Sonic Automotive Inc (SAH) 2010 Q1 法說會逐字稿

Good morning and welcome to the Sonic Automotive first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (Operator Instructions)

As a reminder, ladies and gentlemen, this call is being recorded today, April 27, 2010. Presentation materials which management will be reviewing on the conference call can be accessed on the companies 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 companies 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 those statements made. These risks and uncertainties are detailed in the companies filings with the Securities and Exchange Commission. Thank you.

I would now like to introduce Mr. Scott Smith, co-founder and President of Sonic Automotive. Mr. Smith, you may begin your conference.

Great. Thank you. Good morning, ladies and gentlemen. I'm Scott Smith, the Company's President, Chief Strategic Officer and co-founder. Welcome to Sonic Automotive's first quarter 2010 earnings Conference Call.

Joining me on the call today are the Company's Vice President, David Smith, Vice Chairman and Chief Financial Officer, 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. Today, I'll discuss an overview of the quarter and then turn the call over to Dave for a more detailed financial review. Jeff Dyke will follow Dave and give an update on our operational trends and then I'll summarize and make closing comments and we'll open the call for your questions.

If you'll turn to the slide overall results Q1. At Sonic Automotive, we're building one of the best companies in America to work and shop. We have a culture focused on making associate satisfaction our number one priority. We believe that happy associates lead to happy customers and higher returns for our shareholders. One year ago in the first quarter of 2009 we launched a large scale plan to improve communications with our associates and reduce our associate turnover.

In 2008, our total annual associate turnover was 56%. Today, we are tracking less than 25% with our long term goal of being less than 15%. With lower turnover, our training and play books are gaining traction and our execution is improving.

We ended 2009 with 83% of our dealerships exceeding national averages for their respective manufacturers and customer satisfaction scores. Our goal is to have all of our dealerships exceed national average in CSI. Operating results for the quarter continued to prove the validity of what we're doing at Sonic Automotive. Our overall revenue was up 13% with every one of our departments seeing increases year-over-year.

Our new business, both volume and margin was up nicely over the prior year as we saw an increase in the new vehicle SAAR environment. New vehicle revenue growth was nearly 14%, was driven by 10% increase in volume and a 4% increase in the average selling price. Our used fit business continues to grow as our operational playbook continues to become an ingrained process in all of our stores.

Used vehicle volume was up 25% over last year and this is against comps that were significantly stronger than the rest of the peer group. Our used to new ratio was at 1 to 1 for the quarter, a period where the new vehicle volume was also growing. Our parts and service revenue was up 3% with a 70 basis point improvement in margin. Our fixed Ops benefited from the manufacture recalls from the quarter. Our customer pay business was up approximately 3% and Jeff will discuss further the trends in this area of the business.

I'd remind you that we are in the very early stages of our playbook rollout for fixed operations and we fully expect improvement in this area for the remainder of the year. Dave will have more color on our overall profitability and our SG&A levels, but I do want to make a few comments briefly on our expense structure. A majority of our SG&A to gross increase came in variable compensation line.

We indicated over the course of last year that we're approaching the business and our compensation practices differently than our peer group. We saw slower than expected start to the quarter in January as we had a hangover from a huge December but overall, I'm very pleased with our performance as we saw our SG&A numbers come more in line with our expectations as the quarter progressed with over a 200 basis point improvement year-over-year for March.

We built our budget at the 11 million SAAR number and hit our budget exactly for the quarter. We remain on track for our plan for the year with potential upside should we see continued strengthen the SAAR during the remainder of the year. I'm pleased with all of the work that we've done to strengthen our balance sheet. Dave Cosper, Mike Dickerson, Greg Young and our financial team really stepped up for us when we needed them. We completed another successful offering this past month which allowed us to address $200 million of our senior subordinated notes maturing in 2013. We have $75 million of our 8 5/8% notes left in 2013 while our new 9% notes are not due until 2018.

I'm pleased to be able to tell you today that our balance sheet is in the best shape that it has ever been in and we have a plan in place to continue to deliver and reduce debt by another $75 million to $100 million. With that, I'd like to turn the call over to our Chief Financial Officer, smiling Dave Cosper. Dave?

Thanks, Scott. Good morning, everybody. Revenue for the quarter approached $1.6 billion up 13% from last year. Gross profit was $269 million up nearly 9% from last year and finally operating profit at $35.9 million was 2.3% of revenue.

Profit after tax from continuing operations was $7.5 million up from $4.1 million a year ago. And although it's a substantial improvement I think we could have earned more in the quarter. From a profit perspective we got off to a slow start in January, as Scott mentioned, which followed a very strong December. Things improved in February and March was extremely strong. We're seeing that strength continue in April and feel good about our sales momentum, cost structure and profits. EPS for the quarter was $0.14, up from $0.10 a year ago.

Next slide, please. This slide shows our SG&A. And SG&A as a percent of gross was 83.5% for the quarter up 10 basis points from 2009. We made good improvement in advertising, other fixed and variable costs and rent and rent related and as Scott mentioned this was offset by higher compensation costs. We're making some adjustments to our compensation practices to one, insure that we're at least market competitive and two, to drive behaviors and performance that we desire.

We're also increasing our investment in training and systems to support our people and our strategy is working. And I see it in the March numbers. As Scott mentioned, we were down nearly 200 basis points in March versus 2009. Restructuring the business to generate revenue and not playing defense. Our sales performance in all our business lines is showing that and the profits are materializing. What's more, our associates are happier, turnover is down and customer satisfaction is rising.

Next slide, please? Scott mentioned our debt offering, this slide shows our major debt maturities and we've really come a long way in one year. Presently our only near term maturity is $17 million of debt due later this year and we have cash in the bank to retire this obligation. As you know, last month, we issued $210 million of 9% coupon notes to push the maturity of debt due in 2013 out to 2018. We successfully completed the call of this debt and retired $200 million of our 8 5/8% bonds earlier this month.

This action of course improves the maturity profile of our debt but it also helps stagger our maturities and reduces the amount of debt maturing on any given day. And of course this reduces our refinancing risk and we're very comfortable with the way our balance sheet looks at present. Going forward, we're committed to reducing our leverage further and are targeting to reduce our debt by further $75 million to $100 million over the next few years. And with the balance sheet in very good shape now, we're able to focus fully on the business and the many strategies that we have for growth.

Next slide, please. We're comfortably compliant with all of our financial covenants and on March 31, you can see that in the table. And these covenants they tighten over the life of our credit facility. And the 2012 covenants are shown on the right side of the slide, and as you can see, where we ended March, we actually complied with the tighter future covenants as well.

We ended the quarter with $214 million of cash on the balance sheet and that's because we issued new debt in March and retired the debt in April as I mentioned so we were holding an extra $200 million at quarter end. We did retire that debt. And as of today, we have $40 million of cash in the bank with no borrowing on our revolver.

Next slide, please. Capital spending for the first quarter was $6.5 million net of mortgage proceeds of $1.3 million. We've resumed investment in three large projects that we put on hold in 2009 to preserve cash. Capital spending for the year is projected at $37.8 million net of mortgage proceeds of nearly $21 million.

Before I turn the call over to Jeff, I'd like to give you a couple closing thoughts. As you know, we're not giving guidance and having said that, let me talk just a little bit about how I see things going forward. I've looked at analyst estimates for the year and they ranged from $0.90 to $1.25 full year EPS and that's a pretty big range and it's not 100% clear to me what industry volume assumptions are for everyone but some I think are as high as 13 plus million units. And recall we're planning the business at an 11 million industry and that's what Q1 actually was. As Scott mentioned and I did as well, we got off to a slow start but we're picking up steam and performing nicely. As I look at the analyst estimates, it appears to me that we're seeing industry volume for the year, some of the analysts at 11 million and I feel that we can hit earnings close to what they are projecting at that level. So with that, I'll turn the call over to Jeff for a discussion of our operating performance. Jeff?

Thanks, Dave, and good morning everyone. As mentioned on previous calls, our attention to associate satisfaction, associate retention and our ability to execute our E-sales and pre-owned playbooks continue to contribute to the success of our new vehicle sales. While we saw year-over-year gains in each of the three months in the quarter, our year-over-year revenue and percent gains grew with each month of the quarter accumulating in a March increase of 18% over prior year. What is really exciting is our growth in April is tracking up in unit volume 26% as we continue to implement and execute our new vehicle playbook.

As part of our playbook execution, we added in store and/or regional E-sales offices in several regions this quarter. Which added to our SG&A as we ramp up this new structure which will play a significant role in our traffic Management execution. Returns from our initial E-sales concept rolled out in the fourth quarter are really starting to show fantastic returns but we do have about a four to five month ramp up period before we begin to see the returns as E-sales personnel come on line.

Total new retail volume was up 21,484 units a year-over-year increase of 10%. We continue to manage all new car inventory ordering on a centralized basis. And are proud to report our new car day supplies in outstanding shape of 54 days significantly better than last years 74 days. We're up from the fourth quarter of 49 days as we've increased our inventory by a few days to support the upcoming selling season.

On a quarter to date basis new vehicle margin was 7.1% up 30 basis points from prior year. And as you can see on the slide gross profit from unit was up $179 or 7.8% and gross profit dollars increased nearly 19%. I want to provide some regional new car color for you for the quarter. Florida was up 34% in revenue and 23.5% in volume. Houston was up 25% in revenue and 19% in volume.

The Mid Atlantic area was up 29% in revenue and 24% in volume, while Las Vegas was also up 32% in revenue and 24.5% in volume. Our Northern California market was up 18% in revenue and 14% in volume, and Southern California, Denver and the Dallas markets were all up but single digit and did not enjoy the large double digit growth until the month of March.

Next slide, please. We continue to gain momentum in our pre-owned business as we posted our strongest used car revenue and volume quarter in Sonic's history. This marks our forth straight quarter of double digit used vehicle volume growth as our pre-owned team continues to execute our play book.

As you can see on the slide, we grew used vehicle revenue nearly 29% for the quarter and grew our used vehicle volume by nearly 25%. The quarter was highlighted by our outstanding performance in March up 34.6% over prior year and setting our all-time single month volume record.

The great news is that April looks like it will be even stronger than March in both volume and year-over-year growth which is now tracking up 35% to 36% as our team continues to excel in this very important part of our business strategy. As you can see on the slide and as we discuss in detail last quarter our used vehicle gross margin has stabilized as we projected. Our margin percentage actually is a little higher than our forecast and this is strictly due to inventory tightening and front margin growth per unit moving up as a result.

You should expect our margin percentage and gross profit unit to remain relatively flat throughout the remainder of 2010. Our used to new ratio was 1 to 1. Our best quarterly performance as we continue to work towards our goal of achieving a sales average of 100 pre-owned units per store, per month which will add $1.1 billion in incremental revenue to our current base. This does not take into consideration the incremental revenue as a result of increased fixed and F&I due to the increased in pre-owned volume.

As we've discussed in previous quarters our buying organization continues to grow as we added seven buyers over the past few months. We have buyers now covering our purchase needs in all of the Honda and Acura stores on the West Coast as our team perfected our buying process in the first quarter. The progress that was made has allowed us to now add other import stores on the West Coast including Toyota and Nissan.

This should be complete by the end of the second quarter and then we'll begin to add more markets moving eastward over the remainder of the year. Our plans are to have 100% of the stores covered by our buying organization by the end of 2011 if not sooner. This move has had a positive impact on our Honda and Acura growth. On the West Coast as volume was up approximately 35% for the quarter out pacing the Company, our other Honda stores and West Coast in general. Our certified pre-owned mix was 35% for the quarter right in line with our target.

Inventory ended the quarter at 33.5 days as we began to build inventory for the second quarter and we're purchasing heavily now to keep up with a significant volume increases that we're seeing as a result of our playbook execution.

Next slide, please. As we discussed last quarter we continue to make progress with our fixed operations playbook execution. We fully expect to continue to improve on the gains that we've seen in recent quarters as we work on our goal to have 100% of our stores 100% fixed absorbed.

We had two full regions 100% fixed absorbed in March as the Company was 92.7% fixed absorbed for the month and 86.6% for the quarter. Achieving this goal will add $250 million in revenue to our current revenue base.

We're making great progress with our service line merchandising program. And we'll begin to rollout this quarter our new good better best tire program as well, the program combined with our service line merchandising selling process will continue to bolster our customer pay revenue which was up $3.4 million or 2.7% for the quarter. As I noted last quarter, we began to launch our body shop playbook which will provide great support to our 26 body shops across the country. As we see significant upside opportunity in this area of our business, and we'll continue to keep you posted as to the progress we makeover the next couple of quarters.

Overall our fixed operations revenue was up 2.8% while gross margin grew to 50.3% up 70 basis points over prior year. As stated our customer pay revenue was up 2.7% and customer pay gross dollars war up 2.6% while customer pay gross margin percentage was 56.8% down 10 basis points. Same-store warranty revenue was down 10.8% which included substantial increases at our Toyota stores as a result of the Toyota recall. Warranty continues to be in the 16% range as a percent of our total fixed revenue.

Next slide, please. Here is some color on our outlook for the remainder of 2010. First, we're in the second year in fixed operations after the introduction of our playbook, so we expect to see an improving fixed environment driven by customer pay as the year progresses.

Second, as we describe last quarter, we budgeted 2010 and 11 million SAAR, and at the end of the First Quarter that's exactly where we ended up as Dave and Scott talked about earlier. There's still many analysts and industry leaders projecting at 12.5 million and 13 million SAAR, and if this occurs we have upside to our current goals for the year.

While we're seeing an improving new vehicle environment right now we continue to be cautiously optimistic we're seeing beginning of a slow new vehicle recovery. But are not ready to commit to a 12 million plus SAAR for the year in our planning. We prefer to remain conservative. You should expect to see SG&A as a percentage of gross decline in the coming quarters. March was a good indicator for us as our plans are beginning to materialize. As Dave and Scott mentioned our SG&A was over 200 basis points lower than last year. Before island the call back to Scott I'd like to thank all of our Sonic Automotive associates for their hard work and dedication to the execution of our objective in making associate satisfaction our number one priority. This will lead to lower turnover and create the ability for our training organization to deliver world class training which will improve customer satisfaction and return on investment for our shareholders. As Scott said our turnover is on track to be less than 26% for the year, which will mark the third straight year of significant improvement in associate satisfaction and turnover and supports our mission to create one of America's greatest companies to work and shop. Thank you, team. Scott?

Well, thank you, JD, for the operational update. I just have a few more comments before we'll open the call up for your questions. I'd like to tie this altogether for you by providing a glimpse into what we see in our future over the next three to five years. There are a couple of areas in SG&A that may be of particular interest to you.

It's important for you to understand that we'll invest over $20 million in training and new technology this year alone to help us achieve our goals. We're building Apps that will enhance our customers experience and enable our associates to become more efficient. We're also exploring ways to compensate our associates in more customer centric ways. Which will lead to some SG&A fluctuation as we saw in January of this year, although February and March were much more predictable as Dave described earlier.

We're expanding our new car playbook to include many of the processes that have proven to be beneficial on the pre-owned side. And we expect these additions to help Sonic Automotive improve market share in the new vehicle volume levels over time. We're well on our way to achieving our pre-owned goal of averaging over 100 units per store, per month which Jeff mentioned. And which will add $1.1 billion in incremental revenue and over $100 million in incremental gross, not including the effect on fixed and F&I.

We're also making progress towards our goal of 100% fixed absorption which will add an incremental $250 million in revenue and $125 million in gross. We've challenged our F&I teams to achieve two products per vehicle sold in F&I. Today, we have many stores well over the two products goal and look for the remainder of our stores to achieve this goal as well. This achievement will add an additional $120 million in incremental gross. The combination of the above, excluding any new car volume improvement or SAAR improvement will yield the Company an incremental $1.5 billion in revenue.

Turnover is reducing as you've heard on this call and we'll achieve turnover levels of 15%. As we do, it will yield more effective operations and return on investment for our shareholders. We believe that we can achieve these incremental levels of revenue and growth without having to invest money and adding additional dealerships to our portfolio or seeing any meaningful improvement in the SAAR. Any SAAR improvement or acquisitions would only enhance our plans.

We appreciate the opportunity to share a small glimpse into Sonic's future with you. We have several plans that we'll unveil in the coming quarters which revolve around the customer experience and the technology enhancement plan including the addition of the Sonic Apps Store that will significantly improve our associates ability to communicate both internally and with our customer base.

We continue to see the benefits of the patient, consistent rollout of our playbooks and operating initiatives. Over time, as business and cash flow improves, we plan to maintain our focus on our investment principles, reducing our debt, and when prudent, phasing back our 401 (k) for our associates and dividends for our shareholders. We reported a lot of great news today and I'm proud of all of our associates. What a difference a year could make.

Not long ago our stock was below $1.00 and there was a lot of uncertainty out there about the future of our Company. Today, we're stronger, healthier, and better than ever. We're building a culture centered around our associates and customers to become one of the best companies in America to work and shop. Before we take questions I want to take a minute to thank all of our associates and vendor partners that join together every day to carpe diem. Thank you, team. It's an honor and a privilege to lead our Company. At this time we'll open the call and take your questions.

Ladies and Gentlemen, (Operator Instructions) Your first question comes from the line of Rick Nelson with Stephens.

Good morning. I'd like to follow-up on the SG&A. I know you mentioned that your plan differs from the other auto dealers. I'm wondering if you could talk about that and what recent adjustments were to SG&A? And if the SAAR hits your forecast, where would you expect SG&A gross to be for the year?

So hey, Rick it's Jeff Dyke. How are you?

Good, thanks.

Good. Hey listen, first of all there were a lot of moves, you know, last year was so uncertain and as we, you know, kind of for started to part for us at the end of the year, we had held off on a lot of plans that we wanted to execute last year but just couldn't. So with January started, we began to add a couple of different things. I talked about buyers and our E-sales offices and our stores and those things don't have an immediate impact.

It takes four or five months to get all that stuff ramped up so it had an impact on January's SG&A. As those items began to de live a little bit our SG&A as a percent of gross got better and better as the quarter went along. Accumulating in March we were 200 basis points below from March from previous year and we're seeing that in April so we've just executed a lot of things in the beginning of the year that we withheld off on last year.

You know, I expect our SG&A to be in line, you know, on a full year basis. But, you know, we did start off the year a little bit slow in terms of new car volume and just a little bit of a hangover from December and that's what caused the SG&A fluctuation. It was primarily built into January. February was much more normalized and March was actually fantastic. So we expect the year to be a good year. Got off to a slow start and implemented a lot of things we've been holding back on last year that we really wanted to get up and running this year and that all started January 1 and it caused a little bit of a slowdown from an SG&a perspective.

And would you expect that expense ratio to narrow?

Yeah, absolutely, and we saw that happening in the quarter and that will continue to happen as we move through the year.

Year-over-year, I think you mentioned you were down 200 basis points in March. Is that the magnitude of improvement that you're expecting for the year?

Rick, this is Greg. I think in March, it was a little bit higher than 11 million SAAR, so if we're still planning on that 11 million SAAR level for the year, you know, I don't expect to see quite the same level of improvement that we saw in March. And as Jeff and Dave mentioned, you know, to the extent we see the recovery coming and the new vehicle environment moves up then yes we would certainly ratchet down our expectations even further on SG&A. But I think an 11 million SAAR, you're kind of still in that 80 % to 81% range.

Okay, thank you. That's helpful, and at 11 million units, could you indicate you're comfortable with the low end of the first call estimates?

That's pretty much what I signaled, Rick.

Okay, and then also I'd like to follow-up on the Toyota impact to service and parts. You reported 2.8% same-store growth. What would that have looked like ex Toyota and if we could go through the segments on customer pay, warranty, internal as well, that would be helpful.

If you pull out the Toyota impact which was about $2.1 million for the quarter, our total fix was up $4.7 million so we would have been at about 1.5% increase. We feel like we're making really nice progress from a customer pay perspective and our customer pay is, you know, really what we're paying attention to here is the nice increases that we're seeing there. So the other thing that you have to remember is that's offsetting a $1.6 million year-over-year Lexus decline because we had big warranty impact from Lexus last year in the first quarter, so those two things are pretty much offsetting each other on a year-over-year basis.

If you add Mercedes back in there they are absolutely offsetting each other so we feel real good about where we are on a fixed operations perspective. We're making great progress and that's why I told you we should see sequential growth and improvement as we move forward throughout the year on fixed Ops.

Even with the declines in units and operation?

Yeah, because we're not just focused on units and operation for new car. We have new and used car, and we're driving a lot of our customers that buy used cars back into our facilities as well. So, you know, you got two streams of revenue there and while you have units in operation decline on the new car side, I mean, you just look at the numbers. I mean, our customer pay is up. I'm not sure what the other guys have done but our customer pay is up and while there are some unit and operation shrinkage over the coming years we can certainly make that up on the used car side. We're selling plenty of pre-owned cars to help offset that.

And Rick the reconditioning on the used cars is filling up the shops as well. It's an added benefit to the sales growth on used.

Good. Thank you and good luck.

Thank you very much.

Your next question comes from the line of Matthew Fassler with Goldman Sachs.

Hi, this is actually Mark Andrea filling in for Matt. Just one quick follow-up on SG&A, when you talked about exploring ways to compensate associates more in more customer centric ways what exactly does that mean? Is that increasing variable compensation and just want to know how we should think about it going forward?

Mark, this is Jeff again. Well, we're right in the middle of that. We've worked on all of our Managers pay plans and General Managers pay plans and between now and I'd say the middle of next year we'll work on the balance of all of our associates.

I hesitate to sort of speak out about how we're structuring those pay plans because that's kind of what we think is a competitive advantage to us, so I can just highlight to you that they are going to be more customer centric and getting our associates to do the right thing not that they haven't in the past but making sure we're doing the right thing to get our customers in and out of our facilities as quickly as possible with the best experience that they could possibly have from a retail perspective.

Got it. That's great. Thank you very much.

Your next question comes from the line of Himanshu Patel with JP Morgan.

Hi, this is Ryan Brinkman for Himanshu Patel. Given the very strong retail used unit volume performance in the first quarter and then the fourth quarter of last year, in terms of thinking about how much opportunity that remains in this area, what do you think is the normalized ratio of used vehicles to new vehicles sold in your stores once new vehicle sales normalize and all of your used vehicle sales improvement initiatives are fully implemented?

Well, great question and, you know, we just had our best used car quarter ever as the new vehicle SAAR improved throughout the first quarter and April has been nothing short of that, actually we're gaining momentum. There is just total upside. We've given a baseline to our stores that we're going to average 100 units per store per month and we're well on our way of achieving that goal.

That's going to add a ton of revenue to our bottom line but that's just the beginning stages. You look at Car Max they sell nearly 300 million cars sold per store. There is a ton of upside here and we're just beginning to take advantage of it. There's a lot of room for growth and we're just really getting into the business and you mentioned the fourth quarter we've had four straight quarters of double digit growth and they've gotten bigger every quarter and we look for the second quarter to do the same.

Great, thanks and then just quickly too. I think last quarter you mentioned on that call that SG&A costs were roughly 58% variable and 42% fixed at that point in time and you had helped us by breaking down the compensation amount between fixed comp and variable comp and is there a similar type break out you could provide this quarter or if not perhaps just generally help us in terms of how to think about the most recent split in terms of fixed versus variable SG&A?

I don't think, this is Greg, Ryan. I don't think at this point that we want to break out the variable to fixed component. As Jeff said, we're adjusting in the middle of adjusting some of our pay plans and some of that between fixed and variable may float around a little bit as we go through that process. I think the initial guidance that we gave there on some of those fixed costs and stuff would still stand true but I don't think we really want to go into more detail looking forward at this point on the compensation makeup.

Yeah, this is Dave, and I think it's important to note that what we're trying to do with compensation is not going to be some structural penalty going forward. Our objective is to be competitive or slightly more than competitive with the market and as Jeff mentioned to really drive the behaviors that we need to satisfy our customers and grow our business, so we're not going to see the issues that we saw in January going forward. We're going to be competitive and we're going to be very sales efficient.

Okay and then just from sort of a high level overview, you guys have always been very progressive in terms of how you've treated your salesforce and your associates and how you've thought about them and turnover and really kind of the first to talk about a lot of those things, are you maybe thinking about sort of reading between the lines and you mentioned Car Max earlier, maybe sort of compensating your employees more along the lines that Car Max has as opposed to a traditional new/used vehicle retailer?

No, would love to answer that question for you but again that's a little bit of a competitive advantage to us and I think you can expect us to continue to be very progressive and innovative from a compensation perspective and how we treat our associates and very much focused on making that our number one priority reducing turnover. Look, you guys see it all the time.

The best performing companies in any industry have the lowest turnover. They are below 10% and this Company is headed there. We're going to make that happen and if there's short-term lumps in order to make that happen then so be it but we're headed in the right direction and our turnover is going to get where it needs to be and as a result we're going to create one of America's great companies to work at and shop.

And by the way the sales are going to be there and so are the profits importantly.

All right, great guys. Thanks a lot.

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

Good morning guys.

Hi, John.

Good morning.

You'd mentioned something or factor increasing your SG&A cost was the addition of seven used car buyers in the quarter. I'm just wondering, obviously used cars are a focus for you. Just wondering if there's anything going on structurally in the used car market that's shifting or changing that makes you think you need to add buyers and I'm assuming those buyers are going to auction to source vehicles. I'm just trying to understand why the new addition of all these buyers is coming in?

Yeah, that's a great question. Here is the problem. The problem is the traditional model when you start selling that many cars you can't trade for and we're not going to trade for as enough cars to offset the volumes that we're seeing and we can't send personnel out of the store to go out and buy so we think that we can buy better with a trained buying force and you know, you talked about Car Max earlier, that's how they supply their inventory.

They got a lot of customers that bring them car but at the end of the day they got a very good buying organization and we're building something, not the exact same but something similar and you're going to see that expand over the next year and a half to two years at this Company. We cannot meet our volume goals and our volume targets. When you're selling 50, 60, 70, 80 and 100 cars per store per month that's one thing but when you start selling 200 and 250 and 300 cars, which we're experiencing, you can't keep up with it unless you have a buying organization to support that kind of volume and that's where we're headed so it's an investment we're willing to make today to make sure that we hit those goals.

And if we think about the other investments or costs that might come in with increasing this used focus, I mean, obviously the buyers are a component of it. Do you feel like your real estate and your systems are sufficient to really handle that kind of an increase or there's some additional costs that would come in or, uses that might come in as you expand on used cars?

We have plenty of room and plenty of parking spaces and there's no issue with our real estate in order to be able to handle twice the amount of volume we're doing today. It's not an issue whatsoever.

There's some technology spending we'll be doing to handle improvements in some of our systems but it's not massive.

Scott talked to you about some of the increases in SG&A spending we're doing. Some of that is built around improving our used vehicle operating system and those are just enhancements to what we already have today which we think we have a competitive advantage on anyway.

Got you. And then on show room traffic, I know you talked about this a little bit during the call but just wondering what you were seeing in show room traffic through the quarter and into April and also the availability of financing to customers are up when they come into the show room and what the close rates have been trending through the first quarter and maybe into April as well.

Well, you know, January show room traffic was light. You know, it was down in terms of walk in traffic, something like 11% but as the quarter went on and progressed our traffic, you know, gradually increased and then when we got to March, obviously we got a big bang both from our virtual dealership, you know, website leads coming in as well as walk in traffic and April has been even better. So we're really seeing a really nice bang for our buck from March and April so hopefully things continue the way they are and the numbers will pick up even more than we're calling out.

And close rates on that show room traffic? Have they been improving because of an increased availability of financing?

Somewhere in the 22% range.

And that's an improvement from beginning of the year?

Yes, it is. It improved as we moved forward throughout the quarter and into April.

Got you, and then lastly, I know pretty much everybody in the industry has been backing off their acquisition targets and their focus on acquisitions yet we've been hearing from some of your competitors they've been making acquisitions at a pretty high rate in the first quarter. Just wondering what you're seeing in the acquisition market and if there are any potential opportunities that would be cost effective for you in the near term or through the rest of this year.

John, this is Dave. We're not looking for any major acquisitions or divestitures frankly. We've got a couple tuck ins here and there, new points with many, but our top priority is going to be generate cash and reduce lever raj and you know, going out maybe a couple of years, we'll start thinking about it but frankly we see a lot of upside in the base business and that's really what the operating team is focused on is just bringing out the value out of the assets that we already have that I don't think we've done the best job at up until now, and so we're going to go after that first, generate cash, and then when we're ready for acquisitions, we want to be able to open the wallet and pay cash for it. We don't want to ramp up debt, so that's what our thinking is.

Great. Thank you very much guys.

Thank you.

Your next question comes from the line of Stuart Quan with Zander Capital.

Hi, guys. I just want to follow-up on the SG&A questions. As far as the personnel expense was up almost $14 million sequentially. How much of that was at the store level versus regional versus corporate?

There's a little bit of corporate for accruals.

I don't have that break down in front of me on the sequential number. I think most of it was at the store level.

75% to 80% at the store level.

Sequentially, our gross was up so you would expect some of that comp and I know it was up as a percentage of gross also as Jeff mentioned, some of that January effect and some of the compensation adjustments that we were making but most of it would have been at the store level.

Is there a bigger component of fixed compensation that's being paid at the store level to the sales associates?

No. No, I mean obviously then the dollar amount is higher just because we sold a lot more cars year-over-year and had higher fixed year-over-year when you look at it on a dollar basis but there's no more higher percentage of fixed comp than we've had in previous quarters. We've added headcount in some areas and like I've talked about the buying organization, the E-sales office and the way we're handling traffic so forth and so on is all addition to this year from last year.

The way I've been thinking about it is comp costs were up. I think we were structured for even better revenue performance than what we displayed and the revenue was sort of slow in January and then accelerated in February and March and in March, the revenue caught up with, the revenue costs were balanced so we really hit our stride and that's continuing in April.

And then just second question on parts and service, what do you recognize on reconditioning a used car versus dealer prep on a new car?

In terms of--

Dollars, per vehicle.

It's in the $750 to $800 range on a used car and, you know, significantly less than that on a new car. Maybe $200 on a new car.

Got it. Thank you.

Your next question comes from the line of Derrick Wenger with Jeffries & Company.

Sorry if I missed it. 2010 capital expenditures, did you give an outlook for that?

I did. Let me just flip to that slide. Net of mortgages was $37.8 million.

For fiscal year 10?

Correct.

Net of mortgages, okay. Thank you.

Okay.

Ladies and Gentlemen, (Operator Instructions) Your next question comes from the line of Collin Langen with UBS.

Oh, good morning.

Good morning.

You commented that you had an 11 million SAAR, the SG&A ratio could get to 80% to 81%. What kind of leverage do you have if the SAAR recovers to, you know, where we were in the past, you know 15%, 16%? Can you get it to, you know, past 76% or even lower now that you've done more restructuring in the downturn?

Yes, I can see 76%.

I think if we get up North of the $12 million range we start trending down toward the 70's very quickly the way we structured things now.

Okay, and what about, I apologize of I missed this. Your retail sales were up 10% but the US market was up 16%. What was the factors of why you sort of underperformed the US market?

Well let me start on that. I've started looking at our volume versus others and versus industry and we didn't fall as much as others and the rebound has not been as quick on the new car side. Used is a completely different story. We never fell and it's been straight up.

Our mix may be a little bit different than everybody else. We've got a higher mix of luxury and luxury did not fall off, you know, as far as everybody else so it did not have as much of the upside potential as some of the domestic, you know, some of the dealers that are weighted more there a domestic perspective.

The domestic stores did pop-up nicely.

And we were up sharply in March which is an indicator that, you know, that part of the mix was coming back.

Okay so you think luxury mix sort of helped you underperform in Q1 relative to the US?

I just think it didn't fall off as far last year so the year-over-year comparison--

It's a tougher comp.

It's a tougher comp than it is when you're comping Ford or domestic mix. It's just mix.

Okay. All right. Thanks for your help.

Sure, Collin.

At this time there are no further questions. I would like to turn the call back over to Mr. Smith for any closing remarks.

Well, thanks. It was just a fantastic quarter for us. We're so excited about where we're going and really look forward to our next quarters call. Have a great day, everybody.

Thank you.

Ladies and Gentlemen, this concludes today's Sonic Automotive first quarter earnings conference call. You may now disconnect.