Sonic Automotive Inc (SAH) 2009 Q2 法說會逐字稿

Good morning and welcome to the Sonic Automotive second quarter earnings conference call. All lines have been places on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (Operator Instructions) As a reminder, ladies and gentlemen, this call is being recorded today, July 28, 2009. Presentation materials, which management will be reviewing on the conference call, can be accessed on the company's web site at www.sonicautomotive.com by clicking on the "For Investors" tab and choosing webcast and 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 result 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, please go ahead.

Great. Thank you. Good morning, ladies and gentlemen. I'm Scott Smith, Co-founder, President, and Chief Strategic Officer. Welcome to Sonic Automotive's second-quarter 2009 earnings 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, Jeff Dyke, Rachel Richards, our Vice President of Retail Strategy, and Greg Young, our Vice President of Finance. If you'll please turn to the first slide, Sonic Automotive Q2, 2009, conference call topics. Today, we will be discussing an overview of the quarter, and then turn the call over to Dave for a more detailed financial review. Jeff will follow Dave and give an update on our operational trends and additional color and then we'll summarize and make closing statements.

If you'll turn to the slide, quarter in review. Against a fairly weak but improving economic backdrop, Sonic once again delivered strong operating results. Our ability to stay focused on the basics on our people and what we can control, continues to benefit our overall bottom line. In a below $10 million [seller] environment, we again picked up market share in the quarter. We posted a quarterly used vehicle retail volume record. Our service lanes are seeing improved traffic, our fixed operation margins were up on a year-over-year basis for the first time since the third quarter of 2007, and our total SG&A expenses were down $27 million for the second quarter. Our controllable expenses as a percent of gross were also down from the prior year. Our operating margins before impairment charges was 2.9% which we feel is an outstanding job in light of this recession. For those of you who have been following us for the past year or so, you're aware that we've been preparing our organization to optimize our opportunities regardless of the external factors around us. We continue to build for the long term and not quarterly. As a result our performance will be sustainable for a long time. I would now like to turn the call over to Dave Cosper for his financial comments. Dave?

Thank you, Scott. And good morning, everyone. I have to tell you things feel a lot better on many fronts than they did just a few short months ago. Of course, we successfully addressed our maturing debt in May, and I want to thank again all our lenders for working with us. A key part of what helped us through that was the underlying strengths of the business. And this quarter's results we see those strengths emerging further in essentially every aspect of our business.

Turning to the slide, revenue for the quarter was $1.4 billion, down 22% or $400 million from a year ago. Income from continuing operations was $3.1 million, down $13 million from a year ago, and really not unexpected considering the challenging economic environment and the restructuring cost from our debt exchange. And I'll have more on that in just a moment. I'm very pleased with our operating margin which was 2.9% for the quarter excluding impairment charges and those were related to restructuring -- GM's restructuring. And EPS for the quarter was $0.07.

Please turn the slide and we'll talk about some of the color on the numbers. The successful negotiation of our debt resulted in several accounting impacts including increased non-cash interest and debt restructuring costs. These costs totaled $10.6 million for the quarter, and these are noted on the slide. In addition, we have an impairment charge of $3.8 million, and this is on several GM franchises that will be closed as part of GM's restructuring. Excluding these charges we earned $20 million for the second quarter, compared with $11.7 million in the first quarter on a comparable basis. And given this difficult operating environment, I think it's important to assess whether our improvement actions are having the desired effect. And our results show that they are. This slide shows two things -- first, strong sequential profit improvement from the first quarter, and second, the fact that even in a flat [seller], environment our performance is not driven just by cost reductions alone. So, basically on flat industry volume, revenue is up 10%, gross profits up 5%, cost is flat, and operating income is up 20%. Impressively, excluding the charges I mentioned, pretax income is up 70% quarter-to-quarter. Again, in a flat industry, we grew revenue and growth, we're able to hold costs flat, and that allows gross to flow through to the bottom line. Next slide, please.

This slide looks at EPS and makes the same adjustments for the debt-related costs and impairment that we just talked about. The slide goes on, however, to show the impact of the potential change in our diluted share count. The EPS accounting for this transaction is complex. Our actual diluted share count for the quarter was 41.6 million shares. This share count includes no impact from the new 6% notes that we just restructured, as these notes were not dilutive in the quarter. We do however, expect them to be dilutive in future periods and have, therefore, shown both Q1 and Q2 as if these shares had been outstanding and dilutive in both quarters. Recall that this new convertible debt is not convertible into shares until August, 2011, so we have a fair bit of time to take this debt out and avoid dilution, and that certainly is our plan. As you can see, after these adjustments, EPS increases from $0.14 for the first quarter to $0.22 for the second quarter. Next slide, please.

For accounting purposes, a value of $11 million has been ascribed to the embedded derivative included in the new convertible notes that we issued. A non-cash interest cost of $2 million to $3 million per quarter, will be amortized over the next five quarters. Next slide.

This slide shows our present debt structure post the debt exchange. As you can see, our revolver balance was $80 million at June 30, down from $100 million at March 31, and including, of course, the $15 million draw on the revolver as part of the debt exchange. We have a strong focus on cash generation and are pleased with the progress we're making. The revolver balance is about $45 million today, and we're working to reduce it further. Note that floor plan borrowings are down 26% or $286 million from year end. At the moment, we are finalizing administrative matters on the recently issued 6% bonds and thinking through all options for addressing the 4.25 debt that matures in November of 2010 and our syndicated credit facility that matures in February 2010. Next slide, please.

Comments here are short. This slide shows we're comfortably compliant with all our debt covenants and that's a good thing. Next slide, please.

Capital spending for the second quarter dropped to $6 million as we focused even more intensely on cash flow, and we were able to put several large projects on hold. Spending for the year is projected at $63 million, but this is contingent on us getting mortgage funding for the projects that we have on hold. And if that funding isn't forthcoming, we will not spend the money on these projects. Next slide.

I'm very pleased with our cost performance for the quarter and, frankly, for the year. Our entire team is working together to reduce costs in the best possible way. I feel we're spending smarter and optimizing our cost levels to compliment our revenue generation, and that's a really delicate balance that I believe we struck nicely in the quarter. In total, SG&A as a percent of growth was 79.7%, down from 83.5% in the first quarter. Compared with a year ago, excluding rent, SG&A as a percent of gross was down 100 basis points. We reduced essentially every cost element in our business. Last quarter, we indicated we were on track to reduce total costs by $135 million and within that, reduced structural costs by $85 million. We remain comfortable with that target for the year. And with that I'll turn the call over to Jeff Dyke. Jeff?

Great. Thanks, Dave and good morning, everyone. Echoing the sentiments of both Scott and Dave, I'm really proud of our results this quarter. Our performance is a testament to our strategies and the ladies and gentlemen of Sonic Automotive. Before I get into the numbers, I'd like to talk about one of the major contributors of our success so far this year and a differentiating factor as we continue to execute our strategies. For those of you who have followed us, Scott has mentioned repeatedly that our business is a people business, and that our goal is to become the automotive employer of choice -- plain and simple. While we've always focused on turnover, starting in August of 2008 we've really attacked this important opportunity. Obviously compensation, benefits, and work environment are critical, but just as important is the vision that we're building as a company and our ability to communicate this vision. To the great -- the great news for our investment community is we are just beginning. So, far this year our turnover is down about 50% company-wide. From this time last year. And that is a record low for Sonic. Since the beginning of the year, our associate engagement index has gone up significantly. Which is completely counter to what is happening in the industry. Record levels of engagement coupled with increasing longevity, has resulted in improved execution and higher productivity. Our investments in training, technology, and strategies are paying off. We're executing our game plan and the results are beginning to show just how powerful this company can become as it matures its ability to execute. I want to thank our team for the hard work and dedication to executing our game plan, and I'm proud to present the following numbers on their behalf. Now, let's review the segment results for Q2. Please turn to the next slide.

With regard to new vehicle sales, Sonic Automotive has gained market share in each of the last five months. Our focus on associate retention and the ability to execute our new vehicle inventory management, e-commerce, and preowned game plans have contributed to the success of our all-time high new market share levels. Total retail volume for the quarter was 19,300 units. A decline of about 32%. I'm happy to report that year-over-year rate of decline diminished each month of the quarter. In the month of June, approximately 15% of our dealerships actually increased their volume over last June. We finalized centralizing 100% of our new car ordering approvals at the end of last year. This move has yielded significantly better new car inventory controls since the end of the first quarter 2009. We've reduced our new vehicle inventory by about $45 million. Our new vehicle days supply at the end of the quarter was 62 days. A level that we are very comfortable with given the current business environment. Our inventory process is showing positive results, and our new margin, as well. New retail margin for the quarter was 7.1%, flat with last quarter. As you're aware, we ended 2008 with an all-time high customer satisfaction score for our company with 80% of our scores at or above national average thanks to our great team of associates at Sonic we're tracking to be ahead of that in 2009. Next slide, please.

Turning to preowned, I'm very proud to report that we not only set a quarterly used retail volume record, but we've also set a record for the first half of the year. Additionally, as you can see from the slide, for the first time in our company's history, our used to new ratio for the quarter was over 1 to 1. Total used retail volume was up 12.8% compared to the second quarter last year. And up 19.7% from the first quarter. Once again, the focus that we've placed on -- on associate retention, e-commerce, and the execution of our preowned game plan over the last several years is really paying off for the company. Right now it's fun to watch. We're generating more preowned traffic than ever thanks to our strategy. And at the same time we have a more seasoned and better trained group of associates that are driving the numbers you see. And this is just one part of what I'm excited about. In just a few short years this group of stores has been able to improve their average monthly used retail volume by about 50%. And what's really encouraging is that we have the opportunity and the ability to increase this number significantly. The momentum is continuing into July. Currently we're projecting about a 20% increase over last year, and we had a good preowned July last year. Our team is delivering the results and it's great to watch. Quarter after quarter they just keep getting better. Our used vehicle margin was 8%. Down from last year and last quarter. All brands and regions experienced a decline. Increased valuations in competition put stress on our grosses. However, so far in July we are seeing a pickup to that -- to those numbers. We'd also like you to please keep in mind that while the margins were off the additional unit volume yielded more F&I and internal gross. Our used vehicle inventory continues to be in fantastic shape. We closed the quarter with roughly a 30-day supply of used vehicles on hand. Next slide, please.

Finally, overall, our continuing fixed operations revenue was down 3.3%, as you can see from the slide, customer pay revenue was down 1.1%. The majority of which was Detroit big-three driven and Department Wise body shop driven. We're also extremely excited about the margin increases we are seeing in the customer pay segment. Service was up 100 basis points. Body shop was up 40 basis points while parts was down slightly. Total same store warranty revenue was down 1.1%. And we continue to experience increase year-over-year in warranty in our Lexus dealerships. This increase however, is offset by declines in other brands. Same-store internals were off about 12.3% and thats primarily due to lower PDI but in line with our new vehicle volume declines. For the quarter continuing fixed operations gross profit was down 2.3%. Continuing gross margin was 50.3%, up 50 basis points from last year. Just as a note we have hired a national body shop director that has just recently joined our team. And while it's not a huge portion of our business we're excited to start moving in the right direct on our body shops. The shops add a decent amount of parts revenue and bring some overhead coverage to the dealerships that actually operate body shops. We know there's some low hanging fruit here and expect to see positive results in the very near term. Next slide, please.

I want to take a minute to show our service customer patrons. Our customer pay performance has been improving each quarter as you see on the slide. This performance trend is in line with the trends we are seeing in other segments of our business. Our focus on retaining associates and executing our game plan in fixed operations is having a positive impact on our performance. As are you aware the adjustments that we have made in fixed operations have only recently been put into place, so the results that we're seeing are in their infancy. And we look forward to continued progress as -- as our fixed operations game plan matures to the level of our other business segments.

Before I turn the call back over to Scott for his closing comments, I'd like to summarize the first half of the year. While the last six months have been challenging both economically and professionally, I think I can speak for everyone at -- every associate at Sonic when I say that I've never experienced such a gratifying time. For the first two quarters of the year, despite a rather weak economic environment, our associates came through for us month in and month out by executing our game plan. So far this year, I think our results have shown the investments that we have made in our people, technologies, and strategies that Scott so eloquently laid out every quarter of 2008 were worth the investments. We took our time, developed the right strategies, and developed our people. This slide really illustrates our path to progress. Sometimes the best investments take time to mature. But once they do they usually are sustainable. In a down market we have managed to outperform expectations and every Sonic associate should take pride in their part of our continued success. So, with that , I'll hand the call back over

Thanks, Jeff. The numbers kind of speak for themselves. So, my closing comments will be very brief. Our business is sound and we'll continue to focus on what's important which is our people and our strategies. We reported a lot of great news today and I'm proud of all of our associates. And before I end the call, I just want to say thanks to each and every one of you who continue to work so diligently to make all of our success possible. Thank you team -- very much, I am very proud to be a part of this team and its an absolute honor and privilege to lead this company. We'll now open the call for your questions.

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Matthew Fassler with Goldman Sachs.

(Inaudible) down -- but I actually want the first question to be kind of a financial one related to the EPS calculation. If you could talk to us about how you get to the weighted average shares that you deploy and just any -- any moving pieces in the EPS calculation given the financings that you just did, that would be great.

Hello, Matt, this is Dave. I'm going to let Greg handle that. It's fairly technical accounting.

Good. Thanks. Then I'll have an operational followup. Thanks.

Okay.

Hello, Matt, it's Greg. We talked a little bit about this last quarter as we tried to lay out for everybody some of the impact that we could start to quantify at that point in time. And we were fully expecting that we would have some fairly significant dilution from the conversion feature on the 6% note. But when you go through the "if converted" method and you add back the interest and then add in the share count, the interest add-back more than offsets the impact of the share count. So, for the quarter, it was actually antidilutive so you do not add it back. So, that's why we ended up at the 40 million shares versus the high 50 million that everyone was expecting. But as Dave said in his comments, you know, I would model going forward somewhere in the mid-60 million shares. Because in a full quarter, it's going to -- if it is dilutive, it will amount to about 21.5 million shares on top of our 40 million shares already outstanding.

And we can follow up offline. But just the moving pieces that will determine its that -- whether it's dilutive or antidilutive in any given quarter would relative to the level of earnings? Or is the stock price having an impact on that?

I think it's really related to the level of earning. The stock price really would not impact that calculation at all.

Got you. Okay. I guess the second question I have relates to the -- to your used car business. Clearly you're really cleaning up from a revenue perspective from an aggregate gross profit perspective, maybe a little bit less. So, as you look at your used car gross margin rate, you know, in a market where we're -- I think a lot of your competition probably has been showing higher margins year-on-year. If you could just talk to us about how you think you're positioning yourselves competitively on pricing because it does seem like there are some margins -- some margin (inaudible), maybe some headwinds on the LTV side, the generalist and margin (inaudible) so, any insight you could give us there would be great.

Yes Matthew, this is Jeff Dyke, actually what we're doing -- we're looking at that a little bit differently. We're playing with the elasticity of our pricing which is helping if you noticed in the second quarter along with the first half of the year. We've got record volume levels, and -- and our used car volume, and we're actually taking a lot of new car market share. So, we're being very aggressive with trades. And then when you combine that with the thought process of looking at used car margin, not just on the front margin that you make but when you look at it front margin, F&I and what we make on internal gross, if you combine all that our gross is actually up. So, while there's a little bit of a dip in terms of the margin percentage, when you look at the total picture, we feel real good. That -- you should expect that number to move around a little bit as we play with the elasticity of our pricing moving forward this year.

Got it. Much appreciated. Thank you.

You bet.

Your next question comes from Jordan Hymowitz with Philadelphia Financial.

Congratulations on a very good quarter actually.

Thank you.

Thanks.

First question is -- follows up I think its on Matt's question. You said theer's 60 million shares should be assumed going forward?

Yes. I think so, Jordan. If you do the math on the 85.6 million of bonds at a strike price of $4, you get about 21.5 million shares. And add that to our normal weighted average share count of between 40 million and 41million. And that's where you get to the mid-60 million all the way in for the full quarter.

And then just so I understand, how come on page 8 you only assume 52 million shares?

They weren't outstanding for all of the second quarter. They didn't --

Okay, but if we -- if they were outstanding for this entire quarter, you would use 60 million for the --

That is correct, yes.

Okay, second question. On notes do the 8.625, those are due next Fall, right?

No, the 8.625 are 2013.

The 160 is due next Fall?

That's correct. November.

And at this point what are some of the options you're looking to take those out -- are they -- I guess, first of all, are they many of the same bondholders that had the first deal and might a similar deal be available? Or are you thinking about either some sort of capital raise or some sort of sale of dealership or -- or is it some combination of all three?

It's really a combination of all three. There is some common ownership of -- of folks with the 4.25's and the -- the notes, the 5.25's that we retired or exchanged. And we're looking at all options. I mean, the markets have opened up a little bit. The convertible markets. But, you know -- and our stock price is up. There's a number of different moving pieces that we're looking at. And we're thinking about it now.

Okay. And without naming which dealerships, can you say approximately how many millions of dealers are in the market to be sold or would there be an interest or it all depends on price, so to speak? In other words, if you don't raise capital most likely you've got to sell something, so to speak which would reduce your dealer base. And I guess as you think about that, would that be in one region you would look to get rid of or would it be broadly on what's available or -- what's the thought process there?

I mean, it's a pretty fluid environment. We have raised $16 million year-to-date. And are looking at maybe another $14 million in the very near term. We're keeping all our options open. It's not a fire sale, that's for darn sure. And interestingly, along with the, you know, the increase in our debt price and our equity price, our asset values, of course, are up, as well. And we've got very good stores. But we're-- we're going to play this smart and we're going to use a balance of everything -- we're going to use the capital markets and selective dispositions where it makes sense for it.

And you said $16 million has been raised. Can you say what valuations you've received for the dealerships that have been sold?

Yes. Probably about -- the best valuation was probably about six times earnings. Kind of back to what we were seeing previously for a very nice import store.

Six times pretax I assume?

Yes.

And would that be trailing three years or would it be the current number?

It's closer to the current.

Really, that's a great number.

Yes. It was pretty good. But as Jeff said, some of these stores are -- I mean, many of our stores are earning more profit this year than last year. With everything we're doing in pre-owned and what we're doing on the cost front.

Okay. Thank you very much, congratulations on a very good job.

Sure. See you, Jordan.

Thank you.

Your next question comes from Rick Nelson with Stevens Incorporated.

Thanks. Good morning and my congratulations, as well.

Hey, Rick.

Hey, Rick.

To ask you about cash for clunkers. What you're seeing there in terms of store traffic and how do you thinks that going to effect on used car values and that overall used car business.

Hello, Rick, I'm going to let Rachel provide just a little background on what we've done to prepare for cash for clunkers and then Jeff will give some highlights from the weekend.

Hi, Rick. This is Rachel Richards. We have seen significant traffic at our store level, walk in and also on our dealership web sites. We actually -- early on this year, under the direction of our chairman, went out and purchased cash for clunkers URL. So, we actually own that URL, if you go on www.cashforclunkers.com you'll go right to a site that we own. And we are referring customers directly into our dealerships. And we launched that Friday afternoon and we are up almost 5,000 hits per day just on that web site in addition to the internal pages on our dealership web sites. So, our traffic has been significant on-line and walk-in. We sold over 400 vehicles over the weekend, Friday through Sunday. Jeff, I don't know if you want to touch on yesterday's volume.

You know, Rick, so far right now in term of our volume it's represent about 20% -- 18% to 20% of total volume for the last four or five days. So, we've been very pleasantly surprised. Customers are coming in, they're bringing in the cars. They had a little trouble getting the store signed up but everybody else did. So, equal playing field. We feel pretty good about the program and where we're at.

Are you seeing any impact on the used car side since the program debuted?

No. As a matter of fact, you know, interestingly enough we were talking about this earlier today in California, you know, our California market is just on fire. From a used car perspective. Our southern California market is tracking to be up nearly 70% over last year this month. And in northern California, up 40%. So, when you add those numbers together, it's looking like we'll be up 50% in used car volume in California. And they had a very, very good cash for clunker weekend, so. Not at all. Both sides of the business are doing extremely well. And like I said earlier we're tracking to be up 20% for the month of July so far this month. So, I feel very, very comfortable on -- from both categories.

Alright. Some of the dealers are -- talked about the price rise in the used cars at auction. And having to pass that on at retail. And the LTV limitations that the banks have in place, wondering if you can comment there and how, you know, sustainable you think this used car business -- the improvement is.

Yes. I mean, Rick, we've been improving our used car business quarter after quarter after quarter for the last couple of years. And it's very sustainable. We're going to continue to grow. The prices are expensive. I mean, we're in short demand, the trades are in short demand. And so we're out buying inventory and when you do that, it puts pressure on your retail pricing. And if you run that right like we think we're doing, it's -- you're going to have to bring prices down in order to get more competitive and to stay in the right price range. And that's going to put, you know, some pressure on your margin, which you saw. But you really got to look past just pricing and margin on the front PUR or the front profit per unit. You've got to look at the whole picture. And when we run and we sell a used vehicle, typically we're trading a vehicle in, we're creating new car business and creating market share for our company. We're creating F&I gross and creating internal gross. So, we really look at our used car margin with that total picture. And we -- not only do we think it's sustainable, we think we can grow from where we're at.

Rick, you know the used car industry's probably, what, 43 million, 45 million units. And even if it shrinks some we're playing in it smarter and better. So, I don't think it's going to impact us any.

Right. Good to hear. Can you talk about how much revenue is in discontinued operations?

We're going to hunt for it. We made a few adjustments. Because one of the stores that we ended up selling actually wasn't in previously. Yes, there's probably 600 million to 700 million, something like that.

And are those considered, you know, prime -- primary type dealerships or -- ?

I'd say it's a mix. I mean, some of them are ones that we've been wanting to, you know, help along for a while. And there's a few good stores in there as well. We're going to be very selective. And I think we -- we can be right now.

Okay. Thank you very much. And good luck.

Alright.

Thank you.

Your next question comes from Ben Brogadir with Imperial Capital.

Yes, hello, thanks for taking the call. I was wondering with respect to your revolver in the (inaudible) book you showed 80 million outstanding. But then at the call you said you gave a 45 number. Is that how much is available or outstanding?

No, that's the outstanding. And it moves around. It's volatile. Depending on payroll hits and other payables, what have you. So, that is the amount outstanding. Availability at June 30 was about 45 million, 47 million.

$40 million is outstanding. The number on the slide is what was outstanding at June 30. The $80 million. It's come down substantially since the end of the quarter.

Okay, perfect. Thanks for that clarification. Thanks, guys.

Sure.

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

Good morning, guys.

Hi, John.

Good morning.

Sort of a followup question on the clunkers. It sounds like you're having great success there. But given your brand mix, you know, you typically don't have a lot of folks, I would imagine, coming in with trade-ins less than $4,500. I'm just wondering how that is going. I mean, the residual value on the vehicles that are being traded in, as taking advantage of the -- these vouchers. I mean, what is really going on there? It seems like an odd thing that you have a lot of trade-ins coming in with less than $4,500 in value in them.

Actually, John, you know, interestingly enough at the BMW stores, you're right. I mean, we're not seeing a bunch of those trades. But when you get off -- we have a lot of Toyota stores, a lot of Honda store, and a lot of Chevrolet stores. And when you get off into those brands, we're getting a lot of customers coming in. And so obviously, each and every one of the 450-plus cars that we did over the last few days, everybody came in with one of those vehicles. And that's the brand mix that those customers are playing in. Otherwise, the other brands really don't have the vehicle to sell that customer under the guidance of the program.

So, do you feel like these are -- these are buyers that are real incremental buyers coming to the market? Because you know, once again, it would be tough to believe that you'd still have people come in with cars less than $4,500 in value trading into a straight new car. I mean, that seems like a real incremental buyer. Is that correct?

Yes, it is an incremental. I mean, if you look at our run rate over the last six, seven, eight weeks, I mean we pretty much track out how we've been doing. And clunker volume has absolutely been 100% on top of that. So it -- it's certainly incremental.

Okay, its a big number. Then on slide 8 if we think about the first half earning of $0.36 and I know there's a lot of moving parts in the denominator here, in the earning per share as far the share count. If we were to think of that ramped -- you know, that share count ramping up to the 60 million unit -- I mean their 60 million share range, you know, that earnings would be maybe 10% lower give or take. So, we think about that, and flip that into the second half of the year and try to ballpark the second half of the year earnings. Then shouldn't your second half of the year earnings be similar to what they were in the first half? Maybe -- maybe 10% lower, and shouldn't we be look at earnings, you know, close to $0.70 a share for the full year given what's going on in the market? Is that a reasonable way to think about that?

Boy, I'd like to say -- if you think in millions first and forget about the share count for a second, I'd like to think we're going to improve. Because our costs are gaining -- cost reductions are gaining momentum. We're gaining momentum on the revenue side. And one of the key points we wanted to make was even though industry volume was flat in the first quarter to the second quarter, we grew revenue and we grew gross. And that flew through to the bottom line. So, I would like to see the second half stronger than the first half. Plus, with any luck the industry's going to go up. And cash for clunkers, maybe that will get extended, who knows. But, that should help us. And then your right, when you divide through by higher level number of shares, that's going to pull us down. But the millions should be higher.

So, you're saying the net income line, you know, forgetting about what would happen -- is going to happen with the share count and the adjustments there should theoretically be higher a lot higher than it was in the first half?

I would guess.

Okay, got you. I'm just asking that. Then if we think about the used vehicle business and it seems like you're pretty supply constrained at 29 or -- almost 30 days, 29.7 day supply. Is there anything that you need to do there differently? I mean, is it -- could you buy more aggressively in the auctions or is there anything to do there to help out? And how constrained are you in that business as far as executing sales by just pure supply dynamics?

You know, John, we've been running at about a 30-day supply. So, we're there because we want to be there. We're turning our inventory once a month. And so it's not a -- it's not an issue for us. If we wanted to ramp up inventory higher we could. But, we're keeping very, very tight inventory controls. We're buying about a little over 50% of the inventory that's on our lot today verses what we're trading for. And we're very, very comfortable with where we are, our processes and our game plan that we execute in our stores and have been for the last couple of years have put us at this number. In times past, we've been running -- at this time of the year we'd be in the 33 to 35 day supply range. But, we've actually pulled it back a little bit. And if I wanted to, I mean we could certainly push a button and go out and raise our day supply a little bit. It is not hurting our volume, obviously if you look at it, it's not hurting our volume at all.

Got it. And then just lastly -- I know you talked about disc-ops and I apologize, I might have missed some of the commentary here. But, I mean, was there anything that changed as far the brand mix or the intention to sell more dealerships in the second quarter versus the first quarter? Because the disc-ops seemed to ramp up pretty -- pretty significantly from the first quarter to the second quarter. Is there anything going on there as far as capital raise that we should be thinking about now that you're seeing better valuations in the market?

No, I don't think so. I think we've made some adjustment for some of the GM franchises that are going away. We sold one of the stores that wasn't in the list that we -- you know, its a fluid environment and we made a few change to make sure we got the right set in there to market.

So, really the big change is really the GM stores that --

Yes. It's not a material change and our strategy is unchanged.

Great, alright. Thank you very much, guys.

Thanks, John.

Your next question comes from the line of Colin Langan with UBS.

Good morning.

Hello, Colin.

I just want to clarify -- I mean, in terms of your -- so, all the debt is coming due over the next year or two years, do you still intend on the recently, you know, refinanced convert at 4%, the $85 million, you intend on prepaying that still? Or you're -- are you sort of more questioning whether you can do that now?

We're definitely going to take that out before it goes to conversion which is August of 2011. So, absolutely it's our intent to prepay that.

And can you do that without -- if you can act out the credit markets in any way? I mean I'm not saying you can, is that dependent on accessing the -- being able to --

No, not necessarily. It's part of the negotiation on that deal. We have conceptually a sinking fund concept related to asset dispositions. And if we meet certain thresholds we can use proceeds to take that -- retire the $86 million.

Okay.

It has to do with getting our revolver down to about $25 million and we're headed that way.

So, you think the proceeds of asset sales would be enough to -- to -- generate enough -- ?

It certainly could be. But there's also a call provision in there, as well, and you've got a couple of years, you know, I don't want to let it go that long, but you do have a couple of years until August of 2011 to retire it.

Okay.

And even though there's a call frame, it's a heck of a lot less than the dilution associated with it. So, we'll take it out.

Okay. I just wanted to check.

Okay.

And it n terms of -- how many dealers are now in discontinued ops? Because I noticed in the first quarter, you know, 10-Q that some were reclassed, and -- and moved in and out of I guess in that quarter. And then when I look at the financial statements today and the balance sheet, the number of assets held for sale is dramatically down.

Yes. Its probably 16, 18 stores, something like that. It's down from where it was as I've mentioned. A couple of franchises have gone away. Because they're GM and you can't sell it because it's going away. We sold one of them. And we've [rejiggered] it based on, you know, what we feel is best going forward.

How many were in there at year end, though? Compared to the 16, 18 today?

There was somewhere in the mid-20's or so.

Okay. Mid-20's. And how many -- and you sold how many to date?

We have sold or disposed of one, two, three, four -- four stores. GM, Cadillac, Nissan, and another store.

And do you have any color in terms of how many of the -- how many of your dealerships were impacted by the GM dealer plan to shut dealerships down?

Yes. There was 12 franchises.

12 franchises, okay. And is it less then in terms of the number of absolute dealers or -- ?

I think it was about six physical dealerships, Colin.

And were they already in the discontinued ops or -- ?

No. One of them. One or two of them.

Only one or two?

Yes. There are six stores and 12 franchises, thanks, Greg.

And don't -- and the disc-op rules are really strange, Colin. They actually won't go into the disc-op group until we actually terminate those franchises. Because in reality they're no longer held for sale. That's what Dave was saying. We had a couple of stores that were in disc-ops but now we've had to move them back out because we're not marketing them any longer.

Okay. Aright, that makes sense. Alright. And, I'm sorry, and what was your -- is any -- did you generate -- you generated positive cash flow in the quarter? I mean how much free cash flow were able to generate this quarter?

Well, we reduced the revolver by, what was it, $20 million?

Yes, we're generating between $20 million to $25 million of EBITDA, which --

Okay. And I guess the last one, I noticed F&I per unit had been down. Is there any reason for that? The decline in F&I per unit? Is that getting tougher to find -- ?

Yes, Colin, this is Jeff, in fact our reserves are down a bit. A little of that has to do with the mix of inventory that we're playing with and used cars and elasticity on pricing there. We're really retailing everything we trade for other than the clunker vehicles. And -- so, that's playing a role in the overall issue. And we've got two markets that are really generating most of that decline. And we're working on them right now.

Okay. Alright. Thank you very much for taking my questions.

Okay, Colin.

Your next question comes from the line of Derrick Wenger with Jefferies and company.

Yes. Let me go through several questions. What is the total size of the revolver, and is there more than one tranch of that? And what is the availability on the facility at quarter end, and now? And then secondly, are you restricted from buying back debt right now, any of the debt, and if you could define the liquidity ratio and then just give me a D&A estimate for the year.

Wow. Why don't you --

Start with the revolver.

Yes. We are restricted from buying back our debt at present.

And then the resolving facility is a syndicated facility, there's three tranches it covers. New vehicle floor plan, used vehicle floor plan and our revolving credit facility. And, Dave just gave the availability number. Can you pull that out again?

It's 47 -- it's $47 million.

Yes, roughly almost $50 million available at the end of June under the revolving facility. And it's about -- round number about a $200 million revolving credit facility.

$200 million is, that the borrowing base or is that the actual, you know, size of the three tranches?

That's not the size of the three tranches. It's a 1 -- its about a $1 billion facility with all three tranches in it. The revolving credit facility -- the borrowing base is slightly under that $200 million.

The borrowing base is slightly under $200 million. But what is the size of that revolver?

Yes, I had that number -- don't have it front of me. It was 2.25. It's reduced by asset dispositions. But I just don't have it in front of me.

Okay. And what were -- what's your estimate for depreciation and amortization for the year? And then if you could just define that liquidity ratio that you put in your press release -- or you have on your web site. The covenant?

Yes. D&A -- probably going to be about $18 million. Because, we're not spending a heck of a lot right now.

Uh-huh.

And liquidity ratio?

Liquidity ratio is just your current assets minus your current -- let me back up. Current assets plus availability under your revolver. Over your current liabilities. But, for current liabilities you have to add back some of the debt that for GAAP purposes is shown as current but for covenant purposes it doesn't go current until it's within six months of maturity. So, there's a little bit of math you have to do there to get to that ratio.

We could probably take you through that separately.

Okay. Alright. Great. Thank you very much.

Your next question comes from David Leiker with Robert W Baird.

A question for you on the service side. You've been running negative 3% to 5% here for the last four quarters. Are you seeing any stabilization in that sequentially that that can improve here by the end of the year?

I mean -- David, this is Jeff Dyke. It has been at about that same level. What we're seeing is, is customer pay increasing if you look at the last slide that we presented. Our customer pay numbers are -- have gone from, you know, Q3 of '08, being just slightly down to now up 1.7%. A lot of that also depends on the year-over-year new car volume because of the PDI that goes on in the shops. And along with body shop. Our body shop business is down I think some 12%. And we've hired a new body shop manager that's helping us correct that trend. So, you really got to break fixed operations down into several different categories. The most primary category for us is looking at customer pay. And customer pay is what's -- is doing better. And it -- it's continuing to get better moving forward. So, we do see that between now and the end of the year that not only will our margins continue to get better, but our revenue should continue to increase.

And are you seeing drivers, you know, hold off on deferring maintenance? Has that kind of run its course or is that still an issue?

Some. But we've made some adjustments in our pricing methodologies to help try and drive customers in for some of the more big-ticket items. And that's playing a role. Our RO counts are up, and so that -- that's certainly helping us out.

And then on the cash for clunkers, of the buyers who are coming in, are you seeing a difference -- I realize it's only a couple of days. But are you seeing a difference in the mix between cash buyers versus those who are looking for financing?

It's a -- it's a mix. It's a blended mix. t's a little too early to tell, but we've had both, I mean we've had certainly plenty of cash buyers as a part of that mix and also consumers looking for financing. It's a blend.

And then on the finance side are you seeing any difference in the approval rates versus those who would have been buying before cash for clunkers?

No.

Okay. Great. Thank you.

Your next question comes from the line of Adam Wright with [Conokius].

Hello, gentlemen. Pretty much some -- a caller had asked my question before which was the impact on the used market. When you responded you were talking about California in particular. That -- it sounds like there was no impact positive or negative. I was wondering outside of California, it sounds like potentially California was outlier. It sounds like that -- potentially growing from a small base there. But outside of that market was there any impact either, on the good or the bad side?

I mean, our used car business -- I think if I understand your question, are you asking cash for clunkers effect on -- ?

Yes, yes.

Okay. Yes. It has not affected our used car business in any market. Our used car business is strong in every single market that we have. We're up year-over-year in every market that we have for the quarter. All markets I think set preowned records for the quarter and July has been very good. We're up in every single market that we have in July. So, California's just overstated because in the past we have not driven the used car volumes that we could have. But we're certainly becoming more and more mature there. And really across all of our market, our used car business is strong.

Okay. Going forward do you expect this to continue, basically meaning have no impact from the cash for clunkers?

Yes. We expect it to not affect our used car business at all.

Alright, perfect, thank you very much.

Your next question comes from Jordan Hymowitz with Philadelphia financial.

Well, can you use your mortgage financing for maintenance CapEx?

No.

Okay.

No. That store level typically, Jordan. And the mortgage financing has been on whole properties, buildings and land that we've owned.

We don't have a mortgage facility. Jordan, we do it on one off project by project as we completed them.

So, the -- the 13.5 million of maintenance CapEx has to be funded from cash flow this year?

Correct.

Okay. But facility improvement could be funded from that?

Yes.

Okay. Second, you just said you don't expect any changes from cash for clunkers. And I'm confused by that. I mean, if someone was looking at buying a used car for lets say, 15,000 and a new car was 20,000 and that new car is now $15,000 because of a $4,500 tax credit, why would the used car price not either go down or the sales be impacted? I mean, I'm confused by that.

Well I mean we're just not seeing it. I think that's 100% incremental business. In our used car business, I mean you look at the numbers and you can see what from what we're telling you our used car business has not been impacted at all. There's such a -- if you really look at the used car market, I mean we sell about three times as many used cars in the nation each year as we do new. So, there's just a huge pool of customers for preowned that from a retail perspective -- from an auto retailer's perspective, we don't tach as much as sometimes a private market does. So, we're doing that. And that's why you see us playing with the elasticity of our pricing. And I think because of those moves that we made, it's just not going to affect our overall volume or it hasn't. If it has, I'll take the 20% increases that we have and the new car market share that we've gained. We're enjoying success on both side of the table.

But it's only been in -- in practice three days at this point, correct? Cash for clunkers?

It has, but you got to think that, you know -- you've got to think that early results based -- you know, I think the consumer base was saving up for the evolution of this starting. And so we'll see, you know, ongoing what happens. But, we're not projecting in any of our numbers that our used car business is going affected by cash for clunkers. It shouldn't be. There's just too big of a customer base out there for used cars. It's incremental business to our company.

Okay.

We have time for one more followup question and that comes from the line of Matthew Fassler with Goldman Sachs.

Hello, this is Mark actually filling in for Matt for a quick followup.

Hello, Mark.

How are you? I was looking at total sales that were down less than comps this quarter which was different from last quarter. And I just wanted first to know if you could confirm that this was due to taking some store out of disc-ops and secondly, were these dealership above or below average profitability and how did they do when they were in disc-ops? And if you could quantify the impact on themselves and profit from these different moving pieces, that would be great. Thank you.

The comparisons that are shown are comparable. They've adjusted both sides. So, the change in revenue, you know, percents that you're calculating having nothing to do with the change in disc-ops, okay? You with me on that? We've adjusted both sets of financial statements. And --

Right. Yes.

Yes. Okay. And actually, you know, the change in what we did with disc-ops actually pulled down our Q1 result a little bit. Continuing out the result.

Uh-huh.

So, it really didn't move pro -- I mean, it's just a few hundred thousand. It really didn't really move our profits one way or another. Some stores went in, some stores came out. And net-net profits didn't move much continuing (inaudible) and certainly not in total.

Okay, so even if it -- uh-huh?

Does that help? Is that what you were asking me?

Yes. And actually just -- it pulled down first quarter, but just to be clear, did it pull up second quarter? Results of taking these dealership out of disc-op?

No, there's really no impact either quarter. It was just a few hundred thousand dollars. It was insignificant.

Okay. Thank you.

There are no further questions at this time. I turn the conference back over to Scott.

Great. Well, we'd like to thank everybody for joining us on the call today. And we look forward to a successful quarter.

Thank you very much.

This concludes today's conference call. You may now disconnect.