Apr 23, 2009
Executives
Derek A. Fiebig - Vice President, Investor Relations Mike J.
Jackson - Chairman of the Board, Chief Executive Officer Michael J. Short - Chief Financial Officer, Executive Vice President Michael E.
Maroone - President, Chief Operating Officer, Director
Analysts
Matthew Fassler - Goldman Sachs Rick Nelson - Stephens Inc. Michael Ward - Soleil - Ward Transportation Richard Kwas - Wachovia Capital Markets, LLC Matt Nemer - Thomas Weisel Partners John Murphy - BAS-ML Rexford Henderson - Raymond James Rod Lache - Deutsche Bank Securities
Operator
Welcome to AutoNation's first quarter earnings conference call. (Operator Instructions) Now I will turn the call over to AutoNation.
Derek A. Fiebig
Thanks, [Pat], and good morning, everyone. This is Derek Fiebig, the head of Investor Relations here at AutoNation and I'd like to welcome you to our first quarter 2009 conference call.
Joining us on the call today are Mike Jackson, our Chairman and CEO, Mike Maroone, our President and Chief Operating Officer, and Mike Short, our CFO. At the end of the formal remarks, we'll open up the call to questions and I'll be available by phone to address any follow ups that you may have.
Before we begin let me remind you that today's call may have some forward-looking information as well as 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 may cause the actual results or performance to differ materially from expectations. Additional discussions of factors that could cause actual results to differ materially are contained in our SEC filings.
Certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. Reconciliations are provided in our press release, which is available on our company website at www.AutoNation.com.
And now I'll turn the call over to Mike Jackson.
Mike Jackson
Good morning. Thank you for joining us.
Today we reported first quarter EPS from continuing operations $0.27 compared to a year ago EPS of $0.31. In the quarter the company had a net benefit from certain items.
After adjusting for these items, EPS from continuing operations for the first quarter of 2009 was $0.23. Sequentially, AutoNation's adjusted EPS improved 90% compared to fourth quarter 2008 and a declining industry environment in which the average new vehicle SAR fell from 10.3 to 9.5 million units.
This increase was driven by improved used vehicle margins, lower interest rates, lower vehicle inventory, reduced non-vehicle debt, and our ongoing cost discipline. In the first quarter we reduced our total SG&A spending by $110 million versus first quarter 2008 or over $440 million annualized.
Approximately half of this savings is the result of our previously announced $200 million structural cost saving program, of which we estimate approximately three-quarters to be a permanent reduction. AutoNation continues to focus on managing new vehicle inventories in line with retail demand.
In the first quarter AutoNation new vehicle inventory was down 20,000 units year-over-year and down 11,000 units from the fourth quarter of 2008. The first quarter was negatively impacted by the continued credit panic triggered on September 15, 2008 by the bankruptcy of Lehman Brothers.
Automotive retail sales continued to be at historic lows as the SAR rate was at 9.5 million new vehicle units. Steps have been taken to improve the situation.
CNW Market Research estimates that as many as 1.5 to 2 million annual new vehicles are being lost to the extraordinary tight lending practices that have been in place since last fall. Recently announced Treasury initiatives, including the TALF program, offer the potential to help thaw consumer auto retail credit.
Auto-related ABS, which had averaged $15 to $20 billion per quarter collapsed to a total of around $5 billion in the entire second half of 2008. In the last 30 days since the TALF launch on March 23rd we have seen five auto-related transactions for approximately $7 billion.
The restoration of normal functioning of credit markets is the central catalyst to a recovery in auto retail volume levels. I would like to turn it over to Mike Short to provide more details on the financial results.
Michael J. Short
Thank you, Mike, and good morning, ladies and gentlemen. Turning to our financial results for the quarter, as Mike mentioned, we reported income from continuing operations of $49 million or $0.27 per share.
Items I'd like to bring to your attention include an after-tax gain of $7.4 million related to the repurchase of $72 million in notional amount of our senior notes. We also had a net gain on asset sales and dispositions of about $5.9 million at3 that was offset by property impairments of $4.8 million after-tax.
In aggregate, these three items increased our reported earnings by $13.8 million pre-tax, $8.5 million after-tax. After these items, adjusted net income for the quarter was $40 million or $0.23 per share compared to $0.31 for Q1 2008.
The adjustments to net income are included in a reconciliation in our press release. On our fourth quarter call we discussed how we doubled our cost savings target and achieved a run rate of $200 million in annualized savings.
Since there's been a good deal of interest in understanding the cost savings, I wanted to provide some additional detail. During the first quarter of 2009 we reduced SG&A by $110 million to $365 million, a 23% reduction from the first quarter of 2008.
On an annualized basis this represents over $440 million of savings. Over half of this amount is due to variable costs coming down in line with volumes.
The other $200 million is related to cost-saving actions that we've taken, with about three-quarters of these actions structural in nature. For the first quarter, SG&A as a percentage of gross profit increased to 77.5% from 73.8% a year ago, reflecting the deleveraging of our cost structure partially offset by our cost savings.
Sequentially, SG&A was down $6 million from the fourth quarter and as a percentage of gross profit it was about 180 basis points lower than the fourth quarter's 79.3%. Net new vehicle floorplan was a benefit of $1 million for the first quarter, an improvement of $4.5 million from last year.
This improvement was a result of lower floorplan interest expense as we decreased our inventory levels and benefited from lower LIBOR rates. These were partially offset by a decrease in floorplan assistance.
Non-vehicle interest expense was $12 million for the quarter, decreasing $15 million from last year as a result of our debt reduction and lower LIBOR rates. The provision for income tax for the quarter was $29 million or 37.3%, which was slightly favorable from our estimates.
For the full year we expect our ongoing rate to be about 40%, excluding the impact of any potential future tax adjustments. We recorded an after-tax loss of $14 million from discontinued operations in the first quarter, $13 million due to non-cash losses on transactions and about $1 million due to operating losses of the discontinued operations.
We decreased our floorplan debt by $375 million in the quarter to $1.5 billion. Non-vehicle debt was $1.14 billion at the end of the quarter or $558 million lower than the first quarter of 2008 and $118 million lower than year end.
You may recall that we announced two quarters ago that we intended to reduce total debt by an additional $500 million. As of March 31st we've exceeded that goal and reduced total debt by more than $635 million.
This reduction was driven by our strong cash flow generation from working capital, disciplined CapEx, and asset management. During the first quarter we repurchased $72 million of our senior notes at an average discount of 18% to face value and we had a net gain of $12 million.
As part of our plan to move later this year to our new corporate headquarters facility we amended the lease of our existing headquarters facility. This generated a gain for us during the quarter which is included in the reconciliation of our adjusted EPS.
Additionally, the action lowered our debt by $38 million. Turning to our financial covenants, our debt reduction and cost savings initiatives enabled us to reduce our leverage ratio to 2.35 times at the end of the first quarter compared to 2.45 times at year end and 2.78 times at the end of 2007.
This indebtedness number is not on a net debt basis, so we do not get benefit of our $62 million year end cash balance. Our capitalization ratio, which measures floorplan debt plus non-vehicle debt divided by book capitalization, was 54.9% at March 31st compared to 59.7% at December 31st and a covenant limit of 65%.
The calculations of these covenants are included in the tables of the press release. At the end of the quarter we had $62 million in cash and total liquidity of just under $450 million.
We reinvested $20 million in the business through capital expenditures during the first quarter. Excluding acquisition related spending, land purchased for future sites, and lease buyouts, CapEx was $10 million for the quarter.
We expect our full year 2009 unadjusted amount to be about $90 million. Now let me turn you over to our President and Chief Operating Officer, Mike Maroone.
Michael E. Maroone
Thanks, Mike, and good morning. AutoNation delivered an impressive 3.6% operating margin in the first quarter in the midst of the worst auto retail environment in nearly three decades.
This compares to 3.8% in the quarter a year ago and 2.3% in the fourth quarter of 2008. This performance, coupled with solid profitability, is a testament to the dedication of our associates to operate successfully through this downturn and emerge as an even stronger company as the economy begins to recover and auto sales rebound.
In these unprecedented times we remain committed to being the most cost efficient auto retailer in our peer group. In the quarter we continued to deliver on the cost side of the equation by reducing our marketing spend and further optimizing store staffing to drive greater efficiency and productivity.
I'll also call out our progress on new vehicle inventory, where our year-over-year reduction is one-third or nearly 20,000 units. Sequentially compared to December 31st, we're down over 11,000 units or 21%, which equates to a 66-day supply, which is a reduction of 17 days.
We accomplished this through very structured disciplined inventory management across all manufacturers. Turning to our segment performance, with the first quarter's [inaudible] lower than it's been in almost 30 years, it's not surprising that all segments remained under pressure.
At $79 million, our total segment income was down $43 million or 35% compared to the quarter a year ago. Excluding corporate and other, the contributions declined substantially from the Import segment at 44% and the Domestic segment at 39%; the Premium Luxury segment was less of a factor at 17% due to a solid performance in used vehicles and parts and service.
Given the significant headwinds, on a same-store basis AutoNation retailed 39,000 new vehicles in the quarter. Though down 43% compared to the period a year ago, our performance was slightly favorable to the industry.
That was off 46% in the quarter according to CNW Research. Revenue per new vehicle sold increased slightly due to a shift in mix toward Premium Luxury.
Same-store gross margin per new vehicle retailed of $1,919 declined $129 or 6% in the quarter. This was driven in large part by margin compression in the Import segment caused by an oversupply in the marketplace and lower gas prices.
Stringent credit conditions were also a factor in all segments. In the quarter we retailed 35,000 used vehicles on a same-store basis, in line with the fourth quarter of 2008, but off 27% compared to the period a year ago.
A portion of the decline can be attributed to lower new vehicle traffic, far less trade-ins, and credit availability. Our used-to-new ratio of 0.9 is a record high metric for the company.
Compared to a year ago, revenue per new vehicle retailed dropped 4% due to an overall decline in selling prices. We're pleased to report that gross margin per used vehicle retailed increased $118 or 7% to $1,795 per vehicle year-over-year.
There was a lift in both used car and truck PVR. This margin growth came from a shift in mix toward used Premium Luxury vehicles, improving used vehicle pricing at retail, and our continued focus on certified pre-owned, which during the period certified pre-owned made up about 30% of our used vehicle sales compared to approximately 20% a year ago.
In the quarter we moved 3,600 vehicle from originating stores to more optimal locations relative to turn and PVR. At March 31st our used vehicle inventory stood at 36 days, down 4 days compared to a year ago.
We continued to tightly control our used vehicle inventory to minimize our exposure to marketplace volatility. And finally during the quarter we rolled out intensive training on our used vehicle best practice processes for all of our general managers and used vehicle managers, and early results have been positive.
Turning to service and parts, the impact of low consumer confidence, significantly lower vehicle sales across the board, and declining domestic units in operation contributed to a decline in same-store revenue of 10% to $550 million compared to the first quarter of 2008, which was a very strong quarter for our fixed operations. This quarter we are pleased with the resiliency of our customer pay business, which in the toughest economic time in years performed at 94% of the prior year and was flat sequentially.
We remain focused on growing customer pay through our service sales process and to increasing customer retention. To that end, in the quarter we were pleased to sell 25,000 extended service contracts and 23,000 pre-paid maintenance programs in the service drive.
Based on this success in the service drive, we're moving forward to expand our service drive offerings aimed at increasing both customer pay and retention. In the quarter, revenue from internal and sublet, which is driven by retail sales volume, was off 30% and warranty revenue declined only 5%.
For finance and insurance our same-store F&I gross profit per vehicle retailed of $1,056 declined $138 or 12% compared to the record quarter a year ago. Credit availability, increasing lender conditions on approvals, reduced advances, and higher chargebacks continued to impact our F&I performance in the quarter.
Given the dramatic change in the lending landscape year-over-year, we're satisfied with our results. Further, with TALF under way we're beginning to see the much-needed return of securitization, which we view as a very positive sign.
Relative to our store portfolio, in the quarter we sold or terminated 3 stores representing 7 franchises for a total annual revenue run rate of $98 million. We also acquired 1 domestic franchise that was tucked into an existing store.
At March 31s our portfolio consisted of 228 stores and 296 franchises in 15 states. In closing, we're extremely determined to operate successfully in this environment.
We're relentless in our efforts to be cost efficient and to operate our business profitability by focusing on what is in our control. We are very grateful for our team's efforts.
They performed at an exceptional level in an unprecedented environment. And with that I'll turn the call back to Mike Jackson.
Mike Jackson
Thanks, Mike. In March we saw signs of improvement in the market compared to January and February.
We likely saw the deepest part of the trough in sales in February. We anticipate that we will see some strengthening in sales as the year progresses, with a $10 million SAR for the second quarter and a gradual improvement from that point through the balance of the year.
That concludes our remarks. Operator, please open the call to questions.
Operator
(Operator Instructions) Your first question comes from Matthew Fassler - Goldman Sachs.
Matthew Fassler - Goldman Sachs
A couple of questions, if I could. First of all, in the fourth quarter you disclosed some lending metrics about loans that had been underwritten by some of the domestic captives for your customers and they had really slowed to barely a trickle.
I'm curious if in the quarter you saw some recovery in that, sort of what was actually happening in the trenches from a credit perspective?
Michael E. Maroone
I'll focus my comment on two lenders, GMAC and Chrysler Financial, which obviously were the ones under the most stress. In Q1 '09 13% of our vehicles in our GM stores were financed by GMAC.
I'd contrast that to 2% in Q4 of '08. Also contrast it to a year ago it was 20%.
So we certainly are seeing some recovery there. In Chrysler Financial, 16% of our deals were financed through Chrysler and that compares to 7% in Q4 '08 and 20% a year ago, so we're seeing the recovery not quite back to year ago levels.
Matthew Fassler - Goldman Sachs
The second question I'd like to ask related to the used business. Obviously with essentially record increases in the Manheim Auction Index in January and February, we're in a peculiar used car environment.
I guess that showed up both in your profitability per vehicle, which was excellent, and your units, I guess, somewhat constrained. Now that those price increases in the Manheim Index have started to moderate, what's your best sense of how the used business plays out over the next couple of quarters?
Michael E. Maroone
It's clear that the supply from trade-ins is limited and that's the supply we prefer. Our new vehicle traffic, new vehicle sales are not at the levels they were a year ago.
We have really remained disciplined with our supply. We want to stay lean with that inventory.
As I mentioned, we're moving a lot of vehicles from store to store to try and optimize the value, but we believe there could be some more volatility in the market and we're going to play it conservatively and we'd like to be able to maintain this level of gross margin.
Matthew Fassler - Goldman Sachs
Do you need to see the sequential pops in used car pricing at auction in order to hold gross profit rates where they are or do you think you can continue to do so even if the used car environment stabilizes?
Michael E. Maroone
I think that we can maintain our margins and we're working hard to do that. We've spent a lot of time retraining our people on the latest technologies and I think we've made some real operational improvement.
Matthew Fassler - Goldman Sachs
And then final question, for Mike Jackson, I hate to focus on some of this high-level stuff, but it's become so much more timely in the last couple months and that is it seems like some very, very serious changes are coming for Chrysler. Those seem highly realistic and perhaps a bit less so for GM.
But your latest thinking on contingencies for AutoNation if you were to see brands disappear in the kind of restructuring that's being contemplated in Detroit.
Mike Jackson
Let's talk about General Motors first.
Matthew Fassler - Goldman Sachs
Sure.
Mike Jackson
I think they obviously will get restructured, either outside of bankruptcy or in a government-sponsored bankruptcy, but there will be a General Motors. And certainly they're going to accelerate the rationalization of the retail network.
As you know, we are 85% to 90% Chevrolet. We don't have a concentration in the other brand.
There will be some rationalization in the Chevy brand. We have always anticipated this day and have always looked at which stores would survive a rationalization.
We think we're well positioned for it. And we think the rationalization is necessary and will be a tremendous net plus on the other side of it because clearly the automotive retail enterprises with the strongest capital position and the best profitability, along with market penetration and customer satisfaction, are going to be the survivors and reap the benefits.
So we feel we're well positioned. The Chrysler scenario is a bit more complicated because you have the whole wildcard scenario with Fiat, which adds another player at the table, and whether they will successfully get that to the finish line or not is open to question.
I think they are doing it, the auto committee, in the right order in that we need to know what the answer is for Chrysler before you can really deal with GM because there's linkage and collateral damage depending on what happens with Chrysler. So I think rather than what we faced a month ago - a precipitous uncontrolled bankruptcy that would have been catastrophic - I think if Chrysler is unwound today it'll be in a very managed approach.
What that would mean for our rooftops and our dealerships is hard to say. Certainly the Jeep brand survives in any scenario, but how that would all work is very difficult to say.
So we always though Chrysler was the most exposed in a big shakeout, so it's only 4% of our new car revenue, it's only 4% of our EBITDA, so even if we take all that and totally wipe it out it would not materially affect us nor our ability to meet our covenants going forward. But that's the most extreme case.
Most likely it's somewhere in between.
Operator
Your next question comes from Rick Nelson - Stephens Inc..
Rick Nelson - Stephens Inc.
A follow up on the service and parts. We saw a little bigger decline in comps this quarter.
I know you pointed to tough compares and warranty was down 5, internal was down 30. Did you provide a customer pay and wholesale parts number for the service operation?
Michael E. Maroone
You're correct in that the internal was down 30, warranty was down 5. Customer pay was down 6 on a repair order count that was down 5.
So we actually felt that customer pay held up well. Q1 of '08 was our best performance in fixed ever, so we're comping against a tough number, but I did think it held up pretty well.
On the parts wholesale side, the parts wholesale business was down about 8% in the quarter.
Rick Nelson - Stephens Inc.
Mike, can you talk about geographic areas of strength and weakness and what's happening in Florida and California?
Michael E. Maroone
Florida was down - I'm talking about on a new vehicle basis, Rick - Florida was down about 48%, California was down 37%. I do think that was impacted by a sales tax increase that was put into effect on April 1st, so we did see a very strong close to the quarter in California.
I think they both continue to be under stress. We're beginning to see some stabilization, especially in Northern California.
Rick Nelson - Stephens Inc.
And I was surprised that the [inaudible] and the Import segment dropped more than the Domestic stores. Can you comment on that and is that a geographic issue or what's happening there?
Mike Jackson
As I called out but can never be forgotten, what happened on September 15th, it is truly unprecedented in the automobile business that in a single day every manufacturer, every brand in every geographic location had an incremental decline of 25% in volume. And here we sit six months later and we still don't have normalized credit, which was the underlying factor in this catastrophic collapse.
So for the Japanese, I mean, this is uncharted waters to all of a sudden end up with an over supply situation triggered by this unprecedented event. They always had managed their inventory very well and quickly adjusted to circumstances in market, but this was such a huge shift in such a short period of time that you ended up with high inventory relative to where they traditionally are for the Japanese.
That was the background. Mr.
Maroone, some details.
Michael E. Maroone
Yes, Mike really called it out, Rick. The inventories got almost double what they normally were, especially early in the quarter, and the margins really collapsed.
The margins were very, very soft. The good news is that in high-level discussions at the three major high-volume imports, they've all brought their production down, they've got days supply targets that are more traditional or normal, and I think we'll see some of those margins come back.
But it was really about what Mike said, it's a credit issue and the fact that they have never dealt with over supply and the retailers certainly let the margins go to reduce that supply. But, again, the adjustments, I believe, have been made and we'll really see in the summertime more normalized inventory levels.
Mike Jackson
So just to complete it, we think the Europeans are well under way to balancing their inventories to the new environment and the Japanese also have made the steps. And the best news of the week was this possibility that General Motors will take an extended shutdown this summer to deal with the inventory situation because at retail General Motors has the highest inventory by far.
And this shutdown says two things to me: One, they're really trying to get it right. If you go through all this restructuring and on the other side you still have massive retail inventory, you're going to run right off the cliff again.
So they're really trying to get it right. And second, it means that whatever restructuring plan is being put in place - whether outside bankruptcy or in a government-sponsored bankruptcy - the plan includes a shutdown to deal with the inventory.
And I consider both of those very positive aspects. And what I see going forward is the industry for the first time will really get their inventories in line at an extraordinary low selling rate and we will see a recovery in front end margins as volumes gradually improve and it'll be a big plus for the manufacturers to add appropriate inventory as the volumes gradually recover.
So a very rational approach. Still quite some work to do over the next three to four months, but we really like the way it's developing.
Operator
Your next question comes from Michael Ward - Soleil - Ward Transportation.
Michael Ward - Soleil - Ward Transportation
Just a follow up on that inventory question. How low can you go before you start to penalize sales?
Mike Jackson
I would say we are at that. We have to have a certain stocking level considering our footprint to provide the selection and to cover the range.
And I would say we're there.
Michael Ward - Soleil - Ward Transportation
You've been a big hawk on the inventory situation for years. Do you think they've really found religion, that they're not going to get into a situation where they just overbuild and force units out onto the marketplace?
Mike Jackson
We've met with the auto committee in Washington three times and we have an open channel of communication on a weekly basis as a resource on various issues. And I think you know I'm not shy.
So I think it's understood that this is an historic moment to get it right, and you either get it right now or you're going to run into open knives once again. And when I say get it right what has to be buried once and for all is the old business model, which is development costs are fixed, install capacity is fixed and inflexible, labor is fixed, and legacy costs are fixed.
So you have extremely high fixed costs that, whenever you have a fork in the road, you over produce, push it into the marketplace, and use incentives to liquidate it. That model erodes resale value and brand strength, so over time you lose share, then you have to restructure to become smaller with your new share, and then you repeat the cycle again and again and again and you're on the road to oblivion.
What we see in talking to the auto task force is they absolutely understand that you must move to a demand pull system, which means you must take the fixed costs down dramatically, take out dramatic levels of capacity, really shrink the business to where you have natural demand for your products in the marketplace, and then, as the market recovers, add costs in a flexible way that recognizes you're in a cyclical business. That's a very rational approach.
It's very different than what's happened in the past. Inventory is a key component to that.
You can't be carrying huge retail inventories and run that model. So this step is another confirmation that they're really on to a transformational process here with the auto committee that will lead to a very rational, sustainable, viable American automobile industry.
So it's a very exciting moment and I see no chance that they're going to miss this opportunity to really get it right. They understand that's the stakes that are on the table and, if they're going to put government money behind this, they really want a transformation.
And I'm optimistic it's going to happen.
Michael Ward - Soleil - Ward Transportation
Any sense how much capital that frees up for AutoNation? Are we talking systematically 50,000, 100,000 units of less inventory as you go through the cycle?
Mike Jackson
No, I would say we really haven't calculated that.
Michael Ward - Soleil - Ward Transportation
But it is a sizeable chunk.
Mike Jackson
I'm speaking broad strokes here. Here's how I look at it.
Tremendous capacity is coming out at the manufacturer level, the supplier level, and the retail level. Most important is who's going out in the capacity - the irrational production is going out, the irrational dealers are going out, meaning that, when you get to the other side, even if volumes are lower because credit will not be what it once was and because the consumer is scarred and more conservative, you don't need it to be highly profitable.
And we'll have higher throughput, better margins, better pricing, and a business model that builds the future rather than erodes the future. That's what I see and I think that's the historic chance that is here.
And it'll be painful and disruptive over the 90 days, six months that we go through all this, but my sense is it'll be well worth it.
Operator
Your next question comes from Richard Kwas - Wachovia Capital Markets, LLC.
Richard Kwas - Wachovia Capital Markets, LLC
Mike Short, on SG&A, you gave a good explanation on how you got to the number for the first quarter. Is this kind of the level, if sales increase over the next few quarters, let's just say, is this kind of the bottom tier in terms of absolute dollar spend that you can do or should we think about straight-lining this over the next few quarters?
Michael J. Short
A couple of thoughts on that. We're always looking for additional cost opportunities.
As Mike Maroone pointed out, we're relentless in that effort. And so we're going to continue to try and build on that.
I think other initiatives that we have in place, like our shared service center and the opportunities that presents us for purchasing initiatives, leave us hopeful that we can continue to improve efficiency. With that said, in terms of the major costs that we've taken out as part of this effort to get the business model enhanced, I think that most of those are in place.
There may be some improvements off the $200 million but, in terms of a run rate, most of those are in place right now.
Richard Kwas - Wachovia Capital Markets, LLC
In terms of domestic inventory, could you give us the dollars in terms of Ford, Chrysler, General Motors as of March 31st?
Michael J. Short
Yes. The overall inventory levels for GM were about $235 million, Ford about $212 million, and Chrysler about $85 million.
Richard Kwas - Wachovia Capital Markets, LLC
And then a question for Mike Jackson or Mike Maroone, thoughts about the scrappage program and how much that may benefit the market? And then, to the degree it benefits the market, what do you think the mix is going to be given some of the recent news coming out of Europe that a lot of the vehicles being purchased are less expensive compact vehicles?
What are your thoughts there on how you manage the business and potential upside.
Mike Jackson
I would have to say I'm really not clear on how it's going to work and I was not a big proponent of it. However, in looking at Europe, it has been something of a sensation over there, so I do think it's going to happen here in the U.S., although exactly which form it finally takes is unknown.
But you're also absolutely right in that it is very much focused on the low end price point. And if you think about it, it's a very long journey from a clunker to a brand new vehicle.
It's not the normal trading pattern. Normally a clunker would be traded on a pre-owned and then that pre-owned gets traded on something newer.
You sort of work your way through the system. So we'll have to see.
But it absolutely has been a sensation in Europe and maybe we'll have the same phenomenon here.
Richard Kwas - Wachovia Capital Markets, LLC
Last question for Mike Maroone, how are trends in Texas right now incrementally relative to the past three or six months?
Michael E. Maroone
Texas is still performing at a pretty high level. It's certainly comping against - they had a sensational first quarter a year ago.
South Texas, I would say the business is a little stronger than North Texas, but we have a tremendous team there and I'm confident that Texas is a great market for us, both today and tomorrow.
Operator
Your next question comes from Matt Nemer - Thomas Weisel Partners.
Matt Nemer - Thomas Weisel Partners
My first question is I just wanted to come back to the structural expense cuts that Mike Short talked about. If the structural cuts are, say, three-eighths of the SG&A decline, can you dig in a little bit more into sort of what those are?
Is it a change in the store staffing model? Is it changes in advertising, etc.?
Michael J. Short
Let me see if I can give you some tangible examples that may help here. We talked about the total SG&A on an annualized basis being down about $440 million or so.
A little over half of that is strictly variable. We're not counting that in the $200 million that we've called out.
The nature of those types of expenses is you have an individual who's on a commission rate and let's say he's paid 25% of what he sells and he sells less so mathematically, without doing a thing, that number just comes down. So of the $200 million in cost savings that we're calling out as our initiatives, those fall into the buckets of structural and non-structural.
The structural items are we've consolidated elements of our back office structure. The back office finance function, for example, a single store is now shared between two or three stores.
Those are gone; they're not coming back. An example of something that's an initiative but not something I'd throw necessarily into the structural bucket might be service loaners.
So you have a service loaner fleet that exists at a store just because volume comes down, those vehicles don't necessarily go away. But the stores have been very active in identifying those areas and pulling those vehicles out of the fleet, and therefore the costs come down.
So as the volume improves, obviously you want to have those service loaners available for your customers, so that's the type of costs that'll come back.
Matt Nemer - Thomas Weisel Partners
And then turning to the topic of GM and Chrysler, thanks for the detail on the inventory. I guess this is a question for Mike Jackson.
Assuming that things are disruptive over the next 90 days, what do you think the risk is to the face value or the floorplan value of your GM and Chrysler inventory?
Mike Jackson
I see no risk to the GM inventory because they are not going out of business. They will be a going concern.
If indeed it comes to a government-sponsored bankruptcy, I think there'll be a very clear statement from the Treasury, if not the president himself, that GM is going to come out on the other side, that there will be a GM as a going concern. You know, we handle that situation every day already today, where customers walk in and say you're bankrupt, we're only going to pay you $0.50 on the $1 and that's the starting point.
We work the transaction from there. So for GM, I'm not concerned.
Chrysler, I think it's most likely a deal gets done, but there is that chance that, due to the complexity of the deal and the timeline, it can't get done and you're into an unwind situation. And let's say it's a situation where we have to liquidate that inventory.
Well, Jeep I think is going to be a going concern in any circumstance with somebody, if not folded in to General Motors, which leaves you an issue with Dodge and Chrysler. If we have to distress liquidate that - I guess that's your question, we end up there - I think you're looking at $0.30 to $0.40 on the $1 that we owe on the vehicle.
Matt Nemer - Thomas Weisel Partners
So on the good brand, i.e., Jeep, Chevrolet, Cadillac, you don't think that if there's a massive contraction in the number of, let's say, irrational or rural dealers it won't put overall pressure on sort of the value of new cars in the marketplace?
Mike Jackson
What I would expect - and again, I don't know, although my opinion may be asked at some point - is I would expect some sort of orderly wind down. I don't see a precipitous event where from one day to the next you close 1,500 or 1,000 dealers or whatever.
You probably notify those dealers who are not going to be part of the plan going forward and give them a given period of time to orderly unwind their business and to sell off their inventory, either to customers or to surviving dealers. The only thing that could be precipitous that would trigger the kind of liquidation prices we're talking about is if the manufacturer is going out of business and you have to sell that under distressed circumstances.
Now, you have to bear in mind, I'm not thinking about things like Saturn and Hummer and Saab. We don't have that stuff.
We're Chevrolet, we're Ford brand. So the only thing I see is with Chrysler Corporation there would be a liquidation situation there, in which case we have to make $0.30 to $0.40 on the $1.
Matt Nemer - Thomas Weisel Partners
And then on that same topic, are you able to break out your receivables exposure to GM and Chrysler?
Mike Jackson
Again, I'd like to make an overall statement that even if Chrysler ends up in the most extreme situation and we have to close all our Chrysler stores and unwind all that inventory, etc., etc., we can still manage all that within our covenants.
Michael J. Short
I think it's just fair to say I called out what the inventory numbers are relative to each of the OEMs. That's by far the biggest number and the receivables are small fractions of those.
Matt Nemer - Thomas Weisel Partners
Okay. That was about $50 million for all domestic brands at the end of the fourth quarter, is that right?
Michael J. Short
In terms of the receivables it's actually a little bit less than that.
Matt Nemer - Thomas Weisel Partners
And then lastly, can you just provide a little more color on what's going on in the disc ops line? What's left in your disc ops bucket?
How many stores and what brands and are you comfortable that there's a buyer for what's left in there?
Michael J. Short
Yes, we are comfortable that there are buyers for those. Granted, you have the caveat of what happens out in the marketplace that Mike just talked about relative to Chrysler, but what we called out in the quarter is we put 18 stores into disc ops in the quarter and that's basically what we have in that balance right now.
Michael E. Maroone
We are finding buyers for the stores. I won't say that there's large amounts of goodwill, but there's clearly people out there buying.
There's some legacy dealers that have accumulated cash that are making what they believe are some opportunistic investments. We've continued to work for the last three years on pruning our portfolio and really looking at high throughput stores in the right markets, right locations, and operating those optimally.
Matt Nemer - Thomas Weisel Partners
So just to be clear, there were 18 additional franchises that were added to the disc ops bucket this quarter and I'm assuming that most of those are domestic brands?
Michael J. Short
Yes, about 6 of those were CJVs, as an example.
Operator
Your next question comes from John Murphy - BAS-ML.
John Murphy - BAS-ML
I just wanted to follow up on Matt's question on these disc ops. It looks like the number was larger than it really has been for a long time.
Is that just because those stores are just larger underperformers than you typically have in there or is there just a lot more in the portfolio that you're looking at shedding because it's a distressed situation?
Michael J. Short
I think, as you know, we went through a program to identify cash opportunities and I think the additions that you've seen now is a result of us pursuing those. As we evaluate whether or not a store is a candidate for disc ops, we look at what its current performance level is and whether or not we think that that performance can be improved, either through our processes or will recover as the market recovers.
And so we try and be very discrete about which stores we're going to identify and whether or not we think they are a better value to our shareholders as ongoing operations or whether or not we can extract more value through a transaction. That's the thought process we go through as we decide whether or not to put stores into disc ops but, as we've been managing our balance sheet, obviously concerns for cash have been a higher priority than they have been in the past.
John Murphy - BAS-ML
And are the disc ops used in these covenant calculations or are they actually pulled out of the calculations?
Michael J. Short
Our calculations exclude the effective disc ops so, for example, it starts with income from continuing operations then goes from there.
John Murphy - BAS-ML
And you also mentioned in the press release that you had a gain on sale of a dealership in the quarter. Is that something that could possibly happen with this large chunk of disc ops or is this really just these guys in wind down mode?
Michael J. Short
Those are other sales. Those are other assets that we sold.
To the extent that we decide that we're going to exit a store, we put it into disc operations. Disc operations and those transaction impacts are [contained] in that.
John Murphy - BAS-ML
So asset sales and dispositions doesn't include a gain on any dealerships, it's other assets?
Michael J. Short
Not if it's in - yes, that's right, correct. If it's in disc ops, it wouldn't be included in that.
John Murphy - BAS-ML
When we look at the floorplan financing, it was a small positive, the net floorplan financing [inaudible] was a small positive in the quarter. That's a very positive shift.
Is that something you guys are expecting going forward or are we going to be back in an environment where there's actually going to be some expense that goes along with carrying inventory because carrying inventory for free is clearly a good thing for the business model.
Michael J. Short
Yes, it was a great result in the quarter. I think two factors are contributing to that right now - one is lower LIBOR rates and the second is the great work that our operations team has done in managing the inventory levels down, so we're benefiting from both of those.
I think the inventory discipline is there to stay and then we'll just see what happens with LIBOR rates. But you're right, it was a benefit in the quarter and that's definitely a good thing for us.
John Murphy - BAS-ML
And then on the cost saves, it seems like you guys are going to be running at about $50 million a quarter if you can keep these $200 million or the large majority of this $200 million in structural cost saves. If we look back at the first quarter of 2008, the SAR was running roughly 15 million units.
You guys did about $147 million in operating income. All else equal, would we just say that you're going to maintain a big chunk of that savings, that you could take that $147 million in operating income up to roughly $197 million in operating income in the same 15 million unit SAR environment if that's what happened going forward?
Mike Jackson
Give us the 15 million, we'll get the $50 million, no doubt about it.
John Murphy - BAS-ML
Which means that that EPS would be closer to $0.45 to $0.50 in a similar quarter if we look back.
Michael J. Short
Yes. I think one of the ways you're going at it is to think about of the $200 million how much is in our P&L today.
Through the first quarter I would say about $150 million is actually showing up in the financials. Clearly the full $200 million is recognized in our annualized rate so, you're right, we're adding, as we're going through this, annualized at about a $50 million a quarter rate incremental.
John Murphy - BAS-ML
So if I'm backing into this and looking at typical seasonality - I'm not asking for guidance in the near term, I'm just trying to ask structural earnings in the long run - at a 15 million unit SAR, that would indicate earnings power of $1.95 to $2.15. Does that sound about right in a 15 million unit SAR environment?
Michael J. Short
There are obviously a number of other factors, as you're aware of, interest rates being one of them that could move materially.
Mike Jackson
The question was 15 million, all else being equal, would we still have the $50 million of structural cost savings. The answer's yes.
Michael J. Short
Absolutely.
John Murphy - BAS-ML
And then just lastly real quick, your retail sales were down less than the market. It sounds like you're gaining a little bit of market share in your local markets.
How is that being achieved and is that something we should think should continue going forward? It's also, once again, a very good result.
Mike Jackson
What we see out there at the moment is, again, a real division in that you have dealers who have been disciplined on the inventory side during this six-months period and you have dealers who have really doubled down and tripled down and just have huge inventories of over a year, and then you get the average that gets published. So there's a real bifurcation.
There is margin pressure from those who are completely overstocked at the moment and they're trying to deal with those inventories and bring them into line. That's going to put pressure on margins in the near term, but at least we're in control of the business.
So we still have to get through that 90 - 120 days of getting inventory settled out and then I think there's a good chance on the front end margin side after that.
John Murphy - BAS-ML
Just to follow up with that, do you think that there's GM and Chrysler dealers that are actually not quite firesaling some inventory because they're heavy in inventory and they're concerned about not being able to deal with their exposures to these potentially bankrupt companies?
Mike Jackson
Yes.
John Murphy - BAS-ML
More so than usual?
Mike Jackson
I think they're in the millstone in the following sense: They've taken the inventory - by the way, they got incremental incentives to take that inventory, wholesale incentives - but now the finance companies are coming on the other side as that inventory ages and saying we want cash curtailment, so now they're getting margin calls or cash calls on their inventory and they're realizing that if they don't liquidate that stuff the cash calls or the margin calls are going to push them over the edge. So they have to deal with that situation and they have to deal with it urgently in the next 90 days.
You'll see some disruption from that.
Operator
Your next question comes from Rexford Henderson - Raymond James.
Rexford Henderson - Raymond James
I had a couple of questions, first a macro question and then some more detailed questions. I wanted to ask Mike Jackson about his confidence that sales will improve in the second half of the year.
Even if we get some improvement in credit availability, what gives you confidence that American consumers are going to take up that credit and buy more cars?
Mike Jackson
Well, the confidence that allows me to make that statement is we already have them in our showrooms. If they weren't there then I'd be a little bit worried.
We track every customer walking into a showroom, every telephone call, every Internet lead, so we have a very good comparison year-over-year, month-over-month, sequentially, every which way, of exactly where we are with traffic. And our traffic is only off 20% to 25%, something like that, whereas our sales are off 43%.
And when you analyze the gap, it's credit. Restrained credit is the difference.
So we have the demand. So I'm fully saying that half of the decline in volume, no question, is the lousy economy, unemployment, consumer sentiment, fully agree.
But to get down to 9.5 million units, there has to be something else, and that's the credit panic. So the customers are there; they're in the showroom.
We saw it at the end of March, like somebody threw a switch when TALF came to life and all the automotive finance companies breathed a sigh of relief and said yes, we're going to have a home for this paper. And it began to normalize.
I don't use the word lucent; I use the world normalize. So because the traffic is there it gives me confidence.
Second, in our conversations with the auto task force, they also understand that this 9.5 million is a credit-induced artificial number that is disconnected from reality and they also understand for their viability plan to work with Chrysler and with General Motors they have to fix this. It's part of their challenge, so they are working just as intently on the credit side as they are on the restructuring side.
So again, the fact that they understand it and they're going to address it is what gives me confidence that something's going to happen. You add on top of that some sort of stimulus bill from the Congress, I feel fairly safe in saying we're going to see gradual recovering of unit volume in the second half of the year.
Now if there's another catastrophic event, well then all bets are off. But at the moment I think the government is determined that that not happen again.
Rexford Henderson - Raymond James
Drilling down a little bit, I want to talk as some others have about the costs and some of the cost savings. When I look at the segment numbers and see the corporate loss in there, it suggests to me that corporate overhead has come down rather substantially.
I wondered if that's kind of a one-quarter event or whether that's going to be sustainable for a period of time.
Michael J. Short
Corporate overhead has come down, but there are other business activities in that segment as well. But you're correct in your statement that corporate overhead has come down.
Rexford Henderson - Raymond James
What other business activities are in there and what will happen with that line going forward?
Michael J. Short
Gains and losses show up in there. Some of our collision centers that don't fall neatly into one of the other categories are in there.
And you're correct that those overhead items that are associated with corporate overhead are structural and will stay out; that's in the structural bucket of the cost savings that I've called out.
Rexford Henderson - Raymond James
And Mike Maroone, I was wondering if you could also give me some color on how much marketing spend is down year-over-year or sequentially and kind of quantify what's happening with marketing?
Michael E. Maroone
Our marketing spend is down by about 38%, Rex. It's a big number.
We have really been disciplined and really changed some of our strategies and intend to keep it very disciplined.
Rexford Henderson - Raymond James
Have you shifted more to an Internet-based market strategy and will you stick with that going forward?
Michael E. Maroone
I think that I'd rather probably not go deep there, but certainly the Internet is a big player and we've positioned ourselves very well, including our Auto USA that is a big seller of leads, so it allows us to have a national footprint and be very efficient in the E space.
Derek A. Fiebig
We have time for one more question.
Operator
Your next question comes from Rod Lache - Deutsche Bank Securities.
Rod Lache - Deutsche Bank Securities
First of all I want to revisit the used margins again. You were very clear about the mix factors and certified pre-owned and the process changes that are driving that, but there was also a pretty dramatic improvement in used prices over the quarter.
I was wondering whether you felt that that was connected and did I hear you right in suggesting that this level of margin could be sustainable.
Michael E. Maroone
I think it could be. It requires really good execution.
We think we've got a team that's capable of it. Certainly we benefited early in the quarter from some pricing.
I think over the course of the year it's going to be up and down, but if we stay lean with our inventories and really stay focused on the certified pre-owned business and are aggressive in acquiring inventory at what we call at the door, which is to trade for inventory as opposed to being an auction buyer, I think that we can maintain a strong margin. Obviously, time will tell, but we have put a lot of resources and we've got a lot of expertise in the used vehicle business that I think is beginning to pay off for us.
Rod Lache - Deutsche Bank Securities
On the parts and service business, you've given us some great data on the year-over-year changes, but could you tell us at this point what percentage is related to warranty and how do you think about that business over the next two to three years as obviously the population of vehicles that are under warranty declines just because we're going to be annualizing off of the lower sales years.
Michael J. Short
Well, first of all, about 18% of our fixed revenue is warranty, so although it's a significant piece, it's not a dominant piece. We have felt pressure on warranty through improved quality for three years.
I definitely believe there's going to be some impact from lower units in operation, so I think it will be a segment under pressure. That's why we've put all of our resources into really working on our service selling process and our customer retention efforts.
I mentioned the strong effort we've got in our service lane of selling pre-paid maintenance policies that's been very successful. So we're trying to do things to offset that, but will warranty be under pressure?
I think it will be under pressure. But it's not a dominant piece of that business.
Rod Lache - Deutsche Bank Securities
And just one last thing, Mike Jackson, just to follow up on your comments on the scrappage, is your confidence that this will happen driven mostly from the fact that the administration has a desire to see this happen, which has been very clear, or are you getting the impression from your discussions in Washington that there's an appetite to pass one of these two bills actually in Congress?
Mike Jackson
I think it's both. I think it's clearly understood that the viability of the American automobile industry going forward not only requires significant restructuring at General Motors and Chrysler but also the selling rate has to be addressed.
And that your cost for restructuring, if you don't fix the volume, is almost impossible to calculate. In other words, you almost can't get to viability at 9.5 million units.
So they need a two-pronged approach to pass the viability threshold. I wanted the restructuring and the bridge loans to get to better industry volume and then you need the measures that restore the industry volume.
That's the formula I see and I'm absolutely convinced it will happen.
Mike Jackson
Thank you for your time today.
Derek A. Fiebig
That concludes our call. I'll be around the rest of the day to answer your questions.
Thanks.
Operator
Thank you for participating in today's conference call. You may disconnect at this time.