Sonic Automotive, Inc.
Q2 2011 Earnings Call Transcript

Published: 26 Jul 2011

[Operator:]

Operator

[David P. Cosper:]

Thank you. Good morning, ladies and gentlemen. I’m Dave Cosper, CFO of Sonic Automotive. Welcome to our second quarter 2011 conference call. Joining me on the call today are the company’s Executive Vice President of Operations, Jeff Dyke; our Executive Vice President, David Smith; and Greg Young, our Vice President of Finance. Today, I’ll provide comments on our financial results, and Jeff Dyke will tell you about our strong performance in our operations. Scott Smith is on a plane returning from Europe. So, I’d like to turn the call over to David Smith to provide an overview for the quarter. David?

[David Smith:]

Thank you, Dave, and good morning everyone. Our second quarter results reflected continuing recovery in the retail automotive sector, combined with our focus on further implementing our operating playbook strategy in every area of our business. Our EPS from continuing operations was $0.37 per share. We saw strong growth across all of our business lines. Our new vehicle retail volume was up 15% over Q2 of last year, which again outpaced the industry growth. Even with some inventory challenges in our Japanese brands, our non-luxury import retail volume was also up 15%. Our used volume grew 11%, which marks the ninth quarter in a row of double-digit growth in this core area of our business. Our Parts and Service business continues to grow steadily with revenue up nearly 6% over the second quarter of last year. SG&A as a percentage of gross profit hit 77.6% was a 230 basis point improvement over the second quarter of last year, as a result of strong gross profit dollar growth and our focus on following through on the commitments we made to you over the course of last year. Dave will have more color on the finalization of our credit facilities, but I do want to say thank you to all of our banking and manufacturer captive lending partners. With the new five-year credit facility in place, we have the financing and flexibility to continue our strategic focus of growing our base business, owning our real estate, and reducing our non-mortgage debt. With that, I’ll turn the call back over to Dave to provide more color on the financial results. Dave?

[David P. Cosper:]

Thanks, David. This slide shows financial results for the second quarter compared with the year ago. Revenue was just shy of $2 billion for the quarter, up 14% from last year and operating profit was $59 million, up 23%. We saw further improvement in our interest expense and I’ll talk more about our plans to reduce debt even more. After-tax earnings from continuing operations were $22 million, more than double the year ago results, excluding the debt called premium from last year’s results, earnings were up 59%. As David mentioned, earnings per share from continuing ops was $0.37. There is a small loss in disc ops of $800,000 after-tax, primarily rent charges and sold stores, we have no stores for sale and no stores are included in discontinued operations. As you’ll recall, on our last call, we held EPS guidance for the year at $1.18 to $1.28 notwithstanding the shortage of product from our Japanese manufacturers. We believe the impacts of the product shortages will be most acute in July and into August and then begin to improve. As a result, for now, we’re continuing to hold our EPS guidance at $1.18 to $1.28 a share. Next slide, please. The slide shows our trend of cost performance. As David mentioned, we hit 77.6% SG&A to gross profit for the quarter, lowest level we’ve seen since early 2008 and of course the industry was much stronger then than it is today. You can see on the slide that our gross profit increased to $310 million in the second quarter, up from $266 million in early 2010, an increase of $44 million. Costs for that period increased $19 million, are only 43% of the increase in growth. We’re getting good leverage on our cost base. As we did not cut people’s pay plans during the crisis, we’re not seeing penalties today from having to make changes to pay plans, instead what we’re seeing is great sales performance by our team and better overall cost efficiency. And we expect this general level of cost performance to continue going forward. Next slide, capital spending for the year is projected at $65 million, net of mortgage proceeds, essentially unchanged from our last call. As you can see the bulk of the spending and cash outflow for the year is already behind us. Our large new BMW store in Beverly Hills is now open and operating and doing well, and helping our cash in the second half of year is the anticipated closing of $15 million of mortgage funding. Capital spending, net of mortgages for future years, is still expected to be around $40 million a year. Next slide please. We closed this month on a new credit facilities for our new and used floor plan needs and revolving line of credit. Importantly, as David mentioned, we have a five year structure in place providing competitive financing costs, and improved flexibility for reducing our debt and owning more of our real estate. In this regard, we’ve notified the holders of our 8.625% Notes to recalling these notes on August 16. This will eliminate this particular data instrument and reduce our debt level by $43 million or roughly 10%. On a closing note, our group of lenders has been highly supportive of our company, and I appreciate all they do for us. With that, I’ll turn the call over to Jeff Dyke. Jeff?

[Jeff Dyke:]

Thanks, Dave, and good morning, everyone. I appreciate the opportunity to share the Sonic Automotive’s second quarter 2011 operating results. As we discussed on the last call, our new vehicle playbook is starting to make an impact on our new vehicle volume and the associated gross [Mexico’s] along with it. We rolled out 15 Honda stores and three BW stores so far with the playbook year-to-date. Each group of stores are experiencing exceptional growth. Honda, the Honda group is up 26% year-to-date, while Volkswagen group is up by 59% year-to-date, each well outperforming the market and our competitive sets. And actually, Honda be up higher the inventory shortages were not there. We plan to rolling out an additional 35 stores by the end of the year giving us roughly 50% of a company installed with the balance coming in 2012. As you can see from the slide, our new car volume was up over 15% as we posted our largest new car market share quarter in company history. New gross profit per unit was flat year-over-year at $2,350, and when combined with – when combined with increasing volume and an improving F&I performance, the gross picture looks great up 18% for the quarter. Japanese inventories remained tight especially with Honda and Lexus. We expect inventories across all the Japanese lines to begin to build in the coming months getting back to normal levels as we move into September. Our Japanese manufacturer partners’ have done an outstanding job supporting Sonic during these difficult times, and we appreciate all of their efforts. Next slide please. Once again our pre-owned team delivered another quarter of outstanding record breaking results up 15% in revenue for the quarter. Our pre-owned playbook execution continues to prove that when combined with a great operations team, low turnover and half the associates that there is tremendous upside to this part of our business. As you can see from the chart, pre-owned volume was up 11.3% for the quarter, our ninth straight quarter of double-digit growth, and our all time highest pre-owned volume quarter with over 27,100 units sold in a quarter. The team also delivered the highest all time pre-owned gross in company history up 5.3% over prior year. And even with the increase in SAAR and the new vehicle volumes that we’re experiencing, our used to new ratio was 0.96 as our team continues to demonstrate excellent performance in this important measurement. If you grasp our strategy then it’s easy to see the increasing volume environment is driving not only record breaking funding gross, but also F&I gross up 18.7% in used-only and fixed gross up 4.2% in total. Our new days supply was 32 days ending the quarter and certified premium was 29% which is in line with our strategy. Next slide please. Just wanted to give you a quick update on the progress to achieving our goal of averaging 100 used units sold per store per month, as you can see on the graph, the team has made great strides in 2011. We’re at 82 units sold per store year-to-date, up nearly 19% over our 2010 average. Next slide please. Total fixed operations revenue was up 5.5% and total gross was up 4.2% as playbook continues to help our fixed operations execution. We had a record breaking quarter in fixed in both revenue and gross as our fixed operations team continues to do an outstanding job in executing our processes. Customer pay revenue was up 2%, while customer pay gross up nearly 1% for the quarter as our customer pay fixed business continues to build on the back of new and pre-owned volume growth. Fixed absorption was 88% for the quarter and over 90% for June as we work our way towards our goal of being 100% fixed absorbed. Both internal and sublet continue to see strong growth as in previous quarters supported by record breaking volume in pre-owned, both were up combined 10.6% revenue and 7.1% in gross. Warranty mix was in line at 16% of our revenue. Next slide please. In summary, Q2 was in line with our performance expectations given the reduction and availability from our Japanese manufacturer partners. We are very excited about the early returns from our new car playbook and the market share that we’ve been able to capture. Our premium business is in great shape as we make our way towards averaging 100 units sold per store per month. We have increased our F&I performance, and its benefiting also from the growth in both new and pre-owned. Our fixed operations team is executing our playbook strategy and having record breaking revenue, and gross performances as customers are returning to our service departments driven by the high volume from our variable departments. As Dave Cosper mentioned earlier, we did not cut head count or pay during the crisis. And now we are reaping many benefits by having happy associates with industry low turnover and consistent execution of our playbooks, which are in turn driving higher revenue, gross and market share. We are maintaining our forecast of 12.5 million SAAR as the industry continues to have a steady recovery, and as the Japanese brands improve towards the end of the third quarter. As Dave mentioned, we’re maintaining our continuing operation earning guidance of $1.18 to $1.28 for fiscal year 2011. And it’s my pleasure to lead the Sonic Automotive operations team on behalf of Scott Smith, our team here presenting today. I’d like to thank each and every Sonician family member for their hard work and dedication in making Sonic Automotive one of America’s greatest companies to work and shop. I’d also like to thank our manufacturer partners, vendor and financial partners that joined together every day to help Sonic achieve its goals. With that, we’ll now open up the call for your questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of John Murphy with Bank of America Merrill Lynch.

[David P. Cosper:]

Hey, John. Are you there?

[John Murphy:]

Good morning. Can you hear me?

[David P. Cosper:]

Yeah, John.

[David B. Smith:]

Yeah, John.

[John Murphy:]

Sorry about that. First of all, on the gross profit line, the percentages were little bit weaker than we expected, but still in line with your competition that actually saw a little bit of an increase, that sort of a flat line. Just curious, as we look at the gross profit percentages going forward should, do you think that we should be more focused on the gross profit for a new unit and the gross profit for used unit in forecasting and how you are driving the business to get higher volume, as suppose to looking these percentages. I’m just trying to understand, it seems like you guys are operating the business for volume and looking it on a per unit basis and externally we are looking it as a percentage. It just try to see there is disconnect there?

[David P. Cosper:]

I mean John, there is a big disconnect there. I mean, we’re automobile sales businesses and nothing happens till we sell a car around here. So margin percentages, you don’t take to the bank, we don’t manage our business that way and we’ve been saying that now for a year and half. We just don’t manage our business by a percentage, we are driving volume in this company and you clearly see, we out perform the industry, we – our competitive set from a new vehicle perspective in a big way. A lot of that has to do with our playbook execution in the Honda and VW stores the volumes just in the stores that we rolled out were just incredible and we are going to continue down that road. Our PUR as we told your last quarter on new with range between 2,100 and 2,350, they stated 2,350 and we don’t expect them to change in the third quarter or the fourth quarter, they are going to be very consistent. What you are going to see is, continued growth on the new vehicle side and the used vehicle side. And we believe long-term that the more cars we are putting on the road, the more market share that we are taking. It really supports the big margin business for us in fixed operations and altogether is a great long-term plan for us. I saw a lot of the numbers out there and a lot of the margins out there. We did just not go out there and take our Honda margins way up and take advantage of that situation, that’s just not our long-term plan, that’s not what we’re going to do, and our goal is to sell our cars and that’s what we’re doing.

[John Murphy:]

That’s very helpful. Then on the SG&A line, at 77.6%, you talked about 43% SG&A contribution – your gross profit line. As we think about the gross profit growing going forward, you think you still can continue converting SG&A, at 43% of that, and take down that SG&A line?

[David P. Cosper:]

Yeah. John, I don’t know that it’s going to be at 43%. I did call that out, because I think it is interesting and it’s really, you start to see the leverage given the volume come back. New car industry is still pretty light. I think when that picks up a little bit, it throws a lot of gross in there, and I think you are going to see some improvement.

[David B. Smith:]

That number can come down, it’s just the volume and the revenue have to continue to grow and like I said, we really haven’t changed, we didn’t go out and change any pay plans or cut any head counts, so that’s not what’s driving that 77% margin, it’s your pure would be in driven by the top line.

[John Murphy:]

Gotcha. And then just lastly on the Japanese inventory situation, I’m just curious, I mean, you’re saying that it’s coming sort of September timeframe. I mean, is Toyota ramping up more quickly than Honda and you’re seeing the inventory come back more quickly? And sort of secondarily, do you see a lot of pent-up demand for two it in Honda vehicles that you think might get released as this inventory comes back in August and September?

[David P. Cosper:]

Yeah, great question. Toyota is ramping up quicker; we’re starting to see inventories arrive in August for Toyota. Honda is going to be a little bit later than that, maybe late August or September, but I give Honda a lot of credit, because they can get us inventory with stores that really don’t have any inventory on the ground. We’ve got a lot of pent-up demand in our Honda stores right now because of new vehicle playbook. We are just selling the heck out of Honda, so it’s an amazing growth that we’re seeing. We have not gotten to the Toyota stores yet, we will go this year. So I think a combination of our playbook process being rolled out, plus there is pent-up demand out there for the vehicles. It’s going to make a real exciting second half of the year.

[John Murphy:]

And do you mean you have a big backlog in the Honda stores that you built vehicles that are essentially purchased that will just be delivered upon arrival?

[David P. Cosper:]

I’ve got a lot of deposits on the books for our Honda stores coming forward, going forward.

[David B. Smith:]

John it’s interesting. For Honda, we show the industry down 11%, Sonic was actually up 10% in the quarter, in Honda, in the environment that we’re seeing. So our lots are pretty much clean, we didn’t hold out for – gross per unit on those, I mean there is some of that; we sold a lot of units.

[David P. Cosper:]

John you look at our average Honda store and we’ve got 15 to 20 cars on the ground new. And so but we’ve been so aggressive in our pricing to drive that volume, but we have a lot of customers that are coming and say look, I’m not going to go down the street and pay 1,000 or 1,500 always more just because the Honda sort of inventory. I’ll just make a deposit with you and get my car, 30, 45 days from now and that’s exactly what we’re doing. And if we’ve been able to just have a wonderful quarter with that brand and both brands will be online Toyota and Honda coming into the third quarter with playbooks. So it’s going to be a lot of fun.

[John Murphy:]

It’s a great model. Thank you, guys.

[David P. Cosper:]

Thank you.

[Operator:]

Your next question comes from the line of Colin Langan with UBS.

[Colin Langan:]

Good morning. Could you comment on, I mean, it sounds like you’re running pretty low on inventories? Do you have an update on the day supply of inventory, you are having. Any comment on whether you think the impact from the Japan inventory issues will be worse than the third quarter? Do you think there are actually might be more of a headwind given, you’re saying, you have pretty low Honda inventory?

[David P. Cosper:]

Well. Let me start by saying and that’s one reason, we were holding our guidance, the way it is. I think that’s one of the uncertainties, because what we did is, we are just talking, sell a lot of Honda’s in the second quarter and now we are very like. So I think it is going to be more of a headwind from an earnings perspective going into the third quarter. Jeff, do you have some?

[Jeff Dyke:]

Yeah. Colin. Here we go, Toyota, our Toyota day supplies about 30, 33 days. So I’m not real worried about our Toyota business. Our Honda day supplies 12 days, but it was 12 days in April, it’s 12 days in May, it’s 12 days in June and Honda is doing a great job just replenishing our inventories quickly as they can. So, July is going to be a little bit of a tougher month, but we will get some more inventory on the ground in August and September and then we are after the races.

[Colin Langan:]

And your overall days of supply?

[Jeff Dyke:]

There is, in terms of the Japanese brands, there is 23. In terms of total new car inventory is 41.

[Colin Langan:]

And parts and services quite strong up 6%. Do you have the breakout between customer term warranty and what is your outlook for that into the second half of the year, I mean, is that going to continue to be robust? Or do you think that’s pretty?

[Jeff Dyke:]

I mean, I think it’s going to continue to be robust. Therefore what happen, if you think about it and it’s our whole strategy? The more volume that you put on the road, the more market share that you take, those customers, that’s a dividend, that’s going to pay 12 months, 18 months down the road as those customers start coming back into your shop. So that’s clearly happening. Our customer pay business was up 2.8%, warranty up 4.4%. And based on what’s going on in our used car business like I quoted a minute ago. Our internal and sublet is certainly way of sublets up 23%, internals up another 5% or 6%. So this is nothing that’s surprising us. We expect our fixed operations business to continue to grow. And it’s growing because our volumes growing and this is going to get better as we move forward.

[Colin Langan:]

And what is sublet?

[Jeff Dyke:]

Sublet is – used vehicle reconditioner.

[Colin Langan:]

Okay, so those are – okay. I thought that wasn’t…

[Jeff Dyke:]

We just want those two together.

[Colin Langan:]

Okay.

[Jeff Dyke:]

The combined was up I think 10.7% or something like that for the quarter for revenue and another 7% in gross.

[Colin Langan:]

So the 6%, you think you’ll have to grow the – that is not common for the average dealer, that’s…

[Jeff Dyke:]

I mean, if you look at our performance over last couple of quarters, Colin, we’ve been running 4%, 5%, 6% growth and it’s on the back of our variable growth. I don’t see that changing, I think it’s going to continue to grow.

[David P. Cosper:]

With lot of the play book, we’re going to play through our system and our stores that’s working.

[Jeff Dyke:]

The other thing that’s really helping us on both the variable and the fixed side is they turn over, our turnover is dropping, we’ve got the same people we have been training now for three years. So really, really like turnover, a great culture in our stores and its making a difference, I have seen a lot of the other numbers, its one thing to have the margin, but to not have the revenue to go along with it, that’s not a long-term plan from our perspective, you got to drive revenue and we’re going to continue to do that as we move forward.

[Colin Langan:]

Okay. And one last question. Why they announced the dividend today, can you just reason for the timing today.

[Jeff Dyke:]

That’s our normal timing, I think we’ve been paying $0.025 for several quarters now and we just had a board meeting and it was approved and we’re announcing it.

[David P. Cosper:]

We announced it at the exact same time last quarter.

[Colin Langan:]

Okay. All right, thank you.

[Operator:]

Your next question comes from the line of Scott Stember with Sidoti & Company.

[Scott Stember:]

Good morning.

[David P. Cosper:]

Hi, Scott.

[Jeff Dyke:]

Good morning Scott.

[Scott Stember:]

Could you may be just give a little bit more breakout by some of the brands obviously BMW, Mercedes had very, very strong quarters. How did those brands do for you and did any of those brands noticed any brand migration from what they will access which was some short supply during the quarter?

[David P. Cosper:]

I don’t know if you would call it brand migration with access, I mean our BMW business was up just at 37% for the quarter. Mercedes was up and that included many. Mercedes was up about 7% for the quarter, our Honda; we’ve already given you our Honda. Our GM business, General Motors business was up 37.5%, Ford was up 27% for the quarter. So our business were strong across all the brands and whether it was luxury, import or domestic.

[Scott Stember:]

How do Toyota do?

[David P. Cosper:]

Toyota was actually down 7% for the quarter. A little bit – we got heard a little bit, two or three of our biggest Toyota stores we had an amazing turn of events with hail and like our Chevrolet market we just got – we had 400 cars get damaged with hail and hail only hit our Toyota store in the market place. So we had a little bit of a chat one time there from challenge there, but we expect our Toyota business to get back on track in this coming quarter.

[Scott Stember:]

Okay. And on the used side, you had a very good quarter. You’re heading in to the quarter when you go through; you’ll be able to offer late-model used cars as a substitute for cars out in (inaudible) new site. Could you just comment on how successfully you were within the quarter during that?

[David P. Cosper:]

We had a biggest – it’s the biggest volume quarter we’ve ever had in our company’s history at over 27,000 units. It was fantastic. And we were very successful in going out and buying on the inventory to supplement the new car shortages. So our used car team just did and our buying team did a fantastic job and they just keep getting better. Our July is off to a great start, should be a record month for us.

[Scott Stember:]

Okay. And then a last question on some of the playbooks. I know that obviously, you don’t want to get too much away, but could you just comment on some of the differences on the playbooks for the stores that you are doing for the new side of the business? What’s different from these VW stores from the non-new playbooks store?

[Jeff Dyke:]

You know, Scott, if I told you, I’d have to kill you. That’s our secret, Scott. And it’s the same in used cars, I mean; we’ve been very successful to lay with our playbooks, same in fixed operations, very successful there. We are just getting started in new like I said, we’ve got a bunch and on the stores and VW stores rolled out. The numbers speak for themselves, VW is up almost 60% and Honda be up a heck of lot higher, if we had the inventory and issues are going to keep getting better. We’re going to take more share. Our market share was just all-time record for the quarter we’re in and not by just a little bit, but by a lot and hopefully, we will continue that. When we really got rolling in May and we had our biggest share of month and then just almost beat it again in June and it’s looking like we’re going to have that again in July. So we’re very, very excited about the things we are doing in new. But I’m going to leave it that for now as we continue to grow our business in that sector.

[David P. Cosper:]

Scott, this is David. And we’ve been talking about culture and people and process for a long time, and it sounds awfully soft right and – but you know what, it’s shown up in the numbers. And it really is in the low turn over and it show people how to sell in the best practices and you do things right and you get good results.

[Jeff Dyke:]

Long term revenue growth is the name of the game. You got to sell cars and that’s been our strategy for the last couple of years that drive as much revenues, we can drive at reasonable margin dollars and let that volume grow all the other sectors of our business including fixed operations, which is high margin dollars coming in. And be aggressive there and what the dollars follow they follow in. And it’s – we’re starting to pick up steam and you can see at the numbers.

[Scott Stember:]

Great. That’s all I have. Thanks a lot.

[David P. Cosper:]

Thanks Scott.

[Operator:]

Your next question comes from the line of Aditya Oberoi with Goldman Sachs.

[Aditya Oberoi:]

Thanks. Hi, guys.

[David P. Cosper:]

Hi.

[Jeff Dyke:]

Hi.

[Aditya Oberoi:]

So I just do have a quick question on the new unit comp that you guys posted, it was a pretty strong number, and as you mentioned, it was primarily driven by your aggressive strategy on kind of going at and taking some market share from your competitors. So in terms of understanding how you guys book the revenue, is it like once the customer has paid down the money and you guys promised to deliver a vehicle, let us say, 30 days, do you book that as revenue or does that get booked once you deliver the vehicle?

[David P. Cosper:]

Oh, yeah. Lord no, you can’t book that as revenue until the car is delivered and gone from your lot. So, no, no, we don’t book revenue before the car is delivered. So it’s all done post-delivery.

[Aditya Oberoi:]

So basically the strong number that you have posted is mainly on the back of some aggressive pricing and basically you’ve delivered those vehicles, that kind of float through your 14% increase in the new vehicle sales to comp, right?

[David P. Cosper:]

It’s true. I mean we did deliver, I mean, the 14%, 15% growth that we’re talking about are delivered units, but we didn’t really give up any margin. Our margin is basically flat.

[Jeff Dyke:]

Yeah. That’s not on the back of low pricing. It’s just on the back of our playbook and the execution of our processes in the stores. I mean, if you think about it, we got a bunch of Honda stores and couple of three VW stores that we rolled out, that’s may be 18 stores in total, that’s six months in. There is a ton of work that goes into making this happen. That’s why we think, we think we can get maybe half of the company done between now and the end of the year, and all next year will take us throughout the other half of the company. So there is a lot of pieces, this is not just a pricing issue. Our gross profit per unit was actually just right at flat year-over-year, so we’re not giving away a bunch of margin; we’re just not going up there and charging up a bunch of margin during a very difficult time for our Japanese partners.

[David P. Cosper:]

And again, Jeff said it, but when you sell the vehicle you get a shot at the F&I and for getting the volume in fact on the F&I plus improved F&I per unit, just like unused, you get the used sale, you get the F&I and you get the recount, that’s how we’re thinking about the business and you drive it through volume execution.

[Aditya Oberoi:]

Great. That’s very helpful. And my second question was on your guidance. You guys have done $0.68 in the first half, and the midpoint of your full-year guidance indicates that probably you guys will do another $0.63 in the back half. So what kind of makes you believe that the back half is going to be a little weak especially that you’re going to see a tailwind from inventory normalization in some of the brands?

[David P. Cosper:]

Yeah. I think we’re $0.64 through six months. So I mean, if you doubled it, it would be $1.28, the high end of our range. I mean, the way we’re thinking about is still little bit of uncertainty around the Japanese issue. If we work through this in a nice way, I can see laughing off the bottom of that guidance, but I’m kind of a conservative guy, I don’t want to over commit, but we’re very comfortable with the guidance. And again, if we keep doing what we’ve been doing, we should be just fine.

[Aditya Oberoi:]

Got it. And one last question. If you guys can give some read into July sales?

[Jeff Dyke:]

Yeah, I mean, stronger than June sales. And we’re pacing to have an all-time record used vehicle volume month which is fantastic, our market share in new is good, so everything looks great.

[Aditya Oberoi:]

And Great. Thank a lot guys.

[Jeff Dyke:]

Sure.

[David P. Cosper:]

Thanks.

[Operator:]

Your next question comes from the line of Rick Nelson with Stevens Inc.

[Rick Nelson:]

Thank you, and good morning.

[David P. Cosper:]

Hi, Rick.

[Rick Nelson:]

Congratulations.

[Jeff Dyke:]

Thank you.

[Rick Nelson:]

(Inaudible) return to more normal inventory levels and we see stepped up incentives from the OEMs. How do you think that’s going to affect the used car business and where do you stand today with used day supply?

[Jeff Dyke:]

Yeah, our used vehicle day supply ended the quarter at 32 days; we’re in great shape there. In July, we probably end the month may be closer to 30 days or 31 days somewhere in that ballpark, we’ll be at 30 days ending August may a be a little less than that ending September. So we’re in great step on our used vehicle inventories. Here what’s going to happen, there is not going to be really any change other than may be the Lexus brand and the Honda brand where you don’t have any new car inventory, so and where we’ve got used vehicle inventory there is upcoming new, so as that new car inventory comes in, you got to really push your used car inventories down, which we’re doing right now, we’re going to handoff more new inventories into the store and pull out some used car inventory. So we’re in really good shape, we got a great plan. But, Rick, as our new car business is going up, our used car business is going right with it. We’re right out to one-to-one ratio and we expect our used car team to perform that way. We’ll take in more trades which is great because it will not put so much more pressure on margin when you have to go and buy these cars that we’re paying a lot of money for today. We expect our used car total gross and our volume to go to move right along with the new car business and go up. We’re a one to one business or better and we don’t really expect to have a big impact in terms of swelling our used vehicle volumes or affecting our margins in any way based on not having our inventory managed. I believe we’ve got the best used car team in the industry, they manage our inventory better than anybody and we’re in great shape going into the quarter.

[Rick Nelson:]

Thanks for that color. I’d like to ask you also about areas of regional strengths and weaknesses.

[Jeff Dyke:]

You bet, Southern California, Denver, Texas, Alabama the DC area, all Ohio are very, very strong for us. A little weaker in Northern California, some of that’s are our own operation. Some of it, is a little bit the market. We’ve got, our highest mix of Toyota and Honda stores there, some just out of inventory. So other than that, maybe a little bit Michigan, business is pretty good in the small belt, if you will.

[Rick Nelson:]

And any comments on the financing environmental rolling, what you’re seeing in the subprime sector would be interesting?

[Jeff Dyke:]

Yeah. The financing environment is great. Our F&I business continues to get better and better where the highest peak of our product per car penetration, which is right at almost 1.4 products per car. Our PUR is really good. Our total finance gross is fantastic. In subprime, it’s there if you want it, this is not a big part of our business structure. There is a lot more efficient in the season than that’s subprime market that we all use to deal in so much. You can get a little more bop these days, but we certainly don’t count on that as a big percentage of our overall mix.

[David P. Cosper:]

Rick, we are selling a lot of used cars in our financing, our lending partners are right there with us. We’re not having any issues getting the deals bar.

[Jeff Dyke:]

Yeah.

[Rick Nelson:]

And capital allocation still focused on that every time and so what point you do you think will start to see product move into an acquisition mode? I’m sure the OEMs would love these same-store sales you’re putting out?

[David P. Cosper:]

Yeah. I mean, I’ve been firm and holding as best I can together for two, three years. If we see something that’s just choice, just our model and its attractively priced, we may scoop it up, but I’d like to keep us on track. I think our entire team is comfortable, our board is comfortable with the way we’re headed and we’re seeing so much growth in base business with the execution of our existing plan. And I think, there’s a lot more to come there and personally I think acquisition would be a distraction from our base plan.

[Jeff Dyke:]

Yeah. It’s a great question. (Inaudible) I will finish it. As long as we can continue to grow, our business at the same rate or better than our competitive set with their acquisitions included, that’s risk-free. We’re rolling ahead and we don’t feel like we’re losing any ground. We’re growing our revenues as faster and faster than everybody else is growing theirs and they’re buying. So there’s so much upside opportunity in the stores that we have, just getting them to perform perfectly at a top, top rate. We got a long way to go before we are getting get all that out of our store. So we’re going to focus on that before we go on starting to buying any stores?

[Greg Young:]

Hey, Rick. This is Greg. I know we’ve talked about it before, but if you just do the math going on the used car line from where we are today to getting to their 100 cars per store per month, that’s an incremental $500 million to $600 million of revenue just at the used car line and then count the F&I or the service and parts that comes along with it. So we look at that and that’s absolutely zero risk. No one agrees in risk, no capital required to do that and that’s where we see the upside.

[David P. Cosper:]

And we’re well on our way, we are at 82 today. As you saw on the chart and we were at 70 last year and 50 something a year before, we’re on our way to making that happen.

[Rick Nelson:]

Great. Thanks guys and good luck.

[David P. Cosper:]

Thank you.

[Jeff Dyke:]

Thank you.

[Unidentified Company Representative:]

Thanks, Rick.

[Operator:]

Your next question comes from the line of Clint Fendley with Davenport.

[Clint Fendley:]

Thank you. Good morning, guys. I would like to ask a question about the playbook concept, 35 more stores that you’re planning by the end of the year with the balance in 2012. I wonder what’s the timing on the rollout in 2012? Is that something that’s going to take the entire year?

[David P. Cosper:]

It will. It will take all year to get it all done. Clint thanks for the question. It’s just so much effort, there is a lot of time, a lot of training and just a ton of effort that goes into making this happen. The great news for us is, we rolled our used car playbook out, it took 3.5 years, almost 4 years to get that in place. But our culture and now no turnover in the store being way down, the stores are accepting the change and how we’re operating so much differently now today than they were a few years ago. So it’s a lot easier, but there is still a lot of detail, it takes time and it will be all in next year arena maybe we get it done and all finished in the beginning of the fourth quarter or something like that, but it is going to take us predominantly the whole year.

[Clint Fendley:]

And I guess it’s easy to understand the leverage that you guys can get with your fixed operations business from the new sales. Could you discuss the benefits that you get on the fixed side from your used business given the success that you are having there?

[David P. Cosper:]

Yeah. Sure. It’s big, it’s reconditioning, the vehicles it’s doubled all right, its reconditioning plus you get the customer coming back to your store for service work. But every car that goes through there is a set dollar amount of gross that gets generated in our service department for getting that car up to speed and snuff and getting out in the front line for our consumers to buy. And as you put more and more cars through that shop, you generate more and more gross out of that shop and that’s exactly what we’re seeing in our internal and our sublet business, which is way, way up now nine quarters in a row. So it’s making a big difference for us.

[Clint Fendley:]

I guess, last question here, when I look at the slide on your used volumes and your tracking toward your 100 first store goal, you’ve also had a considerable amount of success on the number of stores that have averaged over a hundred per month recently. I mean, how many of your stores are meaningfully below your 82 average and trying to get an idea, the longer-term potential here with your playbook concept?

[David P. Cosper:]

Yeah, we’ve got very few stores left selling 50 cars, 60 cars. Maybe 10 or 15 in that ballpark and then the balance are pushing upwards of 70% to 75% and the good news now is that we’re getting, we’ve got a bunch of stores that are selling over 200 and a couple in the range of 300. So, if we can believe, we believe we can do that, a 100 is just a start for us, it’s just getting all the pricing mechanisms right, the process is right in all of the stores, but as we roll out our new SIMS inventory management tool, it’s sort of the icing on the cake for us. It will make the difference and put us over the top on a hundred and then, we’ll set our sites on 150.

[Clint Fendley:]

And it’s a mix of all brands.

[David P. Cosper:]

Yeah, it’s not just BMW that’s selling 100 although that brand averages over a 100. It’s all of it. I don’t care if it’s a Kia store or a BMW store or a Toyota store, they’re all selling a lot of vehicles. Honda in particular is well up over 100, the brand in general. So, we just don’t have a lot of stores. The industry, our competitive set average is somewhere between 50 and 55 used store. We just don’t have a lot of stores in that ballpark. I mean, we’re north of 70 in most locations and that’s what’s driving our performance this year, since we’re getting more and more stores away from selling 40 cars, 50 cars, 55 cars, 60 cars a month. We’ve put a lot of focus on that our used car team has.

[Clint Fendley:]

Very helpful. Thanks guys.

[Operator:]

(Operator Instruction) Your next question comes from the line of Joe Overby with Auto Remarketing.

[Joe Overby:]

Good morning guys.

[David P. Cosper:]

Good morning.

[Jeff Dyke:]

Good morning.

[Joe Overby:]

Just some questions mainly for, Jeff. Jeff, you guys mentioned that more and more stores are hitting that 200, 300 mark as far as the vehicle volume and you guys are seeing records for used volume. And what is the driver for such strong used vehicle sales?

[David P. Cosper:]

Pretty simple, it’s low turnover and execution of our playbooks. We just got a great, great used car team. We’ve all been together for a decade and the execution of our processes and no turnover in the culture that we have in our stores is really generating our volume growth, between Hal McLarty, our Vice President pre-owned and the entire team that’s out there they just do a great job in executing our processes. Our playbook is exceptional and what’s need for us is as we’re rolling in, we’ve developed our own Sonic Inventory Management System, which is our own software that’s allowing us to centrally appraise all of our vehicles now, it’s going to allow us in the coming months centrally price all of our vehicles now. And as you know, because the business that you are in, being able to price the car right the first time and keeping that pricing intact is really key critical to making this work so.

[Joe Overby:]

Okay. Thanks, guys.

[Operator:]

At this time, I would like to turn the call back to management for closing remarks.

[David P. Cosper:]

Thank you all for joining us on the call today, and we look forward to talking with you soon.

[Jeff Dyke:]

Thanks.

[David P. Cosper:]

Thank you.

[Operator:]

This concludes today’s Sonic Automotive second quarter earnings conference call. You may now disconnect.