Sonic Automotive Inc (SAH) 2002 Q1 法說會逐字稿

Excuse me, everyone, this is an operator. Thank you very much for your patience in holding. The conference will begin momentarily. Please continue to hold.

Excuse me, everyone. We now have our speaker in conference. Please be aware that your line should be on a listen-only mode. At the conclusion of the presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow, if you would like to ask a question. At this time, I would like to refer to the safe-harbor statement under the Private Securities Litigation Reforms Act of 1995. During this conference call, management may discuss financial projections, information, or expectations about the company's product or market or otherwise make statements about the future. These 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. I would now like to turn the conference over to Theodore Wright. Sir, you may begin.

Good morning and welcome to Sonic's first quarter conference call. I am Theo Wright, the company's Chief Financial Officer. Joining me, at Charlotte is Jeff Rachor, the company's Executive Vice President in Retail Operations. Joining us from another location is Scott Smith, the company's President and Chief Operating Officer. As we did in our last conference call, we are focused on looking forward and will not spend time repeating information contained in our press release. I will discuss industry trends, our acquisition and divestiture strategies, expenses and expense trends, our capital position, same store performance and other items. Mr. Rachor will then cover acquisition integration, further detail on same store performance and other operating matters. We are pleased to record an outstanding 30% increase in earnings per share on a comparable accounting basis. Positive industry trends, we discussed in our last conference call and earlier calls, continue. High levels of manufacturing incentives spending continued to support vehicle-selling rates at levels only modestly below 2001 and 2000 performance. This vehicle sale cycle may ultimately have a normal duration, but it clearly has a less than normal severity because of the impact of vehicle affordability, sustained levels of consumer spending, the impact of consumer leasing where consumers complete their lease term and return to the vehicle sales market to purchase another new vehicle, the quality of product offerings overall and new vehicle introductions and the far stronger financial condition of the manufacturers, which has allowed for higher levels of incentive spending and support. One trend we see developing is considerable tightening of consumer credits standards, our manufacturers tap these finance sources and others principally in the area of used vehicle financing. Mr. Rachor will comment further on this issue and it's impact on our operations. Our revised forecast is based on new vehicle selling rates of 15.5 - 16 million units for Q2 and 15 million units for Q3 and Q4. We are adjusting our forecast of used-vehicle same store performance to down 5%-10% instead of flat. We continue to forecast increasing same store sales of service and parts. Our overall forecast to same store sales declines of 4%-7% in Q2 and 4%-8% in Q3 and Q4. The company continues to pursue acquisition albeit at a more modest pace. We anticipate announcing acquisitions of dealerships representing at least $200 million in annual revenues between now and the end of the year. Our acquisition pace may reaccelerate later in the years. We have become more comfortable with integration of the Massey acquisition and other recent acquisitions. Mr. Rachor will comment further on how integration of these dealerships is progressing. Our acquisition strategy currently is focused on under-performing dealerships. We believe this strategy differentiates us from some of our peer groups and provides direct benefits to the manufacturers. One developing element of our acquisition strategy is consciously targeting for acquisition dealerships with the need to undo, that is go from multiple brands in one facility to one brand in one facility, [go] with other specific real estate needs. This is a strategy that allows us to create value directly to our real estate resources construction expertise and access to capital. Again, this is a strategy that directly benefits manufacturers. We also continued to prune our portfolio. We've sold the number of dealerships and received the benefits in improving margins, returns on capital and reduced operating risks. Most importantly we've been able to better deploy our human resources. As we've realized these benefits, we've become more [rigorous] in applying our return and other criteria to our portfolio. We have identified several additional dealerships for potential disposal. However, we are still being diligent in our acquisition process to avoid acquisitions, which will not need our criteria long-term. We expect to dispose off an additional 4-6 dealerships over the next several months. These divestitures are not expected to result in any significant gain or loss. The recently required discontinued operations disclosure clearly illustrates the benefits of this strategy of pruning our portfolio. To comment on some of our expenses and expense trends and how they impacted the quarter, in the first quarter we invested an additional human resources and infrastructure to support our acquisition growth plans. We added these costs in advance in completing the Massey acquisition as well as other acquisitions. This timing issue caused us approximately $0.02 per share for the quarter. This investment is critical, however, to acquisition integration and appropriate to the higher level of revenues, we will have in Q2 and Q4. This investment also gives us the infrastructure to support additional acquisitions in excess of the targets that we have stated for this year. Health care costs and worker's compensation, insurance costs were in place, continued to rise and these expenses negatively impacted Q1. Our fourth quarter high-yield bond issue increased our interest costs by $0.03 per share above what they would have been without the bond offering. Obviously, interest costs were down year-over-year, but they would have been down even more without the impact of fixing a portion of our interest exposure to this bond offering. Over the last several quarters, we feel that many question regarding apparent negative trends in SG&A in relation to gross profit and revenues. The reason for this apparent trend is how we account for flooring interest and floor plan assistance, how we pay our people, and how we generate gross margins on new vehicles. Floor plan assistance increases our gross margins, but floor plan interest is below the line in our financial statements, so as floor plan assistance has declined because of declines in interest rates, our gross margins have declined on new vehicle sales. If Sonic was to classify flooring interest costs as a component of cost to sales as does automation and as does the industry, generally SG&A expenses is a percentage of gross profit actually declined 2%, despite the impact of cost issues that I have discussed previously. New vehicle gross margins actually increased 60 basis points for the quarter. The decline in new vehicle gross margins over the last several quarters is due largely to reduced floor plan assistance because of lower interest rates. Please keep in mind that many of our compensation plans are based on net profit at the dealership of regional level, that is net profit after floor plan interest cost. Many of our sales managers are also paid after flooring costs. We've extensively evaluated the impact of the new accounting standard on goodwill and intangible assets. We do not expect any significant impairment charges upon final implementation of this standard in the second quarter of this year. On Sonic's capital position, we have over $100 million currently available under our revolving line of credit. We are generating approximately $25 million per quarter in free cash. The combination of these items is more than sufficient to support our acquisition plans for the remainder of the year. Cash flow alone will provide the capital necessary to meet our stated targets. Our debt to total capital ratio is 51.7% with equity standing at $580 million at the end of the quarter. This debt to total capital ratio is 5, even higher than our target of 50% where we expect to be back in line by the end of the second quarter as we generate cash from operations and generate earnings increasing our equity balances. Talking about same store sales, we made terrific progress this quarter in our same store performance relative to the industry in new vehicles despite continued difficult conditions in Northern California. Our same store sales efforts are focused on new vehicle sales and Mr. Rachor will comment further on our efforts in this area. Our brand, our relative performance in new vehicle sales was as follows. For Ford, we outperformed the industry by significant margin, for GM, we outperformed the industry, for Toyota, we outperformed the industry, for Mercedes, we outperformed the industry by a large margin, for Volvo, we outperformed the industry by a large margin. For Honda, Chrysler, and Nissan, we underperformed the industry and that's due largely to geographic concentration in Northern California and to a lesser extent in Dallas, in Dallas, particularly we have a strong presence with Honda. Honda is a major area of focus in our same store sales and they should have because that's an area where the geographic concentration in Dallas and Northern California we did underperform by a significant margin. Overall, our relative performance compared to the industry improved dramatically from prior quarters. Same store service and parts performance was affected by declines in wholesale part sales with one location with the specialty wholesale operation as well as one fewer service days in the quarter. Without these factors, our same store sales performance in service and parts could have been up 5%. Regions with marked weakness during the quarter were Northern California, Dallas, and Charlotte. Regions with particular strength were Alabama, Florida, and Southern California. Same store operating margins after flooring interest costs were 3.8% in Northern California for the quarter, higher than our overall performance despite marked declines in same store sales. Profit dollars in Northern California were comparable to the prior year. Overall same store margins were 3.1% on a same store basis. On a full-year fully integrated basis, our target of 4% operating margins after flooring interest costs is within sight and we believe achievable. Our overall performance benefited from our brand and geographic diversity, our positive brand mix, offset weakness, and some of our major markets. Some additional items affecting our future performance, option dilution compared to the prior year had a negative impact on earnings of $0.02 per share with higher share prices and issuance of shares in the Massey acquisition. We expect share counts to increase to approximately 44-44.2 million shares in Q2 and 44.5 million shares in Q3 and Q4. We expect interest rates to rise in the second half of the year, in fact of 50-100 basis points into our forecast. Our tax rate will likely be in the 37.5%-38% range for the remainder of the year after giving effect to the revised accounting for goodwill. Maintenance capital expenditures were just over $3 million for the quarter, we completed sale-leaseback of real estate late in Q1 and early Q2 generating cash of approximately $17 million. This is consistent with our strategy of constructing or enhancing dealership properties on our balance sheet and then selling these dealerships or enhancements in sale-leaseback transactions. We expect maintenance capital expenditures to be from $12-$15 million for the full year 2002. We continue to carefully manage our working capital, asset management information, day supply of new vehicles 56 days, used vehicles 41 days, parts 53 days, age in information, new vehicles over 180 days old with 1% of our inventories, used vehicles over 60 days aged 6% of our used vehicle inventory, used vehicles over 90 days essentially 0% of our inventory. We are in terrific shape going into the strongest selling quarter of the year. Taking into account all of the above factors we've increased our earnings guidance to $2.52 a share to $2.57 a share for the full year and $0.67-$0.69 for the second quarter of 2002. For those comments, I will turn the call over to Mr. Rachor. Jeff...?

Thank you, Theo. I am going to begin my commentary on operational highlights with an update on the integration status of our most recent significant acquisitions, the Don [Cart Center] and the Don Massey organization. Both of these transactions closed in the last 60 days and I am pleased to report that the transitions have gone very smooth to date. First the Cart Center, which we've operated since March 1st is a great example of the turnaround capabilities afforded by a robust management infrastructure. These dealerships have historically lost money. However, through our standardized diligence process we determined that significant changes needed to be made at the senior management level. Upon closing, we installed new management supported by a dedicated integration team led by our regional management. This crew executed the implementation of our standardized best practices immediately resulting in a first month net operating profit of over $400,000. The Massey organization integration is unique due to its geographic diversity. Once again, Sonic's debt for professional over-side management enabled us to provide a dedicated regional diligence and integration team at each Massey location. In total a 160 Sonic personnel were committed to support the integration process. This support is an obvious benefit of scale and a reflection of our organization's unique on-going ability to successfully digest future growth. The Massey transition is also going very well with minimal key employee turnover. Although, a handful of senior management changes have been made today and these moves were well thought out strategic decisions, which have already positively impacted performance. Once again, our best practices model has been rapidly implemented and substantial progress has been made in applying our disciplined inventory management philosophy. While in general, the Massey stores are very good overall performers, each dealership integration plan was tailored to target the individual opportunities with their significant upside. Just last week we held a two-day integration conference at our Charlotte headquarters specifically for key operations and financial management from both the [Cart] and Massey organizations. This intensive orientation program introduced these new team members to Sonic's operating philosophy, our culture, our policies, and standardized best practices. 85 people attended, including all key Sonic home office department heads. The meeting was an overwhelming success and serves as a jump-start catalyst to further accelerate a smooth integration transition. These two examples are validation of Sonic's management competencies in successfully integrating large transactions and peer play turnarounds. Next, I want to brief you on the progress we are making with our same store sales in Michigan. Early this year, we introduced this initiative targeting improved new vehicle sales. Significant home office resources have been dedicated to underperforming new vehicle sales opportunities in select dealerships. We developed the Marketing Assistance Program or MAP as we refer to it; to provide supplemental marketing funds to these target dealerships, which are incremental to their historical budgets. In addition, we provide MAP [split] funds to create incremental sales motivation. Dealership must meet certain qualifying criteria to receive these subsidies. The results have been impressive as dealerships that are leveraging MAP assistance have showed an average new vehicle sales increase of over 15% in the month of March. The top 25% of MAP dealerships showed increases of over 50% in new vehicle sales. The marketing assistance program and our same store sales initiatives continue to evolve as we are confirming indisputable ability to have an impact on dealership level same store sales improvement by the focused applications of our home office resources. It should be noted that our manufacture partners have received both our same store sales initiative and the marketing assistance program enthusiastically. In fact in most cases these targeted MAP dealerships are receiving additional[ co-op] advertising support and our supplemental product allocations to support a collaborative business plan co-developed as part of the MAP process. Finally, I would like to discuss the negative trend in same store used vehicle sales, down just over a 11% for the quarter. Our operations team has analyzed this phenomenon extensively. It is not brand or geographically concentrated. Instead the most significant price around used vehicle retail activity has been a [withdraw] of certain lenders particularly in the sub-prime category. In addition, remaining lenders have tightened credit standards from historical practices. Sonic has been impacted directly by these trends, for example Ford Motor credit, Sonic's largest captive in direct lending source had historically been aggressive in supporting Sonic's retail used car business in both our Ford and Non-Ford dealerships. Due to the economic environment and their own company's strategic adjustments they have completely withdrawn support of our non-Ford used vehicle retail business and tightened credit standards on their core Ford used vehicle business. Chase], our largest non-captive lender has also tightened credit policy resulting in approximately 500 less Sonic retail deals approved in both in the first quarter of 2002 versus a year ago. Clearly, Sonic is focusing on exploring alternative lending resources and operational support to address these used vehicle trends. I also want to acknowledge that the company's unprecedented strategic focus on used vehicle sales has possibly been a distraction with some resources in focus affecting high used vehicle performance. However, it is noteworthy that while our sales declined, margins were actually up slightly and wholesale losses were down over 40% for the quarter versus 2001 indicating that Sonic's management discipline relative to both margin and inventory management remained strong despite market conditions. Pricing on used vehicle has firmed during the quarter and wholesale pricing at recent auctions continues to be strong. Same store used vehicle declines have also contributed to more modest same store sales growth in our service and parts operations as fewer vehicles are being reconditioned in our shops. In closing, I want to reiterate the success of our own people factory, the Sonic dealer academy, our comprehensive training initiative. Sonic's passion for training, developing and rewarding our people to promote from within culture is allowing us to attract and retain the industry's best and brightest, providing a pipeline of talented management to support our growth strategy. That concludes our prepared comments and at this time we will be glad to entertain questions.

Thank you sir. If anyone would like to ask a question please press the * key followed by the 1 key on your touchtone phone now. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the questioning queue please press * followed by 2.

Thank you and hi guys.

Hi Rick.

Any comments on Northern California and trends there and what you are doing actually to stabilize or improve the results?

Rick, let me start on answering that question and Jeff may jump in, first half in terms profitability the trend has improved markedly although we were still lower a little over 10% in total same store sales in Northern California. Profits were flat and profit margins were up, so we were focused on capturing the maximum benefits from the available business within that market. The other thing we are doing is directing a significant portion of our marketing assistance efforts and other efforts to improve same store sales in Northern California. We've seen a very large strong turnaround trend at our large Mercedes store in the Northern California market which is that store's part of our marketing assistance program that is auto bound, Mercedes. We've also seeing a strong turn around in performance at Stephens Creek, Nissan. Both of those are in the Silicon Valley San Jose area, and we intend to consider other stores in that region for the program. One other store that's included is Capital Ford, which is in San Jose and they also had a strong turnaround in trend there. So our performance in March trended up in part because of the participation of the stores in our marketing assistance program. Jeff, do you have any other comments about Northern California?

No, I would just say that we continue to be encouraged by the progress there. Clearly profitability has stabilized and it is a very positive trend. Essentially we've just adjusted our model to the more moderate sales environment there, which we believe is more reflective of normal conditions and we look forward for those trends to continue at profitability performance to be consistent going forward.

Thank you, any observations on Massey, since you have closed there, are there any surprises?

No, there are no particular surprises. Again, we had a very comprehensive diligence process and integration planning effort. So we identified what we considered to be the bigger opportunities and obstacles associated with that integration and as I noted in my prepared comments, things are going very smooth to date, and we are addressing the inventory management concerns. Historically they had not managed their inventories with the same standards of discipline that Sonic has embraced and that is one of the biggest areas of focuses as we go forward. In addition we are focusing on the development of finance and insurance as a profit center as we continue to see that as one of the biggest opportunities across their organization and finally, service and parts, again, we've implemented best practices from day one in their service and parts operations as well their collision repair centers, which we believe will bear fruit almost immediately.

If I could add to that, one we benefited from is the fact that Cadillac as a brand is performing better than we originally anticipated. Cadillac sales were up 14% in the month of March. The new CTS has been well received. It's essentially an incremental product for Cadillac. The [Escuade EXP]; the truck sport utility high breed has also been an incremental product adding to our sales in our Cadillac dealerships. So we have been the recipient of some lucky timing in terms of the turnaround in Cadillac's performance as a brand in the timing of our closing of our Massey acquisition. So we anticipate sales rates of new vehicles in the Massey dealerships will be better than the original forecast based on the trends that we see today.

Your Massey closed after the quarter ended, is that right?

We closed matter of days before the quarter ended.

The balance sheet is reflective of the debt incurred to acquire [_____]as well as the stock issue?

Yes it is.

Thank you.

Our next question comes from David Nells with Manchester Management.

DAVID NELLS]: Yes, I've got a couple of questions, one on free cash flow and one on interest rates. You mentioned that you had tried to end at 50 - 100 point basis, basis point increase in rates. I would be interested in... if you could just kind of provide sensitivity analysis of, if rates were up a 100 points, what sort of a impact would that have on your floor planning and what kind of offset would you get from assistance plus any hedging you might be doing.

Yes based on the overall exposure that we have to variable rates, floor plan as well as other borrowings of 100 basis point increase in rates would cost us approximately $0.02 per quarter and that takes into account the fact that just over 50%, in fact approximately 60% of the increase in floor plan interest costs would be offset by increases in floor plan assistance from the manufacturers.

DAVID NELLS]: Okay and is that...do you any hedging also?

We have, we talked about that on our prior conference call. We entered into a swap for $100 million worth of variable rate exposure in the first quarter of this year. And that fixed a portion of our borrowings. In addition we also did a high yield bond financing in the fourth quarter, which in effect fixed another significant portion of our long-term borrowings.

DAVID NELLS]: Okay, and the second question on free cash flows. Could you define the $25 million a quarter that you commented on, is that net of capital expenditures or the working capital effects in there?

It is the net of capital expenditures but does not consider working capital changes and with the current trend that we have seen in used vehicle sales rates, we would be generating cash from working capitals as opposed to use in cash and working capital.

DAVID NELLS]: That's this year you are talking?

Yes.

DAVID NELLS]: And is there any sale-leaseback included in that?

No we did not include the sale-leaseback transactions, or construction in progress expenditures that we expect to have refinanced for sale-leaseback transactions.

DAVID NELLS]: So that's all operating cash flow?

Yes sir.

DAVID NELLS]: Thank you very much.

Welcome.

Thank you, our next question comes from [Greg Schultz] with SAB Capital.

Good afternoon, couple of questions please. What's the actual share count today? Basic shares?

Well, I only have the weighted average numbers directly in front of me. The basic share count on a weighted average basis was 41 million and we would add to that approximately1.2 million from the Massey acquisition. So basic share count approximately 42 million.

Got you. Okay and does that include Massey and includes [_____], it does not include the $300 million of annualized acquisitions that you're going to buy whether it is March or February.

That's correct.

And the purchase price for that what's a rough estimate is that $45 million or $50 million.

That's a fair guess. You really don't know the purchase price until you close within the mechanics of our acquisition structure, but that's a fair guess.

Okay and does the debt at the end of the quarter include the full benefit of all the sale-leaseback that you are planning to do with respect to Massey.

It does not. The Massey acquisition as well as another sale-leaseback that we closed after the end of this quarter would generate approximately $10 million in additional cash.

That's it, okay, and the new gross margins did a really good job, I guess it shot up about 60 [bibs], is that something we can expect in the later part of the year or is that a Q1 phenomenon?

No I meant just on New Year 60 yeah...year over year and that's something you been thinking to continue.

Yes we do.

And then lastly on used you talked about the impact of the pull up from the sub prime guys. Did that look like it impacted you ...you know the company I guess just proportionally relative to some of the other consolidators, I listened to the [automation] call early this morning. Those guys were down about 2% on a unit basis for used, is there anything unique?

I think one element that is unique to Sonic is we have an arrangement with Ford credit last year where we had in place very substantial incentives to generate used vehicle business that are non-Ford dealerships a year ago and that incentive program went away and that incentive program was unique to Sonic.

Got you and was that...

That did have a significant impact on our used vehicle.

Got you and was that incentive program in existence throughout all of last year, in other words, it will take full year to anniversary that?

It was, but I would say that the impact to that incentive really declined in the third quarter of last year as Ford credit revised its strategy.

Great okay. Thank you very much.

Thank you.

Thank you. Your next question comes from Michael Norman with Salomon Smith Barney.

Thank you, I wanted to follow up on that last question and ask other one as well. Following up, are you seeing aside from the special case of the Ford incentives, generally a tightening of credit, which I guess is consistent with what we are seeing the other institutions doing and if so why do you see prices increasing for used cars... it would seem that the market will be getting soft or so and what else is in the mix, and just the clarification... when we talked about same store sales for new... was that relative to the total market or relative to the particular region in which the operations or franchises exist.

Okay, let me take that in inverse order, in that discussion of brand performance, we did not take into consideration regional differentiation, so we compared our performance to the performance of those brands nationally and what that really indicates to us based on further analysis is where we underperformed compared to the industry which was largely based on regional conditions. If you dig into those numbers further and look at our market share information as provided by the manufacturers, our market share has held up nicely, even in some of those brands where we underperform. There are exceptions but I would say that's the general rule, with the exception being largely Chrysler brand where we have not performed as well as we should on a regional basis.

Right and that market share, just to clarify, was on a regional basis?

Yes. It's very difficult to get that information on a truly comparable basis and it's also hard to get it all from some manufacturers and so it's not something we can talk about with any great certainty but that would be...the answer I gave you would be based on the indications we see and the information that we have available. With address the issue of credit standards tightening I would say that as a general rule, credit standards are tightening and what we see is just about everybody has moved up a tier in effect and dropped their financing of their lowest year that they previously financed, so somebody who financed maybe CD tiers, is now ABC, and they drop D and that just a kind of a rule of thumb. And there is no precision there but that's essentially what we are seeing. The exception is that the manufacturers captives continued to be aggressive in their application of underwriting standards to support new vehicle sales rates which is their fundamental mission and is consistent with their practice in the past and one of the reasons why we have always had a strategy of partnering with the manufacturer's captives both in the consumer finance arena as well as in our floor plan and other financing.

Roughly what percentage of a year used car retail financing is with captives?

I don't have that in front of me but I would say that as a rough percentage 25%-40%, it depends on the brand but a year ago this time in many of our Ford dealerships we were seeing 50%-60% of our used vehicles financed by Ford credit as an example.

Thank you.

Thank you.

Our next question comes from Scott Stember of Sidoti and company.

Good afternoon guys. Can you just talk about F&I, did you give with the figure was per vehicle this quarter versus last quarter and may be just touch on why the flat same store, has it something to do with the OEM sponsor discounts.

Well, we continue to benefit from our focussed strategy of training and development in the F&I arena. Menu pricing which has been implemented now across our organization and finally leveraging our scale to a range of favorable purchasing relationship for all of our F&I products as well as some of our indirect lending commissions and we've found historically and these numbers bear that out but that's an area of our business that we can influence quite dramatically in a very short period of time and therefore it is the focal point of our integration planning and we see it as one of the biggest opportunities in both the [Cop] and Massey acquisitions. And we are confident that over the next 90 -120 days we can improve the performance of their F&I numbers to be reflected with our averages for those brands.

Okay and Theo I think you gave the days inventory at the beginning of the call, I missed it. Can you just give it me again for the more news?

Yes, hang on just one second, I will get to that page in my notes. The days supply of new 56, used 41, parts 53, new units over a 180 days old 1% of our inventory of new vehicles, used units over 60 days old 6% of our used vehicles inventory and used units over 90 days old essentially 0% of our used vehicle inventory.

Okay and as far as the pruning of the, what do you call...the discontinued stores. How many were there in this quarter that accounted for that one-time charge.

There were two dealerships this quarter. And I would like to comment on that a little bit further. We went to this disclosure somewhat reluctantly, we've always prided ourselves on having the results of operations and the impact of these dispositions reflected in operations and that we never had taken a onetime charge or characterized these items as one time. Type items but the new standard essentially required us to do so, but overall any impact from the plan dispositions in the future quarters is reflected in our estimates going forward and what we are estimating is not an amount that's before discontinued operations, it's after any impact from discontinued operations.

Okay that's all I have. Thanks guys.

Thank you.

Thank you. Your next question comes from Jordan Hymowitz at SF Capital.

Hi guys how are you doing? JEFFREY C. RACHOR & THEODORE M. WRIGHT: Great Jordan how are you?

Good, good. Just a quick followup. Basically answer the question from the gentleman before me. But the new ratio is 56 and the used was 41 inventory days of supplies, am I correct?

Yes.

What was that a year ago or what was that last year?

We are down, we are flat in used, we are down in parts, and we are down in new. I don't remember the exact number of days but I think we are down 7 days in new and a few days in parts and we are flat in used to maybe up to date no significant change there.

Then help me understand some, on a year over year basis and forgetting parts from in it? But how come from the fourth quarter to the first quarter, it looks like the new and the used inventory was both up about 40%. That's because it's the rapid selling season with the highest I saw in the fourth quarter and we ended up so low because it seems to be abnormally low in a fourth quarter term.

We were abnormally low in the 4th quarter but the other factor you have is that we measure those days' supply on a trailing 90-day basis though we have factored in the relatively weak sales performance in the first quarter in calculating the days' supply. If we recalculate day's supply on a forward selling basis as we go into the stronger sales quarter of the year, those numbers would be lower and very much in line. We want to be somewhat higher in inventory at the end of the [second] quarter than at the end of the first quarter because we anticipate much better selling rates in the second quarter than in the first quarter.

Okay.

Thank you sir. Our next question comes from [Jeremy Marks] with [____].

JOEY MARKS]: Good morning.

Good morning [Jerry].

JOEY MARKS]: I was a little confused, Theo, when you were talking about SG&A. You said if you make some adjustments and in fact you said if you include [core plant] interest expense or assistance then it would be down 2%. Could you elaborate a little on that?

What I said is if you include [flooring] interest as cost to sales in a manner identical to the accounting that [Auto Nation] uses, our SG&A expenses as a percentage of gross actually declined [two] percent. So we accounted for [flooring] just like [Auto Nation] does. Our SG&A expenses as a percentage of gross were actually down.

JOEY MARKS]: Okay, so you are [doing] it as a percentage of gross. That is what I asked. And then with the $0.02 that you indicated because of higher integration support, you also indicated that you had about 260 people [across] various platforms involved. I am not sure if you are adding people or what was included in that $0.02 for what was needed.

Jerry], that is people. We need more people to manage 140 dealerships and we needed to manage 110. In addition to that we wanted to have an infrastructure in place that would support 180 dealerships, not necessarily 140 dealerships. So that somewhat premature investment in people had the $0.02 per share impact on the quarter that I mentioned. But what we are confident that that investment will pay off in rapid acquisition integration and reductions in any kind of operating risk because we have a stronger [overside] structure.

JOEY MARKS]: Okay, maybe this is just a quick map then. If you have a capacity of 180 and right now you have 140, then that means you can support another 40 dealerships and so maybe another $1.2 billion [in] revenues?

It would depend on where those dealerships are located and how big they are. There are a lot of factors that would go into that consideration. But we think we can grow our revenues up somewhere close to 50% without having to invest significantly in additional regional [overside] structure.

JOEY MARKS]: Okay, thanks.

Thank you.

Thank you. Once again, if you would like to ask a question please press the '*' key followed by the '1' key on your touchtone phone now. Our next question comes from [Greg Shaw] of SAB Capital.

GREG SHAW]: Hi guys! A quick follow up. I think you made a comment that you are targeting 4%, I guess, of EBITDA margins for floor plan financing and you guys are about 3.25%. What's the time frame for that and [_____] how do you get there?

Well, the time frame for that is over the next several years, [_____] how we get there is through continued strong performance in finance and insurance, in [_____] and parts, better control of our personnel, plus our gross profit per employee initiative and lastly the impact of our divestiture program where we prune those dealerships where we can't meet that kind of operating performance level.

GREG SHAW]: Okay.

Thank you.

GREG SHAW]: Thank you.

Thank you Mr. [Shaw]. At this time there are no further questions.

Thank you. Thanks for being on the [call].