Sonic Automotive Inc (SAH) 2004 Q1 法說會逐字稿

Good morning and welcome to the Sonic automotive first-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this call is being recorded today, April 27, 2004.

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 the actual results to differ materially from those statements made. These risks and uncertainties are detailed in the Company's filing with the Securities and Exchange Commission. Thank you. I would now like to introduce Mr. Theodore Wright, President of Sonic Automotive.

Good morning. Welcome to our first-quarter 2004 conference call. I am Theo Wright. Joining me on the call are Jeff Rachor, the Company's now President and Chief Operating Officer; Lee Wyatt, the Company's Executive Vice President and Chief Financial Officer; and Scott Smith, the Company's Vice Chairman and Chief Strategic Officer.

I will cover a review of our revised long-term strategies, industry trends and 2004 estimates, and then turn the call over to Lee Wyatt to cover financial information in greater detail, followed by Jeff Rachor to cover operating highlights.

On our fourth-quarter conference call, we discussed several revisions to our strategies. I am pleased to report these revisions, along with continued solid market conditions, have had a positive impact on our performance. For the quarter, earnings per share was 52 cents and 53 cents from continuing operations. We improved performance over a year ago in both our continuing and discontinued operations.

A comment on acquisitions and capital allocation, we have closed on all of the pending acquisitions with the exception of one franchise, comprising two dealerships, consistent with the schedule we outlined in our prior conference call. The remaining pending acquisition is expected to close at the end of Q2 or early in Q3 of this year. The 2004 acquisitions, both closed and pending, are predominantly luxury brands where we have experienced consistently outstanding operating performance. We are not actively pursuing any additional acquisitions at this time and do not expect any additional acquisitions to close in 2004, other than the one franchise mentioned previously.

As we discussed on the prior call at length, this pause in acquisition activity, combined with a lower anticipated long-term acquisition growth rate, will allow the Company to focus its managerial efforts on its core operations and fully capture the benefits of scale we have created.

Our revised debt to total capital targets are 45 percent by the end of 2004, 40 percent longer-term. We believe we are on track to achieve those targets. Late last year, we evaluated our dealership portfolio in relation to long-term return potential and our demonstrated management capabilities. We added, as a result of this review, 12 dealerships to discontinued operations. Of our discontinued operations, two dealerships have been sold and three are under contract to sell. In the first quarter and second quarter to date, to we have not added any dealerships to discontinued operations, nor has any dealerships been removed other than through sale of the two dealerships mentioned earlier.

We continue to believe focusing management's attention on dealerships offering the highest return on both human and financial capital is in the best interest of the Company. Upon completion of the pending acquisitions and divestitures, we believe we will have the right brand mix and high-quality assets that will enable us to achieve our objectives.

It is worth noting we improved the operating performance of our discontinued operations in the first quarter. We consider every dollar, whether classified as continuing operations or discontinued operations, important, and are not ignoring these operations. These divestitures do have a beneficial impact on cash flow and we continue to expect approximately $20 million in proceeds from divestitures for the full year.

To comment on new vehicles, the new vehicle market continues to be solid, with a first-quarter SAR of approximately $16.7 million. Preliminary forecasts for the industry in April indicate a SAR in the mid to high $16 million range. The major manufacturers do not appear to have reduced production plans, nor is there any indication manufacturers will be less aggressive in pricing. We are not revising our expectation for a 16.5 million unit selling rate for the full year 2004.

A number of manufacturers such as Volkswagen that are trying to hold pricing have begun to be more aggressive in order to preserve market share. We have not seen the European manufacturers take a less aggressive competitive stance. However, we do expect the retail market to remain highly competitive and new vehicle gross margins to remain under pressure. We are confident we can sustain new vehicle margins above 7 percent for the year.

For used vehicles, we did not achieve the same-store sales growth of 3 to 5 percent we had forecasted for the full year, but maintained our market share based on the limited use vehicle data available to us. We have more than offset the lower sales growth with improved profitability, driven by lower wholesale losses and lower selling expenses in used cars. We expect low single digit same-store growth for the full year as we face weaker comparisons in used vehicles later in the year. Our emphasis on lower cost of sale units is benefiting our used vehicle operations, and continued focus on this segment represents a long-term growth opportunity we have yet to fully realize.

Our services and parts departments delivered a brilliant performance in the first quarter -- strongly growing sales, gross margin, and overall profitability. The benefits from our investment in facilities, our successful efforts to expand sales of certified preowned units, sale of extended warranty products, and achievement of high levels of customer satisfaction are accelerating. The trend is positive in all areas and we have no reason to expect these trends to reverse.

For the first quarter 2004, not a seasonally strong period for service and parts, we achieved our best-ever performance in fixed absorption, at 81.35 percent. Our strategic investment in facilities, although resulting in higher fixed expenses, have benefited our overall profitability and are now aiding in better-than-ever coverage of our fixed costs by services and parts departmental profitability.

Looking at earnings estimates for the year, our overall estimates for the full year 2004 remain unchanged at $2.65 to $2.80 from continuing operations. The second quarter was by far the strongest performance in 2003, creating the most difficult quarterly comparison for 2004. We believe the benefits of a pause in acquisitions and a reduced rate of acquisition growth are already being felt by the Company. These benefits include providing us an opportunity to stabilize our operating management infrastructure, focus management efforts on our existing operations, and address our SG&A expense issues in fundamental, structural and hopefully permanent ways that will benefit our Company for many years.

We've been gratified by the market's positive reaction to the revisions of our strategy, particularly since these revisions of strategy were difficult. We believe we have established the right strategies and expect to build on the solid start and execution achieved in the first quarter of this year.

I would like to close my comments by commenting on my personal decision announced this morning. I have been with Sonic since it was a created as a group of four dealerships in early 1997. We grew at a rapid pace for many years, becoming at one point the fastest-growing large company in the United States, with over 60 percent compounded annual growth in revenues over a five-year period. I have advocated for and strongly believe a slower growth pace is the right strategies for Sonic at this stage of its development. However, I preferred the earlier stages of our growth.

As I mentioned in our last conference call, a slowing growth pace is a natural and healthy development for a company as it moves through its life cycle. Changes in entrepreneurially oriented management at these same transition points is also a normal development. I am confident the Company's ongoing management team is capable of executing the Company's strategies. I am happy to have had the opportunity to speak directly to investors on that topic; however, this call is to discuss Sonic's quarterly results. I will be glad to answer any questions directed at me personally after our conference call is completed. With those comments, I will now turn the call over to Lee Wyatt.

Thank you, Theo. Earnings per share from continuing operations in the first quarter of 2004 was 53 cents, an increase of 7 cents compared to 46 cents in the first quarter of last year. Earnings per share from discontinued operations in the first quarter of 2004 was a loss of 1 cent, an improvement of 3 cents compared to the loss of 4 cents in the first quarter of last year. Net earnings per share was 52 cents in the first quarter of 2004, an increase of 24 cents compared to 28 cents in the first quarter of last year. Earnings per share of 28 cents in the first quarter of last year included a onetime charge of 14 cents for the adoption of EITF 02-16 related to the accounting for vendor rebates and incentives.

In reviewing the first quarter in more detail, revenue grew 8.1 percent, the same growth rate as the fourth quarter of 2003, with new vehicle growth at 8.3 percent; used vehicle growth at 4.9 percent; parts, service and collision grew at 10.6 percent; F&I declined 5 percent. The overall gross margin rate for the first quarter was 15.7 percent, a decline from 16 percent last year, but a 50 basis point increase from the fourth quarter. New vehicle gross margin was 7.3 percent, compared to 7.4 last year, but a 10 basis point increase from 7.2 percent in the fourth quarter. Used vehicle gross margin was 10.7 percent, compared to 10.8 percent last year, but a 50 basis point increase from 10.2 percent in the fourth quarter. The service, parts and collision gross margin rate continued to grow; it increased 60 basis points from last year to 48.6 percent. The overall gross margin rate was negatively impacted by a lower mix of F&I income and 10 basis point declines in new and used gross margins.

During the first quarter, our strongest regions were Alabama, Georgia, Tennessee, Houston, the Carolinas, Los Angeles, Michigan, and the D.C. metro area. Our weaker regions were Colorado, Dallas, Florida, and Oklahoma. Our strongest brands for the quarter were BMW, Lexus, Volvo, Audi, Infinity, Nissan, and Acura. Our top brands based on revenue were as follows. General Motors, including Cadillac, was 23 percent; Honda was 13 percent; Toyota was 12 percent; BMW, 10 percent; Ford, 10 percent; Lexus, 6 percent; Volvo, 4 percent; Mercedes, 3 percent.

On our fourth quarter conference call, we established the following targets for SG&A as a percent of gross profits as a means to hold ourselves accountable for addressing controllable expenses. Those targets were 80 percent for the first quarter, 77 percent for the second and third quarter, 78 percent for the fourth quarter, and for the entire year of 2005, 76.5 percent.

In the first quarter, SG&A as a percent of gross profit was 80 percent, compared to 81.1 percent last year and 82.4 percent in the fourth quarter. We met our first-quarter SG&A target. The SG&A improvement is a result of reducing our spending rate on advertising and selling expenses. The reduced spending rate for these expenses saved approximately $5.4 million for the quarter over last year. In addition, we are realizing the benefits of headcount reductions completed in 2003. We also anticipate achieving the 77 percent SG&A rate target for the second quarter due to continuation of these initiatives, as well as the fact that the second quarter seasonally generates a lower SG&A rate.

Diluted share count for the first quarter was 42.6 million shares. This count is 840,000 shares above the first quarter of 2003, and resulted in a 1 cent lower earnings this quarter. During the first quarter, we expended $4.5 million to purchase 197,000 shares at an average price of $22.71. At March 31, $29 million was available under our share repurchase authorization.

During the quarter, we paid a dividend of 10 cents per share, and today announced another quarterly dividend of 10 cents per share payable July 15th. We continue to believe that the dividend program brings value to the Company and to our shareholders. As previously stated, we will evaluate the quarterly dividend rate annually. This annual review will be completed during the third quarter.

The first-quarter balance sheet reflects our strategy to reduce debt leverage. Our net debt to capital ratio was 48 percent for the first quarter. As previously stated, we continue to target a ratio of 45 percent at year-end. Non-floor plan interest expense decreased by $1.2 million in the first quarter compared to last year, reflecting the benefit of the previous refinancing activities. Including the floor plan debt, approximately 58 percent of the Company's debt is fixed. Our earnings guidance assumes a 25 basis point increase in LIBOR during 2004. An additional 100 basis point increase in the LIBOR rate would reduce earnings by approximately 2 cents per quarter.

Availability under the revolving credit facility net of cash was $274 million at quarter end. We are also pleased to announce that JP Morgan Chase and Merrill Lynch have joined our bank group, and our revolving credit facility has increased to $550 million. Days’ supply of new vehicle inventory was 79 days for the quarter; used vehicle was 42 days; and parts was 48 days. Calculated on selling dates, the date supplied for new vehicle inventory would decline 65 days. These results are among the best in the industry.

On a continuing operations basis and excluding onetime items, LTM interest coverage was 5.7 times. Long-term debt to EBITDA was 3.2 times, and return on equity was 15 percent. Gross capital expenditures for the first quarter were $21 million. We anticipate that over 60 percent will be recovered through sale leaseback transactions. Capital expenditures for the year are expected to be approximately $80 million gross and $30 million on a net basis. We continue to meet all covenants under our revolving credit facility. Jeff Rachor will now review operating highlights.

Thank you, Lee. I will begin my comments on operations with a brief summary of same-store performance by business segment. New vehicle revenue was up 2.4 percent, while new vehicle gross profit dollars increased 1.9 percent versus Q1 2003. New vehicle gross margins were stable at 7.4 percent. Used vehicle revenue was up 0.08 percent, with a decline of 1.5 percent in total used vehicle gross profit dollars, as used car margins were down slightly from 11 percent to 10.8 percent versus Q1 2003.

Fixed operations were especially strong in the quarter, validating our strategy to concentrate on customer retention and additional productive stall (ph) capacity. Overall, same-store service sales increased 6.6 percent, and same-store service gross profit dollars increased 6.44 percent versus Q1 2003 on stable gross margins. Customer pay sales lead this improvement. Fixed absorptions was 81.35 percent compared to 77.82 percent a year ago.

Same-store parts sales were up 3.8 percent, driving a same-store gross profit dollar increase of 4 percent on a slight increase in gross margin versus a year ago. Sonic collision repair centers same-store sales were up 3.06 percent. Total collision repair gross profit dollars were up 6.4 percent versus first quarter of 2003.

Finance and insurance revenue decreased 10.5 percent. This can be attributed largely to two factors. First, a conscious decision by management to realign specific product offerings on F&I menus in the second quarter of 2003 to emphasize the sale of extended service agreement products. Secondly, stricter self-imposed rate caps and profit caps went into effect in the second quarter a year ago. I am pleased to report a positive trend in our extended service contract penetration, up 127 basis points versus a year ago.

Including the extended warning component on manufactured certified preowned vehicles, 46 percent of every vehicle sold in a Sonic showroom during the quarter has extended warranty coverage. Sonic's strategy to emphasize customer retention through this initiative continues to create an annuity of future service and parts business. Finally, standardized finance and insurance compensation plans and 100 percent menu selling yielded sequential improvement in dollars per retail unit during the quarter, and we look for this trend to continue going forward.

Now, a brief update on some of the key operating priorities identified in our fourth-quarter conference call. First, key personnel stability. The four new regional vice presidents installed in the fourth quarter are now fully integrated and collectively posted a 25 percent net operating profit increase in their areas of responsibility. In addition, dealer-operator turnover is stabilizing, with many individual's dealership turnarounds during the quarter directly attributed to these management upgrades.

Used vehicle operations. Used cars are benefiting from our focus on lower cost of sale and sub-prime financing segments. Special finance sales made up 21.5 percent of total used vehicle retail volume, compared to 17 percent a year ago. Same-store manufactured certified preowned unit sales were up 38 percent versus the first quarter of 003. CPO sales represented 33 percent of Sonic's total used vehicle retail unit volume, versus just 23 percent in the first quarter of 2003.

The implementation of our standard pay plan framework is progressing nicely. In the first quarter, we saw the benefits of completed general manager and finance manager pay plan implementations. We have now completed standardized departmental and salesperson compensation implementation in approximately 25 percent of Sonic dealerships. In addition, we have implemented a stiff budgeting tool companywide, which contributed to better control of selling expenses in the quarter.

I want to reemphasize that we are only targeting dealerships with out-of-line conditions initially. These variable compensation plans are not designed to reduce individual employee compensation. They are structured to better link pay to performance, rewarding productivity and creating true variability in personnel costs. We will continue these management-intensive implementations during the second quarter in the remaining target dealerships.

As we look ahead to the third quarter, we expect to have material completion of our expense reduction and variable modeling priorities. We will then be dedicating 100 percent of the Company's resources to growing our revenues in all business segments through the implementation, training, and accountability of standard sales processes in both Sonic's showrooms and service drives. Execution of this two-step approach should allow us to maximize profitability as we enter the calendar year 2005.

I would like to close by expressing my personal gratitude to Mr. Theo Wright for his invaluable contributions to Sonic Automotive. I also want to say that I appreciate the Board of Directors' confidence in appointing me as the new President and look forward to playing a larger leadership role in Sonic Automotive's bright future. At this time, management will be glad to entertain questions.

(OPERATOR INSTRUCTIONS) Rick Nelson with Stephens.

Theo, if you could give me a call after the call, that would be appreciated.

Sure. You're on my list already, Rick.

Jeff, with your change in responsibilities, do you plan to recruit or promote store operations people? Maybe you can address how you see your responsibilities changing --

Essentially, there will not be significant changes either in my responsibilities or the operating structure, initially, at this juncture. I will continue to focus the majority of my efforts on the most important thing, which is continued execution of the operating priorities that we have identified in our strategy, and obviously, expand my leadership role with additional guidance and input into some of the other activities that formerly fell under Mr. Wright's basket of responsibilities.

So your focus or time allocated to store operations would be diminished, I would think, and how do you fill that?

I really don't see any significant diminishing allocation of my time to operations. Again, right now, we are evolving into more of an operating company and our priorities remain the sole focus of the entire senior management team. And I will continue to spend the lion's share of my time working with our field management structure to execute on the simple strategies that we articulated in our fourth-quarter call on a going-forward basis.

Okay. Question on F&I. We saw a big drop in same-store sales and F&I per unit. What caused that and is that expected to continue?

I addressed that, Rick, in my prepared comments. There are really two variables that contributed to that. As I noted first, we restructured our product offering in our F&I departments in the second quarter of last year to put more emphasis on extended service agreement products, and the removal of some of those products was directly responsible for some of that decline.

In addition, as I noted, we were early adopters of very strict rate and profit caps. We actually even made those stricter last year in the second quarter. That impacted the comps. And finally, we did experience a very small decline in unit volume during the quarter, and that also contributed somewhat to F&I performance.

Question about Houston. You closed part of the acquisition. Can you tell us the revenues associated with the closed portion and then the pending portion for July, how much revenue is that?

Rick, this is Theo. In round numbers, the closed portion of the acquisition represents between 250 and $300 million in annual revenues. The remaining portion of the acquisition represents approximately $200 million in annual revenues.

And that is the BMW?

Yes.

Chuck Brum (ph) with JP Morgan.

Going from 80 percent to 77 percent SG&A to gross profit margin seems pretty aggressive. I was wondering if you could walk us through in a little bit more detail what you are planning there and what sort of same-store sale comps are embedded in your expectations?

The 77 percent rate for the second quarter is driven more by just the seasonality and the higher volumes in that quarter of gross margin. That will drive the majority. And then balance is we will just continue to execute the SG&A strategies that we've outlined around selling expenses and advertising.

Okay. And Lee, what you thinking more towards 2005? Are we going to get to the mid-70s percent range? Is that the long-term goal? Or are we going to be pretty happy in the 77 to 78 (multiple speakers) range?

We targeted 76.5 percent for the year of 2005, and that's what we're moving towards.

Okay, great. Then to bounce off Rick's question on F&I, it came in at 842 (ph) for the quarter. Is that what we should be modeling out over the next three quarters or should we expect a little bit of an uptick?

We expect a slight uptick as we move forward in the coming quarters. Again, we're going to continue to focus on training support of the hundred percent menu selling system that is in place. We are seeing good results in extended warranty penetration improvement. And again, in the first quarter we had successful implementation of motivational standardized F&I pay plans, and we are already seeing a positive sequential improvement in our per unit retail F&I results over the last three months, and we do expect that trend to continue.

Great. Thanks.

Scott Stember with Sidoti & Company.

Could you maybe talk about what your brand mix you think it will look like from an import versus domestic once you have completed the majority of your discontinued ops at the end of 2004 -- what the profile will look like?

The profile is going to be altered only modestly. Ford will be down slightly as a percentage. Chrysler will be down slightly as a percentage. And then BMW will be up fairly strongly as a percentage, as will a couple of the smaller luxury brands and near luxury brands, Audi and Volkswagen in particular, as well as Volvo. And we are going to add the largest exposure that we have had as a Company to the premier group brands, with Ford Jaguar and Land Rover. So those will be up from negligible percentage to a couple of percent of our total revenues.

But those should be the major changes. On our sales base, the amount of acquisition and divestiture activity we have, other than with the BMW brand, is not going to affect the percentage of revenues from any particular brand significantly.

So you should still be in that 50/50 range or 55/45 range import to domestic?

The overall import versus domestic, imports will be up slightly -- probably closer to 60 percent. But no one brand is going to account for all of that. The only brand that's going to move as a single brand significantly will be BMW.

Okay. And could you talk about on the parts and service side of the business, customer pay, what was mentioned, that that was up. Can you quantify that and maybe also talk about warranty work, domestic versus import -- the trends there?

Customer pay was up 6.8 percent on a same-store basis, driving gross profit increase of 6.92 percent. We did see a slight margin improvement in our customer pay business as well. Domestic customer pay was up about 3.5 percent. In terms of warranty, warranty sales were up, but they do include some of the certified preowned reconditioning and inspection process etc., and the growth we have experienced in CPO is driving some of the warranty trends, as well as our focus on some manufacturer extended warranty products.

If I could just follow up with a little bit of additional information, just to clarify. Warranty sales and service accounted for 22 percent of sales, identical to the percentage of a year ago essentially. That has been consistent now for really many years that we've been in the 20 to 22 percent range in terms of the percentage of our service business contributed by warranty.

Okay, thank you. Last question regarding inventories on the new side. Are there any particular out leaders (ph) or particular brands that are large at this point -- or pretty heavy?

The days supply is higher in our domestic stores. But some of that was a conscious strategy by management to take our inventories up somewhat in our high-volume domestic stores and even some high-volume import stores. Because if you recall, a year ago we feel like we missed an opportunity to drive market share by not having adequate inventory because of too tight of controls in that area. The time of year is perfect in terms of our positioning, with better inventories, and we are not concerned generally about inventory levels in any brands.

Okay, that's all I have. Thank you.

Adrienne Dale with CIBC World Markets.

I think I might have missed what you said. What did you say about the Houston market performance?

The Houston market performance preacquisition we said was a positive performer versus last year.

Okay, because if I'm calculating this correctly on a pro forma basis for the acquisition, that would now be your largest market segment, right?

That's correct.

And you're saying that now going forward, it should be a positive? Because traditionally, hadn't Houston been one of your weaker markets?

It has been one of the weaker markets in the last number of quarters, but the first quarter, it showed real strength on a same-store basis for us and on an operating profit basis. So we think the trend is positive and at the exactly right time for us.

What is the reason for that?

Primarily, some of the management restructuring that we've done in that market is contributing to the results, and I would just note that while we did see improvement in the first quarter, that that is compared to very weak comps. because as you know, the Houston and even the Texas markets in general have been under pressure economically over the last year or two.

So then in terms of your strategy for overweighting your exposure to the Houston market, would that just be that you got a very good price on this acquisition and you think you can get a lot out of it in terms of turning the operations around?

There are a number of answers to that question. First and foremost, the brands that we are acquiring are, in our opinion, the strongest brands and the brands that we perform best with, so there was a strong match in terms of the brand profile and our management profile. In addition, we do have benefits of scale in a local market -- advertising in particular, as well as management oversight costs. So there are some synergies associated with acquisitions in an existing market.

And lastly, we would just say, as indicated by the recent positive trends in Houston, we have confidence in this market for the long-term. We believe the Houston market has a number of fundamental advantages -- its climate, its tax environment, and for other reasons, we think over the long-term that it is going to be a great place to own dealership operations, particularly with these brands. And our desire is to invest in dealership operations that we are going to own for the long-term, not attempt to acquire dealerships in anticipation of a short-term economic cycle. So we're confident in the market over the long-term, and we think that these are the right types of acquisitions for our management team and our infrastructure.

Would it be safe to assume then that the multiple you paid for the Houston acquisition was better than a typical acquisition?

I don't think it would be correct to assume that it was better. I would say that the approach to valuation was the same as the approach that we have always taken. And that we performed this valuation with knowledge of the current economic conditions in the Houston market, where we already have extensive operations.

Okay, and then one more thing. For the dealerships that you did sell and that you have agreed to sell going forward, what markets were they in?

We do not comment on the specifics of divested operations for a number of reasons, but these dealerships are spread across the country. They are not concentrated in any one particular market.

Okay, thank you.

Nate Hudson with Banc of America Securities.

A couple questions. First, how did your new vehicle same-store unit sales do in the quarter, and do you think you continue to take local market share?

Nate, this is Jeff, and we did see a couple of percent decline in unit volume in new vehicles. But when you consider the impact of fleet on the industry numbers, we think we maintained market share.

Okay. And you mentioned that with the new sales plans, you were going to roll them out to just targeted dealerships. Can you give us some sense of what percent of dealerships does that constitute and what is the pace of rollout over the rest of the year?

I'm sorry, Nate, to qualify -- was that a questions on our sales processes or pay plans?

On the pay plans.

As I stated in my prepared comments, we have now completed implementation of the standard pay plans in about 25 percent or our dealerships. And again, we are targeting only those dealerships that are not performing to an acceptable standard. And during the second quarter and third quarter, we will have material completion of all of the stores that fall into that targeted category.

Is that 20 percent of your stores, half of your stores? Could you give us --?

I would make it 50 to 60 percent of our dealerships.

Okay, and one last question. What is the total dollars you expect to spend in 2004 on your acquisitions?

Nate, this is Theo. We expect that the consideration, as we mentioned on our last conference call, in total should be approximately $125 million, including some acquisitions that we have already closed on. For the full year, I believe that's a rough estimate of the amount that we will expend. You don't know -- I would like to be more precise, but you don't know exactly what the consideration will be until the time of the closing because of the way our acquisitions work mechanically and the amount paid for working capital volumes.

Got it. Thanks very much.

Jerry Marks with Raymond James.

Not to repeat Kurt's (ph) question, but maybe from a different angle, Theo, could you describe what your role has been over the past few months and over the past few years? Has it been more focused on acquisitions and now will Mark Iuppenlatz kind of be focusing on that, or how that gap is going to be filled a little bit?

Jerry, this is Theo. I think in my comments, I indicated that this is a Company I have been with for a long time and an entrepreneurially-focused Company. So describing my responsibilities as they've accumulated over the years is a little bit difficult because some of them are formal and some of them are informal. But over the last few months -- over the last six months, I would say, to give you a more concrete time period, a lot of my time has been spent on revisions to the strategy, execution of the revised strategy ensuring that the pending acquisitions closed, the pending divestitures are properly managed, and developing what I might -- helping to develop what I might describe as frameworks for the ongoing execution of the strategy and operations, and adjusting our SG&A expenses to the proper levels.

So in broad terms, I would say those are the principal activities that I have had over the last six months. But I think those who have followed companies like Sonic, entrepreneurial companies, know that oftentimes it's hard to give a precise description of somebody's responsibilities because you do whatever is necessary under the circumstances with the very same staff, which even today, Sonic does not have a high corporate overhead or a big staff. So that has been my responsibilities over the last six months or so. And on the acquisitions side, obviously Mark Iuppenlatz has been involved there for many years and will continue to play the key role in that area.

Thanks. In terms of the advertising number, it really fell off to like $13 million, the lowest we've ever seen it as a percentage of revenues. Is there something that happened there, or is it timing or seasonality? Because I know in the first quarter you tend to have lower advertising expenses. What happened there?

There was a conscious strategy there, and the management team worked together to develop a very disciplined advertising allocation process. In the past, that process was largely decentralized and driven by individual store operators' forecasts, which were often aspirational, and not based on realistic targets. And we took control of that in the fourth quarter, really started to execute effectively in first quarter, and you are seeing the results of that.

I should note that we are going to continue to benefit from that disciplined allocation process and continue to enjoy savings versus a year ago, but we are reevaluating certain high-volume domestic stores, particularly in the larger metropolitan markets, to make sure that we are investing adequately to be competitive and maintain and take market share going forward. So you may see that number be somewhat volatile and inch back 20, 30, 40 basis points as we go forward.

Okay. And finally, with the standardized management compensation plan, has there been any change in your employee turnover numbers or retention rates -- however you look that up (ph)?

We have had some turnover in what I would characterize as the departmental rank-and-file. I would like to take just a minute to explain that, because some of that is positive turnover. Obviously, the philosophy behind our standardized pay claim framework is to achieve 100 percent variability. That means we're taking away any guaranteed salary or fixed payment component of the pay plan, and really tying compensation directly to performance. Accordingly, when we implement those plans, if we have employees who have been dependent on the fixed component or the guaranteed salary and are not capable of producing to acceptable standards of performance, they aren't willing to survive essentially and turn themselves over. We see that as positive.

Conversely, the high-performing employees who are put on these pay plans see it as an opportunity and have enjoyed increases to their compensation. And therefore, the turnover that we have experienced has largely been limited to what I would characterize as less than adequate performance or production in that employee group.

There is always an element of anxiety and slight disruption in this type of a management-intensive implementation, but obviously you can see from the first quarter results that we were able to mitigate and manage any of that disruption and drive effective results.

Okay, thanks.

John Murphy with Merrill Lynch.

I was just calling you with one quick question on your wholesale vehicle strategy here. It looks like the revenue per vehicle or price per unit was up quite a bit. It also looks like the increase in wholesale units outpaced the increase in new units. I'm just wondering if there was anything going on there with your strategy on wholesaling versus trying to retain vehicles?

We have made a conscious effort to focus on a lower cost of sale. A lot of that wholesale price is a decision to wholesale some of the higher-end trade-ins, and some of that is associated with the increased certified preowned activity that we've had. We tend to have a higher-priced trade-in on what essentially are nearly new used vehicles in that certified preowned category.

Okay, so there's no conscious effort to try to -- or shift in strategy in trying to keep vehicles within your system versus putting them out to auction?

We have not changed our strategy in terms of managing either the days' supply of used vehicle inventory or the aging of used vehicle inventory. We maintain disciplined standards of used vehicle aging and when vehicles reach a determined age, then they are taken to auction. So there is no change in wholesale strategy. You are seeing the effects of a change in retail strategy to emphasize lower cost of sale units, which we are retaining in inventory rather than wholesaling in some cases, which is driving up the average cost of the unit wholesale.

Great. Thanks a lot.

(OPERATOR INSTRUCTIONS) At this time, there are no further questions.

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