Sonic Automotive Inc (SAH) 2006 Q1 法說會逐字稿

Good morning and welcome to the Sonic Automotive first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder ladies and gentlemen, this call is being recorded today Tuesday April 25, 2006.

At this time I'd 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 product or market, or otherwise make statements about the future. Such statements are forward looking and subject to the number of risk and uncertainties that could cause results to differ materially form the statements made. Risks and uncertainties are detailed in the Company's filings with the Securities and Exchange Commission. Thank you.

I will now like to introduce Jeff Rachor, President and Operator--Operating Officer of Sonic Automotive. Mr. Racher you may begin your conference.

Thank you. Good morning ladies and gentlemen. Welcome to Sonic Automotive's first quarter 2006 conference call. Joining me on the call today are the Company's Vice Chairman and Chief Strategic Officer, Mr. Scott Smith and our new Chief Financial Officer, Mr. Dave Cosper. The presentation material for this call is posted to our website www.sonic automotive.com., and can be accessed by clicking on the, for investors tab, and choosing webcast and presentations on the left side of your screen. I should also note or comments today will be linked to the slides on this site.

With that, please move to slide one. This morning we are very these pleased to report an increase in earnings from continuing operation of 9 % over last year and a 19% increase in operating profit. Our first quarter continued the strong trend we saw developing over the second half of 2005. The improvement in profit was driven by strong revenue growth and margin expansion across our entire business along with disciplined management of SG&A expenses. Our operating team continued to implement the strategic initiatives we previously discussed. Importantly, our brand mix continues to improve as we gain more exposure to those brands that are taking market share. Also, we are on the initial rollout phase of our used car initiative and the early results are very exciting. I will have color on both of these initiatives on subsequent slides. Bottom line, we have strong operating performance and momentum with more to come.

Please turn to the next slide. Revenue from continuing operations was 1.8 billion or a 15 % increase. And total gross profit was up 16.1% to 291 million. As I mentioned, earnings from continuing operations increased by 9% to 21.8 million. First quarter earnings per share from continuing operations including a $0.02 charge for stock option expense was $0.50, an increase of $0.03 or 6.4%. On a comparable basis, earnings per share excluding stock options, was $0.52, up $0.05 from $0.47 last year, an increase of almost 11%.

Let me give you some additional information on our margin improvements story that is not shown on this slide. Total gross margin for the quarter was up 10 basis points to 15.8%. New vehicle retail margins were 7.6%, unchanged from last year, while new vehicle margins including fleet were actually up 10 basis points. Used vehicle retail margins increased 10 basis points to 10.8% and we're very pleased with our used vehicle results overall and believe there's additional opportunity here. Total fixed operations margin was 49.7% up from 49.4% a year ago. And finally, [inaudible] insurance per unit increased by $23.00 to $980.00 per unit retail.

Moving to slide three. Now, let me update you on our strong same-store performance. Total same-store revenue was up a healthy 6.5% during the quarter. This sales growth was achieved while improving our overall margins by 20 basis points from 15.7% to 15.9%. New vehicle revenue was up 5.4% versus first quarter of 2005 as we outperformed the industry in retail unit volume for the quarter. New retail vehicle gross margin was 7.8%, up ten basis points from last year. Same-store used vehicle revenue was up 9%. Total used vehicle retail volume increased 4% compared to a national franchise dealer decline of almost 5%.

Manufacturer certified pre-owned unit sales represented 36.1% of our total used vehicle unit volume in the quarter. The lower cost of sale or value used car segment, sales were up 18.6% from last year and accounted for almost 24% of the total same-store used vehicle retail volume. I'm very pleased to announce that total same-store fixed operations revenue was up 7.4% in the quarter. Total customer pay revenue was up 11.7% and accounted for 60% of the total fixed operations revenue growth. Overall fixed operations gross margin was 49.5%, up from 49.4% a year ago. Parts and service revenue was up 7.4% while body shop revenue was up 7.5%. Our investment in additional capacity at our import brands and the consistent execution of our best practices drove the increase. Overall, dealership levels same-store fixed absorption was a very solid 86% up from 82.5% last year.

Moving to slide four. I'd like to elaborate further on our used vehicle sales initiative. As you may know, for some time, Sonic Automotive has lagged the sector in overall used vehicle sales performance. In the first quarter, we began rolling out our new sales and merchandising processes as well as a new vehicle-- excuse me, a new inventory management system to a selected number of dealerships. The early results are very compelling. As you can see from this slide, in the month of March, our used-to-new ratio at our champion stores increased to 0.61 from 0.47. While our other stores increased from 0.45 to 0.48. We believe overtime, we can attain a level equal to the sector leaders. This attainment would equate to a 30% plus increase in our total used vehicle retail volume. Needless to say we are very excited about the early progress and this significant opportunity going forward.

Next slide please. Our strategy of portfolio enrichment is yielding an improved brand mix. Luxury and import brands comprise 70% of total revenues this quarter compared with 67% last year. Luxury and Cadillac increased to 51%, up from 48% last year. While domestic brands declined 2 percentage points to 19%. In terms of total revenue, our top brands in the first quarter were General Motors, including Cadillac at 19.6%, BMW at 17.1%, Toyota, including Lexus at 15.9%, Honda including Acura at 15.8% and Mercedes which more than doubled to 9.3% from 4.3% a year ago. Our strongest performing regional platforms during the quarter were Washington, D.C., Oklahoma, northern California and Houston, Texas.

Market trends continue to favor the import and luxury brands, and we are well positioned to benefit from this. In addition, our acquisition strategy is targeted on import and luxury brands providing further opportunity. The market is moving toward us and we are moving toward the market. I'd like to now turn the call over to my new colleague, our Executive Vice President and Chief Financial Officer, Mr. Dave Cosper to discuss the impact of our portfolio enrichment strategy on our discontinued operations group, and to go over additional financial information. Dave.

Thanks Jeff and good morning everyone. It's a pleasure to be here on my first earnings call after joining Sonic last month. I came to Sonic from Ford Motor Credit Company where I was Vice Chairman and CFO. I joined Sonic because I was attracted to the business, the strategy, and the team. Importantly I was attracted to the strong wealth creation I see for Sonic share holders and myself. So with that let me get started.

And I'm on slide six. We're in the second quarter of our portfolio enrichment strategy and continue to see the benefits. Our fourth quarter call, earlier this year, we reviewed some of the criteria we used when determining which dealerships to sell. You look at the overall volume of the store, profitability, capital expenditures requirements and the market the store is operating in, among other factors. The stores currently in our discop group generally consists of smaller, less profitable dealerships with limited upside potential. We believe our shareholders would be better served by us investing the proceeds from the sale of these stores in new higher margin import and luxury stores.

You can see on the slide these stores lost 2 million in the first quarter on an operating basis, an improvement of 400,000 from the first quarter of 2005. When adding a store to our discop group, we analyzed the proceeds we expect to generate on the sale, compared with the book value of the franchise and other assets on the books. In connection with that, in the first quarter we recorded a $2.6 million charge from parament and lease termination expenses we will incur on some of the new dealerships which were added to the group during the quarter. Almost two thirds of this loss is tied up with three stores.

Turning to slide seven. This is a great story for SG&A for the quarter. SG&A expenses were 77.8% of gross profit, an improvement of 90 basis points from last year. Our focused advertising strategy and common element pay plan continue to keep variable costs in line. Excluding rent, our SG&A improved 130 basis points from last year. And bear in mind, that in the first quarter of 2006 we included the impact of stock based compensation, which increased SG&A as a percent of gross profit by 50 basis points. So in total, that's 180 basis point improvement, operationally.

I should note that part of the increase in rent can be attributed to investments in facilities and fixed operation capacity that have yet to fully mature. Margin from these investments will be realized over time. And I want to reiterate that fixed absorption increased 86% during the quarter. Additionally we continue to make progress on our single DMS conversion, national payroll consolidation, and standard process rollout. All of these initiatives plus our on going focus on efficiencies in all areas of our business will lead to further SG&A reductions in the future.

Turning to slide eight. As expected, we continue to absorb the impact of rising interest rates during the first quarter. Floor plan interest expense was up 4.7 million compared with the first quarter of last year. And essentially all of this increase was due to higher interest rates which were up about 2 percentage points from the first quarter of 2005. Other interest expense was up 1.1 million, again driven by rate increases. As we look forward we built one more rate increase of 25 basis points for the remainder of the year into our earnings target for 2006.

Turning to slide nine, inventory management. At the close of the quarter, new vehicle day supply was 53 days compared with the industry average of 67 days. Luxury and import at 48 days and 47 days respectively. In terms of car and truck. Our light truck inventory ended the quarter at 48 days, and our car inventory was 62 days. Used day supply ended the quarter at 40 days. We've historically been a leader in inventory management and believe we can improve further. For the last several months we've been developing a new vehicle inventory management technology. We'll be begin rolling out this technology later this year. System should help us optimize the level and mix of our inventory which should improve our turn rates and overall profitability. Now with that I'll turn the call back to Jeff.

Thank you Dave. And finally looking at slide ten. As we enter the second quarter we believe the market will remain challenging. And that higher interest rates and energy costs will produce obvious head winds. However, latest consumer confidence and employment trends are positive. This combined with the successful execution of our portfolio enrichment strategy further process improvement, the recently launched used vehicle initiative and our continued focus on cost, should continue to position Sonic Automotive to outperform. As a result, we are reaffirming our full year EPS from continuing operations guidance of $2.40 to $2.50 excluding stock option expense. I should note, that it's unlikely we will close on any significant acquisitions before the end of the second quarter and this should be considered in your estimates.

Finally, dividends will remain unchanged at $0.12 a share payable on July 15th, 2006 for shareholders of record as of June 15th, 2005. Before closing, I never want to miss an opportunity to thank all of the Sonic associates. Because of them, we were able to carry the momentum gained in the second half of 2005 into the first quarter of this year. Their efforts made this a successful quarter. We have never had a stronger team at Sonic Automotive. Additionally, I want to thank our manufacturer partners who consistently support the dealer network and continue to bring exciting, high quality products to the retail marketplace. With that, it's our pleasure to entertain questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Rick Nelson.

Thank you and good morning guys.

Good morning Rick

Jeff, can you talk about a rollout plans, how the new--or the used vehicle software and the processes is that you spoke about in the Champion stores? And maybe how many Champion stores there are in that base?

I sure can, Rick. Again, we're very excited about your used car initiative. It's been something we've developed, really over the last six months and finally we're able to roll it out early in the first quarter. Our rollout process is a result of many lessons learned from previous initiative implementations. And instead of rolling it out in 100% of Sonic Automotive dealerships at one time with varying degrees of success we've identified a number of pilot stores, or what we refer to as Champion stores.

And our implementation teams, one per region, go into those stores, implement the process and they do not leave that store until their confident that it's an embedded practice, because they stay and support the dealership personnel with training and follow up with accountability. As of right now, we have less than 20 stores who are fully operational with the new used car strategy and process. That's exciting to us, because you can see the impact that that store group is already having on our overall used vehicle results.

In terms of technology, we have collaborated--excuse me--we have collaborated with technology vendor to customize a version of a very comprehensive used vehicle inventory management tool, and that is now up and running and about 25 % of our stores and we will be rolling it out now on a parallel track with our other merchandising pricing and inventory management processes in the Champion stores, and expect to be able to implement both our used car process and the related inventory management technology in 100% of Sonic dealerships by the end of 2005-- excuse me, by the end of 2006.

Alright thank you for that. Can you comment on April sales and how they're tracking today?

Well, obviously you have the same industry data that I do. Sales are a little sluggish in April according to the industry data. But it's too early to tell, obviously with the Easter holiday and the tax deadline being a drag on the first couple weeks of April, we never count our chickens until the entire month is complete. So it's really too early to have good visibility but I think what we're seeing is similar market conditions to what we've seen over the first quarter.

However, the used vehicle environment is very robust as there's a greater deferential now between new vehicles, where incentives have moderated, and used vehicles where we've also seen some moderation in the Mannheim index and the overall evaluations. So the used vehicle environment, according to industry data, remains a very robust and that's perfect timing for Sonic's focus on used vehicles in our new used vehicle rollout.

And finally, on SG&A, are there targets that you have in mind to reach your guidance for this year?

No Rick, we have not articulated a target. We work on SG&A every single day. Obviously we're very pleased with the progress that we've made and we believe that overtime, through additional efficiency, improvements in productivity, further leveraging technology and training and developing our associates, that we can continue to make improvement in the quarters and the years ahead.

Thank you.

Your next question come from [Rich] [inaudible] with Wachovia Securities

Hi, good morning

Good morning

I wanted to ask about the portfolio enrichment strategy, how long do you anticipate that it will take to get it to the right mix or your desirable mix?

Yes this is Jeff. I'll take that question. We're in the second year of what we always envision as a aggressive two year strategy to prune our portfolio. We think as we approach the end of this year, certainly in the next 12 months, that we will have largely completed that initial strategic pruning and be left with a very strong foundation of brands to build on in the future.

Obviously, we will have, for years to come, ongoing adjustments to our portfolio but we don't expect them to be anywhere near of the magnitude in revenue or roof tops that you've seen over the last couple years. Again, we made a conscious strategy to accelerate portfolio enrichment this year after we saw the early benefits in 2005. So again, we expect to have that materially complete in the next 12 months and then it will be more the cats and dogs and again an on going strategic focus on the best possible brand and geographic mix possible going forward.

Okay, thanks. And then on the used vehicle software, how long is it taking the Managers to kind of complete the process, in terms of training store personnel and using it and implementing it ? What's the -- I know it is early, but what's kind of the rough figure on timing right now?

Well, that's a great question. And if you can refer back to my comments to Mr. Nelson's question, we've gained a lot of experience now in various standardized process rollouts. And what we've learned with any technology rollout, that it doesn't matter how robust the technology is, if you don't have all of the other processes in place to fully capture the benefits of that technology.

So in the case of the used car rollout, where we had introduced the software in a number of locations, we didn't see we were getting the full benefit without the full implementation. That's the other manual processes, if you will surrounding prices, merchandising, marketing, training [etc.]. And so we are now going in with what is a very comprehensive one week implementation period. And then as I suggested, we leave personnel involved in the store for what is about a 30 day period to be sure that the associates at the dealership fully embrace and get proficient with the new technology, as well as the manual processes.

And then obviously, like anything that's new, it requires ongoing accountability and support and some refresher training as we go forward. But, to answer you question, we think that a full implementation can take place in a 30 day period. That's the technology as well as the manual processes. And again, we've seen benefits as early as the first couple of weeks past the implementation.

And then so how long will it take to completely rollout across the entire portfolio? Knowing that it's taking about 30 days?

Well, again we've got teams in all nine of our regions. So if you use that as a guide, within the next 12 months, we would expect to be fully operational with our new process. And we've seen some immediate results in a number of cases. I'd single out a dealership in Florida, where within a week of the initial one week install, we saw a 60% improvement in volume and a $500.00 per retail improvement in gross margin. Now, that certainly may be an exception but it's indicative of how powerful that the strategy and the tactical execution surrounding the strategy are, when we get a store fully implemented.

Okay. And lastly Jeff and Dave, given your relative outperformance here this quarter you reiterated guidance here, but that seems to speak to your thoughts that this last part of the year, second half of the year, last three quarters, is going to be a little more conservative relative to what the consensus expectation is. What is the reason for reiterating guidance here and not raising it?

Well this is Dave. It's still early in the year. We had a great quarter, we're thrilled about it. But there's a lot of things we've got going on, the marketplace is uncertain. We've got our initiatives. We're midstream on many of them. And we're just going to take it one quarter at a time

Okay. Thanks

Your next question come from Kelly Dougherty with Calyon Securities

Hi thanks for taking my question. Seems you guys made some good progress with the levering in the quarter. And I was wondering if that was that aided by the fact that you didn't undertake any share repurchases? I'm just wondering if you chose to pay down debt instead or if you are looking to take a more opportunistic approach to repurchases?

Let me tell you what we did Kelly. This is Dave. We did buy back a little bit of stock in the first quarter about a 1.5 million worth. Year-to-date we're at about 4.4 million. I'd say the leverage was more driven by the positive cash flow of the business, and the fact that we didn't have any major acquisitions.

Okay great. Thank you. And on the acquisition front, I'm just wondering, if you could provide some more color. Looks like you're still in the 4 to $700 million range. I'm just wondering if you've made slight adjustments to your holder--hurdle rate? And I'm wondering if we're finding anymore opportunities out there as a result of that?

We have only adjusted our hurdle rate for inflation changes . And the target is still 400 to 700 million of revenue this year.

I'm talking about the internal hurdle rate.

Yes, our internal cost of capital has not changed, just for inflation adjustment.

How about on the divestiture strategy? It seems you guys are largely focused on divesting franchises in smaller markets mainly domestic brands. I'm just wondering if you're finding that any of other public retailers are turning up to be interested buyers for any of those stores?

Yes this is Jeff. And you're absolutely right. The profile of our stores are generally smaller stores that aren't a good match for Sonic's strategy. We have both recently and in the past, had dialog with other public retailers where a handful of these stores may be a better match for their strategy or a better match geographically.

We've got some situations where we just have a very small concentration and kind of a one off market, those dealerships are difficult to support and difficult to oversee without extensive travel, [etc.]. So, in some cases we have reached out to our public company peers and have had substance of dialog with some of them. But again it's only a handful of stores that I perceive would be even a potential match for our public peer group.

Okay. Thanks very much, congratulations.

Thank you.

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

Good morning guys.

Good morning.

Hi Scott.

Can we maybe talk about this new used car processes? Actually talk about some of the processes that will be different, aside from the technology?

Sure, I certainly can. There's no silver bullets here. These are just proven best practices and really bringing unprecedented focus to the used vehicle area. One of the biggest drivers of the improvement, and you can see it in the shift of our lower cost-to-sales business mix, is holding more cars that have historically been wholesaled and instead reconditioning them and marketing them at retail. And that's one of the big catalyst for the volume improvements and margin improvements that we've already seen and expect to see going forward. But, it's a very comprehensive process.

It starts with very high standards of reconditioning. It also includes getting everybody in the dealership involved in the valuation and pricing of used vehicles, pricing used cars closer to the actual transaction price. Obviously, inventory management is the most important discipline that drives outstanding used car performance. So again, it's not just managing day supply, but it's leveraging the inventory technology to optimize and determine what profile of vehicle is going to sell and turn the fastest at the best margin off a particular used car lot.

And finally, just merchandising and marketing and again a lot of training and awareness getting everyone in the dealership involved in meaningful aspects of the entire used car program. But again, the biggest catalyst is really focusing on retaining cars that would normally be wholesale. One of the elements of the program is also eliminating wholesalers and going to auction-only and sealed bid sale-type wholesaling practices, which is always a catalyst for a retention of vehicles that might other wise be wholesaled, that we believe can be retailed at high margin off our used vehicle lots.

And as far as the discontinued operations, you talk about in this quarter, the annualized revenues from these dealerships? The number of dealerships and the proceeds that is you expect to get them?

Yes, I can comment on bits and pieces of that. We expect to realize north of $50 million, probably over the next 12-14 months. We don't really want to talk about the number of stores, we don't go public with that. And annual revenues are about--quarterly revenues are about $240 million.

But $240 million was stripped out on this quarter?

That's correct. And last year history has restated for that. And that information will be out on the web later today.

I'm not sure if you mentioned these the dealerships primarily domestic?

They are a mixture of brands. They are largely domestic and what I would characterize as third tier and second tier import brands. Lower throughput per outlet geographically uncomplimentary to our concentration. These are dealerships that again, sometimes require excessive CapEx expenditures by OEMs that do not pencil, frankly for our return thresholds but generally the profile is smaller, underperforming dealerships with brands that are not part of our revised portfolio enrichment strategy.

And I should note and I hope you caught Dave's comments earlier, that our overall operating performance improved in the quarter, including the discontinued operations stores. The actual operating performance of those dealerships improved during the quarter, so we are not ignoring these assets, we're not trying to put the tough ones below the line, this is strategic. And I think that that's a very important point. In fact, 50 % of these stores are profitable.

Okay and you talk about maybe on the F and I side of the business, the penetration rates with regards to lifetime oil change contracts or extended warranties, something like that?

Sure I can give you that. We actually saw a decline in overall finance penetration. We're down to act 67.8 from 70%. And that is normally-- makes a more challenging environment. But through our outstanding training, commitment to 100%, menu selling and disclosure, and our emphasis on product sales supported by our standard element compensation plans, we were very pleased to post a meaningful improvement to our F and I per retail unit.

In terms of service contract penetration it was about flat at 34% but over 50% of our total finance and insurance revenue was realized from product sales. So we're becoming less and less dependant on rate. That's the way we want it. We want to be selling value added products and services to our consumers, and so we're very pleased with the trend during the quarter.

Alright. That's all I have, thank you.

Your next question come from Jerry Marks with Auto Retail Stocks.Com.

Good morning.

Hello Jerry.

Hi Jerry.

Dave, I [inaudible] you said that you had some strong cash flows in the quarter. What was your cash flow from operations and capital expenditures in the first quarter? Or do you want to wait for the 1Q to come out for that?

Well, we've taken as a pass at it Jerry, and the way we've described it, we took net income plus depreciation amortization and a couple of the noncash charges that we had took, the impairment charges, and stock compensation. And if you add those numbers up it's about $28 million for the quarter. And we're projecting in the neighborhood of 90 to100 for the year.

Okay.

CapEx for the quarter was roughly 23 million. And probably about two thirds of that we would expect to put in sale lease back transactions going forward.

So a little bit higher than your actual net income from continuing operations of 21.8 million. Some working capital benefits that you seem to get?

Yes, the number I gave you didn't even-- didn't include working capital benefits.

Oh, okay. In any case, I did notice on the balance sheet, nontrade payable went up. Suggesting your used vehicles, while you floor plan trade payables the new vehicles actually went down. I was just wondering the reason for that?

Oh yes. Yes, we now have a used car floor plan line. And we paid off the captives and have that funded through the consortium that we established earlier this year.

Okay and then last two questions. Jeff, could you comment a little bit if you've seen an improvement in employee turnover over the last few quarters. I know you guys don't really disclose it but maybe directionally where it's gone.

Directionally, Jerry that's been a big focus internally as you know. We declared turnover public enemy number 1 going back now some 18 months. In 2005 we were pleased that we reduced overall associate turnover by 10%. We have targets that are in that range for 2006 and we're continuing to invest in a number of standardized processes around human resource, in terms of recruiting, hiring, on boarding orientation, training, [etc.], that we believe will yield benefits as we go forward. I'd also highlight that brand mix can be advantageous to accelerating that process, because generally, the luxury brands enjoy much lower associate turnover industry wide and that is also the case at Sonic Automotive.

Okay. Also probably helps you lower your advertising expenses or--?

Yes, I think that it does allow you to get some leverage. We did a terrific job of leveraging our ad expense this quarter. Part of that is really doing a better job of investing it and a higher return mix of media, including increased focus on the internet where we enjoyed a record quarter of overall penetration in terms of the sales we realized as a result of internet leads. But, obviously long [tenor] sales associates and management teams are able to build repeat and referral business and overtime that can positively impact your investment in advertising.

Okay. And Dave, I think you said excluding out rent, SG&A as a percentage of gross improved something like 120 or 180 basis points? Any thoughts about where that went if you were to exclude out the stock compensation expense? [Dealt], as well?

Yes, I'm going to let Dave handle that. And then I'd like to add a comment. Go ahead Dave.

Okay. Yes, Jerry excluding rent it improved 130 basis points. During the quarter we had, as you know, stock-based compensation included in our results. That was worth 50 basis points. In adding the 130 and the 50 together, gets you 180 basis points operating improvement, if you will. That is what I mentioned.

Okay.

Jerry and as you know several of the analyst are looking at SG&A without rent and we would really encourage everyone to evaluate Sonic's performance in that metric versus the peer group. You're going to find that we are leaders and we think that is very good metric to judge management execution and efficiency, because it really levels the playing field by taking out any differential that might exist from sale lease back versus real estate ownership, excetera.

Okay. Thanks

Your next question comes from [Doug Carson] with Banc of America

Yes, thanks guys. Congrats Dave on the move.

Thank you

I just had a quick kind of bookkeeping question. When I'm looking at Q1 '05 versus Q1 '06, theres some, looks like there was a restatement there. I was just looking online to see if an 8K or was in one of the published reports of or where that restatement came from? Looks like my top line revenue is 1.8 billion--and it's restated to 1.5.

Yes, what--when we have discontinued operations that we put a new set of stores into discops this quarter. You go back, once you do that, you go back and restate history to show consistency. We will later, today, be putting out restated, reformatted, if you the 2005 by quarter. So with your models you'll be able to look at comparable store data.

What would the total of sales top line be, was there a 15% top line growth when you take out the discontinued?

Yes, there is. In fact it would be higher if--

Discounts was included it'd be even more robust, in terms of absolute growth.

As far as the used vehicles going up, is that going to be a continued trend? Because the margins are significantly higher there versus new, which is a positive. What's in the genesis for the push with the used sales?

Well, again, there's been several good questions today about our used car initiative. And if you study the peer group you'll see that we have always lagged the peer group in our used-to-new the ratio. And a number of other key used vehicle metrics. Obviously, we recognize that opportunity, that potential, we invested in it in the second half of last year to position ourselves to launch our used car initiative in the first quarter, which we've now done. And as we articulated in our initial rollout, some 15 to 20 stores, we've seen very compelling results that tell us that directionally, some of the positive trends that we've posted here in the first quarter should be on going.

Now, again, we think that's a place that we could outperform versus the model that is out there, but it's going to take the remainder of the year to get the full benefit of that used car rollout. But as I said in my comments, if we can move from kind of our historical used-to-new ratio, I believe it's about 0.47 to 1, to sector leadership type ratios, that would represent a 30% increase in total used vehicle retail volume. That's where we have our sights set over the longer term. That's going to come incrementally and sequentially as we continue to roll this out as a measured pace and, execute on a store-by-store basis.

And the reason I like that so much, is not only is it volume but it's higher margin business. Used is 11% margin, new is 7.8. So it's volume and margin.

Changes are mixed favorably.

These a good trend. Alright, thanks guys I appreciate it

Your next question comes from [Peter Cyrus] with [Gorilla Capital].

Hi, good morning.

Good morning Peter

How are you? I have three pretty simple questions today. First, I was reading something from one of your previous questioners, Jerry Marks, who raised the issue as to why companies use these discontinued--used earnings from continuing operations as opposed to just throwing everything in and--won't you ever year have some discontinued operations? And doesn't it--isn't it sort of confusing people between discontinued and regular operations?

Did you have a couple of other questions Peter or do you want us to take them?

Yes, let's do that one, because the other two--let me give you that one first.

I will respond strategically, and then certainly Dave can add his comments. But I think your comment is obviously a valid one or a relevant one, might be better said, but I think that what you need about this cycle in Sonic's evolution is that this is strategic. And your correct, there's always going to be some cats and dogs, that's an ongoing practice across the sector, with any large private or public consolidator.

But for Sonic, this is a core element of our overall strategy, that we articulated now almost two years ago. And that was to focus on pruning our portfolio and repositioning both our brand mix and the profile of our assets. As you know Peter, our Company went through a period of hyper growth from '98 to 2003. We did an acquisition the equivalent of every 11 days during that five year period. And let's face it, you're not going to hit the bulls eye every time. At that time our strategy was not as targeted, we acquired all brands, all profiles of stores and all geographic areas, to build a critical mass.

We recognize that that left us with some assets that aren't a good fit for the strategy that we're now committed to, and we think took a very important strategic step for our shareholders to acknowledge that, to make the tough decisions to divest of those assets. Again, we think that's about a two year process. We're about half way through that process. And once we get beyond that strategic cycle of repositioning, we think that the overall EPS number would be a more relevant metric. Dave?

Yes, so this is the final piece of the clean up basically.

Yes it is.

Following on--you were talking to the last questioner about the used cars and the fact that used cars have higher margins. As you get some of the opportunities that you're looking at in used cars, why wouldn't that give you a faster earnings growth than your currently looking for?

Well the answer is that it certainly could, Peter. But again it's early in our rollout and we're operating in a stable market environment. And so, at this juncture while we're very optimistic and encouraged by the early results, and the size of the opportunity, and the impact it could have on our overall profitability, we are still again in the early stages and so we want to be reasonable, in term of our assumptions. Dave?

Yes, and competition isn't standing still, either. So we're just-- like I had mentioned, taking it one quarter at a time. But it does look very, very good

And the final question I have is that you guys do some of this low end sort of buy here, pay here business, right?

We have a very small subsidiary that was acquired as part of a large acquisition years ago. And we do operate that as a buy here, pay here resource internally but it's a very small percentage of our overall used vehicle retail volume.

And when you talk used vehicles, that's not in the area you are intended to expand?

That's correct.

Okay, thanks guys good quarter.

[OPERATOR INSTRUCTIONS] Your next question comes from [Mike Goggenhagen] with Bear Sterns.

Hi guys, can you hear me?

Yes, good morning Mike.

How are you? I guess my question has to do with the floor plan payables and I understand your explanation on the shift from trade to nontrade is being getting out of some of that business with the captives. But in aggregate we saw those payables go up by about 6% versus just a 1% increase for inventories quarter-to-quarter. So, where there any changes in the terms to this new line of used vehicles or used vehicle payables? Or is there anything else going on there?

Well we--I'm looking here--we did have used vehicles, previously funded by a revolver. And now we've got a used vehicle floor plan line specifically for used cars, that's about $100 million. I think that's probably what you are seeing.

Oh, okay. So, it came out of your other debt basically and moved into this-- alright.

Yes. It had been in long term debt under our revolver,and now it's a specifically on a used car floor plan line.

Okay, and is there any sort of net benefit or disadvantage in terms of interest rates associated with that shift?

There was an advantage. It's libor plus 1.8 versus libor plus 2 and a little bit, 2 to 2.5.

Okay, so you're interest --you floor plan expense head wind would have been greater, were not for this shift?

That's correct. That's only a little bit in the quarter and it's $100 million. I think it came online in February.

Great. Okay that does it for me, thank you.

At this time there are no further questions. Mr. Rachor are there any closing remarks?

Yes, I would like to make some closing remarks today, thank you. First quarter results were very strong and were built upon the progress we made last year. Our strategy is clear, it's working and we're executing it. We're focused on portfolio enrichment and growing the higher margin vehicle sales and fixed operations segments. We're also focused on SG&A cost reductions and process improvements in every aspect of our business. We believe there is substantial profit opportunity going forward that will drive shareholder value. Thank you very much for joining us this morning.

Thank you, this concludes today's Sonic Automotive first quarter 2006 earnings conference call.