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Executives

John Zimmerman - VP of IR

Mike Jackson - Chairman and CEO

Mike Maroone - President and COO

Mike Short - CFO

Analysts

Rich Kwas - Wachovia

Mark Warnsman - Calyon Securities

Rex Henderson - Raymond James Associates

John Murphy - Merrill Lynch

Rod Lache - Deutsche Bank

Rick Nelson - Stephens

Edward Yruma - JP Morgan

Matt Nemer - Thomas Weisel Partners

Colin Langan - UBS

Jonathan Steinmetz - Morgan Stanley

Matthew Fassler - Goldman Sachs

Joe Amaturo - Buckingham Research

AutoNation Inc. (AN) Q4 2007 Earnings Call February 7, 2008 11:00 AM ET

Operator

Welcome to AutoNation's fourth quarter Earnings Call. (Operator Instructions). Now, I will turn the conference over to AutoNation.

John Zimmerman

Good morning and welcome to AutoNation's fourth quarter 2007 conference call. My name is John Zimmerman, AutoNation's Vice President of Investor Relations. I would like to remind you that this call is being recorded and will be available for replay at 1-800-759-3449, after 2:30 p.m. Eastern Time today through February 14, 2008.

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

Before we begin, let me read our brief statement regarding forward-looking comments and the use of non-GAAP financial measures. Certain statements and information on this call will constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks which may cause the actual results or performance to differ materially from expectations. Additional discussions of factors that 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 reconciliation of any such non-GAAP financial measures to the most directly comparable GAAP measures on the investor relations section of AutoNation's website at www.AutoNation.com.

And now, I will turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Mike Jackson

Good morning and thank you for joining us. Today, we have reported fourth quarter EPS from continuing operations of $0.27 compared to last year’s EPS of $0.35. The US economic growth drastically slowed in the fourth quarter of 2007. Results for the fourth quarter of 2007 reflected a decline in new vehicle retail sales, especially in California and Florida, partially offset by continued share repurchases.

For the full-year 2007, EPS from continuing operations was $1.44 per share, equal to a year ago. A slump in the overall housing market continues to impact consumer's willingness and ability to make large ticket purchases, especially autos. Housing and retail auto sales have been declining for the past two years; in fact, in the past two years new home sales nationwide have declined 25% in Florida, in California new home sales are down approximately 42%.

During this period, US auto retail sales have declined 12%. 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. Typically, economic downturns run in 30 to 40 month cycles. The bright part is that we are approximately 24 months into the current downturn. Further, the recent action of the Fed Reserves to reduce interest rates could improve the auto retail outlook in the second half of 2008.

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

Mike Short

Thank you, Mike, and good morning, ladies and gentlemen. As Mike mentioned, we reported fourth quarter earnings from continuing operations of $0.27 per share versus $0.35 per share a year ago. For the full year, we reported earnings from continuing operations of $1.44 per share versus the same amount a year ago. Full year 2007 results included favorable tax adjustments of $0.06 per share. Full year 2006 included charges of $0.09 per share for the debt and the premium and other financing costs related to our April 2006 recapitalization.

Operating profit for the fourth quarter was $148 million, down 16% from $177 million a year ago. For the full year, operating profit was $705 million, down 11% from $792 million a year ago. Our operating results for the fourth quarter of 2007 were adversely affected by some year end accounting adjustments. The aggregate impact of these was approximately $0.02 per share, our earnings from continuing operations.

These adjustments included a favorable finance and insurance revenue adjustment of approximately $4 million and unfavorable adjustment of approximately $4 million in SG&A driven by various legal and other matters, and an unfavorable adjustment depreciation expense of about $4 million. For Q4 2007, SG&A as a percentage of gross profit increased 240 basis points to 74%, from 71.6% a year ago.

This was a result of a deleveraging of our cost structure due to the decline in vehicle sales. For the full year, SG&A as a percentage of gross profit increased to 120 basis points to 71.9% from 70.7% a year ago, with variable costs declining in line with gross profit and fixed costs flat year-to-year in absolute dollars.

Net inventory carrying costs was consistent in Q4 with a prior year period, and was $3.7 million higher for the full year 2007 versus last year. The unfavorable variance for the full year is primarily a result of lower floor plan assistance due to lower new vehicle sales. That was partially offset by lower floor plan interest expense due to lower new vehicle inventory levels. Other interest expense was $5.2 million higher in Q4, versus last year, and $23.4 million higher for the full year.

The unfavorable variance is a result of higher debt levels related to increase borrowings in 2007; and for the full year, due to our April 2006 recapitalization. We expect that the recent reductions in interest rates will result in savings through AutoNation in 2008. All else being equal, (inaudible) to help quantify the benefit of the rate reductions, every 100 basis point improvement in our interest rate results in approximately $25 million in pre-tax savings.

For Q4 2007, we had an effective income tax rate of 39.1% versus a prior year effective rate of 37.5%. The full year 2007 effective income tax rate was 37.3% versus 38.9% a year ago. We expect our underlying tax rate before adjustments to be about 40%.

During the fourth quarter, we repurchased 4 million shares of stock at an average price of $16.29 per share for a total of $65 million. For the full year, we repurchased 33.2 million shares at an average price of $19.43 for a total of $646 million. Our future share repurchases are subject to limitations contained in our debt agreements. As of January 1, 2008, our basket capacity for share repurchases was approximately $30 million and each quarter we're permitted to add back approximately 50% of our net income after-tax and any stock option proceeds.

We reinvested $31 million in the business through capital expenditures during the quarter, bringing total capital expenditures for the year to $160 million. The total capital expenditures for the year, net of acquisition related spending, land purchase for future sites, or lease buyouts were a $124 million. We expect full year 2008 capital expenditures to be approximately a $110 million net of asset sales. Once again, that's excluding acquisition related spending, land purchase for future sites or lease buyouts.

At December 31st, our non-vehicle debt was $1.8 billion and we had unused revolving credit availability of approximately $361 million. Our non-vehicle debt-to-capital ratio was 34%.

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

Mike Maroone

Thanks, Mike and good morning. Unless noted otherwise, my comments regarding our fourth quarter operational results will be on a same-store basis. Throughout 2007, the auto retail environment remained challenging. In the quarter, pressure on the segment increased with the drastic slowing in economic growth. In addition, consumer concern of a possible recession intensified. As a result, our same-store new and used retail volume in the quarter was up 6%, or 70,800 units, compared to the period a year-ago, and gross margin for vehicle retail was compressed for both new and used vehicles.

At December 31st, our new vehicle inventory was 62,700 units for all stores, a reduction of 3% or 1,900 units compared to a year ago. However, due to a slower sales pace, new vehicle day supply increased two days to 53 days at year end. Base supply for used vehicles was 44 days at December 31st, an increase of two days compared to a year ago. We continue to work diligently to optimize our used vehicle inventory.

In January, we added dedicated used vehicle resources to supplement our field team and have redoubled our efforts relative to our used vehicle management process. Our objective is to drive more trade-ins into that retail at a greater percentage of those trade-ins. This includes repositioning used inventory based on store need and highest opportunity for retail.

At $631 million, same-store revenue for parts and service reflected a 3% increase. We were pleased with growth of 5% in customer pay, parts, and service revenue. Our ongoing growth in those areas attributed to extensive training of our field operations associates, coupled with our service drive process and service marketing initiatives.

Fourth quarter same-store F&I gross profit per vehicle retailed was $1,162, an increase of $41 or 4% compared to a year ago. We attribute ongoing solid F&I performance to our preferred lender network, OEM service contract alliances, and strong product to offerings and penetration.

Turning to our store portfolio; during the quarter, we completed the acquisition of two stores representing a combined annual run rate of $60 million. They are Griffin Lincoln-Mercury in Jacksonville, Florida, which was added to our Mike Shad Ford store and Littleton Nissan in Littleton Colorado. We also divested three stores with an annual run rate of approximately $83 million, bringing divestitures for the full year to 14 stores, representing 19 franchises at an annual run rate of $386 million.

At December 31st, our store count was 244, representing 322 franchises and 38 brands in 15 states. I am also pleased to share that in January we completed the acquisition of Don Mackey BMW in Tucson, which is now operating as BMW Tucson. Our corporate development team continues to pursue acquisitions that meet our market brand and return on investment criteria.

In closing, in this phase of continued economic pressure, our focus remains on containing costs and improving our capabilities across all segments of our business. In addition, we will continue to invest in the development of our associates and in technology and processes to drive outstanding associates in customer experiences. On behalf of our executive team, I thank each of our 25,000 associates for their commitment and dedication during this challenging period for auto retail.

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

Mike Jackson

Thanks Mike. As we look to the rest of 2008, we believe the market will remain very competitive and very challenging. AutoNation will continue to focus on our costs structure by continuing to invest in our business. We are confident in our long-term business strategies and our market. We believe that in 2008, industry sales of new vehicles will be in the mid-15 million units. However, the recent action by the Federal Reserve to reduce interest rates could improve the auto retail outlook in 2008.

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

Question-and-Answer Session

Operator

Yes. Thank you. (Operator Instructions) And our first question comes from Mr. Rich Kwas with Wachovia. Your line is open.

Rich Kwas - Wachovia

Hi. Good morning, gentlemen.

Mike Jackson

Good morning.

Mike Maroone

Good morning.

Rich Kwas - Wachovia

Mike Maroone, I want to ask you about used vehicle sales margins. At least margins on the business were down pretty significantly year-over-year, Manheim just put out their wholesale index and that had declined for the fourth consecutive month. What are you seeing in that market? Is it supplies or too much supply out there and then how do you manage that with how demand trends are going and what's your sense for the upcoming spring selling season?

Mike Maroone

Rich, I think what we found is we're in a period of soft demand. I think the housing story has been well told, but the demand is soft and the supply of user is increasing. There are a lot of vehicles coming of lease, there are a lot of repossessions out there, and there is particular softness in certain segments. And I would call that the pickup truck segment, the largest SUV segment and to a lesser degree the sports car.

So you've got a lot of supply, a lot of trade-ins coming in and what we decided to do is to try in retail out of those vehicles. We found the auctions to be quite soft, especially in December and we attempted the retail out. And the way we did it was adjusting our pricing and we took some hits on a gross margin basis, but we felt it was the prudent thing to do rather than send them through an auction system that was weak. The auctions had a very low sell through rate especially over the last month and a half.

Rich Kwas - Wachovia

And how do feel your inventory is set here heading into the spring?

Mike Maroone

Well, we've leaned our inventory up. We were -- at the end of quarter, we were at 44 days which is a really a little bit of a timing issue. We really would prefer to run in the mid-30s to high 30 days supply. And we feel by doing that we can minimize our exposure to some fluctuations in the market. So we're still optimistic about our used business. I think as I mentioned in the script, we've added some resources and really are going to work hard to trying grow that business in the year ahead.

Rich Kwas - Wachovia

Okay. And then a bigger picture question for Mike Jackson. GM's announcement regarding consolidating dealership within in metro markets, you would have some presence. Would you possibly benefit from that longer term? Seemingly, what's your sense on what they are doing and how aggressive do you think they are going to be on that end?

Mike Jackson

Well, first, we have called out that the weighted opportunity or the greatest competitive disadvantage that's really choice free is their retail network. They have an over capacity situation that is causing a slight of capital and talent, the high throughput model is where they need to get tipped to. So they've dealt with their over capacity issues on the production side and now they are really getting serious about dealing with over capacity at the retail level.

We know they want to get to a high throughput model. We are very much positioned to benefit from this strategy of a consolidation to a high throughput model. We are very much pre-positioned for that, assuming that it would always come. They're more committed than ever, but how fast they will actually be able to move at this point, I don't have a clear view of. Mike, do you?

Mike Maroone

I think the pace is not a brisk pace. They have actually said they are going to defer the issue and will not be discussing it at the NADA convention which comes up this week. So I think they are regrouping and trying to figure out how to get there. It's clearly the right way to go. We did one of their deals with them in the last year, where we combined Pontiac, Buick, GMC and Saturn under the same site, at one of our Chevrolet stores. And it was a bold move on their part and we certainly supported it and it's worked out quite well for both GM and for us. But I am not sure about what the pace of the consolidation is going to be.

Rich Kwas - Wachovia

Okay. Great. Thanks for the input.

Operator

Thank you. Mark Warnsman with Calyon Securities. Your line is open.

Mark Warnsman - Calyon Securities

Good morning. I am curious as to whether your $65 million in share repurchases was the maximum allowable under your debt covenant?

Mike Short

Yes. At the end of the year, we had basically depleted our basket and it was replenished in that $30 million that I referred to as of January 1st. So the Q4 income replenished the basket for Q1 '08, but we were pretty much completed with the basked availability in Q4.

Mark Warnsman - Calyon Securities

Okay. And with you non-vehicle debt increasing by $200 million for the quarter, how do you think about balancing your debt levels with your share repurchase program? Do you anticipate continuing to max it out under the debt covenants or is there a balance point there?

Mike Short

I think you'll see on a year-to-year basis, the amount of share repurchase that we engage in will be significantly lower, given the fact that we do have the restrictions on us now that are provided in our debt agreement, which I mentioned is essentially half of our net income plus option proceeds. So, in 2008 it will be substantially lower than we saw in 2007.

Mike Jackson

If we want to add any debt to do share repurchase, it's driven by percentage profitability.

Mark Warnsman - Calyon Securities

Great. Okay. And finally, if I could, cash was down $20 million year-over-year. What do you see as the reason-- or do you have benchmark cash and equivalents level that you'd like to maintain within the business?

Mike Short

No. We monitored it based on a liquidity measurement not in cash and of itself. And cash will move as a result of timing, but we're quite comfortable with our overall liquidity level.

Mark Warnsman - Calyon Securities

Very good. Thank you very much.

Operator

Thank you. Rex Henderson with Raymond James Associates, your line is open.

Rex Henderson - Raymond James Associates

Good morning. First of all for Mike Short, a couple of clarifications on SG&A. You said that there were some legal costs and some depreciation and amortization expenses, I think $4 million and $2 million, what period was that for? Was that for the fourth quarter or for the full year?

Mike Short

In the fourth quarter

Rex Henderson - Raymond James Associates

That was in the fourth quarter?

Mike Short

Right

Rex Henderson - Raymond James Associates

Can you clarify a little bit about what those expenses were and whether they are recurring or whether or they are going forward?

Mike Short

No. Periodically, we review our reserve levels for our legal matters and so we took a look at that at the end of the fourth quarter and concluded that we needed to increase our reserves a little bit there. And on depreciation it was just a result of looking through some of our lease structures and basically cleaning up some of those.

Rex Henderson - Raymond James Associates

Okay. So that is not going to be a recurring expense going forward then?

Mike Short

No, no. Not.

Rex Henderson - Raymond James Associates

Just clarifying. The other thing is, the banks have talked about pulling back on consumer lending lately, I am just wondering what you're seeing in terms of your lending partners? Have you seen any retreat on their part? It looks some economic income it doesn't look like it, but I just want to clarify that whether or not you're seeing any pullback on the part of the lenders in terms of the either terms or in terms of availability of credit?

Mike Maroone

Rex, it's Mike Maroone. We are not seeing a pullback in consumer credit. We really believe that especially on the prime side that it's business as usual. Certainly, the repull rates and the delinquency rates are up slightly. And I think ultimately, the subprime side could get a little more conservative, but it's really not -- it really not had an impact on our business and we're pretty pleased with our ability to get paper placed and with the job our F&I team is doing.

Rex Henderson - Raymond James Associates

Okay. And finally, the Fed just recently cut rates and it's still early to see an impact, but I am just wondering, did you see any change in consumer mood or close rates or anything after the recent Fed rate cuts?

Mike Jackson

This is Mike Jackson. If I look at the consumer we have across the table from us, the critical fall has deteriorated over the last three-four years. I think part of that has been the run-up in rates and adjustable rate mortgages has impacted that. And so, since we're holding credit standards firm, they would like to buy but they can't buy. Certainly, the change in rates and either the cancelling or the absolute reduction of many adjustable rate mortgages will help.

And second thing that we see is a great number of buyers who, potential buyers who are sitting there saying, I am not sure prices have bottomed yet and I am going to wait. That's both in housing and automotive. And in automotive, they are waiting for the mother-of-all-incentive program. But I really don't think that's going to happen this time as the industry has proactively cut production and has reduced capacity.

So the point is with these rate cuts, they will begin to psychologically say, we're at the bottom. This is it. It's safe to come back in the market. You are not going to get a huge price advantage for waiting and things will begin to move again. But that's not instantaneous. I would say that whole process takes at least six months to work its way through and to get a turning point. So that's why I say, you could see a better environment in the second half of '08. If it takes longer than that, then it will be the beginning of '09. But that process has definitely started and will be reflected in the business in six months to a year.

Rex Henderson - Raymond James Associates

Thanks.

Mike Jackson

Thank you very much. Mike Maroone would like to add to that.

Mike Maroone

Rex, if I could, the one thing that we find interesting is although our showroom traffic has slowed commensurate with the sales rate, our e-commerce traffic and our phone traffic, both with which we measure with some proprietary software is up. So there appears to be some underlying demand and I think to Mike's point, we are really trying to figure out where bottom is on pricing and where the incentives are going. But there is people out there looking and they are looking in different manners than they have previously.

Rex Henderson - Raymond James Associates

Okay. Thank you.

Mike Short

Hey, Rex, This is Mike Short. I just wanted to make sure, I wanted to clarify a comment that I made earlier. When you called out some of the variances, the adjustments that we made in the fourth quarter, I just want to make sure we have the numbers right. There were three items that I called out. One is $4 million favorable adjustment from finance and insurance revenue, and then there was the unfavorable in SG&A which was $4 million, then other $4 million in depreciation. I think mentioned too, so it's…

Rex Henderson - Raymond James Associates

Sorry, I had that number wrong. Thank you very much.

Mike Short

Okay.

Operator

Thank you. John Murphy with Merrill Lynch, your line is open.

John Murphy - Merrill Lynch

Good morning.

Mike Jackson

Good morning.

Mike Maroone

Good morning, John.

John Murphy - Merrill Lynch

I am just wondering if you could comment on the mix of your customer base and your financing base on prime versus subprime. And it sounds like you are having a little bit of trouble or a risk in that, not you specifically but there is trouble in market in financing some of these subprime consumers. But it sounds like they are still -- they still like to buy but if we get rates lower they may actually be able to come into the market?

Mike Maroone

John, its Mike Maroone. Our prime is generally 80% or more, subprime is 20% or less. It does vary greatly by market. There is still subprime financing out there. All I was saying is there are losses, it probably gone up a little faster than the prime portfolios and I'd say they are little more conservative, but I don't mean to insinuate that the paw set has been shut off. There is still financing out there. It’s just a little bit more conservative than it was.

John Murphy - Merrill Lynch

And slightly more expensive for the subprime buyer, right?

Mike Maroone

Yes. It's always been expensive for that buyer though.

John Murphy - Merrill Lynch

Okay. Then secondly, we look at the operating leverage in SG&A, it looks like it was a little bit higher than we would have expect, is that because there is such severe weakness in Florida and California, and there is more negative operating leverage there, and it’s not as bad in other markets? Or these charges is one-time items in the fourth quarter, really sway the number?

Mike Maroone

Since there is a -- both the revenue and a cost component to the one-time charges, it doesn't affect the ratios very much but as Mike alluded to there was a meaningful softening of the economy in Q4 and I think that contributed to the Q4 number. Overall, what we look for during the course of the year is that we try and manage our variable costs structures in line with gross and we're aggressive on how we approach our fixed costs structure. And as I mentioned in the earlier comment that was flat on the year-to-year basis, so we absorbed inflation there. So that's how we manage it.

John Murphy - Merrill Lynch

And lastly, you've talked a lot about the weakness in California and Florida. I was just wondering if you can comment on business in your other major markets, I am just wondering what demand in Florida showroom traffic was like there?

Mike Short

John, I would say from the strength side, Texas continues to be very strong especially South Texas but whole state is performing at a very higher level. But Denver market and the Colorado market continues to be strong. I would say, on the weak side, the Florida markets are all weak, the California markets are weak, and we certainly feel a lot of pressure in Phoenix and Las Vegas. And it's come a little bit late to the party versus California, but those are all -- those high growth housing markets are all really feeling it. But it is offset to a slight degree from Texas and Colorado.

John Murphy - Merrill Lynch

Great. Thank you very much

Operator

Thank you. Rod Lache with Deutsche Bank, your line is open.

Rod Lache - Deutsche Bank

Good morning, everybody. I just want a follow-up on the comment you made on SG&A, can you just walk through for us what the variable versus fixed component is of your SG&A costs and are you making adjustments through the fixed part of it?

Mike Short

Yeah. As you know, there is no cost that's perfectly variable and no cost that's perfectly fixed. While there are very few costs that are perfectly fixed, but primarily the costs there are mostly variable are compensation or variable compensation expense where you view advertising as variable as well. But fixed components would be more overhead rent types of expenses, insurance costing like that. And we're working on both side of the equation, both in terms of managing our compensation costs. And I think Mike Maroone has mentioned in the past, so we put in place new systems to give us greater visibility into that, as well as a continued focus which is nothing new for the company about being disappointed by how we look at our fixed costs structure.

Rod Lache - Deutsche Bank

Do you have a rough breakdown of the fixed versus the variable part of that SG&A?

Mike Short

As we look at it, the variable portion of that component is a little bit less than 60% of the total bucket that I just outlined.

Rod Lache - Deutsche Bank

Okay. And also to follow-up on your comment on used, looking at the margins, were you suggesting that the margin this quarter was abnormally low because of the inventory initiative you had or is it coming back now, what should we be expecting in terms of margins looking forward?

Mike Short

I don't know that we talk a lot about the forward look, but I would tell you that our margin compression in the quarter really was about us desiring to retail rather than wholesale them. The wholesale market was very soft and we chose to take pricing actions to move those units on a retail basis. I wouldn't want to predict what it is going to be like going forward, but that's how we performed in Q4.

Rod Lache - Deutsche Bank

Okay. And just one last one. If you look at the parts and service business, it's been pretty stable which looks pretty good. Are you seeing that kind of stability even in regions like Florida and California or are you getting some strength elsewhere, like in Texas to offset weakness in some of the weaker markets?

Mike Short

I would say the Texas market is exceptionally strong. The fixed business has been a good performer for us. As I mentioned, we're up about 5% in customer pay offset by some slight reductions in warranty. It's a little more brand specific where you see brands are taking share, the parts and services growing more. So it's probably more brand specific than it is regional at this point.

Rod Lache - Deutsche Bank

But you are not seeing any kind of significant drop-off in, like Ford or California in that business?

Mike Short

No, again, it's more brand than it is geographical.

Rod Lache - Deutsche Bank

Great. Thank you.

Operator

Thank you. Rick Nelson with Stephens, your line is open.

Rick Nelson - Stephens

Thank you. Good morning.

Mike Maroone

Good morning.

Rick Nelson - Stephens

With tougher co-environment, are you seeing acquisition pricing at all come in?

Mike Jackson

Rick, its Mike Jackson. No, we are not. And I think there is a significant group who would like to sell but they haven't changed their prices whatsoever to reflect where we are in the cycle or what the cycle means to overall valuation. So, until we see a break in pricing it will be a rare deal that we do.

Rick Nelson - Stephens

Got you. Thank you for that. Are you seeing any assistance among the luxury car buyers, or is it primarily the domestic in mid-line imports?

Mike Jackson

Our luxury business has whether the downturn very well, they have simply more flexibility and more resources to deal with the challenges. It's not the same in the next six months, so as we flirt within recession or have a recession that it could not be impacted.

Rick Nelson - Stephens

Thank you.

Operator

Thank you. Edward Yruma with JP Morgan, your line is open.

Edward Yruma - JP Morgan

Hi. Thanks for taking my question. I know that you had run a taste with AutoNation Direct, but I know that the tests have ended, are you planning on rolling it out nationally?

Mike Maroone

I don't know that we'll be rolling it out nationally. We are really moving to more of what we call an affinity business. So we're using some of the same tools and pricing structure. I am really working at a different part of the business. I would say there is a tremendous number of consumers that come on line to gather information. It's still a small percentage that prefer to deal the entire transaction on line. So we're working on our capabilities and our affinity sales, and I think those can translate into the online buyers as well.

Edward Yruma - JP Morgan

Great. And I know that particularly towards the tail end of last year, the pricing on floor plan have increased significantly relative to swaps, has that normalized?

Mike Maroone

Yeah. We haven't seen a dramatic change in our pricing on the floor plan side.

Edward Yruma - JP Morgan

Great. Thank you very much

Operator

Thank you. Matt Nemer with Thomas Weisel Partners, your line is open.

Matt Nemer - Thomas Weisel Partners

Good morning, everyone. My first question is typically you've provided some commentary on your performance in California and Florida versus the industry, I am just wondering if you have any of that data.

Mike Maroone

I can't. I don't have it in front of me. I would say that we're performing fairly much in line with the market. I think it's changed a lot. Yeah, bulk is showing that Florida and California were down 9.7%, we were down 10.2%. So I would say we performed in line with the market.

Matt Nemer - Thomas Weisel Partners

Great. That's helpful. And then my second question is on expenses, can you give us any sense of your performance in some of those line items I know you mentioned that your fixed costs were flat but on comp and advertising were you able to bring that down? How well were you able to bring that down?

Mike Short

On the comp and advertising side, what we're trying to make sure we do is consider the variable costs and see that those decline in line with our gross profit in the case of the deleveraging scenario and on a full year basis that's what we saw.

Matt Nemer - Thomas Weisel Partners

Okay. And then my next question was on floor plan, have you seen any changes in the assistance offers from manufacturers and how should we expect that to change with rates or is that set early in the year as it's stickier in the expense side?

Mike Maroone

It's Mike Maroone, Matt. The only change we have seen is that GM has offered more days of free floor plan, the other manufacturers have not yet adjusted for the changes in rate. GM is the only one that's responded to this point.

Matt Nemer - Thomas Weisel Partners

Okay. And then lastly, in the used business, I understand that you were working with LaneLogic and I was just wondering if you have any comment on their new product called caroffer, which I think is a basically a direct consumer offered to get trade-ins over the internet.

Mike Maroone

We have met with LaneLogic and reviewed it with them. It's just too early to say what the consumer demand would be. We have tested LaneLogic products in several of our markets. The consumer -- but no other consumer offer is something that we haven't used too much. We were using some of the other products. So I think it's too early to say.

Matt Nemer - Thomas Weisel Partners

Thanks very much.

Operator

Thank you. Colin Langan with UBS, your line is open.

Colin Langan - UBS

Okay, Thanks for taking my question. I just had a question looking at new vehicles or unit sales actually sequentially were down last whenever year-to-date. And what really drove that. Is that for Californian part a little bit better than they were so far this year in terms of year-over-year decline? Was it outside of those regions it was actually stronger?

Mike Maroone

It's Mike Maroone. I think Mike Jackson called that out as to we're in the second year of a downturn in retail and I think we're beginning to comp against some softer numbers. So I don't think we've seen an improvement in business in Florida, California. But I think it maybe a slowing of the declining sales rate.

Colin Langan - UBS

Okay. That was just better year-over-year comps. So looking into 2008, is that something that we should maybe think about, too, should comps get a little bit easier in those regions? So their rate of decline should moderate, is that the right way to think about?

Mike Jackson

Well, that would be the tipping point. It’s Mile Jackson. That would be the tipping point indicating that the decline is over and we are on the journey back. And that's why in my remarks I talked about the fact that we're two year into this. If we were just beginning to go down, that was the another story, but these downturns are usually 30 months to 40 months. We're two years into this for all big ticket items but especially housing and automotive.

The medicine is here, though, at a certain point you are absolutely right. The comp is relative easy and the economic environment has improved. And that will be recovery that we're calling out, that will either begin in the second half of '08, I don't see it in the first half, but in the second half of '08 at the earliest and I would say that first half of '09 at the latest.

Colin Langan - UBS

And you said before that outside of California and Florida, you haven't seen any weakness yet. So do you have concern that those regions are going to suffer decline given all the recessionary concern out there in the market or do they look stable?

Mike Jackson

No. Texas went through the decline before Florida and California. Texas went down with Enron and everything that came with that and was down for -- Mike, what was it about 30 months?

Mike Maroone

Yes. It's about 2.5 years.

Mike Jackson

About 2.5 years, so the typical cycle. Now, they skipped the housing boom because they didn't make that big push in '04 and '05 because they had tough economic time. Therefore, Texas is on a very sound footing today and the outlook for Texas is quite good for the next few years.

Colin Langan - UBS

Okay. Thanks. That's very helpful. Just switching it for a second. Looking at parts and services, I mean it's pretty good -- again, also a pretty good year-over-year performance. In warranty it sounds like -- sounds a little bit down but you know not as much as the headwinds has sounds in the past. I mean when looking into 2008, I mean did comps there get better, do we still have the same quality improvements or are there any challenges on that side?

Mike Maroone

It's Mike Maroone. I think the comps do get better. We have seen a moderation of the decline. There were certain manufacturers that had dramatic improvements in quality and dramatic reductions in warranty those seemed to have leveled off some. Our focus has always been on the customer pay side. We think that declines in warranty are good for customers. And we just got to do --- we just got to get the job done on the customer pay side.

So we do that with intense training on processes and are really strong marketing operators including online marketing. And we now have service appointments online in all of our stores and we're seeing a lot of growth there. So our focus is on the customer pay side and the warranty does appear to be moderating, but we don't attempt to control that.

Colin Langan - UBS

Okay. And if I could just ask one last question. Looking at the SG&A ratio this quarter, it's obviously a little bit high. I mean should that -- is that just a Q4 impact, I mean because the costs are a little bit higher percent in that quarter or is that going to be an issue heading into 2008? Do you think that ratio is going to pick up a bit and should this rate be consistent for '08 or is that not the right way to think about it?

Mike Short

I think the way you have to look at it is what we aim to do in a deleveraging environment is bringing the variable costs down in line of gross and manage the fixed costs structure, very aggressively. Obviously, when you have a tough quarter like we did in Q4 that gets a little bit more difficult but I wouldn't view that as something I would extrapolate on?

Colin Langan - UBS

Okay. Great. Thank you very much for taking my questions.

Operator

Thank you. Jonathan Steinmetz with Morgan Stanley Your line is open.

Jonathan Steinmetz - Morgan Stanley

Thanks. Good morning, everyone.

Mike Jackson

Good morning

Jonathan Steinmetz - Morgan Stanley

Just to go one layer deeper on the use per vehicle retails, you are down about a $175 year-on-year. I think Mike Maroone, you mentioned the pick-up in large SUV categories among theirs. What would the comparisons look like in those categories? In other words was it especially pronounced in those categories on a dollar basis relative to that $175 figure?

Mike Maroone

Well, I think it causes the bulk of the compression. Not all of it, but the bulk of it. There is a lot of big SUV's being traded in and they are not easy to value. So we've got to work our way through that. I would say the other segments didn't have as much pressure.

Jonathan Steinmetz - Morgan Stanley

And do you think that this is a new incentive problem from the manufacturers or is there an issue with used demand relative to -- it's a credit availability or what do you think is causing sort of the weakness there?

Mike Maroone

Well, I think it's just an overall demand in the retail sector that Mike Jackson has talked about with big ticket items. But it's also exasperated by the increased supply. There are a lot of vehicles coming off lease and certainly the repossessions are coming up. So it's a softer demand increasing supply and then those segments are seeming to be more effective.

Jonathan Steinmetz - Morgan Stanley

Okay. Switching to the CapEx side. Do the weak sort of business conditions that you and other dealers are facing. Does it give you any greater ability to push back on some of the major CapEx programs with some of the OEMs, especially the foreign guys have been pushing hard for it lately or does CapEx stay at this level because it's hard to push back?

Mike Jackson

Well, all the manufacturers will tell you that we're very tough negotiators. Whatever the environment, we only invest our CapEx where we really think it makes sense and we're going to out produce the type of returns that we have targeted for. We have become highly skilled at it over the years in figuring out exactly how to deploy our CapEx and I would view our continued investment in CapEx during this downturn as a clear vote of confidence in the states of Florida and California.

I have observed they still have 2,000 miles of coastline and sunshine that will carry the day and the franchisees that we're investing in, and our fundamental business model. So, we knew we are in for a tough cycle. If you look at my statements starting all the way back in '04 and '05, we knew it’s going to be a very 30 months to 40 months in a downturn of this cycle. And our plan was to manage cost very strictly, make sure we have variability, continue to invest in our initiative and continue to deploy CapEx. So that when the cycle turns we come out of it stronger than ever. That's been our fundamental plan, we've made it this far. We will not deviate from it at this point.

Jonathan Steinmetz - Morgan Stanley

Okay. And perfect segue to my last question which is Mike Jackson, if you come to the view that you're not going to come out of this until, say, the first half of '09 as compared to the second half of '08, what do you do differently operationally? If you come to that, do you say I don't know this is spring or something?

Mike Jackson

That was my view going into '08. That is our plan that we will not see recovery until the first half of '09. That is our base plan, so we planned and are executing that plan based on that. The interest rate cut that have accelerated from the Federal Reserve are what cause me to say, well, maybe the second half of '08, we begin to see it because the Federal Reserve has finally got it.

They're no longer trying to walk the fine line between what they saw as inflation risk and downside risk. They are in full prevent recession mode, so strong rate cuts will continue and I lived through this before when the [Medison] arise and it's meaningful, our recovery will come. So that's why I modified my statement to say well we may see a better environment in second half of 08.

Our base plan though is in 09, so we've -- as Mike already called out, we've taken effective steps, everything we can do on that fixed costs structure we definitely have variability but we will continue to invest and initiate it and continue to invest our capital likely.

Jonathan Steinmetz - Morgan Stanley

Thank you

Operator

Thank you. Matthew Fassler with Goldman Sachs, your line is open.

Matthew Fassler - Goldman Sachs

Thanks a lot and good morning. Just a couple of follow-up questions and Mike you've just touched on this a moment ago. To the extent that January looks like a tough month, your forecast certainly is consistent with that and you maybe achieved a bit more expense deleverage than the street was anticipating in the fourth quarter, is there room on the traditionally fixed costs side and at this point are you inclined to take more costs out of the business? Or are you essentially sticking where you are given that there might be some light at the end of the tunnel here?

Mike Jackson

Well, our view was in the fourth quarter, as I've already described we've not seen recovery through '09 which means we have to address the fixed costs structure aggressively. We've done that. Already I've taken steps that have already been executed and completed. And now, we're working on the variable part of the business, so we think we are prepared for whatever '08 throws at us.

Matthew Fassler - Goldman Sachs

Understood. And then just secondly the cuts -- the Fed cuts hit rapidly and LIBOR adjusted more quickly than it had been, is there any reason why we wouldn't see that reflected in your floor plan numbers and in your floating rate debt interest as soon as the first quarter?

Mike Jackson

Absolutely, Matt. This is another thing to call out is that with the rapid rate cuts not only will it change the overall environment that we've been in for the last two years and I am convinced that will happen. It also gives us a tremendous benefit on the costs side right away. And each 100 basis points, if you combine the floor plan benefits and the non-vehicle debt, there's a $25 million benefit. And we already have at least 200 basis points of benefit. If you look at the yield curve, so that is there and we'll flow through immediately. There will be some adjustments on assistance from certain manufacturers, but we've embedded into the $25 million figure that we have already given you.

Matthew Fassler - Goldman Sachs

Got you. And one final question, I know you didn't discuss January in great detail but the industry brand numbers are out and while Luxury held in I think quite well in 2007 versus the market, in January, at least a couple of brands looked like they were a little choppier. Would you attach any significance to that in terms of your earlier comments on the luxurious potential of vulnerability?

Mike Jackson

This is absolutely normal for this cycle. For the first two years, Luxury goes along just fine but at a certain point in the 30 to 40 months downturn even Luxury will feel some pressure. So I wasn't surprised to see that. With the rapid rate cuts, I can't predict if we'll see more stress in Luxury or whether these very adaptable resourceful individuals will find a way to take advantage of the lower rate environment and feel confident to continue buying. But we're in that phase, where Luxury can get a little bumpy and whether it will….

Matthew Fassler - Goldman Sachs

Got you.

Mike Jackson

…and how bumpy, I can't say, but it didn't surprise me.

Matthew Fassler - Goldman Sachs

Thank you.

John Zimmerman

Time for one more question.

Operator

Thank you. Joe Amaturo with Buckingham Research, your line is open.

Joe Amaturo - Buckingham Research

Hi. Good morning. I was wondering if you could just give us some detail on your used inventory and what percentage is domestic versus foreign and possibly what percentages is truck versus car?

Mike Maroone

Our inventory overall is in the neighborhood of 23,000 units. I do not have at my fingertips visibility to that mix.

Mike Jackson

We will get that for you.

Joe Amaturo - Buckingham Research

Okay. Thank you.

John Zimmerman

Thank you very much for joining us today for discussing our business. I appreciate your interest. Thank you.

Operator

This concludes today's conference call. Thank you for participating.

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