Midas, Inc. Q4 2008 Earnings Call Transcript

Mar.20.09 | About: Midas Group (MDS)

Midas, Inc. (NYSE:MDS)

Q4 2008 Earnings Call Transcript

March 5, 2009 11:00 am ET

Executives

Bob Troyer – Director, IR and Corporate Affairs

Alan Feldman – Chairman, President and CEO

Bill Guzik – EVP and CFO

Analysts

Tony Cristello – BB&T Capital Markets

Jim Barrett – CL King & Associates

Tom Fogarty – Silverstone Capital

Operator

Good day, everyone, and welcome to the Midas Incorporated fiscal 2008 earnings conference call. Today's call is being recorded. This conference is also being Webcast live by CCBN, and can be accessed in the Corporate News section of the Midas Web site, www.midasinc.com or through CCBN's site, www.companyboardroom.com or www.streetevents.com.

Today's call will be archived on those sites.

At this time, I would like to turn the conference over to Mr. Bob Troyer, Director of Investor Relations and Corporate Affairs. Please go ahead, sir.

Bob Troyer

Thank you. We are joined as always this morning by Alan Feldman, our Chairman and Chief Executive Officer, and Bill Guzik, our Chief Financial Officer.

Their discussions this morning will contain certain forward-looking statements that are based on current beliefs and assumptions. These statements may be subject to risk and uncertainty that could cause future performance and results to vary materially.

Alan and Bill have opening comments and then they will take your questions. Alan?

Alan Feldman

Thanks Bob. And thank you all for joining us for our 2008 fiscal year-end conference call.

In the press release distributed earlier today, we announced that our fiscal 2008 net income was $7.9 million or $0.57 per diluted share compared to $13.3 million or $0.91 per diluted share last year. Operating income declined to $21.5 million for the year, down from $32.5 million a year ago, primarily as a result of reduced revenues from Midas Europe and a significant reduction in the year-end non-cash warranty liability adjustment. Despite these challenges, cash flow from operating activities remained solid in 2008, providing $1.90 per share.

Retail sales in 2008 for Midas and others in the US automotive aftermarket were the most challenging in recent decades as a result of the record high gas prices, high unemployment, credit and housing issues and the changes in driving patterns that resulted in the largest decline in miles driven in the US since World War II. As a result, comparable shop retail sales in US Midas shops were down 4.3% in the fourth quarter and 2.6% for all of 2008.

Results varied dramatically by region in our North American business with the largest declines for the year in the Southeast and West regions of the US at 6.6 and 9.3%, respectively. The poor performance in these regions reflect the severe credit, housing, and unemployment issues in these areas. Two US regions had increases during the year, led by North Central which was up by 1.6% and the Northeast up almost 1%, while the South Central was down 1.5%.

While overall retail comps were down in the US, we continue to see strong increases in new Midas service categories. Comparable tire sales grew by 14.5% in the US. Oil changes were up 8.7% and the National Fleet business increased 41% in the US. Unfortunately, our Brake business, which comprises 36% of our retail sales, declined by 8.4% for the year in the US. By contrast, Midas Canada had a stronger year with comparable shop sales up 4% in the fourth quarter and 2.8% for the year. The overall business environment in Canada has been much more favorable than in the US. The positive results for the year in Canada were driven by a slight increase of 1/10 of 1% in brake sales combined with a significant increase in tires of 29.6%. And oil changes were up 3%.

Even though overall US sales were disappointing, it is important to recognize that the top third of Midas shops and new Midas dealers are performing quite well. In 2008, shops in the top third had overall comparable shop retail increases of 11.2%, led by average brake increase of nearly 5% and an increase in tires of 31%.

Even our top third shops in the Southeast and the West, our toughest regions, reported strong increases in 2008, up 8.5 and 4.2% respectively. So our top third dealers are clearly succeeding with the new total car care model.

We are continuing our efforts to improve the performance of the middle third which posted a 2.4% decline in comparable shop sales in 2008. Our franchise support team is working with these shops to stabilize their sales of brakes and grow the tire and maintenance business to get them fully into the total car care model.

For the bottom third, as operators continue to live in the old world of muffler and brake shop mentality, we are instructing them in the necessity of moving into the new total car care model or to sell their Midas locations. Comparable sales in the bottom third were down 16% in 2008, an obvious drag on the entire system.

As such, we are continuing our focus on transitioning shops to new owners. In the fourth quarter, there were 22 transitions, bringing the total for all of 2008 to 100. These new owners continue to outperform the system. Shops sold to owners new to the Midas system in the past 18 months were up 7.5% for their first year under new ownership.

While we continue to focus on transitions in 2009, the process is being slowed down by the tight credit markets, which is making it more difficult for potential new owners to obtain financing. The credit issue also is slowing the opening of new shops. In the fourth quarter, only three new shops opened in the US and none opened in Canada. For the year, there were 17 new shops opening in the US and two in Canada. At the same time, 44 shops closed in the US and 12 closed in Canada, resulting in a net decrease of 37 shops in our North American shop base.

Moving onto other details about our quarter and the year, as I said earlier, the Company's cash flow continues strong with net cash generated from operating activities during the year of $26.4 million or $1.90 per share. As we have said previously, we use this cash in the immediate future to pay down debt.

We continue to be encouraged by what we are seeing in the early test of co-branding by adding Midas services to SpeeDee oil changes at three former SpeeDee shops in Central California and by adding SpeeDee oil changes to three Company-owned Midas shops here in the Chicago area. Bill will discuss the details of these tests in a few minutes, but I wanted to point out that our results to date point to a significant opportunity for us in co-branding existing Midas and SpeeDee locations.

On its own, SpeeDee has been a solid investment for us. In addition to the potential of co-branding, the stand-alone SpeeDee operation is contributing nicely to the Midas results. Over the three quarters that SpeeDee has been included in Midas results, it has contributed $3.5 million in revenues and $1.6 million in operating income. Interest expense related to the acquisition was $600,000 in 2008, making SpeeDee accretive from the start.

Now let me take a moment and talk more about marketing and retail sales. In 2008, we committed a significant portion of our marketing spending to a national branding effort to support the launch of our SecureStop brake business last March. Unfortunately, the timing was not ideal for a non-promotional brand building effort. The business environment deteriorated as the year progressed and price-conscious customers were looking for extreme value in their car repair purchases.

So for 2009, we have revised our strategy with an aggressive promotional effort with offers that give customers a number of specific reasons to visit their local Midas shops for all of their car service needs. This past Monday, we launched a nationwide radio campaign featuring hard-hitting, value promotions for brakes, maintenance and tires – the three most frequently required car services.

Our new voice of Midas in these spots is veteran award-winning actor Martin Sheen, whose authoritative yet friendly voice resonates well with customers. We strongly believe that these aggressive value messages will drive customers into Midas shops as they seek to get the most for the dollars they spend on car service.

Moving now to tires. As I mentioned earlier, there were continued solid increases in tire sales in 2008 with an increase of 14.5% in the US and nearly 30% in Canada. And clearly, tires drive increases of overall retail sales at Midas shops. In 2008, the top US tire shops outperformed the underperforming tire shops by nearly 5 points.

Previously I have talked about the pilot program that began in late 2007 in 21 shops that aggressively promote their tire business. These shops have been rebadged to become Midas auto service and tire shops. In each of these shops we have added an inventory of at least 300 Bridgestone and Firestone branded tires. We have installed displays in the waiting areas and required shop managers to complete a comprehensive sales training course, initially provided by Firestone. And this program is driving results.

Tire sales in these shops were up an average of 50% in 2008. Importantly, brake sales in these shops increased 2% during the year, a swing of more than 10 points from the overall system brake sales.

Overall retail sales in these 21 pilot shops were up 5.2% for the year.

In mid-2008, we added more than 65 Company-owned and franchise shops to these tests by adding exterior signs, letting customers know that tires are available and requiring that shop employees completed intensive tire sales training. Results in these additional 65 shops showed tires sales increases at least 18% and overall comparable sales increases of 5% since they transitioned. Clearly we are excited about this initiative. And as a result, have stepped up resources allocated to moving more shops into this program.

Changing topics for a moment, I want to provide a brief update of a lawsuit in Canada brought in mid 2007 by two franchisees who are attempting to get class certification for their claims, primarily related to our supply chain. As previously announced, mediation in November failed to result in a settlement. In early February, there was a hearing on the motion for class certification. Now the judge has not yet ruled on certification, but it is likely that we will hear something in the next few weeks. I want to point out that class certification is a step in the legal process that is based on consideration of common traits of the parties in the case and not on the merits of the claims in the case.

Also, granting class certification in Canada occurs in the vast majority of cases compared to the United States, where there is a much higher standard for obtaining class status and therefore is why class status is granted in only a small percentage of the cases here. So we believe there is a likelihood that some of the claims will get class certification in the Canadian court. However, Midas continues to strongly believe that this case is without merit. And we will continue to vigorously defend these claims in trial.

Finally, we announced in our press release this morning that we are not providing any guidance for 2009 at this time because of the difficulty in projecting specific sales, expense, and income in this uncertain retail economy. We announced our initial guidance for 2008 a year ago at this time in our press release of fiscal 2007 earnings. As the year progressed and the business environment further deteriorated, we were forced to revise our full year guidance in each of the three subsequent quarterly earnings news releases. These revisions are frustrating for everyone. Therefore, we have determined that until the economy stabilizes and we have a clear picture of the effects on the aftermarket, we will not issue guidance.

However, I will tell you that our retail sales in early 2009 are showing some improvements but continue their negative trends. US comparable Midas shops sales in January were down by 2.7%, driven by particularly tough results in our West region. We are encouraged by preliminary results for February, which show improvement in sales continued but to be slightly negative, again, because of the clients in the West. The Northeast was much stronger for the month and even the Southeast was positive.

Meanwhile, we are making every effort to control our cost. Everything from downsizing our headquarters space last year to reducing management bonuses this year, to cutting down subscriptions to newspapers and magazines. Our management and support staff is lean and hard-working. For 2009, we have frozen pay for all corporate employees for the year. We have reduced the Company's 401(k) match and we have raised healthcare deductibles and co-pays.

Now having said that all, it is important to note that we believe that we have strong marketing and operational strategies in place that should improve our results in 2009, despite these turbulent times. Additionally, we believe that by implementing our total car care model and transitioning our franchise base, we are positioning ourselves to take advantage of growth opportunities when consumer confidence improves, car owners speed up their driving and spend more freely on their automotive services. Because of these actions, we have in our business model, we are confident that our cash flow will continue to be solid.

Everyone knows that the new car industry is suffering. And US sales of new vehicles by both the domestic and foreign car manufacturers are at the lowest levels since the early '80s. We believe this will evolve into good news for the aftermarket. Why? Well, first, the median age of cars on US highways now is increasing and is at 9.4 years. People are keeping their cars longer and there is no reason to believe that this is going to change anytime soon.

Additionally, as the auto manufacturers continue to restructure their way to survival, as many as 3800 new car dealers, along with their service departments, are at risk of closure in 2009. These closures provide retail and operational opportunities for Midas and the aftermarket as car owners seek service outlets to maintain their vehicles. And as new car dealers close, we have the opportunity to hire and add technicians at key locations.

On a market tour I took last week, I met two of our newest technicians freshly laid off from American car manufacturer dealerships. Motorists who are holding onto their vehicles need repairs and maintenance to keep these cars and light trucks running. They cannot defer replacing the brakes and tires or changing the oil forever. At some point they will need service and eventually, we will see the encouraging results in the Northeast spread across the US. Hopefully, too, lower gas prices, employment stabilization and easing the credit requirements will lead to a rebound in consumer confidence and our customers will again spend their money more freely. The nearly 1850 Midas and SpeeDee shops are well-positioned to meet their needs.

Thank you. Now I will turn the call over to Bill Guzik for more specifics about our financial results. Bill?

Bill Guzik

Thanks, Alan. Good morning, everyone. Again today I will be commenting on our overall financial results, our operating results by business, our Midas SpeeDee co-branding test results, and our cash flow.

As our press release pointed out this morning, revenues were up $400,000 in the fourth quarter. Revenues were helped by the $1.1 million of royalties generated by our new SpeeDee business during the quarter and an additional $2.2 million in sales from having seven more Midas Company-operated shops than a year ago.

Partially offsetting these increases were the expected reductions in European license fees and product royalties, and a $500,000 reduction in real estate revenues as a result of fewer franchise shops in operation and lower percentage rental income. The decline in US comparable shop sales only a $400,000 negative impact on franchise royalties for the quarter.

For all of fiscal 2008, revenues increased by $9.2 million. Again, revenues were helped by the $3.1 million in royalties generated by SpeeDee for the three quarters we owned it, $15.6 million in sales from additional Company-operated shops as well as an increase in software revenue.

The US comparable shops sales decline had only a $900,000 negative impact on royalties, while the conversion of franchise shops to Company-operated shops had an $800,000 negative impact on royalties for the year. This conversion of shops to Company-operated along with franchise shop closings also caused a $1.3 million reduction in real estate revenues for the year.

As noted in the press release, operating income declined $11 million for the year. While this decrease was large, approximately $9.4 million was expected and outside our control because of the scheduled reduction in European license fees and the decrease in the year-end warranty liability adjustment.

Excluding these items, operating income declined by only $1.6 million for the year, primarily due to the retail franchise sales decline in the US. The fact that operating income of our core business was down only $1.6 million in this tough economic environment is testament to the strength of our franchise business model and our ability to manage costs.

Year-over-year comparisons of operating income were also negatively affected by a $1.1 million decrease in gains on the sale of operating shops; the $1.3 million decline in real estate revenues; a $1.8 million decline in Company-operated shop profitability; a $1 million reduction in gains on the sale of real estate and an $800,000 increase in costs related to shop transitions. I'll talk more about each of these items as I discuss results by business.

However these negative items were largely offset by a $1.6 million reduction in administrative costs, a $2.1 million reduction in business transformation costs, and a $1.6 million of operating income produced by the new SpeeDee oil change business.

Now let's look at revenues and results by business. First, franchising and licensing. Revenues were down by $600,000 in the fourth quarter and by $3.1 million for the year. Shop closings and the decline in US comparable shop retail sales accounted for approximately $900,000 of the full year decrease while the elimination of royalties from formerly-franchised shops that became Company-owned accounted for $800,000 of the decrease.

The differential between the $4.5 million decrease in European licensing fees and the $3.1 million of new royalties from our SpeeDee oil change business accounted for an additional $1.4 million of the decline.

Canadian franchise royalties and license fees were virtually flat for the year as the impact of the 2.8% sales increase was offset by unfavorable exchange rates. Midas operations outside of North America generated $1 million of operating contributions for the fourth quarter and $4.5 million for the year.

Operating contribution from our North American franchising business was $8 million for the quarter and $35.5 million for the year. This represents an increase of $200,000 for the quarter and a decrease of $900,000 for the year. As we've said in the past, our franchise model minimizes the impact of comparable shop sales declines. And we are able to adjust expenses as we see trends develop.

Our new SpeeDee franchising business generated $500,000 of operating contributions for the quarter and $1.6 million for the year, consistent with our expectations. Please remember that operating contribution as I detail it here includes direct SG&A expenses, but not unallocated corporate expenses and is a non-GAAP measure.

There were 1,674 Midas shops in North America at the end of fiscal year, down 37 from the end of last year. During fiscal 2008, we opened 19 new shops and closed 56. There were 835 Midas shops in 14 countries outside of North America at the end of the year, down 9 from last year. The decrease in shop count was due to the closing of all 15 shops in Brazil because of a dispute between the master franchisee and the sub-franchisee. On a worldwide basis, the Midas shop count was 2,509 at the end of 2008. There were also 173 SpeeDee shops in operation at the end of the fourth quarter with 116 in the US and 57 in Mexico.

Real estate revenues declined $500,000 in the fourth quarter and $1.3 million for the year as a result of fewer franchise shops in operation, the eliminations of rental income from Company-owned shops that were previously franchised and lower percentage rent revenue as a result of lower retail sales.

Operating income was down $1.2 million in the quarter and $3.7 million for the year. The $1.2 million decline for the quarter was due to the $500,000 decrease in revenues, a $500,000 decrease in gains on the sale of real estate, and a $200,000 increase in costs related to shop transitions.

Remember the gains on sale of real estate results from the sale of owned properties that we have decided to permanently close. We recognized $500,000 of gains in the fourth quarter of last year, but none in the fourth quarter this year. The tight credit market has made it more difficult to sell these excess properties.

Shop transition expenses consist of real estate taxes and maintenance costs on sites that we are preparing to refranchise. These costs are running at an elevated level as we continue to transition shops to new owners, because as Alan mentioned, we see significant sales improvement in transition shops. There were 22 transitions in the fourth quarter and 100 for the full year.

The $3.7 million decline in real estate contribution for the year was due to the $1.3 million decrease in revenues; a $1 million decrease in gains on the sale of real estate; and an $800,000 increase in costs related to shop transitions. The Company also incurred $600,000 of additional rent costs as a result of a net increase of 10 leased shops in North America.

Company shops reported retail sales of $61.4 million for the year, up $15.6 million from a year ago as a result of operating more Company-owned shops this year. Comparable shop retail sales of Company-owned shops were flat for the quarter and the year. Company-owned shops continue to post better comparable sales results than franchise shops. The Colorado market was up 3.4% for the fourth quarter, the Northeast was up 5.2% and Chicago was up 4.9%.

Unfortunately, the economically depressed areas of Florida and California, where over 1/3 of our Company shops are located, were down 3.9% and 8.3%, respectively. And because most of our Florida and California shops were distressed to begin with, and operating sales levels close to breakeven, the sales declines caused both of these markets to report operating losses for the quarter and year.

As a result, the Company shops reported an operating loss of a $1 million in the fourth quarter, compared to a $700,000 operating loss in the fourth quarter last year. For the full year the Company shop business lost $1.6 million. The Florida and California markets produced a combined operating loss of approximately $800,000, while shops that were closed or refranchised during 2008 generated almost $300,000 in operating losses. The Company also incurred $500,000 in additional field and administrative costs because of the increase in the number of shops.

We added 16 Company shops during 2008, refranchised seven and closed two. We'll continue to refranchise Company shops in our portfolio as we find qualified buyers, a process also made more difficult by the tight credit markets.

Replacement parts sales and product royalties were down $700,000 for the quarter and $2.5 million for the year. However, you will remember that we made a substantial change to our US warranty program at the beginning of the year, which had the impact of significantly reducing both product royalty revenues and warranty expense for 2008 and beyond.

Product rebates now go directly to our franchisees, which reduced our product royalties by $700,000 for the quarter and $3.3 million for the year. This $3.3 million reduction in revenues was completely offset by a $3.3 million reduction in warranty expense, which is before consideration of the year end warranty liability adjustments.

For 2008, the only comparable component of our replacement parts sales and product royalties is the sale of tires, oil batteries and equipments, which increased by approximately $2.5 million for the year, as a result of continued increases in sales of tires and maintenance services. The wholesale business recorded an operating profit of $3.7 million for the quarter and $4.8 million for the year, both of which include the $3.4 million year end warranty liability adjustment.

Our R.O. Rider [ph] software business had revenues of $1.2 million for the quarter and $5 million for the year. R.O. Rider operated at breakeven for the quarter and made $500,000 of operating income for all of 2008.

Now turning to the results of the Midas SpeeDee co-brand test. Last July we added Midas services to the quick service oil change business at three SpeeDee shops in central California. We reimaged the exteriors and interiors to reflect the addition of Midas repairs and services to SpeeDee's oil change business, and added equipment and inventories to support the Midas services. Comparable shop sales at these co-branded shops were up 12.7% in the fourth quarter, following an increase of 7.8% for the two months they operated as co-brands in the third quarter. By comparison, other SpeeDee shops in California that are freestanding and not co-branded were up 4% in the quarter and Midas shop sales in California were down by 13%.

During December, we began a test of adding SpeeDee Oil Change services to three Company-owned Midas shops in the Chicago area. We remodeled these shops to evaluate various bay configurations to accommodate the increased number of cars of the Quick Lube service business. In two of the shops, we dug oil change pits under two of the service bays and in one we added a walk-around platform lift that enables a technician to ride up with the vehicle to work under the hood, while a second tech works under the car. Comparable shop sales of these co-branded Midas SpeeDee shops in the Chicago area were up a combined 20% in January and February.

We have additional Company-operated co-brand store under renovation that will be complete in April and have begun the planning to co-brand our 12 Company-operated Midas shops in San Diego. We are also talking to additional California SpeeDee franchisees about expanding our tests and adding the Midas brand and expect to have approximately 25 co-brand locations in place by the end of 2009.

From what we learned in the co-brands in California and Chicago, we are developing a co-brand operation and marketing strategy that will allow us to begin a gradual rollout through both systems next year. As Alan said, we are very encouraged by the results we are seeing so far. This co-branding concept will enable the combined Midas and SpeeDee systems to take full advantage of providing our customers with the three most frequently needed services – brakes, maintenance and tires. However, there are operational challenges that need to be overcome before a full-scale rollout begins.

Turning to other numbers of interest, the unallocated portion of our SG&A was $7 million in the quarter and $28.4 million for the year. This represents a savings of $400,000 for the quarter and $1.6 million for the full year. We continue to take advantage of every cost savings opportunity and the expense reductions in 2008 were primarily the result of savings in our headquarters lease and a reduction in employee benefits expenses.

It is also worth noting that our 2008 results included elevated level of outside legal expenses. Fiscal 2008 includes $2.3 million of outside legal expenses compared to only $1 million in 2007. The increase is primarily the result of two potential class action lawsuits. The product case in California has been dismissed three times. However the players have re-filed the amended complaint each time. The case was dismissed for a fourth time in February 2009 and it is uncertain whether the plaintiff's attorneys will file another amended complaint. The case in Canada, which Alan talked about, is primarily related to franchisee claims involving our exit from the manufacturing distribution business and is ongoing. We continue to believe we will prevail in both cases.

Moving on, business transformation charges were only $100,000 for the fourth quarter and were $1.6 million for the year, primarily for the Project Beacon reimaging program for Midas shops. More than 1300 shops have been reimaged over the past three years. While we do not expect to incur any Project Beacon costs for the US in the future, we will continue to incur costs for Project Beacon in Canada in 2009 with about 70 shops expected to complete their upgrades in the first half. Total costs for Project Beacon in 2009 are expected to be less than 500,000.

Depreciation and amortization was $2.9 million for the quarter and $12.5 million for the year, including stock-based compensation expense of $300,000 for the quarter and $1.3 million for the year. Interest expense was $2.4 million for the quarter and $9.1 million for the year, virtually flat with prior year periods. We recorded income tax expense of $5.3 million for the year, although we do not face significant cash taxes because of our NOLs of approximately $75 million. Our income tax rate for the full year was 40.3%.

Finally, let's look at our cash flow and liquidity. Operating activities provided $26.4 million of cash flow for the year. This strong cash flow, along with an increase of $5.5 million in debt, allowed us to continue to invest in the future and growth of our business. We invested $21 million for the acquisition of the SpeeDee Oil Change business in late March and paid $3.5 million to acquire certain Midas shops from franchisees that we believe we will be able to refranchise in the future.

Capital spending for the year was $6.4 million, including $2.5 million for real estate purchases to grow our store base; $1.8 million to upgrade Company shop equipment; and $2.1 million to keep our computer systems and facilities up-to-date.

On a per share basis, net cash flow from operating activities remains strong at $1.90 for the year. We continue to believe that analysts and investors should be considering our cash flow per share rather than earnings per share when evaluating Midas as a possible investment.

Bank debt was $83.6 million at the end of the year, down from $86.9 million at the end of the third quarter. Total debt at the end of the quarter, including capital and financed leases was $118.6 million.

EBITDA as measured for bank covenant purposes was $36.1 million. This means that our leverage ratio was approximately 3.3:1 for the year. This is in line with historic levels. However, our short-term goal is to get it below 3:1. Therefore, our focus will remain on lowering the Company's debt level and leverage ratio in the first half of 2009. We continue to be comfortably within the covenant levels required by our bank agreements.

All in all, 2008 was a difficult year, but a year in which we proved the strength of our franchise model. Unique circumstances such as the scheduled reduction in European license fees, the lack of gains on the sale of real estate, losses on the sale of Company-operated shops and a significant year end 2007 warranty liability adjustment, made comparisons of 2008 results against 2007 difficult. We also experienced a heightened level of legal fees and high transition costs to bring new franchisees with fresh energy into the system. And then there was the fact over 1/3 of our Company-operated shops are concentrated in Florida and California, two of the states hardest hit by the current economic crisis.

Despite all of this, we were able to open 19 new stores, transition 100 shops, acquire and integrate SpeeDee; repay all of our SpeeDee acquisition debt; significantly grow comparable shop sales in oil and tires; lower our administrative costs, and we only experienced a $900,000 decline in operating contribution of our core North American Midas franchising business. Rest assured, we will continue our efforts to grow retail sales at Midas and SpeeDee locations. We are extremely excited about the opportunities of the Midas SpeeDee co-branding efforts and we'll roll out the co-brands throughout both networks in a well-thought-out program.

At the same time, we will continue to be vigilant in the management of our costs. Believe me, every discretionary expense is being scrutinized. There is no question we face challenges in 2009, but we will continue to focus on the profitable growth of the Midas and SpeeDee brands. And remember, we have shown in the past five years that we know how to generate free cash flows in good times and in bad.

Thank you. Now I will turn the call back to the operator for your questions.


Question-and-Answer Session

Operator

(Operator instructions) Tony Cristello, BB&T Capital Markets.

Tony Cristello – BB&T Capital Markets

Thanks. Good morning. One of the questions in this marketplace and in general, everyone is asking about debt and covenants, I just want to make sure there is nothing from that standpoint that you might be bumping up against. I know that you have accelerated sort of your thought on debt paydown. And I just want to kind of understand that a little bit better.

Bill Guzik

No, Tony. As I just said we are comfortably within our debt covenant levels. We have plenty of room. And we are going to make sure we stay that way by paying down debt for the first half of the year.

Tony Cristello – BB&T Capital Markets

And I mean with the stock at $7 versus paying down the debt, is – how do you balance that? Obviously is, 1, in your mind more or a better return to shareholders and for the Company today by getting that debt down versus –?

Bill Guzik

Tony, I would say I'd think if the economic environment was a little bit more certain we might make a different decision in the short term about what to do. It's all based on the certainty of what is going to happen down the road. So we want to get the debt a little lower before we jump back into the marketplace and repurchase shares. We are not saying we are not going to do that, but our short-term priority is to try to take the debt a little bit lower.

Tony Cristello – BB&T Capital Markets

Okay.

Bill Guzik

I want reinforce again because you know we get this question a number of times about our position vis-a-vis, our bank covenants. We are in no issue and we have comfortable cushion across all covenants.

Tony Cristello – BB&T Capital Markets

Shifting gears, then, to pro care. It sounds like you – on the three stores on the West Coast and then the three stores in Chicago are having some good results. What I wanted to do is maybe dig a little bit deeper. You talked about gradual acceleration of the co-brand stores. Can you – can we maybe talk a little bit about the economics that will be behind that? What is the cost of going into that store to fix it up so that you can have that co-brand product? And when you look at those revenue, those comps, where is that comp being – is it all – generated? Is it all being generated from the service side in terms of oil changes? Or is it – is that in fact driving more comp from brakes in some of the higher margin categories?

Bill Guzik

Well, I presume you're talking about SpeeDee.

Tony Cristello – BB&T Capital Markets

Correct, yes, I'm sorry. Yes.

Bill Guzik

Sure. It's a little different depending on which direction you are going. The three stores in California that began as SpeeDee are showing nice comparable store sales growth. The implementation of Midas into their operations is relatively seamless because they are already doing most of the Midas services except for tires. The cost of getting into that program is probably about $40,000 including signage, tire equipment and tire inventory, as well as some additional brake inventory. And for – there's also an option to buy an alignment machine, which all three have opted to do, which is another $25,000.

And their growth is actually – in the Midas services – their brake business and tires are what is driving the additional growth in their businesses. Obviously, it is not having impact on their oil change business as we wouldn't expect it to. So it is doing exactly what we expected it to do. Going the other direction, taking a Midas and adding SpeeDee services is more complicated because the stores aren't used to seeing the level of cars and servicing the level of cars that they are seeing. Suddenly overnight you are doubling car count, in some cases, tripling car count.

So you need to really change the attitude of the people in the store so that they are ready and prepared to deal with that volume of cars and the facility itself requires a little more work because we need to make accommodations for quick change oil. We don't – we didn't have pits or any special equipment in those stores. So in two of those stores we've dug pits like you would see in a conventional oil change QuikLube [ph]. And that cost us about $100,000 in each location to dig the pits. In the third store, we added these high-speed lifts, which work very well and actually, we are doing more cars in the location that has the high-speed lifts than we are in the stores where we've dug pits. And the difference in cost is substantial. The pits cost us $100,000 per store and the lifts cost us $30,000 per store.

So when you add the cost of that equipment plus the reimaging of the outside and some oil change equipment, you are looking at about probably $40,000 on the low-end for a conversion of a Midas shop to probably $100,000 on the high-end. And in those shops we are seeing – where we are doubling car count, we are seeing a lot of oil change traffic, but we have also seen since the day we put the signs up, increases in our brake and general repair. So it's – and in tire. So it is having again exactly the impact we wanted. It is bringing more cars to us that we can take a look at the tires and take a look at the brakes and move over to the Midas side of the business. So it is working exactly as we had hoped it would.

Tony Cristello – BB&T Capital Markets

And how are you splitting or bearing – who bears the cost of that conversion or that expense for bays and whether it is lift or digging in it?

Alan Feldman

Well, we did – with the three Midas shops, they are Company-owned. So we bore that expense. Going forward, when we do it in a franchise store, it will be the franchisee that has to make that investment.

Bill Guzik

As an example the three SpeeDee stores in California that we added Midas to, the costs were borne by the franchisee.

Tony Cristello – BB&T Capital Markets

Okay and what if – when you co-brand that store is there a difference, then, in how you will derive royalty payments?

Bill Guzik

Yes. SpeeDee's royalty is 6%. Midas's royalty is 5%. So for a Midas store that becomes a co-brand, the royalty, their fluid exchange business will go up from 5 to 6%.

Tony Cristello – BB&T Capital Markets

Okay. So what – as a franchise dealer in this marketplace, I mean, you talked about in the press release about a gradual transition or gradual implementation of this. And I'm assuming that is going to be predicated on the economy and getting a franchisee in this market or this environment to come up with the cash flow to do that because I mean it sounds like the return or the payoff may not be for a five-year payoff? I mean I don't know what studies or what you've done in terms of that. But I mean is it difficult right now to do it outside of your Company-owned stores?

Alan Feldman

You know, it's not – the return is very quick. It is less than a two-year payback, if these results that we're seeing continue. We have many franchisees who are frankly chomping at the bit to do this. And we are holding them back because we haven't yet worked out all the bugs. We can't – we don't yet know exactly how many technicians you ought to have, how many general service techs you should have. How you should staff the store. We have got a lot of learning from SpeeDee, but when you put the two together, we want to make sure that we can give them a model where they don't lose money for the first six months because they've added additional costs for the store.

And we are also experimenting with grand openings. In these stores, these Midas stores we opened in the beginning of December, and we operated for five weeks without a grand opening and then we had our grand opening in the dead of winter. And we realize that we actually don't need a soft opening. We get people trained well enough that they can – we can basically grand open immediately. And also in the case of the Chicago stores, we hired these general service techs weeks in advance of the conversion. And we wanted to make sure they were trained and we've learned ways to shorten that. So we are working through some of the mechanics to make sure that we minimize the impact on the franchisee when they go through the process.

And that is why we are going to do with all the stores in San Diego. And we figure that by the time we are done with that we will have a real good understanding of how to make this work effectively.

Tony Cristello – BB&T Capital Markets

Okay and did you give a number? I'm sorry if I missed it, in terms of what you are targeting for this year?

Alan Feldman

Yes. We expect to have about 25 by the end of the year.

Tony Cristello – BB&T Capital Markets

One last question. How is the rest of SpeeDee performing? You talked about the three, the comps at the three California co-brand and you talked about the ones in Chicago. What about the other 110?

Alan Feldman

They are performing well. As a group, they were flat for the year, but contrary to what we see in the Midas business, California – where they have 38 stores – were up 4% for the year. So in a very difficult economy in California, they are comping positive with $39 oil change prices. What brought the SpeeDee average down was some difficult numbers in the Gulf Coast and the mid-Atlantic.

Tony Cristello – BB&T Capital Markets

Perfect. Thanks.

Operator

Jim Barrett, CL King & Associates.

Jim Barrett – CL King & Associates

Good morning. Could you talk about your comps in the quarter? How much of it was – how much was your traffic down versus how much was your average ticket down?

Alan Feldman

It was less than a car. It was –

Our traffic has been fairly stable except for what we've seen in California and Florida. I don't have the numbers in front of me at the moment. So – got a little bit more aggressive so we have seen a little drop-off in average ticket overall. But our cars per shop per day has seen sort of marginal variation.

Jim Barrett – CL King & Associates

Okay. And, Bill, the LIBOR rates have come down. Is that going to benefit your interest expense at all in '09 or have you hedged that?

Bill Guzik

Well, we've got two swaps for $45 million of the $80+ million that is outstanding, but the rest of it, yes. We are going to benefit. We expect lower interest expense in 2009 than 2008.

Jim Barrett – CL King & Associates

And can you tell us will the CapEx in '09 be comparable to '08?

Bill Guzik

No. I would expect it to be down. We made some unusual investments in real estate this year. I would expect it sub $5 million but for how fast we go with SpeeDee.

Jim Barrett – CL King & Associates

Right. And your pension liability rose year over year. What impact should that have if any on your P&L and on your cash flow statement in '09?

Bill Guzik

Well, it will have a – it will have some impact on our P&L probably in the range of $250,000 of expense that we will see in '09 versus '08. In terms of funding there may be a payment that's required, but there's changes to government regulations that are being talked about that may defer that.

Jim Barrett – CL King & Associates

Then finally, do you anticipate the Company having any further warranty benefit in '09 and possibly beyond that is material?

Bill Guzik

Certainly not of the magnitude of the last couple of years because the warranty liability is down to $16.5 million now, but I wouldn't be surprised as we learn more to see additional credits in the coming years of some smaller amounts.

Jim Barrett – CL King & Associates

Smaller amount. Okay. Thank you both very much.

Operator

(Operator instructions) Tom Fogarty, Silverstone Capital.

Tom Fogarty – Silverstone Capital

Good morning. In terms of transitions for '09, what are you expecting?

Alan Feldman

We are hoping to maintain the pace we had in '08 and '07 so at least 100 going forward. As we said in our comments the credit markets are making it a little tough to make that happen because of candidates' ability to obtain financing, but that is our target.

Tom Fogarty – Silverstone Capital

And how do you anticipate the Company shop count evolving over the next 12 months?

Alan Feldman

We would see it most likely declining overall. It is clearly as Bill said in his comments, we are going to continue to look to refranchise those stores. Some we bought this year with the express notion that we would refranchise those. And so, we will continue to look for the right buyers going forward.

Tom Fogarty – Silverstone Capital

But you run into the same issue as you do with the transitions, right, in terms of that credit being an obstacle?

Alan Feldman

No question about it.

Tom Fogarty – Silverstone Capital

I guess this would be my last question for now. With the shares where they are today, are you finding or are you finding that people are approaching you with what you might consider credible, financeable offers to buy the Company in whole?

Alan Feldman

That's a difficult question for me to answer, Tom. I guess I would say there's not been anything credible.

Tom Fogarty – Silverstone Capital

Anything incredible?

Alan Feldman

That's a fair rebuttal to my comment.

Tom Fogarty – Silverstone Capital

Fair enough. Okay. Thanks.

Operator

And there appear to be no further questions.

Alan Feldman

Thank you, operator. And thank you all for joining us this morning. We appreciate your continued support and interest in Midas in this challenging business environment. We are doing everything we can to attack [ph] and grow your investment. Have a great day. Take care. Bye.

Operator

That concludes today's teleconference. Thank you all once again for joining us. Have a wonderful day.

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