Sonic Automotive Inc (SAH) 2012 Q3 法說會逐字稿

Good morning and welcome to the Sonic Automotive third-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, Tuesday, October 23, 2012.

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 on the right side of the page.

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, information or expectations about the Company's products or markets, or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the Company's filings with the Securities and Exchange Commission. Thank you.

I would now like to introduce Mr. Scott Smith, President and Chief Strategic Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

Thank you, Jackie, and welcome to Sonic Automotive's third quarter 2012 earnings call. I'm Scott Smith, the Company's President and Co-founder. Joining me on the call today are Dave Cosper, our CFO; Jeff Dyke, our Executive Vice President of Operations; David Smith, our Executive Vice President; CG Saffer, our Chief Accounting Officer; and Mr. Heath Bird, our CIO.

I'll start today's call an overview of the quarter, after which I will turn the call over to Dave for his review of the financial results, followed by Jeff with an outlook of our operating results. We'll then talk a little strategy and have some closing comments before opening the call up for your questions. With that, please turn to the first slide.

As you can see, our third quarter results were driven by strong revenue growth in all areas of our business. New retail revenue increased over 20% from the prior-year quarter, driven by strong increases in unit volume. Along with improvements seen in our pre-owned business, our overall retail unit volume for the quarter increased 16%. These increases, along with improved penetration, yielded an 18% increase in our F&I results. Fixed operations remained stable and even grew despite one less selling day in the current-year quarter versus the prior year.

On the cost front, we are pleased to be tracking lower than our targeted SG&A rate of 78%. Our technology objects continue to develop and gain traction in our business. We grew both adjusted income from continuing operations and associated diluting earnings per share through our focus on core competencies in the base business. As noted on the slide, these results excluded certain charges related to our recent debt issuance and related successful tender offer. The effects of these transactions are accretive to shareholder value and the effect is demonstrated in this share count slide that follows.

I will now hand the call over to Dave Cosper to review our financial performance. Dave?

Thank you, Scott, and good morning, everyone. Revenue for the quarter was nearly $2.2 billion, up 12% from a year ago. Adjusted profit after tax increase to $23 million, up 15%. As Scott mentioned, this result excludes an after-tax charge of $11 million related to taking out our convertible debt. I will talk more about the debt in just a moment. Adjusted EPS was $0.40 for the quarter, up 18%. Next slide, please.

SG&A as a percent of gross was 77.6% for the quarter, an improvement of 30 basis points from a year ago. Year-to-date, SG&A was at 77.7%, which is in line with our target for the year. And we remain on track with our technology and training plans that we have discussed on prior calls. Spending on this front has remained flat with the first half rate. We expect this level of spending to continue through most of 2013. The benefits of improved gross profit will become more apparent over time, and Jeff will touch on this shortly. Next slide.

Through three quarters, our cash used for capital expenditures totaled $44.5 million. We are expecting about $88 million for the year as we finalize several large new stores on owned property. As you can see, there's $15 million in mortgage funding for the fourth quarter, and we actually closed on this funding earlier this month. Next slide, please.

We ended the quarter with $62 million of cash and no borrowing on our revolver. As you can see, we are compliant with all of our debt covenants, and in total our liquidity position at the end of the quarter was close to $250 million. Next slide.

This slide shows our maturity profile of our public debt. And as Scott mentioned, during the quarter we successfully completed a major effort to improve further our capital structure. We borrowed $200 million of long-term debt with a coupon of 7% and successfully tendered for all of our 5% convertible notes. As you can see on the slide, we now have over five years before any public debt matures, and this, of course, positions us well for future growth. Next slide.

This slide shows the walk for our diluted share count from the second quarter to the third quarter. The two benefits of taking out our convertible debt are, one, the elimination of potential dilution; and, two, the elimination of accounting impacts associated with portraying our EPS results as if the debt had converted into equity. So our balance sheet and our accounting are now much more simple with this debt out of the way. For the quarter on average, dilution was reduced by 4.5 million shares, and included in this are share repurchases totaling 804,000 shares. It's our intent to repurchase all of the 4.1 million shares issued as part of this effort to take out our convertible debt, and we certainly have substantial share repurchase authorization and liquidity to do so, and we continue to be in the market. For information, our outstanding share count at the end of the third quarter was 56.5 million shares.

So without I'll turn the call over to Jeff Dyke.

Thanks, Dave, and good morning, everyone. I appreciate the opportunity to share the Sonic Automotive 2012 third quarter operating results. As you can see from the slide, new retail revenue was up 20% and our new retail volume was up 25% while gross was up nearly 2.5%. The third quarter was the largest new car volume quarter in company history on a same-store basis. We continue to see strong retail volumes across all segments in all of our markets.

I would like to take a moment to address our gross erosion. As you are aware, BMW represents nearly 30% of our gross, and we had significant inventory shortfalls through July of this year. The great news is that inventory began to arrive in August and sales began to increase. While our BMW volume was down in July some 8%, our BMW volume was up 15% in August and 26% in September. The lower inventory levels reduced BMW as a percent of our total mix during the year and in particular in the third quarter, and as a result hurt our traditional gross levels. At the same time, our Honda business grew a whopping 69% over prior year, which, when added to the mix, dropped our PUR due to lower margins associated with the brand. The BMW issue has been resolved as our day supply is up over 50 days ending September versus being at a low of 34 in July.

Some brand color -- BMW as a brand was up 1% for the quarter versus Sonic being up 10%. Mercedes-Benz business was up 9% versus Sonic being up 12%. Honda was up 44%; as I said earlier, Sonic was up 69%, and Toyota was up 38% versus Sonic being up 44%. New vehicle day supply was 49 days ending June. Next slide, please.

Our pre-owned business continues to improve as the third quarter with the largest pre-owned volume quarter in Company history on a same-store basis as well. Pre-owned revenue was up 4.8% while volume was up 6.6% for the quarter. Total pre-owned and related gross was up 6.6% as well. As you can see on the slide, we are at 87 units per store for the third quarter as we work our way towards our goal of 100 units per store.

We are very excited about our SIMS rollout. We completed our first region rollout in Texas at the end of July, and the results are fantastic. August, we sold 118 units per store, and in September we sold 107 units per store. Both months were up 10% versus prior year. This is a major inventory and process change, so for us to be well over the 100 unit mark signals what we expect to happen for the Company as SIMS gets rolled out to the other stores by the end of the first quarter and the process matures as part of our culture.

August was also the largest pre-owned volume month in company history with a per-store average of 92.4 units. Our day supply was 23.6 days at SIMS and our trade center combined are helping our Company operate more effectively and efficiently on a lower day supply. Next slide, please.

As you can see on the slide, fixed operations revenue was up 1.3% and gross was up 1.7% for the quarter. Adjusting for one less day, for fixed operations, our gross was up 3.3%. Customer paid revenue was up 1.6% while customer pay gross was up 1.1%. Our internal and sublet revenue was up 4.3% while internal and sublet gross was up 9.7%. Our service pad process rollout will be completed at the end of the first quarter. The results continue to be fantastic and we look forward to sharing more when we get the process fully installed. Warranty revenue was down 3.5% and warranty gross was down 2.7% as warranty continues to shrink as part of our sales at 14.1% of the total fixed operations revenue mix.

The important message that you should take away from this discussion today is the fact that both new and pre-owned revenue and volume set all-time records in the third quarter. With one less day, our fixed operations revenue and gross performance in the quarter was among the best performances we've had. Our F&I performance in PUR and gross was an all-time record. Most important, our customer satisfaction was the highest it has ever been and our turnover is on track this year to be the lowest that it is ever been. The investments that we are making are starting to pay off as all of the new processes, technology and training are beginning to become part of our culture. Our investments in technology and training are significant, and as these expenses begin to fade, the results, combined with improving execution of our new customer experience processes, will provide our shareholders and the investment community significant growth opportunities.

I would like to take this opportunity to thank our team for their hard work and dedication in creating one of America's greatest companies to work and shop. And with that, I'll turn the call back over to Scott Smith. Scott?

Thank you, Dave and Jeff. Although we passed a significant milestone in the elimination of the 5% convertible notes in the third quarter, we continue to be guided by our three-pronged strategy as noted in this slide. These three principles -- grow the base business, own our own properties and improve our capital structure -- will serve to guide us to higher profitability and increased shareholder value. The backbone of this strategy lies with creating, maintaining and mastering common processes through our playbooks that are predictable, repeatable and sustainable. We believe our investments in technology and people over time will enable us to achieve this. Next slide, please.

We are pleased with the double-digit revenue growth and overall results of the third quarter. However, we always get excited in the fourth quarter of the year. Our mix of luxury stores contributes to a higher than average activity during the fourth quarter, particularly in the month of December, when many of our manufacturer partners announce programs to drive customers to our store. The overall business and economic climate continues to support growth in the automotive retail space and outlook remains positive.

As communicated in our release earlier this month, we are tightening our adjusted diluted earnings per share guidance from continuing ops from $1.62 to $1.70, to $1.65 to $1.70. Although we have one more quarterly call with him, I would like to take a moment to recognize Dave Cosper in his role as Vice-chairman and CFO, for all of his contributions to the company. Way to go, Dave!

Thanks, Scott.

There are unavoidable milestones in our business that are bittersweet, and this is one of them. During the quarter, we announced the pending retirement of our CFO, Dave Cosper. Dave has been instrumental in developing our culture of leaders within Sonic. He has helped guide Sonic through the downturn of 2008 and 2009 and the recovery that we are experiencing today. Dave's leadership mantra permeates the organization and he has set us up for continued success. At the end of the first quarter 2013, Dave will be passing the baton to Heath Byrd, our current CIO, who we are confident will continue to successfully lead our finance organization. During the next several months, we will be working to ensure a smooth and seamless transaction. I would like to give a huge thank you to Dave and a big congratulations to Heath.

I would also like to take a moment to congratulate David Smith on his promotion to Vice-chairman, effective upon Dave's retirement. Congratulations, Dave.

Our team appreciates the time you have given us today to review the quarter. Before we take your questions, I would like to take a moment to thank all of our associates and partners who joined together every day to help us build one of America's it is companies to work and shop. It's an honor and a privilege to lead our great company, so thank you.

That said, we would now like to open the call to your questions.

(Operator instructions) Rick Nelson.

I want to ask you about the SG&A expense ratio. If I pull out rent and rent related, we saw widening in the quarter. We've seen a widening year-to-date. I guess, what do you see as the drivers to that? And when do you think we would start to see leverage of some of the investments.

This is Dave. As we've mentioned, we anticipated the levels that we are at. We set a target of 78% for the year. We are 30 basis points under that. We actually improved a little bit in the third quarter, even though we were a little light on growth. I would expect us to start to see some leverage going forward from where we are at. I think we will see in the fourth quarter, and then I think you'll start to see it take off Q1-Q2 of next year, as Jeff mentioned, as some of the initiatives that we have been working on get rolled out more fully and we start to see more volume and more revenue. And then at the tail end of the year, I think the cost itself will start to diminish a little bit and then you'll get a further impact from that.

Go you. Do you have a target for SG&A, ex rent?

Ex-rent? No, we just went through our forward year look, where we are at. Today, we own about 23% of our properties. If you skip ahead five years, we are projecting to be mid-40s that we would own. That will make a significant dent in it. But, I think even more important is the gross lift that we are going to get from the actions and the investments and the strategies that we are putting in place and working on right now.

I think the important thing, Rick -- this is Jeff Dyke -- is at the beginning of the, we called out that we were going to be in and around 78% SG&A and that, knowing exactly what properties we were going to buy and the moves we were going to make with our investments in technology and training, and we are right on the number that we said we were going to be at. That's where we are, and that's where we project we will be by the end of the year.

Looking back to the guidance that you had provided in February, $1.55 to $1.60 based on a 13.5 million SAAR, to date we're tracking closer to 14.5, the guidance 165 to 170, $0.07 to $0.08 lift with $1 million lift in the SAAR and Sonic capturing a lot of share within the overall market. I guess, as you look at that incremental profitability, what do you think is holding that back? Or is that something some sort of leverage, that $0.07-$0.08 per million, which --

No, I think that leverage is a little light, Rick, and I think some of the gross items that Jeff talked about -- there was clearly some issues there related to BMW availability. And our gross per unit was a little light across the board on new in the quarter.

One of the other things that you need to think about is the things that we are doing in our stores with technology and the process change; it's pretty disruptive. And that's okay, and we projected for it to be and we have projected for us to be right where we are. And it slows a store down before it speeds it up.

The good news is that, as we begin 2013, we are really not introducing anything new. We're going to spend 2013 getting our stores really acclimated to all of the different technologies and processes that we've rolled out this year. And that will allow the store culture to settle down a little bit, and it will allow us to focus in. We've got little instances all over the Company where we are seeing tremendous growth. Like I mentioned, in Texas the growth that we saw in our average volume per store, 118 units in August, 107 in September -- these are little things that we are beginning to see all over the Company. And we are making some big, big changes. The changes are great for our consumer and they are great for our associates. But when you change something that has been done the same way for decades after decades, it can be disruptive, and it is.

The good news is that we projected for it to be. We said, hey, here's what's going to happen, here's why -- hey, you know, the SAAR that we projected at 13.5 -- it looks like it's going to come in around 14.2 for our estimates for the year. So it's up a little bit. But at the end of the day, our projections are quite solid. We said where we would be in SG&A, we said where we would be in EPS. And we're tracking right along with that.

Quite honestly, with all the changes that we've made at the store level, to be where we are at is a darn good thing. And as things begin to settle down, the results will be more to your liking.

I think it's important to understand that we are long-term investors in the Company. We are building a company for the future and we are not chasing at a quarterly number. When I look at where this Company is going to be in 3 years, 5 years, 10 years down the road, I get really, really excited about the changes that Jeff was talking about. I think there's some real competitive advantages that we are putting into these stores. Unfortunately, I can't tell everybody what they are because it's secret sauce. It would be like giving away the code to Coca-Cola. And that's the way that we view a lot of what we are doing as proprietary information.

But we are hitting the numbers that we said we would hit, and we are investing heavily. We could certainly crackdown SG&A, but that's not our strategy. We have a completely different strategy.

Thanks for that color. Also, if I could ask about priorities now for free cash flow as you contemplate -- you've got the convert now out of the way, lease buyouts, stock buybacks, executive retirement, how you view that?

I'll start here. Scott mentioned the three priorities that we've been on, frankly, for the last 4 or 5 years, and that's grow the base business -- and that's code for no acquisitions -- owning our properties and improving our capital structure. Getting that debt restructured was a very big deal for us and we feel good about it. And that's going to be accretive for us going forward. We do have some shares that we issued to facilitate that transaction, 4 million. We bought 800,000 or so shares in the quarter. We are still -- we are in the market this quarter. I think our total to date repurchases are about 1.5 million shares that we have brought back, of the 4.1 million. My personal recommendation would be that we continue to fund the-based business, as we are, scoop up the properties that make sense for us, as is our plan, and continue to buy shares back to the 4.1 million level and then beyond.

And then we've got some other growth ideas for the future that will be forthcoming. And we will review them collectively. But for where we are at right now, I think when I look at our stock price, it's a darn good investment for us and it's good shareholder value for everyone.

Okay, thanks a lot, and good luck.

Scott Stember, Sidoti & Company.

Could you guys comment on the used side of the business? Still had out some pretty impressive growth despite the fact that you were going up against some difficult comparisons. Maybe talk about some of the competitor pricing on some of the newer models, how that might have impacted your used volume this quarter?

Its Jeff Dyke. Maybe there's a little bit in the Honda brand, because Honda is so competitive it's very difficult to call a 1 to 1 ratio there, and that pulls or used to new ratio down. We are probably more likely 6 to 1 with Honda, and that's just Honda has had this incentive going on with Accords for a big chunk of the summer and we are blowing a lot of cars out doing that. But it's really, for us -- and I appreciate you noticing the year-over-year comparison. This is three or four years in a row now that we have been able to grow. And really we slowed down a little bit last quarter and we didn't growth quite as fast as I would have liked to have, this quarter. A lot of it is, we're changing what we do in terms of inventory management. We are in the middle of moving towards a retail trade center that we built here in our home office, appraising every vehicle centrally. And so that's something that if you can just imagine at the beginning of this year when we started, every single store appraised every single car separately with a pre-owned manager. Today, we're halfway through rolling out SIMS, and now in half of our stores, our central trade center appraises 100% of the cars that are traded at those stores. By the end of the first quarter, 100% of our stores will be -- trade allowances will be handled centrally. So we are becoming a lot more scientific and calculated about how we manage our inventory.

We are going through a huge, a huge culture and process change at the store level. Gross to be up 6.6%, I've looked at our team and tell then they did a great job selling 92, almost 93 stores a car in August was a great -- that was near to our 100 goal. When you look at Texas and what we were able to do that, we maintained our margins, we grew the business 10% and we averaged between the two months probably 110-111 cars a store. That's a sign of the future of what's getting ready to happen.

So, yes, a little bit from competitive new-car retail, but not that much. It did on the Honda brand, no question.

On the incremental SG&A spend, Dave, I think last quarter you had mentioned that was probably between $2 million in $3 million per quarter. So I guess that puts it at about 9 to 12 for the full year. Can you just confirm those amounts? And that's it, thanks.

Yes, it's about $3 million a quarter incremental, and the Q3 run rate was at that level, as it had been in the first six months.

And it will remain at these levels until 2013, and then we will start to see some real significant leverage beyond that as these costs start to layer up.

Yes, in particular the training will taper off.

Yes, that's going to push through 2013 and then begin to taper off as we move into 2014. But no question, huge effort next year from this Company terms of going out and spending a lot of time training on and retraining and refocus on all of the things that we've instituted this year in the stores.

This is Scott. I would like to just throw out that we look at technology as really an enabler of our processes, and it's got to be a lot more than just cool and sexy, it's got to deliver real returns for us. And we look at all the competing areas for our dollars, whether it's acquisitions, whether it's associates, 401(k), CapEx. You name it, there's just 1 million different places -- dividends, share repurchases; it's all over.

So we look to leverage this investment across all of our dealerships, and we believe that we can get a higher return on our investment by putting these systems in and getting the culture right so that when we are ready to go back and grow, we will be predictable, repeatable and sustainable like you've never seen before in automotive retail. And that's one of our main goals here at Sonic Automotive is to make sure that we get an outstanding return on these investments.

So I just want everybody to understand that we are not out there just putting iPads in because we think they're sexy. They make a real return for us, and we look forward to sharing these returns with you in the future.

And the SIMS project -- I believe you mentioned before -- did you say it was going to be completed by the end of the first quarter 2013?

This is Jeff again. That's correct. SMS will be rolled out by the end of the first quarter, and then we will have the next three quarters of no more rollout, no more adjustments on pre-owned, just executing the processes that we put in place and allowing our trade center and our buying teams to manage the inventory and price the inventory and letting our stores sell the inventory. And that's a big change from where we are today, so we look forward to that all being put in place.

Last question, Dave, on the share count -- it looks like this quarter, given the timing of the convert takeout, you still were using the two class method -- it looks like 56 million-plus shares would be a good number to use for a diluted number, assuming that you didn't buy back any other stock from this point on. Is that correct?

That's correct. The quarter end was 56.5 million, and we are pecking away at that 4 million, as I mentioned. I don't think the share count had any impact at all in the third quarter. It will have not a huge impact in the fourth. But then, as we continue to buy, it's going to have an impact in 2013, of course. And we will include that in our guidance when we come out with that.

But starting in the fourth quarter, there will be no more two-class reporting?

That's correct. That confusing accounting is gone.

Got you; that's all I have, thank you so much.

John Murphy, Bank of America Merrill Lynch.

This is [Liz] (inaudible) on for John. The new vehicle gross margin looks like it was about an all-time low of 5.6%. You mentioned that it was probably the impact of mix shift away from BMW and toward Honda. Is there anything else going on there in terms of how incentives are impacting grosses? And how should we be thinking about modeling that going forward?

As BMW turns to a normalized percentage of our overall mix in terms of volume and growth, in the third quarter it ran an all-time low of 12% of our total volume and ran 23% of our gross. It typically runs 14% to 15% of our volume and 26% to 27% of our gross, whereas Honda -- and our PURs were upper 1900s, whereas Honda ran 24% of our volume, which it typically runs 17%. And the gross was almost 12% of our gross versus 10%.

So I expect now that BMW's inventory levels are coming back up and some of the craziness of the Honda brand has settled down from -- the growth level for us for the quarter was 69% of our prior year, and that was on top of future growth with Honda last year, so for us, anyway. And so I would expect the margins to be more normalized as we move forward, unless there's some reason that we run short of BMW supply. We've got a lot of BMW stores, the biggest BMW dealer in the nation, and it really hurts us when we don't have inventory. BMW's performance this year as a brand -- they are up 1%. We are doing our best to overcome that, being up 10% in the quarter, but a very, very slow quarter for that brand. And it has certainly heard our business.

Finally, just housekeeping item -- on fixed operations, you mentioned that there's one last selling day in third quarter, and that the adjusted gross profit would have been up 3.3%. Does that selling day get made up for, in 4Q?

I think it's equal, Q4 over Q4 --

Okay, (multiple speakers) so it's not a benefit next quarter?

No, it's not. Here was the issue -- the month of September was a 19 fixed-day month. And I don't think that that gets made up this year. We rarely -- I think it was three or four years ago when we had another 19-day fixed month. So I think the we will be short a day for the year. I'm not 100% confident about that, but I'm fairly confident.

Alright, great, thanks very much, guys.

Aditya Oberoi, Goldman Sachs.

Can you guys talk a little bit about the performance by region, which of the geographies saw more strength versus others?

Sure, this is Jeff Dyke. Our Texas region -- really, we have been strong across the board, but if you wanted to pick one or two out, our Texas region, in particular the Houston market, Honda in the Dallas market was real strong. The Southern California market very, very strong for us. Colorado and Toyota very strong for us. The mid-South strong when it comes to Atlanta, Alabama, Tennessee a little weaker in the Michigan market than we would have liked. We've got a big brand mix of Cadillac. Cadillac has been a brand that has suffered for a while. Starting to see a little bit of volume come back there, but not to our liking. The Florida market has been strong for us, so pretty good across the country in terms of both new and used volumes.

Got it, that's helpful. Going back to the PNS side, I know one less day impacted your comps this quarter, and other biggest driver, I think, was lower warranty. But as we go forward, is the 1% to 2% growth a new normal, or are you guys taking some actions, like moving to more tire sales or some other stuff that can improve your PNS performance?

No. Look, we've been growing 3% to 5% a quarter for a long time, and we've had record quarter after record quarter after record year after record year in fixed operations. And that's not -- it was just one short day. We expect to continue to grow in the range that we have been growing in. Our service pad rollout that we are halfway through the Company with is making a huge impact. And I'm not really quite ready to share those numbers with you. I want another couple of dots on the chart before I start sharing the numbers. But we are very, very pleased with our parts and service business. As a matter of fact, our margins have begun to improve in parts and service, which is great. They have stabilized and we were adjusting pricing down to do exactly what you just said, to drive more volume in from tires, and there are all kinds of different products on our service drive. So we are very pleased with where we are and we expect a normal nice, robust, record-breaking quarter again this quarter from a fixed operations perspective.

This is Dave. The other thing that is going to help us here is, 2012 is the bottom of the units operations from the financial crisis and the low vehicle sales that we had a few years ago. And that park is starting to grow, and that is going to benefit us and the industry. There's more units out there for potential repair.

That's very helpful, guys. Finally, on the used vehicles, I know you guys tend to look at the number of used cars sold per dealership, but if I look at it from a different aspect, looking at the used to new, it seems your new is growing even faster than the used, and so the used to used ratio is trickling down a bit versus the strength saw in 2011 and to an extent the first quarter of this year. How should we think about it from a used to new ratio perspective? Do you think the new is going to continue to outperform over the next foreseeable future?

That was all driven by Honda. If you remove all that, our used to new ratios are much more normalized. But, we grew our Honda business 69% last quarter. Honda grew 44%; we had a lot bigger growth than that. And I think that our target, and we've said it from day one -- we're going to sell as many or more pre-owned as we are new. When you normalize things, we are in the 0.95 range to 1. But you've got to take into account those kind of things when a manufacturer comes out with crazy incentives. You're going to have those drops, and it doesn't change our focus on what we're doing at all. It just is incremental volume from Honda's perspective, and we will take that and move forward.

Per outlet, we are still the industry leader in the sector.

Yes, our volume per outlet at 87 is not where we want it. We are pressing for 100 units per store and we are getting close. We're going to see that happen as we move into 2013, but it's still significantly ahead of everybody else, other than CarMax. And we're going to continue to press to 100, and then we'll set our goals on 150.

Great, thanks a lot, guys.

Colin Langan, UBS.

Can you just quick clarify -- you said that for parts and services, you expect to, the growth would be similar to what you've had recently. You mean above the -- is there something -- the 1% seemed pretty low this quarter, so were you referring to prior to the quarter?

No, in previous quarters, we have been growing at 3%. Maybe every once in a while, it bumps up a little bit higher than that. And if you normalize the quarter, we grew at 3%, 3.3%, I think, to be exact. So we expect that to continue on as we move into the fourth quarter and the first quarter of next year, so forth and so on, we expect to grow somewhere in the 3% to 4% range in fixed operations.

Okay, the 3% to 4%, okay. Can you provide any color on the difference that there is -- I know in the past, you said that you look for gross -- on the new side, gross per unit in the 2100 to 2300 range. But obviously, I guess based on this quarter, there's a pretty large difference when you're looking at luxury versus mass market. What are the target ranges you have for a luxury type vehicle that would help explain the big weakness that we saw in the quarter in terms of -- ?

You bet, you bet, Colin; this is Jeff Dyke again. Our BMW brand, which represents about 30% of our gross, or at times 27% to 30% of our gross, we make about $3000 to $3200 on every BMW that we sell. Our current Honda margin in the third quarter was probably $600 on the front end of the car. So if you take Honda and grow at 69% and take BMW and don't grow it -- it's not at the same percentage that it was, your PURs are going to come down, and that's exactly what happened. All other brands staying relatively flat, the mix change really smacked us around a little bit when it comes to PUR, and that's it. If we had the inventory for BMW -- I mean a 30-day supply -- a 34-day supply of BMWs for us is really low. And to be honest with you, it was more regionalized for BMW than anything else. Our southern region was really low. We were down into the mid- to lower-20-day supply of BMWs. There were months when I had no 3 Series on the ground. That's all being rectified very quickly by our friends at BMW, and as a result, our day supply is back up, and there we go. We have a 14% and 26% increase in volume, and the mix changes -- it just wasn't enough to overcome the beginning of the quarter. And quite honestly, it's not enough to overcome the year. We've got to have BMW inventory, and the brand has got to perform. And when it doesn't, it's going to be a little slower time for us, just because it represents such a large portion of our business.

In terms of the Honda, is that consistent with other mass-market brands? That seemed pretty -- or is that just a very competitive brand?

It's a hypercompetitive brand, but it's not really -- our Honda margins were down year-over-year maybe $300, $400 a car, and a lot of that is us being hyper-aggressive, hitting some incentive levels that Honda had out there on Honda Accord and really pushing the inventory, as Honda was. We've got our new True Price program in place that brought margins down and helped us move a lot more inventory. We're trying to put a lot more cars into operation, having more units in operation, which is a long-term annuity for fixed operations, which is great.

And it just was one of those things. You have a heavy growth in that line and a low growth in a line that's usually a large percentage of our mix. And it just created a situation for us that's not normal. And that's okay; it doesn't adjust what we are doing or how we are doing it.

Okay. You mentioned aggressive incentives on the quarter. Are you referring to stair-step incentives; and how do those roll through? Does that affect this margin, or does it actually help -- I know sometimes there's timing differences on when those are paid out.

Well, sure. One, first of all, you've got to hit all those incentive levels to get all those. But yes, it was a program that started, and I think it started in -- and Colin, don't completely quote me on this -- but I think it started in April or February. Maybe it was February, and it rolled all the way through September. And then they paid us a portion of the monies. They changed the program in the middle of it all but paid us a portion of the monies in the beginning and then paid us some more of the monies on a monthly basis going through. But look, we are out there fighting for market share with Honda and driving volume with Honda. And from our perspective and probably our competitors' perspectives, it got a little bit crazy with Honda this summer. Those are programs that are fun, but they always don't necessarily make you a ton of money. While we appreciate the program, a little more margin would be certainly helpful.

Just one last question, and it's something probably related to the mix addition in the quarter. But your guidance implies a pretty strong sequential improvement from Q3 to Q4. Are there any other factors, other than the mix recovery, that are going to drive that?

I can tell you that our margins will improve across the board. Our Honda margin is already up quarter to quarter sequentially about $300, $400 a car, and that's going to play a big role. And then BMW being up at the level -- plus, at the end, Colin, and you guys, if you go back and you look at our business at Sonic every year, our Decembers are unbelievable. They're just incredible, and it's really because of our brand mix. And whether it's BMW or Jaguar or Land Rover or Mercedes-Benz, all the high-line brands that we have, it really makes a huge difference in the quarter. We go through this every year with you guys. It's a little over-projecting on the third quarter and a little under-projected on the fourth quarter. And one of these days, we'll all get it right. But that's why we called on our guidance. We said, look, we are calling out $0.40 against what the street called out at $0.44. We are tightening our range for the year and we are still within our guidance for the year. So it's just a miss on the fourth quarter.

Okay, alright, thank you very much.

Clint Fendley, Davenport.

How should we think about the used-to-new ratio for next year, especially post the SIMS implementation, which should be completed in February?

This is Jeff Dyke again. Hopefully, it continues to move to the 1-to-1 ratio less some crazy incentive from the car manufacturers. Honda can really mess that up, or Toyota could, because when they decide to blow a bunch of volume out and move some cars, they can do it. And we've got a lot of Honda stores in Northern California, and for whatever reason the consumers there don't trade their cars in as often as we see in the rest of the country. So it's hard to get the pre-owned inventory just to stay with the 1-to-1 ratio that we need. But I would say that, unless you have some sort of massive program like that, which I'm not expecting, that we're going to say in that 0.95-to-1 ratio, as we have been for the last several years.

And one last question here, sort of a modeling question. So, is the 56.5 million share count for the fourth quarter -- is that what was implicit with the full-year guidance that you guys had provided of $1.65 to $1.70?

Conceptually, yes, because the impact is so small for the full year. When we started the year, we didn't know we were going to reconvert the -- you know, take out the convert. That kind of happened, and the impact of the refinancing in the third quarter was very nominal. It will be a slight plus in Q4, and it will be a pretty good lift for us next year as soon as we take back all those 4.1 million shares. And, as I mentioned, we are 1.5 million shares into that. So we are tracking well.

Okay, thank you.

Does that make sense, Clint?

It does, it does.

(Operator instructions) Ravi Shanker, Morgan Stanley.

If I can just follow up on that last question, so the current guidance is based on the 56.5, but, the old guidance was based on something higher. So, clearly, there was some kind of reduction in the core guidance, if I'm getting this right. Can you just help clarify what may have been taken down there?

Yes. One reason I don't like these damned converts is because they're so confusing. Okay? With the convert, when we had that accounting going on for the first three quarters of the year, yes, you had a higher share count, but you got an add-back to our earnings. Whatever we reported as net income, you added back interest on the converts as if they had been converted. So the profit number we used wasn't even our GAAP profit number; it was some higher level divided through by a higher share count level. So when you remove all those things, you start to get some leverage.

Now, of course, we issued 4 million shares. When those shares come out, then you're going to start to see some positive benefit from this. And we estimate on a full-year run basis, if we had all 4 million shares out by January 1, probably a $0.14, $0.15 EPS lift -- (multiple speakers) for next year, that we had talked about previous.

Right, you are 1.5 million through that?

We are 1.5 million into it, yes.

Got it. Just moving to SG&A, your target for the year is 78.0. Is that still a realistic target, or can you come in a little under that, given your year-to-date run rate?

We stuck with the target because it's the target. We're 77.7 as we speak, and we are about to enter our largest growth quarter of the year. My reasonable expectation would be that we would beat the 77.7, not materially, but you've got one quarter to go.

But it will be due to gross.

But it will be due to gross. But, as Jeff mentioned, we are a December to remember kind of Company. The gross per unit is coming up, the volume is going to be there and the costs are flat, so there ought to be a little bit of leverage.

Understood. Finally, can you comment on the competitive pricing environment on the luxury side? Now that BMW is back to normal inventories, do they have to go back and maybe buy some share they lost over the last few quarters? Also, we've heard these stories of BMW in this really tough arms race, if you will, with Mercedes to juice units and top the luxury sales charts. What is your assessment of the competitive situation there?

It's Jeff Dyke again. It's certainly going to heat up; there's no question about that, but it does every year as Mercedes-Benz and BMW fight for -- and Lexus, quite honestly -- fight for the title of who is going to be the number one luxury dealer in America. But to be honest with you, the brand mix, the mix within the brand also changes. We sell a lot more 7 and 5 Series as a part of our overall sales, or S Class as a part of our overall sales, than we normally do, and it pushes margins way up. There's all kinds of year-end incentives. So I think it's going to be great. It's going to be fantastic. We're going to have a fun December and we are having a fun October. And it's going to be really neat to watch how these guys battle. And when those luxury brands battle, it doesn't always mean big massive margin erosion like you see when the import brands start fighting. And so we are very excited for that because every single year without question, we really benefit from it.

Yes, I'm really looking forward to all those commercials with the big bow-ties.

Exactly, we are too.

Great, thanks so much.

Thank you, everyone. We appreciate you taking time to be on our call today and look forward to talking with you next quarter.

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