Sonic Automotive, Inc.
Q3 2012 Earnings Call Transcript

Published: 23 Oct 2012

[Operator:]

Good morning and welcome to the Sonic Automotive Third Quarter Earnings Conference Call. All lines have been place 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, October 23, 2012. Presentation materials which management will be reviewing on the conference call can be accessed on the company’s website at www.sonicautomotive.com by clicking on the Investor Relations tab under Our Company and choosing Webcasts and Presentations on the right side of the page. 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 projections, 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 and Chief Strategic Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

[Scott Smith:]

Thank you, Jackie. Good morning everyone and welcome to Sonic Automotive’s third quarter 2012 earnings call. I am Scott Smith, the company’s President and Co-founder. Joining me on the call today are, Dave Cosper, our CFO; Jeff Dyke, our Executive Vice President of Operations; David Smith, our Executive Vice President; C.G. Saffer, our Chief Accounting Officer and Mr. Heath Byrd, our CIO. I will start today’s call with an overview of the quarter, after which I’ll turn the call over to Dave for his review of our financial results followed by Jeff, with an look at our operating results. We’ll then talk a little strategy and have some closing comments before opening the call up for your questions. With that, please turn to the first slide. As you can see our third quarter results were driven by strong revenue growth in all areas of our business. New retail vehicle revenue increased over 20% from the prior year quarter driven by strong increases in the unit volume. Along with improvements seen in our pre-owned business our overall retail unit volume for the quarter increased 16%. These increases along with improved penetration yielded an 18% increase in our F&I results. Fixed operations remained stable and even grew despite one-less selling day in the current year quarter versus the prior year. On the cost front, we are pleased to be tracking lower than our targeted SG&A rate of 78%. Our technology projects continue to develop and gain traction in our business. We grew both adjusted income from continuing operations and associated diluted earnings per share through our focus on core competencies and the base business. As noted on the slide, these results excluded certain charges related to our recent debt issuance and related successful tender offer. The effects of these transactions are accretive to shareholder value and the effect is demonstrated in the share count slide that follows. I’ll now hand the call over to Dave Cosper to review our financial performance. Dave?

[Dave Cosper:]

Thank you, Scott and good morning everyone. Revenue for the quarter was nearly $2.2 billion, up 12% from a year ago. Adjusted profit after-tax increased to $23 million, up 15%. As Scott mentioned, this result excludes an after-tax charge of $11 million related to taking out a convertible debt and I’ll talk more about that in just a moment. Adjusted EPS was $0.40 for the quarter, up 18%. Next slide please. SG&A as a percent of gross was 77.6% for the quarter, an improvement of 30 basis points from a year ago. Year-to-date SG&A is at 77.7% which is in line with our target for the year. And we remain on-track with our technology and training plans that we have discussed in prior calls. The spending on this front has remained flat with first half rate and we expect this level of spending to continue through most 2013. The benefits of improved gross profit will become more apparent overtime and Jeff will touch on this shortly. Next slide. Through three quarters, our cash used for capital expenditures totaled $44.5 million. We are expecting about $88 million for the year as we finalize several large new stores and owned property. As you can see, there is $15 million of mortgage funding for the fourth quarter and we actually closed on this funding earlier this month. Next slide please. We ended the quarter with $62 million of cash and no borrowing on our revolver. As you can see, we are compliant with all of our debt covenants and in total liquidity position at the end of the quarter was closed to $250 million. Next slide. This slide shows our maturity profile of our public debt; and Scott mentioned during the quarter, we successfully completed a major effort to improve further our capital structure. We borrowed $200 million of long-term debt with the coupon of 7% and successfully tendered for all of our 5% convertible notes. As you can see on the slide, we now have over five years before any public debt matures and this of course positions us well for future growth. Next slide. This slide shows the walk for our diluted share count from the second quarter to the third quarter. And two benefits for taking out our convertible debt; one, elimination of potential dilution and two, the elimination of accounting impacts associated with portraying our EPS results as if the debt had converted into equity. So our balance sheet and our accounting are now much more simple with this debt out of the way. For the quarter on average, dilution was reduced by 4.5 million shares and included in this are share repurchases totaling 804,000 shares. It’s our intent to repurchase all the 4.1 million shares issued as part of this effort to take out our convertible debt, and we certainly have substantial share repurchase authorization and liquidity to do so, and we continue to be in the market. For information, our outstanding share count at the end of the third quarter was 56.5 million shares. So 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 2012 third quarter operating results. As you can see from the slide, new retail revenue was up 20% and our new retail volume was up 25%, while gross was up nearly 2.5%. The third quarter was the largest new car volume in quarter in company history on a same store basis. We continue to see strong retail volumes across all segments in all of our markets. I would like to take a moment to address our gross erosion. As you are aware, BMW represents nearly 30% of our gross and we had significant inventory shortfalls through July of this year. The great news is that inventory began to arrive in August and sales began to increase. While our BMW volume was down in July some 8%, our BMW volume was up 15% in August and 26% in September. The more inventory levels reduced BMW as a percentage of our total mix during the year, and in, particular in the third quarter and as a result, hurt our traditional gross levels. At the same time, our Honda business grew a whopping 69% over prior year, which when added to the mix, dropped our PUR due to lower margins associated with the brand. The BMW issue has been resolved as our day supply is up over 50 days, ending September versus being at a low of 34 in July. Some brand color, BMW as a brand was up 1% for the quarter versus Sonic being up 10%. Mercedes Benz business was up 9% versus Sonic being up 12%, Honda was up 44%, as I said earlier Sonic was up 69%, and Toyota was up 38% versus Sonic being up 44%. New vehicle day supply was 49 days ending June. Next slide, please. Our pre-owned business continues to improve as the third quarter was the largest pre-owned volume quarter in company history on a same-store bases as well. Pre-owned revenue was up 4.8%, while volume was up 6.6% for the quarter. Total pre-owned and related gross was up just over 6.6% as well. As you can see on the slide, we’re at 87 units per store for the third quarter, as we work our way towards our goal of 100 units per store. We’re very excited about our SIMS rollout. We completed our first region rollout in Texas at the end of July and the results are fantastic. August, we sold 118 units per store, and in September we sold 107 units per store. Both months were up 10% versus prior year. And this is a major inventory in process change. So for us to be well over 100 unit, the 100 unit mark signals what we expect to happen for the company as SIMS gets rolled out to the other stores by the end of the first quarter and the process matures as part of our culture. August was also the largest pre-owned volume month in company history, with a per store average of 92.4 units. Our day supply was 23.6 days at SIMS and our trade center combined are helping our company operate more effectively and efficiently on a lower day supply. Next slide, please. As you can see on the slide, fixed operations revenue was up 1.3% and gross was up 1.7% for the quarter. Adjusting for one last day fixed operations, our growth for fixed operations our gross was up 3.3%. Customer paid revenue was up 1.6%, while customer paid gross was up 1.1%. Our internal and sublet revenue was up 4.3%, while internal and sublet gross was up 9.7%. Our service pad process will allow will be completed at the end of the first quarter; the results continue to be fantastic and we look forward to sharing more when we get the process fully installed. Warranty revenue was down 3.5% and warranty gross was down 2.7%; as warranty continues to shrink as part of our sales at 14.1% of the total fixed operations revenue mix. The important message that you should take away from this discussion today is the fact that both new and pre owned revenue and volume set all time records in the third quarter, with one less day our fixed operations revenue and gross performance in the quarter was among the best performances we have had. Our F&I performance in PUR and gross was an all time record. Most important our customer satisfaction was the highest it’s ever been and our turnovers are on track this year to be the lowest that it’s ever been. The investments that we are making are starting to pay off, as all the new processors technology and training are beginning to become part of our culture. Our investments in technology and training are significant, as these expenses begin to fade the results combined with improving execution of our new customer experience processes will provide our shareholders and the investment community significant growth opportunities. I would like to take this opportunity to thank our team for their hard work and dedication to creating one of America’s greatest companies to work and shop. And with that I will turn the call back over to Scott Smith. Scott?

[Scott Smith:]

Thank you, Dave and Jeff. Although we passed a significant milestone in the elimination of the 5% convertible notes in the third quarter, we continue to be guided by our three-pronged strategies noted in the slide. These three principles grow the base business on our properties and improve our capital structure will serve to guide us to higher profitability and increase shareholder value. The backbone of the strategy lies with creating, maintaining and mastering common processes to our play books that are predictable, repeatable and sustainable. We believe our investments and technology and people overtime will enable us to achieve this. Next slide please; we are pleased with the double-digit revenue growth, no [borrowing] results for the third quarter. However, we always get excited in the fourth quarter of the year, our mix of luxury stores contributes to a higher than average activity during the fourth quarter, particularly in the month of December, when many of our manufacturer partners announced programs to drive customers to our store. The overall business and economic climate continue to support growth in the automotive retail space and the outlook remains positive. As communicated in the, the less area of this month, we are tightening our adjusted diluted earnings per share guidance from continuing ops from $1.62 to a $1.70 to a $1.65 to a $1.70. Although we have one more quarterly call with them, I would like to take a moment to recognize David Cosper and his role as Vice Chairman and Chief Financial Officer, as well as his contributions to the company. Way to go Dave. Yeah, there are unavoidable milestones in our business, they are better and sweet and this is one of them. During the quarter we announced the pending retirement of our CFO Dave Cosper. Dave has been instrumental in developing our culture of leader with in Sonic. He’s helped guide Sonic through the downturn in 2008 and 2009 and the recovery that we are experiencing today. Dave’s leadership permeates the organization, and he has set us up continued success. At the end of the first quarter 2013, Dave, will be passing the baton to Heath Byrd, our current CIO. We are confident we’ll continue to successfully lead our finance organization. During the next several months, we will be working to ensure smooth and seamless transaction. I would like to give a huge thank you to Dave and big congratulations to Heath. I would like to take a moment to congratulate David Smith on his promotion to Vice Chairman effective upon Dave’s retirement. So congratulations Dave. Our team appreciates the time you've given us today to review the quarter. Before we take your questions, I would like to take a moment to thank all of our associates and partners who joined together everyday to help us film one of America's greatest companies to work and shop. It's an honor and a privilege to lead our great company. So thank you. That said, we now look to open the call for questions.

[Operator:]

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

[Rick Nelson:]

Ask you about the SG&A, expense ratio. If I can pull out rents and rents related we saw a widening in the quarter. We've seen a widening year-to-date. I guess what do you see as drivers to that and when do you think we would start to see leverage out some of the investments?

[Dave Cosper:]

Rick, this is Dave. You know, as we mentioned, we anticipated the levels that we're at. Now, we set a target of 78% for the year. We're up 30 basis points under that. We actually improved a little bit in the third quarter, even though we were a little late on gross. I would expect us to start to see some leverage going forward from where we are at. I think we will see it in the fourth quarter and then I think you will start to see it take off Q1, Q2 next year as Jeff mentioned to some of the initiatives that we've been working on, it rolled out more fully and we started to see more volume and more revenue. And then at the tail end of the year I think the cost itself will start to diminish a little bit and then you’ll get a further impact from that.

[Rick Nelson:]

Do you have a target for SG&A ex-rent?

[Dave Cosper:]

Ex-rent, yeah. No, we’re just; we just went through our forward year look of where we are at. Today we own about 23% of our properties, if you skip ahead five years we’re projecting to be about 40%, mid-40s that we would own, that’ll make a significant dent in it. But I think even more important is the gross lift that we’re going to get from the actions in the investments and the strategies that we’re putting in place and working on right now.

[Jeff Dyke:]

I mean I think the important thing Rick, this is Jeff Dyke is, at the beginning of the year we called out that we’re going to be in or around 78% SG&A and that knowing exactly what properties we were going to buy and the moves we were going to make with our investments in technology and training and we’re right on the number that we said we are going to be at. And that’s where we are and that’s where we project we’ll be by the end of the year.

[Rick Nelson:]

Looking back to the guidance that you provided in February, $1.55 to $1.65 based on $13.5 million SAAR to-date we’re tracking closer to 14.5, the guidance 1.65 to 1.70, $0.07 to $0.08 lift with a million lift in the SAAR, its like capturing lot of share within the overall market, I guess so, as you look at that sort of incremental profitability. What do you think is holding that back or is that something, some sort of leverage that’s have a $0.08 per million? We should have…

[Dave Cosper:]

Yeah, I think that leverage is a little light, Rick and I think some of the gross items that Jeff talked about there was clearly some issues there related to BMW availability and our gross per unit was a little light across the board I knew in the quarter.

[Jeff Dyke:]

Rick, one of the other things that you need to think about is that the things that we are doing in our stores with technology and the process change, it’s pretty disruptive and that’s okay and we projected for it to be and we have projected for us to be right where we are and it slows down before it speeds it up. The good news is that as we begin 2013 we are really not introducing anything new, we are going to spend getting our stores really acclimated to all the different technologies and processes that we rolled out this year. And that will allow the store culture to settle down a little bit and it will allow us to focus in. We have got little instances all over the company where we are seeing tremendous growth and like I mentioned in Texas the growth that we saw in our average volume per store 118 units in August, 107 in September. These are little things that we are beginning to see all over the company and we are making some big, big changes. Those changes are great for our consumer and they are great for our associates, but when you change something that’s been done the same way for decades after decades, it can be disruptive and it is. The good news is that we have projected for it to be we said, here what’s going to happen, here is why, hey you know the SAAR that we projected to 13.5 it looks like it’s going to come in around 14.2 from our estimates for the year. So it’s up a little bit but at the end of the day our projections are quite solid. We said, where we would be in SG&A, we said where we would be in EPS and we are tracking right a long with that and quite honestly with all the changes that we have made at the store level to be where we are at is a darn good thing and as things begin to settle down the results will be more to your liking.

[Scott Smith:]

Yeah Rick, I think it’s important to understand, we are long-term investors in the company and we are building a company for the future and we are not chasing a quarterly number. When I look at where this company is going to be in three years, five years, 10 years down the road. I get really, really, excited about the changes that Jeff is talking about. I think there are some real competitive advantages that we are putting into the stores. Unfortunately, I can't tell everybody what they are because the secrets sorts, it would be giving away the code to Coca Cola and that's the way that we view a lot of what we are doing is proprietary information. But we are hitting the numbers that we said we would hit and we are investing heavily, we could certainly crank down SG&A, but that's not our strategy. We have the completely different strategy.

[Rick Nelson:]

Thanks for that color. Also if I could ask about priorities now for free cash flow as you contemplate, you got to convert now out of the way least by out, stock buybacks that's retirement, how would you do that?

[Dave Cosper:]

Yeah, Rick. I will start here. I mean, Scott mentioned the three priorities that we have been on frankly for last four years, five years and that's grow the base business and that's code for no acquisitions, owning our properties and improving our capital structure. Getting that debt restructured was a very big deal for us and we feel good about it and that is going to accretive for us to going forward. We do have some shares that we issued to facilitate that transaction 4 million. We bought 800,000 or so shares in the quarter. We were in the market this quarter. I think our total to-date repurchases are about 1.5 million shares that we bought back of the 4.1 million. My personal recommendation would be that we continue to fund the base business as we are, scoop-up the properties that make sense for us as is our plan and continue to buy shares back to the 4.1 level and then beyond. And then we’ve got some other growth ideas for the future that will be forthcoming and we’ll review them collectively, but where we're at right now, I think, when I look at our stock prices, it's a darn good investment for us. And it's a good shareholder value for everyone.

[Operator:]

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

[Scott Stember:]

Can you guys comment on the used side of the business, perhaps some pretty impressive growth despite the fact you were going up against some difficult comparison; maybe talk about some of the competitive pricing on for some of the newer models. How that might have impacted your used volume this quarter?

[Jeff Dyke:]

Hi Scott, it's Jeff Dyke. Yeah, maybe there is a little bit in the Honda brand, because the Honda is so competitive. It's very difficult to call a one-to-one ratio there. I mean that pulls our used ratio down. We're probably more like 0.6 to 1 with Honda and that’s just Honda has have this incentive going on with Accord’s, big chunk this summer and we’ve blown a lot of cars out doing that. But it's really for us, and I appreciate you noticing the year-over-year comparisons, it's three or four years in a row now that we've been able to grow. And really, we slowed down a little bit last quarter and we didn’t grow quite as fast as I would like to in this quarter and a lot of it is we’re changing a lot of what we do in terms of inventory management. We’re in the middle of moving towards by retail trade center that we build here at our own office, upraising every vehicle centrally and so that’s something, if you can just imagine at the beginning of this year when we started every single store upraised, every single car separately with the pre-own manager. Today, we’re halfway through rolling out some and now half of our stores are central trade center upraises 100% of the cars that are traded at those stores, and by the end of the first quarter 100% of our stores will be, trade allowances will be handled centrally. So we’re becoming a lot more scientific about and calculated about how we manage our inventory. We’re going through a huge, a huge culture and process change at the store level. For us to be up 6.6%, I look at our team and tell them they did a great job, selling 92 almost 93 cars a store in August was a great job, it’s nearly to our 100 goal. And when you look at Texas and what we were able to do there, we maintained our margins, we grew the business 10% and we were averaged between the two months probably 110, 111 cars a store, so it’s a sign of the future of what’s going to happen. And so yeah, a little bit from competitive new car retail, but not that much, I mean it did on the Honda brand, no question.

[Scott Stember:]

Okay. And on the incremental SG&A spend Dave I think last quarter you had mentioned that it was probably between $2 million and $3 million per quarter, so I guess that puts us about $9 million to $12 million for the full year. Can you just confirm those amounts and that’s it? Thanks.

[Dave Cosper:]

Yeah. It’s about $3 million a quarter incremental and the Q3 run rate was that level as it had been in the first six months.

[Scott Stember:]

And it will remain at these levels till 2013 and then we will start to see some real significant leverage beyond that as these costs start to layer out?

[Dave Cosper:]

Yeah, in particular the training will taper off. Yeah it’s going to push through 2013 and then begin to taper off as we move off into ’14, but no question, huge effort next year from this company in terms of going out and spending a lot of time training on and retraining and refocus on all of the things that we have instituted this year in the stores.

[Scott Smith:]

Yeah, and Scott this is Scott. I would like to just throw out that we look at technology as really an enabler of our processes and it’s got to be a lot more than just cool and sexy; it’s got to deliver real returns for us and we look at all the competing barriers for our dollars whether it’s acquisitions, whether it’s associates, 401(k), CapEx, you name it there is just a million different places, dividend, share repurchases, it’s all over. So we look to leverage this investment across all of our dealerships and we believe that we can get a higher return on our investment by putting these systems in and getting the culture right, so that when we are ready to go back and grow, we will be predictable, repeatable and sustainable like you have never seen before in automotive retail. And that’s one of our main goals here at Sonic Automotive just to make sure that we get an outstanding return on these investments. And so I just want everybody to understand that we’re not out there just putting iPad’s and because we think they are sexy, they make a real return for us and we have looked forward to sharing these returns with you in the future.

[Scott Stember:]

Okay. The SIMS project, I believe you mentioned before, did you say it was going to be completed by the end of the first quarter of 2013?

[Jeff Dyke:]

Yeah, that is correct. This is Jeff again, the SIMS will be rolled out by the end of the first quarter and then we will have the next three quarters of no more roll out, no more adjustments on pre-owned, just executing the process that we put in place and allowing our trade center and our buying teams to manage the inventory and fight the inventory and letting our stores sell the inventory. And now that's a big change from where we are today, so we look forward to that all being put in place.

[Scott Stember:]

Okay and just last question, Dave on the share count. It looks like this quarter given the timing of the convert take out, you still were using the two class method; it looks like 56 million plus shares would be a good number to use for diluted number assuming that you didn’t buyback any of the stock from this point on, is that correct?

[Dave Cosper:]

Yeah, that’s correct Scott. The quarter end was 56.5 and we are taking away that 4 million as I mentioned. I don't think the share count had any impact at all in the third quarter and it will have not a huge impact in the fourth. But then as we continue to buy, its going to have an impact in 2013 of course and we will include that in our guidance when we come out with that.

[Scott Stember:]

So starting in the fourth quarter, there will be no more two-class reporting from a….?

[Dave Cosper:]

That’s correct, that’s confusing accounting is gone.

[Operator:]

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

[Elizabeth Lane:]

It’s Elizabeth Lane in for John. The new vehicle gross margin looks like it was about like an all time low of 5.6%. Now you mentioned that it was probably the impact of mix shift, away from BMW and toward Honda. Is there anything else going on there in terms of how incentives are impacting grosses and how should we be thinking about modeling that going forward?

[Scott Smith:]

As BMW turns to a normalize percentage of our overall mix, in terms of volume and growth, in the third quarter, it ran an all-time low of 12% of our total volume and ran 23% of our gross. It typically runs 14% to 15% of our volume and 26% to 27% of our gross; whereas Honda, (inaudible) were up, 1900s whereas Honda ran 24% of our volume, which should typically run 17% and the gross was almost 12% of our gross versus ‘10. So you know, I expect now that BMW’s inventory levels are coming back up and some of the craziness of the Honda brand has settled down from the growth level for us for the quarter was 69% of our prior year and that was on top of huge growth with Honda last year for us anyway. And so I would expect the margins to be more normalized as we move forward, unless there is some reason that we run short of BMW supply; we've got a lot of BMW stores. The biggest BMW dealer in the nation and it really hurts us when we don’t have inventory. BMW’s performance this year as a brand are up 1%, we're doing our best to overcome that being up 10% in the quarter, but a very, very slow quarter for that brand and it certainly hurt our business.

[Elizabeth Lane:]

And finally just a housekeeping item. On fixed operations separation, you mentioned that there is one last selling day in the third quarter and that the adjusted gross profit would have been up 3.3%. Does that selling day get made up for in Q4?

[Scott Smith:]

I think it’s equal, Q4 over Q4.

[Elizabeth Lane:]

Okay. So, now selling (inaudible) benefit next quarter.

[Scott Smith:]

No, it’s not. It was the issue, the month of September was a 19 fixed day month, and I don’t think that that gets made up this year. We rarely had, I think it was three or four years ago when we had another 19 day fixed month. So, I think we’ll be short a day for the year. I’m not 100% confident about that, but I’m fairly confident.

[Operator:]

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

[Aditya Oberoi:]

Can you guys talk a little bit about the performance by regions, which of the geographies saw more strength versus others?

[Jeff Dyke:]

Yeah, sure. This is Jeff Dyke, our Texas region really, we’ve been strong across the board, but if you wanted to pick one or two, our Texas region in particular the Huston market, Honda in the Dallas market was real strong, the Southern California market very, very strong for us, Colorado and Toyota very strong for us, the mid-south strong when it comes to Atlanta, Alabama, Tennessee, a little weaker in the Michigan market then we would’ve liked. We’ve got a big brand mix of Cadillac. Cadillac has been a brand that suffered for a while. We are starting to see a little bit of volume coming back there but not to our liking. The Florida market has been strong for us. So, pretty good across the country in terms of both new and used volumes.

[Aditya Oberoi:]

Got it, that’s helpful. And going back to the P&S side, I know one last day kind of impacted your comps this quarter, and the other biggest driver I think was lower warranty. But, as we go forward is the 1% to 2% growth a new kind of new normal, or are you guys taking some actions like moving to more tire sales or some other stuff that you are going to improve your P&S performance.

[Jeff Dyke:]

No. Look we think growing 3% to 5% a quarter for a long time, and we’ve had record quarter after record quarter, after record year after record year and fixed operations and that’s not what was just one short day. We expect to continue to grow in that range till we’ve been growing in. Our service pad rollout it were halfway through the company where it is making a huge impact, and I am not really quite ready to share those numbers with you, I want another couple of dots on the chart before I start sharing the numbers. But we are very pleased with our parts and service business. As matter of fact, our margins have began to improve in parts and service which is great, they have stabilized and we were adjusting pricing down to do exactly what you just said to drive more volume in from tires and all kinds of different products on our service drive. So we are very pleased with where we are and we expect a normal nice robust record breaking quarter again this quarter from a fixed operations perspective.

[David Smith:]

This is Dave, the other thing that’s going to help us here is, as you know 2012 is kind of at the bottom of the units in operations from the financial crisis and the little vehicle sales that we had few years ago, and that part is starting to grow and that’s going to benefit us and the industry as there is more units out there for potential work there.

[Aditya Oberoi:]

Yeah, that’s very helpful guys. Finally on the used vehicles, I know you guys tend to look at the number of used car sold per dealership. But if I look at it from a different aspect looking at the used to new, it seems your new is growing even faster than the used and so the used to new ratio is trickling down a little bit versus the strength we saw in ‘11 and to an extent the first quarter of this year. And how do you think about it from a used to new ratio perspective, do you think the new is going to continue to outperform over the next foreseeable future?

[Scott Smith:]

Well, that was all driven by Honda. If you remove all that our used to new ratios are much more normalized, but we grew our Honda business 69% last quarter. Honda grew 44% and we had a lot growth than that. And I think that, our target and we’ve said it from day one, if we are going to sell as many are more pre-Honda’s we are new. And when you normalize things, we are in the 0.95 range to 1, but you got to take into account those kind of things when a manufacturer comes out with crazy incentives, you are going to have those drops and it doesn’t change our focus and what we are doing at all. It’s just incremental volume from Honda’s perspective and we’ll take that and move forward.

[David Smith:]

Per outlet we are still industry leader in the sector.

[Scott Smith:]

Our volume per outlet at 87 is not where we wanted, I mean we are pressing for a 100 units for strongly and we were getting close and then we were going to see that happen as we move into ’13, but its still significantly ahead of everybody else other than CarMax and we are going to press 200 and then we will set our goals on a 150.

[Operator:]

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

[Colin Langan:]

Just to clarify, you said that for parts and services, you expect the growth will be somewhere you’ve had recently. I mean 1% been pretty low this quarter, so you were referring to prior to the quarter?

[Dave Cosper:]

In previous quarters, we have been growing at 3%, maybe every once in a while bumps up a little higher than that and if you normalize the quarter, we grew at 3%, 3.3% I think to be exact. So we expect that to continue on as we move in to the fourth quarter and the first quarter of next year so forth and so on. We expect to grow somewhere in the 3% to 4% range in fixed operations.

[Colin Langan:]

Can you plant out any color on the difference that there is? I know in the past you’ve said that you looked for gross on the new side gross per unit in the 2100 to 2300 range. Obviously I guess based on this quarter, there was a pretty large difference when you're looking at luxury versus mass market. I mean what are the sort of target ranges you have for a luxury type vehicle that would help explain the big weakness that we saw in the quarter in terms of?

[Jeff Dyke:]

You bet, Jeff Dyke again. Look, our BMW brand which represents about 30% of our gross or at times 27% to 30% of our gross. You know, we make about $3000 to $3200 a car on every BMW that we sell. Our current Honda margin in the third quarter was probably $600 a car on the front end of the car. So if you take Honda and grow at 69% and take BMW and don’t grow it, it's not at the same percentage as it was, your PUR is going to come down and that’s exactly what happened. All other brands staying relatively flat, the mix change smacked us around a little bit when it comes to PUR and that’s it. If we had the inventory for BMW, in 30 day supply, 34 day supply BMWs for us really low. To be honest with you, it was more regionalize for BMW than anything else. Our southern region was really low. We were down in to the mid to lower 20 day supply of BMWs. There were months where I had no 3-series on the ground. That's all being rectified very quickly by our friends at BMW and as a result, our day supply is back up and there we go, you know, we have a 14% and 26% increase in volume and the mix changes and it just wasn’t enough to overcome the beginning of the quarter and quite honestly, it’s not enough to overcome the year. We’ve got to have BMW inventory and the brand’s got to perform and when it doesn’t, it’s going to be a little slower time for us just because it represents such a large portion of our business.

[Colin Langan:]

Okay. And in terms of the Honda, I mean is that consistent with other mass market brands, it seems pretty, or is that kind of just a very competitive brand?

[Jeff Dyke:]

I mean, it’s a hyper competitive brand, but it’s not. Our Honda margins were down year-over-year, maybe $300, $400 a car, and a lot of that is us being hyper aggressive, hitting some incentive levels that Honda had out there Honda Accord, and really pushing the inventory as Honda was. We’ve got our new true price program in place that brought margins down and helped us move a lot more inventory. We’re trying to put a lot of more cars into operation, having more units in operation which is a long term annuity for fixed operations which is great. And it just was one of those things, you got a heavy growth in that line and low growth in a line that’s usually a larger percentage of our mix and it just created a situation for us that’s not normal and that’s okay, it doesn’t adjust what we are doing or how we’re doing it.

[Colin Langan:]

Okay. You mentioned aggressive incentives on Accord, I mean you were trying to like (inaudible) incentives and how do those serve well through, does that affect this margin or does it actually help. I know sometimes there is timing differences so that someone knows they are paid out?

[Jeff Dyke:]

Sure, I mean first of all you got to hit all those incentive levels to get all those. But yes, it’s a, it was a program that started in April or February, maybe it was February and it rolled all the way through to September and then they paid us a portion of the money, they changed their program in the middle of it all but paid us a portion of the monies in the beginning and then paid us some more of the monies on a monthly basis going through, but it didn’t look, we are up there fighting for market share with Honda and driving volume with Honda and from our perspective and probably our competitors’ perspectives it got a little bit crazy with Honda this summer and those are programs that are fun but they always don’t necessarily make that ton of money and while we appreciate the program a little more margin would be certainly helpful.

[Colin Langan:]

Okay. And then just one last question I had may be related to the next addition in the quarter and your guidance implies a pretty strong sequential improvement from Q3 to Q4 I mean are there any other factors other than the next recovery that are going to drive that?

[Jeff Dyke:]

Well, I can tell you that our margins will improve across the board, our Honda margin is already up quarter-to-quarter sequentially about $300, $400 a car and that’s going to play a big role. And then BMW being up at the level plus at the end you guys if you go back and you look at our business at Sonic every year, our Decembers are unbelievable. They are just incredible and today it’s really because of our brand mix and whether it’s BMW or Jaguar or Land Rover or Mercedes Benz all the high line brands that we have, it really makes a huge difference in the quarter and we sort of go through this every year with you guys. It’s a little over projecting on the third quarter and a little under projected on the fourth quarter and one of these days we will all get it right but that’s why we call that our guidance. We said look we are going at $0.40 against what the street called out at $0.44. We are tightening our range for the year and we are still in our guidance for the year, so it’s just a miss on the fourth quarter.

[Operator:]

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

[Clint Fendley:]

I wondered, how should we think about the used to new ratio for next year, especially post the SIMS implementation which should be completed in February?

[Jeff Dyke:]

Well, this is Jeff Dyke. Hopefully, it continues to move to the one-to-one ratio, less some crazy incentive from new car manufacturers. I mean, Honda can really mess that up or Toyota could because when they decide to blow much volume out, move some cars, they can do it. And we have got a lot of Honda stores in Northern California and for whatever reason, consumers there don't trade their cars and it is often as we see in the rest of the country. So it’s hard to get the pre-owned inventory just stay with the one-to-one ratio that we need. But I would say that unless you have some sort of massive program like that which I am not expecting that we are going to stay in that 0.95 to one ratio as we have been for the last several years.

[Clint Fendley:]

And then one last question here on sort of a modeling question. So is the 56.5 million share count for the fourth quarter, is that what was implicit with the full year guidance that you guys had provided of a $1.65 to a $1.70?

[Jeff Dyke:]

I mean, conceptually yes, because the impact is so small for the full year. I mean, when we started the year, we didn't know, we are going to reconvert that, take out the convert. That kind of happened and the impact of the refinancing in the third quarter was very nominal. It will be a slight plus in Q4. And it will be a pretty good lift for us next year as soon as we take back all those 4.1 million shares and as I mentioned, we're a 1.5 million shares into that. So we're tracking well. That makes sense, Clint?

[Operator:]

(Operator Instructions) Your next question comes from the line of Ravi Shanker with Morgan Stanley.

[Ravi Shanker:]

If I can just follow-up on the last question, so the current guidance is based on the $56.5 but the early guidance is based on something higher or so. Clearly there was some kind of reduction in the core guidance if I am getting this right. Can you just help clarify and to what may have been taken down there?

[Dave Cosper:]

Yeah, one reason I don’t like this damn converts is because they're so confusing. Okay? I mean, with the convert when we have that accounting going on for the first three quarters of the year. Yes, you had a higher share count but you got an add-back to our earnings. Whatever we reported as net income, you added back interest on the converts as if they had been converted. So the profit number we used wasn’t even our GAAP profit number. It was some higher level divided through by a higher share count level. So when you remove all those things, you start to get some leverage. Now, of course we issued 4 million shares when no shares come out then you are going to start to see some positive benefit from this and we estimate, on a full year run basis, if we add all 4 million shares out by January 1, probably a $0.14, $0.15 EPS lift and that’s the number for next year that we had talked about previously.

[Ravi Shanker:]

Right. And you are $1.5 million through that?

[Dave Cosper:]

We’re $1.5 million into it, yeah.

[Ravi Shanker:]

Got it. Just moving to SG&A, your target for the year is 78.0, I mean is that’s the realistic target I mean or can you comment a little under that given your year-to-date run rate?

[Dave Cosper:]

We start with the target, because it’s the target we’re 77.7 as we speak and we’re about to enter our largest gross quarter of the year. My reasonable expectation would be that we would be 77.7 not materially but you’ve got a one quarter...

[Jeff Dyke:]

But it’ll due to gross.

[Dave Cosper:]

But it’ll due to gross. The cost levels are… But as Jeff mentioned, we’re a December to remember kind of company, the gross per unit is coming up, the volume is going to be there, and the cost are flat so there got to be a little bit of leverage.

[Ravi Shanker:]

Understood. And just finally, can you comment on the competitive, the pricing environment on the luxury side, now that BMW has backed the normal inventories, do they have to go back and maybe buy some share they lost over the last few quarters. Also you’ve heard the stories of BMW kind of in these really tough arms raised if you will with the Mercedes to kind of [juicy] on it and top the luxury sales charts. So, what’s your assessment of the competitive situation there?

[Jeff Dyke:]

Its Jeff Dyke again, I mean its certainly going to heat up. There is no question about that, but it does every year as Mercedes Benz and BMW fight for and Lexus quite honestly fight for the title of who is going to be the number one luxury dealer in America. But to be honest with you, the brand mix, the mix within the brand also exchanges, we sell a lot more seven and five series as a part of our overall sales, or S-Class is a part of our overall sales than we normally do and it pushes margin way up. There is all kinds of year end incentives and so I think it’s going to be great. I mean it’s going to be fantastic. We are going to have a fun December and we are having a fun October, and it’s going to be really need to watch all these guys battle. When those luxury brands battle, it doesn’t always mean big massive margin erosion like you see when the in four brands fighting and so we are very excited for that because every single year without question we really benefit from it.

[Ravi Shanker:]

Yeah, really looking forward to all those commercials with the big boat.

[Jeff Dyke:]

Exactly. Thank you, everyone. We appreciate you taking time to be on our call today and I look forward to talking to you next quarter.

[Operator:]

Thank you. This concludes today’s conference call. You may now disconnect.