Sonic Automotive Inc (SAH) 2010 Q4 法說會逐字稿

Good morning, and welcome to the Sonic Automotive fourth 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 session.

(Operator Instructions)

As a reminder, ladies and gentlemen, this call is being recorded today, February 22, 2011. Presentation materials, which management will be reviewing on the conference call, can be accessed on the Company's website at www.sonicautomotive.com by selecting the investor relations under the our Company tab and choosing webcast and presentation.

At this time, I would like to remind everyone that during this conference call management may discuss financial projections, 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.

Good morning, ladies and gentlemen. I'm Scott Smith, Co-founder, President and Chief Strategic Officer. Welcome to Sonic Automotive's fourth-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 operations, Jeff Dyke; David Smith, the Company's Vice President; and Greg Young, our Vice President of finance. Today I'll provide a little 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. We'll then wrap up the call with a summary of our outlook for 2011 and open the call for your questions.

We spent a fair amount of time last quarter discussing our operational and financial strategies. You'll recall that we discussed driving organic growth through the refinement and execution of our operational playbooks, focusing on our balance sheet and continuing to reduce our non-mortgage debt while continuing to convert lease properties to Sonic ownership and focusing on our customers by continuing to refine our e-Commerce processes and overall customer experience by implementing predictable, repeatable and sustainable processes.

We continued to see that benefit of all these strategies during the fourth quarter. Our new vehicle volume easily exceeded the industry growth. The overall star was up approximately 14.5% with the retail star up 6%. Our new vehicle volume was up 18.3% and revenue was up 20%. Used vehicles continued their strong year-over-year double-digit growth trends, and as a result, further refinement and implementation of our used vehicle playbooks and buying strategies. All this incremental volume continued to drive our F&I performance, which was up 24% over last year. Our parts and service revenue was up 8% for the quarter and 5% for the year during a time when a number of people were expecting fixed operations growth to be flat at best.

While growing our top , we also reduced our SG&A to 78.8% of gross in the quarter and hit our full-year SG&A targets. All of this resulted in adjusted income from continuing operations growing by 74%, with EPS from continuing ops coming in at $0.30 per diluted share. Our balance sheet is in the best shape ever, and we continue to look for ways and opportunities to reduce our non-mortgage debt. Dave will also go into more detail on recent successes we've had in continuing to convert lease properties to Sonic ownership.

With that, I'll turn the call over to

Thank you, Scott, and good morning, everyone. Revenue for the quarter reached over $1.8 billion, up 17% from 2009. Gross profit was up 11%, and SG&A as a percent of gross improved to 78.8%. Adjusted operating profit for the quarter was $51 million, up nearly $8 million, or 17%, and we saw further improvement in our interest costs, primarily from our continued focus on delevering. Adjusted after-tax profit from continuing ops was $17 million, up 17% from fourth-quarter 2009. Adjusted EPS for the quarter was $0.30, up $0.11, or 58% from 2009.

I've highlighted on the slide improvement for total operations in the bottom right, and at the moment we have no stores for sale and, therefore, no unsold stores and discontinued operations. We've worked really hard to improve the results of the total Company, and adjusted EPS for total operations was $0.28 for the quarter, double the result from 2009. These results really highlight our focus on investing in the base business, owning more of our properties and reducing debt, and it's paying off. Next slide, please.

This slide shows full-year results for 2010. Adjusted net income for continuing operations was $57 million, up 34% for 2009. Adjusted EPS for continuing operations was $0.99. As with the fourth quarter, substantial improvement was made in discontinued operations for the year, and adjusted EPS for our total operations was $0.91 for the year, up 44% from 2009. Next slide.

This slide shows EBITDA together with industry volume. In 2010 we generated $200 million of EBIT -- EBITDA, getting pretty close to the cash generation of 2007 on a substantially lower industry volume. Our focus on used vehicles, fixed operations and F&I have improved our profitability and lessened to some extent our dependence on new vehicle sales. Next slide.

This slide shows our SG&A, and I'm pleased with our cost performance for the fourth quarter. SG&A improved to 78.8% of gross profit, 100 poin -- 100-basis points better than 2009. Nice improvements were made in advertising and rent and rent-related expense. Variable comp for the quarter was flat from a year ago. We continue to make investments in our people, things like training and development, IT infrastructure and compensation at market or better, and our goal is really to be the most cost efficient automotive retailer. In our view, success is the proper balance between a competitive cost level and gross profit generation. We strongly believe that the investments we continue to make in our people are paying off in terms of more satisfied associates, lower turnover, happier customers, great revenue growth and higher profit. Next slide.

This slide looks at our liquidity, and our cash balance at year end was $22 million, with total liquidity at $158 million, substantially improved from year-end 2009, in fact, double. During the quarter we retired the remaining $16 million of 4.25% convertible note, so that debt's now gone. Total public debt is now down to $426 million, a $39 million reduction for the year. Our nearest maturity is $43 million of 8.625% notes that are due out in August of 2013, and this debt can be called at par later this year, and we certainly have a strong desire to eliminate this debt as soon as practical.

Consistent with our strategy to own our property, in January we purchased five great properties from one of our landlords in California. We've closed down two mortgages on these properties and expect to close two more this quarter. As we've indicated many times, we're going to own more of our properties over time, either through purchase from our landlords or constructing new facilities on owned land as leases mature. Presently, we own just under 20% of our dealership properties. Next slide, please.

This slide shows our capital spending, and spending in 2010 was $64 million, and we've projected it to be roughly flat for 2011, and these levels do include property acquisitions, net of mortgage proceeds, as you can see on the slide. In late 2008 and well into 2009, we sharply reduced our spending to conserve cash. Spending on two major projects resumed in late 2009. One of these was completed in 2010, and one will be finished later this year, but those two projects certainly are impacting the level of spending we're seeing today. The majority of the $80 million for real estate acquisitions shown for 2011 is for the five properties I just mentioned.

As you can see on the slide, we're investing in technology. We've broken that out this time. We're updating our IT infrastructure, providing great technology and sales capability for our people, and investing in our used vehicle inventory and pricing system, and Jeff will talk about that just in -- in just a little bit. We believe the capital spending beyond 2011 will be about $40 million a year after mortgage funding. We have a strategy and spending principles clearly defined, and we intend to stick with them. And we do not foresee any spending for acquisitions in the near term.

Next slide. This slide shows our debt covenants, and we were comfortably compliant with all of them in fourth quarter; in fact, compliant with the 2012 stepped-up covenants, as well, so we're in good shape on this front.

With that, I'll turn the call over to Jeff. Jeff?

Great. Thanks, Dave, and good morning, everyone. I appreciate the opportunity to share the Sonic Automotive fourth-quarter 2010 operating results. So, let's dig in and begin with our new vehicle results. As you can see from the slide, our new vehicle revenue continues to gain momentum, significantly outpacing the SAAR increase, as we generated a 20% growth in new vehicle revenue and 18% in volume for the quarter. We also enjoyed market share gains in all of our operating markets in the fourth quarter. Year to date, we posted new vehicle revenue growth of 14% and volume growth of 9% gaining momentum in each of the quarters sequentially.

Also included on the slide is a review of our gross dollar trends for the year. As you can see, we enjoyed a 10% increase in gross dollars in Q4. Year to date, our new vehicle gross is up 9%, as we gained momentum in each of the quarters sequentially, and I'll have more on gross dollars in a moment when we switch to the next slide.

One of our goals in Q4 was to increase new car inventory levels. Prior to the month of December, we began purchasing vehicles from our manufacturer partners, as well as our competitors all over the country, quite honestly, raising our inventory levels to a year-high 73-day supply prior to December 1st. December is always a terrific month for Sonic, and, as a result, we had the highest volume non-clunker month in years and ended the quarter with a 48-day supply of inventory. We give credit to our centralized new vehicle inventory management process in helping our team get this done.

During the last call, we also introduced our new vehicle playbook concept to you and said we'd roll out one store in Q4 to test the waters. The results are in, they're fantastic. We converted a Honda store to our new vehicle playbook and up-front pricing strategy in November. As a result, our store took market leadership against all other Honda locations in the market, and we beat the Toyota, Nissan dealers in the market as well. The same thing happened in January, and February is tracking the same again.

Based on the results, we decided to expand our rollout to our Volkswagen stores in Houston, which we completed in January, and the results in February are very good. As a matter of fact, we just had our record volume weekend since we've owned the VW stores, which we've owned for quite some time, so we're very pleased with that. We have plans to roll out all of our Honda locations prior to the end of the summer, and we'll keep you posted on the results. We're very excited about this opportunity. It's made a huge difference for Sonic on pre-owned, and we're now beginning to see similar results on our new vehicle business. Next slide, please.

I want to dig a little deeper on gross margin percentage and gross dollars for you. As you can see on the slide, our gross per unit was steady through the year, around $2,300 per unit, while gross margin percentage ranged from 6.9% to 6.5%, and this movement in margin percentage is simply caused by revenue mix and is simply not a concern to us. More important is the year-over-year gains we're seeing in our gross dollars, which further highlights our core strategy of driving top-line revenue, basically selling more cars, which in turn drives gross in several areas of our businesses.

Of course, it drives front-end new vehicle gross, but also F&I gross, as you can see on the slide here, and it creates customers for our fixed operations department. This strategy has worked very well in our pre-owned department and is now starting to do the same in new vehicle, as we continue to expand our new vehicle volume and market share to achieve our goal of a minimum of 1% of the new vehicle SAAR.

We expect our new vehicle PUR to fluctuate a bit quarter to quarter as we roll out our new vehicle playbook, but we'll be in the range of about $2,300 per unit, which I want to note is among the highest in our sector for the year as we settle into our new strategy. Our new vehicle volume will outpace the SAAR, and, as a result, the new vehicle gross dollars will continue to increase significantly, as well as the F&I and fixed dollars associated with our new vehicle volume increases. Next slide, please.

Our pre-owned team continues to do what we believe is the best job in the industry over the past several years, both on a volume and gross dollar business. We posted another quarter of strong double-digit volume growth, up 17% over a strong double-digit growth prior year. Our revenue is up 18% for the quarter on top of strong revenue growth prior year, and year to date we finished up 19% over prior year and in volume up 20 -- excuse me, up 19% in volume and up 22% in revenue.

2010 was the largest pre-owned volume year in our Company's history, selling just over 90,000 units, or an average of 70 units per store per month, which is the highest per-store average among the public automotive new car dealers. The great news for Sonic is that we see nothing but upside in pre-owned automotive sales as we work our way towards our goal of averaging 100 units per store per month.

Last year we introduced to you our investment in CBS, or our Sonic buying organization, and we told you we'd keep you posted as to the progress that we have -- that we've made with this infrastructure. To date we have 16 buyers in our organization and plan to add an additional six prior to the end of 2011 as our Sonic Inventory Management System, or SIMS, comes online. As you're aware, we have developed our own proprietary inventory management system that we believe will continue to enhance our performance. SIMS goes online May of 2011, and we look forward to updating you on our progress later on in the year.

We will also open our centralized Sonic retail trade center this year, powered by SIMS and revenue analytics. This center over the next 18 months will be responsible for pricing all Sonic automotive pre-owned inventory and will provide trade and purchase evaluations to our stores and CBS buying teams. Our pre-owned inventory management abilities are vastly expanding, and these moves will continue to enhance our performance, both in volume and gross dollars generated. The technology that Dave talked about earlier that our IT team has developed along with Apple hardware solutions is simply amazing and will honestly make our jobs easier. It takes guesswork out of our way and will provide a competitive advantage in our industry that we believe few possess.

Our pre-owned day supply ended the year in an efficient 32 days, and we continue to achieve more than 12 turns a year. Our wholesale gross dollars improved by $1.6 million for the quarter, and certified pre-owned was 33% of our business, right in line with our strategy. Next slide, please.

As we have stated for the last two years, our pre-owned PUR will be around $1,500 and I do not expect that to change in 2011. Even with the added pressure of limited inventory, we're trading for more cars due to our new car volume increase, and that will offset the increase of purchased inventory that comes at a higher cost. This, coupled with our new SIMS analytic inventory system, could actually help push margins up in the second half of the year, but my expectations are that it will take several months for our team to get used to the addition of a more-sophisticated pricing analytics tool, so in turn we may not see the added benefit of margin increase over our typical $1,500 average until 2012. We average $1,546 for the year and PUR moved sequentially, as it has over the past couple of years for us. There were no surprises here.

The important message to take from this slide is the increased volume in used is driving incremental gross profit dollars on the pre-owned front-end PUR, as well as F&I, as you can see on the slide, and just as important in reconditioning and fixed operations. This has been a consistent part of our pre-owned strategy since 2008, and, as a result, we have driven an increase in used car volume of 36% over a base year of 2007 and a total gross dollar increase of 23% for approximately $50 million for the same period. Next slide, please.

We continue to be excited about our fixed operations business. 2011 marks the third year in playbook execution for our fixed operations team, and as we've said in the past, year three is when we begin to feel more comfortable that our processes are sticking and that our team is executing on a daily basis. As you can see from the slide, overall our fixed operations revenue was up 8% for the quarter and up 5.2% year to date. Our customer pay revenue was up 3.4% for the quarter and 3% for the year, as our service line merchandising and pricing began to take effect.

Warranty revenue was up 14% for the quarter, driven primarily by Lexus and Toyota recalls, and warranty revenue represented 17.4% of the total fixed revenue in the quarter, and that's somewhat in line with our year-to-date average of 16.6%. Our internal sales and sublet revenue was up 17% for the quarter and 18% for the year and driven by really strong used vehicle volume. 2010 was the largest fixed operations revenue year in Sonic's history at $1.1 billion in sales and we expect to eclipse that mark in 2011. Next slide, please.

Equally as exciting is the gross dollars that we are generating in fixed operations. 2010 marks the single largest fixed operations gross year in our Company's history at $562 million in gross, up 4% over prior year. For the quarter, as you can see on the slide, fixed operations gross was up 6%, nearly $8 million in gross. Customer pay was up 1% for the quarter and for the year. Warranty gross was up 18% for the quarter and 2% for the year. And, again, internal and sublet was up 14% and 16% for the year, driven by strong used vehicle performance.

Overall, our fixed operations margins were 49.4% for the quarter, 49.8% for the year down 60-basis points to 2009 year to date. We expect similar strong fixed growth in 2011 as we saw in 2010. Fixed in 2011 will be supported by a more robust new vehicle volume environment and customer pay growth due to the maturity of our fixed playbook, which includes our service line merchandising and pricing and marketing strategy that was implemented in 2010, as I discussed. These improvements, combined with our already very strong pre-owned growth, will help fix -- our fixed business set another all-time gross record in 2011. Next slide, please.

In summary, 2010 was a very strong year for Sonic Automotive operations. While we made several investments in personnel and technology that increased our SG&A in the front half of the year, our year-end results show that those investments are beginning to pay off. December was our single largest property month in Sonic's history, and that did not include any manufacturer long-term facility accrual pickups. Our new vehicle volume is outpacing the SAAR improvement supported by what we think are industry-leading virtual desktop and mobile websites. Our new vehicle playbook is on the way for our Honda stores in the first half of the year, as we work our way towards our goal of minimum of 1% of the new vehicle SAAR.

Our used vehicle volume continues to be strong, again supported by what we think are the best automotive desktop and mobile websites in the industry, as we work our way towards 100 vehicles per store per month -- our target of 100 vehicles per store per month -- and that will be greatly helped by the introduction of SIMS in May, our retail trade center and the CBS buying team.

Our F&I performance is being bolstered not only by significant increases in new and used volumes, but our product per vehicle is growing as we move to 1.3 products per vehicles sold in January, on our way to our goal of two products per vehicle sold. Our fixed operations business continues to expand as we roll into our third year, and the fixed playbook will be supported by more robust new vehicle, used vehicle and customer pay business in 2011, helping us achieve our long-term goal of 100% fixed absorption.

We are creating a predictable, repeatable and sustainable operations model that in turn will allow Sonic to create one of America's greatest companies to work in shop. It's my pleasure to lead the Sonic operations team. Without the great people of this organization, none of this would be possible. With that, I want to thank each and every (inaudible) for their support and dedication to the execution of our playbook strategies.

Finally, and perhaps our three greatest achievements in 2010, was the all-time high associate satisfaction scores, the 28% total Company turnover, and the better than 80% customer satisfaction measurements we achieved. Our goal over the next few years is to have less than 15% turnover, 100% customer satisfaction, supported by the happiest associates in the industry, and this team will deliver those very lofty but necessary results. These results are the anchor of our success. Well done, team, and thank you.

And now I'll turn the call back over to our leader, Scott Smith.

Thank you, J.D. We appreciate the time you've given to us today to review our quarter and year. We're very pleased with the results in this quarter and the benefits we're seeing from continued execution of our predictable, repeatable and sustainable operational and financial strategies. The current external outlook on 2011 SAAR industry volume varies widely from 12.5 to 15 million units. Most of the industry estimates from analysts that follow our Company are in the 13 to 15 million unit range, with a few outliers on the high side.

While we think the industry is capable of returning to a 14 million to 15 million environment over time, we don't believe it's prudent to predict all that growth in one year. Our estimates on SAAR in the past have turned out to be relatively accurate. As such, we're expecting the 2011 new vehicle SAAR to be in the 12.5 million unit range and have constructed our budgets around that number. Anything over that number is clearly upside. As we take share, we expect our used vehicle volume to continue to grow in a low double digits. Fixed operation should grow in the mid-single digits, with overall revenue growing in the high single digit. We're currently targeting 2011 diluted EPS from continuing operations of $1.18 to $1.28, which represents the 20% to 30% growth over the adjusted EPS of $0.99 for 2010.

Before we take your questions, I want to take a minute to thank all of our vendor partners and dedicated associates who execute our playbooks every day to help us build one of America's greatest companies to work and shop. It is an honor and a privilege to lead our great Company. We'll now open the call for your questions.

(Operator Instructions)Our first question comes from the line of Scott Stember with Sidoti & Company.

Morning.

Good morning.

Did you give the customer pay sales increase for the quarter?

We did. It was up one -- sales increase is up 4.3% for the quarter and 4% for the year and then gross was up 1% for the quarter and 1% for the year.

You said 4.3%, right?

Correct.

Okay, got you. And could you just talk about how things shaped up in January? Obviously, we have a lot of reports of down days due to weather. Outside of that can you just talk about the trends that you're seeing going forward?

You bet, Scott. Obviously everybody had some weather issues, but we had a very nice January and we're having a very nice February, so they're in line with all of our targets and our budgets.

Got you. And can you talk about the pricing environment on some of the mid-level import volume brands? Some of your competitors talked about some pricing pressure there, can you talk about what you're seeing?

There's plenty of it, especially in Honda and Toyota. We're feeling it and with our new car playbook we're being hyper aggressive in our pricing, obviously trying to drive more top-line revenue, which is bolstering both the F&I gross and fixed operations for us. Over a longer period of time we think that's really going to pay off for us because we're going to -- we are taking market share and that's making a big difference for Sonic. So the pressure is there. We're right in that hunt, if not leading the charge, and we're going to continue to do that as we move through the year.

Okay. And just lastly, could you talk about how the new playbook is rolling out at these Honda stores on the new side of the business? Just talk about some of the different processes that you're seeing and that you're implementing and how they compare old versus new?

Yes, we're not giving you all the secret sauce. It's significantly different. We've got some different pricing strategies. We've got a different training program for our sales associate. A different advertising strategy and that advertising strategy really depends on the market that we're in. For example, our Honda store was a single-point market, but our VW stores in Houston, we have three of the six, and prior to really taking this on we only had 45% of the share. We're now pushing 60% of the share. So there's a difference depending on the market that we go in, the advertising strategy that we use because of that market, but it's driven by a much easier shopping experience for the consumer, a much more aggressive retail price on new, and a selected advertising and marketing strategy depending on the market.

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

Thank you, Scott.

Your next question is from line of Rick Nelson with Stephens.

Thank you and good morning.

Morning, Rick.

Just to follow up on that question about the new vehicle playbook in the Honda store, what is the rollout plan for that strategy?

We will roll out all of our Honda stores I'm hoping, Rick, to have it done by midsummer, by the end of June. I gave myself in my notes towards the end of the summer, but Scott's got his foot up my butt to have that done prior to the summer getting over with so we'll probably get that done by mid June.

Okay, thanks. Also like to ask you about any luxury OEM incentives, was there anything of note in the quarter where you're hearing about a lot of auto house benefits from some of your peers?

Not for us. We didn't have any auto house benefit. You had to invest a lot of money in those facilities and our investment principles, which we're following strictly given what we've been through over the last couple of years, have not allowed us to invest, like some of the others, in the auto house concept and so we didn't have any of those long-term accrual pickups that everybody else did. Our performance was just based on the quarter as it stood.

Okay. Also, Jeff, like to ask you about regional areas of strengths and weakness?

Southern California very strong. We're very pleased with our performance there. Texas is just on fire. Florida is coming back and doing very well. Alabama, Tennessee, Georgia, the Florida Panhandle is always a real strong hold for us. A little weak in the northeast, if you will. The Ohio, Oklahoma market was a little weaker than we'd like and I would say northern California is about average.

All right, thanks for that. And then the capital allocation side of things, how do you rank the alternatives at this point between debt pay down and property ownership and acquisitions and buy backs?

Yes, Rick, this is Dave. We've got our priorities very clearly outlined and in a priority order they are invest in the base business because that's the best returns for us, own our property is second best. And if you think about owning our property, it's a little bit of a retiring -- debt financing difference, right, because you've got -- you're moving to a mortgage versus a lease. And then third, take down debt. All three of them are important. We're focused on all of them and we're executing on all of them.

And when do we see Sonic get back in the acquisition game? Is there a target debt ratio you have in mind?

I don't think so. I think, as we look at the base business, the results we're getting today without any acquisitions, I think we're very satisfied with that. I think there's a lot of up side -- continued up side in the base business. I don't know exactly when it's going to happen, but it's a good, in my view, three years.

Okay, thanks a lot and good luck.

Thank you.

Your next question is from the line of Patrick Archambault with Goldman Sachs.

Yes, hi, good morning. A couple quick ones. In terms of -- the new vehicle sale performance is obviously very strong and you clearly, on a national level, have gained quite a bit of share this last quarter. Can you tell us a little bit about what you feel has driven that? Is it a fairly even combination of your footprint, as well as merchandising, or was your marketing push one of the bigger drivers and how sustainable is that outperformance? Presumably if there is quite a bit of incentive spending from some of the bigger players in some of the mid-line import, you would think that over time some of the smaller outfits may be forced to match that. So just your thoughts on that.

Great question, Patrick. We're pretty lucky in that we have some of the highest new car margins in the industry, running over $2,300 a copy, so it gives us some flexibility to drive volume. So we see our margins fluctuating a little bit, but the focus that we've had on driving new car volume, especially with Honda, especially with BMW, Toyota, those brands where we tend to dominate, and when I mean dominate, where we have great market presence, it has allowed us via marketing strategy to really take market share and we've done a very good job there. Our team is executing really well.

And here's the great news. The great news is we rolled out one playbook store for new car in Q4. We're going to signi -- we're going to see significant increase in our Honda business between now and June and the upside's limitless. If you'll remember back three or four years ago when we started doing this on the used car side, we got a little bit of pressure on our used car margin from the Street, but our used car growth in terms of dollars and volume just continued to take off and as a result, I think we've got the best used vehicle business in the country.

The same thing's going to happen on new. It just takes time to get the volume pill, if you will, installed and playbook, if you will, installed in all of our stores and over the next year or two you're going to see the really nice increases in new car volume. As a result, margin percentages may move around a little bit, but the total gross dollars, which is what we take to the bank, are going to grow significantly and we look forward to that, really good upside there for us. So great question and we think there's plenty of upside for us.

Okay. I guess just dovetailing that into the parts and service, I don't have the exact percentage in front of me, but it seems like compared to what we had modeled the margin there was a little lower, but clearly the growth was probably twice what we were expecting and it's been an area of strength, I think, at some of your peers as well. Is the strategy there to take a little bit on price and just extend out to some of the independent repair shops and take share from them by, I guess, matching them or getting closer to their pricing schemes, because obviously from volume point of view it seems like it has been effective at least as of the last quarter?

They've been taking -- the mom and pops have been taking shares from the new car retailers, the Pep Boys and things like that of the world for a long time and we've got the facility, the backing of the manufacturer, the brand, and it's time for that to stop and absolutely it's a strategy. Our margins are down a little bit, still rounded they're at 50%. We've got all kinds of different marketing and pricing strategies that we're working through our service drive so we're very comfortable with where we are margin wise. We see nothing but upside. In particular just because of the used and the new vehicle volume growth that we see our fixed operations business is going to be strong for the years to come. We had an all-time record in 2010, we're going to set that again in 2011 and 2012 as we have move on out. Just based on volume we're going to do that.

Okay, and then last question. Can you just give us a sense of how -- your view on OE-mandated incentives? Clearly in January there was some pretty big stepped-up incentives at some of the OEs that was concerning to some folks. Is that -- what is your opinion? Do you see the OEs in general becoming a bit more aggressive relative to last year, or what you're seeing in the market is it just short term tactical business as usual?

I think it's business as usual. It fluctuates from one quarter to the next depending on who's gaining share and who's not gaining share, who has a inventory levels that are high and who doesn't. Honestly I think that the OEMs are doing a better job as of recent managing their inventory levels so it's going to bring incentives down, which is kudos to them. That's exactly the way it should be. It allows us to make a few more dollars on the front end and will help us as we move forward. So I don't see anything out of the usual occurring here.

Okay, great. Thank you very much.

Appreciate the questions, Patrick.

(Operator Instructions) Your next question is from the line of Colin Langan with UBS.

Good morning. In the quarter it looked like the new to used ratio was a bit lower than it has been year to date. Is that a seasonal impact because it seems like from your guidance that it would have to, on a year-over-year basis, go up next year.

I think we finished at 0.9 to one for the year and it's a December impact. As you know, we do a ton of high-volume business in December, especially centered around BMW, and with all the incentives that are going on it's just -- that's what it is. It's not an October or November, it's a -- we were actually one to one, I think, in those months. We're going to be better than one to one in January and February with really robust new car volume. So it's just a December impact and it happens every year.

Okay. And in terms of -- I think you gave some numbers for parts and services mix. What percent -- what is the breakout there? 16% warranty, what percent is customer paying internal?

Hang on one second and I'll -- if you have another question, ask it. Hang on one second and we'll give you that breakdown.

Yes, sure. And the other question I had is actually earlier made a comment about gaining share from Honda and Toyota even though there's pricing pressure. I didn't quite get that. You're willing to take a lower margin in order to gain share? Is that part of the strategy? I just wanted to make sure I understand what those comments were about.

Yes, you bet. We don't look at our business -- it's more holistic. We don't look at our business as just new car. So our margin percentages have come down on Honda a little bit, but in a sense our new car volume has gone way up. And because your new car volume has gone way up, our trade ratio at those stores, we're trading for a lot more cars, so it's supporting our used vehicle business and our F&I business is improving. So you get that F&I growth and you get the fixed operations growth. So you really have to understand the balance between that new car margin and gross margin percentage if you want to measure it that way and what you can pick up in the other parts of your business and that's really paying off for us. We're making more money and most importantly, we're driving a lot more gross dollars using that strategy.

We started using that strategy in used cars several years ago and it has wildly paid off for this Company and it's going to do the same for new car. Takes a couple years to get it all up and running, but the early results that we've gotten based on the stuff that we've done with Honda and VW are fantastic and we look forward to presenting you guys with better numbers from our new car side in terms of volume in gross dollars as we move forward. Margin percentage may move around a little bit, but that's just not something that we're that concerned about, to be honest with you. It's the dollars that we take to the bank, as I said earlier, and that's what we're focused on is driving more gross dollars. And it's not just a pricing game. There's also how you market it, how you sell when the customer is in there, training with our associates. You put all that together and those things are all as part of the playbook and that's really what it is. The margin may move a little bit, but in total it's the playbook process that's driving it.

What does that mean going forward? Most people model by the percent margins. The margins going to be at the Q4 level going forward, or is there [more] downward pressure on the margin as the strategy rolls out?

To be quite honest with you, I think we're going to be in and around $2,300 a copy and we think per unit. We just don't look at that margin percentage number at all. We look at the per unit per copy number and our per copy number is higher than everybody else's for the most part. I think Penske may be a little bit higher than us, but other than that we've always been a market leader there. We're selling more cars and as mix changes -- for example, on our used car side, as mix changes our PUR was up in domestic, import and luxury, but mix changed so it drives the margin percentage down. It just is not something that we measure. We look at PUR and our PURs are good. They're up and we're satisfied with the gross dollars that we're generating.

And to go back, Colin, just real quick in terms of revenue customer pay is 46% of our revenue. Warranty -- this is for the quarter -- warranty -- oh, no, sorry, this is year to date. Warranty was 16.6%, wholesale parts was 12.3%, sublet 5.3% and internal 13.3% and then other at 6.9% for 100%.

Okay.

And if you want to know for the quarter, it was 45% customer pay, 17% warranty -- within that reflects the Lexus and Toyota recall that I talked to you about -- 12.5% for wholesale parts, 5.2% for sublet, 13% internal and 6.9% other.

Okay. And you think -- for the warranty, will that be strong again next year because of the recall issues?

Your guess is as good as mine. Every time we turn around there's another recall so if they have another recall we'll keep taking care of the customer and doing what's right by the brand. Hopefully that's not happening because long term recalls are not what we want for the consumer.

So your outlook there is based on the internal growing or the customer pay or both?

Both and we're going to see that just as a reflection of new car volume going up. Your service business is going to improve on a customer pay basis and our used car volume driving internal and sublet and with the growth that we're seeing in the first quarter on pre-owned that number is going to continue to grow.

Okay. Thank you very much.

You bet. Thanks for the question.

Your next question come from the line of Himanshu Patel with JPMorgan.

Hi, this is (inaudible) for Himanshu Patel. How are you?

Good.

Hi. How are you?

I'm good. I have one question on the dealership acquisition that you talked about. I think -- I guess you mentioned that you own 20% of dealership right now.

Yes.

I just wanted to put this number in perspective. How many dealerships did you own last year and what's your target on this percentage going forward? And then secondly, how do you plan to finance these acquisitions because I know you are also planning to pay down one of your high-cost debt, so concurrently explain which takes more priority right now?

Yes, I talked about our priorities. Probably I would put owning our property ahead of reducing our debt, but the way I think about it, we look at the properties as we have today that are financed with a lease and all we're really doing is financing it with a mortgage. And our average lease rate probably starts at an 8% or 9% yield and then they work their way up over the years and they can get 10% or 11% and we're financing them with mortgages. Our average is just below 5% today. So there's an obvious spread there that's advantageous for the Company plus all the other benefits of owning your property when you have to reinvest or paint it or whatever. You'd rather do it on something you own versus lease. So that's the strategy.

I think last year we were probably about 14% of owned. I think back in the beginning of 2007 we were 0% owned, so we worked our way up close to 20%. We don't have a target in mind. More is better, especially of good properties that make sense for us in markets we like and brands we like and I think we'll just keep at it.

We have a plan. We know when our leases mature and we look at it every month to see where we are moving forward. And frankly, we've not had any issues with getting financing. It's really nice. We've got about $130 million of mortgages. At year end it's going to jump up to close to $200 million in 2011. And we've got debt with leases, we've got debt with mortgages. We like mortgage debt better, we like owning our property.

Okay. And then following up on your parts and service business, I imagine part of this growth was supported by higher tire sales [due by aggressive] tire company that you talked about. Can you tell me the growth in tire business and also the associated margin in that business?

Let's see here. It's certainly put added pressure because we're selling a heck of a lot more tires. I do not have the tire revenue number with me, but we can reach back out to you after the call and let you know what that is. I don't have that number.

And can you talk about the gross margin in the business?

About 20%, 20%.

Yes, if we're lucky, it's 20%.

Okay, that's very helpful. Thank you.

And that's what's driving some of the margin in the fixed ops business. As Jeff said, it's been hovering right around that 50%, but as we've talked on previous calls, all of that is incremental gross profit because we weren't capturing any of those gross profit dollars in the past with the pricing strategy that we had.

Okay. Thank you.

Thank you very much.

Showing there are no further questions at this time.

Great, fantastic. We appreciate everybody participating on the call today. Take care.

Thank you.

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