Sonic Automotive Inc (SAH) 2004 Q4 法說會逐字稿

Good morning and welcome to the Sonic Automotive fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. [Operator Instructions]. As a reminder, ladies and gentlemen, this call is being recorded today, Tuesday, February 22nd.

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 with the Company's filings with the Securities and Exchange Commission. Thank you. I would now like to introduce Mr. Jeff Rachor, President and Chief Operating Officer of Sonic Automotive. Mr. Rachor, you may begin your conference.

Good morning, ladies and gentlemen. Welcome to Sonic Automotive's fourth quarter 2004 conference call. Joining me today is the Company's Executive Vice President and Chief Financial Officer, Mr. Lee Wyatt. Today, I will be covering overall fourth quarter performance, industry trends, and an update on strategy. Then Mr. Wyatt will review financial results in detail, including full-year 2004 results and 2005 guidance.

In the fourth quarter, we saw rebound in consumer confidence, complemented by aggressive factory incentives that contributed to a stronger than expected industry. I'm pleased to report fourth quarter earnings per share were $0.48 from continuing operations, up from $0.46 in the fourth quarter of 2003. For the fourth quarter, revenues from continuing operations were up 11.2 percent, while total gross profit was up 11.8 percent versus the fourth quarter 2003. Total continuing operations, SG&A as a percentage of gross profit was 80.3 percent for the fourth quarter, down from 81.7 percent in the fourth quarter of 2003. Variable compensation and advertising expense for the quarter were 35.5 percent and 5.1 percent, respectively, compared to 36.5 percent and 7 percent, respectively, in the fourth quarter of 2003. Capping 4 consistent quarters controlling these expenses.

Now I will review same-store fourth quarter performance by business segment. New vehicle revenue was up 2.5 percent versus the fourth quarter of 2003. While total new vehicle margin was flat compared to the fourth quarter of '03 at 7.4 percent. When adjusted to exclude fleet sales, gross margins were 7.7 percent, up from 7.6 percent a year ago. Fourth quarter used vehicles retail unit volume outpaced the industry, resulting in a 2.8 percent increase in same-store used vehicle revenue. Used vehicle gross margin was 10.1 percent versus 9.8 percent in fourth quarter 2003. Manufacturer certified pre-owned sales made up 35.2 percent of Sonic's total used vehicle volume, compared to an industry average of just 11.4 percent. Subprime used vehicle sales comprised 18.8 percent of our total same-store used vehicle volume, compared with 14.4 percent in the fourth quarter of 2003. Our strategy of focusing on these 2 growing segments is working, and we see the positive momentum in our used car operations continuing in 2005.

Total same-store fixed operations revenue was up 1.8 percent for the quarter. Total fixed operations gross margin was 48.5 percent, up from 48.4 percent a year ago. The Company's same-store service revenue was up 4.3 percent. Same-store parts revenue was flat due to a 7 percent decline in our wholesale parts revenue. This decline is due to a revision of our wholesale parts strategy and is limited to just a handful of dealerships. It should be noted that customer pay parts and warranty experienced strong growth. Total same-store parts and service customer pay revenue was up 3.2 percent versus Q4 of 2003. Fixed operations remains a stronghold for Sonic Automotive as fixed absorption was a record-setting 82.5 percent for the quarter. Sonic's brand mix and the ongoing development of additional stall capacity contribute to a positive outlook for this high margin segment. 280 new service stalls were completed in 2004, with an additional 430 new service stalls expected to be completed in 2005. Our initiatives to drive certified pre-owned sales, extended service agreement sales, and standard service drive processes will also drive future fixed operations growth.

At the close of the quarter, new vehicle inventories were at a 52-day supply, well below industry averages. Used vehicle day supply was at 34 days, contributing to strong used vehicle profit improvement during the quarter. These levels are indicative of Sonic's disciplined inventory management culture and position us well for an uncertain first quarter industry environment. The strongest performing regions for the quarter were the Southeast and both northern and southern California. The Oklahoma region is experiencing a noteworthy turn around, while the Denver, Washington, D.C., Michigan, and Ohio regions underperformed. It should also be noted that while both Houston and Dallas regions showed improvement over the previous year, the overall market conditions there remain difficult. In terms of total revenue, our strongest brands were General Motors, including Cadillac, a 25.3 percent of revenue; BMW at 15.3 percent; Honda at 12 percent; Toyota at 10.3 percent; and Ford at 8.6 percent. The luxury and premium brands continue to perform well for Sonic Automotive. In addition, our General Motors portfolio delivered a strong performance in the fourth quarter.

As I have said previously, execution in the retail automotive business is dependent on strong, experienced local management. Accordingly, we continue to invest in attracting and retaining high-caliber management and associates. I'm pleased to report significant declines in general manager and total associate turnover in the second half of 2004. We have introduced a number of associate selection, training, and development resources to build on this momentum. In addition, we've recently announced an innovative general manager retention program. We've strengthened our field management, the addition of Jim Evans as our Divisional Vice President in the West yielded an immediate impact as western division profits improved materially for the quarter. We've also recently made some refinements to our regional structure going from 12 regions to 10 regions, leveraging our strongest leadership over a greater span of oversight, while reinvesting in key tactical specialist in pre-owned and e-commerce support positions. The Momentum acquisition integration in Houston continues to go smoothly with a high retention of management and associates. That, combined with the adoption of Sonic best practices, continued to yield improved profitability during the quarter.

Despite a robust close in 2004, I want to suggest cause for cautious optimism for the 2005 outlook. Overall, industry inventory levels remain high. Domestic OEMs plan to reduce incentives and interest rates are rising. In addition, January industry numbers were negative, reflecting December's pull ahead. Hence, the business climate will remain hypercompetitive creating margin compression risk in the new vehicle segment.

In closing, I want to reflect positively on a year of transition at Sonic automotive. I'm very pleased with the progress since our strategic shift from being an acquisition-focused company to an operations-focused company. Overall, we've executed on our 2004 priorities. We've reduced the acquisition pace to enable focus on core operations. We've regained control of variable SG&A expenses. We've restored solid gross margins in new, used, and F&I. Sonic's fixed operations remain at core strength with additional stall capacity pointing to an optimistic future. Inventories are well positioned. Management development and key personnel stability is improving, and our net debt to cap is on a trend to our previously communicated target.

For 2005, we will continue to focus on this same simple strategy of operational excellence through mastering the basics. In addition, our stable management platform provides a solid foundation to initiate a renewed focus on growing each business segment. I want to take this opportunity to thank all of the Sonic associates for their perseverance throughout the year and congratulate them on the positive trends of the fourth quarter.

Finally, dividends will remain unchanged at $0.12 a share, payable on April 15, 2005 for shareholders of record as of March 15, 2005. At this time, I'll turn the call over to Mr. Lee Wyatt to review fourth quarter and calendar year-to-date financial information in more detail. Lee?

Thank you, Jeff. Earnings per share from continuing operations in the fourth quarter of 2004 was $0.48, an increase of $0.02 compared to $0.46 in the fourth quarter of last year. Earnings per share for discontinued operations in the fourth quarter of 2004 was a loss of $0.13, the same as the fourth quarter of last year. Net earnings per share was $0.35 in the fourth quarter of 2004, compared to $0.33 in the fourth quarter of last year. Earnings per share from continuing operations for the full year 2004 was $2.22, an increase of $0.18 compared to $2.04 last year. Earnings per share from discontinued operations for the full year of 2004 was a loss of $0.22, a $0.01 improvement from last year. Net earnings per share was $2 for the full year of 2004 compared to $1.69 last year.

In reviewing the fourth quarter in more detail, total revenues grew $191 million, or 11.2 percent. Net or new vehicle revenue grew 10.6 percent. Total used vehicles revenue grew 12.3 percent. Parts service and collision revenue grew 12.1 percent. F&I revenue grew 8.3 percent. The overall gross margin rate for the fourth quarter was 15.3 percent, slightly higher than last year. New vehicle gross margin rate was 7.4 percent, used vehicle retail gross margin rate was 9.8 percent. The parts service and collision gross margin rate was 48.3 percent. The SG&A rate for the fourth quarter was 80.3 percent, a 140-basis point improvement from the fourth quarter of last year. This rate's consistent with the guidance that we provided on our last conference call. The fourth quarter SG&A rate was negatively impacted by writedowns of abandoned facility projects and other accruals. The SG&A rate for the full year of 2004 was 79 percent. Our current strategy is to target a 100 basis-point reduction in our SG&A rate to 78 percent in 2005. We will continue to manage advertising and variable selling expenses while targeting reductions in other variable and fixed expenses.

Based on a change required by the FASB's EITF04-8, we've included in diluted earnings per share all of the shares potentially convertible from our $130 million convertible notes. For the full year 2004, the diluted impact was $0.04 per diluted share from continuing operations compared to an impact of $0.02 for 2003. There was no impact in the fourth quarters of 2004 or 2003. Diluted share count for the fourth quarter was 45.2 million shares. This share count includes 2.8 million shares due to the previously mentioned new rules for convertible notes. The earnings per share calculation under the new convertible notes rules allows for the addback of the interest expense on the convertible notes in addition to the higher share count. During the year, we expended $21 million to repurchase 951,000 shares. 33 million is currently available under our existing share repurchase authorization.

Our debt to total capital, net of cash ratio was 46.2 percent at year-end. This ratio is within the previously communicated target range of 46 to 48 percent and reflects progress toward the 40 percent longer-term target. Availability under the revolving credit facility was $253 million at year-end. Non-floorplan interest expense increased by $1.8 million in the fourth quarter of 2004 compared to 2003, reflecting higher interest rates. Including floorplan debt, approximately 54 percent of our debt is fixed.

The fourth quarter effective tax rate increased to a more normal rate of 37.6 percent from last year's fourth quarter rate of only 32.2 percent. This rate increase reduced earnings per share by $0.04 in the quarter. Last year's unusually low effective tax rate was a result of nonrecurring state tax benefits and the favorable resolution of tax contingencies.

On a continuing operations basis, and excluding one-time items, LTM interest coverage was 5.1 times. Long-term debt to EBITDA was 3.3 times, and return on equity was 13.7 percent. And we continue to meet all covenants under our revolving credit agreement. Gross capital expenditures were $31 million in the fourth quarter. We anticipate that approximately 75 percent of these gross capital expenditures will be recovered by through sale and leaseback transactions. Capital expenditures for the year, net of completed and expected sales and leaseback transactions, were $25 million.

Our guidance for 2005 is $2.35 to $2.45 from continuing operations. This is an increase from $2.22 from continuing operations in 2004. Key assumptions in our guidance for 2005 include a continued competitive sales environment, especially in the first half of the year. Same-store sales increases of 2 to 3 percent. Interest rate increases of 150 basis points to a rate of 3.75 percent by year-end. SG&A expense of 78 percent of gross profit. It includes the impact of the new convertible debt rules. As an effective tax rate of 37.5 percent, excludes any impact of stock options expensing in 2005. And includes about $100 million in revenue acquired in each of quarters 2, 3 and 4.

Our plan for the next few years that has the potential to grow EPS by 9 to 12 percent annually includes annual same-store sales increases of 2 to 3 percent, SG&A improvements of 50 to 100 basis points per year, and acquisitions that average 500 million in annual revenue. 17 dealerships were included in discontinued operations at 2004 year-end. We estimate overall proceeds from the dispositions in the range of $20 million. We were also pleased to announce that we have selected ADP as our single DMS provider. The conversion will include moving approximately half of our total stores from other vendors to ADP and upgrading the current ADP stores to newer applications. This conversion will take 12 to 18 months. This strategy will result in improved enterprise management, tools, and consistent data and standardized store-level processes. Although not completed at this time, we anticipate no material weaknesses in our internal controls over financial reporting under Sarbanes-Oxley. At this time, we will take questions.

[Operator Instructions]. John Murphy, Merrill Lynch.

Good morning. I had a couple of questions. The first was on the improvement in the used vehicle department. How much of that is an internal focus, which you're obviously doing a good job on, and how much of it is the general improvement in the used vehicle market in aggregate? Can you parse that out?

Yes. This is Jeff Rachor. I'll be glad to take that question. It was really a combination of those 2 things in the fourth quarter. We had a strong industry environment, wholesale pricing was up. We had a strong auction. We had higher inventories under excellent control, which positioned us well to take advantage of that and used vehicle improvement has been an initiative and will continue to be one of our primary operating initiatives as we go forward into 2005. So the performance in the fourth quarter in fairness, a combination of both a improved used vehicle climate, but also our internal execution. Again, I will note that we outperformed the industry in terms of used vehicle volume. Obviously, we also had margin improvement on a same-store basis and really drove improved profitability throughout the quarter.

Then the second question is, on your margins going forward in 2005, can you sort of characterize where you expect them to be going? I mean, obviously, you can affect a change in SG&A internally, but the gross margins on new vehicles and used vehicles and parts and service, where do you see those sort of shaking out through the year? Are they going to be stronger or weaker in the first half, second half? I don't know if you can give any color on that?

We certainly can. We certainly expect to be able to maintain margins and fixed operations; and I'm also confident that we can maintain, and over time, potentially continue to show some improvement in used vehicle margins. As I noted in my prepared comments, we do see a hypercompetitive new vehicle market, particularly in the first half of the year. The industry has over capacity; and while we are working hard to grow our business and maintain historical margins, I do see some margin risk with the environment that we see over the first half of the year in the new vehicle segment.

And the level of inventory you're running out on new vehicles right now. I mean, that's a pretty efficient level. There's not a whole lot more to squeeze out of the system, is there?

No, there isn't. We want to be very careful to continue to manage our inventories with discipline, but to keep adequate inventory to be able to meet the market share targets that our manufacture partners have for us and to grow our business, and we think that the levels we're at are prudent. We hope to be able to take our domestic inventories down a few more days. That will help our overall numbers, but we are very pleased with the efficiency of our inventory levels as we close the year.

And then one just last question. On your capacity utilization of your service bays right now. Do you have any guess of where you are on your current bays?

Yes. I can tell you we have 3621 productive bays presently. And we're at about 60 percent utilization. But with the advent of the 280 new bays, many of which were completed in the second half of the year, we expect that utilization to improve because many of those new bays that are part of a new construction are concentrated in the luxury segment where we're seeing a stronger rate of growth than our overall portfolio.

And if you stopped adding bays right now, I mean, how do you think you could get gross margin in the parts and service business? I mean, what's-- what do you think is sort of the upper limit there? Could you get into the mid 50s?

Part of that is brand centric and it also has to do with business mix in terms of how much of our business is in wholesale parts, for instance. But I think 50 percent is a reasonable aspiration, and we've always had strong margins and fixed operations if you look historically, and we expect to be able to certainly maintain those margins and with a favorable brand mix, get in the 50 percent range going forward.

Thank you very much.

Charles Grom, J.P. Morgan Chase.

Good morning.

Good morning, Charles.

You guys have done a respectable job reducing excess costs over the last year. Could you elaborate on what leverage you have at your disposal to get to 78 percent in 2005?

Yes. I'm going to let Lee give you some -- just the technical feedback and then I'll be glad to add some operational color. Lee?

Yes. Chuck, we're going to continue to leverage our fixed expenses. Jeff mentioned some modification in field structure which will help. We're going to continue to leverage the rent -- the rent that we've been investing in over the last year as we continue to fill out those service bays. We think that will be helpful. We'll avoid some of kind of the one-time expenses that we've had this year. I think that combination gets us to the 100 basis points.

And would I just add to that one thing that I want to stress is part of the SG&A is obviously an increase in rent. We think that reflects the short-term investment that we've made with the 280 service bays and other state-of-the-art facility improvements and new facilities that we haven't seen a return on yet. As we go forward, we think that's money well spent. We get a huge return on investment in productive stalls. Again, most of that is in the luxury segment where we're experiencing double digit growth in our fixed operations, so we expect over time that that investment will be over come and decrease as a percentage of overall gross profit through growth in our fixed operations, topline, and total gross profit.

Great. Before -- the floorplan benefit after taxes only about $0.02 per share in the fourth quarter versus I think $0.06 in the fourth quarter of last year. Could you comment on the trend and what your expectations are for 2005?

Our guidance is built around a continuation of that fourth quarter trend basically having a smaller profit element -- net profit element from the assistance versus the floorplan expense. So we're assuming that that trend will continue.

Okay. And then, Lee, just to follow-up on your comment on the acquisition, so imbedded in the 235 to 245 is roughly 300 million of acquisition spread throughout 2Q through 4Q. So any additional acquisition you do will be accretive to the aforementioned guidance. Is that correct?

That's correct, Chuck.

Okay. And then last, you alluded to some business conditions being tough and pull forward in January -- or in December and January. Are there certain geographic markets that are performing better than others? I know last quarter you spoke to some issues in the west coast and then in Denver, related to personnel issues. Can you just elaborate on what you've seen quarter-to-date and on those issues?

Yes, I sure sure can. And again, in my prepared comments, I highlighted the stronger geographic regions. And we look for those trends to continue. The Southeast has performed very consistently, and we look for it to continue to be strong going forward. California, both northern and southern. If you remember last quarter, we did have some execution issues in southern California with new leadership in our western division. We already saw an impact in the fourth quarter. We look for California to continue to be a strong contributor. The Washington, D.C. area had a tough quarter, which is uncharacteristic. We look for that to bounce back and be a strong contributor as well going forward. The soft spots, or the areas where we think both economic conditions, brand mix and internal execution will be the biggest challenges will be the Texas region, both Houston and Dallas, as well as our smaller platforms in Denver and Ohio.

Thank you.

Rick Nelson, Stephens.

Jeff, can you break down the day supply between your domestic dealerships and your foreign nameplates?

I sure can. We're running significantly below the industry. In terms of domestic, we're running about an 85 day supply. The industry is well over 100. Those are January numbers.

And what would be your goal there in terms of on the domestic side?

We want to get to the 60- to 70-day range. We believe that that will enable us to respond quickly to take advantage of any upticks in the market, but also help us mitigate the increased rate environment on floorplan expense.

How important was that dealer cash to maintaining the gross margin in the fourth quarter? I guess if we could get a look into the first quarter trends today, both on the sales and margin side, that would be helpful.

Well, certainly dealer cash and some aggressive incentives did contribute to the strong fourth quarter, particularly in December when you saw manufacturers like Honda, who normally are fairly conservative in their incentive game step up. Their incentives were about $250 higher in December than they've been traditionally. They have brought their incentives back down, and in fact really industry wide we've seen incentives come down in January a couple of hundred dollars a car. And while we are seeing some tweaking in February, a lot of it is very market specific or model specific, so we expect the OEMs to continue to support sales with strong incentives; but in fairness, we did see unusually high commitment to incentive spending particularly in December to close out the year, Rick.

And, Lee, if you could remind us what a 150-basis point change in rates means in terms of EPS and is that 150 basis points, is that from current levels or that's from '04 average levels?

It was from year end -- actual year end level, which was, I think, 2.25 percent. So it's 150 basis point increase throughout the year on top of that.

Got it.

And generally, we say that 100 basis point increase in LIBOR is roughly $0.10 -- it's generally $0.08 to $0.10 annually.

So year-over-year, the rise is actually quite a bit more than 150 basis points? But that you've built into your models?

Well, yes. Well, yes, exactly. Recall that the first increase was June 30 of '04. There were 5 increases, I believe, in the second half of last year. So those are annualizing now. And we're building in another 150 basis points from January 1 and we've had 1 of those -- one 25 basis point increases in January already.

Got it. Thank you.

Sure.

Gerry Marks, Raymond James.

Good morning.

Good morning, Gerry.

Lee, could you remind me, what were the benefits that you got in your tax rate in the fourth quarter, and how does that equate out to a $0.04 benefit, I guess, from last year?

Yes, last year's rate was about 32 percent, the effective rate. This year's rate was 37.5, 37.3 percent.

And what was that that was in there in the 32 percent?

What -- what was in there basically were 2 elements. One was just really some nonrecurring state tax benefits that we recorded, and the other was just -- is just eliminating some contingencies -- overall tax contingencies, reserves that were on the books. So that all happened last year. That was an unusually low rate.

Okay.

37.5 is really the rate you should consider going forward.

And that was included in the $0.46 from last year, fourth quarter?

Yes, sir.

Okay. In terms of your used retail gross margins, it looked like they went down about 10 basis points. Is that because of the competitive environment like you were talking about, Jeff?

No, that's on a continuing operations. We were down about 10 basis points. But we were actually up on a same-store basis. A big piece of that, Gerry, is brand mix. It's the introduction of the Momentum acquisition where we're bringing in a much higher cost of sale and -- for instance, the margin on a used vehicle for BMW is closer to 7 percent, and our brand mix shifted when we brought Momentum into our portfolio. That was over a half billion dollars in revenue that influenced our cost to sale and our margin in used cars. And that's the differential.

So luxury actually has a lower margin?

Yes. In used cars. A lower margin rate. Dollars are bigger, but the margin rate is higher. You're doing more manufactured certified -- excuse me, the margin rate is lower. You're doing more certified pre-owned vehicles. They have a higher cost of sale. More dollars, but a lower margin rate.

Okay. I got you. And then you mentioned something about a loss in fleet that caused your new margins to come down.

There wasn't a loss -- there wasn't a loss in fleet. I just simply segregated the fleet business out of our overall new car margins to demonstrate that we actually had incremental improvement in our retail gross margins in the new vehicle segment.

Are these, like, sales to rental car companies and stuff? Or corporations?

Some are to -- yes, fleet sales are a variety. They could be small commercial accounts, large rental fleets, et cetera.

Okay. Last question I just had. You mentioned that you're targeting the 470 million and you got some of that included in the second, third and fourth quarters. Is that supposed -- are we to presume then that you've got some deals kind of in the hopper already and that you're pretty sure that you're going to be getting those, or --?

Yes, we do have a small pipeline of activity that we expect to announce in the next few months, and I want to stress that all of that acquisition activity is right on target with our revised even more disciplined acquisition strategy to focus on premium luxury brands and Asian imports in markets where's we already have a presence and where we see minimal integration risk and distraction from our core operations. Higher margin revenue, high fixed absorption, et cetera.

Okay. Thanks.

Adrienne Dale, CIBC.

Hi, thank you. First, could you just discuss your planned balance between acquisitions and debt reduction? I know that long term you're talking about a 40 percent debt to cap rate, but what kind of time horizon should we expect on that now that you're again doing acquisitions?

We have -- we have said that we will reach a 40 percent debt to capital in the next couple of years so that's 2 years from now. We want to maintain a balanced approach. As Jeff just pointed out with accusations, we think there's some real value to targeted acquisitions in existing markets, strategic brands, high operating margins brands, so we think that's very favorable because that will offset some of the units or dealerships that don't fit our brands strategy, our earnings targets that will be adding to the disc. ops list overtime. So we think that's a prudent strategy. We think we can do both, acquire at a pace of 400 to 700 million in revenue acquired each year and hit that 40 percent target within a couple years, maybe sooner, depending on that -- the acquisition pace.

Okay, great. And did you mention your CapEx guidance for SIs [ph]?

Yes. Net CapEx for us traditionally is about 25 to $30 million. That's net of sale leaseback transactions.

Okay. And you're saying you'd offset about 75 percent of the gross?

Yes, yes. For example, this year, for the full year 2004, we spent a little over $100 million in gross CapEx, and we'll net out -- after all sale leaseback transactions, we'll net out to about 25 million.

Great. And what was your sales mix for luxury and import versus domestic?

I'm going to get you an exact figure if you can bear with me just a moment?

Sure.

With -- including Cadillac, we've got about 42 percent luxury, and we're about 65 percent if you include Cadillac in terms of import and luxury versus domestic.

Okay, great. Thank you.

Nate Hudson, Banc of America Securities.

Hey, good morning. First question, Lee, you mentioned there was some one-time items in SG&A in the fourth quarter for abandoned CapEx or whatever. How significant were they?

They -- probably the ones I mentioned were in the 30 to 50 basis point range for the quarter on SG&A as a percent of gross.

Okay. And then the discontinued line stayed fairly high this quarter. Where do you see that going over the next couple of quarters? Is there -- again, have the loss has been mitigated to some extent or do you see those being sold in the near term?

Our strategy around discontinued ops is as we focus on improving core operating performance, as we have dealerships that just don't allow for that efficiency improvements or don't meet our strategic brand targets, we will add them. They're -- those are stores that again will negatively impact our operating margin. So we added some stores. We'll generally try to add stores only towards year end in the third quarter. That's our philosophy. We added 6 stores this year in the third and fourth quarter. But when we add a store, we will then -- the reason that the charge is high is that we will take writedowns on franchise impairment, for example, or fixed asset impairments. For example, we're exiting the Mitsubishi stores that we have. That's why it's a little bit higher than we would have expected in the fourth quarter. But a lot of those, we actually are operating, our operating performance from those disc ops stores are actually improving. It's kind of those one-time charge -- impairment charges as we add the stores to the list that keeps the expense up.

Okay. So moving into the first quarter, we should see some pretty good improvement there?

Yes. We won't be adding stores in the first and second quarter generally. We want to do that only in the second half of the year.

Okay. Next question, you mentioned you were expanding your subprime activities in the used business. I mean, how much opportunity do you see in the used business and I guess do you see opportunity in the new business as well?

We do. We're seeing some -- a positive credit environment. We've had a number of subprime sources emerge that weren't available a year or 2 ago. We've seen some of the big players, Ford and Chrysler, be more aggressive in their outlook on subprime financing. We want to take advantage of that and it really varies by market because where there's favorable demographics, we have markets where subprime financing is over a third of our business. And obviously, where we're in a market and have a brand mix that profiles with a higher demographic consumer like a luxury market or luxury brands, that opportunity is much less. But, the bigger piece of that is definitely in pre-owned, but there is an opportunity to get some incremental new car volume with some of the lending programs that are now being offered by quality institutions out there to support lower credit quality. And we are seeing credit quality improve as well as the employment picture improves and the economy strengthens as well.

Okay. One last question on the service and parts side, could you talk a little about your outlook for same-store sales there in 2005? It would seem like with your luxury and import brand mix it should be quite a bit better than the 2 or so percent. What is holding that number back?

I'm going to let Lee comment on the model and I'll be glad to add some operational outlook. Lee?

In our guidance, it is in that 1 to 2 percent -- as we've built more service bays, as those come online, we think we may get some improvement there, but we're just trying to be consistent from year to year given that we're coming out of a 2004 market which was kind of having modest growth. So we're just continuing that modest growth. We think we can do better, but we're just not ready at this point in time to actually guide that way.

And then we're optimistic -- there's some uncertainties there. We actually saw some pretty strong warranty growth. It was a record year for recalls. And we're not sure that that will continue. Obviously, there's no way to predict what the OEM recall picture will look like, et cetera, but with a favorable brand mix, we are optimistic that we can grow our fixed operations business. But as Lee suggested, we didn't want to reflect it at that time because there is a ramp up period and the investment in those work stalls is really for the next several years, as we increase units in operation and those vehicles age, which obviously the older they get the more potential revenue they drive in our service and parts operations.

Are there any specific brands which are a real drag on that?

A real drag on fixed operations growth?

Yes.

I would say that generally our fixed operations are not growing at the same rate in our domestic brands, and some of that is -- correlates to declining volume and market share with those brands. Some of that's internal. Some of that is -- is obviously the overall industry dynamics, and clearly, the luxury import brands are growing in fixed operations at a higher rate than the market at large.

Alright. Thanks very much.

Scott Stember, Sidoti & Co.

Do you have the free cash flow for the year?

Yes. free cash flow would be in the 80 to $100 million range for '05.

Okay. And what about for '04, what was it?

It was actually slightly lower than that, probably 10 to 15 million lower than that range.

Okay. And you quantify that as typical free cash flow with capital expenditures and sales leaseback net into that?

Correct.

Okay. And could you give the information on F&I per vehicle this year versus last year?

Yes. We were up $11 per retail unit to $893 on a same-store basis.

Okay. And as far as warranty work, I don't know if you alluded to this before, but are you still seeing the same trends that much of the industry is of domestic brands declining as far as warranty goes?

It's really a mixed bag. We actually saw increased warranty at General Motors and Chrysler with a decline in warranty at Ford and again, it was a record year for General Motors recalls, particularly. One point of clarity that I would like to stress is that a number of the luxury import manufacturers include scheduled maintenance in their warranty. So we show very robust growth in warranty in many of our luxury brands that would normally show up in customer pay, and a comparison to domestic or import brands that do not include scheduled maintenance in the purchase of a car.

Okay. And going back to the F&I just for a moment, can you talk about the penetration rates on that side and any new areas that you guys are looking at to try to increase those, whether it be oil contracts or anything else like that.

Penetration rates are very stable. Over 70 percent finance penetration. About 36 percent in extended service agreement penetration. When you include certified pre-owned extended warranties which are a component of every certified pre-owned sale, over 50 percent of every vehicle that Sonic Automotive retails has an extended warranty that's going to tie them back to our service departments and drive future fixed operations growths. In terms of our F&I revenue growth strategy, we're going to continue to focus on mastering standard 100 percent menu sales process with complete transparency. And we're going to continue to emphasize product. And as we've announced previously, we have long instated rate caps as well as profit caps on the rate spread and products that we offer in finance and insurance. But again, we're going to look to continue to drive product sales that add value for consumers. And we're optimistic that there's another 50 to $100, anything beyond that we believe could create risk with transparency and we're not going to take that risk.

That's all I have. Thank you.

[Operator Instructions]. Jordan Hemowitz [ph], Philadelphia Financial.

Hi, Jordan.

Congratulations on getting the inventories pretty strongly positioned. A couple quick questions. On the interest rates, did I hear you say -- because the phone was weak on one of the questions -- that it was $0.08 to $0.10 for every 100 basis points?

Yes, sir.

Is that -- was it in your Q -- oh, 2 quarters ago it said $0.17. Did something change in the Q or did you change your debt structure?

No. No. We've consistently said that 8 percent to 10 percent on an interest rate change. What can change on a quarterly basis --

-- 8 to 10 percent or $0.08 to $0.10?

8 to 10 cents per 100 basis points change. What could change in a given quarter is if we make an acquisition, the absolute interest expense can spike up.

Okay. Second question is, on the guidance next year at 235 to 245, but you say it's 240 in the middle, you said the first half is going to be weaker but the second quarter is traditionally your strongest quarter. Could you give a quarter break out, or if not, a semi-annual break out of that 240, like how much would be in the first half and how much would be in the second half?

We normally do not give quarterly guidance. What I would say to you is as we've said in the press release that the majority of the gain comes in the second half. We are very cautious of the first half. We had very good comps in the first half of '04. Very strong SG&A improvements in the first -- each of the first 2 quarters. So I would say that the majority of the improvement comes in the second half.

Okay. Super. I think that's it. Thank you.

Sure.

Peter Siris, Guerrilla Capital.

Hi, Jeff. Hi, Lee. How are you doing?

Good morning, Peter.

I have a question about your comments about the long-term growth rate of -- EPS growth rate of 9 to 12 percent. It seems to me that you guys made a lot of acquisitions and now that you're running the business on a more, I guess, conservative is maybe a decent word to use, basis, you're cutting costs. Why shouldn't your growth rate be higher than 9 to 12? It looks to me like you should have on a per store basis the opportunity to improve your earnings more than that.

Peter, this is Lee. There could be the opportunity to improve more than that. But we've built in kind of that standard 2 to 3 percent same-store sales. And that really speaks to focusing on operational improvements, operational excellence. And if we can get 2 to 3 percent consistently, we think -- we think that leads to this 9 to 12. SG&A, 50 to 100 basis points a year improvement. 500 million in acquisitions a year. We also built in negative interest rates. If you look at the long-term, any 15-year period, excluding the last couple of years, LIBOR's averaged around 5.5 percent. So we're also anticipating in there that interest rates will continue to increase to that more normal 5 to 5.5 percent. If interest rates stay lower, we could actually increase above that 9 to 12 percent. If we perform better and build more momentum around our core operating performance, I think we could exceed the 9 to 12 percent; but we want to send a basis that's reliable, that we can build on and just have strong upside if we perform better.

Let me try it this way. What did your average dealer -- your average store, before corporate, interest, the rest of it -- what did your average store make last year?

We don't really look at the business that way, Peter. We'd be glad to give you that information on a sidebar, but we don't look at the business that way, and again, we'd be glad to sit down and share that kind of information with you in a different forum.

Okay. Thank you very much. Appreciate it.

Thank you, Peter.

[Operator Instructions]. There are no further questions at this time.

Thank you very much. We appreciate your interest in this morning's call.

This concludes today's conference. You may now disconnect.