Sonic Automotive Inc (SAH) 2011 Q2 法說會逐字稿

Good morning and welcome to the Sonic Automotive second-quarter earnings conference call. All lines have been placed on mute to prevent 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, Tuesday, July 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 Investor Relations tab under Our Company and choosing webcasts and presentations.

At this time I would like to refer to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this conference call management may discuss 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'd now like to introduce Mr. Dave Cosper, Chief Financial Officer of Sonic Automotive. Mr. Cosper, you may begin your conference.

Thank you. Good morning, ladies and gentlemen, I'm Dave Cosper, CFO of Sonic Automotive. Welcome to our second-quarter 2011 conference call. Joining me on the call today are the Company's Executive Vice President of Operations, Jeff Dyke; our Executive Vice President, David Smith; and Greg Young, our Vice President of finance. Today I'll provide comments on our financial results and Jeff Dyke will tell you about our strong performance in our operations. Scott Smith's on a plane returning from Europe I'd like to turn the call over to David Smith to provide overview for the quarter. David?

Thank you, Dave, and good morning, everyone. Our second-quarter results reflect the continuing recoveries in the retail automotive sector, combined with our focus on further implementing our operating play-book strategy in every area of our business. Our EPS from continuing operations was $0.37 per share. We saw strong growth across all of our business lines. Our new vehicle retail volume was up 15% over Q2 of last year, which, again, out-paced the industry growth. Even with some inventory challenges in our Japanese brands, our non-luxury import retail volume's also up 15%. Our used volume grew 11%, which marks the ninth quarter in a row of double-digit growth in this core area of our business. Our parts and service business continues to grow steadily, with revenue up nearly 6% over the second quarter of last year.

SG&A as a percentage of gross profit at 77.6% was a 230-basis point improvement over the second quarter of last year, as a result of strong gross profit dollar growth and our focus on following through on the commitments we made to you over the course of last year. Dave will have more color on the finalization of our credit facilities, but I do want to say thank you to all of our banking and manufacturer captive lending partners. With the new five-year credit facility in place we have the financing and flexibility to continue our strategic focus of growing our base business, owning our real estate and reducing our non-mortgage debt.

With that I'll turn the call back over to Dave to provide more color on the financial results. Dave?

Thanks, David. This slide shows financial results for the second quarter compared with a year ago. Revenue was just shy of $2 billion for the quarter, up 14% from last year, and operating profit was $59 million, up 23%. We saw further improvement in our interest expense and I'll talk more about our plans to reduce debt even more. After-tax earnings from continuing operations were $22 million, more than double a year-ago results. Excluding the debt call from last year's results earnings were up 59%. As David mentioned, earnings per share from continuing ops was $0.37. There's a small loss of disc ops of $800,000 after tax, primarily rent charges on sold stores. We have no stores for sale and no stores are included in discontinued operations. As you will recall on our last call, we held EPS guidance for the year at $1.18 to $1.28, notwithstanding the shortage of product from our Japanese manufacturers. We believe the impacts of the product shortages will be most acute July and into August and then begin to improve. As a result, for now we're continuing to hold our EPS guidance at $1.18 to $1.28 a share. Next to slide, please.

This slide shows our trend of cost performance. As David mentioned, we hit 77.6% SG&A to gross profit for the quarter, lowest level we've seen since early 2008 and, of course, the industry was much stronger then than it is today. You can see in the slide that our gross profit increased to $310 million in the second quarter, up from $266 million in early 2010, an increase of $44 million. Costs for that period increased $19 million, or only43% of the increase in gross. We're getting good leverage on our cost base. As we did not cut peoples' pay plans during the crisis we're not seeing penalties today from having to make changes to pay plan. Instead, what we're seeing is great sales performance by our team and better overall cost efficiency, and we expect this general level of cost performance to continue going forward. Next slide.

Capital spending for the year is projected to $65 million net of mortgage proceeds, essentially unchanged from our last call. As you can see, the bulk of the spending and cash outflow for the year is already behind us. Our large new BMW store in Beverly Hills is now open and operating and doing well, and helping our cash in the second half of the year is the anticipated closing on $15 million of mortgage funding. Capital spending net of mortgages for future years is still expected to be around $40 million a year. Next slide, please.

We closed this month on a new credit facilities for our new and used floor plan needs and a revolving line of credit. Importantly, as David mentioned, we have a five-year structure in place providing competitive financing costs and improved flexibility for reducing our debt and owning more of our real estate. In this regard, we've notified the holders of our 8.625% notes that we're calling these notes on August 16th. This will eliminate this particular debt instrument and reduce our debt level by $43 million, or roughly 10%. On a closing note, our group of lenders has been highly supportive of our Company and I appreciate all they do for us.

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

Thanks, Dave, and good morning, everyone. I appreciate the opportunity to share the Sonic Automotive second-quarter 2011 operating results. As we discussed on the last call, our new vehicle play-book is starting to make an impact on our new vehicle volume and the associated gross mix that goes along with it. We rolled out 15 Honda stores and three VW stores so far with the play-book year to date. Each group of stores are experiencing exceptional growth. Honda -- the Honda group is up 26% year to date while Volkswagen is up 59% year to date, each well outperforming the market and our competitive sets. And actually, Honda would be up higher if the inventory shortages weren't out there. We plan on rolling out an additional 35 stores by the end of the year, giving us roughly 50% of the Company installed with the balance coming in 2012.

As you can see from the slide, our new car volume was up over 15% as we posted our largest new car market share quarter in Company history. New gross profit per unit was flat year over year at $2,350, and when combined with increasing volume and an improving economic performance the gross picture looks great, up 18% for the quarter. Japanese inventories remain tight, especially with Honda and Lexus. We expect inventories across all the Japanese lines to begin to build in the coming months, getting back to normal levels as we move into September. Our Japanese manufacture partners have done an outstanding job supporting Sonic during these difficult times and we appreciate all of their efforts. Next slide, please.

Once again our pre-owned team delivered another quarter of outstanding record-breaking results, up 15% in revenue for the quarter. Our pre-owned play-book execution continues to prove that when combined with a great operations team, low turnover and happy associates that there's tremendous upside to this part of our business. As you can see from the chart, pre-owned volume was up 11.3% for the quarter, our ninth straight quarter of double-digit growth and our all-time highest pre-owned volume quarter, with over 27,100 units sold in the quarter. The team also delivered the highest all-time pre-owned gross in Company history, up 5.3% over prior year. And even with the increase in SAR and the new vehicle volumes that we're experiencing our used to new ratio was 0.96, as our team continues to demonstrate excellent performance in this important measurement. If you grasp our strategy then it's easy to see the increasing volume environment is driving not only record-breaking front-end gross but also F&I gross up 18.7% in used only and fixed gross up 14.2% in total. Our new day supply was 32 days ending the quarter and certified pre-owned was 29%, which is in line with our strategy. Next slide, please.

Just wanted to give you a quick update on the progress to achieving our goal of averaging 100 used units sold per store per month. As you can see on the graph, the team has made great strides in 2011. We're at 82 units sold per store year to date, up nearly 19% over our 2010 average. Next slide, please.

Total fixed operations revenue was up 5.5% and total gross was up 4.2%, as play-book continues to help our fixed operations execution. We had a record-breaking quarter in fixed in both revenue and gross as our fixed operations team continues to do an outstanding job at executing our processes. Customer pay revenue was up 2% while customer pay gross up nearly 1% for the quarter, as our customer pay fix business continues to build on the back of new and pre-owned volume growth. Fixed absorption was 88% for the quarter and over 90% for June as we work our way towards our goal of being 100% fixed absorb. Both internal and sublet continue to see strong growth as in previous quarters, supported by record-breaking volume in pre-owned. Both were up a combined 10.6% in revenue and 7.1% in gross. Warranty mix was in line at 16% of our revenue. Next slide, please.

In summary, Q2 was in line with our performance expectations given the reduction in availability from our Japanese manufacture partners. We're very excited about the early returns of our new car play-book and the market share that we've been able to capture. Our pre-owned business is in great shape as we make way towards averaging 100 units sold per store per month. We have increased our F&I performance and it's benefiting also from the growth in both new and pre-owned. Our fixed operations team is executing our play-book strategy and having record-breaking revenue and gross performances, as customers are returning to our service departments, driven by the high-volume from our variable departments. As Dave Cosper mentioned earlier, we did not cut headcount or pay during the crisis and now we are reaping many benefits by having happy associates with industry low turnovers and consistent execution of our play-books, which in turn driving higher revenue, gross and market share.

We are maintaining our forecast of 12 -- of a 12.5 SAR, as the industry continues to have steady -- a steady recovery and as the Japanese brands improve towards the end of the third quarter. As Dave mentioned, we're maintaining our continuing operations earning guidance of $1.18 to $1.28 for fiscal-year 2011. And it's my pleasure to lead the Sonic Automotive operations team on behalf of Scott Smith, our team here presenting today. I'd like 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. I'd also like to thank our manufacture partners, vendor and financial partners that join together every day to help Sonic achieve its goals.

With that we'll now open the call for your questions.

(Operator Instructions)

Your first question come from the line of John Murphy with Banc of America Merrill Lynch.

Hey, John, are you there?

Good morning. Can you hear me?

Yes.

Sorry about that. First -- on the gross profit line -- the percentages were a little bit weaker than we expected, but still in line with your competition. It actually saw a little bit of an increase and you sort of a flat line. Just curious, as we look at the gross profit percentages going forward, do you think that we should be more focused on the gross profit per new unit and the gross profit for a used unit in forecasting, and how you're driving the business to get higher volume, as opposed to looking at these percentages? I'm just trying to understand. It seems like you guys are operating the business for volume and looking at it on a per-unit basis; and externally we're looking at it as a percentage. Just trying to see if there's a disconnect there.

John, there's a big disconnect there. We are an automobile sales business, and nothing happens until we sell a car around here. Margin percentages you don't take to the bank; we don't manage our business that way; and we've been saying that now for a year and a half. We just don't manage our business by a percentage. We're driving volume in this Company, and you clearly see we outperform the industry, we outperformed our competitive set from a new vehicle perspective in a big way. A lot of that has to do with our playbook execution in the Honda and VW stores. The volumes just in the stores that we rolled out were just incredible, and we're going to continue down that road.

Our PURs -- we told you last quarter -- on new, would range between $2,100 and $2,350. They stayed at $2,350; and we don't expect them to change in the third quarter or the fourth quarter. They're going to be very consistent. What you're going to see is continued growth on the new vehicle side and the used vehicle side; and we believe, long term, that the more cars we're putting on the road, the more market share that we're taking -- it really supports the big margin business for us in fixed operations; and altogether is a great long-term plan for us. I saw a lot of the numbers out there and a lot of the margins out there. We did not go out there and take our Honda margins way up and take advantage of that situation. That's just not our long-term plan; that's not what we're going to do. Our goal is to sell a lot of cars, and that's what we're doing.

That's very helpful. Then on the SG&A line, it's 77.6%. You talked about 43% SG&A contribution to your gross profit line. As we think about the gross profit growing going forward, do you think you still can continue converting SG&A at 43% of that, and take down that SG&A line?

Yes, John, I don't know that it's going to be 43%. I did call that out because I think it is interesting and it's really -- you're starting to see the leverage given the volume come back. New car industry is still pretty light. I think when that picks up a little bit it throws a lot of gross in there, and I think you are going to see some improvement.

That number can come down. It's just the volume and the revenue have to continue to grow. And, like I said, we really haven't changed. We didn't go out and change any pay plans or cut any headcount, so that's not what's driving that 77% on the margin. It's purely being driven by the top line.

Got you. And then lastly, on the Japanese inventory situation. I was curious -- you're saying that it's coming sort of September timeframe. Is Toyota ramping up more quickly than Honda? You're seeing their inventory come back more quickly? Secondarily, do you see a lot of pent-up demand for (inaudible) in Honda vehicles that you think might get released as the inventory comes back in August and September?

Yes -- great question. Toyota is ramping up quicker. We're starting to see inventories arrive in August for Toyota. Honda's going to be a little bit later than that; maybe late August or September. But I give Honda a lot of credit, because they've been getting us inventory with stores that really don't have any inventory on the ground. We've got a lot of pent-up demand in our Honda stores right now because of new vehicle playbook. We are just selling the heck out of Hondas; it's an amazing growth that we're seeing. We have not gotten to the Toyota stores yet. We will, though, this year. So I think a combination of our playbook process being rolled out, plus there is pent-up demand out there for the vehicles -- it's going to make a really exciting second half of the year.

Do you mean that you have a big backlog in the Honda stores? That you built vehicles that are essentially purchased that will just be delivered upon arrival?

I've got a lot of deposits on the books for our Honda stores going forward.

John, it's interesting. For Honda we show the industry down 11%. Sonic was actually up 10% in the quarter in Honda, in the environment that we're seeing. So our lots are pretty much clean; we didn't hold out for a ton of gross per unit on those. There's some of that, but we sold a lot of [inventory].

John, you look to the average Honda store, and we've got 15 to 20 cars on the ground new. But we've been so aggressive in our pricing to drive that volume that we have a lot of customers that are coming in and saying -- look, I'm not going down the street and pay $1,000 or $1500 more just because Honda's short of inventory. I'll just make a deposit with you and get my car 30, 45 days from now; and that's exactly what we're doing. We've been able to have a wonderful quarter with that brand; and both brands will be online --Toyota and Honda -- coming into the third quarter with playbook, so it's going to be a lot of fun.

It's a great model. Thank you, guys.

Thank you.

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

Good morning. Could you comment on -- it sounds like you're running pretty low on inventory. Do you have an update on the days supply of inventory that you have; and any comment on whether you think the impact from the Japan inventory issue is getting worse in the third quarter? Do you think that actually might be more of a headwind given you're saying that you have pretty low Honda inventory?

Well, let me start by saying -- and that's one reason we're holding our guidance the way it is. I think that's one of the uncertainties, because we did, as we were just talking, sell a lot of Hondas in second quarter; and now we're very light. So I think it is going to be more of a headwind from an earnings perspective going into the third quarter. Jeff, do you have some --

Yes, Colin, here we go. Toyota -- our Toyota day supply is about 33 days, so I'm not real worried about our Toyota business. Our Honda day supply is 12 days. But it was 12 days in April; it's 12 days in May; it's 12 days in June; and Honda's doing a great job just replenishing our inventory as quickly as they can. So July's going to be a little bit of a tougher month, but we'll get some more inventory on the ground in August and September, and then we're off to the races.

And your overall days of supply?

Is -- in terms of the Japanese brands -- is 23; in terms of total new car inventory is 41.

41, okay. And parts and services is quite strong, up 6%. Do you have the breakout between customer pay and warranty, and what is your outlook for that into the second half of the year? Is that going to continue to be robust, or do you think that's a pretty --?

No, I think it's going to continue to be robust. Here's what happening, if you think about it, and it's our whole strategy -- the more volume that you put on the road, the more market share that you take, those customers -- that's a dividend that 's going to pay you 12 months, 18 months down the road as those customers start coming back into your shop. So that's clearly happening. Our customer pay business is up 2.8%, warranty up 4.4%. Based on what's going on in our used car business -- like I quoted a minute ago -- our internal and sublet is certainly way up. Sublet's up 23%, internal's up another 5%, 6%. So this is nothing that's surprising us. We expect our fixed operations business to continue to grow, and it's growing because our volume's growing; and it's just going to get better as we move forward.

And what is sublet?

Sublet is used vehicle reconditioner.

Okay, so those are -- okay, I thought that was --

We just lump those 2 together.

Oh, okay.

The combined was up, I think, 10.7% or something like that for the quarter for revenue; and up another 7% in gross.

So the 6% is -- you think you'll outgrow the -- that's not common for the average dealer (inaudible)?

If you look at our performance over last couple of quarters, Colin, we've been running 4%, 5%, 6% growth; and it's on the back of our variable growth. I don't see that changing; I think it's going to continue to grow.

That's a lot about the playbook working its way through our system and our stores and it's working.

The other thing that's really helping us on both the variable and the fixed side is that we don't have any turnover. Our turnover's dropping, and we've got the same people that we've been training now for three years. So really, really light turnover, a great culture in our stores, and it's making a difference. I've seen a lot of the other numbers; and it's one thing to have the margin, but to not have the revenue to go along with it -- that's not a long-term plan from our perspective. You've got to drive revenue and we're going to continue to do that as we move forward.

Okay, and one last question. Why the announcement of the dividend today, the reason for the timing today?

Yes, it's our normal timing, I think. We've been paying the $0.025 for several quarters now; and we just had our board meeting and it was approved, and we're announcing it.

We announced at the exact same time last quarter.

Okay. All right, thank you.

Your next question comes from the line of Scott Stember with Sidoti & Company.

Morning.

Hi, Scott.

Good morning.

Could you maybe just give a little bit more breakout by some of the brands? Obviously BMW, Mercedes had very, very strong quarters. How did those brands do for you? Did any of those brands notice any brand migration from, let's say, Lexus, which was in short supply during the quarter?

I don't know if you would call it brand migration with Lexus. Our BMW business was up at 37% for the quarter; Mercedes was up -- and that included many -- Mercedes was up about 7% for the quarter. Our Honda -- and we've already given you our Honda. Our GM business -- General Motors business -- was up 37.5%; Ford was up 27% for the quarter. So our business was strong across all the brands, whether it was luxury, import, or domestic.

How did Toyota do?

Toyota was actually down 7% for the quarter. A little bit -- we got hurt a little bit. 2 or 3 of our biggest Toyota stores, we had an amazing turn of events with hail; and -- like our Charlotte market we just got -- we had 400 cars get damaged with hail and hail only hit our Toyota store in the marketplace. So we had a little bit of a 1-time blip there from -- challenge there; but we expect our Toyota business to get back on track in this coming quarter.

Okay, and on the used side, you had a very good quarter. Heading into the quarter one of your goals was to be able to offer late model used cars as a substitute for cars that were in short supply on the new side. Can you just comment on how successful you were within the quarter?

Very -- we had a great -- we had the biggest -- this is the biggest volume quarter we've ever had in our Company's history, at over 27,000 units. It was fantastic; and we were very successful in going out and buying Honda inventory to supplement the new car shortages. So our used car team just did -- and our buying team did a fantastic job, and it just keeps getting better. Our July is off to a great start, should be a record month for us.

Okay, and last question on some of the playbooks. I know that obviously you don't want to give too much away, but could you just comment on some of the differences on the playbooks for the stores that you're doing for the new side of the business? What's different from -- these VW stores, from non-new playbook store?

Scott, if I told you I'd have to kill you. (laughter) That's our secret sauce and it's the same in used cars. We've been very successful there with our playbooks. Same in fixed operations, very successful there. We're just getting started in new. Like I said, we've got a bunch of Honda stores and VW stores rolled out; the numbers speak for themselves. VW's up almost 60%, and Honda would be up a heck of a lot higher if we had the inventory; and it's just going to keep getting better. We're going to take more share. Our market share was just all-time record for the quarter and I'm -- not just by a little bit, but by a lot; and hopefully we'll continue that. When we really got rolling in May, we had our biggest share month, and then just almost beat it again in June. And it's looking like we're going to have that again in July. So we're very, very excited about the things we're doing in new. But I'm going to leave it at that for now as we continue to grow our business in that sector.

Scott, this is Dave, and we've been talking about culture and people and process for a long time; and it sounds awfully soft, right, but you know what -- it's showing up in the numbers. And it really is in the low turnover, and you show people how to sell and the best practices, and you do things right and you get good results. Long-term revenue growth is the name of the game. You've got to sell cars and that's been our strategy for the last couple of years. Must drive as much revenue as we can drive at reasonable margin dollars; and let that volume grow all the other sectors of our business, including fixed operations, which is high-margin dollars coming in. Be aggressive there, and let the dollar's fall where they fall; and we're starting to pick up steam and you can see it in the numbers.

Great, that's all I have. Thanks a lot.

Thanks, Scott.

Your next question comes from the line of [Adetya Roy] with Goldman Sachs.

Thanks. Hi, guys.

Hi.

I just had a quick question on the new unit comp that you both said was a pretty strong number; and as you mentioned, it was primarily driven by your aggressive strategy on going out and taking some market share from your competitors. So, in terms of understanding how you guys book the revenue, is it like once the customer has paid down the money and you guys promise to deliver like in, let's say, 30 days -- do you book that as revenue, or does that get booked once you deliver the vehicle?

Oh, yes, Lord, no. You can't book that as revenue until the car is delivered and gone from your lot. So, no, no, no, we don't book revenue before the car is delivered; so it's all done post delivery.

So basically the strong number that you posted is mainly on the back of some aggressive pricing and making -- and basically, you have delivered those vehicles that flowed through your 14% increase in the new vehicle sales store comp, right?

You're true -- we did deliver -- the 14%, 15% growth that we're talking about, are delivered units; but we didn't really give up any margin. Our margin's basically flat.

Yes, that's not on the back of low pricing; it's just on the back of our playbook and the execution of our processes in the stores. You think about it -- we've got a bunch of Honda stores and couple or 3 VW stores that we rolled out. That's maybe 18 stores in total. It's 6 months in. There is a ton of work that goes into making this happen. That's why we think we can get maybe half of the Company done between now and the end of the year; and all next year will take us throughout the other half of the Company. So there is a lot of pieces. This is not just a pricing issue. Our gross profit per unit was actually just right at flat year over year; so we're not giving away a bunch of margin. We're just not going out there and charging up a bunch of margin during a very difficult time for our Japanese partners.

And, again, Jeff said it, but when you sell the vehicle, you get shot at the F&I and getting the volume. In fact, on the F&I, plus improved F&I per unit. Just like on used you get the used sale, you get the F&I, and you get the recon. That's how we're think about the business; and you drive it through volume, execution.

Great, that's very helpful. And my second question was on your guidance. You guys have done $0.68 in the first half, and the midpoint of your full-year guidance indicates that probably you guys will do another $0.63 in the back half. So what makes you believe that the back half is going to be a little weak; especially that you're going to see a tailwind from inventory normalization in some of the brands?

Yes, I think we're $0.64 through 6 months. So if you doubled it, it'd be $1.28, at the high end of the range. The way we're thinking about it is, still a little bit of uncertainty around the Japanese issue. If we work through this in a nice way, I could see lopping off the bottom of that guidance. But I'm kind of a conservative guy; I don't want to over commit, but we're very comfortable with the guidance. And, again, if we keep doing what we've been doing, we should be just fine.

Right, and one last question. If you guys can give some read into July sales?

Yes. Stronger than June sales; and we're pacing to have an all-time record. Used vehicle volume up, which is fantastic. Our market share in new is good. So everything looks great.

Great. Thanks a lot, guys.

Sure, thanks.

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

Thank you. Good morning.

Hi, Rick.

Congratulations.

Thank you.

[Let me ask you], if we return to more normal inventory levels, and we see stepped up incentive from the OEMs, how do you think that's going to affect the used car business; and where do you stand today with used day of supply?

Yes, our used vehicle day of supply ended the quarter at 32 days. We're in great shape there. In July we'll probably end the month maybe closer to 30 days or 31 days, somewhere in that ballpark. We'll be at 30 days ending August; and maybe a little less than that ending September. So we're in great shape on our used vehicle inventories. Here's what's going to happen. There's not going to be really any change other than maybe the Lexus brand and Honda brand, where you don't have any new car inventory, so -- and we've got used vehicle inventory there supplementing new. So, as that new car inventory comes in, you've got to really push your used car inventories down, which we're doing right now. We're going to hand off more new inventory into the store, and pull out some used car inventory. So we're in really good shape; we've got a great plan.

Rick, as our new car business has gone up, our used car business has gone right with it. We're right at a 1 to 1 ratio; and we expect our used car team to perform that way. We'll take in more trades; which is great, because it'll not put so much pressure on margin when you have to go out and buy these cars that we're paying a lot of money for today. We expect our used car total gross and our volume to go -- to move right along with the new car business and go up. We're a 1 to 1 business or better; and we don't really expect it have a big impact in terms of slowing our used vehicle volumes or affecting our margins in any way, based on not having our inventory managed. I believe we've got the best used car team in the industry. They manage their inventory better than anybody, and we're in great shape going into the quarter.

Thanks for that color. Like to ask you also about areas of regional strength and weakness?

You bet. Southern California, Denver, Texas, Alabama, the DC area, all -- Ohio, all very, very strong for us. A little weaker in northern California. Some of that's our own operation; some of it is a little bit the market. We've got our highest mix of Toyota and Honda stores there, so I'm just out of inventory. So other than that, maybe a little bit in Michigan. Business is pretty good in the smog belt, if you will.

Any comments on the financing environment overall; and what you're seeing in the subprime sector would be interesting?

Yes, the financing environment is great. Our F&I business continues to get better and better. We're at the highest peak of our product per car penetration, which is right at almost 1.4 products per car. Our PUR is really good. Our total finance gross is fantastic. And subprime -- it's there if you want it; it's just not a big part of our business structure. There's a lot more fish in the sea than that subprime market that we all used to deal in so much. You can get a little more bought these days, but we certainly don't count on that as a big percentage of our overall mix.

Rick, we're selling a lot of used cars and our financing -- our lending partners are right there with us. We're not having any issues getting the deals bought.

And capital allocation's still focused on debt retirement. At what point do you think we start to see Sonic move into an acquisition mode? I'm sure the OEMs would love the same-store sales you're putting up.

Yes, we've been -- I've been firm in holding as best I can together the 2, 3 years. If we see something that's just choice and fits our model, and it's attractively priced, we may scoop it up. But I'd like to keep us on track. I think our entire team is comfortable, our board's comfortable with the way we're headed. And we're seeing so much growth in base business, with the execution of our existing plans; and I think there's a lot more to come there. And personally, I think acquisitions would be a distraction from our base plan.

Yes, that's a great question, Rick; puts a smile on my face. Because as long as we can continue to grow our business at the same rate or better than our competitive set with their acquisitions included, that's risk free. We're rolling ahead, and we don't feel like we're losing any ground. We're growing our revenues as fast or faster than everybody else is growing theirs, and they're buying. So we -- there is so much upside opportunity in the stores that we have, just getting them to perform perfectly at a top, top rate -- we got a long way to go before we're going to get all that out of our stores. So we're going to focus on that before we go out and start buying any stores.

Hey, Rick this is Greg, I know we've talked about it before, but if you just do the math going on the used car line, from where we are today to getting to that 100 cars per store per month, that's an incremental $500 million to $600 million of revenue just at the used car line. That doesn't count the F&I or the service and parts that comes along with it. So we look at that and that absolutely 0 risk, no integration risk, no capital required to do that. And that's where we see the upside.

And we're well on our way. We're at 82 today, as you saw on the chart; and we were at 70 last year, and 50-something the year before. We are on our way to making that happen.

Great. Thanks, guys, and good luck.

Thank you.

Your next question comes from the line of Clint Fendley with Davenport.

Thank you. Good morning, guys. I'd like ask a question about the playbook concept. 35 more stores that you're planning by the end of the year with the balance in 2012. Wonder what's the timing on the roll out in 2012 -- is that something that something that's going to take the entire year?

It will. It'll take all year to get it all done, Clint. Thanks for the question. It's just so much effort. There's a lot of time, a lot of training and just a ton of effort that goes into making this happen. The great news for us is, we rolled our used car playbook out. It took 3.5 years, almost 4 years, to get that in place. But our culture, and now no turnover in the store being weighed down -- the stores are accepting the change in how we're operating so much differently now today than they were a few years ago; so it's a lot easier. But there's still a lot of detail; it takes time; and it'll be all of next year. Maybe we get it done in the -- all finished in the beginning of the fourth quarter or something like that. But it's going to take us predominantly the whole year.

And it's easy to understand the leverage that you guys can get with your fixed operations business from the new sales. Could you discuss the benefits that you get on the fixed side from your used business, given the success that you're having there?

Yes, sure, it's big. It's reconditioning. The vehicles -- it's double fold, right? It's reconditioning plus you get the customer coming back to your store for service work. But the car -- every car that goes through, there's a set dollar amount of gross that gets generated in our service department for getting that car up to speed and snuff, and getting down to the front line for our consumers to buy. And as you put more and more cars through that shop, you generate more and more gross out of that shop; and that's exactly what we're seeing. Our internal and sublet is just way, way up now, 9 quarters in a row. So it's making a big difference for us.

Last question here. When I look at the slide on your used volumes, and you're tracking toward your 100 first store goal -- you've also had a considerable amount of success on the number of stores that have averaged over 100 per month recently. How many of your stores are meaningfully below your 82 average? And trying to get an idea of the longer-term potential here with your playbook concept.

Yes, we've not -- we've got very few stores left selling 50, 60 cars. Maybe 10 or 15 in that ballpark; and then the balance are pushing upwards of 70 to 75. The good news now is that we're getting -- we've got a bunch of stores that are selling over 200, and a couple in range of 300. We can -- we believe we can do that. 100 is just a start for us; it's just getting all of the pricing mechanisms right, the processes right, in all the stores. But as we roll out our new SIMMS inventory management tool, it's going to -- it's sort of the icing on the cake for us. It'll make the difference, and put us over the top on the 100; and then we'll set our sights on 150.

And it's a mix of all brands.

Yes, it's not just BMW that's selling 100, although that brand averages over 100, It's all of it. I don't care if it's a Kia store or a BMW store or a Toyota store -- they're all selling a lot of vehicles. Honda, in particular, is well up over 100 -- the brand in general. So we just don't have a lot of stores. The industry -- our competitive set -- averages somewhere between 50 and 55 used, a store. We just don't have a lot of stores in that ballpark. We're north of 70 in most locations, and that's what's driving our performance this year -- it's just we're getting more and more stores away from selling 40, 50, 55, 60 cars a month. We put a lot of focus on that -- our used car team has.

Very helpful. Thanks, guys.

(Operator Instructions)

Your next question comes from the line of Joe Overby with Auto Remarketing.

Good morning, guys.

Good morning, Joe.

This question's mainly for Jeff. Jeff, you guys mentioned that more and more stores are hitting that 200, 300 mark as far as used vehicle volume; and you guys are seeing records for used volume. And what is the driver for such strong used vehicle sales?

Pretty simple -- it's low turnover and execution of our playbooks. We've just got a great, great used car team; we've all been together for a decade. And the execution of our processes and no turnover and the culture that we have in our stores is really generating our volume growth. Between Hal McLarty, our Vice President of pre-owned, and the entire team that's out there -- they just do a great job in executing our processes. Our playbook is exceptional; and what's neat for us is we're rolling in -- we've developed our own Sonic inventory management system, which is our own software that's allowing us to centrally appraise all of our vehicles now. It's going to allow us in the coming months to centrally price all of our vehicles now. And as you know, because of the business that you're in, being able to price the car right the first time, and keeping that pricing intact is really key critical to making this work.

Okay. Thanks, guys.

At this time, I would like to turn the call back to management for closing remarks.

Thank you all for joining us on the call today, and we look forward to talking with you soon. Thanks.

Thanks.

This concludes today's Sonic Automotive second quarter earnings conference call.