the impairment charges was not deductible for tax purposes. The Q3 2007 rate benefited from adjustments for the resolution of various tax matters which resulted in an EPS benefit of $0.02. We expect our ongoing rate to be about 40% excluding the impact of any potential tax adjustments in the future.

We reinvested $55.7 million in the business through capital expenditures during the quarter. We expect full-year 2008 capital expenditures to be approximately $125 million. Excluding acquisition-related spending, land purchase for future sites and lease buyouts, CapEx will be approximately $70 million.

Now let me turn you over to our President and Chief Operating Officer, Mike Maroone.

Michael E. Maroone

Thanks Mike and good morning. The third quarter was marked by extreme economic volatility. In addition to the ongoing drastic changes in gas prices, new developments affecting auto retail were the pullback on leasing and the tightening of credit by traditional auto lenders from raising credit standards to providing lower loan-to-value advances, both of which put increasing pressure on consumers particularly those with negative equity issues.

As consumers were bombarded with these developments confidence waned dramatically affecting store traffic and in turn our business. In spite of this we delivered a 3.2% operating margin as a percent of revenue excluding goodwill and franchise rights impairment charges which illustrates that our operational foundation is sound.

I will begin by providing some additional commentary on the domestic, import and premium luxury segments. Please note that segment numbers as presented in our press release are on a total store basis.

In the quarter, the import and premium luxury segments accounted for the vast majority of segment income at 81% of the income for the three segments. Combined the two represented 70% of our unit mix, up from 65% in the quarter a year ago. While the domestic segment accounted for 30% of our new vehicle unit sales in the quarter, it disproportionately accounted for only 19% of the segment income and domestics contributed 54% of the segment income dollar decline.

As the industry moves forward the auto retail landscape will include fewer domestic stores which should positively impact throughput in both sales and service. As we continue to optimize our portfolio, we will retain well located high throughput domestic stores. Of note, when compared to the industry our domestic stores currently have over three times the throughput of the average domestic dealer.

Now I’ll provide further details on our third quarter operational results. My comments here will be on a same-store basis unless noted otherwise.

First, new vehicles. According to CNW industry new vehicle unit volume was off 31%. AutoNation compared favorably retailing 65,000 units, a decline of 24% in the quarter compared to the period a year ago. While we noted pressure across the board in all of our markets, we gained market share in the quarter. Compared to the industry we benefited from favorable geography and brand mix along with outstanding execution at the store level.

We’ve also gained share on a year-to-date basis. In these difficult times our commitment to providing a superior buying and ownership experience for our customers remains a clear benefit. This was further evidenced in the quarter when our company reached a best ever customer satisfaction milestone for both sales and service CSI.

Compared to the quarter a year ago, revenue per new vehicle retail of $30,000 was off $530 or 2% primarily driven by a decline in truck pricing that was highly incentivized in a shift in car/truck mix. Same-store gross profit per new vehicle retail of $1,975 was off $184 or 9% impacted by compressed truck margins which were pressured by the liquidation of low demand inventory.

We also had margin compression in premium luxury. In premium luxury we noted a continued trend toward entry-level or lower priced models. The premium luxury product cycle was a factor as well. Consumers will soon be seeing the new E-Class from Mercedes Benz, BMW’s new 7-Series, and the new RX 350 from Lexus. These new models should help to improve volume and luxury gross margins.

At September 30th we had a 62-day supply of new vehicle inventory favorable to the industry at 72 days. At 62 days our day supply increased 14 days compared to the quarter a year ago resulting from a slowing of sales in September. Since June 30th we’ve managed our inventory down by 6,600 units ahead of our target for the second half of the year. We achieved this by adjusting our stocking levels and reallocating our own inventory among our stores to more accurately matched consumer demand.

Turning to used vehicles, we retailed just over 45,000 used units in the quarter, up 13% compared to a year ago. Contributing factors to the decline were significantly fewer vehicle appraisals and trade-ins due to lower new unit volume and the conservative credit environment. Same-store revenue per used vehicle retail was down 7% as consumer demand for value or lower-priced vehicles continued to trend upward. Truck pricing remained under pressure but began showing signs of improvement as gas prices started to drop.

Gross profit per used vehicle retailed was down 8% or $136 with used cars and trucks having approximately the same margin and each accounting for about half of the margin decline.

In the quarter we moved 6,600 used vehicles from originating stores to more optimal locations with good success at retail. We also grew our certified pre-owned business by 17% compared to the same period last year. It’s clear that customers recognize the tremendous value of certified pre-owned vehicles and manufacturers are generally supporting them with strong incentive programs.

Our used day supply of 41 days at September 30th is two days lower than a year ago. Given the soft selling environment in September, we’re pleased to keep our days supply in check.

At $609 million same-store revenue for service and parts was off 5% with gross profit off 6% at $264 million. The effect of the economic issues facing consumers impacted all facets of our service and parts business in the quarter as customers sat on their wallets. We continue to work at increasing customer pay business through our defined and measured service sales process, our online appointment program and aggressive service marketing.

Another example I’d like to share is that in May we began to sell our Value Care Program, a prepaid maintenance program in the service drive. The program has been well received. In fact in the third quarter we sold just over 4,000 plans. Initiatives such as these coupled with robust ongoing training will drive both customer retention and financial results.

Turning to finance and insurance, same-store revenue declined 21% on lower volume. Same-store F&I gross profit per vehicle retailed was $1,071 off $20 or 2% year-over-year. In this environment we’re focused on the performance of our third and fourth quartile stores, improving cash opportunities from contracts and transit, and maximizing our existing preferred lender relationships. In the quarter we added two new lenders, one national and one regional; and we expanded the footprint of five existing lenders. Today we have 23 preferred lenders offering prime and subprime financing as well as leasing.

As I mentioned, our work to maximize our portfolio stores overall as well as within each segment is ongoing. During the quarter the bulk of our activity was within the domestic segment where we sold one store and terminated four stores. This activity represented an annual revenue run rate of $94 million. In September we proudly opened Mercedes Benz of Delray and Delray Beach, Florida. This is an add point and it’s our 14th Mercedes Benz dealership. Of note, we sell over 8% of Mercedes Benz in the United States.

As the horizon remains challenging for the entire economy, operationally we’re focused on heightened efficiency throughout the company from the execution of our best practices to tight management of costs, cash flow and inventories. In addition our commitment to the training and development of our associates remains steadfast. We will continue to take the necessary steps to align the size of our operations with consumer demand. And when the economy recovers, our intent is to emerge as an even stronger company.

In closing, I’d like to especially thank our associates in Texas and our emergency response team that had our stores operational in just 24 hours after Hurricane Ike struck in September. Finally, I’ll thank all of our associates for their unwavering dedication to the company during what for many are unprecedented difficult times.

With that I’ll turn the call back to Mike Jackson.

Mike J. Jackson

Thanks Mike. The collapse in auto sales compares with the peak to trough declines of 1973, 1981 and 1991 recessions. Mike Maroone and I have experienced these downturns before and we know how to manage the business through these tough times. We are operationally stronger today than ever before. We will continue to cut costs, redeploy our cash flow to debt reduction, remain committed to strategic investments that include training and technology, be smart on inventories, keep a strong balance sheet to position us opportunistically for when the industry reaches recovery.

As we look at the rest of 2008 we believe the market will remain extremely challenging. We also believe that in 2008 new vehicle sales for the industry will decline to the low 13 million unit level. While at this time it is hard to predict new vehicle sales for 2009, the most conservative industry forecasts are in the range of 12 million new vehicle units. Even at a 12 million unit sales rate, AutoNation will remain profitable and we are confident that we will remain in compliance with our debt covenants.

As previously stated, we are targeting a further $500 million of debt reduction including floor plan and new vehicle debt. AutoNation will continue to focus on our cost structure by continuing to invest in our business. We are confident in our long-term business strategy and our markets.

That concludes our remarks. Operator, please open the call to questions.

Question-and-Answer Session

Operator

Yes, thank you. At this time, we will begin the question-and-answer session. If you would like to ask a question, please press “*1”. To withdraw your request press “*2”. Our first question comes from Mr. Rex Henderson with Raymond James & Associates. Your line is open.

Rexford Henderson - Raymond James & Associates

Good morning and I had a couple of questions about SG&A and the asset impairment charges. First of all, Mike Jackson, you mentioned that there might be some further SG&A cuts. Can you give us any color on where that’s going to be and the magnitude of those?

Mike J. Jackson

I would say our concentration at the moment is absolutely to complete the $100 million in cost cuts that we announced in the second quarter and get that fully integrated into a run rate. But you know us. We don’t stand pat. We’re looking at a very challenging environment in ’09 and therefore we are hard at work at what’s next. I cannot put a number on it today. That’s premature and I would say as compared to the $100 million that we’ve already done that the next tranche, if you will, will be more volume related than permanent related. This is a very rough estimate; something like 50/50. At a certain point it becomes more and more simply volume related than what you can permanently take out of the business. But I’m sure by our next quarterly report we’ll have a better feel for a number that we can give you that we can stand by.

Rexford Henderson - Raymond James & Associates

Okay and so the $100 million so far, you think that’s permanently out of the business and you’ll be looking to make some variable cost cuts that could bounce back when volume comes back?

Mike J. Jackson

I think that’s a good characterization of it.

Rexford Henderson - Raymond James & Associates

Okay. The other thing was on the asset impairment; Mike Short mentioned that you did the asset test on both an enterprise-wide basis and on a segment-by-segment basis. And I wondered if you could give us some color on what that showed. Would the asset impairment have been smaller had you reported on an enterprise-wide basis?

Michael J. Short

Hey Rex, this is Mike Short. As we went through the testing we first, as you correctly recalled, tested the single reporting unit basis. That contributed about $1.47 billion in the pre-tax write-down. As we tested the individual segments following that, the only one that required a further write-down was the domestic segment which was an additional $140 million pre-tax. To get to the balance of the overall charge that was an additional $141 million on a pre-tax basis associated with individual franchise impairments. So those are the various components of it. And I think you’ll recall I mentioned in my comments we had the capacity to write off the entire domestic element without coming in range of any of the covenants.

Rexford Henderson - Raymond James & Associates

Okay and one final question. Inventory looks a little higher than I expected it to be. It’s down some year-over-year but not as much as sales. Should we be expecting inventory levels just to be higher on a kind of a run rate basis or are you going to get those down further so that the day sales kind of match year ago levels?

Michael E. Maroone

Rex, it’s Mike Maroone. I think you could guess that we will continue to drive the inventories down to reflect the environment. We’re down about 6,600 units from the beginning of the year. The one piece is remember that there was a pretty dramatic shift from truck to car so we did ramp up our car inventories to take advantage of that and we’ve been liquidating our truck inventories and I think that’s why you see them not match up perfectly with the sales rate. But we are committed to running even more efficiently with our new vehicle inventory.

Rexford Henderson - Raymond James & Associates

Okay. I said that was my last question. Actually, I had one more and that is in my market I’m hearing advertisements for a 24-hour-a-day parts and service offering. I’m wondering how widespread that is and how successful that has been in driving incremental business in parts and service.

Michael E. Maroone

It’s Mike Maroone again. We’re testing seven-day service in one market. We’ll probably begin testing it in a second market in the spring. We’ve had really good consumer response. The 24 hours, the ability to come in and make service appointments 24/7 but we actually have opened up one market where we’re in full service seven days a week. And again, consumer response has been good.

Rexford Henderson - Raymond James & Associates

And it’s profitable? You’re showing enough volume to make the extra costs worthwhile?

Michael E. Maroone

Yes. Actually this is our fifth week of it. At this point in time I wouldn’t say it’s highly profitable but it’s not a drain. Again, our job is to please customers and serve them when they want to be served.

Rexford Henderson - Raymond James & Associates

Okay. Thank you.

Operator

Thank you. Mr. Matt Nemer with Thomas Weisel. Your line is open.

Matt Nemer - Thomas Weisel Partners

Hi, good morning everyone. My first question is and I may have missed this, I apologize. Just coming back to the goodwill write-down, what can you tell us the remaining value of goodwill that’s associated with your domestic franchises and then were there any changes to goodwill on import or luxury stores?

Michael J. Short

Thomas, this is Mike Short. There were no changes related to premium luxury or import in the segment testing. Obviously the first half didn’t really factor in segments at all since it was done at the single reporting unit test but when we tested the individual segments, premium luxury and import passed with substantial cushions.

With respect to the domestic segment, the amount that’s left on the books is $171 million, so about 15% of the total that’s on the books.

Matt Nemer - Thomas Weisel Partners

Okay and then my second question is regarding the debt covenants, you made a comment that next year even at a 12 million unit level you think you would be in full compliance. Can you give us some sense of your assumptions on the EBITDA side and the debt side of that equation?

Michael J. Short

We don’t forecast the EBITDA piece and 12 million is kind of our stress case for what we think 2009 may be in terms of total units for the industry. So what gives us comfort Thomas is our ability to generate significant cash and use that cash to pay down debt and stay in compliance with the ratios.

Matt Nemer - Thomas Weisel Partners

Obviously I would assume that you’re having pretty frequent dialog with your lenders. Just from a qualitative standpoint, can you give us some sense of the type of expense associated with more flexibility on the covenants? Does it make sense to try to leave yourself a little more wiggle room or is the expense significant there?

Mike J. Jackson

This is Mike Jackson. First, we really like the business model that we have. The service and parts business is basically a recurring big percentage of our fixed costs that allows us in this very difficult environment to remain profitable. The second step of the business model that we like, and if you operate it correctly, as the business de-accelerates you get tremendous cash coming back to headquarters. The amount of working capital that it takes to run the business goes down dramatically, which puts us in a position to easily pay down debt in times like this.

Now, as far as renegotiating with the banks on the covenants, I would not be in the mood to go in and do something with the banks right now. Yes, we’ve spoken to them. Yes, we could get it done. Do I like the numbers that are involved? They’re not my favorite but we could manage it. But why do it? I much prefer the strategy that we are on and just manage within the covenants, and if in a better environment we ever want to do something different, you could get the covenants changed at a much different pricing cost. But to go in and touch the covenants now to me is not the correct time to do it especially when we’ve prepared for a downturn of this dimension all along.

If people have been following me, when I first got here I talked about how we’d manage in a 10 million unit market, and we have the plans and the models and clearly are able to execute in this tough environment. So this is what we’ve always planned for and now that’s exactly how we’re going to manage through it.

Matt Nemer - Thomas Weisel Partners

Okay that’s very helpful. And then just two more quick ones on parts and service, can you give the breakout between customer pay and warranty? And then secondly, the CapEx looked a little bit higher than we were thinking in the quarter and I think you may be above your full-year guidance on CapEx. So I was just wondering what’s going on there.

Michael E. Maroone

Matt, Mike Maroone. On the fixed operations, our customer pay was down 4%, our warranty was down 7% and the customer pay traffic was actually off about 4% as well. So the dollars were off 4%, the traffic was off 4%.

Michael J. Short

Thomas, on the CapEx, within the $55.7 million that I called out for the quarter there was a substantial portion that was lease buyouts that were just economically the right thing to do. So there was about $20 million of that in that number.

Matt Nemer - Thomas Weisel Partners

So for next year, care to give us any sense for where CapEx could be?

Michael J. Short

It’s going to be lower as we continue to manage our cash but no, I don’t think we do any projections for next year on that number yet.

Matt Nemer - Thomas Weisel Partners

Thanks very much.

Operator

Thank you. Mr. Rick Nelson with Stephens. Your line is open.

N. Richard Nelson, Jr. - Stephens, Inc.

Thank you. Good morning.

Mike J. Jackson

Good morning Rick.

N. Richard Nelson, Jr. - Stephens, Inc.

Can you talk about the regional performance, specifically California and Florida and how those trended versus the chain?

Michael E. Maroone

Rick, it’s Mike Maroone. I would say Northern California has shown some signs of stability. Southern California is still in distress. In terms of Florida, Florida is in a lot of distress I would say and is probably one of our most challenging markets today.

N. Richard Nelson, Jr. - Stephens, Inc.

Okay. Thank you for that color. Mike, the weakness in the business overall, how much of it do you think is store traffic and how much of it is the availability of credit and are you beginning to see any thawing at all in the credit availability?

Mike J. Jackson

This is Mike Jackson. Let’s take the industry sales performance in October which was about a 30% decline. While we’re in a cyclical downturn and have been for two years and that’s about a 10% decline in business or about 1/3 of the decline. Now you have the credit panic that hit in the middle of September and all of a sudden that 10% decline has expanded to a 30% decline. Half of that additional decline is the breaking of consumer confidence and their deep concern as to where the economy is and where it’s going and that as you know impacts big ticket items. The balance of the decline is indeed tighter credit standards. If you look at the disproportion of decline of the domestic versus import and premium luxury, clearly it’s in credit because the financing available from the domestics and their companies is under the most stress whereas the Japanese still have very strong finance arms as do the Europeans. But everybody has tightened. Everybody’s made it more difficult. Yes, you can still do business. But I would say in the 30% decline in October, 1/3rd of that then was financing, 1/3rd of it is consumer confidence, and the last 1/3rd is the cyclical downturn that we were in already.

My view is then that since we’re deep into the cyclical downturn and we had this extraordinary event of a credit panic that we’re now in overcorrection. Sales are now dramatically below trends and we will get a benefit from that on the other side. Now, you’ve got to make it to the other side, which we clearly will, but I think both housing and automotive are in an overcorrection at this point.

N. Richard Nelson, Jr. - Stephens, Inc.

Thank you for that color. Are you seeing any thawing at all in the availability of credit or it’s still very tight?

Michael E. Maroone

Rick, it’s Mike Maroone. I think overall it’s very tight. I don’t think we’re seeing a thawing. Certainly you can look at specific lenders such as Toyota that are in much better shape than others. I think Mike spoke to that. The Japanese and the European captives certainly are a little looser but they too have tightened up from prior times.

Mike J. Jackson

And the credit crisis and we talk about how it affects the consumer confidence and traffic. I’m out there in the business community every day talking to colleagues in other businesses that have projects and investments that normally would be green lighted as outstanding undertakings run very skillfully and very professionally with good returns for all parties including the banks that simply are not getting done. So, I know we’ve passed the rescue package in Congress; I know capital’s been put into the banks; but there it sits. So we have a ways to go on the credit side.

N. Richard Nelson, Jr. - Stephens, Inc.

Terribly tough environment. Thank you.

Operator

Thank you. Mr Joe Amaturo with Buckingham Research. Your line is open.

Joseph C. Amaturo - Buckingham Research

Hi, good morning. A couple of questions. First, you cited that there’s additional working capital opportunity. I was wondering if you had an estimate to what the working capital opportunity would be from moving to a 13 million down to 12 million as your initial forecast suggests for 2009?

Michael J. Short

Joe, I think maybe what I’d cite there is Mike Jackson’s comments earlier about our ability to pay down debt by $500 million in the future. I think a lot of that is going to come from working capital improvement which is both a contraction, assuming a contraction of the business, as well as specific initiatives that have been talked about so far to really reduce the way we’re managing cash or heightened the focus on cash management in the company; an example of that being contracts in transit and how long those are taking to get collected and I would congratulate the field as Mike Maroone did earlier in our stores in their ability to accelerate those to help us manage cash in this difficult environment. But actions like that are going to be the things that we do to take advantage of the working capital opportunity that we have in the organization.

Joseph C. Amaturo - Buckingham Research

Okay. That leads me to the next question. Of the $500 million could you break out how much of the reduction’s expected to come from floor plan debt reductions versus capital structure reductions and how long it would take you to basically reduce your debt burden by $500 million?

Michael J. Short

We don’t have a specific timeline for that but the floor plan reduction is about 10% and the balance will be coming on the non-vehicle debt side.

Joseph C. Amaturo - Buckingham Research

Okay. So basically over some period of time you’ll be able to generate about $450 million of free cash flow?

Michael J. Short

And just to be clear on it, it’s a 10% reduction in the floor plan piece. That’s not 10% of the total.

Joseph C. Amaturo - Buckingham Research

Oh. So that’s about $150 million of the $500 million?

Michael J. Short

Probably a little bit more than that.

Joseph C. Amaturo - Buckingham Research

Okay. And then lastly could you just give us the composition of your floor plan debt providers? For example, what percentage of the floor plan is represented by GMAC, Ford Motor Credit, etc.?

Michael J. Short

It’s largely all the captives. About half of it would be in the domestics and half of it from everybody else but we can follow up with you if you like in more detail on that, but that’s just general guidelines on it.

Joseph C. Amaturo - Buckingham Research

Okay, great. And then just one last one. Any indication of how service imports did in the month of October? Any color around that?

Mike J. Jackson

We never comment on the current month other than the industry figures that are out there.

Joseph C. Amaturo - Buckingham Research

Okay. Thank you.

Operator

Thank you. Mr. Rod Lache with Deutsche Bank. Your line is open.

Rod Lache - Deutsche Bank

Good morning. I was hoping you could clarify how much of the $100 million cost cut you’ve completed? I’m not sure I’m reading this right but if you subtract the segment income from the EBIT that you reported excluding charges, it looks like you’ve got $26 million of corporate overhead in this quarter versus $27 million last year. So, is that right and should we then conclude that the cost savings are largely outside of corporate overhead?

Michael J. Short

You’ll note that it’s corporate overhead and other, so there are other things in that number including some of the ancillary businesses that we have in our lines clearly one segment, collision centers and things like that that run in to that number as well. So, that’s not just corporate overhead and we don’t provide at this point any additional detail within that for you.

In terms of your other question on the $100 million in cost savings, we’ve taken $86 million of that out now on our run rate and expect to complete the $100 million that we had targeted before the end of the year and we think that there are opportunities beyond that.

Rod Lache - Deutsche Bank

Okay, if you could just clarify, I believe your floor plan debt would be excluded from your covenant calculation, would that be correct?

Michael J. Short

It is not included in the leverage ratio test. The leverage ratio test is only on non-vehicle debt. The capitalization ratio test is on both non-vehicle debt and floor plan.

Rod Lache - Deutsche Bank

Okay. And what about used floor plan?

Michael J. Short

That’s in the floor plan number in that test.

Rod Lache - Deutsche Bank

Okay. And any additional color on the outlook for the parts and service business? It has actually been quite stable up until recently. It looks like it’s moderating a bit. Is that something that you’re expecting to continue to moderate through next year or any thoughts based on your experience in that business, how that should look now?

Michael E. Maroone

Rod, it’s Mike Maroone. Certainly we feel that there’s tremendous pressure on consumers in terms of their disposable income so I would expect some pressure. However, at the same time there’s got to be some pent up demand so I think as consumers gain more confidence we believe that business will come back. It’s been a very stable part of the industry for many, many years. Yes, we’ve got some short-term pressure but I think it will be back and I think we’ll be just fine there.

Rod Lache - Deutsche Bank

Did the composition of customer pay versus warranty change?

Michael E. Maroone

Not noticeably. Customer pay still about 50% of the total, the balance being warranty and internal with internal being bigger than warranty.

Rod Lache - Deutsche Bank

Right. Thank you.

Operator

Thank you. Mr. Matthew Fassler with Goldman Sachs. Your line is open.

Matthew J. Fassler – Goldman Sachs & Company

Thanks a lot. Good morning to you. I guess my first question for Mike Jackson, given your history in the industry, particularly in the luxury side, if you think about some of the macro drivers of the current slowdown and what implications they typically would have for luxury versus a more moderately priced cars I would be interested in your color on what kind of downturn you think we’re in for here and how they might rebound versus the rest of the market as well?

Mike J. Jackson

First Matt, we’re in a very extraordinary period where you have this most unfortunate combination of a cyclical downturn all of a sudden combined with a credit crisis. That is a very toxic combination that no segment will be immune from. If I look at the quarter, our domestic business unit wise was down 36% new cards, imports 18% and premium luxury 14% so that makes the point. I do believe though that the actions that the Federal Reserve and the treasury have taken are unprecedented, they’re going to take time to work. Clearly, looking at the narrowing of spreads and LIBOR means that the measures are working but it’s still going to take more time. I think premium luxury will come back first. As soon as they see that the most dramatic parts of the crisis are past us, I think premium luxury will recover first.

Matthew J. Fassler – Goldman Sachs & Company

That’s helpful. Secondly, given that new car inventories remain a bit elevated, is it your expectation that the industry continues to see some margin pressure on the car side?

Mike J. Jackson

This is Mike Jackson again. First, the inventory on a selling rate basis you have to bear in mind we calculated it off the month of September, which you had the credit panic in the second half of September where things came to practically a standstill as far as a selling rate to calculate a day’s supply. So, that extreme situation on the sales side will slightly elevate the day’s supply but if you could look past that a little bit you’d see we’re actually in very good shape.

But, to you point, yes it’s extremely tough out there. It’s very competitive. The customers that do come in know that they’re in the driving seat on price and there will be margin pressure but I think there’s some relief you want to add, we’ve managed it quite well considering the environment.

Michael J. Short

I think if you look a good part of the margin compression comes out of luxury where it’s really about mix and where we are in the product cycle. As I mentioned in my comments is the new products get introduced, they’re higher margin products and I think you’ll see a little less of that. Certainly, there’s pressure in the domestic and the import side and I think we’re managing that okay.

Matthew J. Fassler – Goldman Sachs & Company

Great and then I guess my final question, on the in store credit dynamic and what you’re seen from your lenders we’ve heard a lot about the contrast between flat out turn downs and then perhaps in some instances rather than that stricter implementation of say LTV ratios. How would you describe the credit tightening being manifested? I’m also interested in your perspective on the timing of this cycle, is this something that you think is panic by the financial institutions who will kind of get their wits about them and ease of bidders, does this part of the cycle maybe have some more likes to it?

Michael E. Maroone

It’s Mike Maroone. I think Mike Jackson used the term over correction and I think that applies in this case. CNW reported that the approval rate was about 64% versus a year ago at 83%. They also reported one in five subprime loans getting approved. I think that reflects the current environment. Certainly there’s a problem with people getting these portfolios securitized and we feel that pressure but we believe it’s an over reaction and over correction I should say and I think over time will work itself through.

Matthew J. Fassler – Goldman Sachs & Company

Great. Thanks for your help.

Operator

Thank you. Mr. David Lim with Wachovia. Your line is open.

David Lim – Wachovia Corporation

Good morning gentlemen. Just several questions, first on that $500 million of additional debt reduction, what’s the propensity for that to increase over the next couple of years?

Michael J. Short

I’m sorry David, just so I can understand that the propensity for the amount of debt to increase?

David Lim – Wachovia Corporation

Yes, I mean like the debt pay downs. You’re targeting $500 million, at least that’s what you said today. Can that number possibly go up?

Mike J. Jackson

It’s Mike Jackson. You know us by now, when we give you a number that’s a number that we’re beyond highly confident that we will go out and deliver and when that’s done then we’ll tell you what happens next. Certainly, if you look at the way we run the business we have, I believe, the choice to pay down more debt if that’s what the circumstances call for after we complete the $500 million. In that we will be still making money, positive cash flow in the business and our skills at managing working capital improves every quarter. So, we will have the choice to do more and if the circumstances call for us to do more then we will do more.

David Lim – Wachovia Corporation

Understood. Last quarter you guys gave out a sort of composition of your inventory mix as well as your sales mix between cars and trucks. May I get that for this quarter as well?

Michael E. Maroone

Yes, it’s Mike Maroone. Our current inventory is about 49% domestic so it’s 51% luxury and important. About 61% car, 39% truck.

David Lim – Wachovia Corporation

And how was your sales mix between cars and trucks?

Michael E. Maroone

I don’t have that handy. What I could tell you is domestics were about 30% of our sales. I’m sorry the car and truck sales were 54% car, 46% truck.

David Lim – Wachovia Corporation

Just in general terms can one of you comment about sort of the 0% financing? I know that the OEMs have been fairly aggressive or I should say really aggressive, is that really gaining any kind of traction whatsoever with consumers?

Michael E. Maroone

It’s Mike Maroone. I think the program was very aggressive. They supported it with a great media plan. I think it was extremely well thought out and it did connect with consumers although the market was in such stress I’m not sure that it got everything that it could get but Toyota did take share in a very, very tough market. So,you could argue that they could have waited a month but I really applaud them for really testing the market and putting forth a very substantial offer to consumers.

David Lim – Wachovia Corporation

Great. And finally, can you comment on what’s your normalized maintenance CapEx?

Michael J. Short

I think you might think of it David just in terms of matching our depreciation levels.

David Lim – Wachovia Corporation

Okay matching depreciation. Great. That’s all I have. Thank you very much.

Michael J. Short

Thank you. We have time for one more question.

Operator

Thank you. Mr. Eric Selle with JPMorgan. Your line is open.

Eric Selle – JPMorgan

Good morning. Thank you. A couple of questions, how do you explain customer pay outperforming warranty during the quarter being down 4% versus 7%?

Michael E. Maroone

It’s Mike Maroone. It’s been a trend that’s been going on for quite some time. I think the warranty number really reflects the higher quality vehicles made both domestic important and premium luxury, the quality of vehicles have improved dramatically over the last several years.

Eric Selle – JPMorgan

And it could be there’s a bigger fleet of off warranty vehicles that can drive that number better?

Michael E. Maroone

Correct. And, remember that the customer pay also includes, with the exception of a couple of manufacturers, includes normal maintenance. So, people continue to maintain the vehicles they made significant investments in.

Eric Selle – JPMorgan

So because of the aging fleet that 50% of your parts and service dollars should continue to be fairly stable?

Michael E. Maroone

We’re very confident about our parts and service business going forward and it carries nice margins with it.

Eric Selle – JPMorgan

And then secondly, looking at financing obviously the capital fin cos have ratcheted back on leasing and subprime, are you guys seeing the banks filling in gaps where the capital fin cos are kind of retrenching from that business.

Michael E. Maroone

It’s Mike Maroone. We’ve got a very large preferred lender base. We’ve got 23 lenders and I think they do fill gaps well. Do they fill all the gaps in this environment? No, I don’t think they fill all of the gaps. Subprime is still more difficult but in general we’re really pleased with our preferred lender network that includes both the captives and the big banks and some regional banks as well.

Eric Selle – JPMorgan

And then finally a question I get a lot so I’ll ask you guys, floor plan availability, any concern there? Are the banks retrenching from that at all?

Michael J. Short

No, I don’t think we have any concerns about that at all. In fact, we’re in discussion with about some of our lenders about adding more flexibility to the floor plan capability so I don’t see any issues on that right now.

Eric Selle – JPMorgan

Great. I appreciate your time.

Mike J. Jackson

Thank you everyone for your questions today and thank you for your time.

Operator

Thank you for participating in today’s conference call. You may disconnect at this time.