Sonic Automotive, Inc.
Q4 2009 Earnings Call Transcript

Published: 23 Feb 2010

[Operator:]

Good morning, and welcome to the Sonic Automotive fourth quarter and year-end earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer period. (Operator instructions). As a reminder, ladies and gentlemen, this call is being recorded, today, Tuesday, February 23rd, 2010. Presentation materials which management will be reviewing on the conference call can be accessed on the Company’s Web site at www.sonicautomotive.com by clicking on the For Investors tab and choosing webcast and presentation on the left of the monitor. At this time I would like to refer to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this conference call, management may discuss financial projection, information or expectations about the Company’s products or markets, or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the Company’s filings with the Securities and Exchange Commission. Thank you. I would now like to introduce Mr. Scott Smith, President of Sonic Automotive. Mr. Smith you may begin your conference.

[Scott Smith:]

Thank you. Good morning, ladies and gentlemen. I am Scott Smith, Co-Founder and President and Chief Strategic Officer of Sonic Automotive. Welcome to Sonic Automotive’s Fourth Quarter 2009 Earnings Conference Call. Joining me on the call today are the Company’s Vice President, David Smith, the Vice Chairman and Chief Financial Officer, Dave Cosper, our Executive Vice President of Operations, Jeff Dyke, and Greg Young, our Vice President of Finance. If you please turn to the first slide, today, I will be discussing an overview of the quarter, I will then turn the call over to Dave for a detailed financial review, Jeff will follow Dave and give an update on our operational trends, I will then summarize and we will open the call for your questions and then closing comments. If you turn to the next slide, overall results, Q4, fourth quarter of 2009 continued a series of operating successes that we have seen over the course of the year. Majority of our stores continued to take new vehicle share in the local markets, which helped our new vehicle volume increase 6.3% over the same quarter last year. In addition to the strong volume performance, our new vehicle retail margins were up 60 basis points at the end of the quarter at 7.3%. Our used vehicle business continues to grows our stores implement, refine our play book strategy. Jeff will have more to say about our used vehicle business. But, it’s important to note that our retail used vehicle volume was up 18% compared to last year. At the same time, our gross profit dollars generated our used vehicle business were up 21% compared to the fourth quarter last year. The successes that we are seeing in our core operating segments for our business are the results of a lot of hard work and patient roll out of a consistent operating strategy in all of our dealerships. Our balance sheet is in the best shape in a long time, the successful refinancing of our syndicated credit facility in January, the latest in a series of steps that we have taken to get our balance sheet where we wanted. We now have a grand total of $17 million of long-term debt maturing over the next three years. In addition to dealing with our debt maturities we have also delevered to the tune of $146.3 million over the last years. And all of this was done in a less than ideal economic environment. We were required to report some charges related primary to non-cash lease accruals and impairments on the dealerships General Motors terminated in connection with their bankruptcy and from the repayment of our 4.25% notes that we completed in October. Overall, our team performed very well this quarter and our operating metrics continue to demonstrate the effectiveness of our play books that we’re rolling out across our stores. With that, I will turn the call over to Dave, our Chief Financial Officer. Dave?

[Dave Cosper:]

Thank, Scott. Good morning, everyone. Nice to be in a position now to look back at 2009 and certainly was a challenging year. It’s also nice to see we had strong revenue growth in the fourth quarter, just over 10%, with gross profit of nearly 8%. Cost performance was strong with SG&A as a percent of gross at 80.3% and operating profit came in at 2.7% of revenue. As Scott mentioned, there is a number of adjustments included in our results, such as the impacts from the termination of the GM stores, debt restructuring, and a tax valuation allowance change. These adjustments are detailed in the appendix to this presentation. And taken together, these adjustments actually improved earning so the adjusted earning shown here are actually lower than our GAAP results. On an adjusted basis, we are at 9.3 million after tax from continuing operations with EPS at $0.18 a share. Next slide, please. This slide shows our results for the full year 2009, revenue was just over 6 billion for the year, down 12.5% from 2008. SG&A as a percent of growth for the year was 80.4% and operating profit as a percent of revenue was 2.8%. On an adjusted basis we earned 35 million after taxes from continuing operations, which is $0.68 a share from the full year. Next slide, please. This slide shows our trend of EBITDA, for 2009, we generated $170 million of EBITDA, up from $151 million in 2008. Directionally, able to improve cash generation in 2009, even though industry volume fell by over 20%. Given our improved cost structure and operating efficiencies, we believe we can reach a 2007 EBITDA level on an industry volume significantly below 16 million units. Next slide, SG&A costs total 208 million in the fourth quarter, down nearly 6 million from 2008. Controllable costs within that were down over $13 million. SG&A as a percent of growth was 80.3%, down from 88.9% in 2008. We worked really hard during the year to reduce costs in a prudent and thoughtful manner, improving both our efficiency and optimizing our ability to generate revenue in a weak sales environment. And as industry volume increases, we plan to hold the line on costs to leverage our cost base and generate improved profitability. Next slide. Scott talked about our balance sheet. This slide shows our capitalization. We focused in 2009 on reducing debt level and improving our liquidity. At year-end, our long-term debt balance was 605 million, down 146 million from year-end '08, nearly a 20% reduction. And as part of this we reduced our short-term borrowing to zero with the cash balance of $30 million. With the sharp decline in industry volume we reduced our new vehicle inventory and associated floor plan borrowing decline by over $350 million or 32%. I wanted to mention there is a page posted on our Web site now that provides a look at our interest forecast for 2010 and we thought this might be helpful. Next slide, please. I really like this slide. This one show how our debt maturity profile has changed during 2009 and we worked really hard with our key debt holders and our banks during a very difficult time in the financial markets. Not only did we reduce debt in 2009, but we substantially improved our maturity profile and now I have essentially no material maturities for over three years. The 17 million of debt maturing later this year is the remaining balance of our 4.25 convertible notes. We plan to address these notes later this year with available cash. Next slide. As shown above, we are compliant with our all debt covenants by a fairly wide margin and the covenant shown here are the new ones effective with our new credit facilities that were put in place on January 15th and we expect to be in compliance with all of our debt covenants going forward. Next slide. As part of our focus on improving liquidity, we held capital spending, net of mortgage funding to 35 million for 2009. As you may recall, we put several large projects on hold during 2009 to conserve cash. Given our improved financial situation, we have resumed construction. We already have secured mortgage funding for one of the projects that are working on another one right now and hope to have it in place shortly. Spending for 2010 is projected at $60 million and mortgage funding of $20 million is expected for a net cash spending level of $40 million. With that I will turn the call over to Jeff Dyke for a review of our operations. Jeff?

[Jeff Dyke:]

Thanks, Dave, and good morning, everyone. Our new vehicle market share continues to improve, as mentioned in our previous calls, our attention is associate satisfaction, retention and our ability to execute our eSales and pre-owned play books continue to contribute to the success of our new car market share gains and record setting performances. Fourth quarter marked our fourth straight quarter of share growth, also setting a share record for the quarter and the year. Additionally, our share continued to grow in January of 2010. Total retail volume for the quarter was just over 23,000 units, year-over-year increase of 6.3%. We continue to manage all new vehicle inventory ordering on a centralized basis and are proud to record our new car day supply continues to be in excellent condition at 49.3 days, below the industry average of 54.7 days and significantly better than the same time last year of 85 days. On a quarter-to-date basis new vehicle margin was 7.3%, up from 6.7% last year. In our previous call, we discussed our customer satisfaction scores were on record pace and we're happy to announce 82% of our stores are at or above target in sales and services measured by our manufactured partners an all-time record for Sonic Automotive. Next slide, please. As you can see on this slide, our pre-owned strategy continues to show progress quarter after quarter, our used volume was up 18% and revenue was up 23% for the fourth quarter. As our California markets came on line in late March last year, the entire company began to make progress with our play book strategy as it matured. This success is a result of three plus years of hard work by our team. You have asked about our margin erosion, each of the last few quarters and I would like to make certain we address this head on this quarter. We do not see our margin as an issue in pre-owned. We have been adjusting our core mix year-over-year now to perfect inventory levels; we’ve also been playing with the elasticity of our pricing models to provide our customers with the right vehicle at the right price at the right location. This effort as you can see is paying off for the Company, as our gross dollars continue to grow, setting an all-time gross record for the fourth quarter, some 4.7 million more than prior year, up 21.1%. It’s important to note that this is only used car front end per unit and does not include the incremental gross that is generated in F&I and fixed operations as a result of re-conditioning. We fully expect our used car margins to be in line sequentially to Q4, but you should not expect margins at Q1 levels of 2009, as those levels are not in line with our strategy. However, you should expect to continue to see unit volume revenue and gross growth. I’d also like to add at this point that wholesale markets are not causing margin erosion at Sonic nor are we simply reducing margin to sale units. That is not a strategy. We are growing our revenue, our unit volume and gross at record levels quarter after quarter after quarter. Another important element of our strategy is our trade ratio, which has grown from 38% some 18 months ago to now over 50%. This allows Sonic access to valuable trade inventory and has substantially helped our new car market share. Our play book continues to help Sonic work its way towards achieving our long-term goal of averaging 100 units per store per month. We are gradually introducing further play book elements as our stores mature in the process that include new technologies, procurement plans and much more, which we look forward to sharing with you as they come online. Our certified pre-owned business continues to be about a third of our total used car mix, which is right on target and in line with our plan. Inventory ended the quarter at 30 days, which was a few days lower than I would have liked. We targeted to be at about 35 days at the end of December, but simply out sold our projected volume models in December. Our retail volume was up 11% in January of 2010 and is tracking to be up some 30% in February, both all-time volume records for these months for Sonic. We are aggressively trading for as many cars as we can at this point and are buying prudently now as our pre-owned business continues to grow as a result of our play book execution. Next slide, please. Overall, we continue to make progress with our fixed operations play book role out, now, one year into its introduction. We fully expect to continue to improve on the gains that we have seen in 2009. We are particularly excited about the three tiered menu selling process now being trained in our stores and our newly developed service lane merchandising program that will be anchored by competitive, good, better, best tire program that will attract additional customer by customers to Sonic Automotive. We are also excited about the introduction of our collision repair play book, which will be launched in the second quarter of this year, which will dramatically help our collision repair business, a major opportunity that we have in our 30 collision centers at Sonic. Overall, our continuing fixed operations revenue was up 0.6%, while gross margin grew to 50.3%, up 20 basis points on a year-over-year basis. Our customer pay revenue was up 0.7%, and customer pay gross dollars were up 0.5%, while customer pay gross margin was down, take [ph] basis points. Same-store warranty revenue was down 11.4% and has now dropped to 16.4% of our overall fixed revenue mix. Next slide, please. As we look to 2010 we expect the SAR to be around 11 million as we begin to see some improvement in the new car business, but either way, our model has become less dependent on the swings in the new car SAR and any uptick to these levels would be added benefit to Sonic. We expect to see used vehicle GPU lower than the first quarter of 2009, but stable sequentially to Q3 and Q4 2009, somewhere in the $1,500 range. However, we do expect to see both used car volume and gross dollars continue to perform well in terms of year-over-year comparisons due to our play book process and our ability to execute. We expect fixed operations to continue to improve, in 2010, as our fixed play book matures and to its second year of execution. Before I hand the call back to Scott I’d like to thank all of our Sonic Automotive associates for their hard work and dedication to the execution of our objectives and increasing associate satisfaction, reducing turnover, improving customer satisfaction and the execution of our play book which all leads to creating one of the America’s greatest places to work and shop. Thank you. Scott?

[Scott Smith:]

Thank you, Jeff. Speaking as both the President and a significant shareholder, our company today is stronger and more prepared to meet the challenges and opportunities of the future than ever before. This company has been significantly transformed in the last two years. Our operational strength and financial strength has been stress tested and proven. Our future growth is going to be driven by all those things that by now you are very familiar with our focus on cash and our balance sheet. Our corporate investment principles are driving every investment and facility decision we make. We have a plan to continue to strengthen our balance sheet, by controlling capital expenditures and further delevering over time. Our operational play books, we have completed these now for every area of our business and the future of our business model, profitability is not built on a rebound of the new vehicle SAR environment. Our investment in training, we will continue to roll out industry leading training to all our associates and it continues to pay dividend and retention and performance and our people. I’ve said from the very beginning that this is a people business and that truth is even more evident today, as we invest in our people through training, standardized processes, and technology, we’re seeing positive trend in our associate satisfaction, customer satisfaction, and reduction and turnover. I look forward to updating you further on these initiatives on future calls. At this time, we now like to open the call for your questions.

[Operator:]

(Operator instructions). Your first question comes from Rick Nelson of Stephens.

[Rick Nelson:]

Thank you. Good morning.

[Scott Smith:]

Good morning, Rick.

[Jeff Dyke:]

Morning, Rick.

[Rick Nelson:]

I was interested in what you are seeing in the early billing of 2010 in both used cars and new cars and how the Toyota recall is affecting business?

[Jeff Dyke:]

Hey, Rick, it’s Jeff Dyke. Business continues to be solid, moving into January and February as I stated earlier. Our used car business was up 11%, I think, in January, it’s pushing up nearly 30% in February. New car business is good as well. So, we’re pleased with the trends that we’ve seen so far. Toyota is 14% of our overall revenue business. Early on, it had a little bit of a tick, but in recent few days here especially this week end we had a very nice Toyota week end both on the new and the used car side. So now we expect to see some slow down in the Toyota business, because of the recall but ongoing, they’re going to bounce back and bounce back solid and we’re not too concerned about it on an annualized basis.

[Rick Nelson:]

And if you go back, can you also comment at on used car margins what you’re seeing there sequentially, year-over-year, you’re expecting lower margins, but maybe on a sequential basis –.

[Jeff Dyke:]

On a sequential basis, they’re right in line with the fourth quarter, actually, up just a little bit, and just like I said, sequentially, the Q3 and Q4, you should expect to see us somewhere in the $1,500 range, but not up in the $1,700 range where we were last year at this time. We’ve just found with pricing elasticity and our product mix at the stores as we trade cars around, but this is kind of the right area for our margin and its maximizing our volume and the gross that we’re generating off of the volume.

[Rick Nelson:]

Thank you. And the 11 unit SAR assumption, you have for the full year, what does that say about fleet and more importantly, the retail expectation?

[Jeff Dyke:]

I’m not sure from a fleet perspective. Fleer was a larger role in January than I think everybody anticipated, but it’s all built into our model. Our model is built somewhere in the upper 10s million units to 11 million units. So, we will be in good shape.

[Rick Nelson:]

And I know one in the third quarter call, Scott, you had talked about an SG&A to gross, in the mid 70s at a 10.5 million units to 11 million units, is that still the expectation?

[Greg Young:]

Hey, Rick, this is Greg. I think that the SAR would have to be a little bit more than the 10.5 million units to 11 million units to get down into that range. If I recall going back into the 15 million units and 16 million units environment, we were in the mid-70s. I think you’re going to have to see something north of that 11 million units range. We were getting close in December, but that was closer to about 12 million units SAR environment, also for the month of December. I think north about 12 million units we start to see the mid 70s, I think in the 10.5 million units to 11 million units is still going to be somewhere in the high 70s there.

[Rick Nelson:]

But narrowing the expense ratio.

[Greg Young:]

Yes.

[Rick Nelson:]

Great, thank you.

[Greg Young:]

Thank you.

[Operator:]

Your next question comes from Matthew Fassler of Goldman Sachs.

[Marc Andre:]

Hi, this is actually Marc Andre filling in for Matt. How are you?

[Scott Smith:]

Good, Mark.

[Jeff Dyke:]

Good, Mark.

[Marc Andre:]

Good. Just one quick question, first, on the used ASPs were very strong this quarter compared to last despite the very strong unit comps. I’m just wondering what the drivers are and why this was not felt as much last quarter even though used, used vehicle market was strong.

[Jeff Dyke:]

Mark, I am sorry, I didn’t understand your question. ASVs?

[Marc Andre:]

The ASPs, average selling price.

[Jeff Dyke:]

All right.

[Marc Andre:]

Is it basically the mix shift or what drove the strength in the used pricing?

[Jeff Dyke:]

Mark, some of it has to do with mix shift and some of it has to do with just the market. I felt like the market in Q4 was really strong, especially, as we entered the December period. December was just a fantastic month for us. October and November a little bit weaker, but that was off a little bit due to coming out of September with a lighter inventory than we wanted, but the quarter ended really strong and mix played a little bit a role in the pricing.

[Dave Cosper:]

Mark, this is Dave. One thing I noticed California was very strong in used, they were up 40% in the fourth quarter and we have a large luxury exposure there, and that’s helpful and up a little bit as well, some of the mix item that Jeff mentioned.

[Marc Andre:]

Got it. And as a follow up on the SG&A front, the ratio was turning very good year-over-year basis was a little bit of what we expected, I was just wondering what’s left there in terms of cost and what we should expect from here?

[Scott Smith:]

I think we did a pretty good job balancing cost and our focus on growing revenue. You certainly saw that in the gross line with the fourth quarter with new and used gross up over 20%. I think there’s more opportunity there. We’re going to continue to look, but, I think we’re going to maintain that prudent, thoughtful approach that we’ve done and not just going in, cut everybody’s pay plan, and let people go would did make sense. We got our business structure to sell as a revenue business and we’re going after it.

[Marc Andre:]

Got it. And lastly, if I may, just one question on parts and service. What do you think the trajectory there will be, given lower units and operation and what are the different initiatives if you could give a little bit of detail on what you’re doing there?

[Jeff Dyke:]

Hey, Mark, it’s Jeff. We’re continuing like I said in the presentation to implement our fixed operations play book primarily focused around customer pay, menu selling in our service drives and our service lane merchandising program. We are expecting small uptick from 2009 and our revenue, as we continue to hold margin, I think, there’s a little margin opportunity there, as we continue to play with our pricing, our expectations for 2010 are to improve upon our performance in 2009.

[Marc Andre:]

Got it, thanks very much.

[Jeff Dyke:]

Thank you.

[Scott Smith:]

Thanks Mark.

[Operator:]

Your next question comes from Colin Langan of UBS.

[Colin Langan:]

Good morning.

[Scott Smith:]

Hi, Colin.

[Jeff Dyke:]

Hi, Colin.

[Colin Langan:]

I am looking at the forecast for interest expense in 2010 and its lower than the annualized rate this quarter. What is the factor that’s actually helping it come down next year at least for an annualized basis?

[Scott Smith:]

There’s probably some one-time items in there. Greg?

[Greg Young:]

There’s some of that and it may be some of the delevering. We don’t have anything outstanding on the revolver now; we may have had a little bit at the beginning of the fourth quarter.

[Colin Langan:]

Okay. What about the swap, the swap interest is that down as the LIBOR rates go up, is that an offset?

[Scott Smith:]

Yes, these are variable to fixed. And there were some other debt fees and things like that. We had to write off and ran through interest in the fourth quarter. Some of those are outlined on the tables that we had in the press release, too.

[Colin Langan:]

Okay. And when I look at the share count and actually it was a little bit lower than I was anticipating. Is there any more dilution to come? I know you took out a (inaudible) quarter convert mid-quarter. Did that negatively impact the dilution or is that completely diluted?

[Scott Smith:]

No, there shouldn’t be anymore dilution to come going forward.

[Colin Langan:]

So the Q4 diluted shares is a good proxy for the full year next year or will it be even lower since you took out that convert?

[Scott Smith:]

No, no, it should be pretty much that run rate.

[Colin Langan:]

Okay. And how many dealerships are left in discontinued op?

[Scott Smith:]

That’s a great question. It’s two and one, gone half a foot out the door. So we will be left with one shortly. And you recall what happened there, Colin, we had a number of stores for sale in the hopes of getting some liquidity from the sales but that didn’t work out. So we’ve pulled them all back.

[Colin Langan:]

Okay. And just one last one, what was the performance, I think, in the past you’ve given warranty and customer pay within parts and services?

[Scott Smith:]

Hang on, just a moment, Colin. I gave warranty. Warranty was down 11.4% and it is down 16% of our total fixed revenue, customer pay was up 0.5 percentage, which is, I gave customer pay revenue was up 0.7 while customer pay gross dollars were up by 0.5 point.

[Dave Cosper:]

Warranty has been trending down for several years now and continuing.

[Colin Langan:]

So going into next year, customer pay is going to have to be up a bit to get that slight increase because warranty should continue to be having, okay.

[Jeff Dyke:]

It is in. And that’s how it has been. It was like that in 2009, it started pretty heavily in '08 and we’re managing it. Our play book process is helping drive customer pay. That’s what its completely centered and focused on. We’re doing a much better job there, so we’ll continue to see nice increase in '10.

[Colin Langan:]

Okay, all right, thank you very much.

[Operator:]

Your next question comes from Ryan Brinkman of J.P. Morgan.

[Ryan Brinkman:]

Ryan Brinkman for Himanshu Patel. Your outlook for 2010 SAR is, I think, just 6% higher year-over-year than 2009. Do you think it’s fair to say that in such a scenario, Sonic new vehicle revenues and/or luxury sales more generally if you are more comfortable with that could increase at a faster clip year-over-year?

[Jeff Dyke:]

Slightly, Ryan. It all depends on how those manufacturers perform this year as a part of the total SAR and maybe slightly, it could be, but you’re looking into a crystal ball there.

[Ryan Brinkman:]

Okay. And then could you just remind us, again, of when your interest rate swaps expire and could you perhaps comment on what the proper quarterly impact should be on a pretax basis going forward? I think in somewhere in the reconciliations you mentioned that you had a net income impact of $3.3 million in 4Q. I imagine that interest rates rose during the quarter, but I don’t really know. Can you say what that ought to be on a run rate basis going forward?

[Scott Smith:]

I can handle the maturity; almost all of them mature about mid 2012, May to July.

[Dave Cosper:]

And then there will be a table file, our 10-K tomorrow running and there will be a table there in the footnotes like we’ve had in the past that will give you more the detail on the individual swaps, its running $4 million to $5 million a quarter at where the interest rates are, are right now, is the impact of those (inaudible).

[Ryan Brinkman:]

Okay, thanks, I appreciate it.

[Dave Cosper:]

Because roughly where the swap fix at about 5% interest rate, so –.

[Ryan Brinkman:]

Okay, good.

[Operator:]

(Operator instructions). Your next question comes from Derrick Winger of Jefferies & Co. Derrick Winger – Jefferies & Co. Yes, just two follow-ons here. What was your capital expenditure outlook for 2010 and your availability on the bank facility and letter of credits that are out against it?

[Scott Smith:]

Yes, the number was 60 million gross and with 20 million of mortgage funding. And it’s important to know we have zero actually on our revolver today, drawn and anticipate have a zero balance throughout the year. So it would be from cash that we generate. Derrick Winger – Jefferies & Co. What is the availability on that facility in the letter of credit, out against it and then the capital expenditure outlook?

[Scott Smith:]

The facility, right now, we’ve got, as of today, something like $73 million of availability on the revolver that we could use, given the borrowing base that where letters of credit are today. But again, like I say, we’re not planning to use the revolver for any purpose this year. Derrick Winger – Jefferies & Co. Okay. So do you have that letter of credit balance at year-end and then capital expenditure outlook for 2010?

[Scott Smith:]

The capital expenditure was 60 million gross, 20 million of mortgage for 40 million of cash.

[Derrick Winger:]

No, the outlook for this year.

[Scott Smith:]

That is the outlook for 2010. It’s up 5 million from 2009. And principally because we’ve got, we restarted three large projects.

[Dave Cosper:]

There’s about 96 million of LCs out there.

[Scott Smith:]

That’s at year-end; it’s down to just over 60 million today. Derrick Winger – Jefferies & Co. Okay, thank you very much.

[Operator:]

Your next question comes from Peter Siris of Guerilla Company.

[Peter Siris:]

First, before I ask my question, I want to thank everybody since I am not only a happy shareholder, but I’m a happy customer having bought a car from you guys, got great service, so thank you very much for all the help.

[Jeff Dyke:]

Thank you very much.

[Peter Siris:]

It was actually a very interesting experience to buy a pre-owned BMW, so Thanks. The question I am curious about is right now we are clearly in an economic slowdown with very low new car sales. First, what’s the scrappage rate, do you guy have any idea?

[Jeff Dyke:]

It’s about 13 million new cars a year.

[Peter Siris:]

So, how long is this level of low car sales sustainable? In other words, is there a point, if you look out three years or four years, I don’t know we have to look at for your four years, but if you look out three years or four years what’s the lowest level that you can see sustainable?

[Jeff Dyke:]

I think we’re at it. I don’t think it gets any lower than where we’re today and you’re going to see a nice gradual increase, some are projecting the SAR to be up over 12 and we’re not seeing that, but a nice gradual increase in new car volume.

[Scott Smith:]

Yes, I mean I agree with Jeff. If you go out three or four years it’s going to 14 million to 15 million. You may not get 17, again, but we don’t need 17 million to generate the cash we did before.

[Jeff Dyke:]

It’s going to be a lot of fun when we get into a 12 million or 13 million SAR for Sonic Automotive. We’re going to have a ball.

[Peter Siris:]

I am just curious, with people having closed dealerships, if the SAR gets back, so there’s a total less competition, if the SAR gets back to 14 or 15, do you make as much profit as you would have at 17 in the past?

[Jeff Dyke:]

Oh yeah. We sure do. And it doesn’t need to go back to 14 or 15. It needs to get to 12 or 13. And that’s the beauty of the model that we’ve been working so diligently on with used cars and fixed operations. Our used car business is really driving our business. So, it really doesn’t have to; have to go up that high. And we’re anxiously looking forward to that.

[Dave Cosper:]

That was the point I was trying to get on the EBITDA slide that we showed. We actually generated more EBITDA in 2009 than 2008. At an industry of 12 to 13, I think we can be back to where we were in 2007. That was the 16 million SAR back then

[Peter Siris:]

So last question I have is, as I look at the world I see less dealers and see more efficient dealers and at some point my view is the SAR has increased. What can go wrong with that picture? Aside from, we could have another great, great depression. But, in a normal world at some point doesn’t the SAR have to at least equal the scrappage rate?

[Jeff Dyke:]

Yes, or get better. And that’s what we keep saying is exactly your comment. And things are going to continue to get better. And that’s why we have been working so hard on the other facets of our business so then what does get better on the new car side; we can take full advantage of it.

[Scott Smith:]

If it does we’re still profitable.

[Peter Siris:]

Right. I understand that, what I am saying is, is there a scenario that you can imagine four years out from now, where it doesn’t get substantially better?

[Jeff Dyke:]

Unless there’s another depression on top of the great recession, no. Oil prices go crazy, but we’ve seen that and made our way through that, too.

[Peter Siris:]

I guess the question I am asking is this, even if oil prices go crazy, if the scrappage rate is 13 or 13.5, you can’t keep selling 10 million cars a year.

[Jeff Dyke:]

That’s correct.

[Scott Smith:]

It’s still a big country and people need to move from Point A to Point B. We’re optimistic.

[Peter Siris:]

Okay, thanks, I appreciate it.

[Jeff Dyke:]

Thank you.

[Operator:]

That was our final question. I will now turn it back to management for closing remarks.

[Scott Smith:]

Well, thank you everyone. Just before I end the call I want to thank everyone of our outstanding associate who continue to work so diligently to make all of our success possible. Thank you, team, very much. And it’s an honor and a privilege to lead this great company and we look forward to talking to you next quarter and sharing some more results with you.

[Jeff Dyke:]

Thank you.

[Dave Cosper:]

Thanks.

[Operator:]

Thank you for participating in today’s conference. You may now disconnect.