Sonic Automotive Inc (SAH) 2011 Q1 法說會逐字稿

Good morning and welcome to the Sonic Automotive's first quarter 2011 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 26, 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 clicking on the For Investors tab and choosing webcasts and presentations. 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.

Thank you, Holly. Good afternoon, ladies and gentlemen. I'm Scott Smith, Co-Founder, President and Chief Strategic Officer. Welcome to Sonic Automotive's first quarter 2011 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, Mr. Jeff Dyke; Greg Young, our Vice President of Finance; and David Smith, the Company's Vice President. Today I will provide 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. And then we will open the call for your questions. If you will please turn to the slide labeled overall results. We're pleased with this quarter's operating results.

Our EPS from continuing operations was $0.27 per share, an increase of 125% over the first quarter of last year. Our results were driven by our new and used vehicle business, which also drove incremental business in our fixed operations and F&I business. Our 27% new vehicle volume growth easily outpaced the industry growth in Q1. Our used volume continued its double digit growth trend for the eighth consecutive quarter.

Our used to new ratio was 0.94 to 1 for the quarter, as our used volume continues to increase even as the new vehicle market continues to rebound. We continue to get closer to our goal of 100 used cars per store per month. Our parts and service business continues to grow steadily with revenues up 6% over the first quarter of last year.

The implementation of our operating play books, which is driving new and repeat customer business, combined with the benefit we get from our reconditioning used vehicles are both giving a positive impact on our fixed operations business. Dave will have more color on this in just a minute, but we made progress this quarter on our continuing effort to own more of our dealership property.

We purchased the real estate for five of our luxury and import stores in northern California and we now own the real estate on 18% of our dealerships. SG&A as a percentage of gross profit improved by 310 basis points over the first quarter of last year. We finished the quarter at 79.9% of gross profit, which is in line with our expectations in our sequential trend. With that I will turn the call over to Dave to provide more color on the financial results. Dave.

Thanks, Scott, and good afternoon, everyone. Overall I feel we had a very strong quarter. Revenue was up 19% and gross profit was up nearly 10%. With SG&A improving to 79.9% of gross profit, we were able to grow operating profit by 32%. Our interest costs declined further in the quarter, which helped to more than double bottom-line profit from last year. As Scott mentioned, EPS was $0.27. That's up from $0.12 a year ago.

Results for total operations improved even more, up more than threefold, as losses in discontinued operations have been sharply reduced. And we continue to have no stores for sale in discontinued operations. Our guidance is going to stay pat at $1.18 to $1.28.

We are off to a good start for the year and the industry seems fairly robust. However, there is numerous risks related to availability of new vehicles and Jeff will talk about that shortly. So, for now we are comfortable holding our guidance.

Next slide, please. As Scott mentioned, SG&A as a percent of gross was 79.9%. That is 310 basis points better than last year. Reductions were made in all cost categories except advertising, where we increased spend modestly to help fuel our sharp increases in volume and market share. And for the full year we continue to see SG&A as a percent of gross a bit below 80%.

Next slide. Capital spending for the year remains projected at $63 million. In the first quarter spending was $36.6 million, a large portion of which was for the real estate acquisitions that Scott mentioned. We did acquire five great properties on the west coast for $75 million. And with support from our financial partners, we closed on mortgages totaling $54 million. So, we will continue to own more of our properties over time as opportunities arise.

Beyond 2011 we expect CapEx to be in a range of $40 million - $45 million a year. And this includes equity down payments for future real estate purchases. Next slide, please. This slide shows our maturities of our public debt, which now total $425 million, and we have no scheduled maturities for the next two years. As we have said many times, our investment priorities are the base business, owning our properties and reducing debt. We plan to stick with these priorities.

And consistent with this, we plan to take out the $43 million of 8.625% debt later this year and it can be called at par in August. Following that, we plan to turn our attention to the $173 million of convertible debt, which has a call and put date in October 2014. This debt trades substantially above its face value and our plan to address it will include a substantial repurchase of our equity over the next several years.

Next slide, please. Debt covenants. This slide shows full compliance with our credit facility covenants and the covenants are shown at the level that stepped up effective March 31 of this year. The final step up is March 31 of 2012 and these are shown to the right side of the slide. And we were even compliant with these levels also. So with that I will turn the call over to Jeff for a discussion of our sales and operations. Jeff.

Thanks, Dave, and good afternoon, everyone. I appreciate the opportunity to share the Sonic Automotive first quarter 2011 operating results. Before I get started, I would like to extend our prayers to the people of Japan, as well as our manufacturer partners for the tragedy that they have endured and wish them God speed in their full recovery. With that, let's talk about the quarter and our new vehicle results.

New vehicle revenue was up 25% for the quarter and, as you can see on the slide, new vehicle volume was up nearly 26%, both easily outpacing the SAAR increase of 18%, as we began the rollout of our new vehicle playbook. New vehicle gross was up 14% for the quarter to $58.1 million. The great news is just like we've seen for three years in pre-owned, our new vehicle playbook strategy is starting out well, as we drove significant volume increases in stores that we rolled out that have been out for more than one month of performance.

The increase in these stores from a volume perspective for the quarter was up 96% year-over-year. And from a gross perspective, including front end and F&I, was up 47% year-over-year. As you can see on the slide, when combined with F&I our total new car gross was up 18%, driven by strong volume gains across all brands, but in particular BMW Mini, Honda, Ford, General Motors and Volkswagen. We ended the quarter with a 48 day supply of new vehicles and I'm sure that each of you is interested in how our Japanese inventory, import inventory situation looks, so let's take a look at the next slide, please.

As we've described on the slide, our inventory levels for the month of April are in good shape and we expect no volume disruption in total for the month. As we move into May and in particular with Honda and Lexus, inventory levels will begin to thin out about the middle of the month.

Please note that this could be earlier in May for some brands in stores, as consumer demand is increasing and we have no intention of slowing down our business to conserve inventory. Our goal is to sell everything we have at market rates. Overall we expect to have a solid month in May, even with Japanese inventory levels beginning to thin out.

June is when we expect inventory levels to get tight. We do expect disruption to our Japanese brands during the summer months because of slimmed down production, stoppages and part shortages. We believe that our manufacture partners are doing all they can to provide us with inventory and expect things to be touch and go until we have further information telling us otherwise.

The question is what can Sonic do to offset the shortages during the summer months. We are increasing our day supply on certified nearly new pre-owned vehicles, especially with Honda and Lexus. We are doing this through our strong buying organization and through aggressive in-store trade allowances to entice consumers to trade their vehicles.

As you can see on the slide, we've also suspended all fleet deals associated with these import brands and certain dealer trades. And we've asked our employees to not purchase these units under their employee discount program. We will be happy to address questions on inventory from these brands during our Q&A session.

Next slide, please. I know I get to keep saying this each quarter, but I sure am proud of our pre-owned vehicle team, as they once again had an outstanding performance, delivering an all time record volume quarter and another double digit volume growth, our eighth straight since the second quarter of 2009. Revenue for the quarter was up 15%, while unit volume was up 17.5%.

To add to the performance, we also had an all time record pre-owned gross quarter up 10%. When we add in the incremental F&I dollars and fixed operation's internal and sublet growth, the story simply keeps getting better, as those categories were up an additional 15% combined, as our total gross dollar growth strategy for pre-owned continues to prove itself quarter after quarter. Our CBS buying organization has grown to 20 buyers and we have plans to add a couple of more between now and the end of the year to help Sonic keep pace with its volume growth and our target of 100 units per store per month.

We averaged 78 units per store per month for the quarter, well ahead of our pace in 2010. And in March we sold over 9000 units, an average of 84 units per store and our single largest volume month in company history. If I gave you a sneak peek at April, you would see this record being broken again, as our pre-owned team continues to gain momentum around our playbook execution.

After two years of development, we're set to roll out our new inventory management system that we call Simms in May. We have been fine tuning the final version of the system, and the technology is simply fantastic. We believe Simms will give us a competitive advantage in inventory procurement, pricing and logistics.

Our pre-owned day supply was 35 days ending the quarter and our certified pre-owned business was 31% of our sales, in line with our strategy. Next slide, please. As we start our third year of playbook execution in fixed operations, we started with a bang. Our strategy is paying off as both revenue and gross dollars set all time records for the company.

As you can see on the slide, this performance was supported by 6% growth in revenue and 3.8% growth in gross dollars. Customer pay revenue was up 1% for the quarter, while customer pay gross was actually down 1.4%. And these numbers are down from what we have been trending in the previous few quarters, driven by unusual amounts of snow days or what we had store closure days. We had those in the northeast, Oklahoma and Dallas during the quarter.

We saw a return to 3.5% growth in March. As a matter of fact had our all time sales and gross record month, so we aren't concerned with this blip. Both internal and sublet continue its pace with the tremendous growth we were seeing in pre-owned sales, both were up a combined 17% revenue and 13.2% in gross. Warranty did contribute to our growth this quarter, as Toyota, Lexus and BMW had recalls. They were the primary drivers of the warranty increase in revenue and gross both up 11%.

Warranty has averaged about 17% of our revenue mix for the last couple of years and first quarter was in line with that number as well. Next slide, please. In summary, Q1 was in line with our performance expectations, as we achieved our SAAR adjusted operational objectives for the quarter.

We continue to be optimistic about the SAAR, which is running above our $12.5 million budgeted projection at 13 million units and this will only enhance our performance as we move through the year. We continue to gain speed in all of our operating categories, and are excited about Q2, even with the inventory issue of our Japanese import partners, as they deal with the aftermath of the tragedy that struck Japan.

Let me briefly summarize how we currently view the Japanese import situation. Our Toyota inventory is in very good shape. Honda is getting a little tight. We expect to see some supply disruption over the course of Q2 and Q3. We expect to see some brand migration on part of the consumer and potentially some pent up demand for these brands as the inventory pipeline returns to normal later in the year.

Our used business continues to grow faster -- at a faster rate than we had originally forecasted, which will help offset some the disruption on the new vehicle side. Our first quarter performance proved simply that our continued focus on associate satisfaction and playbook execution will lead directly to the results you are seeing.

We are excited about 2011. We look forward to presenting you second quarter results in the coming months. It's my pleasure to lead the Sonic operations team and I would like to take this opportunity to thank each and every Sonician family member for their hard work and dedication in making Sonic Automotive one of America's greatest companies to work and shop. And now I will turn the call back over to our leader, Scott Smith.

Thank you, JD. Our operating strategy is simple and successful. Our focus on creating predictable, repeatable and sustainable processes in our dealerships are producing results in every area of our business. We continue to focus our attention on developing our culture and developing our leaders at all levels of our team.

Our new and used volumes are exceeding the industry growth and driving growth in the related fixed operations in F&I business. We still targeting 12.5 million SAAR for 2011, even with the potential for short-term disruption from the natural disaster in Japan.

We're maintaining our earnings guidance of $1.18 to $1.28 per share. It's an honor and a privilege to lead our great team. 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 help us build one of America's greatest companies to work and shop. With that, we will now open the call for your questions.

(Operator Instructions) Patrick Archambault, Goldman Sachs.

This is actually [Adeo Broy] filling in for Pat. I just have a quick question on your margins on the new vehicle side. Going from here I would like to hear your thoughts on what do you think the margin trajectory is going to be both in the near-term and in the long-term given that you might see some benefit from tighter inventory in the near-term and what do you think is going to happen in the long-term. Thanks.

Pat, it's Jeff Dyke. Listen, our margins are going to range some where just like we said at the end of the fourth quarter, somewhere between. $2150 a copy up to $2300. Last year in the first quarter we were $2300. It also happened to be our best new car margin quarter ever. And we're getting really aggressive with our Honda brand. We are rolling out our new vehicle playbook and we said at the end of the fourth quarter that that was going to move our margins around a little bit. But with performance that we are getting out of the stores, with the lift that we are getting it supports our overall strategy to drive total gross. So in terms of margins, $2150 a copy, $2200, somewhere in that ballpark. Can short supply push that up, possibly. We are seeing that in our Lexus brand right now, where inventory is getting tight and margins are moving up, especially on the west coast our margins are up maybe $1000 a car over the last six weeks.

But overall we are going to be in that range. Somewhere in the $2150 to $2300 range in terms of new car PUR. And then our used car PUR is at $1500 and it's been there for seven quarters. It's just going to stay right in that ballpark. We are not going to push that up. We are in a driving a lot of volume and on our way to selling 100 used per store per month, so that's not going to move. And then from a fixed operations perspective, the margin last year was at 50 and it's a little lower than that, maybe 60 basis points or something lower than that and that's more mix than anything else that's driving that. As we work to increase our volume and our service drives as well. So, margin is going to move around a little bit, but we are very comfortable with where we are today.

Got it. And moving on to the SG&A as a percentage of gross profit, incremental SG&A, that came in pretty low at 36%, if I do the math. It has dragged in the high 70s in the past. Was there anything specific going on this quarter or how should we be thinking about it in the future?

Pat, it's Jeff Dyke, again. Our SG&A was at 79.9% unless I'm not understanding the question.

Because if I see your incremental SG&A that you guys did this quarter, year on year was like $8.2 million on an increased revenue of 22.5, right?

Yes.

And so if I do the math that translates into 36% incremental SG&A as a percentage increase.

Yes, we typically don't look at it that way, but you are right. And basically what we are seeing is we are leveraging the cost base as we're growing throughput and revenue and gross and you are just seeing the variable piece of our business moving up a little bit and leveraging the fixed cost structure.

We said last year we were building our model all last year and our SG&A was a little higher and we kept saying, look, this is going to come down as we drive our revenue and gross is up and that's exactly what's happening right now. And we expect it to be in the range that we are at now for the remainder of the year. Could get a little better as the summer month go on, but it is going to be right in the range, just below 80.

Right and I think in the longer term you guys have said that if SAR goes back to that 13 or14, 15 million range you guys could be in the mid-70s as well.

That's correct.

Okay. Great. Thanks a lot, guys.

Scott Stember, Sidoti.

Could you maybe talk about some of the cross selling opportunities that you could possibly have, which brands would migrate to which brand, and just maybe talk about how some of the non-Japanese brands, like such as the Cadillac and some of the other alternatives have performed in recent months.

Scott, it's Jeff Dyke. Certainly when you look at Ford, you look at Chevrolet, Cadillac from our perspective, Audi, Volkswagen. These brands are all performing extremely well. I would challenge you to look at cross shopping a little bit differently than maybe some of the others have challenged you and that is not so much from brand to brand, but from new to used. We've really beefed up our nearly new Honda and Lexus inventories. And I'm not talking about 2008 or 2009 Honda models, I'm talking about 2010 and 2011 Honda models that we're buying at closed Honda sales. And we are having to pay up for them.

But our average margins are hanging in there and these miles on these cars are anywhere from 500 miles to 1500 miles, so it's an easy switch when you don't have a Civic or an Accord or Pilot, as we see that happening in the coming months, to switch them to this inventory. And the way that we have structured our buying organization and as aggressive as we are in our trades, the transition is from new to used, that's where we will go first. And then migrating from a Honda to a Ford, certainly that's going to happen, but we don't track that kind of data, so it's hard for me to be able to tell you there what we would see happening from one store to another.

Have you seen any early successes or any examples of new down to used?

Well, we have in some of the stores that have new car tightening. We have got a Honda store in Vegas that's doing very well with it. But we really don't have low inventory levels yet on new. So that experience is going to start mid-May towards the first of June. And our guess is that we are going to sell a lot more used cars as that begins to happen. The consumer wants the vehicle. There is a feeding frenzy a little bit now on Honda and Lexus and Toyota and we are enjoying that right now. That's going to get tight and when it does we are going to have the used car, the nearly new car on the lot to support our consumers needs.

Okay. And on the parts and the service side, you had a very strong quarter from a warranty stand-point given the fact that last year you had some benefit from warranty. Do you see the comparisons getting more difficult throughout the year?

We said that in first quarter -- in fourth quarter going into the first quarter because of the Toyota recall. And then here we go with more Toyota, BMW, et cetera. So, it's so hard to predict. We are not counting on it, that's for darn sure. We didn't budget it. And we are counting on our customer pay business to drive the day plus internal and sublet for us is growing a ton just because of our used car business is growing so much. You can't ignore that. You have got to pay attention to that and so there is a lot of growth there from a fixed perspective just because of the used car business.

And just last question related to the guidance, the fact that you guys were able to keep your guidance in tact essentially with all of the turmoil going on in Japan. At this point I know, maybe you don't want to answer this, but is there an area within the guided range where you would be more pointing to assuming that we have some significant impact from part shortages in the next couple of quarters.

You are right. It's a tough question. Of course, we gave a $0.10 range and everybody gravitates to the middle and then I noticed all the analysts move up from there. These guys are signaling the middle and got to do better. I think we are comfortable with the range. I don't know how long this thing is going to last. We don't know. We have got a lot of great plans, a lot of energy and the other parts of our business. We're just going to take it day by day and see how things go. But we are very comfortable even where it is. And $0.05 is a lot. It's $5 million. So, we are comfortable where we are at.

We just not built our business strategy around the new vehicle department. And we have been working very hard the last couple of years to get our used vehicle business up and we think we have a competitive advantage there. And we are going to exploit that over this summer and going to have a lot of fun doing it.

And Jeff hinted at it. We are beating our expectations on used. I think our guidance had low double digits. Well, we're not low double digits. We are a significantly higher than that and fixed ops revenue is growing much higher. It's probably going to be 3% to 5% anyway. 6% was nice and we will take it. So there are some opportunities to help us offset the issues we are facing.

Great. That's all I have. Thank you.

Thank you, Scott.

John Murphy, Banc of America.

Good afternoon, guys. I think you partially answered my first question, but you know as we look at this $1.18 to $1.28 range, there is still a tremendous amount of uncertainty around the Japanese delivery of vehicles. Forget about the production and the delivery to dealers. Is this really just this reiteration really just a function of how strong your used vehicle business and the parts and service is doing and there still is a lot of uncertainty around when you get normal supply of Japanese brand vehicles back on track?

John, you took the words out of my mouth. That's exactly right. Our used vehicle business is very strong. Our parts and service business is growing and its stronger. We are just not tied down to what the new vehicle industry is going to do in terms of the performance of our Company like we used to be and we've worked very hard to grow those other categories and as a result we are going to benefit from that moving forward.

And if we didn't have this disruption, would you be -- do you think you would be raising your guidance range right now or is the model balancing out to offset that pressure and this is just a model really working out to sort of the way that you set it up.

I think you would be raising our guidance range.

The conservative CFO in me would say wait a quarter. But we would be feeling a hell of a lot better. We had a good quarter in our view. We are very, very pleased.

Yes. Second question. Just on the finding thing of used vehicles, as you are able to sort of migrate some of these new vehicle buyers over to the nearly new vehicles. How are you finding financing from fincos, both captive and third party financing companies?

It's solid. It's been pretty stable. Maybe they are buying a little deeper as credit ratings get a little better. But overall there has been no substantial change there and our lending institutions have been, quite honestly, they have been great. And we are not having any trouble getting our vehicles purchased.

Then on acquisitions are you seeing anything going on in the market that's changed in the near-term in response to these disasters where there might be more acquisitions available at better prices or in general what are you seeing in the acquisition market?

Well, we just haven't been looking. It doesn't fit our top three priorities right now. And we aren't looking.

Okay. And then just lastly on the April sales pace, have you seen -- you mentioned this sort of a little bit of a feeding frenzy at some the Japanese brands. Have you seen a pick up in sort of showroom traffic in response to what's been going on or in general have you seen a pickup in showroom traffic?

John, it's hard to tell because we are in the middle of rolling out our new vehicle playbook and in those stores the business is just going crazy. And our used vehicle business has been on such a great pace that maybe we are not -- it's hard to tell whether it's what's going on in Japan or what's just continuing that's been happening at Sonic for the last couple of quarters. We just had a nice steady growth in both the new and used vehicles side and we expect that to continue. There is no reason for it to slow down and in April it's doing exactly that.

Okay. So it's fair to say that this showroom traffic is continues to improve and it's really just tough to parse out the exact factor that's driving that. It's a lot of it is what you are doing and it might be market conditions as well.

Absolutely. March was our best volume month in our Company's history and April is right on the heels of it and might even beat it. We will see kind of how that goes.

Great. Thanks a lot, guys. Keep it up.

Thank you very much, John.

Rick Nelson, Stephens.

Just follow up to that if you could comment on margins that you are seeing on the new vehicle side maybe that last couple months and what your expectation would be as we move into May and supplies are even more constrained.

Hi, Rick, it's Jeff Dyke. As I said earlier, our margins are going to range from the new vehicle side $2150 to $2300 a copy. And a lot of that depends on what manufacturer moneys you earn and hit. Lexus margins are up right now, especially on the west coast. They are much higher than they have been in the previous six weeks and that is clearly from a lack of supply. So margins could inch up across some of the brands, but we are going to continue to be hyper aggressive. So, our goal is a total growth dollar strategy goal and so we are not out there to be the highest PUR Company around, although our PURs are of some of the highest in the sector. And then on the new car side, I mean on the used car side $1500 a copy is kind of where we've been. It is where we are targeting and our growth has just been fantastic. It has been superior there actually and we are just going to keep driving that strategy home.

Rick, this is Greg. I would also add we aren't seeing a lot of increase right now in the Honda and Toyota GPUs or margin, the local markets still seem to be fairly competitive. So we aren't out there trying to hold out for the highest margins. As you guys kind of model this out as we go through the second quarter and into the third quarter, I don't know that I would model out any significant increase in new vehicle GPU as a result of lower inventory levels and stuff, because right now we are not really seeing that in the local market.

And their sourcing cost on the new car side I would think would be increasing with having to source more cars at auction.

You mean on the used car side.

Used car side, excuse me.

I mean, look, you go out and you better know what you are doing in today's market when it comes to buying a Honda and a Lexus in these auctions in these closed bid sales, because if you don't you are going to get in big trouble. And we just got a very strong buying organization and our technology really allows us to have a competitive advantage and we are out buying cars when others aren't or they can't. So it makes a really big difference for us and so we are loading up on inventories right now and we are buying inventory. Our buying group is buying anywhere from 1500 to 2000 cars a month. We are loading up on inventory and our margin hadn't changed. So it's $1500. It's $1500, it's $1500. So, yes, the prices are high at the auction, but we are also selling the cars and making gross and making gross both from an F&I perspective and a front end perspective, so -- plus what you get in reconditioning. So, it's working out for us and we can live in this market easily. It's something that we do very well.

Are you seeing any resistance at all to the prices on used cars? The gap I know is narrowing.

No. It's moving up. It's not moving up, though, as fast as we'd like it to. We'd really like it to move up, but one thing that we are very focused on is our trade ratio. It's a lot smarter to buy a car to trade for a car than it is to go stand in line in lane and bid against each other for a car. So our trade ratios are moving up and we've targeted the trade for seven out of every ten cars that we look at. That's a big number and hopefully by the end of the year we will be hitting that number.

What's the duration of the supply disruption that you all are planning for that's incorporated into the guidance.

We just in terms of and I'm assuming you are speaking about the Japanese disruption here in terms of that. We just don't know. It could be the end of the third quarter or the beginning of 2012. But we've taken all that into consideration and for now, I feel comfortable now. If supply completely shuts off then that creates a whole different ball game that we will have to talk about, but we aren't anticipating that.

Toyota allocation we heard last week were pretty much shut off. Is that accurate?

No. They aren't completely shut off, but they are certainly slimmer and we've seen that, but one of the great things for us is is we had great Toyota day supply ending the third -- ending the first quarter. In March we, I think we ended the quarter with a 50 some odd. Today right now we have a 55 day supply of Toyotas on the ground. So we are in really good shape from a Toyota perspective and we have got some stores that have a lot more than that. Honda is the one, we have got about a 27 day supply there. So that is a much bigger issue for us. And that's why we are so focused on buying nearly new Hondas at the auctions.

Thanks a lot and good luck.

Thank you very much, Rick.

(Operator Instructions) Colin Langan, UBS.

Not sure if I caught the comment when you went through slide 8, I thought you made a comment around the buying back shares to repurchase the convertible note. Could you just clarify that?

I did say that. The convert trades ahead of -- if you go out and price the thing right now and I haven't looked at it, but it trades substantially more than the convertible number of shares that you would think, the underlying value of the stock today, it always trades ahead of that. So if you are going to take it out you are better off buying the shares and then netting the shares against the debt.

Okay. And have you started? I guess haven't -- doesn't seem like there is evidence as a future plan to -- .

That is a future plan and exactly what I said was at first we are going to go after the $43 million of debt that's due in 2013 and we can call it in August. So I would -- post that, I would look to see us do something.

And you could the 2014 debt that can be called at any time or you have to wait for 2014.

You have to wait for 2014. There is a put and call date at that time. The ultimate maturity of this debt is 2029, actually. It won't last that long.

Okay. The other question -- actually missed the parts and services, what was the warranty internal -- how did each of the parts perform.

Sure, Colin, it's Jeff Dyke. Let's see here. On the internal and sublet we were up a combined 17% revenue and 13.2% in gross. And then from a warranty perspective we were up both in revenue and gross 11%. And warranty averaged 17%, 17.7% of our revenue mix, which is in line with where we have been for the last couple of years.

And customer pay.

Customer pay was revenue was up 1% for the quarter and gross was down 1.4%.

But a lot of that was weather, as Jeff mentioned. The revenue was actually up 3.5% in March. And gross was up almost 1%.

And the weather was also -- was that also a factor to the margins were a bit weaker too or is that -- ?

Now that's more mixed, Colin, than it is that. We are driving a lot more tire sales in our service drives and they just have much thinner margins, so it's creating that. But the thing about it is, and everybody gets hung up on margin percentage and we're trying to get everybody to start thinking about total gross dollars and that's what we are looking for. There is a sweet spot from a margin percentage perspective, whether it's 49.5% or 51.5%, we are playing with that. But it's the gross dollars that we are generating that makes a big difference, because that's what you take to the bank. You don't take a margin percentage to the bank and we are seeing that happen now throughout all of our categories.

To Jeff's point our gross dollars was up 9.5%. And that's what we are focused on.

Okay. And Jeff you commented twice on the new vehicle gross per unit range. What factors dictate where you should be in that range. Is that car truck mix, brand mix -- ?

It does have a lot to do with brand mix. We have really focused on driving our Honda and Toyota business in the first quarter, in particular Honda. And they have a lower PUR, so that drives the overall GPU down in terms of our import brands. And then BMW has a higher PUR and it's up. So the mix is somewhere -- we said this in fourth quarter coming in, we've got our new vehicle playbook that we are executing and we're rolling out and that put some pressure on the margin or on the gross per unit. So, somewhere between $2150 and $2300 is what we are projecting and it's going to fluctuate around there. Also when you hit all these manufacturer incentive programs that adds more money back into the PUR and you really don't know that until you get towards the end of the quarter. Things are a little bit fluid and we have been saying that, as we move into 2011 things are going to be a little fluid on new vehicle PUR because of the things that we are doing. But ultimately what's going to happen is we're going to take market share, drive a lot more revenue and a lot more gross and that's exactly what we are doing.

How about car/truck mix, if we see a big shift back to cars that brings the lower end of that range.

You are seeing some probably more for gasoline than our strategy, though, because the strategy covers both, obviously, both segments. You are seeing a little bit of that. It's driven primarily by gas, but then that's driven by availability of inventory. And so it's just really in a very fluid situation right now and it's going to be that way for the remainder of the summer we are projecting.

Okay. Thank you.

Thanks, Colin.

Thank you, Colin.

Thank you. I would now like to turn the call back over to management for closing remarks.

Great. Thank you, Holly. I would like to thank everybody for being on the call today. We are very focused here at Sonic Automotive and we are delivering our results and we are very optimistic about the year. We look forward to speaking to you again next quarter. Have a great day, everybody. Bye-bye.

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