During the quarter the bulk of the activity was within the domestic segment where AutoNation sold one store and terminated four stores.
This activity represented an annual revenue run rate of $94 million. In September AutoNation opened Mercedes Benz of Delray and Delray Beach, Florida. This is an add point and it’s the 14th Mercedes Benz dealership. Of note, AutoNation sells over 8% of Mercedes Benz in the United States.
In 2008 new vehicle sales for the industry will decline to the low 13 million unit level. While at this time it is hard to predict new vehicle sales for 2009, the most conservative industry forecasts are in the range of 12 million new vehicle units. AutoNation is targeting a further $500 million of debt reduction including floor plan and new vehicle debt.
Key questions and answers from the third quarter fiscal 2008 earnings call conducted by AutoNation, Inc. (AN) on November 6, 2008.
Rexford Henderson (Raymond James & Associates):
You mentioned that there might be some further SG&A cuts. Can you give us any color on where that’s going to be and the magnitude of those?
Mike J. Jackson: I would say our concentration at the moment is absolutely to complete the $100 million in cost cuts that we announced in the second quarter and get that fully integrated into a run rate. We’re looking at a very challenging environment in ’09 and therefore we are hard at work at what’s next. As compared to the $100 million that we’ve already done that the next tranche will be more volume related than permanent related. This is a very rough estimate; something like 50/50. At a certain point it becomes more and more simply volume related than what you can permanently take out of the business.
Rexford Henderson (Raymond James & Associates):
On the asset impairment, you did the asset test on both an enterprise-wide basis and on a segment-by-segment basis. I wondered if you could give us some color on what that showed. Would the asset impairment have been smaller had you reported on an enterprise-wide basis?
Michael J. Short: As we went through the testing we first tested the single reporting unit basis. That contributed about $1.47 billion in the pre-tax write-down. As we tested the individual segments following that, the only one that required a further write-down was the domestic segment which was an additional $140 million pre-tax. To get to the balance of the overall charge that was an additional $141 million on a pre-tax basis associated with individual franchise impairments. We had the capacity to write off the entire domestic element without coming in range of any of the covenants.
Rexford Henderson (Raymond James & Associates):
Inventory looks a little higher than I expected it to be. It’s down some year-over-year but not as much as sales. Should we be expecting inventory levels just to be higher on kind of a run rate basis or are you going to get those down further so that the day sales match year ago levels?
Michael E. Maroone: We will continue to drive the inventories down to reflect the environment. We’re down about 6,600 units from the beginning of the year. There was a pretty dramatic shift from truck to car so we did ramp up our car inventories to take advantage of that and we’ve been liquidating our truck inventories. I think that’s why you see them not match up perfectly with the sales rate. But we are committed to running even more efficiently with our new vehicle inventory.
Rexford Henderson (Raymond James & Associates):
I’m hearing advertisements for a 24-hour-a-day parts and service offering. I’m wondering how widespread that is and how successful that has been in driving incremental business in parts and service?
Michael E. Maroone: We’re testing seven-day service in one market. We’ll probably begin testing it in a second market in the spring. We’ve had really good consumer response. The 24 hours, the ability to come in and make service appointments 24/7 but we actually have opened up one market where we’re in full service seven days a week. Actually this is our fifth week of it. At this point in time I wouldn’t say it’s highly profitable but it’s not a drain.
Matt Nemer (Thomas Weisel Partners):
Can you tell us the remaining value of goodwill that’s associated with your domestic franchises and then were there any changes to goodwill on import or luxury stores?
Michael J. Short: There were no changes related to premium luxury or import in the segment testing. Obviously the first half didn’t really figure in segments at all since it was done at the single reporting unit test but when we tested the individual segments, premium luxury and import passed with substantial cushions. With respect to the domestic segment, the amount that’s left on the books is $171 million, about 15% of the total that’s on the books.
Matt Nemer (Thomas Weisel Partners):
Regarding the debt covenants, you made a comment that next year even at a 12 million unit level you think you would be in full compliance. Can you give us some sense of your assumptions on the EBITDA side and the debt side of that equation?
Michael J. Short: We don’t forecast the EBITDA piece and 12 million is kind of our stress case for what we think 2009 may be in terms of total units for the industry. So what gives us comfort is our ability to generate significant cash and use that cash to pay down debt and stay in compliance with the ratios.
Matt Nemer (Thomas Weisel Partners):
From a qualitative standpoint, can you give us some sense of the type of expense associated with more flexibility on the covenants? Does it make sense to try to leave yourself a little more wiggle room or is the expense significant there?
Mike J. Jackson: First, we really like the business model that we have. The service and parts business is basically a recurring big percentage of our fixed costs that allows us to remain profitable in this very difficult environment. The second step of the business model that we like, and if you operate it correctly, as the business de-accelerates you get tremendous cash coming back to headquarters. The amount of working capital that it takes to run the business goes down dramatically, which puts us in a position to easily pay down debt in times like this.
I much prefer the strategy that we are on and just manage within the covenants, and if in a better environment we ever want to do something different, you could get the covenants changed at a much different pricing cost. But to go in and touch the covenants now to me is not the correct time to do it especially when we’ve prepared for a downturn of this dimension all along.
Matt Nemer (Thomas Weisel Partners)L
On parts and service, can you give the breakout between customer pay and warranty? Secondly, the cap ex looked a little bit higher than we were thinking in the quarter and I think you may be above your full-year guidance on cap ex. I was just wondering what’s going on there?
