AutoNation, Inc. (AN) Q1 2010 Earnings Report, Transcript and Summary

Thank you for standing by and welcome to AutoNation's first 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. (Operator Instructions). 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 your conference host, Ms. Cheryl Scully, Treasurer and Vice President of Investor Relations for AutoNation. Ma’am, you may begin.

Good morning, everyone, and welcome to AutoNation's first quarter 2010 conference call. Leading our call today will be Mike Jackson, our Chairman and CEO; Mike Maroone, our President and Chief Operating Officer; and Mike Short, our CFO. Following their remarks, we will open up the call for questions. Derek and I will also be available by phone to address any additional questions you may have. 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 our SEC filings. Certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. Reconciliations are provided in our press release, which is available on our website at www.autonation.com. And with that, I would now like to turn the call over to AutoNation’s Chairman and Chief Executive Officer, Mike Jackson.

Good morning, thank you for joining us. Today, we reported first quarter EPS from continuing operations of $0.34, a 55% increase compared to adjusted EPS from continuing operations of $0.22 in the prior year and a 13% increase compared to the $0.30 on a GAAP basis. First quarter 2010 revenue totaled $2.8 billion compared to $2.4 billion in the year-ago period, an increase of 19% and increased in all of our revenue categories. In the first quarter, total US industry new vehicle retail sales increased 15%, based on CNW Research Data. In comparison during the same period, AutoNation’s new vehicle unit sales increased 19%. Our new and used vehicle and finance and insurance revenues, all increased 24%. And parts and service revenue was up slightly for the first time since the first of 2008. Going forward, there are three issues I would like to address. The first is that we had two quarters of growth in all of AutoNation’s regions with significant year-over-year growth in our largest state of Florida, where we have 54 dealerships that represents 30% of our revenue in the first quarter of 2010. Florida was one of the initial states that saw a downturn beginning in 2007 and a collapse in the middle of 2008. We have now seen two straight quarters of growth in Florida. After increasing 15% in the fourth quarter of 2009, Florida revenue grew 29% and new units saw a 27% increase in the first quarter of this year. The second issue is the recent recall by Toyota. We saw a no sales period that lasted nearly all of February and affected over 55% of our Toyota inventory. In March, Toyota launched an incentive program that brought customers who have been waiting back into our Toyota dealerships. Toyota has continued to retain the trust of their customers. AutoNation new vehicle unit sales for Toyota in March were up 38% and 6% for the first quarter. And third, we have begun to see the resurgence of domestic brands, especially at Ford and General Motors. Because of our balanced brand portfolio and our focus on the Ford and Chevy brands, AutoNation is well positioned to benefit from the recovery of these manufacturers. I would now like to turn it over to our Chief Financial Officer, Mike Short.

Thank you, Mike. Good morning, ladies and gentlemen. Let’s turn to our financial results for the first quarter. As Mike mentioned, we reported net income from continuing operations of $58.4 million or $0.34 per share versus $52.6 million or $0.30 per share during the first quarter of 2009. Part of (results) included the gain on senior note repurchases of $0.04 per share, a net gain on assets sales and dispositions of $0.03 per share, partially offset by property and over appearance. After giving the effect of these items, our adjusted EPS from last year's first quarter was $0.22 per share. Adjustments to net income are included in the reconciliations provided in our press release. Compared to last year, revenue increased $446 million or 19% and gross profit improved by $54 million or 12%. The SG&A increased of $23 million was primarily related to variable expenses, such as sales commissions increasing with higher sales volume and improved gross margin. As a percentage of gross profit, SG&A was 73.6%, that’s a reduction of 360 basis points year-over-year and down 280 basis points sequentially from the fourth quarter of 2009. As has been the case in previous quarters, net new vehicle floor plan continued to be a benefit. For the quarter, it was a benefit of $3.3 million, an improvement of $2.5 million from the first quarter of last year. Non-vehicle interest expense was $9 million for the quarter, down from the $11.8 million we reported last year due to our $76 million lower average debt balance and the decrease in LIBOR rates. Provision for income tax in the quarter was $37.6 million or 39.2%. During the quarter, we repurchased nearly 2.1 million shares for $37.2 million at an average price of $17.91 per share. Capital expenditures for the quarter were $14 million and we invested $12.5 million related to acquisitions. We remain within the limits of our financial covenants with a leverage ratio of 2.37 times at the end of the quarter. Our capitalization ratio measures floor plan debt plus non-vehicle debt divided by total book capitalization. Floor plan debt was $1.427 billion at quarter end, up $46 million from December 31st, 2009. As of March 31st, the capitalization ratio was 52.8%, well within the covenant requirement of 65%. The calculation of these covenants are included in the tables of our press release and do not reflect any changes related to the financing that we announced on March 31st. Our quarter end cash balance was $161 million, which combined with our additional borrowing capacity resulted in total liquidity of $447 million at the end of March, again before taking into account the debt transactions announced on March 31st. I would like to spend a moment discussing our recent group financing transactions. With debt maturities scheduled for 2012, 2013 and 2014, AutoNation has been monitoring market conditions to identify an opportune time to announce its capital structure. In light of near historical lows in the bond market, the vastly improved banking environment, and the potential for rate increases on the horizon, we have decided that now was the right time to go to market. I am very pleased with the results and we believe the market recognize and rewarded AutoNation for managing through the downturn effectively and positioning the company to succeed during the recovery. Key accomplishments of the refinancing include, we extend our maturities by issuing eight-year bonds and move the extended credit facility maturity from 2012 to 2014. Next we improved our flexibility by increasing leverage ratio covenants and eliminating the impact of any goodwill, franchise rate, property impairments, subsequent through January 2007 on the capitalization covenant. And additionally, we were able to issue bond with investment grade covenants, reflecting in markets understanding of the quality of our balance sheet. Thirdly, we achieved improved liquidity from less restricted covenants. We provide additional access to our revolver and we captivated our covenants on March 31st based on the revised agreement and/or pro forma capital structure, our leverage ratio would have been unchanged at 2.37 times and the capitalization ratio would have been 40.4%. Additionally we reduced our exposure to interest rate volatility by increasing the fifth straight portion of our debt from 33% to 55%. And finally, we achieved very attractive pricing. At 7% yield to maturity, our bonds were priced at one of the tightest high yield spreads to treasury this year. Additionally, the increase in our term loan pricing from LIBOR plus 87.5 to LIBOR plus 225 is on favorable terms relative to market. Remember that absent this transaction, the credit facility would have likely been refinanced prior to the middle of 2011 that we have gone current. It includes in our press release that provides a pro forma comparison of our previous and our new capital structures. Approximately $20 million before tax will be expensed in the second quarter of 2010 related to these transactions including approximately $4 million for the write-off of certain unamortized debt issuance costs associated with the old notes and the prior credit agreement. So in summary, we are very pleased with the outcome of these transactions. As they have extended our debt maturities, increased our available liquidity, lowering our exposure to interest rate increases in the future, and it provides us with additional flexibility to manage our business and optimize capital allocation in the future. Now, let me turn you over to our President and Chief Operating Officer, Mike Maroone.

Thanks Mike and good morning. We are very pleased with our performance in the quarter. Customers were back in the market and thanks to the tremendous efforts of our associates; we recorded impressive increases in revenue, in gross profit dollars across the board and delivered a strong operating margin of 4%. Our Q1 focus was on driving volume in all areas of our business and we did just that both delighting customers as well as reinvesting in the business. We are particularly encouraged by the performance of our Florida region store, where store revenue increased 29% in the quarter, followed by our Texas region at plus 24%, our Central region at plus 21%, and our Western region at plus 12%. This marks two consecutive quarters of revenue growth across the enterprise. During the period, we ramped up our new and used vehicle inventories for the spring selling season, maintained our disciplined cost structure and continued to experience very low associate turnover. Relative to Toyota, I will note that our Toyota stores continue to do a great job of addressing customer concerns relating to the recalls and handling the high volume of recall related business. On the sales side, incentives offered by Toyota to attract new and returning customers worked. In fact AutoNation had increases in both new and used vehicle volume for Toyota in the quarter, driven by an exceptionally strong March. Turning to detailed results, I will begin with our segment performance. In the quarter, segment income excluding corporate and other increased $37 million or 40% compared to a year-ago. Segment income grew for all segments with sizeable gains coming from the domestic and import segments, which wore the brunt of the headwinds in the period a year-ago. We saw strong performances from Nissan, Honda and Toyota in the import segment and Ford and General Motors in the domestic segment. That floor plan benefited all segments. As I continue, my comments will be on a same-store basis unless noted otherwise. AutoNation retailed 45,000 new vehicles in the quarter, an increase of 19% compared to a year-ago, and favorable to the CNW industry retail number of plus 15%. We were pleased to record new vehicle unit growth in each month in the quarter. First quarter new vehicle revenue increased $282 million or 24% to $1.5 billion on increased volume and a slight shift in mix toward domestic and import vehicles. Year-over-year revenue per new vehicle increased 4% with increases across all three segments, particularly premium luxury. At a $103 million new vehicle gross profit dollars rose 40% or $30 million in the quarter. Gross profit per new vehicle retail was 2272, an increase of 18% or $347. Factors contributing to the increase were AutoNation’s performance relative to strong manufactured dealer incentives, the end of the production push system by manufacturers in the domestic segment and our inventories being in great shape. We have the right inventory including the right mix with prior-year models comprising just 2% of our March ending inventory compared to 7% a year-ago. Same-store new vehicle gross profit as a percent of revenue improved 80 basis points to 7%. At March 31st, new vehicle days supply was 50 days or 37,800 units compared to 65 days a year-ago and 54 days at December 31st. AutoNation retailed 37,700 used vehicles in the quarter, a unit volume increase of 12% compared to the period a year-ago. Our used to new ratio was a solid 0.83 to 1. Retail used revenue was up 24% to $644 million, driven by increased unit volume as well as across the board increases in used vehicle pricing due to a tight supply of used inventory. Revenue per used vehicle retail increased $1600 or 10% to $17,100 as tight inventories and increased demand moved prices higher. Specific to AutoNation, we experienced a shift in mix toward premium luxury which has the highest average selling price of the three segments as well as a 19% increase in certified pre-owned units which have a higher average selling price compared to other used vehicles. Wholesale revenue increased $23 million or 35% to $88 million as a result of increased volume and very strong wholesale prices in February and March. Same-store used vehicle gross profit of $66 million reflected an increase of 6% with wholesale improvement of 1% being a contributing – $1 million being a contributing factor. Gross profit for vehicle retail was $1680 was off a $131 compared to the period a year-ago, resulting in part from a keen focus on increasing volume through the use of software that enables us to priced recently acquired inventory closer to market. Our target is to turn 75% of our used inventory in the first 30 days. This focus optimizes our inventory turnover and minimizes wholesale loss. I will also note that the margin reduction was partially offset by strong gains in F&I, PBR on used vehicles. Sequentially, compared to Q4 2009, gross profit for used vehicle retail increased a $195 or 13% and gross profit as a percent of revenue improved a 120 basis points. We also noted a 24% increase in appraisals and a 42% increase in trade-in supplier compared to the period a year-ago due to continued emphasis on our appraisal process. In the quarter, we moved 5500 used vehicles from originating stores to a more optimal location relative to turn and PBR. And we continued to experience good success at retail with this program. At March 31st, our used vehicle day supply was 39 days. For part service and collision compared to the quarter a year-ago, same-store revenue of $538 million and gross profit of $237 million, both grew 1%. Gross profit as a percent of revenue increased 10 basis points to 44.1%. Excluding Toyota, part service and collision revenue would have been flat and gross profit would have been just shy of 1%. Relative to gross profit in the quarter, we had a 1% increase in customer pay service gross and a 23% increase in internal gross which is driven by current period sales volume. Those increase has substantially offset a 4% decline in warranty gross. When we normalized our warranty results for the Lexus recall in the period a year-ago and the Toyota recalls in this quarter, our warranty gross declined 12%. The warranty decline continues as a result of improved vehicle quality in a declining surface base which we define is the trailing five years of our new and used unit sales. Overtime as the industry continues its gradual recovery, the part service and collision business will benefit. In the meantime, growing customer pay service business and improving customer retention remain our priorities. Our aggressive approach to service marketing as well as selling our value care program on the service drive continue. In addition to ongoing training, we have launched a new initiative with our service associate to improve full skills and appointment setting capabilities. These efforts and others are aimed squarely at offsetting the impact of the declining service base. Next, we had a very strong quarter in finance and insurance with gross profit per vehicle retail with $1149, an $85 decrease or 8% versus a year-ago. We attribute much of that growth to continued improvement of the automotive credit environment and better execution at the store level. Gradual improve in the economy also drove reduced F&I chargebacks as a percent of gross profit. In the quarter, there was an improvement in the credit environment compared to a year-ago, we noted an increase in approval rates by the majority of the captives as well as the majority of our preferred bank lenders for prime and near prime customers. For the higher risk segment of non-prime, credit recovery continues at slower pace. The securitization environment continues to improve with spreads versus LIBOR remaining at the lowest levels since the fourth quarter of 2007. With consistent execution of our best practices and continued emphasis on the opportunity stores, we expect a favorable F&I performance trends to continue. Relative to our store portfolio, in the quarter, we purchased two stores and gained one store through an add point from an increase of five franchises. We continued to actively pursue acquisition opportunities that meet our market brand criteria as well as our return on investment thresholds. The combining annual revenue run rate for the added stores of the $71 million. In the period, we divested one store and terminated another with a combined annual revenue run rate of $45 million. At March 31st, our portfolio consisted of 204 stores and 249 franchises in 15 states. Finally, our associate productivity has increased and our team is enthused as our retail selling environment is improved significantly. We are benefitting by leveraging our low-cost base and our improved execution from the intense training during the downturn. Our industry leading margins reflect that work and we are very grateful for the teams’ efforts. I would like to thank our associates for their contributions to a strong quarter as well as their commitment to delivering a superior buying and ownership experience for our customers. And with that, I will turn the call back to Mike Jackson.

Thanks Mike. As we look at 2010, we believe that gradual improvement in new vehicle sales will continue. We still believe 2010 industry new vehicle unit sales will be in the range of 11.5 million units. With that, we will open it up to questions.

(Operator Instructions). Our first question is coming from John Murphy with Bank of America Merrill Lynch. Your line is open. John Murphy – Bank of America Merrill Lynch: Good morning, guys.

Good morning, John. John Murphy – Bank of America Merrill Lynch: I just wonder if you can talk a little bit about ups or show room traffic and where that – where that’s going versus your ability to close. I mean, is the increase by both those factors or if you can just parse out the 19% increase in the quarter and really where you see those factors going?

Well, this is Mike Jackson. Overall, I would say the difference in credit environment this year versus a year-ago is the main story. And the way to think about it is, last year’s number was a grotesque distortion of what was going on, because of the lack of credit. In other words, we had more traffic than we had credit. And that always gave us confidence that once credit normalized, the recovery would be underway. And indeed we see a much more normal credit environment. And Mike Maroone, why don’t you call out some of the specifics.

John, on the traffic side, our total business, and we define business as walking traffic, plus what we can be-back traffic, was up about 3% over a year-ago, and up about 6% versus the fourth quarter. The other thing that we measure of course is our e-com traffic and that’s up about 5% versus the year-ago and 11% versus the prior quarter, which I think really emphasized Mike Jackson’s point on better credit environment as well as the fact that we think we have got much better inventories. Our inventories are cleaner and better balanced and really reflect consumer demand. John Murphy – Bank of America Merrill Lynch: That’s very helpful. Then on parts and service, how much of the Toyota work do you think was done in the first quarter and is there a lot more to be done in the second quarter?

In terms of the recalls, we have completed 58,000 recalls. And at the peak time, John, it was running at about 10,000 a week, it’s now at about 2,000 a week. So it continues and there is more recalls being released on lower volume models every week or two. But it’s at a very manageable level and frankly it will allow us to get back to trying to grow our customer pay revenue in Toyota impacted by the recalls. John Murphy – Bank of America Merrill Lynch: That’s great. And then lastly just on the debt purchase here, it looks like there was a little bit of the floaters still out there and a little bit of the 7% note. If those are taken out, is there any – is there any place else in your credit agreements where there is a restricted payment basket? I am just trying to understand if you get those two completely taken out, if the RP is no longer an issue and you will be much more free to buy back stock or increase dividends beyond sort of the growth in that traditional RP basket?

Yes there is no other restricted payments basket John. And the restricted payments basket that used to be effective based on those older notes no longer exists. That’s been changed.

So there is no basket. There is no restricted – John Murphy – Bank of America Merrill Lynch: Even though there is a little bit of these guys out there.

Even though (inaudible). John Murphy – Bank of America Merrill Lynch: Great.

We took out more than 50% of those notes, the restricted payments basket was limited.

So the way to think about it is, it’s the leverage ratio which is now the restriction, which is 3.25. John Murphy – Bank of America Merrill Lynch: Fantastic. Thank you very much.

Our next question is coming from Rick Nelson, Stephens. Your line is open. Rick Nelson – Stephens: Thank you. I would like to follow up on John's question, and ask about capital allocation. You are sitting now on a big pile of cash. The business generates lots of free cash flow. How do you rate alternatives that are out there, acquisitions, stock buybacks, debt retirement?

Hi Rick, how are you doing? It’s Mike. I think we the way we have talked about this in the past is that the first we look at is what do we need to do to keep our stores front line ready, right? What is the capital there are existing store portfolio requires to make sure that we can maintain and grow our earnings base. Beyond that we look at all other capital allocations decisions opportunistically in terms of which generates the highest shareholder return, whether that happens to be a – an acquisition or a share repurchase at that time, those are made solely based on levels of return. And I think as a result of the refinancing, we have expanded our flexibility in order to be able to respond to opportunities as they are presented to us. Rick Nelson – Stephens: Thank you. Also I am wondering if you can comment on how – what you are seeing in April, how long you think the new vehicle sales incentives, Toyota and others, have stepped up incentives in March, how long do you see those continuing. And do you think we are going to see any pull-forward if A&D back off the incentive peddle?

I think if you look at our results, it gives you a lot of confidence that this is a real recovery. And that our new vehicle revenue was up 24%, our unit volume for new vehicles was up 19%, our content per vehicle sold increased. And overall in total, manufacturer incentives are down from a year-ago. I think that specific Toyota incentives to address their difficult period are appropriate. And I would also observe that their incentives are still significantly lower than the domestics. So when you see higher volume, higher content, higher front-end grosses for us, that’s a real recovery. And I think there could be no question, there is some impact from Toyota’s incentives particularly for them. But I don’t think it is going to be dramatic. And when we made our forecast of a 11,500,000 units for the year, that’s what we thought was going to happen and now with the first quarter, you look at and say, well that’s going to happen. So our level of confidence is much higher. And if there is any movement from month-to-month and quarter-to-quarter around incentive so be it, but this is a real genuine recovery. And, of course, I think the Florida figure of a plus 29% is also meaningful, because people don’t go out and spend $30,000 for a vehicle without feeling much better overall. So they – even though the housing hasn’t recovered in Florida, it is stabilized in the sense that unit sales are up and prices have stopped going down. They feel more secure about their jobs, they know the worst of the unemployment is over. And when they come in, we have a much better credit environment for them. So we feel good about the year and I think the incentives are very much on the tactical side of the equation. Rick Nelson – Stephens: Thank you. Also, to follow up on the regional impressive growth in Florida, if you could comment on some of the other regions, I guess in particular California, what's happening there?

Rick, it’s Mike Maroone. As we said earlier, we are pleased that we got revenue growth in all regions. We had Florida up 29%, we had our central up 21%; Texas was up 24%, and Western region that includes California, that was up 12%. So we had double digit growth in the quarter across all regions and it’s the second consecutive quarter that we’ve had growth in the regions.

Our next question is coming from Matthew Fassler, Goldman Sachs. Sir, your line is open.

A couple of questions. First of all, the wholesale business looked terrific in terms of both volumes and in particular profitability. I know it’s not a massive driver but it was the standout relative to our expectations. Any color on what’s helping to propel that pace?

Matt, it’s Mike Maroone. Obviously, it’s the overall type inventory, there is a lot of demand for wholesale product and our goal is to wholesale less and retail more and we are working really hard to do that. But the overall the market was just strong there. We have done a good job of managing our inventory. And as we mentioned in prior calls, we have begun to change our – we have changed our risk profile and are stocking more aggressively and again, trying to wholesale less. So we think we made nice improvements in our used vehicle operation.

Second question I guess for Mike Jackson, a little more philosophical, higher level, your forecast for the year for the SAR looks quite prudent relative to what we are seeing and who knows perhaps a bit conservative. Given the traffic declines that we had a year ago and I look back and they are upwards of 20% and we're only getting some of that back, what do you think the triggers are going to be to get the numbers back up, understanding that the growth has been quite solid off the press numbers. But as we think about the potential path to $13 million or $14 million or $15 million, what do you think it as the consumer’s need to see to get the behavior back where it had been?

Well, I think we have been pretty good at calling which way the market is going to go, and I would observe for us, it’s not an academic conversation we act on on this outlook. And the biggest factors that we look at are housing. I have been saying it for strongly since 2005. And to get back to 16 million and to really get full stride in this recovery, you just got to watch these housing figures closely. And when you see the combination of increased unit volume plus the beginning of valuations going up, and the resumption of new housing construction, which will be crucial for our truck sale. That's what we are watching for, that’s what we are waiting for. The employment situation obviously and there it’s not the unemployment number, we know the unemployment number is going to remain high, could even go higher as people return to the work force. It’s simply that the total number of people employed is going up. The credit situation we have talked about (inaudible) and in premium luxury, what has made the difference this year and what we watch is the equity market and the bond market because the clientele has heavily invested there and how they feel about that determines whether they are willing to buy a expensive vehicle and also in the premium luxury, the employment numbers in the sense that many of them are entrepreneurs and small business people and they really don't want to buy a new expensive vehicle when they are laying people off, and as soon as they have to stop doing that, they told us they are going to return to the market. So those are the big issues that we really watch state by state and we will make a judgment call. We think that we are all moving in the right direction. We call the recovery, I call it a (fat z) in the sense that the collapse took two years and I think we are looking at three to four years to get back the 16 million units. However, I think the journey back is going to be very rewarding for the industry and that it’s a new business model at the manufacturer level, more about sustainability, profitability and viability and so much cost, so much irrational behavior, it’s been squeezed out. I think the profit opportunity during the recovery period is significantly higher than it was on the downward spiral.

Our next question is coming from Michael Ward of Soleil. Your line is open.

Two things. What are the percentages that those regions, Florida, Texas, and West Coast representing your total?

Florida is about 30%. I think Texas is about 20% and California is probably in the 20% as well. So I think the three of them together are about 70%. Michael Ward – Soleil: Second thing, you mentioned your liquidity before you did the debt offering. What is it now, is it – is close to $1 billion, is that about what it is?

It has improved a bit. Michael, let me – I will get you a number on that, hang there a second.

I will come back to you on that one.

We will come back to that, Michael.

Okay, and then just lastly, Mike, you have talked in the past about how you thought luxury was a good leading point for the rest of the overall market. Do you still feel that way? It looks like luxury now, two consecutive quarters were extremely positive?

Yes, it has and indeed I believe that. Luxury did not go down to the same extent that import or domestic volume went down because that clientele has more choice around financing a car. So it did not go down as much, so it’s not going to rebound off of such an extreme bottom. However, we had healthy recoveries for two quarters in row in premium luxury.

Our next question is coming from Rod Lache of Deutsche Bank. Your line is open.

Hey guys, this is Dan Gallatin for Rod this morning. Had a question on SG&A, you have done an incredible job on cost. In the past you have talked about $200 million annualized reduction in fixed cost and that 75% of that is permanent, which would imply that at some point there is going to be $50 million of cost coming back into the business, it’s probably tough to answer with this bigger business you have got. But do you know – has there been any of that cost that's come back in this quarter?

I would say some of it is – you can't dye tag each of these dollars, Rod. So it’s a little bit tough to (dye) each dollar. But the way to generally think about it is when you look at our SG&A buckets, we are about – and fixed and variables do divide classifications very cleanly. But directionally about half of our costs would be fixed and about of them would be variable and our variable costs did indeed move and while gross are fixed costs performed, we were very well controlled during the quarter. That is as we had expected but I would also say that that's not a given – that that will perform that way and we continually thank and congratulate our store associates for their ongoing diligence on the cost front. But in terms of the specific answer to you, the $50 million, yes, I do believe that some of that is beginning to come back and as we said, it would once volume came back.

Okay, got it, thanks. On parts and service, it’s been a while since we have seen a 44% plus gross margin. I missed some of the split out. Did Toyota help – the Toyota recall repairs help the gross margin in the quarter? And also, as the internal part of the business becomes kind of a year-over-year positive, does that hurt or help gross margins?

In terms of Toyota, Toyota has definitely helped overall. But even without Toyota, I think the business performed pretty well. The internal margins are generally a little bit less than our customer pay. So I think that as internal increases, it does impact your overall margin percentage.

On the used business, it sounds like there is a lot of good things going on. Over the long-term, some of your competitors have talked about certain portions of the used business that may be permanently impaired or permanently gone, I am talking about used, subprime. Are you seeing any movement in that area of the used business? And I guess over the long term, is there potential for the used business maybe on used sales per store to get back to where it was historically or is there a part of that business that you think is permanent gone?

This is Mike Maroone. Dan, I don't see the business being permanently gone. Certainly the subprime market has recovered at a slower pace than the prime and near prime financing. The availability product out there is limited but we’ve really put a lot of effort in defining unique ways to source product and we are testing some different ideas including some centralized buying teams because there is more online buying going on than ever before. So I think there is a lot of opportunity in the used business. Our used to new rate show 0.83 as one of the best performances we have had and we are really doing a good job of understanding what the market pricing is and pricing to market trying to get quick turn and trying to create less exposure as vehicles age. So I think there is opportunity. There is opportunity in the CPO business, there is opportunity in what we call the (seat cars), which are the higher mileage cars and I think it’s about execution, it’s about finding ways to corner supply.

Your next question is coming from Ravi Shankar Morgan Stanley. Your line is open. Ravi Shankar – Morgan Stanley: Can you talk about the current inventory situation for new vehicles and we have heard of some of the incentive slowdowns coming off because of way low inventory for certain products especially on the import side, and you are 50 odd days supply for the new, all of it sounds very low. So, are we in danger of getting back in a post Cash-for-Clunkers situation where low inventory hurts this hour?

This is Mike Jackson. First, the industry is well on its way to making a transition from production push to customer pull and Cash-for-Clunkers was crucial to clear the old inventories and I would say, the structure of the inventory is probably the best ever and manufacturers react much faster to stop producing something that's not selling and really try to configure vehicles the way they are selling. And that is probably the biggest change coming out of the big disruptive period that we have been through. So, Mr. Maroone, you can talk about some of the specifics.

Ravi, I agree with Mike Jackson. There are some nice cases of inventory. There is always a few models you are short of. But all in all, our inventories are in really good shape. Each of the import inventories is in the 45 to 50 day range, the domestic inventories are in good shape in the 60 to 70 range; premium luxury continues to be tight and were especially tight on Mercedes and Lexus, I know Mercedes is ramping up their production in the second quarter. So I think all-in-all, we are very pleased with our ability to manage inventory. We have added a lot of capability centrally to work with our stores to be sure we have the right inventory. We move a lot of inventory from store-to-store but I don’t see long-term big shortages that are going to impact it. We really like the way we are performing now. As we mentioned in our call script, only 2% of our inventory right now are ’09 models. That's the best we have ever been. So all-in-all, inventories were in good shape and as far out as we can see, it looks like production is going to stay steady and Mike Jackson’s called out, doing a really nice job of reflecting consumer demand.

Mr. Short, do you want to update us on liquidity?

Yes, I would like to speak about your question. We noted in the script that $447 million was where we were today. To begin our pro forma basis for the new capital structure, it would be almost $700 million. Ravi Shankar – Morgan Stanley: On the used side, I mean you obviously have you seen record high prices on – for the used vehicles, and in the past you said there has been an issue with passing that through completely new customers. So can you just update I mean how things stand right now and what that means for the used vehicle margin in the near term?

I think that if you look back over February and March, used car prices are in all time high on a year-over-year comparison and we look to Mannheim index. We anticipate used inventories continuing to be tight. There is not as many vehicles coming off the lease. Leads are carrying their vehicles longer. I think the inventories are going to continue to be tight and that's why we are testing some new ideas as to how to acquire inventory and how to create a competitive advantage on the used side. Ravi Shankar – Morgan Stanley: But are people willing to pay for that, are you able to pass through all that higher pricing on to the customer?

I wouldn’t say we are able to pass through all of it. Certainly there is some margin pressure but if you look our margins have been pretty constant over the last three quarters. I think there is always more you can do when you continue to improve your execution. But I think there is pressure. One of the things that really can put more pressure on is if new vehicle incentives increase, the good news is the vehicle incentives are actually down year-over-year and appear to be stable at this point.

And I would say the issue isn’t the customer’s willingness to pay it, the bank’s willingness to finance. It is the restriction. Ravi Shankar – Morgan Stanley: And finally, the CapEx seemed a little low compared to what you indicated the full year rate is going to be. Can you just talk about the (inaudible)?

Our expectation for the full year was about $150 million as we called that earlier. We green lit some projects. So we think (inaudible), possible, we need to spend that this year. Ravi Shankar – Morgan Stanley: Got it, so the full year number remains unchanged?

Right.

Our next question is coming from Matthew Nemer, Wells Fargo Securities. Your line is open. Matthew Nemer – Wells Fargo Securities: Just I want to start with Florida, I thought the commentary was very interesting about the performance in that market. I'm assuming that there were some relatively easy comparisons. I guess what I am wondering is which markets in your opinion have highest relative opportunity, whether that's back to actual peak, or maybe a more realistic peak?

I am not sure I really under the question. Matthew Nemer – Wells Fargo Securities: If you look at the extreme downturn in certain markets, like Florida and California, does that essentially mean that those markets could be relative outperformers for the next few years, or do you think Texas and – yes –

Right, that's what we are saying. Matthew Nemer – Wells Fargo Securities: Okay. And then in the used market, you clearly went for volume, but your gross profit dollars, the growth lagged some of the other segments in the business. Are you – do you feel like you're optimized in this segment? Or is there a chance you'll actually go back for some more margin to get the gross profit dollar growth higher?

Right now, I would say, Matt, our focus is on volume. Certainly there is room for improvement in what we call the front end gross. But if you look under the covers, what you will see is is that our F&I dollars have increases as we move to a more expensive used product, we got a higher percentage of certified preown and before. So our total gross dollars including F&I were up about 9% on 12% increase in volume. The other piece is their internal gross in parts and service has been positively impacted as we have done more reconditioning and more CPO. So if you put all that gross together we are performing we think we think at a pretty high level. Is there room for more on the front end, I think there is some and we will continue to work at that. But our focus in the quarter was really to drive more top line growth to turn our inventory quicker in the wholesale less products. So, yes, I think there is always a little more, you can never be satisfied but if you put the whole package together, a front end gross, F&I gross and recon gross, I think we did a really good job. Matthew Nemer – Wells Fargo Securities: Great. That's helpful. And then on the Toyota recall, the mix of service work that you've done, related to the recall, can you give us any indication of how much is related to the sticky pedal, and how much is related to the more profitable pedal entrapment job?

I don't have all of that. But I will tell you that the pedal entrapment is less than the sticky pedal. The sticky pedal is more of the volume. It’s probably double the volume of the pedal entrapment and that's a relatively easy repair. So right now we are performing those at a much lower rate, third of where they were at peak, and actually less than the third of where they were at peak. So I don’t anticipate this is going to have a huge impact on our business going forward.

This is Mike Jackson. The way to look at it is the sticky pedal just required the insertion of a shim. The shims were easy to make and quickly we had full availability on shim. So we’ve have really moved very fast through the sticky pedal. The pedal entrapment is a much more labor intensive, complex repair and the number of units involved is much greater and it’s going to take quite some time to get through. Mike, what percent of pedal entrapment have we completed?

I think we have completed about 20% of the pedal entrapment and about 45% of the sticky pedal and that's of the total database and that doesn't mean all of those customers are going to return. But to Mike’s point, the pedal entrapment has moved to the slower pace and they are releasing a model by model and it’s – we are now into the lower volume models. Matthew Nemer – Wells Fargo Securities: So we might conclude that the, that profitability of this Toyota recall business could improve over the next few quarters, as you pick up some of the entrapment business, relative to the sticky pedal business?

Yes, it depends what the customers do and I go back to my manufacturing days. It’s fascinating to watch behavior around these recalls. You have – when a recall is announced, even on something like Toyota with all the media coverage, you have about 5% to 10% customers who absolutely positively want to have it instantaneously and then you have another 30% to 40% who are very open to come in and schedule and they will come in on their scheduled appointment. And then the last 50%, it’s almost like a marketing campaign. And you can literally call people up and say, “You know, this is it, you must come (inaudible) as soon as I finish my shop and according to scheduled appointment. So it’s really hard to say how it plays out and what’s the completion rate ultimately is. It’s really a marketing campaign pass 50%. Matthew Nemer – Wells Fargo Securities: Got it. And then just, lastly, could you provide a little more detail on the acquisitions that you completed? I may have missed it if you put it out. I apologize. But where, what brands? And then is the $12.5 million primarily goodwill, so we could just kind of take a multiple, a blue sky multiple of that to the $71 million in revenue, to get a sense for what you're paying? Or is there some real estate in that number?

The $12.5 million is about a deal what we closed in January in Spokane, Washington that was a Honda and Acura that are separate facilities on the same site. Within that $12.5 million, there is a mixture of real estate and goodwill. I don’t think we have ever in the past flipped that out but there is a combination of those. Those stores happen to be a great fix for us because they are right across the street from a big complex we have had that's operated at a very successful level. The other add to our portfolio was an add point that was a multiple franchise add point in the Denver market.

Our next question is come from Himanshu Patel, JPMorgan Chase. Your line is open. Ryan Brinkman – JPMorgan Chase: Hi, this is Ryan Brinkman for Himanshu Patel. I know you alluded to outlook for sequentially stable new vehicle incentives, but I was just wondering with the Toyota led increase in new vehicle incentives in March and in April, how sustainable do you think your strong first quarter used vehicle ASP performances, as we progress into the rest of the year 2010?

This is Mike Maroone. I think it is sustainable. I mean you have read both (inaudible) and others talking about April continues at a strong rate. We are really right in our selling season and May, June, July, August are very strong selling months. So I think the pace is sustainable. It will be interesting to see at the end of April how Toyota responds and how the competitive manufacturers respond. Mike Jackson’s clearly called out that the incentives are down about 12% year-over-year, volumes up, revenue on a per vehicle retail basis up and gross margins are up. So I think it really says it’s a true recovery, it’s not just incentive driven. Ryan Brinkman – JPMorgan Chase: And then also, just lastly, do you have a view on April SAR that you can share? And what are leasing penetration rates looking like for the Detroit three versus where they were at the worst point, maybe in like fourth quarter 2008 or so?

No, I am not smart enough to give you a April SAR or maybe I am smart enough not to give you an April SAR. We don’t (quote outside) month. And the other question was?

Lease penetration.

Lease penetration, Mr. Maroone.

Lease penetrations for the domestics and I really focused more on foreign GM where we have bigger positions are about 9% to 10% right now and I would say that’s up from a miniscule level at GM and I don't have the Ford number in my head. I know they are up but they are not a major factor the way they are in premium luxury and to a less degree in imports.

Colin Langan – UBS: Can you give an update on your outlook for parts and services? I think the last quarter you said you expected it to be flat for the year. You're obviously up in the first quarter, and obviously benefiting from the Toyota recall. I mean, do you -- are you more bullish on that or are you still expecting to be flat for the year?

Colin, it’s Mike Maroone. I would anticipate that we are going to be flat for the year and we have to work very hard to be flat at a time that you have got tremendously improved quality and a declining units in operation. So the headwind is really on the warranty side where the warranty numbers continue to drop for the reasons I just mentioned with the benefits and the offset being the internal. So our focus really is on customer pay and on customer retention and we continue to test some very innovative ideas of how to retain our customers and to make ourselves more convenient and more price efficient for our customers. But I think the overall outlook for the year, I think we would stay with our outlook of flat. Colin Langan – UBS: I apologize if I have missed it, but what was the warranty and customer pay for (inaudible) the quarter?

The warranty was minus four, the customer pay was plus one. But we really believe, you got to take Toyota and Lexus out because of some unusual comps a year ago with Lexus, this year with Toyota. If you take Toyota out, our customer pay was up 2.2% and our warranty was down 12%.

All right, we have time for one last question.

And our last question is coming from Brian Sponheimer of Gabelli. Your line is open.

I was wondering if you had any metrics for FICA scores for your customers during the quarter.

We do. Mr. Maroone?

I actually don't have them handy.

We will get those for you, Brian.

All right. I appreciate that. And then just very quickly going back to Florida, you're clearly coming off a fairly easy comp. Maybe you can just comment qualitatively, what drove the pickup in this particular quarter, and whether housing is starting to play a role in the Florida market?

This is Mike Jackson. First and foremost, the credit environment but that was everywhere, but with absent that nothing would have been able to improve. The housing situation in Florida is stabilizing. The downward spiral has been broken, unit volume is increasing with stabilization around pricing. Everyone’s come to terms with the fact that is going to be our long, long journey on the recovery of valuations but people have had come to terms with that and have adjusted to it. Now we still have a long way to go because the downward spiral in Florida was dramatic but I said it before that I fundamentally believe that Florida will recover and recover strongly. Also, something to keep in mind is as the housing market improves in the rest of the country, it helps Florida. In other words, if people can't sell their homes and move to Florida, that's a problem and that's been the situation for the last couple of years. And the growth that you normally see Florida was not able to occur because people couldn't sell their home and move here. I think that is also going to change that would be a big help to Florida and Florida is going to be more attractive than ever when you look at the (inaudible) and we still have great coastal lines of sunshine. So I am optimistic that the recovery in Florida is real and Florida probably will be one of our leading markets going forward for quite some time. Mr. Maroone?

Brian, the FICA score, I apologize, our team just came up with the number that's our average FICA score is 680 and we will dig around and find the prior year’s score and get back to you today.

Thank you everyone for your time today. Thank you.

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