Midas Incorporated Q4 2007 Earnings Call Transcript

Feb.29.08 | About: Midas Group (MDS)

Midas Inc. (NYSE:MDS)

Q4 2007 Earnings Call

February 28, 2008 11:00 am ET

Executives

Robert Troyer -- Director of Investor Relations and Corporate Affairs

Allan Feldman – Chairman and Chief Executive Officer.

William Guzik – Chief Financial Officer

Analysts

Scott Stember - Sidoti

Tony Cristello - BB&T Capital Markets

Jim Barrett - Harte Hanks

Vic Kumar

Tim Griffith

Operator

Good day everyone and welcome to the Midas Incorporated fiscal year 2007 earnings call. Today’s call is being recorded. This conference is also being webcast by CCBN and can be accesses in the corporate news section of Midas’s website www.midas.com or through CCBN at www.companyboardroom.com or www.streetevents.com. Today’s call will be achieved on these 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.

Robert Troyer

Thank you. With us this morning as always are Alan Feldman, our Chairman and CEO and Bill Guzik, our Chief Financial Officer. Any discussion today will contain certain forward-looking statements based on current management beliefs and assumptions. These statements maybe subject to risks and uncertainty that could cause future performance and results to vary materially. Alan and Bill have opening remarks then we’ll turn to answer your questions. Alan?

Alan Feldman

Thank you Bob and good morning everyone, we appreciate all of you joining us on this call today. Our net income for fiscal 2007 as announced in our press release this morning was $13.3 million or $0.91 per diluted share. That compares to $10.5 million or $0.67 per share the previous year that is better than a 35% increase in earnings per share. Our fourth quarter and fiscal year earnings were significantly affected by year end positive non-cash adjustments in our warranty liability which added $8.3 million before taxes to our results. Now, Bill Guzik will discuss the specifics in a few moments of how we determined to this adjustments to our warranty reserve.

Moving on, operating income was $12 million for the fourth quarter and $32.5 million for the full year. These numbers include the warranty adjustment, business transformation charges of $1.6 million for the quarter, and $3.7 million for the year primarily related to our project began shop re-imaging program and a $1 million termination payment to AutoZone, as well as a gain of $200,000 on the sale of the former exhaust plant in Hartford, Wisconsin.

Now, there is no question that 2007 was a challenging year for Midas and for others in the retail market place. Many of us felt the full impact of uncertain consumers spending as a result of credit issues. Slowing housing market, high gas prices and overall declines in consumer confidence, as a result, our comparable shop sales in US shops were down 4% for the fourth quarter and 2.3% for the full year. In Canada comparable shop sales were virtually flat for the quarter and slightly positive for the year.

The good news is that sales of our new service categories; tires, maintenance and fleet all grew very well in 2007; comparable shop sales of tires were up by 12.7% in the US and 17.7% in Canada, while oil changes grew by 9.3% and fleet by 34% in the US. Our gains in these new categories were tempered by declines in our core categories of 7.4% in brakes and 11.2% in exhaust.

More about our retail sales in a moment; first I would like to update you on some other topics for the year. 2007 was the first year in the company’s history that we were totally out of the product distribution business. You will recall that we completed our exit from the distribution business when we closed our exhaust warehouse in Chicago in the first quarter of 2006. Therefore, there were no distribution related operating losses in our 2007 results.

Company shops produced an operating contribution of $200,000 for the year; the first profitable year since 1996 this is a significant turnaround for the company shop operation, which had lost a total of $13.4 million over the five years leading up to 2007. We transition 97 shops new owners in 2007 with 2/3rds of those sales to dealers to new to the Midas system. Over the past three years we had transitioned almost 300 shops to new owners to existing dealers or new franchises. Sales at shops sold to new dealers in the past year grew 14% since those transitions. Now, these transitions are a continuing critical effort to bring in energy and enthusiasm to the Midas business.

We successfully made our commitment to reduce SG&A, posting a $4.3 million reduction during 2007 following the $6 million reduction in 2006. Our full year reduction exceeded our $3million target, as certain cost savings originally earmarked for 2008, we’re accelerated into 2007.

Net cash flow from operating activities for 2007 were $30.6 million up from $28.3 million in 2006 and $13.8 million in 2005 and for the year cash flow per share was up 16%, hitting $2.10 per diluted share.

And finally, we spent $29 million during 2007 to repurchase nearly $1.5 million shares of Midas stock, bringing the total acquired to 3.2 million shares since the repurchase program began in early.2005. There is $34.6 million remaining in our $100 million authorization.

Now, let me talk about our plans to meet the continuing challenges in the retail market place, as well as few other highlights.

First, as I said earlier, our2007 retail results were mixed. We’re encouraged by what we're seeing in our new services of tires, maintenance and fleet. But they were challenges in our Brake business, which accounts for about 38% of our retail sales in US shops. Looking back at Brake sales in 2007, you'll recall that we supported Brakes with a national price point of $89.95 a promotion that had worked well for us in the past, going back to 2003, when we were the first to market Brakes with a national price and saw increases of mid single-digits for the year.

Over the subsequent years, many of our competitors were watching our successes and began offering their own price promotion, some new car dealers at $99.95, regional players meeting our $89.95 price, and some going to $79 or even $69 million In effect, our national price point of $89.95 had lost the differentiating power that set Midas apart and attracted new customers to our business. So a year ago, we began an effort to design to move us away from national discount pricing for Brakes.

Our goal has been to develop, a Brake service branding platform based on the quality of the products and services offered by Midas. Over the past year, we have been working with our vendor partners to increase availability of high quality Brake parts. Our dealers and shop managers have completed a series of training programs to enhance their customer service skills and mechanics have participated in technical training to enhance their technical competency in Brakes. The end result of this intense effort for this year, has been our new SecureStop Brake branding platform, which we began advertising on national television on February 16, and to hopefully you've seen one of our two new TV commercials, one featuring crash test dummies and the others a humorous scene in which a car crashes through the front door of a Midas shop.

Now, these creative commercials from DDB Chicago are attention grabbing spots that we believe will generate interest in SecureStop brand brake service at Midas. We believe this quality branding effort will elevate and differentiate the Midas brand, and most importantly help us to grow our Brake market share.

Now, moving on to tires, you’ll recall that since we introduced the Bridgestone/Firestone program in spring of 2004, our North American shops have been selling tires primarily as a convenience to customers, already in our stores for other repairs and services. Our tire sales in 2007 were up sharply and made up nearly 5% of our retail business in US shops and nearly 7% in Canada. That amounts to an average of really just about 1 tire a day per shop. That's right on target with our original projection. While we have clearly succeeded in moving the Midas system into the replacement tire business, we believe there is a bigger opportunity for us. So to get at this opportunity, we launched a test program last Fall in 21 shops in 9 markets, to become an aggressive competitor in the tire business. Our goal is to move our tire business from customer convenience to becoming a customer destination for tires. And that is what this test is all about. These 21 shops added an inventory of at least 300 Bridgestone and Firestone branded tires.

Importantly shop managers completed a comprehensive Firestone training program to gain the confidence they need to talk tires to customers coming into their shops. And we even went so far as to re-badge the signs on the exterior of these shops, changing them from Midas Auto Service Experts, to Midas Auto Service and Tires. Some dealers also put up Bridgestone and Firestone signs on their shops and added tire wall displays in their shop waiting areas. These shops look a lot more like tire stores and they are telling potential customers about tires through direct mail and other CRM efforts.

Looking at the results in the first three months from these pilot shops, we are seeing some interesting findings, as expected entire sales of increase dramatically on average by more than 135% for the group of 21. It comes to an average of more than 250 tires per shop over the three months, that’s an average of about 3 tires per day per shop. Very important to note that the effect that selling tires is having on the sales of other product and services in the shops. Overall comps and these shops are up about 18% during the test, compare to a decline of 2.3% for the overall system. Alignments are up in the shops by 18% in sales of shocks and struts by 16%.

Brake sales in these shops were up by 5%, compared to a decline a more than 7% for the overall system. Now, we have lot to learn about the tire business. We will continue the test and slowly grow this program, as the early sales and profit results are clearly encouraging.

Now, as I mentioned at the start of the call, this has been our significant year for our company shops, achieving a full year operating profit of $200,000 a dramatic turn around over the past five years. During the year, we added 25 to our company shop count, by acquiring 37 shops in re-franchising twelve. We attend to continue the add shops to our company shop portfolio as the right opportunities present themselves.

Additionally, we also intent to re-franchise shops as those opportunities come up as well. To the end, so far during the first quarter of 2008, we have acquired one shop in New Jersey, and three shops in Canada. We expect re-franchise many company shops in 2008 to balance out our portfolio.

Now, to be clear, we have no plans to significantly increase the number of company operated shops. Overtime, I expect the number of shops we operate to decline by re-franchising. As we are a franchising company and we like it that way.

Moving forward we will step up our efforts to transition shops to new owner this year with an aggressive goal of at least 125 transitions up from 97 in 2007. And, we’re also good start, in January alone we transitioned 17 shops more than the 16 in all of the fourth quarter last year, the obvious benefit is a double digit growth experience in shops under new enthusiastic owners.

One last retail related update, we now have completed the project Beacon image upgrade at just over 1000 Midas shops and primarily in the US. We are expecting in 300 in 2008, incentive program to encourage dealers in US, to complete the remodeling program expire at the end of the year. However, there are more than 200 shops which properly obtained their incentive approvals, but could not complete repaying by the end of the year, because of the weather, these shops will be repainted in the spring and we will have about $1 million and incentive payments for remaining in 2008.

Now incentive programs remains in place for all Canadian dealers. Moving on, I hope you all saw our news release earlier this weak about our new partnership in Costa Rica. We signed an exclusively franchise agreement with the subsidiary of Purdy Motor in Costa Rica to build and operate Midas shops there. Per shops in San Jose is expect to open later this year, we are pleased to have the company of Purdy’s statue as our franchise in this venture. Purdy is the fourth oldest Toyota distributorship organization in the world, with 12 sales outlook and more than 500 employees in Costa Rica. The Midas shops they will build will be freestanding from the Toyota dealerships.

Now, before turn the call over to Bill for specific on the financial results, I would like to say that overall I’m pleased with our 2007 performance given the top market place and weakened economy we’re in. Despite disappointing retail sales our franchise business model allow us to post an operating income of $32.5 million and to generate more than $30 million in cash flow from operating activities.

We intend to continue to use our cash flow to repurchase shares and to fund any potential acquisitions of an auto-related operation they would compliment the current Midas systems. As we move into 2008, we believe we have the retail programs in place help us grow retails sales improved shop level profitability and encourage new franchises to come in to Midas system. In 2008, is off to an improved start with January, North American sales up nearly 2%.

Thanks for being with us this morning and now, I will ask Bill Guzik to discuss our financial results. Bill?

William Guzik

Thanks gentlemen and good morning everyone. Our report this morning is longer than usual, as of we’re talking about our overall full year 2007 results and how they compared to our guidance, our operating results by business and our continued strong cash flow and we did with it in 2007. I’ll also be providing sales, operating income and cash flow guidance.

Operating income and cash flow guidance for 2008. Fourth quarter sales of $46.9 million allowed us to exactly hit our full year 2007 sales guidance of $180 million, lower franchisee royalties and international license fees were offset by an increase in sales from having more company upgraded shops. Operating income was $32.5 million for the year excluding business transformation charges and gains and assets sales, operating income was $36 million for the year. This amount is significantly above our previous operating income guidance range of $28.5 million to $29.5 million; however our guidance range assumed that the 2007 warranty adjustment would be consistent with the prior year.

If the warranty adjustment had been only $1.1 million as it was in 2006, our reported 2007 operating income would have been in the middle of our guidance range at $28.8 million. Let me take a moment to discuss this annual adjustment in our warranty liability. You'll recall that in 2003, after we exited the product distribution business, we established after we exited the product distribution business, we established a $39 million reserve to fund future warranty obligations for Midas guaranteed mufflers and brake pads that had been sold through that time in both the US and Canada. Using the best data we had available at the time, we established the warranty reserve based on an assumed redemption rate of 21% for all lifetime brake pad warranties issued. Meaning that out of every 100 brake pads sold, 21 would be replaced over the lifetime of the guarantee.

A similar calculation was done for lifetime mufflers; in 2003 we only had access to five years of reliable warranty registration of redemption data, since the Midas Link system through which warranty data is electronically transmitted and captured, wasn't installed until the 1998, prior to 1998, all the warranty registration of redemption data was processed manually. That said, we did the best forecasting job we could with the data we had when we determined the $39 million reserve number in 2003. Since then, all of our financial reports have disclosed the fact that we annually evaluate the warranty redemption rates to determine whether they require adjustment. The year-end 2005 analysis suggested that the brake redemption rate was trending slightly lower, so we reduced it, which resulted in a positive fourth quarter adjustment of $700,000 to our 2005 results. At the end of 2006, we recognized that the muffler redemption rate was trending lower, so we reduced it slightly, resulting in a positive adjustment of $1.1 million.

Our comprehensive analysis at the end of 2007 revealed that the trends in redemptions were dropping, resulting in the reduction in the brake redemption rate by 2 percentage points and a reduction in the muffler redemption rate by 3 percentage points. Because these percentage point change has an approximately $4 million impact, these changes resulted in a much larger adjustment to our warranty liability for 2007, of $8.3 million or a benefit of $0.35 per diluted share on our net income. Further changes in these redemption rates either up or down are possible; however, our 2008 guidance does not include any further changes in the warranty redemption rates.

Now back to discussing our results for the fourth quarter and fiscal and fiscal year. You'll notice that we reformatted our statement of operations this quarter to eliminate the gross profit line and to provide a further breakout of company operated shop costs and expenses. We did this in consultation with our auditors in order to provide a clear presentation and to confirm our presentation to other franchise companies, such as McDonald's and Yum brand. Now, let's look at revenues and operating contribution by business components. Franchising and licensing revenues in the fourth quarter were down $800,000 from a year ago. Approximately $200,000 of this reduction was due to the scheduled reduction in European royalties, approximately $100,000 was due to the conversion of franchise shops to company shops, and the balance, or approximately $500,000, was due to the US comparable shop sales decline shop sales decline of approximately 4%. Remember, that as a franchise company, the impact of retail sales declines are minimized such that a 1% drop in comparable franchise shop sales only has an approximate $125,000 impact and quarterly revenues.

While US comparable shop sales declined for the quarter and full-year, Canadian comps were flat for the fourth quarter and up by about 1.5% for the year. Canadian comparable sales in the core brake and exhaust categories did not decline as much as in the US, and we believe that our shop sales in Canada, likely benefited from the November bankruptcy of a major competitor. Canadian royalties also continued to benefit from the favorable Canadian exchange rate. International royalties were $2.3 million in the fourth quarter and $9.1 million for the year. At the start of 2008, all international royalties converted to a variable amount based on a percentage of sales, because of the franchise royalty decline operating contribution from the franchising business was $10.1 million for the fourth quarter down in $1 million from a year ago. For the year, operating contribution was $45.4 million down $3.7 million from 2006. The full year decline resulted from an approximate $800,000 schedule reduction in European royalties, approximately $300,000 due to the conversion of franchisee shops to company shops approximately $2 million due to the lower store account and comparable stores sales decline in the US and a $600,000 increase in expenses. Please remember that operating contribution as I detailed here include the direct SG&A expenses but not unallocated corporate expenses and as a non GAAP measure.

There were 1711 shops in North America at the end of 2007 down 20 from the end of the third quarter and 40 from the end of last year. During the year there were 15 new shop openings in the US with 40 shop closures in the US and 15 in Canada. We expect to open approximately 35 new shops in 2008, with 20 of those being Greenfield Developments and another 15 being conversions of Independence. The closing number off course is hard to predict since many are outside of control, but we are hopeful with closings will not exceed openings Outside of North America, there were 844 shops in operation at the end of the year up two from the end of the third quarter and up 25 from the end of 2006.

New shops opened in Spain, Italy and Mexico and as Allan said, we signed an agreement just last week to enter our 19th country with shops to built in Costa Rico. Real estate revenues were even in the fourth quarter versus the year ago. For the full year, real estate revenues were down 300,000 from the prior year all of which was due to lower retail sales since many rental agreements contain a provision for percentage rents. Real estate operating profit for the quarter was down $500,000 to $2.5 million, while operating profit for the year was down in the same $500,000 to $10.8 million. A $500,000 savings for the year on SG&A expense was offset by the $300,000 decrease in percentage rents and a $500,000 increase in third party rent expense due to schedule rent increases and new shop leases. Company shops produce an operating contribution of $200,000 for fiscal 2007 the first positive contribution since 1996 compared to a loss of $500,000 in 2006.

Unfortunately, the slowing economy particularly in Florida and California pushed that company shops back into the last position of $700,000 for the fourth quarter. The fourth quarter is typically a weakest quarter for company operated shops and this was magnified in Florida and California where the declines in the real estate and mortgage markets seemed to be having the most pronounced impact in consumer spending. These markets produced a combined $350,000 loss in the fourth quarter of 2007compared to breaking event in 2006. Profitability in the Colorado North East in Chicago markets held approximately constant from 2006 to 2007 in the fourth quarter at comparable stores sales gain during the quarter of 10% in the Chicago market and 5% in Colorado were offset by an approximate 8% decline in sales in the North East. Comparable shop sales in Florida were down 3.5% in the fourth quarter, because these shops had only recently reached their aggregate break even sales amount, the comparable shops sales decline pushed them into the last position, also contributing to the fourth quarter loss was the acquisition of 12 additional company shops. While the shops essentially broke even for the quarter, the integration of these shops required significant temporary additional overhead of approximately $200,000. Now that these shops are up in running most of this over head is being scaled back and we expect these shops to contribute to over all profitability in 2008. We fully intend to re franchise many of our company shops through out North America during 2008, as we find qualified buyers.

Replacement part sales and product royalties were 9.8 million in the fourth quarter and $33.5 million for 2007 up $700,000 for the quarter and $1.1 million for the year. The increase of the primarily the result of high tire sales were franchise these, off course tire sales are extremely low margin sales for us so our success in tire is only having the impact of diluting our operating margins. The wholesale business produced an operating contribution of $9 million for the quarter and $9.2 million for 2007, as a result of the $8.3 million warranty adjustment. To recall that our wholesale business is designed to approximately break even after paying warranty expenses and administrative expenses for performing a centralized billing for tires, oil, batteries and shop equipment. Beginning on January 1, 2008, there was a change to our US warranty program, which will impact our sales and warranty expenses line items.

Since 2003, vendor partners have been paying a product royalty to the company as a small percentage in all part sale to Midas shops. Those revenues were recorded as product royalty days earn and we use to ask that the future estimated cost of consumer warranty claims which were being recorded as those parts were installed. Under the program, we’ve lowered our franchisee cost of goods by directing those royalties to our parts vendors directly to Midas shops. At the same time, the consumer warranty program is now being funded by dealer payments of the company as shops install Midas guaranteed parts. The program is intended to have no net penal impact on the company, as the per-parts rates are being set such a collection from franchisees exactly equal warranty reimbursements to franchisees over time.

The company will record the revenue from the per-part warranty billings, at the same time the expense from warranty reimbursement to franchisees is recognized. Because of vendors are now responsible for replacing guaranteed part failures during the first 12 months after installation, there will be no warranty billing revenues or warranty reimbursement expense recorded in the US during fiscal 2008.

Warranty revenue recognition will begin at fiscal 2009, when warranty claims for fiscal 2008 installations will begin to be submitted. The new program will have the effect of lowering 2008 sales and warranty expense by approximately $3 million each. It is important to note this change in the US warranty program has no effect on our outstanding warranty liability and at the $8.3 million non-cash warranty liability adjustment is unrelated to this policy change. Finally our RO Writer software business had revenues of 1.2 million for the fourth quarter and 4.5 million for the year.

RO Writer produced a $400,000 operating contribution for the year, and importantly generated EBIDTA over 1 million for the year of 20% from the prior year. Here are some other numbers of interests. The unallocated portion of SG&A for the quarter was 7.4 million down 600,000 from last year. For the full year unallocated SG&A was down 3.3 million to 30 million inline with our commitment to produce overall expenses by 3 million in 2007.

Turning to depreciation and amortization, D&A for the fourth quarter was 3.4 million and 13.5 million for the year including stock based compensation expense. Capital spending was 2.2 million in the quarter and 5.1 million for the year, primarily for equipment and leasehold improvements that acquired company shops and ongoing systems projects. Interest expense for the quarter was 2.3 million and 9.1 million for the year up slightly from the previous year and inline with our full year estimate of $9 million.

Our tax rate for the quarter was 48.1% and 44% for the year. These rates are higher than the 40% we had expected for 2007, and are due to the impact of a write down of the Canadian differed tax asset caused by reduction in the future Canadian statutory tax rate and higher than expected nondeductible expenses.

These deduct rate differences had a $0.07 per diluted share negative impact for both the quarter and the year. However, Midas did not pay a significant amount of income taxes because the net operating loss carry forwards of approximately 91 million from previous years.

Looking at cash flow, cash flow from operating activities provided net cash of 30.6 million for 2007 compared with 28.3 million last year. As promised virtually all of the 2007 cash flow was used to be purchase stock, as the company spent approximately 29.2 million to acquire shares. At the same time, the company paid 13.7 million to acquire company shops from franchisees all of which was financed through incremental borrowings.

On a per share basis, we generated $2.10 in cash flow from operating activities for the year of 16% from a $1.81 in 2006. Total debt at the end of the quarter, including capital and finance leases, was 113.1 million compared to 17.2 million at the end of the third quarter and 100 million at the end of 2006. Bank debt was 76.3 million at the end of the fourth quarter, up from 70 million at the end of the third quarter. The increase in bank debt is a result of company shop acquisitions.

As our press release said this morning, we provided 2008 guidance on several key items; we are projecting full year revenues of 190 million up 5.5% from 2007. Our revenues from international franchising will decrease by about 4.5 million in 2008, because our European license fee has moved to a variable payment based on a percentage of sales. In addition, we will loose approximately $3 million in product royalty sales due to the change in our US warranty program. Offsetting these declines is an increase in the number of company shops and expected increase in sales of tires, oil and batteries, and an approximate 2% comparable shop sales increased for North America.

We will reduce our overall SG&A by an additional 2 million in 2008 in line with our commitment to reduce our expenses by a combined 12 million for the 3-year period that began in 2006. In the first two years, our SG&A has been reduced by approximately $10 million. As a result, we’re projecting operating income in the range between 27 and 29 million excluding an estimated $1 million in business transformation charges for the completion of the shop re-imaging, and any gains on asset sales or any year-end warranty adjustments. We expect the tax rate of approximately 41.5% with the difference from the statutory rate being due to nondeductible expenses. We expect cash flow from operations of 30 to 32 million in the 2007 after business transformation cost and changes in working capital. We will use this cash to repurchase shares and to fund shop growth and any potential acquisitions.

If all that cash flow is devoted to share repurchases, as it was in 2007. We would expect average shares outstanding for 4-year 2008 or approximately 13.3 million shares. So with 2007 behind us, we face 2008 with a realistic attitude. Comparable store sales will continue to be challenged by the market place, which is widely our forecast and modest 2% comparable store sales increase. Our P&L loss will also be impacted by the loss of 4.5 million in the European royalties. But our 2008 guidance reflects an expectation that the entire decrease will be offset through operating improvements and cost reductions.

And because of our strong cash flow, we can continue to repurchase shares and improve upon 2007 cash flow from operations per share of $2.10.

Thank you for your interest in Midas. Now, I’ll turn the call back to the operator for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question from the side of Scott Stember - Sidoti, your line is open, please go ahead.

Scott Stember - Sidoti

Good morning.

Alan Feldman

Good morning, Scott.

William Guzik

Good morning, Scott

Scott Stember - Sidoti

Good. Can you give the sale count numbers by segment for the quarter? I think you gave it for the year.

Alan Feldman

We did give them for the year. You want them for the … what would you want for the fourth quarter?

Scott Stember - Sidoti

For the fourth quarter, yes please.

Alan Feldman

U.S. was down 4.1% and Canada was down 0.1%.

Scott Stember - Sidoti

You have individual segments?

Alan Feldman

You want by segments?

Scott Stember - Sidoti

Yeah.

Alan Feldman

Brakes, Brakes, okay by product line, sorry. In the U.S., Brakes were down 12.8%, exhaust was down 10.7%, suspension was up 0.5, oil changes were up 12.5, tire and tire related were up 14.7%, and the all categories were up 2.7%.

Scott Stember - Sidoti

Okay, and you talked about 2008, are we expecting to see pressure on the operating margin or the operating line from company-owned shops being added as well as tires?

Alan Feldman

Well, I think we’ll have to wait and see on that, we are hopeful that we will find the appropriate buyers for many of the company’s shops we are operating today, and we will continue to move that number down and that should take some of the pressure off. Our operating margin line caused by an increase in the number of company shops that we have, so I think we will wait and see. We’re marketing those shops aggressively and hopefully we will get the results we want.

Scott Stember - Sidoti

And just coming back to the company-owned shops, all these stores that you are acquiring, they are current Midas franchises that you’ve decided to fix and re-franchise or are some of these outside stores that you’ve just brought on?

Alan Feldman

They are all current Midas franchise locations that for one reason or another, the franchise needed to leave, we wanted them to leave, we acquired those stores and many of them will be re-franchised overtime. Some of them are excellent operating stores. The three we picked up in Canada, is an example in January had average volumes of about a million dollars. So, they are not all bad stores by any means.

Scott Stember - Sidoti

So at least in the near term there could be some headwinds just as far as until you transform these back to franchise?

Alan Feldman

I think that’s possible in the short term.

Scott Stember - Sidoti

Okay and you made a comment Alan, before you finished about sales in North America being up 2% in January. Can you maybe just expand upon that a little?

Alan Feldman

I don't know what else I could say. We were up in both U.S. and Canada. We're seeing a kind of bifurcated results in the U.S, the center part of the US from the Great Lakes south, the result seem to be very positive, great results into the Ohio valley and then into upstate New York. Parts of New England seem to be have recovered in January, we’ve got some softness clearly as Bill talked about the California and Florida markets where the credit crunch and for closure seem to be the most acute. Our business, when we map the foreclosure activity on top of our business is a pretty high relationship right now. So, we are working with those dealers in those markets. But, you know, what it says to me is that the underlying viability of the health of business there, there are some macro factors right now they are affecting us in certain parts of the country.

Scott Stember - Sidoti

A just real quick as far as the breakout some of the higher margins items like break peacefully inline with what you’ve said?

Allan Feldman

I’m not sure, I didn’t understand your questions sir.

Scott Stember - Sidoti

Breaks up as well?

Allan Feldman

Okay. I don’t have the numbers for January to asses that, but, generally speaking since breaks are 38 to 40% of our business, if our comps are up breaks – our breaks doesn’t has to be improving.

Scott Stember - Sidoti

Okay. And last question you have CapEx figures for 2008?

Allan Feldman

We do yeah, $6 million which is higher than our normal run rate because we’ll spend about $3 million which is you know sort of our ongoing maintenance CapEx for the base business, Before we go to do some investing to move the development process along up about $3 million on top of that. So, that will be equipment in some new stores that we’re building, that we hope to franchise as well as some investments we’re making in our company stores for this new tire initiative where we’ll be buying additional tire equipment and some signage for the stores. So, the CapEx budget for 2008 is $6 million.

Scott Stember - Sidoti

Great, that’s all I have. Thank you.

Allan Feldman

Yeah, thank you.

Scott Stember - Sidoti

Thanks.

Operator

Thank you. And our next question comes from the site of Tony Cristello, your line is open, please go ahead.

Tony Cristello - BB&T Capital Markets

Thank you, good morning gentlemen.

Allan Feldman

Thanks Tony

William Guzik

Hi, Tony

Tony Cristello - BB&T Capital Markets

Couple of questions, Alan maybe if you can talk a little bit more on the timing of how the SecureStop break plan has rolled out, where you are seeing the successes and sort of what’s ultimate strategy in terms of differentiating what might this is offering versus what you’re seeing across other segments from competitors?

Allan Feldman

Right, Well, it’s too early to tell really Tony you know the kind of impact we are having although we are getting anecdotal results of our people noticing our commercial. So, that’s you know most important thing is making sure we are getting in the word out and it’s not just through television but, through our CRM efforts and other direct mail programs that we are using to get the word our any again that they just started in the middle of this month, so, it’s too soon to tell but, our plan as I try to describe in my comments, is really to move ours away from the discount pricing which we had worked for us historically 2003 through to you know arguably early 2006, but, where we had just lost you know our ability differentiate ourselves, the car dealers coming down on top of us and regional competitors coming up as low as we were stuck in the middle. And it’s not unusual it can only go so far with price promotions and then the compounded on a national basis you know, you find that those kind of price points work in some markets and don’t work in others. So, in conjunction with our franchise leadership we have switched our programming, we are talking a high ground quality related effort and product and services that reinforce our national warranty and our reputation for quality trust and reliability. And we are going to differentiate Midas based on that and it’s a place that we don’t think anybody else can go to in this market place. And so, you know we are hopeful that we will have that impact on the market, we think it’s the right thing for us to breakout of the cesspool of discount pricing that characterizes parts of these markets.

Tony Cristello - BB&T Capital Markets

Do you think you are ultimately leaving money on the table with having the lower price point break plan in place, given that the consumer the under budget are strapping and we know what’s going on with the macro so to situation of they are going to fix their brakes when they go bad and regardless of price it’s something that they simply has to repair?

Allan Feldman

Actually Tony, I think just the office and the reason I say that is we are not going to not price promote, that the price promotion will now be done locally. So, we have changed our budgeting between national and local slightly, boosted up the local budgets in conjunction with franchisees in many of our markets and now we can respond locally. So, in a market where we should be at 69 or 79 and that’s what the franchisees can be at, so be it that's what they'll do. In markets where 89,95 was too low like in parts of Northern California, they'll be a little higher. But they'll be able to respond locally to the pricing that the competition has and better able to manage the retail nature and the margin going forward. So I actually, I think just the opposite. It should improve our ability to respond locally and our competitiveness up and down the street.

Tony Cristello - BB&T Capital Markets

How is the pricing set? I know you defer to the local level. Do you get feedback from what the competition is doing in that local market that has been fed up to corporate or are you deferring to that local franchisee to say, Alan, our competitor is selling them at $75 or $75, 99 or whatever, I want to take our pricing down or vice versa, take our pricing up?

Alan Feldman

We don't set the prices with the franchisees locally. That's for them to decide. They do that in conjunction with our local marketing agency. If often times in markets we will do what's called questing, where we'll go out together and drive the market and make sure we understand exactly what is happening in the marketplace. And then discuss what appropriate retail tactics might be going forward. So, it's a cooperative effort. We don't set the prices. We do get feedback, again, through our local marketing agency, about what's going on in primarily our 40 major metro markets around North America.

Tony Cristello - BB&T Capital Markets

Okay. Maybe just shifting gears a little bit. I don't want to take up all the questions here. But one, when you look at we've been in sort of soft operating environment for the aftermarket in service and repair for a couple of years now. Have you been able to aggregate some data with respect to what the consumer buying patterns or habits have done now over the last two years and then incorporate that into sort of planning and target marketing and such, at least while this environment continues to linger?

Alan Feldman

Well, I wish we could be as precise as you were hoping we are about this, Tony. You know, I think clearly, we've seen periods of large ticket repair and replacement deferrals , whether it was tires or brakes, and we and some of our competitors have reported the same. So I think we know that's happening. But, you know, on the contrary, in the new businesses that we're in, we see continued strengths in our business, even in some of our weaker markets. Our tire and oil change maintenance business are growing and growing well. So, we're going to keep the pressure on those areas, because we think those are viable for the future. We've got to get our brake business moving. We've got to gain market share and grow that business, so the launch of SecureStop, getting off the national price pointing, giving our franchisees the headroom they need to price aggressively locally, is exactly the right thing for our business, I think. I talked about our new initiative with tires and how we think that is beginning to show some promise and we'll continue to grow that out in the future. So, I don't think we have maybe quite as much consumer insight about what's going on in their heads we like, because I think the whole issue of what's happening in America in particular is a continuing evolving story.

Tony Cristello - BB&T Capital Markets

Okay. One last question. Bill, you noted the 35 new stores and I can't recall what the mix of Greenfield was, if they were all Greenfield. Are they going to all be company stores? How should I be budgeting for company stores for 2008, and if they're not all company, do you have a certain number of franchisees already lined up? And then the second part would be just from a geographic standpoint, where are these stores being opened right now?

Bill Guzik

Well, 25 of the 35 will be greenfields, we are building five of those on a spec basis, which we will operate as company-operated shops if we have to, but we are actively trying to franchise them before they open. But we are prepared to operate them if the need be. So, we put them in markets where we're already operating company shops like Chicago. The remaining 15 of those greenfields will be built by franchisees, either existing or new.

So, in terms of how you should think about company shops, I think Alan said we've already acquired a few this year I think the number will rise slightly and probably hover in the 9 deed of you know, unless something changes in our business, 90 to 110 range, worst case and if we are successful selling off and re-franchising, we can lower that number.

Tony Cristello - BB&T Capital Markets

Great. Thank you very much guys.

Bill Guzik

Okay.

Operator

Thank you. And the next question comes from the side of Jim Barrett - Harte Hanks. Your line is open, please go ahead.

Jim Barrett - Harte Hanks

Good morning everyone.

Bill Guzik

Hi, Jim

Jim Barrett - Harte Hanks

I may have missed this, but Bill, a couple of questions for you. Can you tell me what the cash taxes were in 2007, and what number you would use for 2008, if you meet your guidance?

Bill Guzik

Sure. We paid $1.1 million of cash taxes in 2007, and we expect a similar number of 2008.

Jim Barrett - Harte Hanks

Okay. And I think you indicated transformation charges in the US in ’08 would be $1 million plus whatever you do in Canada?

Bill Guzik

No, that will include Canada.

Jim Barrett - Harte Hanks

That will include Canada?

Bill Guzik

That's all in, yes.

Jim Barrett - Harte Hanks

And just so I understand your comment about the change in warranty policy, it would appear as you have no warranty expense in 2008, so you save $3 million. What should someone model for warranty expense in 2009?

Bill Guzik

We will actually have a little bit of warranty expense, because we didn't change our Canadian program, so call it $1 million. And I think probably what will happen is in 2009, it'll step up by about maybe $2 million and then we should get to a $4 to $5 million run rate the following year. But remember, that will be exactly offset by revenues, so you're just grossing up the P&L.

Jim Barrett - Harte Hanks

Okay, so there's $1 million expense for Canada in 2008, and because there's the offset between expenses and revenues, there should be in essence no incremental impact in 2009, versus 2008, because of this new warranty program?

Bill Guzik

Exactly.

Jim Barrett - Harte Hanks

Oh, that's obviously a positive. And could you, the depreciation in '07, you mentioned that included stock option amortization.

Bill Guzik

Yes.

Jim Barrett - Harte Hanks

Can you tell us what it was simply for the plant, property and equipment and what the run rate is on that?

Bill Guzik

Yes, the total stock-based compensation was $4.2 million, so it would be 9.3.

Jim Barrett - Harte Hanks

Sounds good. Okay we’ll thank you about very much.

Bill Guzik

Sure

Operator

Thank you. Then our next question comes from side of Vic Kumar. Your line is open, please go ahead.

Vic Kumar

Hi guys. I just wanted to check on a number you guys had said before and I don't think I wrote it down. What was the dynamics in terms of store closings and openings in 2007? I think you had broken it out before, but I didn't get it.

Bill Guzik

There were 55 closings in the US and Canada, and there were 15 openings, for net of 40 closings.

Vic Kumar

Got it. And I think you had given some expectation for 2008, was that 35 new stores?

Bill Guzik

Right, 35 new stores with closings again being hard to control, but we're hoping that will not exceed openings.

Vic Kumar

Got it. And you had mentioned 20 of the 35 are Greenfield, is that alright?

Bill Guzik

Right.

Vic Kumar

Okay. That’s all I just wanted to confirm those numbers, thank you.

Bill Guzik

Thank you.

Operator

(Operator Instruction). Our next question comes from the side of Tim Griffith. Your line is open, please go ahead

Tim Griffith

Hi, good morning guys. How are you?

Bill Guzik

Well Tim, good.

Tim Griffith

I've got a question on the warranty adjustments and maybe if you can just help me understand a little bit of the dynamics of the liability there. What is the average age of warranty redemption on a brake job? Is it something that's been done in last 12 months or how old is that job, typically?

Bill Guzik

Now, warranty redemptions on a brake job typically start to show up en masse in the second year, peaking in the third year, and declining in the fourth year. So, between the second and the fourth year you get a large majority of them.

Tim Griffith

Okay. And was the brake comps for ’07 versus ’06, I think you gave that earlier, but I missed writing it down.

Bill Guzik

Brake comps for full-year '07 in the US was 7point minus 7.4.

Tim Griffith

Okay, so is it reasonable to assume that going forward warranty liability will continue decline on a 2 to 4 year lag as these results have kind of come down?

Bill Guzik

Yes the warranty liability will come down as part of this new warranty program. So the pre 2008 warranty liability should run off substantially over the next three years and then bleed into our P&L over the rest of my life frankly we’re choosing redemptions from 1950s vehicles. So, the tail on it is very, very long.

Tim Griffith

Okay, that’s all I had, thank you

Bill Guzik

Okay

Operator

Thank you. And, it appears that we have no further questions in the queue at this time.

Bill Guzik

Okay. Well, thanks everyone again for joining us this morning. This weekend our management team is going to be heading to Atlanta to participate in our annual Midas dealers convention and participation with the international Midas Dealers Association. They will be sharing the details of the new secured staff branding platform, our marketing strategies as well as what we are going to do to improve and sharp execution and build the Midas business in this challenging market place. And most importantly, I think we will also be honoring the managers of the top 50 Midas shops across North America in customer experience. So, these are always rewarding meetings and energizing.

But, once again, I want to thank you for your continuing interest in Midas and have a great day everyone.

Operator

This does conclude today’s teleconference. You may disconnect at any time. Thank you for your participation and have a wonderful day.

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