Sonic Automotive Inc (SAH) 2007 Q4 法說會逐字稿

Good morning, and welcome to the Sonic Automotive fourth quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this call is being recorded today, Tuesday, February 26, 2008. Presentation materials 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 Foreign Investor's 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 Security 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 Security and Exchange Commission. Thank you, I would now like to introduce Mr. Scott Smith President of Sonic Automotive. Mr. Smith, you may begin your conference.

Thank you. Good morning, ladies and gentlemen, this is Scott Smith, President and Chief Strategic Officer. As cofounder it's an honor and privilege to be leading our company and this call today. Welcome to Sonic Automotive's fourth quarter 2007 conference call. Joining me on the call today are the company's Vice Chairman and Chief Financial Officer Mr. Dave Cosper. Our divisional Chief Operating Officers, Mr. Jeff Dyke and James Evans. Rachel Richards our Vice President of Retail Strategy and Mr. Greg Young our Vice President of Investor Relations.

The presentation material for this call today is posted to our website www.sonicautomotive.com and can be accessed by clicking on the Foreign 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.

If you'll please turn to slide number one. Discussion topics for today's call includes some color for me on our corporate culture, our people, our vision, our strategy, and motion, a look back at 2007 accomplishments, our 2008 strategic focus, and review of our fourth quarter performance. We'll then open the call up for questions and we'll wrap the call up with some closing comments.

If you'd please turn to slide two. This slide is a little bit busy, but I think it's important for our fellow shareholders to get a better understanding of who we are, what we believe, and how we do it. It's our corporate culture, our values, our beliefs. On the left side of the slide is a copy of the Sonic Creed Card. While this may be the recipe for success, the secret sauce is really woven into the fabric of our culture. Let me call out our promises.

It's ASI plus GSI plus MSI equal our ROI. This really isn't rocket science. Simply put associate satisfaction plus guest satisfaction plus the manufacturer's satisfaction equals our return on investment or our shareholder satisfaction. Please note that our formula for success all begins with our associates, you're going to hear us talk a lot about our associates here today.

On the right-hand side of the slide, we have listed some things that are very strong views on the way that we do business. Buildings don't sell cars, people do. If we take our people out of our buildings, what do we have left? Nothing except empty buildings. We need our people much more than they need us and Brutonand I believe our people are our greatest assets. We're going to invest in them heavily. We're investing more in training and development than ever before. We feel strongly that we need to provide our associates with an objective and clear career path for them to be able to map out their entire careers, regardless of what position they enter our company. We must provide them with the tools and education to enable their success, this is why we're investing more money than ever before in our people.

We like to invest where we make money. And again, that begins with our people. We believe that it's essential for us to develop and promote from within. In fact, this past year, roughly 75% of the open positions within our company were filled with promotions internally. We also believe that first and foremost we're a sales organization if nothing happens until we sell a car. Our 75% sales and 25% cost control means that we focus 75% of our time on generating sales. Closing the books really doesn't count for any revenue, 25% of the time we're dedicated to cost control, of which, we're the best in our peer group with the lowest SG&A. And all the while we're committed to taking the high road, which simply means we do the right thing all the time.

Please turn to slide number 3. This is our strategy in motion. I presented this slide during our first quarter call. The slide laid out our strategy for 2007. And I'm thrilled to report today that our dedication to the execution of our strategic initiatives resulted in sonic hitting our full-year EPS target.

Used vehicles, we completed our champion process and rolled out this process across all of our dealerships rather and began the implementation of our trade desk concept in the fourth quarter. The result, used retail volume record in our used is up 6% year-over-year. Our standard F9 menu, we rolled out our standard F9 menu across all of our dealerships this past year. The menu allows transparency to our customers and also allows our F&I managers to easily sell our products. Results record, F&I per unit retail performance of 9.7% year-over-year.

Fixed ops, our focus on customer satisfaction, standard sales processes, investment in capacity at key dealerships resulted in all time fix offs gross profit record up 3.3% year-over-year. Our DMS at the end of October, our last set of dealerships converted to ADP while this conversion company-wide to ADP was enormous, it's just the foundation to a much bigger vision and we'll share more here in a little while.

Digital marketing approximately 88% of our customers begin their car shopping experience online and we're investing more than ever before in our infrastructure to enable digital market. Growth, we've stated all year that we wouldn't overpay for dealerships and we'd only acquire dealerships that matters strict return hurdles. The results, four fantastic acquisitions that contributed significantly to our bottom line. Land Rover and Jaguar, Houston North, the sale of BMW Mini, Mercedes of Calabasas in Long Beach, BWM and Mini. Combined these stores generated $528 million in revenue last year.

While we had more acquisition opportunities we found the market a bit expensive and wouldn't allow ourselves to stray from our spending principals. As a result we didn't meet our internal acquisition target but invested instead in an area that the yield was much higher. We invested in ourselves, our own stock.

Customer satisfaction and associate satisfaction. I'm very passionate about these subjects and last year our motto was turnover is public enemy number one. Focusing on the drivers of turnover allowed us to adjust our behavior. And the result, our all time ever low turnover.

Our associates are responsible for our success and, therefore, we don't view our associates as an expense but rather as an investment and in 2008 we plan to invest in our most valuable assets, our associates. A touched on it earlier but last week at our annual meeting, we unveiled our plans to roll out a comprehensive training program for every Sonic associate from our Porters on down to Maine.

This training program will be the stepping stone to a career planning path. As I stated, we want to develop our talent. We feel that this will differentiate us from our peers over time and that we will be the employer of choice among the automotive consolidators.

If you'll please turn to slide number 4. This slide is a good visualization of our overall strategy for 2008. It's pretty basic if you think about it, it could clearly apply to almost any successful business. Let's take a look at it. The inside circle are four key items that we need to do well. Let's just say flawlessly. And it all begins with our associates. We need to develop our associates. Without well trained valued associates our company will not meet our goals. And you'll see in subsequent slides the investment we're about to make in training and development.

Next well run operations, we have to be the best of the best. The tools and processes that we have developed for us to sell more cars and trucks and institutionalize them across our stores. By doing this, we'll leverage a competitive advantage and have scale, 169 dealerships.

We'll launch improved technology and processes to support our traffic management, CRM, E-commerce, service business, advertising, et cetera. Third, valued customers, we will treat our valued customers well. This year with the input of many of our associates we plan to develop an industry leading customer experience that will differentiate us from our competition.

Fourth but definitely not least is grow the business. We'll do that in two ways, through organic growth and through growth via strategic acquisitions. We've entered into asset purchase agreements to purchase Thoroughbred Motorcars in Nashville adding Audi, Jaguar, Porsche, Saab to our BMW, Cadillac, Hyundai, Hummer, and Mercedes platform. In Charlotte, we've entered into an asset purchase agreement, to purchase the assets of Beck Imports bringing the Mercedes-Benz franchise into our hometown portfolio, representing two Cadillac franchises, two Ford franchises, Infinity and Toyota.

These acquisitions are subject to customer manufacturer approval and we expect them to close by the end of Q2 2008. We continue to be focused on adding dealerships that are of premium brands and other dealerships that meet our investment quality standards.

If you'll please turn to slide number 5. Now, for the quarter in review, I'm proud to report that in a slower economic climate, Sonic was able to deliver an operating margin of 3.7% for the quarter. Our EPS was up 6.3%. Our total revenue was up 7.6% driven by an increase in used vehicle volume, improved F&I PUR performance and increased service customer of pay.

While these numbers are strong, I'm very pleased to report that due to our teams constant focus on control our SG&A percent was just 74.8, best in the peer group. And now I'll turn the call over to our Vice Chairman and Chief Financial Officer Mr. Dave Cosper to review our performance in detail. Dave?

Thank you, Scott. Good morning, everyone. As you can see on this slide, total revenue for the quarter was up 7.6% from the prior year to over $2.1 billion. Although gross profit was up 5.7% gross margin slipped 20 basis points from the prior year to 15.3% reflecting primarily increased competition in a soft market.

New retail margins were 7.2%, down 40 basis points from last year. Used retail margins were 8.2% down 90 basis points. Fixed operations margins were 50.3%, down 20 basis points from last year. Operating profit for the quarter was $77 million, an increase of 4% from Q6. Our margin was 3.7%, down only 10 basis points from last year.

Our strong focus on cost control and cost reduction helped us offset a large part of the deterioration in gross margin. Total income from continuing ops was $29.4 million, an increase of 1.7% from last year. And EPS from continuing operations was $0.68 up 6.3% from 2006.

Please turn to the next slide. Let's take a quick look at the full-year 2007. Scott mentioned, we delivered on all the commitments we made you despite facing many challenges, for the year, revenue was $8.3 million, up 4.4%. Gross profit for the year was up 5.2% and gross margin improved by 10 basis points to 15.5%. Operating profit for the year was up 13.1% driven by higher gross and 190 basis point reduction in SG&A. Operating margin was a strong 3.6% up 30 basis points from 2006.

Continuing EPS for the year was $2.54, right where we projected. And total EPS was $2.13 up from $1.85 in 2006 a 15.1% improvement. Please turn to the next slide. Let me review our same store sales performance.

Overall, same store revenue increased 1.3% for the quarter. Excluding our wholesale business, same store revenue was up 2%. Same store new revenue was down 2.6% with new retail revenue down 3%, fleet sales increased 3.8% for the quarter. Used vehicle retail revenue was up a hefty 9.3%. Roughly 2/3 of this growth came from a 13.2% increase in volume.

The balance came from a 5.3% increase in prices. We had a very strong sales of CPO vehicles, unit sales of CPO were up 18%, and of course, CPO sales typically have higher per unit prices. Same store F&I revenue was up almost 9%. Our electronic menu is fully rolled out and it's helping our sales. F&I per unit hit 1,027 for the quarter up from 967 in 2006.

Continued focus on customer satisfaction, our standard sales process and increased capacity are driving improvement in our fixed ops. Total same store fixed operations revenue increased 2.3%, and gross profit was up nearly 2%. Customer pay revenue and gross were up 3.7 and 3.2% respectively driving the overall increase. Fixed absorption was a very strong 91.3% for the quarter.

Next slide, please. Our great story on cost performance continued throughout 2007. For the year, SG&A as a percent of gross was 74.9%, down from 76.8% in 2006. Our team has consistently focused on costs that we can control.

Excluding rent, SG&A as a percent of gross in the fourth quarter was 65.5%, down 20 basis points from the prior year. Even though the market was soft our variable cost structure and focus on cost reductions helped improve our performance. Our total SG&A as a percent gross for the fourth quarter was 73.8%, we believe the best in the sector.

Next slide, please. We ended the year with a debt-to-capital ratio of 42.4%. Excluding the $46 million of recently added mortgage financing, our debt-to-capital ratio was 40.7%, was just above our target level. We continue to see the benefit of owning our real estate from both a financing and operational perspective.

During 2008, we expect to add another 90 plus million in new mortgage financing. We remain committed to our debt-to-capital target of 35% to 40%, but it's clear that in the near term, mortgage financing will pressure our ability to achieve this. Nonetheless, I believe owning our real estate is the right thing to do.

During 2007, we repurchased $50 million of our stock, most of which was funded by the sale of our financed subsidiary Cornerstone Acceptance and so far this year, we've repurchased another $12 million of our stock and have an additional $21 million of remaining authority. Frankly, given the price of our stock, we believe it's one of the best uses of our capital at this time.

Next slide, please. We ended the inventory with a good inventory position for 2008. We maintained our inventory discipline throughout the fourth quarter and on December 31, had an overall new vehicle days supply of just over 48 days. This compares with the industry average of 59 and with 48 days that we had at the end of 2006. Used vehicle inventory ended the quarter with slightly over 36 days supply, right in line with our internal targets.

Next slide, please. This slide talks about our earnings outlook for 2008 and compares the outlook with earnings for 2007. As you can see, we're projecting EPS at 235 to 250 for 2008. This compares with an adjusted EPS for 2007 of $2.45. Let me first talk about the 9 set adjustment for changes and dealerships held for sale.

We are considering changes to the group of stores held for sale including the potential sale of a number of profitable stores that did not fit our business model. Some of which are stores that require capital expenditures that frankly just don't pencil for us. Obviously, this reduces our profit from continuing operations. We talked a lot about improved capital allocation at Sonic and this is a reflection of just that. We feel our capital can be deployed better elsewhere.

Now, let me walk you through the rest of the slide, 2008 is going to be challenging for everyone, especially on the new vehicle front and frankly that's not new news. However, we'll continue to do what has made us successful. A strong focus on all our operations, especially the higher margins used, fixed operations, and F&I segments.

All in, we believe our store level earnings for 2008 will be about flat to up slightly compared with 2007. We've not included any acquisitions in the outlook for 2008. Included in the operations line above is a fairly substantial investment of $4 to $5 million for training, for our people, and supporting IT infrastructure. This is consistent with what Scott mentioned in his opening remarks, we're building for success over the long haul.

Other interest is up $0.14 year-to-year. This reflects interest on our mortgages and swap impacts that are not included on our operating income and more on this on the next slide. Lower share count primarily from our repurchases increased EPS by $0.12 Our assumption of a 40% tax rate up from 39.3% for 2007 reduces EPS by $0.2

My last slide is some key assumptions included in our 2008 projections, as I mentioned other interest is up $0.14 year-to-year. This increase reflects interest expense from our mortgages for $0.6 and the impact of interest rate swaps. The swap impact is a partial offset to a projected $0.16 reduction in floor plan costs for 2008.

We're projecting Libor to be flat 3 1/2% through June and then increasing to 4 1/2% for the balance of the year as economic conditions improve in the second half. As I mentioned, the tax rate of 40% is projected for 2008. The increase from 2007 primarily reflects higher state income taxes and is principally a mix of where income is earned. With that, I'd like to turn the call back over to Scott.

Great. Thank you, Dave. In summary on slide 14, while I'm thrilled with our 2007 performance I'm even more excited about our future. As cofounder I've seen our company in every stage of our company's history and I can tell you that I've never seen it in such great shape and we've never been so poised for success as we are today. We're expecting that 2008 is going to be a challenging year. However, we're not building a company for the short term, we're building a company for the long haul.

I'm pleased to announce that our dividend will remain unchanged at $0.12 per share payable on April 15, 2008, for shareholders of record as of March 15, 2008. And before we open the call and take your questions, I'd like to take time to thank our manufacturer partners and the many Sonic automotive associates, without whom these accomplishments would not have been possible. Nothing happens until we sell a car and we're committed to taking the high road. It's our compass. At this time, we'd like to open the call and take your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Edward Yruma with JP Morgan.

Hi, thanks for taking my question.

Hey, Ed.

Your discontinued to ops line continues to grow and I'm not necessarily just referring to the $0.09 but the amount you have on it right now. How long will it take for you to divest those dealerships within that group?

Yes. Ed, this is Dave. We made great progress, in fact, 67% of that loss is now gone. We've sold the stores, we really ramped up the activity in the fourth quarter, sold successfully 7 or 8 franchises so, the lion's share of that is behind us.

Got you. And on your fixed to floating. How much of your debt do you have swapped right now?

We're a little over 50% fixed.

Got you. And the final question I have, I know that you guided that you'd like to get back from - - to a kind of a 35% to 40% debt to cap level. What's the time frame around that?

Yes, I'm going to call that longer-term. With the mortgages basically all we're doing is taking off balance sheet financing that exists and putting on our balance sheet. It is it pressuring us. The nice thing about mortgages, though, as you make payments every month and they go down. And over time, it's just like owning your house, it's going to be yours.

So we're convinced it's the right thing to do and we're going to keep pressure on it. But I am going to call it out as a separate item, so you can see what it is we're doing with the business. It's going much faster than I thought it would and I think it's a long-term rescue for success for Sonic.

Got you. Thank you very much.

Your next question comes from Rick Nelson with Stephens.

Thank you, and good morning.

Hi, Rick.

Can you talk about the profitable dealers that you're contemplating bringing into discounts and how much revenue, how many dealerships, and possibly what the proceeds might look like for these?

Yes, let me talk in general terms about that, Rick. I don't want to get specific. But I'll tell you this, it's a little different way of thinking for us. There's a lot of expenditures that are often required by manufacturers and we're reviewing whether or not those make sense for us and sometimes in the past, I think we may have just invested the money and moved on.

But as we look at some of these stores, where you've got to spend 5, $7 million and we don't see any revenue increase. We're thinking, geez, it probably doesn't pencil for us, and we may be better letting the store go. Avoid spending that money, free up some capital, invest somewhere elsewhere we can earn higher returns. We're close on a Toyota store, I can tell you that. But beyond that, I don't want to give you a lot of detail. It's not a huge number, but there's several stores that we're contemplating.

Are they import stores or domestics as well?

Both. But I think probably for the first time we're considering import stores.

Got you. Your SG&A to growth as you point out is already the lowest in the peer group, what do you think is the potential there as we move forward?

I think in 2008, it's going to be tough to see a lot of improvement there given the gross environment and the fact that we're going to be ramping up our spending particularly on the training front. I was pleased to see that in absolute dollars our fixed comp and our other fixed overhead were flat in 2007, in dollar terms versus 2006. That always helps and we'll just keep whacking at it wherever we can. But I don't see huge improvement given the environment we have.

Got you. And then finally on acquisition multiples, are you seeing those contract at all given the overall environment and the tradeoff, I guess between acquisitions and buybacks and still favoring buybacks?

Hi, Rick, this is Scott. The stock buyback is not a long-term growth strategy for us. But when we look out there at the current prices, I think there's a lot of unrealistic expectations by the private dealers as to what their dealerships are worth and I don't see a whole lot of transactions happening this year. The transactions that we talked about earlier were deals that we've been working on for many, many months, in case of Beck Imports years, and it was just a matter of timing. But as we look, when we can buy our stock at 6, 7, 8 times after tax, it doesn't make any sense to pay the 6 times, 7 times pretax for acquisitions.

Thank you and good luck.

Thank you.

Thanks, Rick.

Your next question comes from Rich Kwas with Wachovia.

Hi, good morning, guys.

Hi, Rich.

I had a question on grosses on the luxury side. Are you seeing any deterioration on that on the new vehicle front?

We saw grosses soften a little bit in fourth quarter in luxury, domestic, and imports as well. Interestingly, I would say that from a regional perspective, they held up reasonably well in California and Florida, and most of the deterioration was in other parts of the country, including Texas.

Go ahead, sorry.

You know Rich, some of that compression is coming out of truck and luxury. But other than that, maybe a little bit on BMW3 series, but other than that, no more.

And what's factored into the guidance? Do you see it stabilizing where it is now, or do you see further deterioration at all?

It's pretty much factored in the steady state, there may be a little bit of improvement in used going-forward. I'm hoping to see that. But we're not assuming any huge deterioration from today's levels.

Okay. And then, on the California exposure, Dave, can you just walk us through what happened on the new vehicle front and the used vehicle front in that market. It seemed like in the fourth quarter things it's been a tough market, but incrementally things got worse?

Yes, I'll turn it over to Jim in a second, but in a - - as I mentioned, the overall, new car margins were down a 10th of a point from 2006 which is good. We grew used handsomely on the West Coast. Fixed ops, improved as did F&I. New car was soft. And Jim can give you a couple bits of color on that.

Yes, Rich this is James Evans, just after Dave's comments, we did see some continuous softening in the new vehicle market in California. But one of the encouraging things was a stabilization of the gross profit on the new car side. We saw that finally hit near the bottom, we believe. And at the same time, almost 14% growth in used cars, good growth in customer pay and F&I up 5%, so we out performed the market with our major brands despite the continued softness in gross compression in California.

Okay, and then on the used vehicle front, you're going to start to face some pretty difficult comps in the second half of the year. Are you expecting the first half to be up nicely given the initiative that you have in place and that second half softens? What's your current thought there?

Rich, this is Jeff Dyke. Yes, we're continuing to see some nice growth on the beginning of the year. But you got to remember, we're also rolling out our second phase of our used vehicle process, which is going to help us. We just completed our first region. We'll roll out Texas here in a few weeks and then, the rest of the country sometime between now and the end of the year and maybe the first quarter of 2009. We won't see the full benefit of all that towards the end of maybe 2009.

In that stage, with the trade desk, it's really more about getting more margin than volume it's putting the right vehicle in the right place to maximize margin. I mean, we had a fourth quarter was huge for us on used cars, not up 19% in total. Continuing ops is up 25% in revenue. BMW CPO sales were up 86%. So there's some really terrific number and obviously you can't repeat that, but we'll maintain it and improve from there.

Okay. And then finally, Dave on the Libor assumption there, it looks like back half you're assuming an increase? What's the thought there?

Well, I mean, who knows where the market is going. We've seen a number of different economic forecasts and we're hoping that things - - we're hoping with some of the other economists out there, things start to turn around in the second half and that's a time when rates would tick up. If they didn't tick up, if you want to do the math, if they were 3 1/2% for the whole year, it's somewhere around $0.03 of good news for us given, you know, our variable exposure.

Thank you.

Your next question comes from Collin Langen with UBS.

Hi, great. Thanks for taking my question. I noticed you did talk about the mortgage being slightly up. I mean, did you have a significant change in the - - or a notable change in the number of dealers that you lease versus own?

Well, we're starting to move the ball. We've got 4 stores presently with mortgages, another 2 that we're about to close on, and another 5 that I'm hoping within the next two months we can close on. So, we're getting close to maybe 10% owning our property which I think it's big, it's gone a little faster than I would have thought, but that's okay. It's a financial benefit for us.

Okay. And as part of that, I mean, when the mortgage interest that's higher, that's due to owning more and more mortgages, thus some of the recent moves that you've made? Is that correct or is that a market factor?

You're thinking about it exactly right, we had zero mortgage property previously. We now have 46 and we're headed to 140, $150 million of on balance sheet mortgage financing.

So that year-over-year head wind that includes properties you anticipate on maybe buying next year?

It does. We've got $46 million on the books. We're looking for another 90. So a total of 130, 140.

Okay. And I think you mentioned in terms of parts and services, are customer pay was up 3.7, how is warranty looking, is that stabilizing at all or it must be down a little bit?

You got that number, Jeff?

Give me a second, Collin.

Sure.

Either up or what down on one. Give me - -

Down 1.7%.

Down 1.7%, 80s have been the biggest driver of that as its warranty costs fell but I see that kind of stabilizing now. Sorry, I view it probably as flat going-forward.

We probably, we've seen that stabilizing over the last couple of quarters.

Okay. So I mean, excluding maybe Mercedes, do you expect parts and services to be up? Is that anticipated in your guidance? I mean, there is no reason to - - anything out there we should be thinking about?

Yes, we'll continue to improve in fixed operations absolutely. We're adding some still capacity in our sales processes as they are still benefiting us, and the units, and operations out there for our luxury vehicles are continue to grow, so we'll be up.

Okay.

And really as you think about the guidance, new cars are going to be soft. We're going to grow in used. We're going to grow in fixed ops, and F&I may be a little bit of upside, but not much from where we ended the year.

To quantify that a little bit Mercedes-Benz warranty was down 23% for the quarter, so that what 's dragging that number down.

Okay. I wanted to clarify something, you mentioned that you're going to have some assets that you bought close in Q2. Are those mortgage properties that you bought or those are new dealerships? And if they're new dealerships what is the revenue on those?

They're new dealerships.

Okay.

And I don't have the revenue numbers handy on those.

Okay. And just one last question. In your guidance for the repurchase earnings per share repurchase earnings benefit, I mean, is that from what you've done already or are you anticipating doing more? Is that baked in there or no? It seems like it's done already looking at the numbers, but --

It's really a combination of both and the timing. We had a pretty hefty repurchase last year of $50 million. We have got 12 done. And - - yes, that's $0.16 or is it -- $0.12 is really both years impact.

Hey, Colin, this is Greg. We did a lot of our share repurchases in 2007, starting around late third quarter, so we'll get the full-year impact of that in 2008. Plus, we did bake in some additional share repurchases in the 2008 forecast.

Yes, that's exactly right.

Okay, so the bulk of it though is what was done already as of last year and as of what you've done so far this year?

That's correct.

Okay. Thank you.

Thanks, Collin.

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

Good morning.

Hey, Scott. Good morning.

Can you talk about on the fixed ops side, it looks like the gross margin was off by 20 basis points, can you talk about that a little?

Yes, I was looking at that this morning. Actually, there's a couple things we think may be driving it. First, I don't think it's a huge significant issue, but tire sales are actually up 10% year-to-year, and tires have a lower margin in percentage term, but fairly good gross overall. Also we've got a pretty big initiative to ramp up our quick lube business at all of our stores to get people in and comfortable with our dealerships and our shops. And that's not the highest margin business either, so I guess I'm okay with a 20 basis point slip in the margin if the total dollars are more, and that's a strategy that's working for us.

And you said customer pay was up 3.7%, right?

Yes.

Okay and can you just - - the buyback information for the quarter and what you did so far this year, I missed that.

Oh, $12 million.

That was in the first quarter?

In the first quarter (multiple speakers) yesterday.

And what did you do in the fourth quarter?

The fourth, I - - $14 million. A total of [50] for the year and $14 million for the quarter.

And how much do you have left currently right now?

$21 million of board authorization, last year I think we got $60 million of authorization throughout the year.

And could you comment on January early February what we're seeing as far as trend?

In general terms January was not a good month, February is a little better. Let me give Jeff a chance to give you a more color.

Yes, absolutely, I mean, if you look at January it was a difficult month. Although in our initiative categories, fixed operations, used cars we continue to perform. And then in February, a little better, but not much.

That's all I have, thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from Doug Carson with Banc of America Securities.

Hey, Doug.

Hey, how are you?

Good.

I had a quick question about funding, how's the availability for financing the floor plan kind of how's the tightness of credit if there is any kind of based on what's going on at some of the finance companies? And then separately, the perception of the consumer how's the availability for credit for the consumer coming in to buy a vehicle? And then, I have kind of a separate question on the used car market.

Okay. I mean, first on floor plan financing, we have a fantastic relationship with our banking syndicate group and with the captives and that's just not an issue at all. I mean, it's a 4-year facility, and it's in place and there are great rates and super supports, so in terms of flooring our vehicles, absolutely not an issue.

In terms of the market out there clearly some of the sub prime lenders are tightening up, we're seeing that. We haven't seen it have a material effect on our sales yet, which is a good thing and frankly a little surprising. We'll keep an eye on that, but we have a preferred lender group that we do business with, and they're very strong with us, and, Jim and Jeff, if you have any - - are you seeing anything that I'm not?

We haven't seen any direct linkage between the mortgage issues and the sub prime retail lending that there's plenty of capital still there and the lenders are staying aggressive for the most part, and sub prime only represents 15% of our overall used car business at any rate. So we don't see any gap here at the moment. It remains steady.

I would tell you, as you know, we spun off Cornerstone last year, and they're up and running as American Credit Acceptance and doing a great job in growing their business and being very supportive of Sonic, and while I've got people here, I've checked the revenue on those two acquisitions, combined it would be about $120 million of new revenue for the Mercedes and the Thoroughbred stores.

I guess the next (inaudible) is a good answer. The [temptation] of this merchandising strategy program for the used vehicle, did it surprise you guys internally with the 19% year-over-year growth? Because that seemed very high to me, and a great number relative to what others have been doing in the used car market. I'm just trying to understand that better.

Hi, Doug, this is Jeff. Doug, we appreciate that, it was a great quarter for used cars, but quite honestly, that's sort of been a building trend over the last two years. We've been working on sort of phase one in controlling our inventory merchandising, inventory and pricing it right for the last two years, so this is not something that we just woke up and started doing, it's been something we've been working on a very, very hard, executing at the store level, and we're starting to finally reap the benefit of all of our hard work.

Great. Okay, guys. Well, thanks so much. I appreciate it.

Thanks, Doug.

There are no further questions at this time. I will turn the call back over to Mr. Smith for the any closing remarks.

Thank you. I'd just like to thank everyone again for being on the call today. Thanks so much. We'll let you go. Bye.

This concludes today's Sonic Automotive fourth quarter 2007 earnings conference call. You may now disconnect.