Nov 3, 2008
Executives
Dan Werthaiser-Kent –IR Manager Sid DeBoer – Chairman and CEO Bryan DeBoer – President and COO Jeff DeBoer – SVP and CFO Brad Gray – EVP
Analysts
Rick Nelson – Stephens, Inc. Rex Henderson – Raymond James John Murphy – Merrill Lynch Art Weiss – Group G Capital Partners Matt Nemer – Thomas Weisel Partners Peter Siris – Guerilla Capital Management
Operator
Good evening. My name is Tashawna and I'll be your conference operator today.
At this time, I would like to welcome everyone to the Lithia Motors third quarter 2008 earnings conference call. (Operator instructions) I would like to turn today's call over to Mr.
Dan Werthaiser-Kent. Thank you.
You may begin your conference.
Dan Werthaiser-Kent
Thank you, Tashawna. Good afternoon to everyone.
Welcome to Lithia Motors' third quarter 2008 earnings conference call. Before we begin, the company wants to let you to know that this conference call includes forward-looking statements.
These statements are necessarily subject to risk and uncertainty and actual results could differ materially due to certain risk factors. These risk factors are included in the company's filings with the SEC.
Now, I'd like to thank you for joining us on our third quarter 2008 earnings conference call. Presenting the call today are Sid DeBoer, the Chairman and CEO of Lithia, Bryan DeBoer, our President and Chief Operating Officer, and Jeff DeBoer, our Chief Financial Officer; and Brad Gray, our Executive Vice President is with us as well today.
At the end of the call, we'll be open to questions, and our Vice Chairman, Dick Heimann, is unable to be with us as he usually is, on our Q&A today as he's down in Abilene, Texas at the grand opening for our new Honda store there. With that, it's my pleasure to turn the call over to Lithia's Chairman and CEO, Sid DeBoer.
Sid?
Sid DeBoer
Thank you, Dan. Good afternoon, everyone.
Thank you for joining us today. Our third quarter net income from continuing operations was $2.7 million or $0.13 per share.
Again, Lithia has shown sequential earnings growth since the fourth quarter '07 loss of $0.16 per share, a first quarter loss of $0.03 and a profit of $0.10 per share in the second quarter. We have accomplished this all while economic conditions have been worsening.
Despite the third quarter being the worst economic quarter of '08, it is our best quarter so far this year. On a consolidated basis, excluding impairments, net income was still $0.09 per share.
This number reflects all of our operations, continuing and the discontinued. Since our last earnings conference call, we have see additional macroeconomic headwinds, as most of your know and the Fed is finally recognizing the recession that our sector has been feeling – feeling really, since March of '07.
With that said, it is important to dispel some fears that seem to be in the marketplace today. First, the credit markets have indeed tightened, but Lithia and all other retailers have felt the pinch, to be sure and credit unions, small local banks, which have always been our stable business partners, are picking up much of the business that some of the larger financial institutions and some of our manufacturer partners have cut back on.
Lithia has a company-wide base of over 80 different lenders that we regularly work with and we continue to work on growing that list throughout this credit environment. To imply that the credit market is frozen is simply inaccurate.
Though some of our captive finance companies have tightened their lending requirements, we still are able to arrange financing on over 70% of our vehicles that we sell. The troubles experienced by the auto manufactures have been significant.
Although declining demand does impact our business, it is different for us as retailers. Our business model has some important differences from the manufactures.
First and foremost, our core businesses are retail vehicle sales and retail service and part sales. Throughout the years, we have seen our share of market shocks and economic slowdowns.
But as retailers, we have the ability to reduce many costs, adjust our inventory quickly, and continue to operate profitably in most environments. Many of our variable costs are personnel and can be adjusted with market conditions.
We even have manufacture incentives to help clear out older inventory and keep our margins fairly stable. Not many other retailers can offer what our sector has available in this stability component.
Second, and probably as important as any, is our service and parts business. It has always historically performed dependably even in tough times.
We develop relationships with our customers in order to sustain that steady business in both good times and bad. As you can see in our press release, despite the 15% to 25% declines in our vehicle sales in the third quarter, our service and parts business remained relatively stable, with only a 1.2% decline.
Additionally, this overall relative mix shift to one of our highest-margin businesses during economic slowdowns lends stability to overall gross margin. The used vehicle part of our business is also an easily overlooked component of auto retail.
It provides over 20% of our revenue and over 15%, and as much as 20% sometimes, of our gross profit and the gross profit margin on used vehicles has historically been almost twice as high as that of new vehicles. So, again, this also helps us to stabilize our potential earnings.
It is important for our investors to not forget the significant strengths of this business model and to recognize the important differences that we have from our auto manufacture partners. In continued response to the macroeconomic and industry challenges, Lithia is continuing to expand our cost reduction and restructuring efforts.
We began these efforts back in the fall of '07. Bryan will give you an update in a moment on our restructuring actions, but I will update you briefly on our cost cutting progress.
Our most recent plan called for annualized cost reductions of $22 million by the end of September. We're pleased to report that we accomplished this and more.
In fact, by the end of the third quarter, we had reduced company-wide SG&A expenses by an annualized $26 million. That's over $2 million a month.
These cuts are mostly the result of reductions in personnel, travel, training, and other such expenses. As mentioned earlier, there are many ways to adjust to declining retail sales and Lithia will continue to do so in order to improve our chances to remain profitable regardless of what happens to the economy.
With a lean company, when the economy does improve, which we know it will, we will have a much better ability to demonstrate high levels of profitability, as we have in the past. For several years now, we have been working on streamlining specific operations within our company.
Many of our functions have been centralized and we are capitalizing now on many of those efforts. Our simplified systems and common language have been instrumental to our ability to reduce costs.
We have also found success with the combination of management roles at the store level. Additionally, we have improved our analytical and data reporting in order to isolate cost centers within our company.
These efforts are now bearing fruit and with these new tools, we are better able to focus on efficiencies wherever we can find them. That investment is serving us well, particularly in this recessionary climate.
Our ability to find so many cost-cutting opportunities is partially due to the slowing, actually stopping, of our growth objectives. From our beginnings as a public company, Lithia has been focused on growth.
We have pursued the expansion of our revenue base and store presence across the country. As we outlined for you on last quarter's earnings call, now is not the time to pursue that growth objective and by removing much of that growth infrastructure from the company right now, we can focus on getting through the current recession.
We will be very well prepared and we can prepare ourselves again for growth at a later time. Our company's senior management team has experienced macroeconomic challenges like this before.
The best way to work our way through these challenges is by shoring up our balance sheet and by reducing costs everywhere we can to maintain profitability, both of which we are accomplishing. We feel good about having cut the outstanding balance on our main credit line to below $70 million, as of today, which is less than half of its balance at the beginning of the year.
We have also retired, at this point, 44% of our convertible bond at an early price and an attractive discount. We feel our balance sheet and liquidity are both improving, with plenty of tools still available to us to ride out the storm.
And now, to update you on our restructuring efforts and other items, we have with us our President and Chief Operating Officer, Bryan DeBoer. Bryan?
Bryan DeBoer
Thank you, Sid. Good afternoon, everyone.
As Sid mentioned, in our response to the macroeconomic and industry challenges Lithia continues to take action on a comprehensive restructuring plan. He already told you about some of the cost reductions we have been able to accomplish.
I want to first say that these efficiencies have been successfully accomplished because of the hard work and dedication of a unified Lithia team. It's very important.
Time and time again, our highest performing individuals have risen to the challenges we put in front of them in order to make our company stronger and better prepared to handle whatever economic headwinds may arise. A moment ago, Sid mentioned how we had outperformed our cost reduction goals for the year that we disclosed at the beginning of June.
In fact, we have recently identified, and this quarter will realize, another $7 million in annualized reductions. This will bring our total annualized cost reductions target to $33 million.
You should be pleased to also hear that we are not about to stop there. Now that we have gained comfort in a more efficient model, we are pressing forward to find even more savings while minimizing the impact they have on sales.
We will be doing this through direct contact with our store leaders, thereby eliminating all unnecessary costs in each individual store. Now let's move on to right-sizing, another component of our restructuring that we disclosed in our June 2nd press release.
This strategy is progressing even better than our early expectations. Of the 14 stores we originally selected for divestiture, seven of those have been successfully divested in just four month's time.
From this, we have recognized the benefits of a more diversified brand mix, a reinforced cash position, and bottom line gains on our income statement, which Jeff will talk about in just a few moments. We continue to evaluate stores based on these criteria and how further right-sizing actions might benefit the company.
As a result, we will be expanding our right-sizing efforts by 15 additional stores. Four of those additional stores have already been divested.
We are finding a healthy demand for our stores from private dealers even in this difficult time. Let's clarify that real quick.
Of the 29 total stores we have selected for divestiture, 11 have been successfully divested already and we have preliminary agreements signed on another six of them. All of these actions will continue to move us towards our near-term goal of 50% domestic and 50% import/luxury mix.
By reducing our costs and divesting under-performing stores, the earnings power we now have gained, and will continue to realize as the economy stabilizes, is invigorating our teams without end. We sure hope you share our enthusiasm and we'll get into that a little further in the Q&A session.
We continued to adjust our inventory as well to mass consumer demand. Since the second quarter, our inventories of new and used vehicles have been substantially reduced.
We expect to realize an annualized flooring interest expense reduction of approximately $2.5 million from this, despite an assumed flooring interest rate spread increase of 50 basis points. It is important to note that most of these reductions have already taken place and there is still room for more, as we sell our way through our inventories.
With all the restructuring taking place, it could be easily forgotten that sales are the primary driver of our profits and our company. We continue to have success in this area by always focusing on our customers.
Our people on the ground have never lost sight of delivering on our customer-facing advantages. We've discussed these in the past and they are our clear pricing, our used vehicle warranties, and our assured services guarantee, which all continue to be the focal point of our team and every customer experience.
By expanding our used vehicle business, we can offset new vehicle declines and continue to develop new customer finance opportunities, all while enhancing our opportunity to succeed on the sales front. In our service drives, we continue to focus on driving performance through competitive pricing, simple and quick customer experiences, and our repeat business.
I will now turn the call over to Jeff DeBoer, our CFO, who will comment further on the company's financial statements. Jeff?
Jeff DeBoer
Thank you, Bryan, and good afternoon. We now currently have 11 states in our continuing operations space.
You can refer to our press release to see the contribution by geographic regions. Even with our recent divestitures outlined by Bryan, we remain regionally diversified.
Texas continues to be the only state with over 25% of sales. The states that held up the best for us this quarter, in order, were Alaska, Iowa, Washington, and Texas.
The four states in order of our same-store sales mix that had the biggest declines were in Nebraska, Idaho, Oregon, and once again, California. Our domestic/import mix for the quarter on a continuing operations unit basis was 54% domestic and 46% import, in contrast to the third quarter of last year when it was 58/42% split.
So we're making progress toward that 50/50 goal that Bryan talked about. Looking at inventories, at the end of September our new vehicle inventories, although reduced, were still approximately 26 days higher than our five-year historical average day's supply.
Seeing the slowdown in sales, we reduced vehicle ordering a couple months ago and have a good plan in place to get these numbers back in line by the end of the year and are making progress on that plan. Our days supply for used at the end of the quarter was six days below five-year historical averages at this time of year.
We were able to reduce those levels by 14 days since the last quarter and we exceeded our targets for inventory reductions, internally, during this quarter, so we're pleased about that. In the finance and insurance business, we continue to show stability.
Our F&I per vehicle for the third quarter was $1,143, which is $79 lower per vehicle than the third quarter of 2007, but still very high. We had penetration rates for the financing of vehicles of 72%, service contracts of 42%, and our lifetime oil product of 34%.
These figures are notable, given the current credit concerns. Our service and parts business continues to be a stable profit center for Lithia, as described by Sid earlier.
In a vehicle sales environment that was down 15% to 25%, our service and parts continues to remain relatively stable, declining only 1.2% during the quarter. Our customers are still servicing their cars.
Margins on service and parts are up 90 basis points in the third quarter from 2007. Warranty work accounts for approximately 21% of the company's same-store service and parts sales.
Domestic brand warranty work increased by 6.9% and import/luxury warranty work also increased by 7.7% for the quarter. Customer pay, which represents 79% of this sector, was down 3.3% this quarter.
New vehicle margins were down 50 basis points, from the third quarter of last year, to at 7.6% because of the challenging retail environment. The margin on new cars, however, went up 130 basis points to 10% with good demand in the car part of our business.
This was up from 8.8% last year in the third quarter. Conversely, truck and SUV margins came in 150 basis points lower at 6.3%, due to the shift in consumer demand that you're all aware of and our efforts to clear out older inventory.
Used retail vehicle margins were down by 430 basis points from third quarter last year to 9.9% due to a sudden shift in consumer demand and our efforts to clear out older inventory. We have made good progress in this area.
Our overall gross margin decreased by 30 basis points from third quarter of 2007, largely due to the lower used vehicle margins as explained earlier. But the stability from the service and parts business helped us here from going down more.
Now, to the debt and the capital side of the business. We realized positive cash flow from operations of $82 million year-to-date, due largely to inventory reductions and positive trends in our receivables and payables.
We anticipate that further cost cutting and inventory reduction measures will continue to increase our cash flows from operations despite the current economic environment. Now, I'd like to go over the list of stores that have been successfully divested, so you can better understand the big picture.
Wenatchee Chrysler-Dodge in Washington; Lithia Dodge of Sioux Falls in South Dakota; Lithia Chevrolet, Sioux Falls, South Dakota; Lithia Chrysler-Jeep-Dodge of La Crosse, Wisconsin; an L2 Store in Cedar Rapids, Iowa; Lithia Chevrolet of Issaquah; Lithia Chrysler-Jeep-Dodge of Burlingame; the consolidation of two Northern California Chrysler product stores into other nearby Lithia stores; consolidation of a Suzuki store in Reno with other nearby Lithia facility and an L2 store in Loveland, Colorado. Of the $100 million in net proceeds that we've generated so far this year in new capital just from internal sources, one-third came from the sales of these stores, which are all completed.
One-third came from real estate financing and one-third was from used vehicle inventory reductions. Since the beginning of the year, we have reduced the outstanding debt on our credit facility from $184 million all the way down to $84 million at the end of the quarter and below $70 million currently, as we continue to make progress to rid ourselves of debt.
The additional store divestitures that Bryan outlined earlier are estimated to generate approximately another $50 million in total net cash proceeds. Additionally, we expect to raise as much another $35 million through sale of development properties and another $35 million through further real estate financings, all of course subject to market conditions.
But, so far, we've encountered very little hurtles to accomplishing our goals. Most of these actions are expected to be completed within three-to-six months and should provide another $120 million in new capital to further pay down debt.
Our goal is to eliminate all debt other than flooring and mortgage debt by sometime in 2009 and we're well on track to accomplish that goal. As Sid mentioned, we have also repurchase over 40% of our convertible bonds that would have been due in May of 2009.
The first tranche was a $16 million retirement and occurred in third quarter. We have subsequently purchased two more tranches equaling $22 million, for a total retirement of $38 million at a discount, of course.
Our remaining convertible debt balance is approximately $47 million only. We reported last quarter that we successfully amended our credit facility.
The most recent amendment reduced our minimum net worth ratio and lowered our required covenant performance ratios through the second quarter of next year to allow us more room to operate in the current economic environment. We are now happy to report that we are in full compliance with these covenants and expect to remain in compliance in the future.
In terms of fixed charge coverage ratio, this last quarter was the most difficult and we have successfully passed that. Going forward, the large loss from the fourth quarter of last year will fall out of the calculations, making compliance easier.
In terms of the leverage ratio, with the $100 million debt pay-down of our credit line, this ratio is no longer close to the limits. For the quarter, the total of flooring and other interest expense as a percentage of revenue was 1.6%, which is 12 Basis points higher than last year.
For the quarter, we had a decrease in flooring expense of approximately $1.8 million. The decrease in this expense is largely due to LIBOR interest rates being lower than last year.
Including all fixed rate debt obligations and hedges, approximately 60% of our total debt now has fixed rates. This percentage moved up dramatically, due to the significant repayment of our credit line, which was all floating rate debt.
Including swaps, our average annual interest rate on all debt is 5.1%. Looking at the balance sheet, we had $17 million in cash and approximately $30 million of contracts in transit, for a total of $48 million at the end of the quarter.
Our long-term debt-to-total-cap ratio, excluding real estate, is down to 28%. We would like to provide a breakdown of our non-flooring debt as of September 30, 2008.
Convertible notes $69 million, but with the additional repurchases only $47 million today. The line of credit $84 million at the end of the quarter, today $66 million with further repayment.
Mortgages $178 million, with $66 million in liabilities held for sale; and other debt of $22 million, with $3 million in liabilities held for sale, total of $353 million, with $69 million in liabilities held for sale. Our non-financeable CapEx for the full year 2007 was $23 million.
For 2008, our projected non-financeable CapEx is only $15 million to $20 million, with further reductions expected in 2009, probably in the $10 million to $15 million range. Our current book value per share is $12.86, which does not include any appreciation of real estate above our carrying value on our books.
Nor does it include any goodwill, as it was written off last quarter and we know there is tremendous value in the stores that we currently have under operation. Lithia has substantial positive tangible net worth as well.
That concludes the Presentation portion of the conference call. Thank you all for joining us.
We'd now like to open the floor for your questions.
Operator
(Operator instructions) Your first question comes from the line of Rick Nelson of Stephen's.
Rick Nelson – Stephens, Inc.
Thank you and good afternoon, guys.
Sid DeBoer
Hi Rick.
Jeff DeBoer
Hello, Rick.
Rick Nelson – Stephens, Inc.
I want to ask about the dispositions, how you – are you getting blue skies for those and are the credit market's a challenge at all in getting people financed for those acquisitions?
Bryan DeBoer
Rick, we are getting blue sky for a good portion of the divestitures. In terms of our buyers having good credit opportunities, so far we haven't experienced a pitfall where we weren't able to close.
We've had Brad I believe, 13 transactions that have been contracted, and we've had none fall out yet.
Brad Gray
Over financing done.
Bryan DeBoer
Okay, over financing. We haven't even had a contract fall out yet.
Brad Gray
Not yet.
Rick Nelson – Stephens, Inc.
Okay and we hear about Chrysler, their plans with floor plans faking higher spreads – what are you seeing there and – other alternatives?
Sid DeBoer
That was factored into that interest rate adjustment. We figure another 50 basis points on average.
Chrysler, I think, was a little more than that, Rick, but nothing that's upsetting the apple cart. With LIBOR continuing to fall again, it should get back inline.
I saw LIBOR, the one-month rate was at 3.17% today and we anticipate that getting down around 2.5% and it is based on LIBOR. So, thankfully, what the Fed has done is beginning to show and banks loaning to each other again.
Rick Nelson – Stephens, Inc.
On the captives, Sid, are any of the others following Chrysler's lead in –
Sid DeBoer
Yes. They're all up slightly higher, Rick.
We do have a pretty good national contract with each of them and I don't think we've had to pay quite the increases some of the under-financed dealers may.
Rick Nelson – Stephens, Inc.
Gotcha. Would you care to speculate on the GM-Chrysler combination and how, if it does occur, how that would impact Lithia?
Sid DeBoer
Well, we know the Jeep and the Dodge brand have great value and when you look at General Motors' ability to manage that whole group; we would anticipate there would be some dealer fall-off in time, but now suddenly and we have plenty of time to react and move things around. Rick, I'm not privy to whether that, first of all, is going to happen and secondly what the full impact would be.
But there is – when you look at the Chrysler brand even, it actually, I think, out-sells Buick and Pontiac. So which ones do you keep?
Do you need GMC trucks if you have Dodge trucks, because GMC is just a Chevrolet with a different label on it? So, I mean, there's a lot of synergies there that we don't know the answers to.
We're preparing ourselves with good growth in parts and service and used cars and disposing of – I think its 15 total Chrysler stores over this discontinued op program. Out of that 29, I believe 15 of them are Chrysler product stores, so we get the mix down to some reasonable amount.
Rick Nelson – Stephens, Inc.
All right. Thank you, Sid.
Just wanted to ask about the inventory, too, and the new cars being 26 days above your average, I think that's statistic-wise. How do you see that shaping out in terms of gross margin on the new cars, as we look forward.
Sid DeBoer
I don't think it affects the gross margin, Rick – that's largely is a result of the drop off in the sales rate in the third quarter, that's a tremendous drop off and obviously we were billed out. Domestic stores are quite a bit different than import stores in terms of inventory at model year-end and we had to order, and those still came in throughout the quarter, so.
But we are not getting hardly anything in now, so that will work its way through this quarter pretty quickly.
Rick Nelson – Stephens, Inc.
All right. Thank you very much.
Operator
Your next question comes from the line of Rex Henderson of Raymond James
Rex Henderson – Raymond James
Good afternoon and thanks for taking my call. Rick asked some of my questions, but I had some, a couple of others.
First of all, can you comment a little bit of how the quarter progressed and what you're seeing in October sales – in terms of the sales rate and kind of how September compared to the earlier part of the quarter and how October compares to September?
Sid DeBoer
I think Bryan can handle that.
Bryan DeBoer
Rex, in terms of the third quarter, the quarter was moving along fairly well until approximately the middle of September where we definitely saw a decline in showroom traffic levels and sales, obviously, to follow. That continued into the start of October for about the first seven days or so.
Then we saw a recovery back to typical seasonality and hopefully, it will maintain that throughout the quarter.
Rex Henderson – Raymond James
Okay. Second question is if we continue to see this extremely low level of new car sales for a protracted period, say all of next year, $12 million SAR for the next year, what impact do you think that'll have on you having divested enough stores or discontinued enough stores to be right-sized for that kind of environment and if you take enough costs out to be right-sized for that environment?
Sid DeBoer
I think its more taking the cost out than it is, as far as this mix is concerned. I mean, it appears that the drop-off from now on will be pretty level amongst brands that there isn't a huge impact, a larger impact for the domestics than the foreign.
As you saw, I mean, even Toyota had a 30% drop in September. So there'll be a little shifting each month, as different ones try different incentive plans, but overall it should be a fairly level reduction.
We're structuring our company so we can be profitable, as low as $10 million annualized units and that's where we're going. We're not there yet, but we're prepared to.
Bryan DeBoer
Right, additionally, Rex, we're working on many different used car – push on the retail side. We're expanding our reach into lower-priced vehicles so we can, hopefully, pick up some of that slack as SAR continues, possibly continues to decline in our used car business.
Sid DeBoer
We hope your 12 million-unit number is a good number. That would be fine.
Bryan DeBoer
Yes.
Sid DeBoer
Okay.
Jeff DeBoer
Plus Rex, the one thing important to keep in mind for retailers is we adjust to lower sales levels or higher sales levels, because most of our costs are variable and it's really the shocks that create the challenges and that's what we've been through. Once you've adjusted to the new level as a retailer, you can be as profitable as ever and it's not the absolute level to a limit.
But certainly that's an advantage that a retailer has and that's what's happened with our sector over the past cycles that we've been through.
Rex Henderson – Raymond James
Okay. One final question on inventory.
You mentioned that your new car inventory was, I think, 26 days above the average. Do you have an absolute number in terms of days inventory for new cars and used cars?
Sid DeBoer
We don't give that. We just give the ratio, how it's been versus the prior period.
Everyone uses a different method of computing day's supply and there's no standard method. So we've resisted ever giving the actual day's supply and I think that reference you gave, obviously it's high.
But it's really based on that really slow rate of travel and we're anticipating an even slower rate of travel and we do factor that into our day's supply when we look at it. We look at how bad is it going to be and the seasonality issue and so we look for declining sales and that impacted that day's supply level.
If we used strictly a trailing sales, our day's supply would be lower.
Rex Henderson – Raymond James
If – I know that a lot of your dealerships are in rural markets where you need to maintain a relatively high level of inventory, in comparison to your sales rate, because you need selection for a small market. Is there much room to flex that inventory down in those kinds of places?
Sid DeBoer
Yes.
Bryan DeBoer
Actually, Rex, the majority of the stores that we have selected in our divesting are our smaller stores that is a little bit harder to respond to. Fortunately, most of our areas we're regionalized, where we have multiple stores in an area.
So they can, again, draw from other Lithia stores that are in those same areas.
Sid DeBoer
But we're getting some synergy out of that. But it's also true that if you're selling Dodge trucks and Chevy trucks and Ford trucks and all of that mix of brands, you're going to have a higher day's supply than someone who only sells luxury brands, because there is a necessity.
When you try to figure out three-quarter, one-ton, half-ton, different axle ratios, different engines, I mean, there's so much variety that there will always be, probably, a higher overall day's supply in our store mix in those rural markets, so that you can grant us.
Rex Henderson – Raymond James
Okay and finally, in your efforts to buy back the – convert – you've bought back about $38 million so far. Do you expect to be completed with that process before the put date in May?
Bryan DeBoer
We'll buy back as much as we can get on the market. We have restrictions in our credit agreement as to how much we can purchase in advance, but we've done a lot and we've got a really good discount on that.
Rex Henderson – Raymond James
Okay.
Bryan DeBoer
So we'll continue efforts, Rex.
Sid DeBoer
The goal, certainly, is to have it paid off prior to its due date.
Bryan DeBoer
We already have availability on our credit lines to retire the entire balance of that convert, so that problem's been handled.
Rex Henderson – Raymond James
Okay and can you quantity for us how much the discount has been?
Bryan DeBoer
Well, if you can refer to the market prices, it's trading in the 80s, between 80 and 86 or so is where it's been trading the last couple of months. I mean, you can get the difference off of Bloomberg.
So it's in that range.
Rex Henderson – Raymond James
All right. Thanks a lot.
Bryan DeBoer
You bet.
Sid DeBoer
Thanks, Rex.
Operator
Your next question comes from the line of John Murphy, from Merrill Lynch
John Murphy – Merrill Lynch
Good afternoon.
Sid DeBoer
Good afternoon, John.
John Murphy – Merrill Lynch
When we're looking at the quarter and looking at the $0.13 from continuing ops that you put in for EPS, does that include – and I think it does – does that include the gain from the retirement of the convert?
Jeff DeBoer
Yes.
John Murphy – Merrill Lynch
Okay, so –?
Sid DeBoer
Only the first tranche.
Jeff DeBoer
Only the first tranche.
John Murphy – Merrill Lynch
Yeah what you did in the quarter. Now, I'm just actually, what I'm still trying to understand is when we take this quarter and you made a very interesting statement in the press release, that this was reflective of the company on a continuing ops basis going forward.
So if we back that out, it looks like it's about $0.05 to $0.06 in earnings.
Jeff DeBoer
It's $0.05 exactly, yes.
John Murphy – Merrill Lynch
Okay. So if we back that out, it looks like $0.08 is the earnings power of the company in a $13 million unit SAR, as it's currently constructed.
So, if we roll that forward that probably looks like the company and the $13 million SAR, on an annualized basis, is about $0.25. Does that ballpark sound at all right?
It's hard for us externally, and as you're shipping so quickly in the base of stores, to figure out sort of what the jumping off point is as far as future estimates. Is that at all reasonable?
Jeff DeBoer
You have to remember it's higher than that, but we've been reducing costs since June and those are not all fully realized. The $33 million in annualized savings have just begun since June in a major way and a lot of them were in August and September and October and those are just kicking in.
So, as those seep through, we have potential to earn much more than that.
Sid DeBoer
It gets close to guidance. It's too close to guidance if we give you any part.
Jeff DeBoer
That's the easiest piece to overlook, but it's the most important factor, as we pointed out.
John Murphy – Merrill Lynch
Well, I’m not going to be needing any company details, but the other question I had for you, in looking at the balance sheet, the liabilities held for sale, $140 million. You made some mention of what was in there, but there's been a dramatic increase there.
What exactly is in that line, at this point?
Jeff DeBoer
The remaining stores that aren't sold.
John Murphy – Merrill Lynch
Okay, so there's a huge increase in the assets for sale that goes to $230 million and the liabilities all for sales are $140 million. So the net OE, or equity in those stores, is roughly $90 million?
Jeff DeBoer
That's correct.
John Murphy – Merrill Lynch
Okay, gotcha and then lastly, just on floor plan lines of credit. I mean, who's in your conduit and how is that set up currently?
Jeff DeBoer
We do floor plan directly with each of the captives. It's not a conduit or a syndicate, so it's just direct vehicle-specific with each captive, very simple and very stable.
John Murphy – Merrill Lynch
Okay, great. Thank you very much.
Sid DeBoer
Yes.
Operator
Our next q comes from t line of Art Weiss of Group G Capital
Art Weiss – Group G Capital Partners
Good afternoon.
Bryan DeBoer
Hi.
Sid DeBoer
Hi, Art.
Art Weiss – Group G Capital Partners
Hi. Can you break down your inventory for me, in dollar terms, into new and used?
Sid DeBoer
I think he's got it here. Hang on a second.
Jeff DeBoer
Let's see.
Sid DeBoer
Go ahead. Do you have another question?
Art Weiss – Group G Capital Partners
Yes and you mentioned that there were 29 units that we're to be sold; 11 have been sold so far. So does that mean that the assets and liabilities held for sale at quarter-end relate to 18 units, is that correct?
Sid DeBoer
I believe so, yes.
Art Weiss – Group G Capital Partners
Okay and then regarding your revolver, what was the availability at quarter-end and then currently?
Jeff DeBoer
The balance is down to $84 million.
Sid DeBoer
At quarter-end.
Jeff DeBoer
At quarter-end, yes.
Art Weiss – Group G Capital Partners
No, I meant, sorry, the availability?
Bryan DeBoer
We have – I'm not sure exactly the number on the availability. There's a borrowing base, so.
Jeff DeBoer
It's around $70 million, as I remember, but –
Bryan DeBoer
No, the borrowing base is $130 million.
Jeff DeBoer
I know, but the amount we can have, what's left that we can still borrow.
Bryan DeBoer
Yes, exactly. It's a $70 million plus $70 million, yes.
Art Weiss – Group G Capital Partners
So it's $70 million you mean currently or at quarter-end?
Jeff DeBoer
At quarter-end.
Art Weiss – Group G Capital Partners
Okay and then is that number at a high or lower end, since you bought back-buy, it sounds like you generated cash and said you've also brought back bonds? I think someone had said that the borrowing base was above the amount of the remaining convert balance?
I'm just trying to get my arms around kind of if you – let's just say you buy back all the converts in the open market, will they get – more of it comes into May. How much more of availability do you have to kind of run your business?
Sid DeBoer
We have plenty of room to pay back the convert and run our business, going forward, even without further asset sales. But we will be selling up to $120 million more of assets, which just gives us that much more comfort.
Bryan DeBoer
But we have availability on the current line to be able to pay off the convert.
Art Weiss – Group G Capital Partners
Okay, so the ability as of right now is more than $50 million?
Sid DeBoer
Correct, yes.
Art Weiss – Group G Capital Partners
Okay.
Sid DeBoer
I think it actually went up, the availability did, since the end of the year – since the end of the quarter.
Jeff DeBoer
Since the end of the quarter.
Sid DeBoer
We've had more asset sales come through.
Art Weiss – Group G Capital Partners
Okay and then I don't have anything else other than the – the inventory question.
Bryan DeBoer
Inventory, new vehicle inventories are $390 million at the end of the quarter. Used vehicle inventories were $95 million.
Art Weiss – Group G Capital Partners
But on the balance sheet, your inventory shows $426 million?
Jeff DeBoer
$426 million is the number. That's correct.
There's also parts inventories in there.
Art Weiss – Group G Capital Partners
Yeah, but since I – maybe I misunderstood its basically 390 new and 95 used?
Jeff DeBoer
Yes. That would be off of the operational reports that we just read you.
Off the GAAP, it'll be in the 10-Q. I don't have that here right in front of me, so we'll have to get that for you.
Art Weiss – Group G Capital Partners
Okay, because obviously that adds up to four, the number you gave me adds up to $485 million, which is about $60 million higher than what's on your balance sheet?
Jeff DeBoer
I can get you those numbers and it'll be in the 10-Q when it's filed.
Art Weiss – Group G Capital Partners
Okay, thanks.
Sid DeBoer
Yes.
Operator
Your next question comes from the line of Matt Nemer of Thomas Weisel.
Matt Nemer – Thomas Weisel Partners
Good afternoon, guys. Just I had one follow-up question on the new phase of the capital raise effort, the $120 million.
What are – can you go into a little bit more detail on what's in there? Obviously, I guess, my first piece is the extra 15 stores.
But what are the other pieces of that plan and how much comfort do you have around that number, sort of given what's happened in the markets over the last few weeks?
Sid DeBoer
Matt, you understand that, even if we didn't raise that that we're okay now, we've got enough capacity?
Matt Nemer – Thomas Weisel Partners
Absolutely. Yes I know, I just want to get an understanding of kind of where …
Sid DeBoer
We want to get rid of all the debt that we can, so that's the goal and we have a lot of comfort in those numbers. The numbers include some financing on real estate and some sale of vacant land and properties that we held that are now held for sale.
There's a few other items that total up to those numbers and that's probably conservative.
Matt Nemer – Thomas Weisel Partners
There's a development property's piece, is that raw land?
Sid DeBoer
In most cases, yes. We were going grow L2 in several markets and those properties are for sale.
They're in high traffic areas and then we had expansion land we'd bought for BMW growth in Seattle and we have some land in Fresno and I mean, it's scattered here and there, but it's all good land – Texas.
Matt Nemer – Thomas Weisel Partners
Okay and then my next question was – just trying to get our arms around a free cash flow number for next year. Obviously we're all going to have to come up with our own guess on the net income piece, but do you have any sense for what D&A should look like next year?
And then, on CapEx, you mentioned that the non-financial piece your target was somewhere in the range of $10 million to $15 million. Should we assume that the financeable piece is down to close to zero or what are you thinking for total CapEx?
Bryan DeBoer
Matt, could you repeat that? We cut out for some reason.
Matt Nemer – Thomas Weisel Partners
Sure, yes. So, looking at free cash flow in '09, can you give us a sense for what the D&A will be in '09 and then also the total CapEx, both non-financeable and financeable?
Jeff DeBoer
Right. The total CapEx is basically our maintenance CapEx next year.
We have very little projects that are currently underway...
Matt Nemer – Thomas Weisel Partners
Which is $10 million or $15 million?
Jeff DeBoer
Our maintenance CapEx is about $12 million, so that's basically all that we would have.
Matt Nemer – Thomas Weisel Partners
Okay.
Sid DeBoer
Yes, Matt, the stores that we've finished, I mean, we just completed building the Abilene Honda store and we've got stores in Grand Forks that are – one of them, the Toyota store, I believe, is opening here soon and we've got a Dodge store. So, well, we have Seattle BMW, but that is being financed as we go, so that's it.
We don't have any other real projects underway, so most of anything except maintenance CapEx is all we have left, and we'll hold that to a minimum.
Matt Nemer – Thomas Weisel Partners
Okay and then on the –?
Sid DeBoer
And then there was a projection that Jeff gave of $15 million to $20 million will probably fall much closer or even below the $15 million – even just $10 million, $11 million is where we're shooting.
Matt Nemer – Thomas Weisel Partners
Okay and then on the depreciation piece for next year?
Jeff DeBoer
We don't give guidance, Matt, so you'll have to look at your models and determine that.
Sid DeBoer
It's pretty much similar to what we have.
Jeff DeBoer
Yes and we're selling stores, so you have to factor that.
Sid DeBoer
Just shrink in maybe a 25% reduction for the store count coming down, but they're mostly smaller stores, so.
Matt Nemer – Thomas Weisel Partners
Got it. Okay.
Yes, it's tough to get to, given all the divestitures, but –.
Sid DeBoer
Yeah – again and we'd love to help more on it, but I think you can pour it out.
Matt Nemer – Thomas Weisel Partners
Okay. Okay, fair enough.
Thanks very much.
Bryan DeBoer
Thanks, Matt.
Operator
Your next question comes from the line of Peter Siris of Guerilla Capital
Peter Siris – Guerilla Capital Management
Hi guys. I must have gotten on late, I apologize.
Did you talk about that you filed for bankruptcy?
Bryan DeBoer
Absolutely not.
Peter Siris – Guerilla Capital Management
Well, no, because everybody's been telling me that you were going bankrupt, so I assume I missed that press release.
Sid DeBoer
There's seems to be a misunderstanding that if the stock price is way down that a company is going bankrupt, but it really has very little to do with our asset balance and all the assets we have and the very limited liabilities we have. So we don't see a risk of any bankruptcy and certainly have no plans to even talk about it.
Peter Siris – Guerilla Capital Management
Okay. So the – I was only kidding, Sid.
Sid DeBoer
I know, Peter, but you're helping –
Bryan DeBoer
We can always count on you for that.
Peter Siris – Guerilla Capital Management
Yes. A couple of guides ago, somebody was asking a question about everybody's having a tough time because there's a lot of moving pieces here.
You're selling off, cutting a lot of overhead, you're selling off businesses and somebody asked I thought a very reasonable question, which was what would you earn – what's the business going to look like, what are you going to earn in a $13 million car year? And you guys passed – you guys said, well, we can't do that because we can't give guidance.
But to me that's not guidance. To me, what I'd like to understand is, I don't care if it's $12 million, $13 million, $12.5 million, I'd like to understand what the – have some better understanding of what the model looks like under some particular scenario.
Then I can decide if that's a reasonable scenario. But I'm having a tough time building – because of all the moving pieces, building a model.
Like, if I said car sales, the crunch rate is like $14 million, is that reasonable?
Sid DeBoer
It's lower. Probably $13 million.
Peter Siris – Guerilla Capital Management
Crunch rate is $13 million? If I said for the next five years sales were going to be $13 million every single month and there was going to be no mix change.
In other words, I'm not betting on Chrysler or against Toyota or BMW, just saying, $13 million for five years every month exactly the same. What is this –?
Sid DeBoer
First that – we would be highly profitable in that environment.
Peter Siris – Guerilla Capital Management
What is that? What does "highly profitable" mean, Sid?
I got a dollar – I got a buck and change. So I'd like to know what "highly profitable" means.
Sid DeBoer
Look at what we earned when we were that size about five years ago – and there you are.
Bryan DeBoer
And then reduce the expense by about $2 million a month.
Sid DeBoer
Well, because of the sea-change in the volume. I mean, that was a 15-million unit year and we made over $2 a share, so I think that helps give you some feel for that.
I mean, that's our look at it and we certainly think there's opportunities for us to make a lot of money in this business.
Peter Siris – Guerilla Capital Management
a
Jeff DeBoer
Yes.
Bryan DeBoer
Yes.
Peter Siris – Guerilla Capital Management
And then in this cost if I model $13 million and took this cost take-out and did all the other things that you're talking about, that's the kind of number I would come to, right?
Sid DeBoer
Definitely.
Bryan DeBoer
Absolutely.
Peter Siris – Guerilla Capital Management
Okay. So the real question is when – in terms of building a model, when is the rest of these costs going to be added?
In other words, when does the steady state come?
Sid DeBoer
When it stops declining in sales.
Peter Siris – Guerilla Capital Management
No, no. I'm not asking from the demand side.
I'm not talking about when – because you're not going to get to steady state – I mean, something's going to happen. The government's going to bail out General Motors and give loans to everybody, sales are going to go up or something else is going to go down.
I'm asking from your side, in terms of cost-cutting and everything else, when is the company going to be sort of like what you want it to be for the tough times we're in?
Bryan DeBoer
We believe that we're at 90 days to 120 days away from that and that's that tranche of expense reductions that we had talked about in the discussion.
Peter Siris – Guerilla Capital Management
Okay. So what you're saying, Bryan, is that if by the beginning of the year, if I had a crystal ball and said $13 million was the car sales for next year, that you would say internally you would have earned blah-blah-blah?
Bryan DeBoer
We would be expensed appropriately at that time at $13 million.
Sid DeBoer
You've worked your way into a forecast.
Peter Siris – Guerilla Capital Management
No, no, no, because I haven't Sid, because no, because if you polled everybody on the conference call, there may be people who think that sales next is going to be $10 million and there'll be people who think it's going to be $12 million or $14 million. I'm just picking a number.
I could have picked $12 million as a number. I'm just picking a number to try to get an idea of where and when.
So, how can I –?
Bryan DeBoer
Peter, if you were to ask us six months ago could we maintain profitability at the $12 million to $13 million SAR, we would have had a hard time answering that with a definitive yes. Today, when you ask us that question, we definitely have our hands around enough expense reduction and margin improvements to make our sales very profitable in that type of environment.
Now – and it sure appears like that's where it's going to end up being in the 2009 year, too.
Peter Siris – Guerilla Capital Management
Great. Well, thanks guys and I'm sorry I missed that bankruptcy filing.
Sid DeBoer
We love you.
Jeff DeBoer
And I'd like to jump in and provide the inventory data that was asked earlier. I found the report that has that on it.
The $426 million, which is on the continuing operations piece, breaks into $329 million of new cars, $70 million of used cars and $27 million of parts inventories, for a total of $426 million. That's just continuing operations.
If you go to assets held for sale of $230 million, within that there's $67 million of new vehicles, $21 million of used vehicles and $5 million of parts. So it's broken into two pieces and that's why the numbers before totaled higher than what you see on the balance sheet.
Sid DeBoer
Who was it that asked that? Is it John Murphy or –?
Bryan DeBoer
It was Art.
Sid DeBoer
a
Jeff DeBoer
Next question, please?
Operator
There are no further questions at this time. Do we have any closing remarks?
Sid DeBoer
We are very thankful for all of you being on the phone and being interested in our company and we look forward to continued success. Thanks for your interest.
Bryan DeBoer
Thank you.
Operator
This concludes today's call; you may now disconnect.