Sonic Automotive Inc (SAH) 2010 Q3 法說會逐字稿

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

(Operators Instructions)

As a reminder, ladies and gentlemen, this call is being recorded today, October 26, 2010. Presentation materials, which management will be reviewing on the conference call, can be accessed on the Company's website at www.sonicautomotive.com, by clicking on the "For Investors" tab and choosing webcast and presentations on the left side monitor.

At this time, I would like to refer to the Safe Harbors statement, under the Private Securities Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information, or expectations about the Company's products or markets, or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the Company's filings with the Securities and Exchange Commission. Thank you.

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

Thank you, Brandy. Good morning, ladies and gentlemen. I'm Scott Smith, Co-Founder, President, and Chief Strategic Officer. Welcome to Sonic Automotive's third quarter 2010 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 Operators, Jeff Dyke, and Greg Young, our Vice President of Finance. Also joining us is David Smith, the company's Vice President. Today I'll provide an update on our strategic direction, followed by an overview of the quarter. I'll then turn the call over to Dave Cosper for a financial review. Jeff Dyke will follow Dave and give an update on our operational trends.

Our prepared comments will be a little longer than our typical earnings call, but if you will give me a few moments, I think that it will be well worth your time. We'll then open the call up for questions. Since going public in 1997, Sonic Automotive has gone through several strategic evolutions. Now that we've seen some stabilization in the economic front, we've completed our balance sheet restructuring, I thought that now would be a good time to review with you, our investors and analysts that follow the company, where our strategic focus has been and where it's going.

If you'll please turn to the first slide, slide number 4. In the early stages of Sonic Automotive, our strategy was one of portfolio growth. As you'll see here on the slide, we were an acquisition company that operated dealerships. Our primary goal was to acquire automotive dealerships to gain a national footprint and scale that would allow us to capture economies of scale, support a regional infrastructure, and drive standardized practices and technology throughout the organization.

If you'll turn to slide five please. As we move through the portfolio growth stage we realized that our fast acquisition pace was not allowing us to fully integrate the standard technology and operating practices we wanted to see in each of our dealerships. We were profitable, but we knew that we could do better. That led us into the portfolio enrichment stage of our strategy. During the stage we focused on optimizing our portfolio mix. We began to divest of smaller, underperforming stores that we acquired as part of larger group transactions over the years. As we sold these stores, we replaced them with larger, more profitable dealerships, that were primarily luxury and Asian import brands. More importantly, we began the process of standardizing our dealership technology platform and started the early stages of what would ultimately become our operational play books.

If you'll turn to slide six please. Over the last three years since I returned to the position of the Company's President. We've transitioned into the portfolio maximization stage of our strategy. We began building a predictable, repeatable, and sustainable business model. Our primary focus -- strategic focus today is centered on several key initiatives. They are associate satisfaction, internal growth versus acquisitions, operational play books, balance sheet and capital structure, E-commerce, and customer experience. If you'll allow me to briefly discuss each of these.

First is associate satisfaction. We're committed to reducing our turnover in order to gain the highest return on our dollars we've invested in training, technology, and process. We're absolutely convinced that to build a customer-focused company that has a predictable, repeatable, and sustainable customer experience, while maximizing our dealership portfolio, we must have low turnover. We are attacking turnover by changing our culture. We're improving our communications, we're doing career planning, compensation structure, and training. We've seen our turnover steadily decline as we pay more attention to those things that are important to our associates. Today I am pleased to say, our turnover is the lowest that it's ever been.

Second is internal growth versus acquisitions. We don't believe it's necessary to go out and start making expensive acquisitions in order to grow our profits. Nor do we believe our future profit growth is completely dependent upon the new vehicle returning to historical levels. In fact, we expect to grow profits next year, even if the new car industry stays flat. As we look at our business, we see growth opportunities in every one of our revenue streams. These opportunities, combined with the steady increase in the SAR, will provide a platform for growth for the foreseeable future, without the investment in integration risks associated with acquisitions. You can do the math, as well as I can, to see how much incremental revenue is available to us from just used cars alone as we move closer to our goal of 100 used vehicles per store per month.

Third is our operational playbooks. You've heard us talk a lot about these for some time now. Our operations playbooks are the engine that will drive our internal growth. These are our road maps to building our predictable, repeatable, and sustainable customer experience. Our used vehicle playbook is the most mature of these that you've seen since we've introduced the play books several years ago. We've consistently grown our volume and overall gross profits from used vehicles, and we believe that there's future growth potential as we continue to refine our processes and technologies in this area. We now have play books written for every significant area of our business and we are in various stages of rolling them out to our dealerships.

Fourth is our balance sheet and capital structure. We've been very clear on our balance sheet goals and we've steadily made progress on them. We want to continue to reduce our non-mortgage debt over the next several years. At the same time, we continue to replace our leased facilities with owned properties funded by mortgages. We currently own 13% of our facilities and expect that to trend to over 30 over the next several years.

Fifth is E-commerce. As you're well aware, customers are shopping differently in today's digital world. We have made strategic investments in technology, people, and processes to be responsive to how customers want to shop. We're seeing early successes in both lead generation and close ratios in the stores where we're piloting these programs. We have seen advertise spend go down even as traffic increases. This will continue to be a key component of our internal growth strategy.

And finally, customer experience. We are developing a customer experience that is unique to Sonic Automotive. An experience that is again predictable, repeatable, and sustainable across all the great brands that we represent. Customers deserve a pleasurable experience when shopping for a car of their dreams, not a torturous experience. I'll be the first to tell you that it takes too much time and paperwork to buy a car today.

We're making investments in technology and piloting programs in several key markets to begin to change this. We believe that our secret sauce and competitive advantage lies in reducing turnover, having flawless execution of our playbooks, and embracing technology. The Sonic Automotive customer experience that we're developing will cause customers to want to shop at our stores. As we implement these strategies, we likely won't get everything right the first time. And of course, we know we have opportunities in our existing business that we need to go after, even as we roll out these strategic initiatives.

One of the biggest areas of discussion this year has been around compensation costs. We said at the beginning of the year that we would average 80% SG&A to gross, and we're on track to hit that target. While that's lower than last year, we know we have opportunities in compensation and we're addressing them in a very measured and determined manner. We've gained a lot of credibility with our associates in this area and we won't give that up for tough rash action.

All of the gains we've made in process rollout and turnover reduction can be lost very quickly if compensation issues aren't handled in an equitable and professional manner. We've made adjustments since the beginning of the year and have seen the costs trend down. We realize there are further opportunities and are taking steps to address them. We expect compensation and overall SG&A costs as a percent of gross profit to continue to trend down as we go through Q4 and head into next year.

Now let's turn to slide seven and discuss briefly the third quarter results. Our total revenues were up 8.6% in Q3 versus the same period last year. Our new vehicle revenues were up against a strong prior year comp that was driven by Cash for Clunkers. Our used vehicle volume continues to grow every quarter, even in the phase of strong prior year comps. We continue to make progress on our balance sheet goals. We redeemed $20 million of our senior subordinated notes in third quarter and announced planned redemption of the remaining $16 million of our 4.25% convertible notes in November.

Overall, the $49 million in debt reductions we made this year will save us $3.5 million in annual interest expense. With that I'll turn the call over to Dave Cosper for a more detailed look at our financial results. Dave?

Thanks, Scott. And good morning, everyone. Revenue for the quarter grew to nearly $1.8 billion, up 8.6% from a year ago. Gross was up 2.7%. We did see some softness in margins. Interest cost savings on our debt were over $3 million for the quarter, as we continue to de-lever the balance sheet. And we are going to see more of this as we go forward. After tax profit on an adjusted basis was $15.2 million and EPS of $0.27, just ahead of last year, and pretty much in line with our expectation.

Next slide, please. EBITDA for the quarter was $50 million, and $143 million for the first nine months of the year. For the year in total, we should be over $190 million, and this is up from the EBITDA levels in 2008 and 2009. So we continue to improve profit and cash generation in a fairly weak industry environment.

Next slide, please. SG&A as percent of gross was 80.3% for the quarter, up slightly from Q2, and in line with expectation for the year. With respect to compensation, as Scott mentioned, we have been making progress throughout the year as shown on the bottom of the slide. Also as Scott mentioned, we're making some adjustments in compensation presently that should take hold this quarter and into next year. And Jeff is going to talk more about that in just a moment. For 2011, we expect SG&A as a percent of gross to be below 80%.

Next slide. Our total liquidity at quarter end rose to $148 million up from $79 million at year end. We had no borrowings on our revolver. We continue with our plan to reduce our non-mortgage public debt, and so far this year we've taken out $32 million of our 8.625% notes. This leaves only $43 million of these notes remaining, and these mature in 2013, and it's our intent to take them out prior to that maturity.

In addition we just called the remaining $16 million of our 4.25% convertible notes and we'll take those out next month. As we've indicated many times, owning our land and facilities remains a priority for us. We're presently working on several opportunities, where we'll either acquire stores from our landlords, or build new facilities as existing leases run off. We expect this trend to continue for several years. And finally, we'll be paying a $0.025 per dividend per quarter going forward. Our business has stabilized. We are generating cash. And we feel a small dividend is appropriate. Importantly, it will not materially impact our plans to reduce our debt or own our properties going forward.

Next slide, please. This slide shows our debt covenants and we were comfortably compliant with all of them for the quarter and expect to remain so going forward as we're generating a lot of cash and reducing our debt. With that I'll turn the call over to Jeff.

Thanks, Dave, and good morning everyone. Before commenting on my slides, I'd like to take a minute to comment on Dave's SG&A slide, with respect to compensation. As you're aware, we've had several things going on with compensation in 2010. It was our strategy last year, during the difficult times, to stand by our associates and not reduce compensation with across the board compensation cuts or across the board head count cuts. However, we did let our head count reduce through natural turnover.

Instead, we focused on taking care of our associates during this time and supporting them when they needed their company to support them the most. I am very proud of the fact that our leadership team did not waver under the pressure to adjust. As a result, our turnover is among the lowest in the industry, and our associate loyalty is at an all time high, as we strive to create one of America's greatest companies to work and shop. In the coming quarter, as a combination of increased gross, as supported by our play books, pay plan adjustments and improving economy will all benefit Sonic Automotive.

We have already adjusted compensation models to support our SG&A targets and know exactly what's left to be done in Q4 from a comp perspective. These adjustments will still allow us to pay our team at, or 10% above, the market, which is our stated goal, while achieving our company profit and SG&A objectives. Thanks and now let's turn to my slides.

As mentioned on the previous calls, our attention to associate satisfaction, associate retention and our ability to execute our e-sales and pre-owned playbooks, continued to contribute to the success of new vehicle sales. As you can see on the new vehicle revenue on the slide, new vehicle revenue was up 4% for the quarter and our new vehicle growth continues to gain on a sequential basis. New vehicle gross was down 5% on a year-over-year basis, which was aided by Cash for Clunkers. Our new car volume continues to show steady improvement in all markets. Texas, Alabama, Florida, the Mid-Atlantic area, Ohio, Michigan, and the Carolinas are all experiencing double digit growth this year, while California is up marginally as for Cash for Clunkers for Sonic saw tremendous gains in prior year, due to the Honda and Toyota mix in the market.

We expect all regions to experience steady volume growth in Q4. And October is proving just that. We are tracking up anywhere from 15% to 30% in volume, depending on the region for the month. We continue to manage all new car inventory ordering on a centralized basis, and are proud to report our new car day supply is in outstanding shape at 52 days.

Actually, we'd like to see our domestic inventory move up a bit. We are in the 55 day supply range, and we'd like it to be in the 60 day range and are working to add product for both Ford and Chevrolet. But manufacture inventories are tight. We are comfortable with both our high line and import inventories, other than a need for more of the high volume products which is normal course of business.

New vehicle playbook comes to life at Sonic in Q4 as our initial stores will be installed and we'll keep you posted on the progress we make there.

Next slide please. We continue to gain momentum in our pre-owned business as we posted another strong used vehicle quarter. This marks the seventh straight quarter of double digit growth, as our pre-owned team continues to executive our play book. It's important to note that we have been able to sustain this level of growth on top of double digit growth last year in Q3. Simply outstanding performance by our pro-owned team.

As you can see on the slide, we grew used vehicle revenue 20% for the quarter, and used vehicle volume was up nearly 15%. And the great news is that we continue to march forward in achieving our goal of selling 100 used per store per month. October looks strong again as we are tracking up 17% for the month, as we comp against strong year-over-year performance. It's fun to watch the team work knowing the up side volume that there is for us to achieve, as we get better and better at executing our pre-owned play book.

We now have 13 buyers as part of the Sonic central buying system that we updated you on last quarter. And look to maximize these buyers before adding any more towards the middle to the end of 2011. And we'll keep you posted on the performance that we're getting from them in the coming quarters. Our certified pre-owned mix 35% for the quarter, and that's right in line with our target. Inventory ended the quarter at 28.5 days, as we continue to show Sonic's strength in managing pre-owned inventories.

Next slide, please. As you can see on the slide and as we've discussed in detail in previous quarters, our used vehicle gross margin percentage has stabilized as we projected. Our margin percentage was 7.8% for the quarter and you should expect our margin percent and gross per units to remain relatively flat throughout the remainder of this year.

We also continue to see year-over-year growth in our total pre-owned gross profit dollars up 9.4% for the quarter, again comping against strong prior year growth. While we've been very pleased with the progress that we've made in revenue, volume, and gross and pre-owned, we believe that tremendous up side exist as we perfect our skill sets. We spent a lot of time and effort studying our pre-owned model and continue to investment in our playbook. In the coming quarters, we'll announce the introduction of Sonic Inventory Management System or what we call SIMS for short. This proprietory system will provide Sonic with industry leading inventory and pricing analytics technology, that we believe will give Sonic the distinct competitive advantage, allowing us to price inventory in a market pricing value format, to move inventory with more detailed data than we've had before, and to help support growth in used vehicle margins while maintaining our aggressive projected growth rates.

Next slide, please. We added an F&I slide for you this quarter, and our F&I playbook is beginning to show progress. We have a stated company goal to sell two F&I products per car sold. This plan was developed to help our F&I team offset the decrease in profit coming from finance commissions, which has been an industry trend that we've all had to face over the last couple of years. This process combined with our growth in new and used vehicles have contributed to a very successful economic gross profit growth in 2010.

For the quarter, our F&I gross is up 9.2%. Our PUR is up $972 per unit, which is our best performance in a couple of years. While we expect our F&I business to continue to benefit from increasing unit volume and better product penetration. We've also been piloting other strategic F&I initiatives in various regions that are showing some early signs of success and we'll have more for you on that in the coming quarters.

Next slide, please. We're very excited about our fixed operations business. We're in the second year of our playbook roll out with fixed operations, and the results are improving with each quarter. As you are aware, we designed our playbook to combat the reductions in warranty gross and to help deal with the lower SAR levels, and these moves continue to pay off for us. As you can see on the chart, overall fixed operations revenue was up 5.6% and our gross profit was up 2.8% despite a 130 basis point decline in margin rate. For the year-to-date period, our fixed operations margin is relatively flat at 50%.

Our customer pay revenue was up 4.2%. And customer pay gross dollars were 1.4%. Same store warranty revenue was flat as warranty continues to be in the 16% range, as a percent of our total fixed operations revenue. And our internal sub-let gross from fixed operations was up a combined 32% or $2.1 million for the quarter. This increase is a direct result of our used car playbook and a significant increase we're seeing in our used car volumes.

As promised, we said we'd update you on our aggressive tire campaign that we've been rolling out across the country. And so far, on a year-to-date basis, we're up 25% in revenue, and 19% in gross from our good, better, best campaign. And we're just getting started. And we'll continue to update you on those as we move through each quarter.

Before I hand the call back to Scott, I'd like to thank all the Sonic Automotive associates for their hard work and dedication to the execution of our objection in making associate satisfaction our number one priority. Our turnover is tracking to be in the 25% range for the year, which will mark the third straight year of significant improvement in associate satisfaction and supports our mission to create one of America's greatest companies to work and shop. Thank you very much, team. Scott?

Thank you, J.D. We appreciate the time that you've given to us today to review both our strategic vision and our operational highlights from the quarter. I hope this has given you a better insight into our company and our future plans. This team has built a solid foundation and positioned Sonic Automotive for a prosperous future. A future where the next generation of Sonic leaders can build upon the predictable, repeatable, and sustainable business model that this generation has started.

As we continue to focus our energies on our investment principles and spending priorities, our balance sheet will continue to strengthen and ensure that prosperous future. Before we take questions, I want to take just a minute to thank all of our associates and vendor partners that join together every day to help us to build one of America's greatest companies to work and shop. Thank you team. It's an honor and a privilege to lead our great company. At this time, we'll open the call and take your questions.

(Operator Instructions) Your first questions comes from the line of Scott Stember, with Sidoti & Co.

Good morning.

Hello, Scott.

Can you talk about how some of the brands performed in the quarter? Some of your higher profile brands?

This is Jeff Dyke. From a luxury perspective, BMW is up 5.1%, Cadillac was up 40%, Audi was up 24.5%, Jaguar, we've got a big mix there, was up 36%.

And from an import perspective obviously, Honda and Toyota were down just because of the Cash for Clunkers program comparison. Ford was up 7%. GM up 11.6%.

Got it. And Jeff, did you make qualitative comments or quantitative comments about how new car sales are trending in October so far? Reports are that they've been pretty good so far?

Yes, they are - they are very good for us. Our unit volume is trending up from anywhere from 15% to 30%, given the market and that's just across the board. The volume is very good. It's nice to see.

Okay. And can you talk about the balance sheet a little bit? Dave, as far as, what is your targeted debt reduction going forward into next year as you continue to generate nice cash flow?

Yes, for sure we want to go after those 8.625%. There's $43 million of those left. And then, we don't have a firm target, but it's over another $100 million beyond that that, that we just want to take out. And we think it makes sense. Because, as Scott and Jeff talked about, what we're doing is focusing on building our base business, not going out and acquiring.

So, we're going to take a lot of the capital that we generate and further improve our balance sheet. And fast forward two or three years, you've got a very clean balance sheet, and a great operating company and then you can do a lot of interesting things.

And would you guys, at this point, not making acquisitions, you announced that you are going to make a small dividend, can you talk about how share repurchases could eventually fall into this?

Yes, it's possible. I don't see it as imminent kind of thing. I think our priority -- we want to take care of all of our stake holders and we've been fair with our debt holders and we're going to be providing a small return here. A little less than 1% to our equity holders in terms of dividend. I think share repurchases may have a spot in the future. But it's not imminent.

Got it. That's all I have right now. Thank you.

Thank you.

Our next question comes from the line of John Murphy, with Bank of America Merrill Lynch.

Good morning, guys.

Good morning, John.

Just wondering, as we think about SG&A leverage going forward, and SG&A as a percent of gross, how we should think about that? And also as you run these play books and really try to tie your employees to performance I think over time, really, what kind of metrics do you use? And at what level as you use those metrics to get the SG&A leverage to gross to come through? Is this the kind of thing that is really at the senior executive level?

Or do you have SG&A to gross targets for general managers at stores? I'm just trying to understand how you'll control this SG&A hopefully as gross comes back?

Yes John. Jeff Dyke here. I'll take a stab at answering the first part of your question here. First of all, we've made adjustments this year. We know exactly where our SG&A increase is, and it's sitting at 80%. We know exactly what moves we need to make to bring it down below that. For me to target a 77% or 78% number right now is probably not fair. I'm not quite sure what the number is going to end being.

We're making adjustments in pay plans. We already have this year. We've got a few more adjustments in the fourth quarter. We'll start seeing some fairly significant reduction there in fourth quarter of this year. And we've also tied our compensation plans for our management teams to our budgets, which is a first for us. And we've been through this entire year making that work. And so we look forward to rolling out our 2011 budgets with all of our stores and holding them accountable to hitting the goals that we put out there for ourselves and that's going to help reduce the SG&A numbers.

It's not that we don't know where it is. We know exactly where our SG&A issues are. If you call them issues. We just -- we have had a plan and we've been sticking to that plan all year long. We called out at the beginning of the year that we'd be at 80%. That's exactly where we are. You're going to see that actually trend down in Q4 and it'll continue to trend down into 2011.

John, this is Dave and I've been thinking about it as an investment. And as Jeff said, we consciously have kept our compensation costs up and we're investing in a number of technologies that are very interesting. And SG&A as a percent of gross is a balance. And we're investing on the cost side right now. The gross is coming. And as these play books mature there's going to be more gross and you'll see it shrink over time.

This is Jeff again. We've always been a leader in SG&A as gross as a percent. And so, it's just something we've made a conscious decision to do this year, and we'll continue to adjust the pay plans, and adjust our plan moving forward. I think everybody will be relatively pleased with the SG&A percents as we move forward.

Okay, and as we think about it going forward, it's more sort of efficiency of SG&A going forward, as opposed to really cutting it and the gross up so the ratio goes down. Is that really how you think about it, as opposed to making absolute cuts?

No, John. Actually, it's a combination of both. We're making adjustments in our pay plans and we're going to drive incremental gross. And we've been doing that. It's a combination of both to answer your question. And it's still going to allow us to pay at or above the market and that's one of our stated goals with our associates. We're not going to try and get away with what we can with pay, we're going to pay what we should pay and we've been very, very focused on that.

Got you. Second question just on new vehicle margins. It sounds like inventory across the industry is pretty tight. Yet, we're seeing this every place else. The new vehicle margins are pretty light.

And there seems to be a lot of competition amongst dealers and some price cutting that's going on there. I'm just trying to understand why we're seeing your new vehicle margins so light given your commentary that inventory is light, and apparently it kind of light across the industry. I'm just trying to get into the details and understand what's going on.

This is Greg. I'll let Jeff follow up with some comments here. I would just caution everyone not to pay too much attention to the overall margin rate. As you know, there's various components that go into that. If you really look at the underlying detail, I think one of the drivers of the decrease in the margin rate was a fairly significant increase in the average selling price of our vehicles. Year-over-year they were up about $2600 per vehicle.

If you look at our average gross profit dollars per new vehicle, we were pretty much steady right at a little over $2100 a vehicle year-over-year. So I think from a gross profit generation perspective we're still very strong on the new vehicle side. Some of the average selling price increases are moving the rate around a little bit.

That's a result of cash for clunkers last year. There was a lot of imports sold and luxury mix is highing this quarter.

And last year, we were selling import mix at full pop. We were selling everything at sticker. And that aided last year's margin percentage number.

Our PUR is among the best in the industry and I don't see that being an issue at all.

So, that $2100 is sort of how we should be thinking at it, as opposed to a percentage, going forward?

Yes, that's the way I would do it.

And then just lastly, on the new used car system that you're putting in place, just wondering, if you can juxtapose that versus what you're doing right now. Is your current inventory sort of very decentralized and at the store level and we're going to a real centralized system and how that's all going to work going forward and what the timeline is for implementation?

Our inventory is centralized as anybody else's in the industry right now maybe other than Car Max. And we just see so much up side in the used car volume. And all this is, is a -- we have a system in place today, it's our system going on steroids, or putting a turbo on it. We're going to know more realtime on pricing analytics.

And you will see us gradually over the next 18 to 24 months move to more of a centralized pricing format than having a decentralized pricing format. Stores play a bigger role in pricing today and it's a huge opportunity pricing the car right the first time is the biggest opportunity that we have in the company, and we've done a good job with it.

Our revenue growth and volume growth has been double digit now for seven quarters in a row. We just see much more upside here. It's a huge market. There are 40 million cars being sold out there. We see a lot of upside. And we're going to go get it. We are no where near a full potential from a used car perspective. And these adjustments we are making are just improving the systems that we have today.

And that pricing system will help you out on the buy side of the equation, as well as the sell side of the equation for the vehicle?

I think. But I'll tell you, inventories -- and that's why we've introduced our Sonic Buying System. And we've added the buyers to our system. Inventories are going to get tighter. We're going to be fighting in a more difficult situation over the next 18 months off-lease cars and certified preowned type vehicles are harder to get.

There should be a little margin compression there in that arena. Overall, I think our system is -- it has allowed so far us to stay ahead. I mean, we've managed a really tight day supply. 28 1/2 days which is real solid. And I think we can continue to do that and sell a lot more cars moving forward.

Great, thank you very much.

Thanks, John.

Your next question comes from the line of Aditya Oberoi with Goldman Sachs.

Hi guys. Talking on the used side of the business, you are using your ratio as kind of trending pretty high versus what you guys have done historically. So, assuming that the playbook strategy continues to pay off. Do you think this ratio will continue to trend higher from here? Or are your comfortable in this 0.8 to 0.9 kind of range?

Actually, I think -- this is Jeff Dyke again -- I think, if you go back and look at last quarter, we were right at 1 to 1. And I think for the second quarter too. We are at 0.9 to 1 I think for this quarter. And our expectations are that if we sell a new car, we sell a used car. There's more used cars sold in America than new cars. There's a bigger pool to play in and we think we can continue to grow our used car business even to a point of selling more used than new.

Great. The second question was more of a strategic question. I know that associate satisfaction is one of the key focuses of the management team right now. Is there a quantitative way you measure it. If two quarters down the line, when you say, okay, our associate satisfaction is higher than today. How do you measure it? Is it just the attrition levels? Or are there some other parameters that you kind of look at?

Well, the first one is that our turnover is down significantly three years in a row. We also do an associate satisfaction survey that a third party outside company does for us on an annual basis. It's done individually for every associate in the Company. And those internal measurements are also improving each year. A combination of those two things is how we measure our employee loyalty and satisfaction.

Great. Thanks a lot guys.

Your next question comes from the line of Rick Nelson with Stephens, Inc.

Thank you. Good morning.

Hey, Rick.

I'd like to ask about the EPS target here for the fourth quarter, $0.25 to $0.27. Historically, fourth quarter sales have been smaller Q4 versus Q3. You made $0.27 in third quarter. I guess what line items are changing there? Either margins or expenses, or have other factors that are driving this target?

Rick, I think as we got into Q3, we probably did a couple of pennies better than what we thought. We think there is some underlying strength in the business. I think some of the compensation items that Jeff mentioned are going to be there and we're seeing the used business continue to be very strong.

So, that's not a seasonal thing. And then early indications are that the new car SAR is up a little bit for October. We're seeing some strength there. We've moved up a little bit from where we are initially. I think a couple of quarters back we said we'd be at $0.90, we are going to beat that.

Hi Rick, this is Greg. I think some of the earnings seasonality may still be a little bit skewed coming out of the downturn in the Cash for Clunkers. If you remember, September of last year fell way off. October fell way off post Cash for Clunkers. We're obviously not seeing that phenomenon this year. That's what makes us think that Q4 is going to look a whole lot like Q2 and Q3 did. And I agree with you. Normally, you don't see that.

Our October, Rick, so far is trending in the same sort of atmosphere as our August and our July which is unusual. And so we always have a little slowdown in September. That combined with the moves that we're making from an SG&A perspective, that we talked about already are going to help the quarter.

Plus the interest costs are going to be a little bit lower.

Thanks. What sort of timeline do you have in terms of debt reduction? If we see no improvement in the operating environment, when do you think we can look at potential acquisitions? A couple years away from --

Yes, for acquisitions it's probably closer to three if I have my way. I think we've got --

I would agree with that.

I'm getting support here.

Is there a target debt ratio you're looking for, before we start to look to acquisitions?

Yes, we're still firming that up. At the moment, it's just lower is better. As long as we're not growing, we are going to be taking down our debt and paying that dividend. And, I think, we've got some issues with our credit facility that we'll need to talk to our banks next year about the ability to take more debt out. There are some restrictions. But early indications and discussions with them are that we can work something out. Because we're sitting on a lot of liquidity and it behooves everybody to have us take some of the debt out.

We've thought long and hard, Rick, on this acquisition versus internal growth strategy, and the more and more we've looked at it and the more and more we've talked to some of our larger investors, the more we just keep leaning towards the significant opportunity we have from an internal operations perspective. We still look at some of the hurdle rates that are out there from an after tax perspective.

We don't see them being significantly higher than cost of capital and that kind of makes us scratch our head and say why would we want to take on that incremental risk. We still think that there's a fairly wide delta out there between buyers and sellers when going out on the acquisition trail. With everything that Jeff and Scott have talked about, we just think that the growth for us is really going to be focused internally. And we think it's there.

Really it's a risk return tradeoff. You look at our investment priorities. It's invest in the base business and it's not huge dollar investment. It's some work and effort. And there's great pay out and low risk. Buying back our debt, good payout, low risk, owning our property, great payout, very low risk. So we kind of like that. I think we can get very good returns without impacting the risk greatly of our business. In fact, improving it.

Thanks for that. Also, like to ask you about the tax rate. It came in a little lower year to date results.

Yes, let me talk for a minute about that. Year-to-date it's at 39.8%. In Q3 it was 37.7%. The year-to-date number of 39.8% is very close to where we were back in 2007. It was 39.1%.

And so, we're trending down to where we were historically. And what's happening, some of the states we operate in have a state tax system that has you pay even though you may not be so profitable. It's more of a fixed charge. And as our earnings start to improve, which they are, that fixed charge becomes a smaller impact. So our rate is actually declining. And somewhere around 40%, 39%, 40% going forward is what we would anticipate. And it's down from where we've been when earnings were lower.

Got you. Okay. Thanks a lot. Good luck.

Thanks, Rick.

(Operator Instructions)

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

Great. Just thank you everyone for joining us today. Bye.