Sonic Automotive Inc (SAH) 2011 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 period. (Operator Instructions).

As a reminder, ladies and gentlemen, this call is being recorded today. 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 Webcast 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 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. Good morning and welcome to Sonic Automotive's fourth-quarter earnings call. I am Scott Smith, the Company's President and Co-Founder. Joining me on the call today are David Smith, the Company's Executive Vice President; Dave Cosper, our CFO; Jeff Dyke, our Executive Vice President of Operations; and Greg Young, our Vice President of Finance.

I will start the call today with an overview of the quarter, and then I will turn the call over to Dave for his review of our financial results, followed by Jeff with a look at our operating results. We will then have closing comments and open the call for your questions.

If you'll turn to the slide Overall Results. We are pleased to have wrapped up one of the strongest quarters in the Company's history. Our adjusted EPS from continuing operations was up 43% for the quarter to $0.43 per share and up 40% for the year at $1.39. These results were driven by strong growth in all lines of our business. New-car retail volume was up 15% for the quarter compared to an industry growth of just 10%.

Our dedicated focus on our playbooks has allowed us to (technical difficulty) share and grow our new-car business faster than the overall market recovery every quarter this year. This is the 11th quarter in a row that we are reporting double-digit growth in our pre-owned volume. That is almost three years in a row.

Our pre-owned playbook rollout strategy implementation over the last several years has proven that we can consistently grow our base business through the implementation of predictable, repeatable and sustainable processes. This volume growth in our vehicle business has generated growth in our parts and service departments, where revenues were up 2.5% for the quarter and 5% for the year, along with growth in our F&I business, which is up 19% for the quarter and 21% for the year.

Our adjusted SG&A gross profit declined 220 basis points in the quarter and the full year to 76.6% for Q4 and 78.2% for the full year.

I'm proud of our team and what they've accomplished this year. I've talked a lot in the past quarters regarding our focus on both our people and our culture, and you are seeing how the softer side of our strategy is consistently translating into industry-leading growth for our Company. I will now turn the call over to Dave. Dave?

Good morning, everyone. As Scott mentioned, we grew revenue in all parts of our business, and this slide shows very clearly the leverage of increased sales on the bottom line. In the fourth quarter, revenue was up 12%, operating profit was up 19% and adjusted profit after tax was up 46%. The story is essentially the same for the full year.

Jeff will talk more about this later, but as the new vehicle industry recovers further and our execution gets even better, you can expect to see more of this favorable leverage. For the year, adjusted earnings per share was $1.39, up 40% from 2010. Next slide, please.

This slide shows our SG&A performance, and the leverage of increased sales as well as a focus on our costs are shown here as well. Adjusted SG&A as a percent of gross was 76.6% for the quarter, an improvement of 220 basis points from the prior year. The same improvement was achieved for the full year.

I am pleased we were able to achieve these results as we are continuing to invest heavily in our people and our processes with training and technology. I am very comfortable with the investments we are making because the payback for both our people and the business is fast, and it is really showing up in our results. Next slide.

This slide shows capital spending for 2011 and 2012. Both years are fairly heavy investment years for us, with significant investment in property and buildings that we now own. Owning our property is one of our key priorities, and this trend is going to continue into the future.

In 2012, we are spending for two new luxury stores and a Japanese import store, all that we own. And as I mentioned, there is substantial IT investment, including iPads for many of our front line associates. Next slide.

This slide shows our compliance with our covenants at year-end 2011. Also shown is the step-up in covenants effective at the end of March. Our year-end status complies with this stepped-up level also.

As we've said so many times, our top priorities at Sonic are the base business, which means growing organically, owning our property, and third, reducing debt. We're focused on all three of these priorities and making good progress on all of them. In 2011, we reduced our public debt by $60 million and ended the debt with $365 million of public debt. We added over $50 million of new mortgage debt in 2011, but we view this as good debt, as it replaces higher-cost leases and owning our property provides so many other operational benefits.

With that, I will turn the call over to Jeff.

Thanks, Dave, and good morning, everyone. I appreciate the opportunity to share the Sonic Automotive fourth-quarter operating results. We continue to be excited about the success of our new-vehicle playbook rollout. As you can see on this slide, we continued to outperform the industry. We had the highest market share in Company history in 2012, which is a direct result of our new-car playbook.

The new-car playbook has been installed in roughly 50% of the Company, with the balance being completed this year. As with our experience in other areas of playbook execution, it really begins to mature in its third full year, so we've got a lot of upside to look forward to.

New-car retail revenue was up 16.2% for the quarter and 17.4% for the year. New-car retail volume was up 14.5% for the quarter and 15.5% for the year. New-car retail gross was up a little over 11% for the quarter and 13.5% for the year.

We expect the 2012 SAAR to be in the range of 13.5 million units, as Japanese inventory levels continue to improve and the industry continues its slow but steady recovery.

New vehicle days supply ended the year at 37.5 days, which breaks out in the following -- domestic at 63.8, import at 29.2 and luxury at 34.3. Our Japanese brands were at 26.9 days, up from 24.5 ending in September. Next slide, please.

This marks our 11th consecutive quarter of double-digit volume and revenue growth in pre-owned, as our team continues its march towards averaging 100 retail units sold per store per month. As you can see on the chart, we were up 11.4% in volume for the quarter and we were up 13.9% for the year. Pre-owned front and related total gross was up 10.6% for the quarter and 11.1% for the year.

Our days supply was 31 days and certified pre-owned was approximately 30% of our sales mix, which is right in line with our strategy. Next slide, please.

As you can see on the slide, we had another record pre-owned volume year, breaking the 100,000 pre-owned unit volume level, a first in Company history, at just under 103,000 units. I want to take this time to congratulate our entire pre-owned team on a job well done.

Since the implementation of our pre-owned playbook, our compounded annual growth rate has been 11% over a six-year period. And as we've said previously, it takes about three years for playbook to mature; as a result, our compounded annual growth rate since this time is about 15%.

We continue to make excellent progress on achieving our target of 100 units per store per month. As you can see on the slide, we reached an average of 79 units in 2011, and we look forward to making more progress in '12 towards this very important goal for us. Next slide, please.

As you can see on the chart, Fixed Operations revenue was up 2.5% for the quarter and 4.8% for the year. Gross profit grew nearly 2% for the quarter and 3.2% for the year despite significantly lower warranty levels. Customer pay revenue was up 5% for the quarter and 3.2% for the year. Customer pay gross was up 4.2% for the quarter and 1.5% for the year.

Warranty revenue was down 15% for the quarter and 1.5% for the year, while warranty gross was down 15.5% for the quarter and 1% for the year. Warranty was 14.4% of the fixed revenue mix in the quarter, and that is down from 17.4% last year, same quarter. And warranty was about 15.5% of the fixed revenue mix for the year, down from about 16.5% prior year. Next slide, please.

2011 was the largest revenue and gross year in Fixed Operations in Company history. I want to congratulate our Fixed Operations team on a job well done. We began to install playbook in Fixed Operations in 2009, and the result, we've grown our fixed revenue over 10% since this base year. As you can see on the chart, we've grown our revenue on average $34 million each year for the last five years, with a dip in 2009 just due to the economy. Next slide, please.

In summary, the fourth quarter was another record quarter and 2011 was another record year for Sonic Automotive. We continue to demonstrate that our strategy of reducing turnover, increasing associate satisfaction and playbook execution is creating positive growth in our performance versus the industry. We had record market share, pre-owned revenue and volume, Fixed Operations revenue and gross for the year.

We also continue to show that our strategy of reinvesting in our current store base and reinvesting in our associates is paying off, allowing our stores' revenue, gross, profit and earnings per share to grow as fast or faster on a same-store basis as many of our competitors grow on a total store basis.

These performances are allowing Sonic to invest in state-of-the-art technologies that are beginning to have significant impact on our customer experience in establishing one of America's greatest companies to work and shop.

We expect the recovery to continue steadily in 2012 and that our strategy and playbook execution will allow Sonic to continue to grow and take advantage of the recovery. I would like to take this moment to thank our team for their hard work and dedication to our strategy. Great year, everyone; I look forward to an even bigger 2012.

Now I will turn the call back over to our leader, Mr. Scott Smith.

Thank you, JD. We appreciate the time that you've given us today to review our quarter. We are very pleased with the results of this quarter and the benefits we are seeing from our continued execution of our various operational and financial strategies.

We look forward to 2012, as we are expecting a new vehicle industry volume of 13.5 million units. We expect our pre-owned vehicle volume to grow in the high single digits. Fixed Operations should grow in the low to mid single digits, with overall revenue growing in the high single digits.

We are currently targeting 2012 diluted EPS from continuing operations of $1.55 to $1.65, which represents a 12% to 19% growth over adjusted EPS of $1.39 in 2011.

Before we open the call, I just want to take a minute to thank all of our associates and vendor partners who have joined together every day to help us build one of America's greatest companies to work and shop. Thank you, everyone.

Let's go ahead and open the call for your questions then.

(Operator Instructions) Elizabeth Lane, Bank of America.

Good morning, guys, and congrats on the good quarter. It looks like your -- so your 2012 outlook of $1.55 to $1.65 is based on industry sales of 13.5 million. I was wondering if you have a general rule of thumb for what a 1 million unit increase in SAAR adds to your EPS.

I'll give you the number for 500,000, because I was just looking at it. About $0.07, $0.08 per 500,000. So you just double that to get to 1 million.

Okay, great. Thanks. And what are the Company's priorities for cash at this point? Because I know the strategy has been to reinvest in the business and not necessarily in acquisitions, but are there any opportunities out there in the market that would make you reconsider that strategy?

This is Dave again. I work really hard to keep us focused on our three priorities of the base business, and we are investing heavily there. Property, owning our property is also very important, and taking our debt out it as well. Now if something beautiful presented itself, would we consider it? Absolutely. But we are really not actively looking.

This is Jeff Dyke. As long as we can continue to grow our business organically as fast as the rest of the market is growing, going out and buying dealerships, it makes a lot of sense to continue to reinvest in our people and the current facilities that we have. There is just still a lot of upside opportunity in what we've got.

And it's very low risk.

Yes.

And I like that.

Okay, great, and just one more is that -- are you doing any additional hiring at this point or increasing incentive compensation materially as the new vehicle sales environment continues to improve? And what portion of your SG&A is variable, and should we expect it to creep back up versus more permanent or sticky cost reductions?

Boy, a lot of questions there. First, not really. We are not doing any additional hiring. We believe we've got the right staffing levels to handle the business, even if it grows past the 14 million mark. The technologies that we are deploying today are going to allow our associates to be more effective and efficient, meaning more sales per associate than what we've experienced in the industry and what we've experienced at Sonic in the past. So we are pushing up the throughput through our individual associates more now than ever before. We want fewer people making more money.

We have not really adjusted compensation plans that would make comp as a percent of gross change, and I don't see that happening at all this year or next. We've got very, very good plans in place, and they are producing the results that we are looking for.

This is Greg. On your SG&A question, we look at it kind of broadly. And at the two ends of that spectrum, there is probably about 10% of our costs that are truly fixed, 10% to 15%. Then there is probably somewhere in the neighborhood of 25% or so that is truly variable, that is going to move as the business moves. And then the big mix in the middle is what we refer to as the semi-variable, where we are able to control it, we are able to move it if we want to, things such as advertising and those types of things. But the truly, purely variable is probably around 25% or so.

Okay, great. That's very helpful. Thanks, guys.

Aditya Oberoi, Goldman Sachs.

Congratulations on a good quarter. I just wanted to follow up. Can you talk a little bit about your regional performance in the fourth quarter, which pockets did you see some better strength versus the others?

First of all, the fourth quarter was a solid across-the-board for us. But if you wanted to pick some of the front-runners, Texas was very solid, Southern California was solid, Alabama, Tennessee, sort of the DC area, all of those were very solid from a revenue and volume (technical difficulty) perspective.

Got it. And I just wanted to dwell a little bit on the question on SG&A. Your guidance says you will be below 78%. I think this is the first time in Sonic's recent history -- for I would say the last few years -- that you guys will be running at that kind of a run rate.

Now when we think about additional leverage, how much more flexing do you think there is, or how much is low-hanging fruit versus what you have to really go for in terms of reducing your SG&A further?

This is Dave. I don't know that I would look at it as low-hanging fruit. I think our strategy is to -- as we've been talking about -- investing in our people and our processes and training and what have you. So if we pull back on that, I think there is more leverage.

But frankly, we are investing there because it is working. And then I think the leverage comes from the success in our ability to sell and execute our playbooks. That is really where the leverage is versus slashing costs.

One of the great things about what we've done is we didn't go out in '08, '09, '10 or '11 and cut headcount; we didn't cut any pay plans. So we didn't leverage the bottom line or our expense structure that way. We leverage it by growing top line and by growing our gross.

And so as a result, we've got industry-leading low turnover, high associate satisfaction, and it is paying off for us, and it is really just beginning to start paying off. I mean, we see a lot of upside here, and I think that SG&A range is a good number for 2012.

Got it. And one last one, if I may. Your used-to-new ratio kind of (inaudible) a little bit from 0.79 in Q4 of '10 to 0.77 in '11. How do we think about it in 2012? Do you think the normalized rate could be more like 0.75ish, or do you think you will kind of go back to the levels we saw in 2010?

We will go right back. If you study historically, it is really not -- it didn't have anything to do with October or November; it's all December. We are heavily weighted Highline, and we do sell a lot of Highline new vehicles in the month of December. And if you study the previous year, the same thing happens every year.

January and February out, we are 1-to-1 or 0.95-to-1 used-to-new. And I expect to see that all throughout this year. Then go back in December, we will probably have the same phenomenon happen again, and it is just our brand mix causes that. And we do everything we can. Another thing is what helps us is when we sell a lot of new cars in December, we take a ton of trades. So it makes us better than one-to-one in January typically, and that is exactly what happened this year.

So I expect us to continue to range in the 0.95-to-1 -- to 1 ratio throughout the entire year; December just is a little bit of a different twist in terms of our brand mix.

Got it. Very helpful. Thank you so much guys.

Rick Nelson, Stephens.

Congratulations, as well. I would like to ask you about that SAAR guidance of 13.5 million units. It is a little more conservative than we are hearing from some of the other companies. If you could comment on sales trends that you are seeing in early 2012 on the new car side, as well as the used, would the helpful.

This is Dave, and you know we've got a pattern of budgeting or targeting based on conservative assumptions. And then if the gravy is there, we will certainly take it. And I think that strategy has served us well the last couple of years, and I think it is appropriate.

But having said that, we are off to a bang-up start this year. And Jeff, why don't you talk about that a little bit?

Yes, February and January have been great, Rick, both on the new and used car side, so we are very, very comfortable with our guidance.

And I will tell you, if we go all the way back to '09, '10, '11, our SAAR guidance has been right in line. There is nothing that we really missed. I think the SAAR ended up being for 2011 12.7, something like that, and our guidance was 12.5 at the beginning of the year. We are projecting 13.5. If it is higher than that, we are going to do better than the numbers that we are calling out. But I think it is a good, conservative number, and based on our previous two or three years of projecting these numbers, fairly accurate. Unless something just really changes in the industry.

Jeff mentioned this in his comments, but I think it is really important. The industry was up 10% last year and we were up closer to 15%. That is a (multiple speakers) -- that's big.

That's 50% more than (multiple speakers).

Yes. It really makes a difference in our new car volume. And if we can keep that even on a 13.5 SAAR, we are doing pretty well.

Thanks for that. Also, like to follow up on the SG&A. Is there any structural reason why the SG&A-to-gross that you delivered this quarter, 76.6%, can't be maintained in 2012? I guess especially as we move into seasonally bigger periods like Q3 and Q2.

It is Jeff Dyke. The thing is in December, mix plays a big role in that. We make a bunch of money in our Highline stores, and it just plays a big role. Plus the incentives that we get back from the manufacturers at the end of the fourth quarter is large. So -- more large than other quarters. So that is why it is as pronounced as it is in Q4. And I think you see that amongst some of our competitive set as well.

But it will fluctuate in and around, I think, the 78% number that we gave for the quarter -- for the year, for the first three quarters, and then be sizably better in Q4.

Finally, if I could ask you on the service and parts side when you feel that you anniversary the tough comparison [warranty].

Tough comparison -- I didn't hear you Rick. Did you say warranties?

And the warranty. Yes, is it the recalls -- what is causing the declines in warranty?

Well, it is. It is major declines in Q4, both in Lexus and in Toyota. Lexus warranty gross is off 64% in the fourth quarter. And Toyota warranty gross was off 43%. That is the majority of it.

And look, the great news is that we were able to grow our customer pay 14% and 5% in those two brands during the quarter. So we are doing what we need to do to offset the warranty gross reduction. We had a really nice quarter from a Fixed Ops customer pay perspective. And we expect that to continue on. It was a record-setting year for us in Fixed, and it is going to be again in 2012.

Got you.

I am not real worried about warranty.

The Toyota/Lexus recall, the compares get easier now as we move forward?

Yes, they do, just naturally, because there are just less and less recalls. And it is such -- it has moved to 14% of our overall revenue mix, I think, in Q4. It is a small -- getting to be a smaller and smaller number, and (multiple speakers).

Internals are almost the same.

Yes, our internals are almost the same. It is just not something that bothers us. We've sort of run the gamut on warranty, and as it continues to decrease, it is fine. We are going to do a much better job executing our customer pay and internal grosses and make up the difference.

Thanks a lot, and good luck.

Thank you very much.

Scott Stember, Sidoti & Company.

Good morning. Could you talk about maybe how some of your brands did in the quarter versus the industry, namely BMW or Mercedes? And maybe talk about Toyota and Honda and the wind that you have at your back with the supply improving?

Sure. BMW and Mini, obviously, just fantastic. The business was up 16.3% for us for the quarter, and about 16.9% for the year, on a year-over-year basis, in terms of revenue contribution.

Honda as well has just been excellent, even though we have been short of inventory. We've been selling everything we've got. Our days supply is really low, but it has kept margins up, and Honda has done a great job getting us inventory. And it has just been fantastic. And we expect to see that continue.

Mercedes-Benz for us in the fourth quarter really grew, which is great. You guys have read that we settled our disagreement with them, and the relationship is continuing to grow stronger and stronger. As we saw in the fourth quarter our business, was just really good, up about 15% in terms of revenue contribution from that brand on a year-over-year basis.

Ford also up about 12% on a revenue contribution basis, and they did a really nice job. Their product mix is good. As a matter of fact, I would take this time to congratulate all of our manufacturer partners, whether Mercedes, BMW, in the new 3 series, the Accord, you name it -- the reskinning of the Civic that is coming. They are just all doing a great job. The new Camry, doing a great job bringing product. The cadence is good. They are not overproducing, which is keeping the margins up. And they are just doing a really nice job with products right now.

On the Fixed Operations side, could you give us some of the other buckets, as far as like prep work and completion business and distribution, how that did?

Our internal gross, I think if that is what you mean by prep, for the quarter was up about 7% for the quarter. And that is the gross. Revenue was up maybe 3.5%, 3.8% to 4%.

So like I said earlier, customer pay was up 4% for the quarter, and on an annual basis up 2%. On an annual basis, our internal gross was up 8% for the year. So both of those things combining to more than offset the reduction in terms of dollars for warranty.

And our team just continues to execute. We are in the middle of introducing our iPad rollout to all of our service drives, which allows our service writers to get into the service lane and do a walkaround on the vehicle with the consumer without really having to go into an office or sit down at an ADP station, which makes it easier and more effective and efficient. The consumer likes it.

And the stores that we've put that into, we've just seen really nice growth in the amount of progress that we are selling per car in the hours that we are writing per car. So our Fixed Operations business is growing in those two really important sectors, customer pay and internal, and we look for that to continue this year.

Okay. Just going back to the SG&A, could you maybe just remind us of the buckets that you've been successful in reducing, leading to this very nice performance in the quarter?

Well, a lot of it was the leverage -- again, we are investing, right? And it's successful in selling. And of course it is a numerator and a denominator, and we are focused on both. I think in the fourth quarter, as Jeff mentioned, a lot of the lift was from the strong sales gross that we had.

Advertising has been one of our big areas, where we have done a lot more on the Internet, and that has been effective. The compensation, we compensate our people very well. But guess what? They perform, and they generate a lot of gross. So that draws that right into line.

The other thing we've done is reduced our rent in a number of areas, sub-leased a bunch of properties, own more of our properties. It's really across the board.

But again, Jeff mentioned iPads for all our people. That is some money that we are spending. But I support it, because it generates a lot of revenue and helps our team.

Yes, Scott, I think is really important. I know this may be repetitive, but we didn't cut pay, and we didn't cut headcount in our Company over the last three or four years. That is something we made a big commitment to. Our turnover was in and around 25% total Company for the year. Our General Manager turnover was about 10% for the year. And these are all-time lows for our Company.

And why our SG&A is low is because we are generating more revenue, and we are generating more gross, and that is what is driving that number down. We've been a little bit different, I think, from our competitive set all along, saying that. That early on, you guys, along with others, we kind of had a little bloody nose to begin with because we weren't willing to cut our associates' pay; we just weren't going to do it -- or headcount. What we were going to do was focus on generating more revenue, and as a result, SG&A is coming down nicely now and our top-line revenue growth is among the best in the industry. So that has sort of been our secret for success.

Got you. And just last question. How much of your real estate do you own as of the end of the year?

It is about 21%, 22% today.

Up from zero three years ago.

Got you. Thanks again, guys.

Colin Langan, UBS.

Thanks for taking my questions. Can you give any color on where your import inventory stands? I guess you said it was, I think, 29 days? So is that adequate, or do you think you -- is there more restocking? I mean as of the end of February, is it back to where it should be?

It is not quite back to where it should be. If you look at -- Honda is coming back. Toyota is basically back. We are at 29 days with our Japanese imports. It is Lexus that is really, really low. We are missing out there.

But I'm expecting Honda to be up and running full for us. And I don't want to take anything away. They have done a great, great job getting us inventory. But end of March, April, May, we should be full swing with everybody but Lexus, and we are really struggling getting more and more Lexus inventory. They've got some reskin coming on inventory. So hopefully, midsummer, the Lexus inventory will be back up where it should be, and we can take advantage of that great brand as well. There is a consumer base out there that wants it. We just need more inventory to help support the consumer base.

I know during Q2, Q3, you were pretty -- you kept your margins on the import side fairly consistent, and you were able to get a lot of business for that. Is there still a backlog of customers waiting for some of those vehicles, or has that kind of already run off at this point?

You know, I don't know that I would call it a backlog. I think what is helping for us is the execution of our playbook. We are very competitive in terms of our pricing there. We have been able to manage margins, but I wouldn't call it a massive backlog. I don't think you're going to see this big increase in volume due to customers that have been waiting for cars. I think customers nowadays have a lot of choices and they will go buy inventory when they need it.

But it is certainly -- in particular with Honda, we have been very successful in growing that brand. And I think we were up 10% maybe, with the brand being down 5% for the year. Maybe those numbers are fairly close. And that is going to continue on. And as inventory levels rise for them, I think our days supply is going to continue to be in the range it is now, because we are just turning the inventory so much faster. But no major pent-up demand; I don't really see that.

Okay, and I'm not sure if I missed this. The outlook for Fixed Ops, did you say low to mid single digits? And within that, is that warranty down offset by customer pay, or --?

That is correct -- 3% to 5%, and warranty is shrinking, as it has been. And customer pay and internal will offset that and then some.

Any concern about -- the customer pay growth, is that reflecting your playbook strategies, or what do you think of the overall market? Because isn't there fewer vehicles to service over the next couple of years?

I don't know. Everybody always says the fewer cars that you are selling, the less, but we've just not seen that. I mean, you look at our growth -- three years in a row we've had record revenues in gross and Fixed Ops (technical difficulty) out in 20% of our (technical difficulty) and will be complete this year is making it very, very (technical difficulty), and our ability to get the consumer in and out of our store on a timely manner and servicing exactly what they need. So it is no question that our playbook process is helping that.

Colin, this is Scott. It was really pretty cool last year in the third quarter. Apple, that really big company that puts out all these iPads and everything, they called us out on our earnings call right after Mr. Jobs passed away as one of their leading innovators. And they've just been extremely supportive in helping us.

So that investment, I think, will roll out over the next couple of years.

Okay. Are those iPads in the dealers starting today or they coming in the future?

No, I mean, they are in the majority of our Toyota stores. We are working on Honda and General Motors stores now. And the service pads will be rolled out, along with the proprietary application that goes with it, between now and the end of the year.

It's expensive. We are spending a lot of money doing it. But we are generating a lot of gross and a lot of revenue, and this is the time to make that happen. So you may see fluctuations here and there in SG&A, but we are going to continue to make that investment, because long-term, it is going to make a huge difference in how the customer experiences their visit at a Sonic Automotive store.

Okay. All right. Thank you very much.

Jon Evans, Edmunds White and Partners.

Can you help me understand, I guess, your thought process relative to buying back the convert? And then also maybe just help us understand -- if you exclude your mortgage debt, where do you guys want to get debt to?

We've set an internal target of getting our total debt down to a couple hundred million. And basically, if you take the convert out from our balance today, that is where we would be.

The convert is an interesting animal. I don't like it. It is expensive. There is a lot of dilution, there is a lot of short selling, a lot of confusion. And it is complex in the way it rolls through the income strip as well, because it is a 5% convert, but it ends up hitting the income strip for like 9% or so.

So we don't like it. We would like it to be gone. And we are focused --.

If I may just ask you -- if you did buy it back or bought a majority of it back, did you contemplate that into your guidance? And is that transaction accretive to you?

Yes, it is a tricky calculation. When you buy it back, it does reduce your shares. I think we've reduced the shares something like 1.3 million from the purchases that we've made of the convert. However, there is an offset in the accounting world, this [COCO] add-back. So it doesn't change your EPS tremendously. There is a slight improvement. But it is really not as big as you would think from a normal buyback of your equity out in the market.

Okay, thank you so much.

(Operator Instructions) Clint Fendley, Davenport.

Thank you, and congratulations on a nice quarter, guys. I wondered if your 2012 EPS guidance was contingent on any specific property purchased this year. And if you could refresh us just on the impact that these property purchases typically have on your earnings, as well as the capital requirements.

No, there is really no contingent. We are comfortable with $1.55 to $1.65 number.

No, the way the math works on that, if you have a $20 million property, we put 20% down, so there is an inherent delevering. And then typically we will save four percentage points, something like that, on the balance. Because right now our average mortgage rate is just under 5%, and our average lease cost is 9%, roughly. So you would take that difference times the amount of the loan.

It is not huge, but it does add up over time. And it really starts to make a difference in your balance sheet and the way it looks, and that was one of the things that we like about the strategy. And then we don't mind spending money on properties we own.

Again, we've got $1 billion worth of real estate out there.

And today -- you're right -- our total portfolio is just over $1 billion. I think we've got $220 million of properties that we own, with a mortgage balance of $108 million. And the nice thing about these darn things is we pay $10 million, $11 million of the mortgage principal off every year, and pretty soon, the mortgage is paid off and we own it. And that is just a better place to be. And that is why we are headed this way.

And you own roughly 21%, 22% today. Any expectation for that level by the end of 2012?

It may pop up a percentage point or two. But then we start to get into a few years where leases really start coming due more quickly. And I think it's like 2016 -- or -- 2016, we work our way up to close to 40%.

Okay, thanks. And one -- switching gears a bit here, I wondered if you could just comment on where you see the pricing going in the coming year on the used side. if the impact that the higher prices might be having on your used-to-new ratio here.

It is Jeff Dyke, I don't see it having any impact on the used-to-new ratio. I mean, there are 40 million used cars sold a year in America, and there is so much upside opportunity in that area.

Are the prices going to move up? They are. Just inventory is a little harder to buy now, and that is probably going to be the true story for '12 and '13 as the new car business comes back. But we are so focused on trading for cars instead of going to brick-and-mortar auctions and buying cars.

And then we are also -- we have a retail trade center up and operating, and by the end of the year, we really will trade and put valuations on all trades centrally through our home office. So we will be more aggressive than the street level -- or the store level is going to be in making sure that we are taking trades.

Today, we trade for roughly five out of every 10 cars, and I think as we move into the latter part of this year, that number will increase to seven out of 10. And in the future, hopefully, we are treating nine to 10 out of 10. It is going to cause a little bit of -- could cause a little bit of margin erosion, but that is all baked into our numbers. Nothing significant from what we've been experiencing in 2011 and 2010.

As I've said on previous calls, we are very aggressive in buying inventory, and so some of our margins have been running -- traditionally, we had run $1500, $1600, $1700 a car on the front end. Today, we are running in the $1400 range, and we've been there for the last eight quarters or so. And that is where I think we will stay. Even given the pressure for used car inventory, we will be in that ballpark.

Thanks, guys.

Jim Henry, Automotive News.

I was a few minutes late to the call and I may have missed this, but have you put out a number for F&I per vehicle? That is something that I usually see and I don't see it this time around.

Actually, Jim, that is not a number that we publish.

Oh, really? Okay.

On the forecast, nope.

All right. Well, I will take that up with you off-line and see if I can (technical difficulty).

Be happy to take your call and visit with you about it, but is just not a number that we publish.

There are no audio questions at this time.

Fantastic. Thank you, everyone, so much for your time and have a wonderful day.

Thank you.

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