Sonic Automotive Inc (SAH) 2008 Q4 法說會逐字稿

Good morning and welcome to the Sonic Automotive fourth quarter earnings conference call.

(Operator Instructions)

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 For Investors tab and choosing Webcasts and Presentations 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. Scott Smith, President of Sonic Automotive. Mr. Smith, you may begin your conference.

Great. Thank you, Maggie. Good morning, ladies and gentlemen. I'm Scott Smith, Co-Founder, President and Chief Strategic Officer. Welcome to Sonic Automotive's fourth quarter 2008 conference call. Joining me on the call today are the Company's Vice Chairman and Chief Financial Officer, Mr. Dave Cosper, our Executive Vice President of Operations, Mr. Jeff Dyke and Greg Young, our Vice President of Finance. You'll turn to the first slide, please. Today I'll be discussing an overview of the quarter, then I'll turn the call over to Dave Cosper for a detailed financial review. Jeff Dyke will follow Dave and give an update on some same-store performances, as well as operational trends. I'll then summarize and make some closing comments, and we'll open the call up for your questions.

If you'll turn to the next slide entitled Quarter End Review, my opening comments today will be brief. I don't need to tell anyone just how difficult the operating environment was in the fourth quarter. The trends projected in this slide illustrate just how dramatically and quickly the new vehicle market declined, and the new vehicles have been in a free fall ever since. Used vehicle valuations were extremely volatile during the quarter as well. As you'll hear on the call today, our operations are doing quite well. In fact, I would say that we have the best overall operating team in alignment that we've ever had.

Currently, our impending debt maturity is our biggest focus. The situation that we find ourselves today is not the result of Sonic's inability to service our debt, or reflection of ongoing ability to generate cash. Rather, it's a result of a weak capital market condition and the current inability to look to the capital markets to refinance our existing debt maturities. Our dealerships continue to perform extremely well, despite a soft environment. I believe that we compare very favorably to our competitors, except for one aspect and that's the timing of our maturities. As we've been working through a number of tough decisions, we looked to where we could conserve cash. First, we've cut our capital expenditures which we expect to save around $85 million over the next two years. Second, we have a strong focus on reducing our cost and increasing revenue. Both of these efforts are paying off for us. We've also suspended our quarterly dividend payment which will save us around $20 million for the year.

Outside of these aggressive measures to conserve cash, we're focusing on operational areas that we feel we can control and benefit the most. Strategic cost reductions, Dave will have more details on the subject but I want to emphasize, as I have on every call, that this is a people business. While we're very conscious about our costs, we're not willing to give us talented associates. I'm happy to report that 2008 was a year in which Sonic Automotive experienced the lowest associate turnover in Company history. Additionally, we also posted the highest customer satisfaction results in the Company's history. Happy associates lead to happy customers and it's a winning strategy for us, something that we've been committed to for many years. We managed to achieve an overall headcount reduction of nearly 10% as we've optimized our structure. On the surface, the overall numbers for the quarter may not reflect the team's efforts. However, as we walk you through the presentation, the operating trends show that the Company continues to move in the right direction. I'd now like to turn the call over to Dave to run us through the numbers. Dave?

Thank you, Scott and good morning everyone. I have to agree with Scott, this has been an extremely challenging time in the automotive industry, but amidst the lower volume and non-cash charges, there are many positive and encouraging signs in our business. This slide shows our financial results, adjusted for impairment and other unusual charges. As you can see on this basis, we lost $4.8 million in the fourth quarter from Continuing Operations. For the full year, we earned a profit of $42 million or $1.05 a share. Revenue and profit fell sharply in the fourth quarter, as the economy deteriorated quickly. Over the next several slides, I'll talk more about how this impacted our business, and how we responded. But before I do that, let me make a couple comments about cash. One, our cash balance was unchanged during the fourth quarter. Two, our revolver balance increased by only $2 million, so essentially flat. And three, during the quarter we bought back $20 million of debt. So notwithstanding the poor operating environment and the large non-cash charges, our cash generation was reasonably strong.

Next slide, please. This slide shows detail on several items included in our reported SG&A numbers. Clearly, on any measure, our SG&A as a percent of gross deteriorated in 2008, particularly in the fourth quarter. Revenue fell off faster than we were able to take cost out. On an adjusted basis, SG&A was 80.9% for the full year and 90.3% in the fourth quarter. Given the cost reduction actions we've taken, SG&A fell to about 86% of gross in January and February, on even lower industry volume. So I feel we're making great progress on cost. Please turn to the next slide and we can talk about this.

This slide provides a summary of actions we've taken on the cost side of the business. We did respond quickly in the second half of the year to align our operating costs to the difficult environment, and our efforts continue in this regard. Substantial fixed cost savings have been realized through the right-sizing of our business. We've reduced a number of regions we have, adjusted our field support structure, and substantially reduced overhead expense at our stores and at our home office. We've also substantially reduced advertising expense in absolute dollars, and as a percent of gross profit. As part of this, we've changed our mix of our ad spend, and actually have increased our leads with a reduced spend. So in total we achieved fix cost savings of $75 million continued to identify further opportunities. I was looking this morning and that $75 is working its way up close to $80 million. As Scott mentioned we suspended our dividend, and are not repurchasing any stock or debt for that matter.

Capital spending has been pared back sharply, and if you turn the page I will talk about that. Capital spending for 2008 was $137 million, up $59 million from 2007. Consistent with our strategy to own more of our properties, $65 million of this spending was for real estate, principally for buying out leased properties. As noted above, this was financed largely with mortgage funding at very attractive rates, which average about 5% so it's a great rate for us. For 2009, we're projecting capital spending at $62.5 million, there's two large facility actions planned that we believe we have mortgage financing secured for later this year. Our plan is to limit spending to projects that maintain our facilities, and only invest in upgrades where absolutely required and where mortgage financing is available. If we cannot secure cost effective mortgage financing, we will not spend the money.

Next slide, please. This slide simply shows our financial covenants for our debt and our compliance status by quarter for 2008. Please turn to the next slide, and I'll talk in some detail about our upcoming debt maturities. This slide really lays out the issues we're facing with our maturing debt. Our independent auditors included a going concern explanatory paragraph in its audit report for our 2008 financial statements. On March 31, 2009 we executed an amendment to our 2006 credit facility, which resulted in no default being created by this action through May 4, 2009. As indicated on previous calls, our plan had been to address our debt maturing in May, either through refinancing in the capital markets or by using our revolver. Unfortunately, the capital markets remain closed to us and given the short-term nature of the amendment we were able to obtain, we do not believe we will have the ability to retire this obligation using our revolver.

As you are probably aware, we have engaged a financial advisor to assist us in analyzing the options we have to address our capital structure. The overall goal is to restructure our upcoming debt obligations. As part of this, we've been actively engaged in discussions with our bank syndicate and our bond holders. As these discussions are very fluid and could change on almost a daily basis, I trust you will understand, when I tell you that we cannot provide any more color than that, at the current time. I would also ask for your consideration in refraining from questions on this topic during our Q&A session, because I simply can't answer them. With that, I'll turn the call over to Jeff Dyke for a review of our operations. Jeff?

Great. Thanks, Dave and good morning everyone. Today I'll be commenting on our same-store results for Q4, and will provide you some color around our operational performance, as well as some Q1 data. Total same store revenue for the quarter declined 28.2% compared with last year. Our volume declines contributed to the majority of our year-over-year shortfall. Our retail revenue was down $350 million, or 35.1%, accounting for roughly 71% of the overall revenue decline. Our retail volume decline of 33.1% made up the majority of this decline. Used retail revenue was off approximately $46 million, $19 million of which can be attributed to the margin decline, while the other $27 million was due to volume declines. F&I revenue was down 31.1%, while F&I per unit was down $92.00, or 8.9%. The majority of the overall F&I revenue decline can be attributed to decreased retail volume. Fixed operations revenue was down 4.8%. The majority of our fixed operations declines can be attributed to our Detroit three dealerships.

Next slide, please. Diving a bit further into fixed operations performance, as you can see from the slide customer pay revenue was down 2.1%, the majority of which was Detroit big three driven. Our progression during the quarter was a bit mixed. We project our performance will be flat in Q1, and see opportunity in subsequent quarters as we continue to execute our fixed operations playbook. As we outlined at the end of Q3, the grid pricing overall has been completed in all stores. With these pricing modifications in place, we have begun menu installations which will be completed at the end of Q2. Same warranty store revenue was off 5.6%, and while many brands experienced a decline, our Mercedes and BMW stores accounted for over half of the overall decline. For Q4, same-store fixed operations gross profit was down 5.3%, reflecting lower volume and margin. Although margins were down 30 basis points from last year, margins were up 30 basis points from Q3, and were the highest quarterly reading we have had for the whole of 2008.

Next slide, please. I want to give you an update on our used vehicle segment. As you're aware, we have stated in the past couple of years that preowned is one of our Company's biggest opportunities. This slide shows our progression during the fourth quarter and our projection for the first quarter. Some key items that I'd like you to take away from this slide. During the fourth quarter at a time used vehicle valuations were extremely volatile, we improved both volume and gross profit per unit. Unfortunately, the large wholesale losses were due to cleanup that needed to occur in the former northwest division, from not following the Sonic preowned playbook. As you can see in Q1 our projected wholesale loss is really insignificant, as all inventory issues have been resolved.

We consistently outperform the industry. For the fourth quarter, overall national franchise dealers were down 14%, we were down 8.5% in unit volume. Our certified preowned volume was up 6.1%, compared to the industry decline of 0.5%. Our inventory was in great shape at the end of Q4, and is trending to be in very good shape at the end of the first quarter. We project our used day supply will end the first quarter around 25 to 28 days, with a very low aging issue in inventory. In total, not just on a same-store basis, in January the Company experienced the fifth best used retail volume month in its history. And in March we're pacing to have our second best month ever, as we continue to execute our playbook more effectively especially in the West Coast regions. During the fourth quarter our used to new ratio was 0.74 to 1, and I am proud to announce that at the end of Q1, that we're tracking to hit 0.9 to 1 used to new.

Next slide, please. A couple of highlights on our new car market share. After a good start to the fourth quarter, we dropped off in November and December, but we've addressed the issue and as you can see in January and February, almost every region outperformed their local market. Key in our Q1 success is the ability -- is our ability to adapt to customers that are coming through the virtual door. We're getting better at executing the Sonic Internet playbook and it's starting to show in our results. We also increased our trade ratio as a result of the strength of our used car business, which is helping the Company trade for cars in a difficult environment, and supporting our market share growth on new. We're keeping very close tabs on our new car inventory. At the end of the fourth quarter, our new vehicle day supply was 85 days. At the end of March, we project our new day supply to be somewhere between 70 and 75 days. Most important, less than 5% of our new car inventory is 2008 model year, significantly better than the industry average of about 20%. All of our new car orders are being approved essentially. We're very proud of the share effort, and the trend looks like it will continue into March.

Next slide, please. I'd like to provide you some regional color for Q4 and Q1. First, as Dave said earlier, we have consolidated our regional structure from seven regions to six regions. We believe the consolidation made more sense from an operational point of view, by taking away some redundancies in the structure. Southern California was up 12% in used vehicle volume in the fourth quarter, and also saw customer pay revenue increase 10.2% in December. Our Southern Cal numbers will improve from the fourth quarter performance in Q1. While we feel good about our overall performance in Texas, our Dallas platform is really hampering our overall results. During the fourth quarter, Dallas was responsible for nearly 70% of the overall gross profit decline we experienced in Texas, and we're attacking this issue, and attacked it in Q1.

Our large Toyota dealership that we discussed in Q3 in Florida, has really been turning around the last few months. During the fourth quarter, new retail volume was up about 37.5%, and used volume was up about 25.5%. And we've continued this great pace into the first quarter. Also, all our other Southeast markets continue to be very steady. Our Internet and E-marketing strategies continue to show vast improvement in each region, as we train and execute our playbook. I'm very proud to announce that our total Sonic annualized turnover has improved from 51.3% in August, compared to an annualized trend of 29.3% at the end of February, an all-time Sonic best. I'm also proud to announce as Scott mentioned earlier, we finished the year with 80% of our stores in sales and service at or above national and regional averages in customer satisfaction, again an all-time high for Sonic.

Since taking the Executive Vice President role in August, I have had the joy of visiting almost every single store at least once, and some twice. Regardless of the position, our team is aligned and not only moving in the right direction, but in the same direction. Our associates are focused and performing in the most difficult economic environment in decades. And I'm very proud of their efforts but more importantly, their partnership is fantastic. I want to thank every -- each and every Sonic associate for their support and look forward to more and more operational performance victories, as we move through the year that we can share with our investment community. With that I will now turn the call back over to Scott. Scott?

Thanks, Jeff. As I take a step back and look over the last quarter, I'm pleased with the progress that we're making in such a difficult environment. As we mentioned earlier, all-time low turnover and all-time high CSI scores, prove that the opportunities we're offering to our associates and the products and services that we're offering to our customers have never been better. Our ability to adapt and our progress in fixed Ops and used vehicle areas were very positive. As I look forward, over the peer group and their earnings releases, I've taken a lot of pride in noting that we have either finished first or second in nearly all the operational metrics.

It's difficult out there, but we will continue to execute our strategies. We'll continue training our people, offering the best customer experience, taking market share, finding and cutting unneeded expenses, and continuing to make Sonic Automotive the best in the industry. Following the lead of some of the other public retailers, due to the uncertain environment, we will not be providing guidance in 2009. But we do see a tough year as are likely to come in between $9 million and $10 million, in -- in a difficult new car margins. However, we think the used vehicle demand and margins should be steady, and fixed Ops should be stable as well. Before taking your questions, I'd like to say thank you to each and every one of our outstanding associates who keep working so diligently to make our success possible. It would be easy in this atmosphere to complain, point the figure, assign blame but that's not what's happening here. As Jeff mentioned, we are aligned, and we are focused, and for that I am extremely proud. Thank you guys, its an honor and privilege to lead our company. At this time I would like to open the call to your questions.

(Operator Instructions).

Our first question comes from the line of Rick Nelson with Stephens, Incorporated.

Good morning.

Good morning.

Dave, can you discuss the options that are available to you to deal with the near term maturities?

I see you didn't take my comments to heart there, Rick. We're looking at all our --

Any color you can provide would be helpful.

Yes, I mean we're looking at every option available out there. We're working closely with our partner, having discussion with all the concerned parties, and we've got the amendment approved in the near term, and I felt good about that. But beyond that, I really can't provide anything. We've put a lot of detail in our K. And that's really what I'd have to have you take a look at. But frankly, we're looking at everything, and we'll see.

A question on the cost cuts, the $125 million that you discussed. Is that for the entire Company or is that -- I realize you pushed a lot into disc ops, does that includes some of those fillers, or is that a Continuing Operations number?

It's total Company-wide. and we split that out into two pieces. Some of those costs come out just naturally with volume, and I've always thought that -- that piece is really not that complex to get. It's just part of our business model. So we tried to structure that between what was more structural savings and ongoing, and that's really the 75 versus the 125.

Can you provide us an estimate as to what would be in Continuing Operations?

I guess 80%.

Okay. That's helpful. Thanks. And in terms of the asset sales, I'm wondering, what you've sold recently, and what sort of multiples you're getting on dispositions. And are you indeed seeing blue sky? And what sort of dealers have you sold?

Yes. It's been a little tough right now in the environment, and I kind of view it as, our stock's been depressed with the debt overhang and that has the same impact on assets. I think the same things that are impacting our stock price, impact that. And, we sold ten franchises in 2008 and I think that went extremely well. There was a little bit of blue sky. We've got a couple of deals pending, and I actually was pretty pleased with the blue sky multiple on one of those. But I don't want to get stuck into a distressed value kind of concept. Our intent is to delever over time. And I think that over time when we show that we can make money in these dealerships, we're very valuable as a Company.

And you talked about 86% SG&A to gross profit for January and February.

Yes.

Where do you think that number needs to be, to be profitable for the full year, or were you indeed profitable in January and February?

It's a little early to call on that but I would think that we're pretty close to breakeven for those two months. Now, we've got that crazy -- what is the accounting thing?

The debt, the change in the accounting for the convertible debt, that's going to skew some of the numbers in first quarter, Rick and some of those estimates, the impact of that are in the 10-K. It was interesting, the cost came out very quickly, and the gross was actually -- it was tougher selling environment in January and February. March, we're just getting a look on closing the books there, but we ramped up very nicely in March, similar to what we've seen in past years. Normal seasonality uptick in March, it's just off a lower base. But as Jeff mentioned, the sales are going extremely well, in particular out in the west.

Can -- I guess the March sales data will come from the OEMs this afternoon. Any initial thoughts as to what we'll see in March? And also on the used car business, I realize the prices are rising for used cars and the gap is narrowing between used and new. Are you seeing any slowdown in the used car business of late?

Let me start with that. We actually were surprised at some of the early indicators on how low the SAR is. I saw one at 8 8 and another one at 9 1 So I don't know where that will shake out. We were thinking it was closer to 10. But, I'm -- we want our guys to be thinking it's a $15 million SAR, and just sell the hell out of it. Our new car -- our used car margins were actually pretty high, they were like 9.6%, Jeff, something like that.

In that ballpark.

Yes, for the first quarter, so thats pretty good, that's encouraging.

Our new car business, this is Jeff Dyke, our new car business coming out of March was very encouraging, and our used car business is just excellent. I mean, it's going to be our second best month in the history of our Company, and the big opportunity for us is trading for cars and finding inventory. Today, maybe half of the inventory that sits on our lot we're out having to buy, and we're getting real aggressive in doing that. And using the Internet not only as a source, but a retail source, so we're making a lot of great progress there and our business continues to get better. March was a good month.

And on the finance side, are you seeing any you thawing at all?

It's about the same. And everybody has got to deal with the exact same pressures on the finance side, so there's no competitive issue there. We're dealing with it. It's the way the business was run years and years ago, and we're dealing with it today and it's about the same. I don't see any differences there.

Rick, I'm hoping that some of that government, that TALF program is going to help some of the captives get some funding capability, particularly for GMAC because they've been tough.

I guess I'll ask one more question, if I could.

Sure.

Pending potential bankruptcy of GM and Chrysler, how do you think that affects your business? And what do you think on the finance side there, GMAC and Chrysler financial, how that will affect your floorplan lines, et cetera?

I'll start with Chrysler. I mean, we're so small on that, I think it's -- it would be insignificant for Sonic Automotive. We're pretty big with GM. Of course. GMAC is a separate Company. I read the papers just like you. I guess a bankruptcy for GM is possible, but that does not necessarily mean GMAC has an issue, because their 51% with Cerberus and a stand-alone Company with its own funding. If I were in their shoes, and I think back to my Ford credit days, I mean, I think I would keep those loans out there and keep the dealers going. It's very profitable business. If the government does the kind of things it says it's going to do, I think it's going to be very good for GM. So we're very optimistic.

Newer and bigger dealers, probably at the end of the day?

I think so. You know our dealers. They're not the smaller ones. We've got them, big domestics in areas where we make money, Texas and Oklahoma.

Okay. Thanks a lot and good luck.

Hey Rick, this is Scott. I just wanted to circle back around to you on valuations and kind of what we're seeing. Dealerships that are basically beach front properties that have great brands and great markets and great facilities are still bringing all the money. Transactions, believe it or not, are happening out there. Some of the stores that require facility projects, such as Mercedes, those are still somewhat depressed from where they've been in the past. But generally good dealerships making good profit are bringing good multiples.

Thanks for that color. Good luck.

Thank you.

Thanks, Rick.

Thank you. And the next question comes from Colin Langan with UBS.

Can I just confirm, I mean, I want to make sure I'm reading the 10-K properly. It said that you had, I think about $140 million available under your revolver. But the way I read it is that you cannot use that to address your main maturities, and that any asset sales would first need to address the outstanding amount of the revolver before it addresses the main maturities? Is that correct?

That's pretty close. The amendment expires May 4th, and the debt matures May 7th. But essentially, you're correct, Colin.

Okay. In that gap, that means from the 4th to the 7th, some of that cash could technically become usable? Or -- That is what you're getting at? Yes?

I -- I would go back to the 10-K, Colin, we we talk about that fairly extensively, and what would happen on May 4th, and the need to negotiate a new amendment with the syndicated credit facility at that time.

Okay. And I just -- and also, you decided I think 35 franchises have been selected to be discontinued ops. I mean, that is part of your effort to raise cash here? Is that the logic? What is the thought process behind those new dealerships that are being discontinued? Which ones are you choosing? Is your mix going to look different after this divestiture?

Annually in the fourth quarter, we take a review of the stores that -- for strategic fit with our business. To answer your last question, no, we're not going to look different than what we have in the past. We're going to maintain our luxury and import focus. We think that's a strength, as well as some of the stronger GM brands. We took a little sharper pencil to it, and as I mentioned earlier, I think we want to over time, look to delever the Company. But we're not in any fire sale mode that you might infer from that, at all.

Okay. All right. Because that is 20 -- about 20% of your franchises today, with what you added to the -- about right or -- ?

Yes.

Okay. And if you didn't -- those were profitable? I mean, again I want to make sure I'm understanding. The discontinued ops actually helped -- would actually have contributed a positive $0.06 to earnings after charges?

That's a little bit hard to reconcile, Colin, with all of the impairment charges and everything rolling through. So let me follow up with you on that one after the call, maybe.

Okay. And do you have any estimate for how much you expect to generate through these sales and the timing of them?

No. Not that we really want to get into right now.

Okay. I guess the last question, the potential dilution, if you strike a deal, I mean, how would that impact the different classes of shareholders? I mean, would the dilution be to the common shareholders or Class A and B or -- ?

It would certainly depend on the nature of the deal but all of the -- I mean, we do have two classes of stock, but they're both common shares and share in the wealth of the Company, equally. It's just a matter of the voting rights of the Class B.

Okay. Okay.

Okay.

Thanks for taking my questions.

Thank you. And our next question comes [Dale Lore] with FAC, LLC.

You had had mentioned the Southern California markets, and its strengths and weaknesses. And I'm wondering how that compares to your Northern California markets, particularly the San Francisco Bay Area.

And Dale, this is Jeff Dyke. Actually, both markets are doing well. We recently had some structural changes out there, and so the Southern California has just been maybe a month or two on our processes ahead of Northern Cal. But both Northern Cal and Southern California markets are doing extremely well, especially on the preowned side and on new car market share.

Very good. And system-wide, do you anticipate in the coming year any store closures?

No, we don't have any. We've closed two stores, a Saturn store in Northern California and a Volvo store in Atlanta, and we don't have any other stores. We had multi-stores in the marketplace and so it was a good business decision for us to make those decisions, and supported by the manufacturers. and we don't have any plans to close any other stores.

Very good. And as the industry continues to go through these upheavals and withdrawals, are there any potential merger or acquisition talks on the upside or down side?

Probably not. We've got our hands full at the moment. I think most others do as well.

All right. Thank you very much.

Thank you.

Next question comes from Jordan Hymowitz with Philadelphia Financial.

My first question is, you guys knew all along that you had debt maturities due. Why weren't there more dealer -- you have some very valuable dealerships -- why weren't they actively on the market over the past six months, let's say, to be sold?

I would say, Jordan, this is Greg, there was a fairly abrupt decline over the last six months in the operating environment. And I think that our decisions relative to that topic kind of tracked the external operating environment, and outside of that, I would go back to the 10-K and some of the issues that we were dealing with here, as we came out of the fourth quarter, relative to the going concern opinion and the need for amendment and all of that.

The strategy has been really two fold, one for capital markets to open and like most companies, we would expect to refinance in the markets or two, use the revolver. And I don't think anybody really anticipated the markets freezing as they have, hasn't happened in my lifetime. So I mean, those things sort of got -- cut the legs out of that strategy.

That makes sense. Second question is, why the change that you can't use the credit facility to pay back the 2009 debt? I always thought you could. I mean, what did you give up? Or why is that not a possibility any more when I always thought it was a possibility.

I think we've covered that pretty extensively in the 10-K and the need for that short-term amendment that goes through May 4th. I think that was one of the bigger drivers in the availability under the revolver.

What page is that? I'm sorry. It all came out late last night and it's pretty vague.

I would say go to the liquidity and capital resource section, Jordan, and I think we laid it out in the most detail in that section.

Third question is, you said on an operating basis you're about breakeven in the first quarter?

Yes, that's a statement. Yes.

Yes, prior to the change in the accounting for the debt. In January and February was the statement.

We've got to see where it shakes out for the quarter. We haven't had a chance to close the books, of course.

Would it be fair to say, if the SAR new and used were around the same level in January and February, for the full year that would you be approximately breakeven, and we can use a wider range of approximately?

I think with everything that we've got going on and what we said on the prepared comments, Jordan, and not giving '09 guidance, we're probably just going to let it stand with that.

We're the only one that's gave guidance for the fourth quarter, as you recall, and that was a somewhat problematic.

Okay. And my final question on a completely different topic, is GMAC is now being a little more active in financing other -- more cars. Are they doing a better job financing other brands? Or do you think they're more likely to look to finance brands other than GMAC -- other than GM cars at this point?

I think they're aggressively financing GM cars, and looking to stay away from a lot of the others.

Certainly on floorplan. I mean, maybe some used --

Not on floorplan. On retail finance.

On retail financing, I don't know, maybe used, or doing some others. I doubt they're buying a lot of new, other brand business.

Okay. Thank you.

Thank you, Jordan.

Thank you.

(Operator Instructions)

And our next question comes from the line of John Murphy with Merrill Lynch.

Good morning, guys.

Good morning.

I had a number of questions here. First, on the assets that you're retaining in continuing ops your ongoing business, what is the level of unencumbered assets? Is there anything in the real estate portfolio, or other assets in the Company that are unencumbered?

No, not really, John. Most of the hard assets are active security under the syndicated credit facility, and then as you know, it's only been in the last two years or so, that we've been shifting from a leasing strategy to an owning strategy on the real estate. So the real estate that we've picked up in the last couple of years, has mortgages attached to them. So I would say the answer -- the broad answer is no to that question.

Okay. And then if we think about the $125 million in cost saves,depending on how you parse it out exactly, assume roughly 80% stays at the continuing ops ballpark, what is your breakeven level, if you achieve all those cost saves? And I mean, is there a level that you're really trying to shoot at? I know there's a lot of moving parts on used and parts and service, but what's the level you thing you can get to breakeven with those cost saves implemented?

We're kind of seeing we are at breakeven right now, given our discussion of the first quarter. A lot of these cost savings are being phased in over time. A lot of them happened in Q4, and they're continuing as we speak. So I think we'll shoot through these levels that we've achieved here, because we're looking at efficiencies, everywhere we can get them. And so I guess that's how I would answer that question.

So we're looking really in the low $9 million unit range is, where you -- I mean -- looking at January and February, March will likely shake out.

Where it's been running, yes.

Okay. Next question is on inventory, and what kind of risk you guys are looking at potentially with the resolution of the GM and Chrysler situation? If it goes awry and we end up in Chapter 11, or worst case scenario, Chapter 7, is there any provisioning or any way you're thinking about dealing with that -- those inventories?

I think on used inventories, it's not a very big number, and it's not all those specific brands. In other words, you may have a Toyota on a GM lot. That's one thing. Plus, we've got ability to move those inventory units to other stores. I personally don't think it's going to be that big of an issue. I think the government has come out very strong on the warranty side. It was a very strong comment, the warranty's now stronger than it's ever been. It's got the US Government behind it. I think that is designed to send a very strong signal to customers that it's okay to buy these cars that you want to buy anyway. So I really don't see that as being a huge issue.

Okay. Then another question on inventory. I mean, there's a lot of pictures floating around on the web. And we certainly see them when we're driving to the airport near Newark, all these port lots, and lots all over the place, shopping malls and stuff, used to be in the old days of these excess inventories, these new vehicles. And from what we can tell, what we're being reported to on dealer inventory, inventories look like they're leaning out, and you guys are clearly leaning out your new vehicle inventory. Are you aware of any incremental or excess inventory that is in transit, that you guys are not accounting for that the companies are trying to push on dealers? Is there something weird going on there right now?

Absolutely not, for us. We're aware of all of our inventory on our lots, and all of our inventory incoming, and any inventory that we ordered. We control that all centrally, and absolutely we know where all our inventory is, and we account for that in our day supply numbers.

Yes, I recognize you guys fully know what you guys have. Is there anything that the automakers have on their books, that is in transit, that they are trying to push on dealers right now, that you guys are clearly pushing back on that, which is did right thing to do? I mean, it just seems like that there's a bubble of inventory that's building behind the scenes, that is not on dealers' lots or on your books that the automakers are sort of stashing in these lots. Is that something that you're -- it's not in your business, but you're seeing in the channel potentially?

I know their pipelines are full and obviously you've seen the ports are full. But other than that, no. Nothing more than the unusual.

Okay.

They've got obviously production cuts going on as, now probably more than ever before.

Pretty responsible, I would say.

Yes. And lastly, just on these assurance programs that Hyuandi sort of launched earlier this year. Everybody seems to be piling on, even some of the dealers, the larger dealers are putting on their own programs. What is your general take on that, on spurring demand and it's clearly just another -- it's another form of an incentive. I mean -- is there something that will help really support the SAR in your mind? Or is this something that might just create a temporary bump and then we'll see a pullback like we've seen with past incentive programs?

It's helped Hyuandi a little bit, I think. But who knows. I mean, it's another program. It's something we're looking, other retailers have gotten in. Other manufacturers, GM and Ford as you've seen yesterday dove in. We're looking at it, and long-term if it is something that stays around, I don't know the answer to that, but it's another program that helps incent customers to come into the stores.

Great. Thank you very much.

Thank you. Our next question comes from the line of Stuart Smith with FAC, LLC.

Hi, guys. Good morning.

Good morning.

How aggressive are you guys going to be? I know you touched earlier on your Internet marketing strategy. How aggressive are you guys going to be for the remaining '09 year?

This is Jeff Dyke. We're very aggressively attacking it. It's really the staple of our business right now from both a new and used car perspective, and fixed operations. And it's probably at the top when it comes to operational focus for us and improving volumes. And I think you saw that in one of the slides that I did for new car market share and used car volume in January and February were just really, really decent. And a lot of that is because of how aggressive we have been ton Internet.

And couple that with the fact that I think print advertising being so costly and I think now a days just ineffective, I think it's a great way to go. I'll take it a step further. It's not just print. It's television and radio. And we've cut our advertising basically in half. And we're focusing the dollars that we do have heavily on the Internet and it's really driving our business. And so -- and that's from coast to coast, north and south, our business is really doing very well from an Internet perspective, and it's going to get better. I recently read an article that they said -- in the article it said, I think it was The Wall Street Journal, that for the first time since World War two there are fewest amount of dealerships in America, yet there are more drivers on the road. I think you guys are doing a great job ,and I think if you guys can pull through this '09, and the light at the end of the tunnel does indeed come through 2010. How do you guys see yourselves positioned with respect to competitors like AutoNation?

I mean -- this is Jeff Dyke again, I appreciate the comment. We're very, very well positioned. From an operational perspective, this company is performing better than it's ever performed. It's just getting through the liquidity issues that Scott and Dave have talked about, but operationally speaking I don't care if it's used cars, new cars, the Internet, whats going on in fixed operations, our business is headed in the right direction. We continue to get stronger each quarter.

But you make a great point about, if some dealers do fall off, and it is happening at an increasing rate, we're seeing that. It means demand isn't going to change as result of that, therefore, throughput through the remaining dealers is going to increase. It's going to help margins. It's going to help fixed operations. It's going to help everything. So I think all of us will be stronger.

One other thing to that too, is we've had also a huge focus on our training and because our turnover is reduced down to what I think from a comparative basis, might be Best-in-Class at a trend of 29% for the year. It makes the training stick. And it's really bringing all of our playbooks, and our processes in the stores together. So we look forward to getting through the opportunities here, and letting our operations take hold.

With respect to your training, I have visited on the West Coast, several of your locations, and you do indeed provide good training. They're all very pro-Sonic people. I felt like in many dealerships I was walking into a basketball game. They were really, really helpful, friendly and very, very upbeat. I commend you for doing that. That's a great thing.

Thank you very much.

All the best to you guys. I hope you guys can work out your financing.

Thank you.

Thank you. Our next question comes from Paul Kerry with Fountain Capital Management.

Hi, guys, thanks for taking the question. I was wondering along the lines of what John Murphy was asking about in terms of incentives, what about the cash for clunkers program? Is that actually causing people to stay away until those details come out? Or are people just not aware of that, or have you seen any impact from the talk about that program?

I don't think we've seen anything. I'm not sure people are aware of it. Especially the folks who might be interested. I think the program's great. We're strongly supportive of it. I think it's worked well in Europe, in raising overall demand for vehicles, and it was up 20% in Germany. It's got a lot of other benefits. The older cars tend to be much more polluting and gas inefficient and if you can put these people in new cars, I think it helps everybody. Helps the environment. And helps us.

Yes. And secondly, have you guys sought any kind of legal opinion on what the impact potentially is on your franchise agreements, if one of the manufacturers were to enter into bankruptcy? How your claims on that would fit, and kind of where you would fall out in that process?

We've actually done some evaluation on that. We're not prepared to go into it on this call but I think we would fit very nicely. Especially --

Do you believe the franchise agreement likely would remain in force, then, even in a bankruptcy situation? Is that your understanding or -- ?

I don't know. I know our legal people have taken look at it. I don't know all the facts. I just personally think they would be nuts to mess with great dealerships like the ones we have.

Right. Okay. And then finally, I was wondering if you could speak to the level of engagement of the CEO over the last, call it two months, versus level of involvement, call it 18 months ago?

This is Scott. Bruton is very engaged. His office is located in the Ford store, right next to our corporate offices. And he's there virtually every day that he's in Charlotte including Saturdays and some Sundays. And I've spoken to him four times today, so he's very engaged.

Okay.

Always has been engaged. You ought to come by and visit him. You can walk straight in his office. He doesn't have an assistant there. You don't have to go through 12 people to get to him. You can just walk right in.

Okay. I appreciate that. Thanks.

Next question from the line of [Joe Gagen] with Atlantic Equity.

I have a couple questions around the repair business. I see on the service and parts and repair, the revenues were down from like $248 million to $237 million. And there's been a lot of talk about how repairs will go up, because people aren't buying new cars or new used cars. Do you know why the service and parts went down, when there has been a lot of talk about people fixing their cars instead of buying new cars?

What's happening now is our customers, especially the domestics, are pushing off the heavy line work. And some of the heavier maintenance work that's needs to be done, and they're doing all the lighter work. There's kind of a two sided story there as well. We've got opportunity in our fixed operations, as we've been calling out for the last two quarters, and our playbook that we're executing now, our trends are getting better and better. The first quarter we called out here, that we should be about even year-over-year. And that's progressively better than what it's been over the last few quarters. So there's certainly opportunities from a Sonic perspective. And then the consumer's not spending as much money. And we're seeing that more prevalent on a domestic Cadillac line, than we are for, example BMW or Mercedes-Benz where they're actually may be spending a little bit more money. We should be, less our body shop business for the the first quarter, somewhere in the plus 3% range in that perspective.

But it's interesting within that, our oil change, quick lube, those kinds of things are up 20%, 25%.

Are they really?

Yes.

Why is that?

Consumer behavior, "Oh my God, I'm going to get a change so nothing goes wrong." And as Jeff said, I think they're pushing back on the larger repairs, and doing the smaller ones.

Now, do you think that your BMW and the foreign car business, repair business, is doing better because there's less competition from independents in the foreign work?

Maybe some of those smaller shops are shutting down. But again, our O count is up. It's just that average ticket is less. and the customer's just not spending as much money.

One last question. I've heard before that to some degree over the last year or so, that the manufacturers are pushing back on some warranty claims. Given what's going on with the manufacturers, how it's got really bad over the last six months to a year, is that accelerating that problem, where people put in warranties and they're refusing them?

It's not different than it was a year ago, or two years ago. You have to have your ducks in a row and submit the right paperwork, and they're great to work with and when you don't, they're not and so there's just been no issue or change there.

All right. Thank you.

Thank you. Maybe we'll take one more call.

Okay. Our last questioner is Josh Givelber with Nomura.

I got a quick question on your SG&A expenses. You broke it down in your press release and I guess in the other area, it went from $49.9 million to $64.9 million. And I know 3.9 of it was the lease breakage costs. I was wondering what the other increase was?

Yes, there was a fair amount of hurricane and hail storm damage. If you look a little bit further into the tables, it gives you some more of that detail. There was probably about $8 million or so of hurricane and hail damage for the full 12-month period.

David, that doesn't occur -- this is just in the fourth quarter.

Okay. I'm with you. Yeah, in the fourth quarter I probably have to get back to you on that one and dig into the details a little bit more on that one. I don't have the details right in front of me.

That was it.

Okay. If you want to give Greg a call.

You can just reach out to me after the call and I can give you more of the details as to what's running through that line.

Okay. Thanks very much.

Okay. Great. Well, I would just like to thank everyone, all our fellow shareholders and bond holders, everybody that participated in the call today. Have a super day. Take care.

This does conclude today's fourth quarter earnings conference call. You may now disconnect.