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AutoNation Inc. (NYSE:AN)

Q2 2007 Earnings Call

July 26, 2007, 11:00 AM ET

Executives

John M. Zimmerman - VP of IR

Mike J. Jackson - Chairman and CEO

Michael J. Short - EVP and CFO

Michael E. Maroone - President and COO

Analysts

Edward Yruma - JP Morgan

Richard Nelson - Stephens

Rexford Henderson - Raymond James

Matt Nemer - Thomas Weisel

David Lynn - Wachovia

Michael Geoghegan - Bear Stearns

Atilla Edwards - JP Morgan

Neil Wexler - Shankman Capital

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2007 Earnings Conference Call. At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the conference over to AutoNation. Please go ahead.

John M. Zimmerman - Vice President of Investor Relations

Good morning and welcome to AutoNation's second quarter 2007 conference call. My name is John Zimmerman, AutoNation's Vice President of Investor Relations. I'd like to remind you that this call is being recorded and will be available for replay at 1-800-475-6701, access code 875632 after 2:30 Eastern Time today through August 2nd, 2007.

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

Before we begin, let me read our brief statement regarding forward-looking comments and the use of non-GAAP financial measures. Certain statements and information on this call will constitute forward-looking statements within the meaning of the Federal Private Securities litigation Reform Act of 1995. Such forward-looking statements involve risks which may call the actual results or performance to differ materially from expectations. Additional discussions of factors that could cause actual results to differ materially are contained in the Company's SEC filings. Certain non-GAAP financial measures, as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, the Company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on the Investor Relations section of AutoNation's web site at www.autoNation.com.

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

Mike J. Jackson - Chairman and Chief Executive Officer

Good morning and thank you for joining us. Today we reported second quarter earnings per share from continuing operations of $0.38 compared to a year ago EPS of $0.33. Last year's second quarter results included one-time debt repurchase costs of approximately $21 million after-tax or $0.09 per share.

Results for the second quarter of 2007 reflected a decline in new vehicle retail sales, especially in California and Florida, plus the offset by tax adjustment. Industry new vehicle retail sales in the second quarter for California and Florida were off approximately 14% based on CNW Research data.

AutoNation's decline in new vehicle sales for California and Florida was 16%. Together, Florida and California represent approximately 50% of the Company's new vehicle business and 20% of the industry's retail new vehicles sold in the United States.

The slump in the California and Florida housing markets continue to impact consumers' willingness and ability to make large ticket purchases, including autos. The combination of declining home prices and increased adjustable rate mortgages has resulted in large numbers of consumers with reduced or negative equity in their home along with tighter lines of credit.

Year-to-date California and Florida home sales are down 25%, resulting in speculative homes, languishing on the market, the cancellation of new construction process, and consequently a reduced demand for pickup trucks. We continue to have confidence in our California and Florida markets and view them as healthy over the long-term, especially when housing begins to recover.

I would like to turn it over to Mike Short to provide more details on the financial results.

Michael J. Short - Executive Vice President and Chief Financial Officer

Thank you, Mike, and good morning, ladies and gentlemen. As Mike mentioned, we reported second quarter earnings from continuing operations of $0.38 per share versus $0.33 per share a year ago. He also noted the prior-year EPS was impacted by $0.09 in one-time debt repurchase costs.

Operating profit for the second quarter was $185 million, down 13% from $212 million a year ago. SG&A as a percentage of gross profit increased 110 basis points to 71.3% from 70.2% a year ago. Although our variable costs declined in line with our gross profit decrease, we did experience a deleveraging in our fixed cost structure due to the decline in vehicle sales.

For Q2 2007, we had an effective income tax rate of 37.3% versus a prior-year effective rate of 38.4%. We expect our ongoing rate to be in the mid 39% range, excluding the impact of any potential tax adjustments in the future.

During the second quarter, we repurchased 8.7 million shares of stock for $190 million. During the quarter, 900,000 shares of our common stock were issued upon the exercise of stock options, resulting in proceeds of $13 million. At June 30, 2007, there were 13.2 million stock options outstanding, representing a 6.5% overhang.

We reinvested $37 million in the business through capital expenditures during the quarter. We expect 2007 capital expenditures on a full year basis to be approximately $140 million, excluding acquisition-related spending, land purchase for future sites and lease buyouts. We currently anticipate full-year 2007 spending on share repurchases of approximately $400 million, plus we continue to evaluate acquisition opportunities.

After the quarter, we completed an amendment to our credit agreement, which consists of our $7 million revolving credit facility, and $600 million term loan facility. The key changes include an extension of the maturity to July 2012, a reduction in pricing, and fees of approximately $3 million on an annual basis, as well as increased covenant flexibility. At June 30, our non-vehicle debt was $1.5 billion and we had unused revolving credit availability of approximately $453 million. Our non-vehicle debt to capital ratio was 29%.

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

Michael E. Maroone - President and Chief Operating Officer

Thanks, Mike, and good morning. As I review our second quarter operational results, my comments will be on a same-store basis, unless noted otherwise.

The industry saw a quarter that was characterized by heightened pressure on auto retail sales, resulting in large part from continued weakness in the housing markets in California and Florida. At AutoNation, where these two states represent half of our unit sales, we experienced the drop in new unit volume for total of 16%.

Our new unit volume excluding California and Florida was down 7%. A decline of this magnitude creates a highly competitive environment with increased pressure on gross margins and a fewer number of trade-ins impacting our used business as well.

As we continue to adjust to lower sales volume, from what appears to be a prolonged slump in the housing market, our focus is on controlling variable expenses and inventories. In the quarter, variable expenses that should fluctuate with growths did just that. Specifically, advertising and compensation, which is a percent of gross margin were comparable to a period a year ago.

At June 30th for total stores our new day supply was 56 days versus 60 days a year ago. We closed the quarter with 63,000 new units in inventory, a reduction of 12,000 units or 16% compared to the period a year ago, driven once again by significant reduction in domestic units in inventory. On the used side, we ended the quarter with a 44-day supply.

We are working diligently on improving our capabilities across all areas of our business. Examples include eCommerce, inventory management, service, used vehicles, purchasing, and back office consolidation. On the new and used vehicle front, our Smart Choice sales menu is now operational in 200 locations and the complete rollout will be finalized in early 2008. In addition, I'm pleased to report that we have completed the implementation of our common element pay plans.

Same-store revenue for parts and service was relatively flat at $467 million. Our customer paid business increased 3% compared to the period a quarter -- compared to a quarter a year ago. However, a 7% decline in warranty more than offset the customer pay gain. We attribute the warranty decline to improved quality. Parts and service gross profit of $283 million was off 1%.

Turning to F&I, our second quarter same-store F&I gross profit per vehicle retailed was $1,105, an increase of $20 year over year. Our preferred lender network, OEM Service Contract Alliances, and strong product penetration continue to be a benefit in this area. Our efforts are ongoing relative to maximizing our store portfolio.

On the acquisition front, our corporate development team is actively pursuing opportunities that meet our market, brand, and return on investment criteria. We are also working with domestic manufacturers to consolidate brands within our showrooms to improve store throughput.

During the quarter we divested 4 stores with an annual run rate of $90 million. At June 30th, our stores numbered 249, representing 321 franchises and 37 brands in 16 states. In closing I would like to note that despite a very difficult environment, we delivered an operating margin of 4.1% while making strong improvements in customer satisfaction.

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

Mike J. Jackson - Chairman and Chief Executive Officer

Thanks, Mike. As we look at the rest of 2007, we believe the market will remain very competitive and challenging. AutoNation will continue to focus on our cost structure by continuing to invest in our business. We are confident in our long-term business strategies and our markets. We believe that in 2007 industry sales on new vehicles will be in the low 16 million units.

That concludes our remarks. Thank you for joining us today. Operator, please open the call to questions.

Question and Answer

Operator

[Operator Instructions]

Our first question will come from the line of Edward Yruma from JP Morgan. Please go ahead.

Edward Yruma - JP Morgan

Hi. Thanks very much for taking my question. If the improvement in vehicle quality is something that's largely sustainable, what can you do to offset that with some initiatives in customer pay?

Michael E. Maroone - President and Chief Operating Officer

This is Mike Maroone, Edward. We continue to work very hard on a common service drive process that we measure every day. We have done some pretty creative things in direct marketing, both buyers and people who are just residing in our markets. We work -- continue to work hard at soliciting people who have defected from our owner base.

So we've got a number of initiatives, but I think it really starts with customer treatment and handling, continued expansion of service hours to make it easier for people to do business with you, as well as very competitive pricing.

Edward Yruma - JP Morgan

Got you. And when did you under perform in California and Florida? Was that really a by-product of your mix, or --?

Mike J. Jackson - Chairman and Chief Executive Officer

I would say it's -- you can imagine in this environment with this kind of decline, 25% decline in housing sales, 14% in automotive retail sales, it's an extremely competitive environment.

We have competitors with double and triple the inventory, double and triple the advertising, so there's a lot of unprofitable business being done out there, and we take a more balanced, disciplined approach. I assure you, we didn't leave any profit opportunity on the table.

Edward Yruma - JP Morgan

Great. Thank you very much.

Operator

Thank you. Our next question goes to the line of Rick Nelson from Stephens. Please go ahead.

Richard Nelson - Stephens

Thank you and good morning.

Michael E. Maroone - President and Chief Operating Officer

Good morning, Rick.

Richard Nelson - Stephens

Can you discuss regional performance outside of California and Florida where there might be pockets of strength or weakness?

Michael E. Maroone - President and Chief Operating Officer

Sure. Rick, its Mike Maroone. Texas continues to perform extremely well for us, specifically in Houston and Austin, the market is very robust. We also are performing at a very high level in our Colorado market, as you know, we moved to a new brand name GO, and it's performed very well.

We're also performing well in Cleveland and Chicago. So we do have pockets of strength. It's just our concentration in Florida and California really offsets some of those other markets.

Richard Nelson - Stephens

Can you address the margin pressures in new cars, maybe even by brand? And the 6.9% level is the lowest, I think I've seen. How much of incremental pressure do you see there?

Mike J. Jackson - Chairman and Chief Executive Officer

Rick, this is Mike Jackson. When they talk about the 16 million and the fact that industry sales are only off 1% so far this year, you really have to look at the structure of that. Capital spending is up on fleet vehicles, whether that's the big corporation, government or rental cars, and underlying that, there's been a significant pullback in retail sales for the industry. 8% year-to-date.

You extend that for the full year, that's nationally, that's almost 1 million retail units that are going to be lost for the industry. So it's a very difficult competitive environment out there, nationally. You then compound the situation on extreme ends in California and Florida.

Michael E. Maroone - President and Chief Operating Officer

Mike, you can talk about --

Michael J. Short - Executive Vice President and Chief Financial Officer

Rick, the macro's pretty interesting in that on the non-luxury car side we were off about $100 a car and all of it was on the import side. Specifically on the west coast, there was some pretty significant margin deterioration in Honda and Toyota.

We didn't see the same deterioration on the east coast. Probably the other notable factor was on the luxury side. There was some compression, primarily driven against a comp last year when Mercedes launched the S-class and there was very, very healthy margin.

So I would tell you that luxury margins are more normalized. And we also see some pressure on the truck side, especially on the import truck side where Toyota is being extremely aggressive. It's really in pockets and its a little bit more west coast than it is east coast.

Mike J. Jackson - Chairman and Chief Executive Officer

And I would point out that even for the Japanese, they have dramatically increased their fleet business so far this year. So even they cannot find enough retail customers at the moment.

Michael E. Maroone - President and Chief Operating Officer

And have increased incentives as well.

Richard Nelson - Stephens

Thank you for that. Can you talk about sales as they progressed during the quarter for you and what you're seeing in July to date?

Mike J. Jackson - Chairman and Chief Executive Officer

Well, I would say, we never comment on individual months, but I would say the overall environment remains unchanged. The public figure that is out there is that housing sales in June are down 30% in Florida and California. So it's a difficult environment to relate. My personal view is that, this idea that there's been no spillover from housing into other segments is just faulty. We all know in an economic cycle that the consumer pulls back first, pulls back on big ticket items, capital spending continues. That's exactly what we're seeing. And I really think we have to be talking about a rate cut to stabilize the situation and begin to see where we're going to be able to recover.

Richard Nelson - Stephens

Thank you for those candid comments.

Operator

Thank you. And our next question comes from the line of Rex Henderson with Raymond James. Please go ahead.

Rexford Henderson - Raymond James

Good morning and thanks for taking my call. A couple of questions. First of all, the parts and service business, same-store sales is sort of flattish. Normally, that's a pretty reliable business. Can you give me some color on why you think parts and service kind of underperformed this time around?

Michael E. Maroone - President and Chief Operating Officer

It's Mike Maroone. Our customer pay business was actually up. It was up a little over 3% in the quarter, up 4% year-to-date, and its offset by warranty declines, warranty was down 7% in the quarter and 8% year-to-date. Probably a particular note in warranty is Mercedes quality is tremendously improved and the warranty revenue continues to really fall.

At some point in time, we'll be comping against a different trend there, but our customer pay business is pretty healthy. On the import and the luxury side, its high single digits, low double digits, but again the warranty pressures and the warranty reductions that are really due to improved quality have offset that.

Rexford Henderson - Raymond James

Okay. Second area is, part of the long-term strategy is to improve the efficiency of the operating model, integrate it and take costs out of the stores. I'm just wondering if -- are you using this dip in sales as an opportunity to reduce the fixed cost base in the existing stores and if not, why not?

Mike J. Jackson - Chairman and Chief Executive Officer

Well, all our strategic initiatives remain underway, all along the lines that you just discussed, and many of them have one-time costs involved, which will fall away at days in the future. And also I think also, if you look at our results and our operating margin for this level of difficult environment, it's quite a statement on operating discipline.

So tactically, our operating discipline is there. Strategically, we continue to invest in all our initiatives, which we are convinced in the long-term will pay tremendous benefits for us.

Rexford Henderson - Raymond James

Okay. Is there any area of the -- any progress or any specific initiatives in terms of cost cutting in the dealerships that you can give us a progress report on?

Michael E. Maroone - President and Chief Operating Officer

I would say one of the most notable is the way we're managing our inventories. As we noted, our inventories were down significantly, about 12,000 units. We have introduced some new technology that we're working on. We've centralized our -- some ordering. So I think we've really used shared service to dramatically improve our inventory performance.

Michael J. Short - Executive Vice President and Chief Financial Officer

In-line with that, Rick, this is Mike Short, we continue to progress in the process of getting our stores into the shared service center. We now have over 90% of our stores on a common dealer management system and we should be substantially complete with that migration by the end of the year.

And we continue -- we now have approximately 2/3 of our stores into the base SSC environment and that provides the kind of platform that Mike alluded to, to enable things like purchasing savings and things like that.

Rexford Henderson - Raymond James

All right. Thanks very much.

Operator

Thank you. Our next question comes from the line of Matt Nemer with Thomas Weisel. Please go ahead.

Matt Nemer - Thomas Weisel

Good morning, everyone.

Mike J. Jackson - Chairman and Chief Executive Officer

Good morning, Matt.

Matt Nemer - Thomas Weisel

My first question is related to California and Florida. What's your outlook for a recovery there? I guess, how are you planning your cost structure for those stores? Do you think this continues for the next two quarters, five quarters, can you give us some sense of that?

Mike J. Jackson - Chairman and Chief Executive Officer

I would say I sort of have a rolling two quarters, meaning it's hard to predict beyond six months, and the next six months looks about the same environment as we have now. Therefore, we see more risks than opportunity, meaning that we manage everything in a very disciplined way, as we just discussed.

Whether that's inventory, advertising, or any other expense item, so tactically, we'll manage through it. We refuse to pull back from our strategic initiatives. These markets will turn. I can't tell you exactly when, but they will turn. And we'll reap the benefit of that turn.

Matt Nemer - Thomas Weisel

And just to follow-up on that, clearly these are good markets for the long run, but at what point do you start cutting a sales manager who is good but is just not needed right now because of the volume?

Can you give us a sense of the cost structure at these stores in California and Florida and whether there's still room to cut that you're holding out on or are they pretty lean and mean right now?

Michael E. Maroone - President and Chief Operating Officer

It's Mike Maroone. I think they're sufficiently lean. We have worked really hard to make sure that our compensation was variable, and as you look inside our numbers, the comp moved right with the gross, although the gross was down significantly, the compensation moved right with it, which indicated that we really leaned up.

I don't see us taking in much leaner, but we're really working hard to improve our capabilities, doing a lot of training in stores on handling traffic, really examining our closing ratios, we're very intense right now in how we're managing our stores, but I think we're really focused on efficiency rather than taking more heads out.

Matt Nemer - Thomas Weisel

Okay, that's helpful. Then just on the inventory, I would love to get Mike Jackson's thoughts on what's happened in the midline imports. It seems like inventory is up significantly more than sales over the last few quarters. You mentioned some pressures in margins there on the west coast and I'm wondering if this is something we should be concerned about going forward?

Mike J. Jackson - Chairman and Chief Executive Officer

Well, I think the missed story that I see thus far overall is it's the steep decline in automotive sales at retails nationally. Everybody's sort of saying automotive is okay because it's only down 1% year-to-date, it's going to be over $16 million. The structure within that has changed significantly and it's hit everyone.

Whether you're referring to the inventories on the imports, which indeed are higher, by the way, nothing compared to what the domestics are, but whether it's the fact that the fleet business is up significantly, retail inventories are up significantly, these are all indicators of just how difficult automotive retail is out there right now.

Matt Nemer - Thomas Weisel

I guess, to dig a little deeper, is it permanently -- has there been a permanent change or a structural change in the profitability of these midline import stores, given this higher level of inventory?

Mike J. Jackson - Chairman and Chief Executive Officer

I really don't think so. I think it's extreme economic distress out there right now. It's one of the toughest environments I've ever seen since I've been in the business.

Michael E. Maroone - President and Chief Operating Officer

I agree exactly what Mike said, especially on the west coast. And the inventories did balloon up, but we've got a lot of confidence in the import manufacturers and their disciplined approach to the business.

We've already seen the Toyota inventories come back down, I know that Nissan has taken some steps to bring their inventories down. They run a very disciplined business model and I don't see any long-term damage here. I think there was some short-term aberrations as the inventories went up.

I think there was a little bit of desperation, but they're well-run companies and they understand the need to keep inventories lean.

Mike J. Jackson - Chairman and Chief Executive Officer

And in absolute numbers, the domestics are moving in the right direction in that their inventories are lower than a year ago. They have more to do, in my view, but you've got to give them credit for moving in the right direction.

Matt Nemer - Thomas Weisel

Okay, that's helpful. One last question for Mike Short, on the new credit facility, I may have missed it, but did you provide a rate for that agreement?

Michael J. Short - Executive Vice President and Chief Financial Officer

Yes. We lowered our term loan rate from LIBOR plus 125 to LIBOR plus 87.5. So we extracted 37.5 basis points out of the rate. And that's what leads to the $3 million in annual savings.

Matt Nemer - Thomas Weisel

Great. That's helpful. Thanks so much.

Operator

Thank you. Next we go to the line of David Lynn with Wachovia. Please go ahead.

David Lynn - Wachovia

Good morning. Just had a -- just a couple quick questions. Can you give us a little more color on the progress you're making? You mentioned in your prepared comments working with the domestic brands to consolidate under one roof. Where are you guys on that? And how are the domestic brands actually seeming about that?

Mike J. Jackson - Chairman and Chief Executive Officer

We had a overall strategy starting four or five years ago that said, on the domestic side, there's going to have a consolidation and a rationalization of the retail network and we identified locations and brands that we thought would be… we point the problem which consolidation would occur, and we divested those that we thought were not positioned to take advantage of that consolidation whenever it would come.

The consolidation now is finally beginning to happen. They should have started years ago, but it didn't. It's still in its early stages and we don't know how fast it will move. But we think it's a win-win to take good location and consolidate franchises on them to get the throughput back in the stores and underpin the economic viability of those stores. Mike, why don't you talk about some of the specifics?

Michael E. Maroone - President and Chief Operating Officer

Sure. David, we have participated in a number of consolidation moves with Chrysler, where we have what they refer to as alphas, which is Dodge, Chrysler, and Jeep in one showroom and I think they're performing well. We're beginning select basis to do some consolidation with Ford with some Lincoln/Mercury franchises.

It's not one size fits all. We can't do those kind of things in every market, but we're finding a lot more flexibility. Even doing some things with general Motors in some smaller throughput stores where Pontiac, Buick, GMC are moving into Chevrolet showrooms. Again, I don't expect it to be that way in every situation. I think the manufacturers are testing some new ideas. We're working together to drive higher throughput and we're optimistic.

As Mike said, we've been planning for this day for quite some time and have quite a few situations underway that can provide us with higher throughput.

David Lynn - Wachovia

So when you talk about consolidation, I guess, what I want to be clear on is, are you consolidating the stores that you already own or the OEMs are approaching you and saying, hey, AutoNation, why don't you look into acquiring -- we'll help you acquire some of the lower throughput stores that are not owned by AutoNation?

Mike J. Jackson - Chairman and Chief Executive Officer

It's both. But it's more that the franchises are owned by others, and then the franchises consolidate on to our location and the real estate that is left vacant is sold for other uses. So that's a real consolidation.

David Lynn - Wachovia

And the dealer point will no longer exist?

Mike J. Jackson - Chairman and Chief Executive Officer

And the dealer points no longer exist.

David Lynn - Wachovia

Okay. My last question that I have is Chrysler just announced lifetime power train. How would that affect your business? And can you comment on -- apparently, this is probably going to be a good thing, but just your opinion on the new marketing tactic from Auburn Hills?

Mike J. Jackson - Chairman and Chief Executive Officer

Well, I've been a proponent of that for quite some time. The way I see the issue is, they've had dramatically -- and I'm speaking for the Detroit 3, dramatically improved quality. I would say there's almost parody on quality, from what a consumer tends to discern today, however there's a perception lag that is significant and you need to proactively do something to bridge that perception gap.

So, if you have good quality and a great reputation for quality, you don't need to extend your warranty, but if you have good quality and a perception that it's lousy, you have to proactively address that. And the way to do it and make that statement that you have the quality is to come with a dramatic step on the warranty side. A step in that direction has worked very well for General Motors and I think it will work well for Chrysler.

David Lynn - Wachovia

Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Mike Geoghegan from Bear Stearns. Please go ahead.

Michael Geoghegan - Bear Stearns

Good morning.

Mike J. Jackson - Chairman and Chief Executive Officer

Good morning.

Michael Geoghegan - Bear Stearns

On the inventory, I guess it's pretty clear that this is a lean-type of inventory level in this selling environment, but how comfortable are you with -- how comfortable are you in the event that there's some sort of inventory event, I guess, in the near term that would cause you, or that would put you at a competitive disadvantage versus your local competitors that are over-inventoried?

I guess the two things that come to mind are, number one, a strike by the UAW, or number two, just some sort of massive uptick in incentives that would leave your competitors with a better selection.

Michael E. Maroone - President and Chief Operating Officer

Mike, it's Mike Maroone, there's always a little bit of a risk/reward equation here, but we feel very confident that we've got sufficient domestic inventories to compete. Now, if there's some off the wall idea that comes that dramatically spikes the business, it could have an impact. We don't expect that based on all the statements.

The other thing that you should understand about our business is that we have achieved real critical mass in our key markets. We're not spread all over the country.

So often times, we have multiple locations in the same franchise that allows to us share inventory and move inventory to where the customer demand is. I think we're properly positioned regardless of the environment.

Michael Geoghegan - Bear Stearns

Okay. On customer pay, service, and parts, can you just talk a little bit about how similar or dissimilar consumer mentality is with repairs made to their vehicle that they pay for versus buying a new vehicle outright? In other words, if consumers are tightening their belts with vehicle sales or purchases, then are they also tightening their belts with respect to repairs?

And what I'm really trying to get at is, if customer pay was up 3% this quarter, what could the upside look like if you didn't have such a headwind with California and Florida?

Michael E. Maroone - President and Chief Operating Officer

I think there's -- it's Mike Maroone. I think there's always opportunity on the customer pay side and certainly if people aren't buying new vehicles, they've got to repair the ones they have. So we are very aggressive in trying to solicit more business, and I do think that there is opportunity on the service side.

Michael Geoghegan - Bear Stearns

Okay. Last question. You refer repeatedly to pickup trucks as being one component of the sales pressure in California and Florida. Can you give us a sense for how much of the headwind in those markets is due to pickup trucks specifically versus, again, this consumer belt tightening where it's just Joe average doesn't go out and buy another sedan?

Mike J. Jackson - Chairman and Chief Executive Officer

I think for Florida and California, it's really across the board. And pickup trucks maybe have a combination of the economic -- the stress plus the cancellation of all the work.

Michael Geoghegan - Bear Stearns

Okay. Okay. Thank you very much.

Operator

Thank you. Next we go to the line of Eric Selle from JP Morgan. Please go ahead.

Atilla Edwards - JP Morgan

Hi, this is Atilla [ph] Edwards on the phone for Eric. I was just wanting some more color around the amended terminal facility. You increased the covenant flexibility by revising your consolidated leverage ratio covenants. I was wondering if you could give some more color around that.

Michael J. Short - Executive Vice President and Chief Financial Officer

Sure, Eric. This is Mike Short. I think when we went to market, we found that the markets were quite favorable to our credit, and we were able to achieve both the improved pricing, as well as the extended term, and in addition to that, we were able to extend the leverage ratio from the prior covenant which was 2.75 up to 3. And I think it's reflected on the market's view on AutoNation's credit, in absolute terms as well as relative to our competitors.

Atilla Edwards - JP Morgan

Thank you.

Operator

Thank you.

John M. Zimmerman - Vice President of Investor Relations

Time for one more question.

Operator

That will come from the line of Neil Wexler from Shankman Capital. Please, go ahead.

Neil Wexler - Shankman Capital

My questions have been answered. Thank you.

Operator

Thank you. At this time I will turn the conference back over to our host. Please go ahead.

John M. Zimmerman - Vice President of Investor Relations

I would like to thank everyone for taking the time to join us today. We appreciate all your questions. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation, and for using AT&T executive teleconference. You may now disconnect.

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