Sonic Automotive Inc (SAH) 2006 Q2 法說會逐字稿

Good morning, and welcome to the Sonic Automotive second earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [OPERATOR INSTRUCTIONS] As a reminder, ladies and gentlemen, this call is being recorded today, Wednesday, August 2, 2006. Presentation materials which management will be reviewing on the conference call can be accessed on the Company's web site, at www.SonicAutomotive.com by clicking on the for investors tab and choosing webcast and presentation on the left side of the monitor. 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 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 and good morning, ladies and gentlemen. Welcome to Sonic Automotive's second 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 Chief Financial Officer, Mr. Dave Cosper. The presentation material for this call is posted to our web site, www.SonicAutomotive.com, and can be accessed by clicking on the for investors tab and choosing webcast and presentations on the left side of your screen. Our comments today will be linked to the slides on this site.

As I reviewed our results this quarter in preparation for this morning's call, I was very pleased with the progress we made as a Company. We came to you two years ago, acknowledging that we were not satisfied with our strategy or performance. And we communicated a clear vision of what we were going to do to change that. Looking back, objectively, I can understand why the investment community viewed Sonic with skepticism and as a show-me story. And frankly, our valuation has reflected that sentiment; however, our consistent results over the last five quarters warrants some hard-earned credibility. We've made the hard decisions to get the right people in key positions in our Company. We've relentlessly attacked our variable expense structure. We've executed on our portfolio enrichment strategy, and now have one of the best brand mixes in the sector. We've reduced our leverage and we're on track to hit the target that we articulated to you. We recognize that there's much more work to be done, but we're very proud of the progress that our team has made. In addition, we are in the early stages of some very key operating initiatives for our Company that will provide significant future benefits, our used vehicle process, single DMS conversion, electronic F&I menus and inventory management technology, just to name a few.

As you know, today's conference call is the final call from the Companies in our sector. In reviewing the operating results from our peer group, whom I view as the premier operators in automotive retail, I'm very proud of how Sonic Automotive compares. We are at the top in virtually every key business driver for the second quarter and a clear number one in new and used vehicle sales in a difficult industry environment. In addition, we are the clear leader in controlling our expenses. Sonic Automotive is controlling the controllables, and we continue to execute on our promises and look forward to future success. And I'm confident that in time we'll be rewarded with a valuation that reflects our sustained progress.

With that, please turn to slide number one. Operationally, sonic delivered another strong quarter. Earnings from continuing operations, before considering the impact of our second quarter adjustments, increased 9.2%. The increase in profit was driven by same-store revenue increases in all retail [segment], improved margins and controlling SG&A. Before considering the impact of the charges we took in the quarter, our operating margin was 3.8%. The highest level since 2002. Our strategy of focusing on portfolio enrichment and the higher margin business segments helped us navigate through a challenging new vehicle sales environment. For the quarter, our luxury and import brands comprised 82% of total revenues. We are also pleased to report continued progress on our core operating initiatives, our used vehicle revenue increased 21% due to the continued rollout of our used vehicle sales initiative. Our fixed operations revenue grew by 13.5% and we've further capitalized on this growth by improving fixed operations margins by 60 basis points to 50.2%. This is the first time in the Company's history we've exceeded the 50% mark in this area of our business. Of the $29 million worth of growth in our overall gross profit, 61% of that growth or $18 million was generated from our high margin fixed operations department.

Please turn to the next slide. Second quarter earnings per share from continuing operations, including a one penny charge for stock option expense was $0.42. As we discussed on our July 19th pre-release conference call, this includes a $0.27 charge related primarily to our decision to exit various facility leases and to cancel certain facility improvement projects. Total gross profit for the quarter was $308 million, with total gross margin of 15.1%. Before considering the impact of the second quarter adjustments, total gross margin was 15.4%, a 30 basis point improvement over last year. New vehicle retail margins were 7.7%, unchanged from last year. Used retail margins increased 10 basis points to 10.4%. Total fixed operations margin was up 60 basis points to 50.2%. And finally F&I per unit, including the impact of $121 per unit retail as a result of the increase in the chargeback reserve taken this quarter, was $845 per unit. When looking at that per unit performance, excluding the charges, F&I was $966 per unit, a 3.5% increase over prior year.

Please move to slide three. Now, I'll discuss our same-store performance. Total same-store revenue and gross profit, including a one-time chargeback reserve, was up 3.7% and 4.3% respectively. New vehicle revenue was up 2% versus the second quarter of 2005. I might note, that was a very strong same-store sales quarter in '05. Consistent with the last several quarters, we outperformed the industry in retail unit volume for the quarter. Same-store used revenue was up 15%. The majority of the increase can be attributed to the 11.6% increase in our retail unit volume. Again, this quarter, our fixed operations delivered strong results. Same-store fixed operations revenue was up 5.5%, while gross profit for the quarter was up 6.6%.

Please move to the next slide. On slide four, we have some additional used vehicle information. As you can see, these results are impressive. As a percent of total continuing operations revenue, used vehicle retail revenue increased 150 basis points, compared to the second quarter of 2005. The 24.2% increase in used vehicle retail volume at our pilot stores drove a large portion of the revenue improvement. The benefits of this program remained evident as these pilot stores continue to outperform our other stores in used vehicle volume, margin, and used-to-new sales ratios. Our rollout of the used vehicle program continues to progress and we are on track to have all dealerships integrated by the end of the first quarter in 2007. Equally impressive, as the revenue increase here is the fact that we were able to maintain margin while growing the top line substantially. Although there may be some near term softness in the used vehicle market, due to increased new vehicle incentives, we are very pleased with the progress we're making in this area, and we remain very excited about the long-term opportunities for Sonic in our used vehicle business.

Please move to the next slide. Our fixed operations performance continues to be driven by improvement in our brand mix, our investment in additional stall capacity, and consistent execution of our standardized best practices. This quarter, we were able to drive both top line and gross profit growth in this extremely profitable segment of our business. Total customer pay revenue was up 8.8% and accounted for nearly 90% of the total fixed operations revenue growth. Execution of our best practices, coupled with the additional stall capacity at our import stores has allowed to us capitalize on the increased demand for service. Finally, dealership level fixed absorption was 88.2%, up from 86.1% a year ago. In the month of June, our same-store fixed absorption was 94.5%, a record for the Company. And I should note that our luxury brands enjoyed 100% fixed absorption for the full quarter.

Next slide, please. We continue to execute on our strategy of portfolio enrichment. Luxury and import brands comprise 74% of total revenues this quarter, compared with 69% a year ago. In terms of total revenue, our top brands in the second quarter were Toyota, including Lexus, at 18.5%; General Motors, including Cadillac at 18.4%; Honda, including Acura at 16.5%; BMW, including Mini, at 16%; and Mercedes-Benz at 9.3% of revenue. Our strongest regional platforms during the quarter were Texas and Northern California. To date, we've acquired approximately $300 million in annual revenues, substantially all of which have been premium brands. As we communicated in the past, we have a very disciplined acquisition strategy. While we will continue to pay the high-end of the historical range for premium brands that are taking market share, we will not overpay for acquisitions simply to gain access to a particular brand or market if it does not meet our growth and return targets. We evaluate the individual merits of each acquisition opportunity and we will walk away if we're not comfortable with any of the factors that we consider. Given that discipline, we believe the acquisition market has become somewhat frothy, especially for the premium brands that we are targeting and we are cautious about the level of acquisitions that we will complete over the second half of this year. We believe, however, this is a short-term phenomena and we expect acquisition pricing to return to more rational and normal levels in 2007 as there is a limited number of buyers with the capital or the management capacity to execute on these larger transactions.

Next slide, please. At this time I'd like to turn it over to Mr. Dave Cosper to review our financial results in detail. Dave?

Thanks Jeff. And I'm on slide seven now. This slide is a summary of the adjustments we discussed on our July 19th call, and I won't go back through these in detail, but I did want to illustrate how they effect some of our core operating metrics. As you can see, F&I per unit declined [120 min] -- $121 per vehicle as a result of the increase to our chargeback reserve, and this is recorded in F&I revenue. For this adjustment, our F&I per unit was up $32 or 3.5% to $966. These adjustments also had an impact on SG&A of 460 basis points, and I'll talk about that in more detail on the next slide. And as Jeff mentioned, our operating margin prior to these adjustments was 3.8% and that's the highest level we've seen since 2002.

Turning to slide eight, for the quarter, SG&A expenses were 78.7% of gross profit and this includes a 460 basis point impact from Q2 charges. Adjusting for this impact, we approved 130 basis points from 2005. And after adjusting for peer group differences in owned versus leased properties this puts us at the top of the peer group in SG&A performance. Variable compensation as a percentage of gross profit declined 50 basis points. It was down 120 basis points before considering the impact of second quarter charges that they had on gross profit. Advertising expense was down 10 basis points, down 20 basis points before the adju -- adjustments. These favorable trends show our benefit of our focus on cost reduction, our improved processes and our strong brand mix.

Now let me move to slide nine. One this slide, you can see we closed the quarter with new vehicle day supply at 50 days compared with the industry average of 65 days. Luxury and import were at 49 days and 43 days respectively. Our light truck inventory ended the quarter at 53 days and our car inventory was 49 days. Used days supply ended the quarter at a very strong 37 days. As you know, we're piloting a number of technology solutions, all of which have the potential to improve our vehicle inventory management, even further. A core piece of our used vehicle sales initiative consists of an inventory management tool pioneered by Auto Exchange. We are currently working with Auto Exchange on a similar solution for new vehicle inventory. And as you know, we're also continuing our conversion to a standard DMS platform that ultimately will provide the foundation for fully integrated inventory and data management solutions.

Turning to slide 10, we continue to make progress reducing our leverage. Hopefully you got the sense from our July 19 call that we were focused squarely on robu -- robust evaluation and execution of our capital allocation decisions, especially as it relates to acquisition, capital expenditures, and leasing decisions. In previous calls, we've mentioned we have a small buy here, pay here finance business. As part of our ongoing capital review, we're exploring strategic alternatives for this business. Although this is a very profitable operation for us, we believe we can free up capital and retain the many [bene] -- benefits this business provides us. At June 30, the outstanding notes receivables for this subsidiary were approximately 56 million, net of associated reserves. The monetization of the entire loan portfolio would reduce our leverage further by about 200 basis points. As Jeff mentioned, we are reviewing acquisition targets over the second half of the year with a degree of caution. And as we have discussed, we will be disciplined in our review of acquisition opportunities to insure we achieve required returns. Absent any compelling acquisitions, we'll continue to use our cash flow to reduce our leverage. Now, let me turn the call back to Jeff.

Thank you very much, Dave. And finally, let's look at slide number 11. As we discussed on our July 19 call, our revised guidance for continuing operations for the full year 2006 is $2.05 to $2.15, which reflects $0.08 of stock option expense. We have adjusted our guidance to reflect current interest rates and a higher effective tax rate for the remainder of the year. These items have been partially offset by improvements in certain operating assumptions. Dividends will remain unchanged at $0.12 a share, payable on October 15, 2006, for share shoulders of record as of September 15, 2005. While we -- while we are very pleased with our operating performance for the quarter, we believe there is opportunity for improvement. We are in the process of rolling out a standard F&I menu technology which will not only enhance transparency but also improve gross profit. We expect to have our used vehicle sales initiative fully implemented by the first quarter of 2007. We are approximately halfway through our standard DMS conversion. These operating and technology initiatives, along with our continued relentless focus on SG&A reduction will continue to drive future results for Sonic Automotive. With that said, we do expect the new vehicle market to remain challenging and that interest rates will continue to mask our true underlying operating performance. However, our brand mix, used car focus, and continued fixed operations improvement should mitigate this risk.

As always, I want to close the call by conveying my sincere appreciation to all of our outstanding Sonic associates their collective efforts in delivering this strong performance. Additionally, I want to extend our appreciation to the manufactured partners for their continued support. And at this time, Dave and I will be glad to entertain your questions.

[OPERATOR INSTRUCTIONS] John Murphy, Merrill Lynch.

Good morning, guys.

Good morning.

I was just wondering on the SG&A front, I mean you had great performance in the quarter. If we [bag on] these charges at 74.1%. I mean, is there more opportunity there, or is that a pretty -- is that a pretty sort of bottom of the barrel rate that you will be able to get to?

Well, I will be glad to answer that, John. Obviously, we're already at a rate that compares very favorably to our peer group. And, in fact, when adjusted for the peers who own versus lease, we are at the top of the peer group sector. So we're very pleased with the progress we've made there. We do see an opportunity over the next 12 to 24 months to further reduce our SG&A and that will come in a combination of continuing to improve our brand mix, as well as leveraging the continued execution of standardized best practices and benefiting from the completion of our DMS conversion, where we believe technology can enable increases in efficiency and productivity that could drive future reductions.

John, I would just add that getting cost out is never easy, and you have to work at it every single day. And we have a team of finance people in the field doing just that. And I think you will see us improve over time.

And, Dave, on the capital allocation discipline that you're -- I mean, or increased discipline that you are sort of instilling here, I mean, do you -- do you expect any future charges? Are there any other programs that we might -- might be seeing in the coming quarters that, are scaled back or changed? And, as we look at the capital allocation going forward, you mentioned that the buy here, pay here business may be rationalized in one form or another. Are there are other big chunks there or leverage ratios you think that should be changed?

Well, let me -- let me answer that first. We've done a thorough review of all of our plans and programs. So we are very comfortable with the charges, and as reflected in the financials thus far. So, I mean, we are always going to review our plans ongoing but I don't anticipate anything major. The only real non-core business that we have, is the buy here, pay here. And that's probably the largest opportunity to free up capital. And it's a great business. It's just that, we're in the car and truck sales business and I think, we can retain the benefits of -- of the buy here, pay here financing opportunities without having our capital tied up in it. So we're just going to explore alternatives and we're underway with that as we speak.

Okay. And then Jeff, if you look at your -- your service bay utilization rates, what was it in the quarter and is that helping ramp up the margin here? And is it something we should expect to continue going forward?

Yes, well, we have articulated really for -- for several quarters, our focus on adding capacity and increasing productivity, particularly in our import and luxury stores. For instance, in '05, we added just over 300 service bays. It looks like we have another 307 bays that will be added in 2006, and in '07 we have another 206 bays. And virtually all of that additional capacity is going to be added in the import and luxury stores where we're enjoying very strong demand in our service lines. In terms of utilization and productivity, those ratios are much higher in our import and luxury stores overall. We're kind of in the high 60s, but, again, in the luxury and import stores, we enjoy higher utilization than those averages. And so as we go forward and continue to enrich our portfolio, and improve our brand mix, and on a parallel track, continue to execute our standardized best practices in the service drive, we do expect utilization to improve and we obviously look for that additional capacity to be a catalyst for growth in our high margin service and parts business.

Great. And, Dave, just one last housekeeping issue. I know we might need to follow up on this. But on -- on chart seven, the impacts are sort of muddled a little bit between continuing [ops and disc ops]. Is there any way to get the dollar value pre and post tax for each of those items for the continuing ops column there?

Yes, we can do that. I don't have that in front of me. and we can circle back with you.

Okay, but the -- if we adjust for the continuing ops -- I mean it's fair to say that the continuing ops EPS is about $0.69. There's certainly a level of interpretation there.

That is very close.

Okay. All right. Great. I appreciate it, guys. Thank you.

Rick Nelson, Stephens, Inc.

Thank you and good morning.

Good morning, Rick.

Hi, Rick.

I wanted to follow up with you, Dave, on the capital allocation strategy. It sounds like acquisitions are maybe going to be pared back,[inaudible] cashflow going toward debt paydown and possibly buybacks. I'm wondering how -- how you ranked those two alternatives and what sort of target debt ratio you have in mine in a normalized type of environment?

Yes, you know I don't see us changing our -- our leverage target at the moment. It's been 40%, and we're headed that way and, frankly, we have made great progress towards that this year. I think the best way to think about it is -- actually, there's a lot of acquisition targets out there, but the multiples are pretty high. And I don't know that we really have a -- a new -- I think what -- I think of it more as just tightening up our discipline that we have and really making sure we're comfortable with how we're allocating and spending our money. and we're not going to overpay for things. I think Jeff articulated that well. But if there are, good acquisitions that earn the returns that we need, we'll go after them; and if not, we will reduce debt.

And Jeff, what do you think it is going to take for the valuation incentive to change for some of these premium, luxury, import?

It's simple supply and demand economics, Rick. And as I have noted in my prepared comments, I believe there's a limited universe of qualified buyers for the larger transactions, and I think that that is driven by both availability of capital and the risk/reward profile of the private cap consolidators. And so, again, we view this as a temporary phenomena. I think that -- that there are only a handful of players that have the capacity, both from a capital standpoint and management to execute on these type of transactions. I think that you have a natural cycle of estate planning needs out there that are always going to exist. You have the OEMs that are expecting very meaningful CapEx investments for facility improvements in a number of these premium brands that we're targeting. And a number of current private cap owners are going to make a decision in my view to forgo in that investment and look to the buyer community. And I think there's going to be some opportunities out there. Having said that, I don't think we're going to see valuations decline below their historical norms. I think they will return to their historical norms. And as we expressed today, we are prepared to pay at the high end of the range of the historical norms for the premium brands that are taking market share, because there's inherent growth that ultimately rationalized the valuation in a year or two or three, looking out on a pro forma basis.

And are these -- are the deals getting done at these big valuations that you are talking about? Or are these primarily asking prices and -- ?

They are asking prices, Rick. That's a thoughtful question. And there've been just a handful of deals done at what I would view irrational pricing. And I think the reality is that there's a lot of people out there with big asking price, based on the folk lore that they are hearing in the market place, and that there's going to be a rationalization going forward. I think that both Sonic and our peer group will remain disciplined and that ultimately supply and demand is going to dictate more reasonable pricing expectations from sellers.

Okay.Thank you for that. And just one last one on the DMS conversion. When do you expect to have that completed? I know you mentioned you're halfway through.

By -- by the first or second quarter of '07. We are very pleased with our progress today. We're about half way through, but we're going to take the time to make sure that we capture the full benefit of those conversions. And obviously, a piece of that is clearly the technology, but the real benefit is surrounding that technology which is an enabler, with standardized best practices and the synergies and some of the productivity and efficiencies that we can realize through making sure that we complete the conversions on a measured pace and allow for comprehensive training and adoption.

Very good. Thanks.

Edward Yruma, JPMorgan

Hello and thank you very much for -- for taking my question.

Hello.

In terms of the used business. I know that you have previously kind of articulated a bar bell strategy with focus on the CPO and the value segment. Will this potential move away from the buy here, pay here kind of change in that dynamic? And where do you expect the used growth to really come from in the future?

No, we -- we don't think the buy here, pay here strategic considerations will have any impact on our barbell strategy as you described it. We continue to have a commitment to the manufacturers certified pre-owned business. It's been very profitable, and a great strategy for us that also drives future high-margin fixed operations revenue. But part of our used vehicle rollout has been an even greater focus on what we call the value cars or the value segment of the market, which certainly includes an element of sub-prime financing support. But one of the priorities, as we consider strategic alternatives for our buy here, pay here financing subsidiary, would be the ability to continue to use the support of that -- subsidiary, even if we pursued monetizing the capital we have invested or the outright sale. So we don't think that we're going to have any interruption, and the benefits of that buy here, pay here subsidiary. And, again, there's a myriad of other conventional sub-prime lenders that also support that segment. And, really, we expect that segment to continue to be the biggest growth segment in our pre-owned business because we have always done an outstanding job with certified pre-owned but part of our used vehicle strategy is to put a lot of emphasis on wholesaling less cars and retailing more cars. And keeping some of those lower-cost vehicles that our history might have been to wholesale. So we look for that segment of the market to continue to be an important driver of growth in our overall used vehicle strategy, but we're going to remain committed to CPO as well.

Great. And I -- I think you have also noted a little bit about your progress on your -- on your new F&I menu system. Now do you view that predominately as a way to increase customer transparency and then customer satisfaction or do you really see an opportunity to improve F&I results through that initiative? Thank you.

All of the above. We, as you know, have been committed to 100% menu sales process in our organization for many years. But after piloting a number of F&I menu technologies, we recently chose a common technology provider, and we are in the process of rolling out that electronic menu technology, a common technology to each and every Sonic location. First, obviously, we have a strong commitment to the highest levels of transparency, integrity and professionalism in the F&I process. So certainly it gives us [a] important compliance tool. But equally importantly, we know indisputably that menu selling is the best way to drive superior results in F&I production. It's real simple, if you offer 100% of the products to 100% of the customers, 100% of the time, you are going to sell more. So we look forward to capturing both of those benefits as we continue to execute the rollout of our standardized technology.

Great. Thank you very much.

Kelly Dougherty, Calyon Securities

Good morning. I just have a quick follow up on the used vehicle business. The results look good this quarter. And on last quarter's call, you had said that you had seen some additional opportunity on the used side. I'm wondering if you could quantify that a bit. Are you guys looking for further margin expansion or to increase volumes?

Well, obviously, we're thrilled with the results of our used vehicle initiative that we're reporting here today. And we think it will continue to be a driver as we go forward. And part of that is the technology piece that Dave mentioned, which is a used vehicle inventory management technology. We have partnered with Auto Exchange, a vendor that is owned by JM&A and as we roll out our manual best practices we also implement that technology to each location. We are about 40 to 50% complete in terms of rolling out our process and the technology across the organization. So we think, as we continue to work toward implementing the processes in 100% of our locations, that that's clearly going to be a continued catalyst for growth in our used vehicle departments.

Yes, I would agree,

Kelly, we're pushing on 60 stores that have the process in place, and we're targeting the completion by the first quarter as Jeff had mentioned. So there's a lot of opportunity there.

Okay. Great. And specifically, could you discuss the process you're making on your used-to-new ratio and then maybe give a breakout of your certified pre-owned [inaudible] value vehicles?

Yes, we can. And in fact I think some of that is on the slide. Certified pre-owned was just shy of 35% of our total used vehicle business. That's actually down slightly as a percentage of our business. But we were up in certified pre-owned volume, because, again, we are focused on that value segment. And that was the driver of most of our growth. So therefore, certified pre-owned was slightly less, as a percentage of our total mix. We did have slight improvement in our used-to-new ratio, and as we mentioned, the used-to-new ratio in our Champion dealerships, or our rollout launch dealerships has improved materially. And we would be glad to follow up and give you some specific information on both of those items. And I think really you are highlighting what the real opportunity for Sonic is and that is we have historically lagged the sector in our used-to-new ratio. As we continue to close the gap between our historical performance and just the sector average, it's going to drive very significant increases in used vehicle revenue and gross margin. That's also going to change our overall gross margin profile and ultimately impact our Company's total margin performance.

Okay. Great.

I think it was impressive that we were able to grow the volume like we did and keep the margin. We actually increased the overall margin versus year ago by 10 basis points. So I'm very pleased with that.

Great. Thanks. I'm just wondering if you can give me a little bit more color on how things looked at both the Cadillac and the G.M. dealerships on the new vehicle side in June? If you saw any kind of material effects from the comps associated with last year's employee discount programs? And if you expect to see anything similar going forward in July and August?

Well, obviously, there was a huge impact in the month of June. There was experience across General Motors dealerships in the country. That was totally expected. Obviously in the prior year period, they enjoyed record sales in a hyper hot market, driven by their family plan incentive programs. So General Motors, nationally, was down significantly, but you have to dig into the numbers and take into account their comps, which were very unusual. I'm pleased to report that our General Motors stores, while also participating in that year-over-year decline for the month of June, as expected, outperformed General Motors and what they saw across the board nationally, both with Chevy and Cadillac which is where our G.M. exposure is largely concentrated. And in terms of July and the outlook going forward, again, I think you are all in receipt now of the industry numbers for July. So certainly, no harm in me repeating some of those. Again, you saw Chevy and Cadillac down nationally over 20% for General Motors in July. Sonic was down but we were down less. So again, we outperformed the industry in our General Motors portfolio.

Great. Thanks very much.

Scott Stember, Sidoti & Co.

Good morning.

Hi, Scott.

Can you maybe quantify a little bit more on the Champion. Last quarter you gave some -- I believe is the sales metrics of how they're performing versus the core stores. And if you could also -- I don't know if you, Jeff, if you gave the value percentage. What was the value revenue versus of the total used?

Value percentage is right around 21, 22%. And CPO was at 34.7%.

Okay. And on the Champion stores, do you have any -- any color? Or can you give any similar statistics that you gave out last quarter on the performance [inaudible]?

We don't have that data at our fingertips but we'll ask Greg to give you a follow-up call and we'll be glad to give you some specific information. But I can tell you that the results in our rollout dealerships are compelling and that those stores are enjoying significant improvements in volume while maintaining if not growing margin. They are improving their new -- new-to-used ratio and they are also managing with a lower days supply of overall used vehicle inventory.

It's really more of the same. That's why we are so excited about it. And, again, with 40% of the organization complete, we have a lot to look forward to, as we bring the other 60% of our stores online. I will take a moment, though to comment on the industry numbers from July, because I think this information is now in the market place and available to everyone, but the used car market, as expected, was under pressure in the month of July. That was very predictable. Whenever there is a very strong new vehicle incentive environment, like we experienced a year ago with the family plan, that always pushes through to a transitional period of wholesale pricing in the market place. And the overall industry was down 7% in used cars in large part as a result of our used car process rollout. Sonic was still up single digits in same-store used vehicle performance, and when compared to the franchise dealers, franchise dealers in the month of July were down 21.4%. Again, we showed a slight same-store increase. So while we expect a difficult cycle here for a couple of months, which is traditional, after a period of very, very deep new vehicle incentives, you can see that our used vehicle success is pushing through and we're enjoying the same level of outperformance versus the overall industry.

Yes, I would point out just one added thing is not only are we getting great volume increases there, we're watching our inventories, which I keep an eye on and used inventories were at 37 days at June 30, which is a very comfortable level.

That point on inventories, it looks like you guys have relatively low domestic numbers here. Even your domestic stores on the used -- on the new side are quite low. You guys are comfortable with [inaudible] where you stand right now, particularly with the sales rates out there and the interest rates?

Absolutely. In fact, we're -- we're very, very pleased with where we finished the quarter in new vehicle inventories. Keep in mind that a significant percentage of our domestic exposure is with Cadillac and it behaves a lot more like a luxury import store. And so we're able to manage our Cadillac inventories a little tighter than a full lineup domestic franchise like Chevrolet, Ford or Chrysler, for instance. So that's contributing to what is a very low number here versus the industry. I think if you look back historically, Sonic has always been very disciplined about new vehicle inventories. And with uncertainty in the market place, we think we are positioned very favorably with what are some of the lowest inventory levels in our sector. I'll also note that we are directing our dealerships to be very disciplined about accepting '07 orders until we have an '06 sell through because obviously a heavily incentive '06 is a faster turning, more attractive product on our lots than a new '07. The exception being, of course, any new model introductions where we anticipate high demand. So as usual, we are managing our inventory by model, very, very closely, to make sure that we don't end up short of the faster turning commodity lines. But we also feel like in this rate environment with poor plan expense and the other realities surrounding inventories in a new vehicle market that's somewhat uncertain, that we're positioned very favorably in -- at these lower inventory levels at this time of the year.

Could you give your total percentage of fixed debt as the total debt profile [inaudible] in the swaps and convertibles.

Yes, that's actually on slide ten and we declined to 42.3% debt-to-cap. That was down just over two points from the first quarter.

No, but if -- if you look at your total debt profile, including the floor plan, what percentage is fixed versus floating?

Oh. Oh, oh, I'm sorry. About 65% is floating.

Where was that last year? Do you remember?

It would be similar. Maybe a little less.

Okay. And just two housekeeping questions here real quick. In the quarter, it doesn't appear that there was a significant discontinued operations related to the stores put up for sale. Could we assume that we -- we have seen the end of that for the most part? That the pruning of your portfolio has been completed?

Yes, annually and we did that in the first quarter, actually. We did a thorough review of the stores and made an adjustment in the first quarter and there haven't been significant changes. You know, we'll always look at it ongoing but, I don't see any huge movement in the near term.

Okay. And the tax rate going forward after the 42% this quarter?

Probably close to 38% -- well, for the balance of the year, 40%. Beginning in '07, back to a more normal 38%.

Okay. And just to confirm, I think I missed this part. Jeff, you affirmed your guidance of 205 to 215, that you had previously stated a couple of weeks ago?

That's correct.

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

Jerry Marks, AutoRetailStocks.com

Good morning.

Good morning, Jerry.

Dave, I was a little bit unsure. Your depreciation spiked up to almost $7 million. Is that part of the $0.27 or is something else happening there?

There was a bit of a charge in there. There's some catchup depreciation and there'll be some detailed provided in the Q.

Okay.

But you're absolutely right. Because it's kind of dull.] I'm just trying to figure out -- so -- so you are seeing some of that $0.27 was in that depreciation number or --? That's correct.

Okay. And I also heard you mention with the book at Auto Exchange, is [i've been talking about a lot of the benefits on used but I also thought I heard you say that you might be going and experimenting on the new side. What would that look like? How would they help you there?

Well, again, we are very committed to the disciplined management of our new vehicle assets, as well, and we're working with Auto Exchange. In fact, we're preparing to launch a pilot and had collaborated with them on a proprietary new vehicle inventory technology that would give us the ability to [have] enterprise level visibility to our inventories, to have a better grasp of the pipeline and shipments, to be able to better determine which models move the fastest, off which lots and which geographic locations. And really to determine kind of what's hot and what's not and how to optimize our new vehicle inventory and manage our -- our turn in a way that enables us to have a very competitive selection of inventory and yet carry the lowest possible days supply and, therefore, reduce our floor plan expense while increasing our margins by making sure that we just have the ripest apples and oranges on our shelves.

How does that -- not to go into too much detail, but how does that kind of do that? Does it merge like [inaudible] registration data with consumer demographics in your historical sales -- or -- ?

No, a lot of it is obviously you're going to be based on our historical sales and it'll help us to develop model inventories based on our own sales data and certainly some of the objective market intelligence that's available. But we would be glad to tell you more about it, Jerry, on a side-bar, and, in fact, I will be glad to have one of our team members from our retail strategy group give you a call and answer any questions that you might have. But we're excited about it. And we see it as a bridge solution until we get 100% converted with the DMS and we'll ultimately be exploring similar solutions that are fully integrated with our DMS technology partner, ADP.

Okay. Thank you.

Jerry, I -- I checked the depreciation, it's 2.1 million.

The depreciation? I thought it was 6.7 million.

No, yes, of -- of the 6.8, 2.1 million is related to the charge.

Okay. Thanks. Last question. We heard yesterday on the conference call with G.M. and Ford it sounded like they were 60 to 70% '06 models still. Jeff, you were saying that you want to focus mostly on '06 models, if I heard you correctly. Is that about where you are guys at in terms of your inventory mix?

Yes, we -- we would probably be there with Ford and Chrysler. Keep in mind that we have very little exposure to Chrysler. It's a -- a few percent of -- I think it's 1% or 2% of our revenue now. So we have very little exposure to Chrysler. We would be at those levels in our Ford stores but we would be better than that in our General Motors stores somewhat.

Okay.

But, again, we do view a heavily [incented] '06, provided there's no significant change in the model in terms of a meaningful face-lift, contact or an entirely new model introduction, as desirous to having too many '07s to compete with that '06 inventory. So we're going to be thoughtful about how we plan for the ramp up of '07s and we want to be careful that we don't end up paying floor plan on a lot of new vehicle inventory over the seasonally slower selling months and so we're very, very close to that inventory planning.

Okay. Great. That's all I have. Thanks.

Okay, Jerry, thank you.

[OPERATOR INSTRUCTIONS] Richard Kwas, Wachovia Securities

Good morning.

Good morning, Rich.

Dave what, in terms of guidance, [inaudible] the 205 to 215, do you have -- what's the interest rate assumption?

It's basically flat from where we are at. We did obviously roll in the increase that's already happened and if there was another 25 basis point increase, it -- it would be between 1 to 2 pennies for the years but we would working hard to find cost offsets or volume offsets so we could maintain the guidance.

Okay. And then, Jeff, longer term, with the mix here in the mid-70s on, luxury import, what -- where do you think that goes kind of given the acquisition environment that multiples are high and you're ability to grow that further?

Well, first off, we are 74% luxury import and import. When you add Cadillac in, which, again, we view as a luxury brand, we're actually in the low 80s in terms of our overall brand mix. And there's going to be two drivers of that portfolio enrichment going forward. One of them is, as we articulated our divestitures will focus on brands that don't compliment our strategy. And our acquisition strategy, while it will remain very disciplined, particularly in the short term, will continue to target those premium luxury and import brands. And so there will be a rotation over time that will naturally continue to improve our import domestic ratio. But in addition, there's another phenomena that is impacting those numbers, and that is the organic growth of our brand mix. Again, the premium brands, the luxury and import brands continue to take market share. For instance, last month, the overall industry is reporting a 17.4% decline in July; however, Honda is up over 8% and Toyota is up over 13%. Lexus, Mercedes were also up. So within our existing dealership portfolio, we will see more revenue rotate to those import brands who are enjoying strong year-over-year sales gains and who are taking market share. Conversely the domestic brands regrettably are losing share and so that phenomena, will be another driver of underlying portfolio enrichment. I don't want to articulate a hard target but because it will depend on the availability of acquisitions that fit our return thresholds. But we do expect that to continue to improve, driven by those two components over the next year or two.

All right. Thanks so much.

Okay, Rich.

Greg Wilcox, Wachovia Securities

Yes. Most of my questions have been answered but just one real quick housekeeping item. On your revolver what's the current availability there?

It's just over 200 million available.

Great. Thank you.

There are no further questions. Mr. Rachor, are there any closing remarks?

No, I would just like to thank everybody for their participation today. Thank you very much.

This concludes today's Sonic Automotive second quarter earnings conference call. You may now disconnect.