Sonic Automotive Inc (SAH) 2005 Q1 法說會逐字稿

Good morning, and welcome to the Sonic Automotive first-quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] 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, management may discuss financial projections, information, or expectations about the Company's products or market, -- or information, or otherwise make statements about the future. Such statements are forward-looking, -- and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the Company's filings with the Securities and Exchange Commission. Thank you, I would now like to introduce Mr. Jeff Rachor, President and Chief Operating Officer of Sonic Automotive. Mr. Rachor, you may begin your conference.

Thank you. Good morning, ladies and gentlemen. Welcome to Sonic Automotive's first-quarter 2005 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 first-quarter performance, industry trends, and an update on strategy. Then Mr. Wyatt will review financial results in detail, and update you on guidance for the remainder of the year.

,Per our announcement last week, first-quarter earnings per share were $0.45 from continuing operations, down from $0.51 in Q1 2004. The first quarter proved to be difficult, due to continuing pressure on new vehicle margins, domestic brand performance, including Cadillac, rising interest rates, moderating demand for large SUVs, and uncharacteristic weakness in our northern markets, which include Michigan. For the first quarter, revenues from continuing operations were up 8.8%, while total gross profit was up 8.4%, versus Q1, 2004. Total continuing operations, SG&A, as a percentage of gross profit, was 80.8% for the quarter. However, total associate compensation for the quarter was down 90 basis points from a year ago. The standardized variable pay plans implemented last year kept compensation in line during a difficult operating environment. Advertising expense for the quarter was up 40 basis points from last year. The increase was strategic, and is in line with our 2001 and 2002 historical spending rate. The additional marketing dollars were deployed to specific dealerships targeted for market share improvement. This additional investment paid off, as Sonic outperformed the industry in overall new vehicle sales.

Now I will review same-store first quarter performance by business segment. Total new vehicle revenue was up 2.2% versus Q1, 2004. Total new vehicle gross margin was 7%, down from 7.3% a year ago. New vehicle retail margin was 7.4%, compared to 7.7% in the first quarter of 2004. Most of the decline was realized in our large truck and SUV segments. Total new truck margins, including SUVs, fell from 7.1% last year to 6.7% this year. This decrease was not limited to our domestic lines. Our luxury import truck margins experienced margin pressure as well, as anxiety over increased gas prices continued. Q1 used vehicle revenue was down 0.5%. This modest decline in used vehicle revenue was highly concentrated, largely in our San Diego platform. Overall, used vehicle departmental profitability continued to improve. Used vehicle gross margin was 11.4% versus 11.1 -- excuse me, versus 11.2% in Q1, 2004.

Sonic continues to drive market share in the used vehicle segments we have targeted. First, Manufacturers' Certified pre-owned sales were a record 36.2% of Sonic's total used vehicle volume, compared to an industry average of just 14.5%. Sub-prime used vehicle sales comprised 21.6% of total same- store used vehicle volume, compared to 18.1% in Q1, 2004. Total same-store fixed operations revenue was up 0.9% for the quarter. Total fixed operations gross margin was 48.5%, up from 48.4% last year. The Company's same-store service revenue was up 1.4%. Same-store parts revenue was flat, due to a 3.8% decline in wholesale parts revenue. This decline is due to a revision of our wholesale parts strategy, and is limited to just a handful of dealerships. Parts customer pay and warranty were up 2.4% and 3.2% respectively. It should be noted that our luxury import brands experienced robust fixed operations revenue growth of 7.5%. This trend should continue, as UIOs mature, and as we increase stall capacity in these dealerships over the next 12 to 18 months. Fixed absorption was 80.5% for the quarter.

At the close of Q1, new vehicle inventories were at 55 days' supply, well below industry averages, while used vehicle inventories remained consistent at 39 days' supply. The strongest performing regions for the quarter were Florida and northern California. The Dallas and Oklahoma regions are experiencing a turnaround, while the small platforms in Denver and San Diego underperformed. As I mentioned, in my opening comments, uncharacteristically, the Michigan and mid-Atlantic markets experienced weakness in the quarter. In Michigan, the fact that our portfolio is 84% Cadillac is one of the main reasons for the decline in performance. In addition, our Michigan market is largely dependent on General Motors employee purchases, which have been inconsistent this year, understandably. Dealerships in both Michigan and the mid-Atlantic also experienced adverse weather conditions, which forced some of them to close a few days during the quarter. In terms of total revenue, our top five brands for Q1 were General Motors at 23.6% of revenue, BMW at 14.9%, Honda at 12.6%, Toyota at 11%, and Ford at 9.9%.

Now a brief update on acquisitions. During the last 30 days, we closed on two acquisitions that exemplify our revised acquisition strategy of portfolio enrichment. We acquired Mercedes-Benz of Nashville, which represents 55 million in revenue. In addition, in order to optimize our facility configuration in Montgomery, Alabama, we swapped a Chrysler and a Kia franchise for a BMW and a Buick franchise.

It is our view that new vehicle margins will remain tight in coming months. Though industry-wide inventory levels are starting to come down, they remain historically high and domestic OEMs do not plan to materially increase incentives. These factors will perpetuate a hyper-competitive new-vehicle market. Additionally, escalating interest rates and energy prices will continue to impact bottom line profits. Finally our outlook in Michigan may remain difficult, due to economic conditions there. Despite this challenging industry landscape, we believe our internal execution on strategic operating priorities will continue to improve. The seasonally-adjusted annual selling rate should remain stable, the used vehicle market is sound, and fixed-operations growth should continue to be robust in our import brands.

Additionally, as we expressed last year, key personnel stability is critical to the success of any organization. In 2004, we declared war on associate turnover, and have taken steps to upgrade management infrastructure and stabilize our workforce. I'm pleased to report that these initiatives are progressing. At the end of the quarter, total associate turnover was down 23.2%. We will continue to invest in resources to improve selection, orientation, training and retention of the industry's top talent. The retail automotive business is highly dependent on platform- and store-level management. In early 2004, we acknowledged that the record growth pace during our Company's first five years had taken its toll on human resources, and outran our infrastructure. We are making studied, consistent progress on getting the right people in the right places. But this element of our revised strategy has taken longer than expected.

Having said that, we remain supremely confident that our strategy is sound, resulting in continuous improvement that will ultimately deliver consistent operating performance and EPS growth. First, we've successfully managed compensation and advertising through a difficult quarter. Number 2, fixed operations remain a core strength, particularly in our import brands. Number 3, inventories are well-positioned. Number 4, management development and key personnel stability continues to improve. And, number 5, net-debt-to-capital is on-trend for our previously-communicated target.

For the remainder of 2005, we will continue to focus on this same simple strategy of operational excellence through mastering the basics, while accelerating execution in concentrated areas of underperformance. Dividends will remain unchanged at $0.12 a share, payable on July 15th, 2005 for all shareholders of record as of June 15th, 2005. Finally, as always, I want to take this opportunity to thank all of our Sonic associates for their hard work and dedication during this challenging quarter. At this time, I will turn the call over to Mr. Lee Wyatt to review first-quarter and year-to-date financial information in more detail. Lee?

Thank you, Jeff. Earnings per share from continuing operations in the first quarter of 2005 was $0.45, a decrease of $0.06 from the same quarter of last year. $0.45 includes a $0.02 charge for hail damage in the southeast. Earnings per share from discontinued operations in the first quarter of 2005 was a loss of $0.05. In reviewing the first quarter in more detail, total revenues grew $147 million, or 8.8%. New- vehicle revenue grew 8.5%. Used retail-vehicle revenue grew 7.1%. Parts, service, and collision revenue grew 10.1%, and F&I revenue grew 7.4%. The overall gross margin rate for the first quarter was 15.7%, 10 basis points below last year. New vehicle gross margin rate was 7.1%. Used retail vehicle gross margin rate was 10.9%. The parts, service, and collision gross margin rate was 48.5%.

The SG&A rate for the first quarter was 80.8%. This SG&A rate reflects the following trends: Lower overall gross margin rates. Variable compensation expense, which has been a focus, continued to show improvement as it declined by 50 basis points from last year. Advertising expense, which has also been a focus, increased by 40 basis points to 5.5% of gross profit. As Jeff mentioned, this increase was planned, as ad spending was increased in selected stores. The actual spending rate of 5.5% was still at or below historic spending levels. Fixed expenses, excluding rent, showed a 40 basis point improvement. This improvement was 80 basis points, when excluding hail damage. Other variable expenses, many of which have been negatively impacted by interest rates and gas prices, increased in the quarter. We're taking steps to address the increases. Continue to target an SG&A rate of 78% for the year.

Diluted share count for the first quarter was 45.5 million shares. This share count includes 2.8 million shares due to the convertible notes. During the first quarter, we expended 1.5 million to repurchase shares. 31 million was available at the end of the quarter, under our existing share repurchase authorization. Our debt to total capital, net of cash ratio, was 47.3% at quarter end. This is a slight increase from 46.2% at year end. The increase resulted from the acquisition of the Nashville Mercedes store, and the seasonal use of working capital. We continue to target a 40% debt to capital ratio next year. Availability under the revolving credit facility was 214 million at year -- at -- at quarter end. During the quarter, Moody's upgraded our credit facility rating, and confirmed all other ratings. The overall ratings outlook improved to stable.

Non-floorplan interest expense increased by $1.4 million in the first quarter compared to last year. This reflects higher interest rates and prior year acquisitions. Excluding floorplan debt, approximately 53% of our debt was fixed. Based on selling days, the days supply of new vehicle inventory declined to 55 days, compared to 61 days last year. Used vehicles increased to 39 days from 37 days last year, and parts supply was consistent at 35 days. On a continuing operations basis, and excluding one time items, LTM interest coverage was 4.9 times, and long term debt to EBITDA was 3.3 times, and return on equity was approximately 13%. And we continue to meet all covenants under our credit agreement.

Gross capital expenditures were $22 million in the quarter. We anticipate that approximately 16 million of this amount will be sold in sell-leaseback transactions. As previously stated, our guidance for 2005 is $2.25 to $2.40 from continuing operations. Annual guidance includes continued uncertainty around the second quarter, and notable improvement in the second-half performance. The second quarter of 2004 EPS was $0.70. With comps, that included strong gross-margin rates on new vehicles, of 7.5%, and 10.7% on used vehicles. If conditions remain similar to the first quarter of this year, the second quarter of this year could generate a similar shortfall in EPS as the first quarter. Expectations for the second half of the year, however, include notable improvements. Those improvements are based on continued integration of 2004 acquisitions, continued operating process improvement, and consider that last year comps included hurricanes in the third quarter, and one-time charges in the fourth quarter.

15 dealerships were included in discontinued operations at quarter end. Five of these were under contract to sell RLLI [ph] at quarter end. A key element of developing consistent operating performance at our dealerships is the decision to convert to one DMS vendor. We will complete conversion planning in April, and will complete standardization of data structure in May. -- We will begin dealership conversion in June, with an expectation to complete all dealerships by the third quarter of 2006. At this time, we'll take questions

Your first question comes from Rick Nelson of Stephens.

Thank you, good morning.

Good morning, Rick.

Can you give us the inventory number for your domestic dealers and your import dealers?

Sure can, Rick. We closed the quarter at 68 days in our domestic dealerships. We are 45 days in our import dealerships.

And, Jeff, how do you calculate -- days supply? I realize everybody does it a little different.

We use selling days, Rick.

On a trailing 30-day?

Trailing 90.

Trailing 90 days, okay. And the -- the ad spend that you talked about in the first quarter, do you anticipate backing off the accelerator there, or continuing to be aggressive?

No. We -- we really don't see it as -- being unusually aggressive, Rick. If you go back to the years when we had historically very low SG&A, we were in that mid-5%, even as high as 6% range. But if you go back a year ago to kind of fourth quarter, a little more than a year ago, fourth quarter of '03, we had seen that go as high as 7%. And so what we really believe is that last year in Q1, perhaps we overreacted somewhat, and needed to get control of it, get a disciplined process in place, which we have, a centralized basis. And so we think now it is prudent to -- reinvest in specific stores where we see an opportunity to take market share, and we look for advertising spend to continue to fall in kind of this mid-5% range, as a percentage of total gross margin.

I, got it. Last year was the upper edge. [ph]

Yes, sir.

The improvement that you cited in March, is that continuing into April?

We're encouraged by the strength we see in vehicle volume, particularly in the Asian import lines. We have very strong trends in the industry, and the industry is seeing very strong trends in April. We've got little bit of a transition period in our BMW stores, as the 3-Series buildout is transitioning down. And there will be a product shortage there that could impact their business this month, but we think that will more than off -- be offset -- with the launch of the new 3-Series as they come into inventory throughout the rest of the quarter. And finally we continue to see pressure on domestics. But overall we are seeing that top line or new vehicle volume trends are continuing. However, we continue to see the same new vehicle margin pressure, really across our brand portfolio in April.

I got it. Thank you, Jeff.

Your next question comes from John Arby [ph] of Merrill Lynch.

Good morning. It's John Murphy. How are you?

Good morning, John. How are you today?

Good. Lee, I just had a -- point of clarification real quick on -- your sort of guidance there on the second quarter. You said you expected sort of a similar shortfall in the second quarter that you saw in the first quarter. Was that on a year-over-year basis, or on an absolute basis, if things stay tough here we might see another quarter in the mid-$0.40 range?

Yeah, it's -- it's basically when you look at the first quarter we were down $0.06 on $0.51.

Okay.

And so if conditions remained the same for us, we could see the same kind of rate -- kind of decline in the second quarter.

On a year-over-year basis.

Year-over-year basis.

Okay. All right. Good.

That's very important. That's definitely year-over-year. We don't expect any sequential decline.

Yes. That is a big point there. Next, on inventory, you guys are running pretty lean right now. I mean, where are there opportunities to reduce your inventory to help offset the rising floorplan interest expense that you're seeing? And what are you seeing on your floorplan assistance, in the quarter and going forward?

Let me comment on inventory levels. First off, Sonic Automotive has a great history of leading the industry in the disciplined management of all of our inventory assets, and we're pleased that we continue to manage those inventory assets with discipline. We do not see significant opportunity to take inventories down from these levels. Frankly, we feel we're well positioned as we head into the spring and summer selling months, and we're going to continue to support our manufacture partners in taking adequate inventory to achieve our -- market share responsibility across the organization. So we don't believe that there's significant opportunity to take inventories down from here as a measure to offset the rising floorplan rates. I'm going to let Mr. Wyatt comment specifically on floorplan assistance.

Hi, John. We have not seen any real reduction in floorplan assistance rates at this point. About half of our floor plan is financed under arrangements that are interest-rate sensitive, they move with interest rates. However those are the primarily domestics. [ph] And unfortunately, our volume with domestics has -- was lower in the first quarter, so we didn't realize all of the floorplan assistance that we could have. We basically do not realize the -- the income, the floorplan assistance income, until we sell the units. And when your -- your sales decline, then you don't realize the same benefit under the the assistance. So that will come as we -- as we move sales, basically.

Okay. Then just on -- on your turnover, you mentioned that your turnover on a -- on a year-over-year basis was down 23.2%. What is it on -- on an absolute basis, you know, percent of total employees? And how has that been -- I mean, obviously that's trending in the correct direction, but how far can you get that down?

Well, we're very pleased right now that total associate turnover is below 50%, and we're in an industry that has average turnover levels much higher than that. And we measure it by position across our organization. And this year we hope to be able to maintain a sub-50% total associate turnover. And we're also very focused on the turnover of our store-level general managers. There is an indisputable correlation in performance related to their tenure and stability and that's another area of focus. Over the longer term, we hope that we can reduce associate turnover even further, but right now we're focused on delivering on our target for the year, of reducing overall associate turnover below 50%, and through the first quarter, we are on target.

And just one housekeeping issue, Lee. On the contingent converts there's a 2.8 million share dilution. What is the -- what is the corresponding interest addback?. I'm sure we could back into it, I just wanted to get the exact number there.

It's $1.1 million, after tax.

Great. Thank you very much.

Thank you, sir.

Your next question comes from Adrienne Dale, of CIBC World Markets.

Hi, thank you. I think you had alluded to part of the softness coming from the softness in SUV sales. Could you actually give us your split between passenger cars and light trucks, and within that, the split between SUVs and other light trucks.

Sure. Let me, first off, just comment on our SUV performance for the quarter. Large SUV sales for Sonic Automotive were down 20%, mid-size were off about 3%, and large pickups were off about 8%. But, like the rest of the industry, we did offset some of that decline with the robust improvement in crossover vehicles, which were up 12.3%. In terms of our total split, it's about 55% car and 45% truck, as we close the quarter.

Okay. And what's the crossover component of that?

I'm sorry, could you repeat the question?

What was the crossover component of that?

Crossovers again, in terms of sales increase were, 12.3%. I don't have have the exact number. We -- we sold 2466 crossovers during the quarter, and as a percentage of our total business, I'd have to get back to you with that -- figure.

Okay. That's fine. Great. And then in terms of your stock buyback plan, you've got quite a bit left that can you repurchase there. Do you have any expectations for how much we should expect you to be buying back throughout the year? Should it be comparable to the first quarter or --

Yes. This -- this is Lee. We've historically -- on a gross basis spent 20 to $25 million a year on share repurchases. We were lighter than normal in the first quarter, due to -- this -- generally some stock price issues, it was -- it was fairly high. We'll -- you'll probably see a -- a higher rate of repurchase in the second quarter than you saw in the first quarter.

Okay. So maybe a little less debt paydown.

Yes.

Alrighty. And we're still expecting to -- you're still expecting to repurchase, or to buy about $400 to $700 million worth of revenue in acquisitions?

Yes, yes, for the year, yes. Somewhere between 300 and 600, probably, in that range.

Okay. Great. And can you just speak a little bit about what you might be doing to increase the margins, and your focus on the parts and service side of the business?

Do you -- I'm sorry, if you could please repeat the question, are you asking about margins in the service and parts business?

Yeah. What you might be doing to increase those margins, and use that business a little bit more to offset slowing new vehicle sales going forward.

Sure. Well, we're very focused on fixed operations growth. In terms of margins, we have always enjoyed consistently strong margins, even this quarter, up another 10 basis points in overall fixed operations. A lot of that is also driven by business mix. We have chosen to pull out of the wholesale parts business in a couple of markets, which will strengthen our overall parts margins. But some of the steps we're taking, to drive growth in our overall gross profit dollars in fixed operations, include a strategic investment in additional productive stalls. We have 23 different construction projects on the schedule that will be completed in '05, and those 23 dealerships will increase our productive stall capacity 74%, which will give us a -- significant growth in that portfolio of our dealerships. In addition, operationally, we're continuing to focus on standardized service drive sales processes. Things like what we call ASR's, additional service requests. We continue to focus specifically on customer retention, and marketing programs. Including leveraging technology and CRM for those initiatives. And in addition, we are driving certified pre-owned sales, and continuing to focus on extended service agreement sales, very successfully. Those two initiatives ultimately create a bond between the customer and our service and parts operations that will serve as an annuity of future business.

Okay, great. Thank you.

Your next question comes from Gerry Marks of Raymond James.

Good morning.

Good morning, Gerry.

A couple of questions. First of all, Lee, in terms of that 78% SG&A as a percentage of gross target, does that include the new sale leasebacks you guys are anticipating doing?

Yes, yes.

It does. Okay. And then I noticed that in the fourth quarter you guys -- you mentioned charges even on this call, you got a 3 million hit from your change in your chargeback assumptions. Did you have any changes in the first quarter as well?

No.

But that's some of the charges that are you going to comp up against that's easier in the fourth quarter of this year.

Yeah. There were -- there were several things that we'd mentioned on that -- on that call, basically, Gerry, including wholesale parts and several one-time items that we took in the 4th quarter last year, that will make the 4th quarter comps easier.

Okay. And I noticed also in your 10K that your subprime finance subsidiary, you mentioned that you are changing your accounting so it is going to offset the SG&A. How much was that in the first quarter?

It -- it was probably under 20 basis points when you consider the netting of -- of the interest income against that. So it was not a material impact.

Okay. And Jeff, just so I can get a little bit better clarity on, you know, what the advantages are of DMS. DMS stands for dealer management systems, right? And what does it mean when you guys convert over in April or May to your operations, what are you going to be able to do differently to help bring that SG&A as a percentage of gross down?

Well, first off the conversion will take approximately 12 months, so I want to be clear on that.

Okay.

But historically we have used two different DMS providers, about 50% of our organization was on one vendor, 50% on another. And accordingly, we were unable to really develop standardized processes across our organization that are supported by that DMS system. And as we execute and implement that standardization, not only will we get the benefit of the technology, but we are writing a number of best-practice-based standardized operating processes that will really drive efficiency and productivity, and also enable us to take some cost out of our model. But we won't get the full benefits of that, really until kind of year 2 and year 3. I also want to invite Lee Wyatt to add his color because he and his team are spearheading the DMS conversion. Lee?

Thanks, Jeff. Yeah, Gerry, I think there are several things that we'll do. Jeff mentioned a key one, and that is best practices. Currently we can't implement best practices because we have such different systems across the stores. The other thing, we'll get consistent data structure. Right now, we don't have consistent data structure across our stores. So that will allow us, both at a national level, at a regional level, or at a platform level, to pull consistent data in the same format. The other thing it will allow us to do is, at the dealership level every service and parts manager, when they pull up a screen, will be looking at exactly the same screen. It might be a slight brand difference, but the same screen as everybody -- every other service and parts manager at a dealership. So we'll really be able to get a very consistent approach to the business, and as Jeff mentioned, implement those best practices.

Okay. That's all I had. Thank you.

Your next question comes from Charles Grom of J.P. Morgan Chase..

Good morning, guys.

Good morning, Charles.

Last year you outlined SG&A to gross profit margin targets for each quarter, and I was hoping you could do the same for the remaining three quarters of the year. I know your're targeting at 78% for the full year, but -- what are you thinking for the second, third, and fourth quarter.

Well, the reason -- Chuck, this is Lee. The reason we didn't do that this year, was we knew it was going to be lumpy, candidly, especially in the -- in the first half. But I would say to you that -- that broadly, the second quarter might be in the range of, -- say, 78%. And the -- the third and fourth quarter combined would be around 77.5%. That's the kind of improvement we're -- we're looking at, broadly.

Okay. Alright, that's helpful. Thanks. And then on the other -- the other SG&A in the quarter was up about 130 BPs. Can you speak to the components in the increase?

Sure. I -- I think when you really boil -- when you look at SG&A for the quarter, the 140 basis points in total, it really boils down to a couple things. 40 basis points was hail damage. Advertising was 40 basis points. Rent was up 60 basis points, and that -- those are -- created by -- the rent is created by the issues Jeff mentioned, with continuing building facilities, specifically focusing on service bays and improving our service and parts business, specifically in the luxury, and to a lesser extent the import dealerships. So in the short run, our -- our rent as a percent is -- of gross is -- has gone up. And then there's some other expenses, candidly, that we haven't had to focus on as much in the -- in the past, which now have kind of increased because of things like -- like gasoline prices on delivery, service loaners, interest rates, gas prices, those kind of things. And we -- we're putting plans together to kind of go after what we'd call those other -- other variable kind of expenses.

Okay. And then on -- on floor plan, I think you may have touched on this, but it was -- the benefit was -- well, actually there was no benefit in the quarter. Is that what you're thinking for the rest of the year based on rates, and maybe a slower inventory turn?

Yeah, I think you -- really -- with floorplan assistance, you really have to look at the domestic sales rates, because that's where we kind-of get all the capitalized assistance and whoever holds the inventories, so I'd say it's going to be very similar for the balance of the year. Might improve a little bit in the second half, on the assistance side, as our -- if our same-store rates continue to improve. But I'd say for right now I'd -- I'd look at it fairly flat.

An then, last, I'll pass on to others, just on John's question earlier on guidance, you know, first quarter earnings are down about 13%, or absolute dollars about $0.06. [ph] Is that -- which one are you expecting for the second quarter, in terms of the decline? Just wanted to clarify.

Percentage.

So, the percentage -- so a- a 13% decline in the second quarter, relative to the $0.70?

Could be.

Could be. That's the potential if the second quarter turns out to -- to look a lot like the -- the environment looks a lot like the first quarter.

Okay.

Again, I want to reiterate that's against last year.

Right.

Not sequential.

Right. Okay. And then April trends, could you just add a little more color there? Relative to March, are they resembling more March, or is it more like January or February?

Well, obviously it -- it's very difficult to give you much visibility on April sales, because the last week of the month is so important in our business. But as I stated earlier, when Rick posed the question, we are seeing a continuation in momentum in new vehicle volume, led by the Asian imports. We continue to see challenging environment for domestics, and because so much of our brand mix is with BMW, I also highlighted that for the month of April, BMW is seeing difficult comps, because they are in the process of building out their 3 Series model, and introducing the new model. So, for the month of April that is going to negativity impact BMW sales, but we expect that it will more than be offset in the next couple months as the new 3 Series begins to arrive, because it's got very favorable reviews. So overall, again, we see volume trends remaining strong in the industry. However, we continue to see new vehicle margin pressure. And we've got one less fixed operations day in April, which will also create a difficult comp for our fixed operations. But we expect to pick up in May.

Great. Thanks a lot for the color. Good luck.

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

Good afternoon, guys.

Good afternoon.

Could you tell us what the certified pre-owned percentage was a year ago, just so we can have a better flavor, on a year-over-year basis.

I believe it was in the low 30s, but if you'll bear with me just a moment, I can give you that number. 33.1%.

Okay. And the same for the percentage of SUVs and trucks, I think you said it was 55 this year. What was it last year?

Can you bear with me just a minute.

Yes, I can.

I'll have to get back with you with that one. It was very close. Frankly we've always had pretty close to a 50% penetration, car versus truck. We're exactly counting 53-47 this year, and it's been running in -- in a very close to a 50-50 mix.

Okay. And just touching on inventory management, heading into the next quarter when you guys are going to be going close to a model year changeover, are there any plans as far as how heavy you will be in one inventory versus another, '05 versus '06, or is it just too soon to tell right now?

Well, I think we've learned a lot of lessons, and there have been some production cuts on the domestic side that we want to be cognizant of, so that we don't run short of '05s. And I think you'll actually see us trying to be sensitive to having adequate number of '05s, and being very disciplined about how quickly we ramp up '06 inventory. If you look at the inventory cycles of the industry, and even our company, where inventories generally spike is beginning with the buildup of the new model year over the seasonally slower months of the fall and winter. We're going to try to be more disciplined during those months, and then position ourselves so that we can be more aggressive in our inventories during the spring and summer selling months, and make sure that we have adequate prior model years to take advantage of some of the strong manufacturer incentives that are introduced historically to clear out prior model year.

Okay. And the last question has to do with Cadillac in Michigan. Could you give the figure again that you said a percentage of Michigan sales that are Cadillac --

84% of our business. We own some of the largest Cadillac dealerships in the country, and they are largely dependent, about 75% of their business is supported by General Motors employee purchases. Historically that has been a very predictable, consistent source of business. But obviously with all of the controversy surrounding some of the media with General Motors, the announced white collar layoffs, some supplier struggles in the greater Detroit metropolitan area, that business was under pressure in the first quarter, and at this juncture it is hard to predict where it might go for the rest of the year. So we believe we could see continued pressure on our business in the Detroit market.

And just back to Cadillac really quick, can you just talk about how that performed for you in general in the quarter?

Cadillac was actually tough for the quarter. Industry-wide, Cadillac saw pressure on retail volume. When you take out fleet, -- We participated in that. Our Cadillac sales were down. But even more material was pressure on Cadillac margins. Cadillac margins were down significantly. Remember, they have a -- a large part of their business and historical success has been with Escalade. That business has been under pressure as a result of gas prices. And we expect Cadillac to comp -- against last year. Pretty -- pretty challenging, when you consider the market dynamics and some of the macro-economic factors, and about 25% of our total Cadillac business is in Michigan.

That's all I have. Thanks.

[OPERATOR INSTRUCTIONS] Your next question comes from Nate Hudson of Banc of America.

Hey, good -- good morning. -- You mentioned wholesale parts as being a drag on your service and parts. Can you just put some numbers on that? How much was it down in the quarter, and how much did that affect the -- the overall service of parts comps sale?

Well, it affected our top line comps. But, remember, that business is very low margin. So -- it really -- we'd have to work you through the numbers, Nate, because it affects your sales number negatively. It generally affects your margin number positively. If you can bear with me, I'll try to get you a little more detail.

And just -- just generally I know that -- that's been a drag for at least a couple of quarters. When do you expect that to -- to flatten out?

Well, we -- we would expect that to flatten out. We don't think it will continue to decrease once we get through 2005. It's all being driven by two or three large dealership operations, where we were very dedicated to the wholesale parts business, and there's been some competitive dynamics in those markets that no longer make it viable to compete profitably. In terms of -- of kind of -- total margin dollars, we were down about $350,000 for the quarter as a result of that phenomena.

Okay. And a different subject, you called out San Diego as a weak market, and particularly in used vehicles. Just expand upon that a little. Is that just a store issue? Is it -- do you think it actually is a regional issue?

It's a -- it's a store issue. It's -- really, we have a very small platform in San Diego that historically has been a pretty consistent performer, and we've had some management gyrations there, and some market dynamics that have changed, and all of the shortfalls I referenced are concentrated in those three dealerships. We do expect improvement in that platform during this quarter. But we probably will not get back to historical levels of performance for a quarter or two.

Okay. Thanks very much.

Your next question comes from Peter Siris of Guerrilla Capital.

Hi, guys.

Good morning, Peter.

This is not a "when did you stop beating your wife" question. Jeff, you -- you talked about -- when you -- the fast growth rate, and then pulling back. And I'm curious of two things. First, -- what have you found that was -- more difficult, or slower to fix, than you originally thought when you -- when you took over? And the second question I have is, if -- if this is a journey, how far on the journey are we?

Sure, Peter. I'll be glad to take that question. I think that there's two areas that we're not satisfied with the pace of improvement. One in which I mentioned in my opening comments, and it's the most important one from my perspective, and that is people and leadership. Again, as I noted, and if you reflect back, about a year and a half ago, when we acknowledged that the record growth pace that we enjoyed for five or six years ultimately caught up with us, we outran our human resources, our infrastructure was no longer able to successfully integrate the number of dealerships that we were acquiring, and at that time we kind of called a time-out. And that's when we developed and articulated the revised strategy that we're continuing to execute today.

Slower growth pace, very, very, very targeted acquisition strategy, going forward. And a lot of the reason we slowed the growth pace was so that we could really focus on developing our human resources, building out our leadership and oversight infrastructure. Again, we've made some tremendous progress on getting the right people in the right places, but that has come slower than what I would be satisfied with. There's a tremendous shortage of talent in our business. We approach that from two prongs. First, developing people internally through training and mentoring. Secondly, obviously, through making outside acquisitions of talent. We've had a lot of successes in both arenas, but we aren't where we need to be. And that has taken longer than we originally -- anticipated.

The second piece is standardized processes. Again, during that rapid growth cycle, we really didn't have the time and resources to slow down and develop standardized, best-practice-based processes. And that piece takes longer to develop and to implement if you are going to mitigate the risk of execution and implementation. And I'd like to highlight a couple of our peers who have adopted the centralized model, and successfully implemented standardized processes. If you look at the years and years it has taken them to really get the full benefit, and now they are enjoying tremendous returns on that investment. We are on that path, on that journey, as you suggested. I think in terms of people, we're 2/3 of the way there. In terms of process, we're a third of the way there. But what's exciting about that is that we've got all of that upside to look forward to, when, on a parallel track, we're focused on an acquisition strategy of portfolio enrichment, and we're going to continue to enhance our brand portfolio. As you look to the end of the journey, it gets pretty exciting.

Well -- then just a follow-up. -- I'm not asking you for a projection, but when you say the amount of upside that you have, -- I'm not talking necessarily this year or next year, but how could I quantify the amount of the upside that you have?

Well, it's -- it would be difficult for me to quantify that, -- with -- with any kind of numeric quantification. I think that -- that taking a look at some of the peers I referenced might give you a relative barometer to gauge how much potential there is, once the standardized processes and associate stability is fully realized.

So I should look at -- at -- at Auto Nation, and since you have a better portfolio than they do, assume that you can make a higher percentage of profit that than they can?

Well, you are going to have to draw those conclusions on your own, but I think that -- to give rightful credit to the sector leaders, Auto Nation and Lithia, they are further along on the journey than us. And while we are not going to mimic their model completely, clearly Sonic has been on a path of standardized process, of centralization, and so we expect to enjoy similar benefits as we mature, and when we can demonstrate that we can execute with the same consistency that some of those peers have.

Thanks, Jeff.

It's the right strategy. And we're very confident in that. And we're going to keep our heads down, and these calls are going to get kind of boring, because we're going to be in the salt mines, continuing to work hard on this simple strategy. And as long as we're moving forward on the journey, we're not going to get discouraged.

[OPERATOR INSTRUCTIONS] At this time there are no questions. Mr. Rachor, do you have any closing remarks?

Well, I'd just like to thank everybody for their interest in our company. Thank you very much.