Sonic Automotive, Inc.
Q1 2010 Earnings Call Transcript

Published: 27 Apr 2010

[Operator:]

Good morning, and welcome to the Sonic Automotive first quarter 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, April 27, 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 side 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 those 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, Co-Founder and President of Sonic Automotive. Mr. Smith, you may begin your conference.

[Scott Smith:]

Great. Thank you. Good morning, ladies and gentlemen. I am Scott Smith, the company’s President, Chief Strategic Officer and Co-Founder. Welcome to Sonic Automotive’s first quarter 2010 earnings conference call. Joining me on the call today are the company’s Vice President, David Smith; Vice Chairman and Chief Financial Officer, Dave Cosper; our Executive Vice President of Operations, Jeff Dyke; Rachel Richards, our Vice President of Retail Strategy; and Greg Young, our Vice President of Finance. If you please turn to the first slide. Today, I will discuss an overview of the quarter, and then turn the call over to Dave for a more detailed financial review. Jeff Dyke will follow Dave and give an update on our operational trends, and then I will summarize and make closing comments and we will open the call for your questions. If you turn to the slide, Overall Results – Q1; at Sonic Automotive, we are building one of the best companies in America to work and shop. We have a culture focused on making associate satisfaction our number one priority. We believe that happy associates lead to happy customers and higher returns for our shareholders. One year ago, in the first quarter of 2009, we launched a large-scale plan to improve communications with our associates and reduced our associate turnover. In 2008, our total annual associate turnover was 56%. Today, we are tracking less than 25% with our long-term goal of being less than 15%. With lower turnover, our training and playbooks are gaining traction and our execution is improving. We ended 2009 with 83% of our dealership exceeding national averages for their respective manufacturers and customer satisfaction scores. Our goal is to have all of our dealerships exceed national average in CSI. Operating results for the quarter continued to prove the validity of what we are doing at Sonic Automotive. Our overall revenue was up 13% with every one of our departments seeing increases year over year. Our new business, both volume and margin, was up nicely over the prior year as we saw an increase in the new vehicle SAAR environment. New vehicle revenue growth was nearly 14%, was driven by 10% increase in volume and a 4% increase in the average selling price. Our used fit business continues to grow as our operational playbook continues to become an ingrained process in all of our stores. Used vehicle volume was up 25% over last year, and this is against comps that were significantly stronger than the rest of the peer group. Our used to new ratio was at 1 to 1 for the quarter, a period where the new vehicle volume was also growing. Our parts and service revenue was up 3% with a 70 basis point improvement in margin, our fixed ops benefited from manufacturer recalls from the quarter. Our customer pay business was up approximately 3%, and Jeff will discuss further the trends in this area of the business. I would remind you that we are in the very early stages of our playbook rollout for fixed operations, and we fully expect improvement in this area over the remainder of the year. David will have more color on our overall profitability and our SG&A levels, but I do want make a few comments briefly on our expense structure. Majority of our SG&A-to-gross increase came in the variable compensation line. We indicated over the course of last year that we are approaching the business and our compensation practices differently than our peer group. You saw a slower-than-expected start to the quarter in January as we had a hangover from a huge December, but overall I'm very pleased with our performance as we saw our SG&A numbers come more in line with our expectations as the quarter progressed with over a 200 basis point improvement year over year for March. We built our budget at the 11 million SAAR number and hit our budget exactly for the quarter. We remain on track for our plan for the year with potential upside should we see continued strength in the SAAR during the remainder of the year. I'm pleased with all the work that we have done to strengthen our balance sheet. Dave Cosper, Mike Dickerson, Greg Young, and our financial team really stepped up for us when we need them. We completed another successful offering this past month which allowed us to address $200 million of our senior subordinated notes maturing in 2013. We have $75 million of our 8 5/8% notes left in 2013, while our new 9% notes are not due until 2018. I'm pleased to be able to tell you today that our balance sheet is in the best shape that it has ever been in, and we have a plan in place to continue to de-lever and reduced debt by another $75 million to $100 million. With that I would like to turn the call over to our Chief Financial Officer, smiling Dave Cosper. Dave?

[Dave Cosper:]

Thanks, Scott. Good morning everybody. Revenue for the quarter approached $1.6 million, up 13% from last year. Gross profit was $269 million, up nearly 9% from last year. And finally operating profit at $35.9 million was 2.3% of revenue. Profit after tax from continuing operations was $7.5 million, up from $4.1 million a year ago. And although it's a substantial improvement, I think we could have earned more in the quarter. From a profit perspective, we got off to a slow start in January, as Scott mentioned, and which followed a very strong December. Things improved in February, and March was extremely strong. We are seeing that strength continue in April and feel good about our sales momentum, cost structure and profit. EPS for the quarter was $0.14, up from $0.10 a year ago. Next slide please. This slide shows our SG&A. And SG&A as a percent of gross was 83.5% for the quarter, up 10 basis points from 2009. We made good improvement in advertising, other fixed and variable costs and rent and rent related, and as Scott mentioned, this was offset by higher compensation costs. We are making some adjustments to our compensation practices to one, ensure we are at least market competitive, and two, to drive behaviors and performance that we desire. We are also increasing our investment in training and systems to support our people. And our strategy is working, and I see it in the March numbers; as Scott mentioned, we were down nearly 200 basis points in March versus 2009. Restructuring the business to generate revenue and not playing defense, our sales performance in all our business lines is showing that and the profits are materializing. What's more, our associates are happier, turnover is down and customer satisfaction is rising. Next slide please. Scott mentioned our debt offering. This slide shows our major debt maturities, and we've really come a long way in one year. Presently, our only near-term maturity is $17 million of debt due later this year, and we have cash in the bank to retire this obligation. As you know, last month we issued $210 million of 9% coupon notes to push the maturity of debt due in 2013 up to 2018. We successfully completed the call of this debt and retired $200 million for our 8 5/8% bond earlier this month. This action of course improves the maturity profile of our debt, but it also helps stagger our maturities and reduces the amount of debt maturing on any given day. And of course, this reduces our refinancing risk and we are very comfortable with the way our balance sheet looks at present. Going forward, we are committed to reducing our leverage further and are targeting to reduce our debt by a further $75 million to $100 million over the next few years. And with the balance sheet in a very good shape now, we are able to focus fully on the business and the many strategies that we have for growth. Next slide please. We are comfortably compliant with all our financial covenants, and on March 31, you can see that in the table; and these covenants, they tighten over the life of our credit facility. And the 2012 covenants are showing on the right side of the slide. And as you can see, where we ended March, we actually complied with a tighter future covenants as well. We ended the quarter with $214 million of cash on the balance sheet and that's because we issued new debt in March and retired the debt in April, as I mentioned. So we are holding an extra $200 million at quarter end. We did retire that debt, and as of today, we have $40 million of cash in the bank with no borrowing on our revolver. Next slide please. Capital spending for the first quarter was $6.5 million net of mortgage proceeds of $1.3 million. We’ve resumed investment in three large projects that we put on hold in 2009 to preserve cash. The capital spending for the year is projected at $37.8 million net of mortgage proceeds of nearly $21 million. Before I turn the call over to Jeff, I would like to give you a couple of closing thoughts. As you know, we are not giving guidance, and having said that let me talk just a little bit about how I see things going forward. I've looked at analyst estimates for the year and they range from $0.90 to $1.25. Full-year EPS, that's pretty big range, and it's not 100% clear to me what industry volume assumptions are for everyone, but some I think are as high as 13 million plus units. And recall, we are planning the business at 11 million industry and that's what Q1 actually was. As Scott mentioned and I did as well, we got off to a slow start but we are picking up steam and performing nicely. As I look at the analyst estimates, it appears to me that we are seeing industry volume for the year, some of the analysts at 11 million, and I feel that we can hit earnings close to what they are projecting at that level. So with that I will turn the call over to Jeff for a discussion of our operating performance. Jeff?

[Jeff Dyke:]

Thanks Dave, and good morning everyone. As mentioned on previous calls, our attention to associate satisfaction, associate retention and our inability to execute our eSales and pre-owned playbooks continue to contribute to the success of our new vehicle sales. While we saw year-over-year gains in each of the three months in the quarter, our year-over-year revenue and percent gains grew with each month of the quarter accumulating in a March increase of 18% over prior year. What is really exciting is our growth in April was tracking up in unit volume 26%, as we continue to implement and execute our new vehicle playbook. As part of our playbook execution, we added in-store and/or regional eSales offices in several regions this quarter, which added to our SG&A as we ramp up this new structure which will play a significant role in our traffic management execution. Returns from our initial eSales concept rolled out in the fourth quarter are really starting to show fantastic returns, but we do have about a four-month to five-month ramp up period before we begin to see the returns as eSales personnel come on line. Total new retail volume was up 21,484 units, a year-over-year increase of 10%. We continue to manage all new car inventory ordering on a centralized basis and are proud to report our new car day supply is in outstanding shape at 54 days, significantly better than last year’s 74 days. We are up from the fourth quarter of 49 days as we have increased our inventory by a few days to support the upcoming selling season. On a quarter-to-date basis, new vehicle margin was 7.1%, up 30 basis points from prior year. And as you can see on the slide, gross profit per unit was up $179 or 7.8%, and gross profit dollar has increased nearly 19%. I want to provide some regional new car color for you for the quarter. Florida was up 34% in revenue and 23.5% in volume. Houston was up 25% in revenue in 19% in volume. The mid-Atlantic area was up 29% in revenue and 24% in volume, while Las Vegas was also up 32% in revenue and 24.5% in volume. Our northern California market was up 18% in revenue and 14% in volume. And southern California, Denver and the Dallas markets were all up but single digit and did not enjoy the large double-digit growth until the month of March. Next slide please. We continue to gain momentum in our pre-owned business as we posted our strongest used car revenue and volume quarter in Sonic’s history. This marks our fourth straight quarter of double-digit used vehicle volume growth as our pre-owned team continues to execute our playbook. As you can see on the slide, we grew used vehicle revenue nearly 29% for the quarter and grew our used vehicle volume by nearly 25%. The quarter was highlighted by our outstanding performance in March up 34.6% over prior year and setting our all-time single-month volume record. The great news is that April looks like it will be even stronger than March in both volume and year-over-year growth which is now tracking at 35% to 36% as our team continues to excel in this very important part of our business strategy. As you can see on the slide, and as we discussed in detail last quarter, our used vehicle gross margin has stabilized as we projected. Our margin percentage actually is a little higher than our forecast and this is strictly due to inventory tightening and front margin gross per unit moving up as a result. You should expect our margin percentage and gross profit unit to remain relatively flat throughout the remainder of 2010. Our used to new ratio was 1 to 1, our best quarterly performance as we continue to work towards our goal of achieving a sales average of 100 pre-owned units per store per month, which will add $1.1 billion in incremental revenue to our current revenue base. This does not take into consideration the incremental revenue as a result of increased fixed and F&I due to the increased and pre-owned volume. As we discussed in previous quarters, out buying organization continues to grow as we added seven buyers over the past few months. We have buyers now covering our purchase needs in all of the Honda and Acura stores on the West Coast as our team perfected our buying process in the first quarter. The progress that was made has allowed us to now add other import stores on the West Coast including Toyota and Nissan. This should be complete by the end of the second quarter and then we will begin to add more markets moving eastward over the remainder of the year. Our plans are to have 100% of stores covered by our buying organization by the end of 2011 if not sooner. This move has had a positive impact on the Honda and Acura growth on the West Coast as volume was up approximately 35% for the quarter outpacing the company, our other Honda stores and the West Coast in general. Our certified pre-owned mix was 35% for the quarter, right in line with our target. Inventory ended the quarter at 33.5 days as we begin to build inventory for second quarter and we are purchasing heavily now to keep up with the significant volume increases that we are seeing as a result of our playbook execution. Next slide please. As we discussed last quarter, we continued to make progress with our fixed operations playbook execution. We fully expect to continue to improve on the gains that we've seen in recent quarters as we work on our goal to have 100% of our stores 100% fixed absorbed. We had two full regions a 100% fixed absorbed in March as the company was 92.7% fixed absorbed for the month and 86.6% for the quarter. Achieving this goal will add $250 million in revenue to our current revenue base. We are making great progress with our service lane merchandising program and we’ll being to rollout this quarter our new good, better, best tire program as well the program combined with our service lane merchandising selling process will continue to bolster our customer pay revenue, which was up $3.4 million or 2.7% for the quarter. As I noted last quarter, we begin to launch our body shop playbook which will provide great support to over 26 body shops across the country as we see significant upside opportunity in this area of our business. And we will continue to keep you posted as to the progress we make over the next couple of quarters. Overall, our fixed operations revenue was up 2.8%, while gross margin grew to 50.3%, up 70 basis points over prior year. As stated, our customer pay revenue was up 2.7% and customer pay gross dollars were up to 2.6%, while our customer pay gross margin percentage was 56.8%, down 10 basis points. Same-store warranty revenue was down 10.8%, which included substantial increases at our Toyota stores as a result of the Toyota recall, warranty continues to be in the 16% range as a percent of our total fixed revenue. Next slide please. Here is some color on our outlook for the remainder of 2010. First, we are in the second year in fixed operations after the introduction of our playbook, so we expect to see an improving fixed environment driven by customer pay as the year progresses. Second, as we described last quarter, we budgeted 2010 at 11 million SAAR and at the end of the first quarter that's exactly where we ended up as Dave and Scott talked about earlier. There is still many analysts and industry leaders projecting at 12.5 million to 13 million SAAR, and obviously if this occurs, we have upside to our current goals for the year. While we are seeing an improving new vehicle environment right now, we continue to be cautiously optimistic that we are seeing the beginning of a slow new vehicle recovery, but are not ready to comment to a 12-plus SAAR for the year in our planning; we prefer to remain conservative. You should expect to see SG&A as a percentage of gross decline in the coming quarters. March was a good indicator for us as our plans are beginning to materialize; as Dave and Scott mentioned, our SG&A was over 200 basis points lower than last year. Before I hand the call back to Scott, I would like to thank all of our Sonic Automotive associates for their hard work and dedication to the execution of our objective in making associate satisfaction our number one priority. This will lead to lower turnover and create the ability for our training organization to deliver world-class training which will improve customer satisfaction and return on investment for our shareholders. As Scott said, our turnover is on track to be less than 26% for the year, which will mark the third straight year of significant improvement in associate satisfaction and turnover and supports our mission to create one of America's greatest companies to work and shop. Thank you, team. Scott?

[Scott Smith:]

Thank you, JD, for the operational update. I just have few more comments before we’ll open the call up for your questions. I would like to tie this all together for you by providing a glimpse into what we see in our future over the next 3 years to 5 years. There are a couple areas in SG&A that may be of particular interest to you. It's important for you to understand that we will invest over $20 million in training and new technology this year alone will help us achieve our goals. We are building apps that will enhance our customers experience and enable our associates to become more efficient. We are also exploring ways to compensate our associates in more customer-centric ways which will lead to some SG&A fluctuation as we saw in January of this year, although February and March were much more predictable as Dave described earlier. We are expanding our new car playbook to include many of the processes that have proven to be beneficial on the pre-owned side and we expect these additions to the Sonic Automotive improve market share in the new vehicle volume levels over time. We are well on our way to achieving our pre-owned goal of averaging over 100 units per store per month, which Jeff mentioned, and which will add $1.1 billion in incremental revenue and over 100 million in incremental gross, not including the effect on fixed and F&I. We're also making progress towards our goal of 100% fixed absorption, which will add an incremental $250 million in revenue and $125 million in gross. We challenged our F&I teams to achieve two products per vehicle sold in F&I. Today, we have many stores well over the two products goal and look for the remainder of our stores to achieve this goal as well. This achievement will add an additional $120 million in incremental gross. The combination of the above, excluding any new car volume improvement or SAAR improvement, will yield the company an incremental $1.5 billion in revenue. Turnover is reducing as you’ve heard on this call and we will achieve turnover levels of 15%. As we do it will yield more effective operations and return on investment for our shareholders. We believe that we can achieve these incremental levels of revenue and growth without having to invest money and adding additional dealerships to our portfolio or seeing any meaningful improvement in SAAR. Any SAAR improvement or acquisitions would only enhance our plans. We appreciate the opportunity to share a small glimpse into Sonic's future with you. We have several plans that we will unveil in the coming quarters, which should revolve around the customer experience and a technology enhancement plan, including the addition of a Sonic Apps store that will significantly improve our associates’ ability to communicate both internally and with our customer base. We continue to see the benefits of the patient consistent rollout of our playbooks and operating initiatives. Over time as business and cash flow improves, we plan to maintain our focus on our investment principals, reducing our debt, and facing back our 401(k) for our associates and dividends for our shareholders. We reported a lot of great news today and I'm proud of all of our associates. What a difference a year can make. Not long ago our stock was below $1 and there was a lot of uncertainty out there about the future of our company. Today, we are stronger, healthier and better than ever. We are building a culture centered around our associates and customers to become one of the best companies in America to work and shop. Before we take questions, I want to take a minute to thank all of our associates and vendor partners that join together every day to (inaudible). Thank you team. It's an honor and a privilege to lead our company. At this time, we will open the call and take your questions.

[Operator:]

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

[Rick Nelson:]

Good morning.

[Scott Smith:]

Hi, Rick.

[Rick Nelson:]

I'd like to follow-up on the SG&A. I know you mentioned that your plan differs from the other auto dealers. I am wondering if you could talk about that and what the recent adjustments were to SG&A. And if the SAAR hits your forecast, where would you expect SG&A to gross to be for the year?

[Jeff Dyke:]

Hi Rick, it’s Jeff Dyke. How are you?

[Rick Nelson:]

Hi, thanks. Good.

[Jeff Dyke:]

Listen. First of all, there were a lot of moves. Last year was so uncertain and as we kind of (inaudible) started to park here for us at the end of the year and we had held off on a lot of plans that we wanted to execute last year but just couldn’t. So with January started, we began to add a couple of different things. I talked about buyers and our eSales offices and our stores. And those things don’t have an immediate impact. It takes four or five months to get all that stuff ramped up. So it had an impact on January’s SG&A as those items began to deliver a little bit our SG&A as a percent of gross got better and better as the quarter went along accumulating in March, we were 200 basis points below March from previous year. And we are seeing that in April. So we just executed a lot of things in the beginning of the year that we had held off on last year. I expect our SG&A to be in line on a full-year basis. But we did start off the year a little bit slow in terms of new car volume and just a little bit of a hangover from December. And that’s what caused the SG&A fluctuation. It was primarily built into January. February is much more normalized and March was actually fantastic. So we expect the year to be a good year, got off to a slow start and implemented a lot of things that we’ve been holding back on last year that we really wanted to get up and running this year. And that all started January 1 and it caused a little bit of a slowdown from an SG&A perspective.

[Rick Nelson:]

Would you expect that expense ratio to narrow?

[Jeff Dyke:]

Yes, absolutely, and we saw that happening in the quarter. And that will continue to happen as we move through the year.

[Rick Nelson:]

Year over year, I think you mentioned you were down 200 basis points in March. Is that the magnitude of improvement that you're expecting for the year?

[Greg Young:]

No – Rick, this is Greg. I think in March it was a little bit higher than 11 million SAAR. So if we are still planning on that 11 million SAAR level for the year I don’t expect to see quite the same level of improvement that we saw in March. And as Jeff and Dave mentioned to the extent we see the recovery coming and the new vehicle environment moves up, then yes, we would certainly ratchet down our expectations even further on SG&A. But I think in an 11 million SAAR, you are kind of still in that 80% to 81% range.

[Rick Nelson:]

Okay. Thank you. That’s helpful. And at 11 million units, could you indicate you're comfortable with the low end of the First Call estimates?

[Jeff Dyke:]

That’s pretty much what I signaled, Rick. Yes.

[Rick Nelson:]

Okay. And then also I would like to follow up on the Toyota impact to service and parts. You reported 2.8% of same-store growth that have looked like ex Toyota and if we could go through the segments on customer pay warranty internal as well, that would be helpful.

[Greg Young:]

If you pull out the Toyota impact, which was about $2.1 million for the quarter, our total fixed was up $4.7 million. So we would have been at about 1.5% increase. We feel like we're making really nice progress from a customer pay perspective and our customer pay is really what we are paying attention to here is the nice increases that we are seeing there. So the other thing that you have to remember is that’s offsetting a $1.6 million year-over-year Lexus decline because we had big warranty impact from Lexus last year in the first quarter. So those two things are pretty much offsetting each other on a year-over-year basis. If you add Mercedes back in there they are absolutely offsetting each other so we feel real good about where we are on a fixed operations perspective. We are making great progress and that’s why I told you are going to see – we should see sequential growth and improvement as we move forward throughout the year on fixed ops.

[Rick Nelson:]

Even with the declines in units and operation?

[Scott Smith:]

Yes, because we are not just focused on units and operation for new car. We have new and used car, and we're driving a lot of our customers to buy used cars back into our facilities as well. So you got two streams of revenue there and while you have units in operation decline on the new car side – I mean, you just look at the numbers, I mean, our customer pay us up. I'm not sure what the other guys have done, but our customer pay us up, and while there are some unit and operation shrinkage over the coming years, we can certainly make that up on the used car side. We are selling plenty of pre-owned cars to help offset that.

[Jeff Dyke:]

Rick, the reconditioning on the used cars is filling up the shops as well. It’s an added benefit to the sales growth on use.

[Rick Nelson:]

Thank you, and good luck.

[Scott Smith:]

Thank you very much.

[Operator:]

Your next question comes from the line of Matthew Fassler with Goldman Sachs.

[Marc Andre:]

Hi, this is actually Marc Andre [ph] filling in for Matt. Just one quick follow up on SG&A. When you talked about exploring ways to compensate associates more in a more customer-centric ways, what exactly does that mean? Is that increasing variable compensation, and just want to know how we should think about it going forward.

[Jeff Dyke:]

Mark, this is Jeff Dyke. We are right in the middle of that. We’ve worked on all of our Managers pay plans and General Mangers pay plans and between now and I'd say the middle of next year we'll work on the balance of all of our associates. I hesitate to sort of speak out about how we are structuring this pay plans because that’s kind of what we think is a competitive advantage to us. So I can just highlight to you that they are going to be more customer-centric and in getting our associates to do the right thing, not that they have in the past but making sure that we are doing the right thing to get our customers in and out of our facilities as quickly and possible with the best experience that they could possibly have from retail perspective.

[Marc Andre:]

Got it. That’s great. Thank you very much.

[Operator:]

Your next question comes from the line of Himanshu Patel with JPMorgan.

[Ryan Brinkman:]

Hi, this is Ryan Brinkman for Himanshu Patel. Given the very strong retail used unit volume performance in the first quarter and then in the fourth quarter of last year, in terms of thinking about how much opportunity that remains in this area? What do you think is the normalized ratio of used vehicles to new vehicles sold in your stores once new vehicle sales normalize and all of your used vehicle sales improvement initiatives are fully implemented?

[Scott Smith:]

Well, great question. And we just had our best used car quarter ever as the new vehicle SAAR improved throughout the first quarter and April has been nothing short of that. Actually we are gaining momentum. There is just total upside. We’ve given a baseline to our stores that we are going to average 100 units per store per month and we are well on our way of achieving our goal. That’s going to add a ton of revenue to the bottom line, but that’s just the beginning stages. You look at CarMax, they sell nearly 300 cars per store. There are 40 million used cars sold in America each year. There is a ton of upside here and we are just beginning to take advantage of it. There is a lot of room for growth and we are just really getting into the business and you mentioned in the fourth quarter we’ve had four straight quarters of double-digit growth and they’ve gotten bigger every quarter. And we look for the second quarter to be the same.

[Ryan Brinkman:]

Great, thanks. And then just quickly too, I think last quarter you mentioned on that call that SG&A costs were roughly 58% variable and 42% fixed at that point in time, and you had helped us by breaking down the compensation amount between fixed comp and variable comp. Is there a similar type breakout that you could provide this quarter or if not perhaps just generally help us in terms of how to think about the most recent split in terms of fixed versus variable SG&A?

[Greg Young:]

I don’t think so – this is Greg, Ryan – I don’t think at this point that we want to breakout the variable fixed component. As Jeff said, we are in the middle of adjusting some of pay plans, and some of that between fixed and variable may float around a little bit as we go through that process. I think the initial guidance that we gave there on some of those fixed costs and stuff would still stand true. But I don't think we really want to go into more detail looking forward at this point on the compensation makeup.

[Dave Cosper:]

Yes, this is Dave. I think it’s important to note that what we are trying to do with compensation is not going to be some structural penalty going forward. Our objective is to be competitive or slightly more than competitive with the market. And as Jeff had mentioned to really drive the behaviors that we need to satisfy our customers and grow our business. So we are not going to see the issues that we saw in January going forward. We are going to be competitive and we are going to be very sales efficient.

[Ryan Brinkman:]

Okay, and then just from sort of a high level overview, you guys have always been very progressive in terms of how you treated you sales force and your associates and how you thought about them in turnover, and you really kind of the first to talk about a lot of those things. Are you may be thinking about sort of reading between the lines and you mentioned CarMax earlier, maybe sort of compensating your employees more along the lines that CarMax has as opposed to a traditional new slashed used vehicle retailer?

[Jeff Dyke:]

No, would love to answer that question for you but again that's a little bit of a competitive advantage to us I think. You can expect us to continue to be very progressive and innovative from a compensation perspective and how we treat our associates and very much focused on making that our number one priority reducing turnover. But you guys see it all the time, the best performing companies in any industry have the lowest turnover. They are below 10% and this company has (inaudible) there. We're going to make that happen and if there's some short-term lumps in order to make that happen then so be it, but we are headed in the right direction, and our turnover is going to get where it needs to be and as a result we are going to create one of America’s great companies to work at and shop.

[Scott Smith:]

By the way, the sales are going to be there, and so are the profits, importantly.

[Ryan Brinkman:]

All right. Great, guys. Thanks a lot.

[Operator:]

Your next question comes from the line of John Murphy with Bank of America Merrill Lynch.

[John Murphy:]

Good morning, guys.

[Scott Smith:]

Hi, John.

[Jeff Dyke:]

Good morning.

[John Murphy:]

You'd mentioned something or factor increasing your SG&A costs was the addition of seven used car buyers in the quarter. I am just wondering, obviously used cars are a focus for you. Just wondering if there's anything going on structurally in the used car market that's shifting or changing that makes you think you need to add buyers and I am assuming those buyers are going to auction to source vehicles. I'm just trying to understand why the new addition of all these buyers is coming in.

[Jeff Dyke:]

Yes, that’s a great question. Here is the problem. The problem is the traditional model when you start selling that many cars you can’t trade for and we're not going to trade for as enough cars to offset the volumes that we are seeing. And we can’t send personnel out of the store to go out and buy. So we think that we can buy better with a trained buying force and you talked about CarMax earlier, that’s how they supply their inventory. They got a lot of customers that bring them cars. But at the end of the day they’ve got a very good buying organization and we are building something, not the exact same, but something similar. And you are going to see that expand over the next year and a half to two years at this company. We cannot meet our volume goals in our volume target when you are selling 50, 60, 70, and 80 and 100 cars per store, per month; that’s one thing. But when you start selling 200, 250 and 300 cars, which we are experiencing you can’t keep up with it unless you have a buying organization to support that kind of volume. And that’s where we are headed and so it is an investment that we are willing to make today to make sure that we hit those goals.

[John Murphy:]

And if we think about the other investments or costs that might come in with increasing this used focus, I mean, obviously the buyers are component of it. Do you feel like your real estate in you systems is sufficient to really handle that kind of an increase? Or there is some additional costs that would come in or issues that might come in as you expand on used cars.

[Jeff Dyke:]

We have plenty of room and plenty of parking spaces and there is no issue with our real estate in order to be able to handle twice the amount of volume we are doing today. That’s not an issue whatsoever.

[Scott Smith:]

There's some technology spending that we'll be doing to handle improvements in some of our systems. But it’s not massive.

[Jeff Dyke:]

Yes, Scott talked to you about some of the increases in SG&A spending that we are doing. Some of that is built around improving our used vehicle operating system and those are just enhancements to what we already have today, which we think we have a competitive advantage on any way.

[John Murphy:]

Got you. And then on show room traffic, I know you talked about this a little bit during the call but just wondering what you are seeing in show room traffic through the quarter and into April? And then also the availability of financing to customers are up when they come into the show room and what the close rates have been trending really through the first quarter and maybe into April as well.

[Jeff Dyke:]

January show room traffic was light. It was down in terms of walking traffic, something like 11%, but as the quarter went on and progressed our traffic gradually increased and then when we got to March, obviously we got a big bang both from our virtually dealership, Web site leads coming in as well as walking traffic and then April has been even better. So we are really seeing a really nice bang for our buck from March and April. So hopefully things continue the way they are and the numbers will pick up even more than we are calling out.

[John Murphy:]

And close rates on those show room traffic and they’ve been improving because of an increased availability of financing?

[Jeff Dyke:]

That’s somewhere in the 22% range.

[John Murphy:]

And that’s an improvement from the beginning of the year?

[Jeff Dyke:]

Yes, it is. Yes, and improved as we moved forward throughout the quarter and into April.

[John Murphy:]

Got you. Then lastly, I mean, I know pretty much everybody in the industry has been backing off their acquisition targets and their focus on acquisitions, yet we’ve been hearing from some of your competitors that they have been making acquisitions at a pretty high rate in the first quarter. Just wondering what you are seeing in the acquisition market, if there were any potential opportunities that would be very cost effective for you in the near term or through the rest of this year?

[Dave Cosper:]

John, this is Dave. We are not looking for any major acquisitions or divestitures, frankly. We've got a couple tuck-ins here and there, new points with many, but our top priority is going to be generate cash and reduce leverage. And going out maybe a couple of years, we will start thinking about it, but frankly we see a lot of upside in the base business and that's really what the operating team is focused on is just bringing out the value out of the assets that we already have. I don’t think we’ve done the best job at up till now. And so we are going to go after that first generate cash and then when we are ready for acquisitions, we want to be able to open the wallet and pay cash for it. We don't want to ramp up that. So that’s what our thinking is.

[John Murphy:]

Great. Thank you very much guys.

[Dave Cosper:]

Thank you.

[Operator:]

Your next question comes from the line of Stuart Quan with Zander Capital.

[Stuart Quan:]

Hi, guys. I just want to follow up on the SG&A questions. As far as the personnel expense, it was up almost $14 million sequentially. How much of that was at the store level versus regional versus corporate?

[Dave Cosper:]

There’s a little bit of corporate for accruals.

[Scott Smith:]

Yes. Stuart, I don’t have that break down in front of me on the sequential number thing. And most of it was at the store level.

[Jeff Dyke:]

75% to 80% of it at the store level.

[Scott Smith:]

Sequentially our gross was up, so you would expect some of that comp. And I know it was up as a percentage of gross also, as Jeff mentioned, some of that January effect and some of the baseline compensation adjustments that we were making. But most of it would have been at store level.

[Stuart Quan:]

Is there a bigger component of fixed compensation that’s being paid at the store level to the sales to the sales associates?

[Jeff Dyke:]

No. I mean obviously then the dollar amount is higher just because we sold a lot more cars year over year and had higher fixed year over year when you look at on a dollar basis. But there is no more higher percentage of fixed comp than we had in previous quarters. We’ve added headcount in some areas and Mike had talked about the buying organization, the eSales office and the way that we’re handling traffic so forth and so on is all addition to this year from last year.

[Dave Cosper:]

The way I have been thinking about it is comp costs were up. I think we restructured for even better revenue performance than what we displayed. And the revenue started slow in January and then accelerated in February and March. In March, the revenue caught up with – the revenue and cost were in balance. So we really hit our stride and that's continuing in April.

[Stuart Quan:]

And then just second question on parts and service, what do you recognize on reconditioning a used car versus dealer prep on a new car?

[Dave Cosper:]

In terms of price?

[Stuart Quan:]

Dollars per vehicle.

[Dave Cosper:]

I think it’s in the $750, $800 range on a used car and significantly less than that on a new car. Yes, maybe $200 on a new car.

[Stuart Quan:]

Got it. Thank you.

[Operator:]

Your next question comes from the line of Derrick Wenger with Jefferies & Co.

[Derrick Wenger:]

I am sorry if I missed it. 2010 capital expenditures, did you give an outlook for that?

[Scott Smith:]

Yes, let me just flip to that slide. Net of mortgages, it was $37.8 million.

[Derrick Wenger:]

For fiscal year ’10?

[Scott Smith:]

Correct.

[Derrick Wenger:]

Net of mortgages. Okay, thank you.

[Scott Smith:]

Okay.

[Operator:]

(Operator instructions) Your next question comes from the line of Colin Langan with UBS.

[Colin Langan:]

Good morning.

[Scott Smith:]

Hi, Colin.

[Colin Langan:]

You commented that you had an 11 SAAR, the SG&A ratio could get to 80%, 81%. What kind of leverage do you have if the SAAR recovers to where we were in the past, 15, 16? Can you get us to, you know, past 76% or even lower now that you've done a lot of restructuring in the downturn.

[Scott Smith:]

Yes, I can see 76%.

[Jeff Dyke:]

Yes, I think if we get up north of the $12 million range we start trending down into that high 70s very quickly the way we structured things now.

[Colin Langan:]

Okay. And what about, I apologize if I missed those. Your retail sales were up 10%, but the US market was up 16%. What was the factor of why it sort of underperformed the US market?

[Dave Cosper:]

Let me start on that. I started looking at our volume versus others versus industry. We didn’t fall as much as others and the rebound has not been as quick on the new car side. The US is a completely different story. We never fell and it's been straight up.

[Scott Smith:]

I mean our mix maybe a little bit different than everybody else. We’ve got a higher mix of luxury and luxury did not fall off, you know as far as everybody else. So it did not have as much of the upside potential as some of the domestic – some of the dealers that are weighted more from a domestic perspective.

[Dave Cosper:]

Domestic stores didn’t pop up nicely.

[Scott Smith:]

And we were up sharply in March which is an indicator that that part of our mix was coming back.

[Colin Langan:]

Okay, so you think luxury mix sort of helped you underperform in Q1 relative to the US?

[Scott Smith:]

I just think it didn’t fall off as far last year. So the year over year comparisons, it’s a tougher comp than it is when you are comping Ford or domestic mix. It’s just mix.

[Colin Langan:]

Okay. Thanks for your help.

[Operator:]

At this time, there are no further questions. I would like to turn the call back over to Mr. Smith for any closing remarks.

[Scott Smith:]

Well, thanks. It was just a fantastic quarter for us. We are so excited about where we are going and really look forward to our next quarters call. Have a great day.

[Jeff Dyke:]

Thank you.

[Operator:]

Ladies and Gentlemen, this concludes today's Sonic Automotive first quarter earnings conference call. You may now disconnect.