Sonic Automotive Inc (SAH) 2007 Q2 法說會逐字稿

Good morning, and welcome to the Sonic Automotive second quarter 2007 earnings conference call. All lines are placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period.

(OPERATOR INSTRUCTIONS)

As a reminder, ladies and gentlemen, this call is being recorded today, Tuesday, July 31, 2007.

Presentation material which management will be reviewing on the conference call can be accessed on the company's website at www.sonicautomotive.com by clicking on the For Investors tab and choosing Webcast and Presentations on the left side of your monitor.

At this time I would like to refer to the Safe Harbor Statement under the Private Securities Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectations about the company's products or market, 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 defer materially from those statements made. These risks and uncertainties are detailed in the company's filings with the Securities Exchange Commission. Thank you.

I would like to introduce Mr. Scott Smith, President and Chief Strategic Officer of Sonic Automotive. Mr. Smith, you may begin.

Thank you, Elizabeth. Good morning, ladies and gentlemen.

Welcome to Sonic Automotive second quarter 2007 conference call.

I'm Scott Smith, the company's President and Chief Strategic Officer. Joining me today on today's call is the company's vice Chairman and Chief Financial Officer, Mr. David Cosper, and our divisional chief operating officers Mr. Jeff Dyke and Jim Evans. Presentation material for today's call is posted to our website at www.sonicautomotive.com, and can be accessed by clicking on the For Investors tab and choosing Webcasts and Presentations on the left side of the screen. Our comments will be linked to these slides on this site.

If you please go to the first slide.

I'm extremely pleased to report that Sonic Automotive has once again delivered another quarter of sound results. Our EPS from continuing operations was $0.65 per share and our operating margin was an impressive 3.6%. I'm proud to report that our SG&A was just 74.2%, down 30 basis points from a year ago. Management is controlling the controllables.

Late in the quarter we purchased two large luxury dealerships, and are closing on Long Beach BMW and MINI today. Including today's acquisitions we closed on four dealerships so far this year and we will touch base on these a little bit later in the call. The implementation of our standard processes as well as the execution of our key initiatives prove that we can maintain our performance even in a difficult new vehicle environment. I want to re-iterate what I stated in our first quarter call that Sonic has never had a more aligned and talented group of associates that are dedicated to delivering results.

I would like to turn the call over to our Vice Chairman and Chief Financial Officer Mr. David Cosper to go over our performance in detail. Dave?

Thank you, Scott and good morning, everyone.

Total revenue reached nearly $2.1 billion for the quarter, up slightly from a year ago. Gross profit increased 4% to $325 million, and operating profit increased 34% to $75 million. Recall the last year we took a substantial charge in the second quarter as we improved strategic focus of the company. Of course, this impacts the comparisons with last year.

Net income from continuing operations was $30 million, up $12 million or 68% from last year. Our EPS from continuing operations was $0.65. All in all, I feel we had a strong quarter but I still see many areas for continued improvement. I will take you through the drivers of our performance over the next several slides.

Please turn to slide three.

This slide shows our same store revenue changes from a year ago. Excluding wholesale, total revenue for the quarter was up 0.5%. Lower sales of new vehicles were more than offset by increases in other parts of our business. Our BMW, Lexus and Toyota brands posted healthy new vehicle revenue growth for the quarter. Used vehicle sales were up 3.4%, with most of the increase coming from our luxury and import stores. I will talk more about used cars on the next slide.

Revenue from our fixed operations was up 1.8%, again driven by improvements in our luxury stores and import stores. Margins in our fixed operations business improved in most markets and in most brands, and customer pay drove the increase and I will talk more about that on a subsequent slide as well. Same store F&I revenue was up 3.7% excluding the impact of charges taken last year. On a per unit basis, F&I was up 7.6% from last year. Our F&I menu helping us increase our product penetration.

Please turn to slide four.

We continue to make steady progress on the used car front. We rolled out our champion process to roughly 80% of our stores, and should have all the stores complete by year end. Of course, we have further training to do and some re-rollouts to ensure the processes stick. For the champion stores, our used to new ratio increased 8% to 0.52 to 1. As you can see on the bottom of the chart improvements were made in California, our luxury and our domestic stores.

Growth in used vehicle sales remain one of our biggest profit opportunities. We will pursue this opportunity aggressively for the balance of this year and into 2008. As you may know, we were putting together in place a technology for centralized management of our used vehicle inventory and assist our appraisal and pricing processes. Over time, this technology will bring us more sophisticated big box retail capability and dramatically change the way we market used vehicles. We will keep you apprised of our progress as we go forward.

I mentioned on the last slide that wholesale revenues are down. This is a direct little of our champion process. We are retailing more. As part of this, wholesale losses were cut by more than half and including this impact used vehicle margins actually increased year to year.

Please turn to slide five.

Our standard F&I menu is rolled out to all our stores, all show training and development continue. As you can see, the results remain compelling. Our F&I per unit was over $1000 and up nearly $60 from a year ago. We were continuing to train and fine tune our sales process and offerings and believe there is opportunity to improve further.

Next slide please.

Revenue for our profitable fixed operations grew 4% in the quarter driven by strong performance and customer pay business. In total, customer pay revenue was up nearly 10% for the quarter. Every one of our regions enjoyed increases in customer pay revenue and most of our brands did as well. In contrast, our warranty business was down 3.5%, consistent with the industry trends. Most of our regions and brands had warranty declines for the quarter.

Please turn to slide 7.

I'm very pleased that our strong focus on cost continues to pay dividends for us. This is particularly important in a soft sales environment. SG&A is a percent of gross profit for the quarter with 74.2%. This is an improvement of 30 basis points from a year ago after adjusting for charges taken last year. As shown on the slide rent expense increased 50 basis points but more than offset by 80 basis points in savings and other cost areas. I am pleased to report total compensation costs in dollar terms declined year to year as did total other fixed costs. Advertising was essentially flat. This kind of cost control plus increasing gross profit drives the bottom line.

Turning to the next slide, I wanted to give you a feel what we are seeing in the marketplace. First with California. California represents 27% of our total revenue and 30% of our new car revenue. The market was certainly softer and our Toyota and Mercedes stores were impacted the most. In California, similar to our business overall, improvements in used volume, fixed operations and F&I helped offset the impact of soft new car sales.

In Florida, the market also difficult but seems to be stabilizing for us. A big challenge is a major construction project in our large Toyota store that Is impacting both sales and service. Both BMW and Lexus posted strong sales increases in California and for all our other Sonic markets. Honda industry sales were up 2.3% in the U.S., but down 5% in California markets, clearly showing the market weakness in California. The new Honda Accord will be introduced shortly and we are excited about the sales opportunity. Cadillac is 9% of our total revenue. Our large stores in Michigan have been impacted by the economic situation there, and we don't see this changing in the near term.

Turning to slide nine, we ended the quarter with a 50 day supply of new vehicles, much lower than the industry average of 62, and down slightly from a year ago. We are very pleased with our inventory control on domestic and luxury vehicles, both at levels down from year ago. Import inventories are a bit higher than we would like, reflecting primarily soft sales for Honda and Toyota. Used car inventory ended the quarter with a 38-day supply equal to our target for the quarter.

Turning to slide ten.

We ended the quarter with debt to cap ratio of 41.2% up two points from the end of March. As you know, we closed on two very large luxury stores late in the quarter and drew on our credit line to fund them. Our target debt to capital, of course, remains at 35% to 40%.

I'm pleased to announce we have signed an agreement for the sale of our finance company, Cornerstone Acceptance. We expect the sale to close in the next 60 days or so and the sale will provide Sonic with a cash inflow of $30 million. I'm also pleased to announce that we have two mortgages in place and are the proud owners of a brand-new Mercedes dealership in Florida and a Porsche store in Texas. The financing cost savings with the mortgage versus lease financing over time are substantial. We have plans for several additional mortgages in the coming months.

And finally I would like to note we have fixed a large portion of our interest expense to reduce income volatility from changes in interest rates. Because the yield curve was inverted a slight ongoing profit improvement is being realized at today's short-term rates.

Please turn to the next slide.

So far this year we have acquired four luxury stores with revenue totaling $528 million a year, about a 6.6% increase in our total revenue. These are all terrific stores that fit our operating sweet spot perfectly. They are located in our existing markets, are large and profitable and have substantial upside profit opportunity that we already are working on as we integrate them. Note that with the addition of these stores our luxury brand mix moves from 52% to 55% of total sales. Our growth plans remain at 10% to 15% of revenue per year as I indicated in the past, we are being disciplined, prudent and opportunistic in our acquisitions. We see many opportunities for growth, but are patient and not compelled to grow through acquisitions. There is substantial profit opportunity in our base business today as we further improve our operations.

Next slide, please.

Our performance this year has been very strong within a difficult industry backdrop. Given this performance, our recent acquisitions and our outlook for the second half, we are increasing our earnings target for the full year to $2.50 and $2.60 a share. At our board meeting earlier this month, we received authorization to purchase an additional $30 million of our shares. In 2006, we purchased 15 million, and another 7 million so far this year. Of course, we have many compelling priorities for our capital, but I feel it's important that we at least offset dilution from our employee stock plans.

With that, I'll turn the call back to Scott.

Thank you, Dave. In summary, folks, we are very, very pleased with the quarterly results. Once again, we proved that Sonic can deliver on promises and expectations. We believe in our team, our strategies and our ability to execute. I'm pleased to announce we are increasing our full year EPS guidance to $2.50 to $2.60. Dave, you help me out with the math on 15 time multiple on that? Is that $37.50?

That's close.

Our dividend will remain unchanged at $0.12 per share payable on October 15, 2007 for shareholders of record as of September 15, 2007.

And as always, before we close, I would like to reach out and thank all of our dedicated Sonic associates. They are the heart of our company and the reason why we are posting such great results. I also like to express my sincere gratitude to our manufacturing partners and thank them for their support and thank all of our investors.

At this time, we would like to take your questions.

(OPERATOR INSTRUCTIONS)

Your first question comes from Rich Kwas from Wachovia Securities.

Good morning, gentlemen.

Hey, Rich.

I wanted to ask there, in terms of the guidance there $2.50 to $2.60, what are you assuming in terms of retail environment for the remainder of the year? Are you assuming where we are right now relatively soft retail environment? Or are you assuming things will get worse?

We assume basically flat, Rich. And frankly we are seeing that in July. It isn't a lot different than June. Although last weekend was pretty good for us in many of our regions.

Okay. And then on the SG&A to gross profit front, Dave, could you update us on where you think more leverage will come from? Are there a lot of pure SG&A costs reductions to be made still? This is going to come from just better same store sales and better mix of gross profit?

The battle on costs never ends. I told you that before. We keep getting smarter in the way we do business. And structure savings. As I mentioned, a lot of our costs are flat. And that's really good. And offsetting economics and growing gross. I think longer term it will come from in terms of a ratio in terms of growing our gross. I think there is more opportunity there. But we get smarter every day on reducing costs and we will keep at it.

And then customer pay, dollars here, up almost 10% a quarter, what do you attribute that to? Is that more the luxury mix or are there things going on inside on a store basis that are driving --

We invested a lot of install capacity in our stores and a lot of those projects are up and running now. The luxury area in particular is really up. But frankly so are our imports. Domestic not as much, of course. And it's really the units in operation and us getting the capacity to deal with those units. We have been very pleased. We have good marketing programs in place to get customers back. And I think that's all helping drive the growth. Jeff or Jim, want to add anything to that?

We agree, insuring as time goes on that we are dedicating a specific amount of ad spend monthly to fixed operations support as part of our total ad budget is helpful in driving additional revenue.

And I point out that we have increased all capacity in the next year and half or so we will go up another 5% roughly. And then maybe start to taper off from there.

I will point out our customer satisfaction from a service perspective is as strong as it's ever been, so that's certainly helping our customer play.

And then Cap Ex for the year, what's the updated guidance?

Cap Ex came in a little lighter than I thought. It may be just calendarization. I have to get into that a little bit. We had said about $100 million I think gross for the year. It may be a little lighter than that. And I would keep it at $100 million for right now until I have a chance to study the second quarter data better.

And finally, I don't know if I missed this, but on the champion stores or the stores that are using the software for the used vehicles, what percentage of that is now implemented --

We were a little over 80%, Rich. Target and completion by year end. But still having to go back and retrain and help people in the field. Keep the processes in place. Make sure they stick.

Great.

We were continuing to see great progress on that front.

Great. Nice job. Thank you.

Your next question comes from John Murphy with Merrill Lynch.

Good morning, guys.

Hey, John.

I was wondering in the acquisition market or out there in the market, what you are seeing as far as multiples and if there is any real change out there in valuations and if there is also any change in the landscape who or the parties are coming up against in the bidding process?

Couple thoughts there. We actually haven't bumped into anybody in the market and rarely do and never get into a fight over an acquisition. That's never happened. I would say the premiums are down from last year. And I just was looking at the pricing -- prices we paid because I knew this was going to come up. And we were solidly in that range of 4 to 6 times after a year or two of owning that store, in terms of premium we are paying. These are all good stores with a lot of upside. So I'm very comfortable with what we are seeing and what we are acquiring. Much lower risk from what we have seen from what our pattern had been in our early days of growth.

I'm sorry, the four to six times is not on trailing but it's on first year?

Yes.

Okay. Got it. And then also in what we have seen in July and now what we are seeing in July and what we saw in June as far as the demand environment, clearly June was a weak month and sounds like July is shaping up better -- what generally would you attribute that to and in your dealerships. Is a lot of that the effectiveness of our news incentive programs that are coming out, or is there just a lull in June that's picking up again in the summer month of July as it typically does?

John, this is Jeff Dyke.

I think that business is a little bit better in July than June. The incentives aren't that much changed, but our fixed operations business, our used car business especially and our F&I business continue to get stronger.

Okay. So you are saying those businesses are benefiting from the UIOs as opposed to what's going on in new vehicle market right now?

Correct.

And then lastly on the gross margin, looks like you performed better than your peers recently. There appears to be some pretty severe pressure developing on new vehicle margins in certain groups. Are you experiencing that? Are you doing anything that is offsetting that that they may not be doing and see that as continued pressure going forward? Because the numbers were cracking through 7% for some of your peers right now which is a pretty low level.

Yes. I mean, we are certainly not immune to the competitive environment out there in the compression of gross. Our new car margins were 7.3. They were flat with the first quarter but down from a year ago. Some of that is mixed because luxury brands are higher volume. You know, we were hanging in there with gross. It's a very difficult market environment. And some of the improvement flowing through to the gross margin overall where we did extremely well is some the mix of our business, the growth in F&I and growth in fixed operation.

Steve, you see that more as a competitive pressure from your local market competitors as opposed to pressure that's coming down from the auto makers? What's the driver there that you are seeing?

I think it's market by market. There is just once demand softens, people get hungry and deals start to get slimmer.

It's both. You hit it on the head. It's both manufacturer pressure and local market pressure.

Great, thanks a lot, guys.

Your next question comes from Rick Nelson from Stephens, Inc.

Good morning, guys.

Hi, Rick.

Good morning.

Wanted to follow up on the overall operating environment. You have a bullet point in your slide show this morning that although Q3 has softness, Q4 results tend to be stronger. I guess what the thought process is working into that?

Very perceptive. That's really more a thought about Sonic's performance and how we are going to do overall given plans that we have in place for our various cost actions and revenue improvement actions. And so not necessarily related to the market itself.

And what are the Q4 drivers as you see them?

A lot of it is cost. And that's some of our other programs and continued improvement in used cars. And, you know, December is a strong month for us. We are thinking all those factors taken in, into account, probably have a little stronger impact, including some of the sales, some of the new products coming out. Mercedes C-class in particular.

Thank you for that. I know you have a departure recently. Your head of corporate development and acquisition, I guess getting your arms around that activity now overseeing that. How do you feel about the $1 billion acquisition target?

I don't think that change will impact things at all. I started assuming some of his responsibilities last year and now have the two Vice-Presidents in that area reporting directly to me and very capable. I don't see that impacting our growth plans or ability to execute in anyway, shape or form.

Thank you. And just curious, have you brought any stores out of discontinued operations and put them into continuing operations as we look at numbers.

There may have been one store.

I can't -- not a very big store as I recall. Maybe a Chevy store. The one thing that is moving around in there is Cornerstone Acceptance. Because we have a signed asset purchase agreement, that has come out of continuing operations and is now down in discontinued operations.

That could be moving a number around if you are looking at it. That's still 30 some odd million in receivables.

Very good. Thank you.

Your next question comes from Edward Yruma with J.P. Morgan.

Hi, guys. Thanks for taking my question and congrats on a solid quarter. Can you give me an update -- on your leverage target, how quickly will you get back there? Are you willing to take on more leverage for acquisitions and how do you balance that out on your share purchase plan? Thank you.

That's a great question. There is a lot of things that require capital here.

You know, I think where we are at, I think 41.2% is just a little bit above the range. And I think we will fall back into line very quickly. Certainly with the sale of Cornerstone which is like 1.2 or 3 points of leverage. That would bring us down on our own. Plus our own cash generation.

Yes, I am willing to go above the targeted range in the near term for acquisitions. But I'm not willing to stay there over time. I think I have convinced -- I know I have convinced myself and the market that that's where we need to be, in that range. So I will stick like glue on that. And that's where we will be over time. If we are going to grow in a big way, we will have to alter our capital structure a bit to get back to that targeted level.

Understood. Scott, I know you had a pretty significant role in the company in the past. Now you have your enhanced role, has your perspective on your initiatives changed and take any other changes that may not be apparent to the streak? Thank you.

It's a great question. Because my visibility hasn't been that public over the past several years. But if you recall, I was one of the founders and I was President and Chief Operating Officer for five years before I was Vice Chairman and Chief Strategic Officer. The strategic glide path that we are on today was really laid out and formulated over the past several years with this team. And we haven't changed. It's the same vision that we had a couple years ago. Same vision that we had while Jeff was here, who, again, is still on our board and a dear friend of the company and personal friends. And we remain focussed on those objectives and strategies that we outlined over the past. And I think it's reflected in our performance here over the last several quarters. We keep hitting the ball out of the park. And eventually I think the street is going to wake up and realize just what a special company this is.

There aren't any bogeymen out there. We paid for our past sins and evolved in this company. If you look at our portfolio mix from our early days back in the late '90s to where we are today, arguably if we aren't the best, we are tied with the best in brand mix and portfolio. Again, I feel like we have just absolutely the best team that we have ever had and we are executing. I'm feeling as you can probably tell very, very excited about the future of Sonic Automotive and where we are going.

Understood. Thank you very much.

Next question is from Scott Stember with Sidoti & Company.

Stember. Thank you.

We know who you are.

Can you talk about sales trends throughout the quarter? It sounds like your competitors are talking about a weak April and gradual improvement through the quarter?

This is Jeff Dyke. April was soft. May got a little better and June was strong. We had a good strong closeout to the quarter. In July again we will restate it feels a bit like June.

As far as the parts and service are starting to increase your utilization. Will you talk about the stall utilization rates versus a year ago?

Give us one second.

We were expanding our capacity ongoing. We are adding 136 to 140 stalls between now and the end of the year. Our utilization rate right now is about 60%.

It varies dramatically by brand. And the domestics are the lightest and most luxuries think are up in the 80s, 85%. Something like that.

And as far as the F&I, you talk about your service contract penetration rate and finance contract penetration rates?

They are flat with a year ago as we compare them with the number. Jeff, do you have those?

Our finance penetration rate is about 68% and our service contract penetration is about 33%.

We are a little higher on new and a little lighter on used. That's a total number.

And last question, share repurchases, were any repurchased in the quarter or is that $7 million amount that take place in the first quarter only?

That's a little bit in the second quarter as well. And we got as I mentioned $30 million, and if the stock stays where it is, I'm going to use it.

What was the share amount you purchased in the second quarter? Did you give that already?

$7 million. Receive a number of shares specifically -- 160,000 shares in Q2. And so far another 45,000, probably a little more than that in Q3.

Great. Thanks a lot, guys.

Your next question comes from Greg Wilcox with Wachovia Securities.

Good morning.

Good morning.

Just quick question. Trying to get my arms around the used vehicle market. You guys have performed better than your peers in the quarter. In the second half of the year with your improved guidance, what do you see on year with your improved guidance, what do you see on the used car side versus the new for the second half of the year?

Well, we have been one of the bottom quartile performers in used, so we had a bigger hill to climb and a full-court press on it and we made great progress. I think we will start to accelerate a little more in the second half of the year on used car performance. And if you think of the new car sales environment is kind of flat with where we have been. I think our ratio will improve further. Used cars sales will increase.

Greg, this is Jeff. What's happening is the more mature our champion stores get, we continue to see more acceleration. April decent used car month, June a little better. May a little better and June much better and we continue to see that trend going through July.

I guess I'm trying to get a sense with the incentives what they are on new cars right now, what kind of pressure can we see on used cars? You look at Manheim's data on a used car basis, monthly it's been flat for the last 4 or 5 months. When you talk anecdotally with other dealers you hear it's a very difficult used car market due to incentives so I'm trying to figure out why you guys are doing so much better

Well, there are a couple things rolling around in there. Of course, new car incentives impact used vehicle prices. That's one issue. We manage our inventory so tight, we don't have huge exposure to price volatility, which helps our margins a lot. And we turn our inventory very quickly. That helps. We are not immune to the price changes of the market, of course. We just react a little more than others may.

We were also wholesaling much fewer vehicles than we did a year ago. We trade for about 65% of our overall inventory. And then get out into the market and buy some vehicles, but our landscape has changed so much year over year in used cars we are not as affected by the Manheim indexes as we have been in the past.

I mentioned our wholesale losses were cut in half a year ago and revenue was down 17% in wholesale.

And that for us will get better as our champion process continues to strengthen and we introduce inventory management technologies in an even more sophisticated way over the coming year.

Okay. That helps. Thanks a lot.

(OPERATOR INSTRUCTIONS)

You have question from Darren Kennedy with Goldman Sachs.

That's Darren Kennedy (inaudible). I am trying to get more color on SG&A. We consider a big part of your story to be cost leverage improvement. And I was wondering what the dynamic of rent will be going forward with the impact of sale/leaseback of that component of your expenses. Is there any specific cost initiatives you can put any dollar signs on or talk about what you are looking for from them that one -- you are looking forward to help you in your fourth quarter to continue to look to benefit in '08. Finally whether there is any tough decisions you still have to make around compensation and personnel.

Personally, think we have done a very good job on the compensation on the personnel side of things. Particularly in terms of structure and our pay plans. I mentioned on the call that compensation is flat or down slightly in dollar terms. And I think it's hard to do a lot better than that certainly given my experience at Ford. I know how difficult that is.

I also talked about just going after all cost elements aggressively, continuously. And we really have a formalized approach of going into stores one by one with our regional teams and general manager. Just looking at them and we have so much experience with -- we have 16bmw stores. We know what a good bmw store looks like. We optimize around the best. And that's one big plus that we have. And others have it, too. But it's really about execution. I think we get it done. We do a great job controlling advertising. So I think we will keep after it. I don't know there is any specific initiative per se than relentless pursuit of cost.

So there's nothing like standardization of procedures, or cost efficiencies, I guess, from implementing a system that will make things more efficient in anyway, anything like that is more about execution at this point?

Greg, this is Jim Evans. It's an ongoing core competency of our company. It's something we never take our eyes off. We use comparative data brand by brand to look to standardize where it doesn't impede operations over time. We -- while we realize some of the regional differences even brand to brand, that at the same time we are always looking to make sure that there is no excess and that -- at this point in our evolution, over the past several years we looked at this consistently as a core competency, the need for radical change is just not there. The operating models are very sound, and they continue to be as we watch this month in and month out.

And is rent affected at all by sale/leaseback activity and also from building out service capacity?

I was going to talk to that. Our sale/leaseback activity is down quite a bit from where it's been historically. I mentioned on the call a little earlier about getting mortgages on some of our stores. That obviously will reduce our rent. It increases your interest expense. But I mean to me a clear cut winner in terms of financial performance and operating flexibility going forward for Sonic. And it's a trend that's going to stay with us.

Another thing I would mention, we have a small central purchasing staff and they had a number of pretty big wins here lately. And it's amazing where they can find opportunity $300,000 to $400,000 here across the stores. Half a million. And even a big $2 million or $3 million win every now and then. I don't want to get too many specifics here. But they are out there. And we just keep after it.

And I just comment on the compensation. It's really the modeling. It's fewer people doing more and making more. And attracting the best people in the industry. Our objective is not to cut to the bone but to trim out as much of the fat as possible and have the best trained and best paid people in the industry.

Absolutely.

Okay, that is helpful. Thank you very much.

You have a follow-up question from Rick Kwas with Wachovia Securities

Hi Dave. Quick question on Disc Ops. How many stores are left in Disc Ops and what is the cadence of Disc Ops? Will it come down it come down in terms of the negative contribution year over year?

Yes it will. We are accelerating that. We are moving some stores out. We may have been a little slow and trying to hold out for a little higher dollar on some of these. We're trying to move those out at a reasonable rate. I think there is probably about twenty franchises in there. I would estimate, if I had to guess to guess the revenue on those on a year basis, some where around $230 million to $240 million. So it is a shrinking pool and I'd like to see - I mean there is always going to be something in there but where we're headed with out strategy these stores are not future Disc Ops stores, we're buying winners. So I want to whittle that down and maybe I'm going the ambient level is 5 to 8 stores in there. Something like that cause there is always a give and take. But it going to become less and less a factor for us.

Very helpful. Thank you.

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

We would just to thank everyone for their time and for being on the call. Thank you very much.

Thank you. That does conclude today's conference call. You may now disconnect.