Sonic Automotive Inc (SAH) 2012 Q4 法說會逐字稿

Good morning and welcome to the Sonic Automotive fourth-quarter and year-end results 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, Wednesday, February 20, 2013.

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, Kimberly. Good morning and welcome to Sonic Automotive's fourth-quarter 2012 earnings call. I'm Scott Smith, the Company's President and co-founder. Joining me on the call today are David Smith, our Vice Chairman; Dave Cosper, our CFO; Jeff Dyke, our Executive Vice President of Operations; and Heath Byrd, our CIO.

I'll start the call with an overview of the quarter, after which I will turn it 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.

With that, if you will please turn to the first slide, overall results. Our record fourth-quarter results were driven by strong revenue growth in all areas of our business.

New retail vehicle revenue increased nearly 16% from the prior-year quarter, driven by solid unit volumes. Along with improvements seen in our pre-owned business, our overall retail unit volume for the quarter increased 11%. These increases, along with improved penetration, yielded a 19% increase in our F&I results.

Fixed Operations grew at a healthy 3% rate. SG&A for the quarter was 75.4%, which continues to include incremental technology and training expenses that we anticipate will continue into the next year.

Income from continuing operations for the quarter was also at record levels, with the Company earning $28.8 million. These results allowed us to increase our diluted earnings per share for the quarter to $0.52, an increase of 21% from an adjusted prior-year amount of $0.43.

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

Thank you, Scott, and good morning, everyone. Revenue grew 10% in fourth quarter and reached nearly $8.4 billion for the full year. Profit after tax for the fourth quarter was $29 million, up 13% from the prior year. And EPS for the quarter was $0.52, up $0.21. Adjusted EPS for the full year was $1.71, up 20%.

SG&A as a percent of gross was 76.8% for the year, a little bit better than our 78% target that we established; and more on this as we turn to the next slide. This slide shows our SG&A performance. For the fourth quarter we came in at 75.4%, up slightly from the prior year. As I mentioned, for the full year we were at 76.8%, 20 basis points better and substantially better than our target of 78%.

As we have discussed several times, we remain in an investment mode with our IT infrastructure and training initiatives. We expect pretty much the same level of spending we had in 2012 to continue into 2013. Nonetheless, we do expect to see further improvement in SG&A as a percent of gross as we continue to grow our business.

Next slide, please. Capital spending in 2012 after mortgage funding was $70 million. For 2013, it is projected at $97 million, and included in this are the purchase of five existing stores that today are on leased properties. We were acquiring these stores as part of our strategy to own our properties over time. Also included are three all-new stores -- one in Nashville; a new Audi store in Houston; and a new Honda store on the West Coast -- and all of these are on owned properties.

Mortgage funding for the year is projected at $66 million, with another $19 million expected to close in early 2014. Our owned property is projected to increase this year to 30%, up from 23% in 2012. So we are making good progress on this big initiative for us.

Next slide. As shown on this slide we are comfortably compliant with all our financial covenants and expect to remain so going forward. Our syndicated credit facility matures in 2016, so we have a fair bit of time there.

Next slide. This slide shows our public debt maturities. As you know, we took our 5% convertible notes in the third quarter, and with that debt gone we have no public debt maturities for five years, all the way out to 2018. Importantly, our balance sheet and share count are much less complex for investors and for us.

Next slide. As part of that plan to take out the 5% convertible debt, we issued 4.1 million shares of common stock. This was really done to facilitate the transaction, helping our debtholders cover their short positions in our stock.

Following the successful tender that we did have for the converts, we went to work buying back the shares that we issued. And in total last year we repurchased nearly 4.4 million shares at an average price of $19.00 a share.

Next slide. This really shows the progress that we have made in reducing our fully diluted share count. We are now at 54 million shares for 2013, down from nearly 66 million shares in 2011, a 17.5% reduction in our fully diluted share count.

At our most recent Board meeting we just received Board approval for another $100 million of share repurchase authorization. And over time we will continue to be opportunistic in reducing further our outstanding shares.

So with that I will turn the call over to Jeff Dyke.

Thanks, Dave, and good morning, everyone. I once again appreciate the opportunity to share the Sonic Automotive 2012 fourth-quarter operating results.

Before I start I want to take a minute to thank my partner, Dave Cosper, for all that he has done for our Company and me. I want to wish him the best of luck in his retirement. He has meant a lot to the Sonic organization and will always be remembered for his great leadership and unending smile. Thanks a lot, Dave.

With this said, let's take a look at the numbers. New retail revenue was up 15.7%, and our new retail volume was up 14.5%. The fourth quarter was the largest new car volume quarter in Company history on a same-store sales basis, beating the third-quarter record we set last quarter and helping Sonic achieve its largest new car volume year on a same-store basis as well, up 18.5% year-to-date.

I want to congratulate our new car team for setting this record, and we look forward to an even bigger 2013. As we discussed during our Q3 call, new car margins per unit returned to normal in Q4 with our BMW inventory levels coming back in line.

Our PR ended the quarter at $2,260 per unit, which is in line with our expectations. We were a little down to last year; but this is simply a mix issue as Honda was a larger part of our overall volume this year and carries a smaller PUR. However, our overall gross was up 11.2%.

A little brand color. We were up 18% with BMW during the quarter; 26% with Honda; 29% with Toyota; 4% with Mercedes-Benz; and 23% with Audi. Our new vehicle days supply ended the quarter at 51 days and in line with our thoughts and our targets.

Next slide please. Our pre-owned business continues to improve as well. As you are aware, we completed our SIMS rollout this month, which centralizes 100% of our pre-owned inventory management, from appraisals to pricing to buying and shortly even selling at auctions.

This move was a significant change for us and pushed our store management teams into a new environment and culture. With all of the change, our team continued to drive year-over-year growth. Pre-owned revenue was up 5.1% for the quarter and volume was up 6.4%.

Overall, volume per store grew to 80 units in the quarter versus last year at 75. Year-to-date our volume per store was at 86 units versus last year at 80.

We believe we can surpass the 100 unit volume per store goal that we set for ourselves as a Company in the back half of this year, as our team settles into the use of SIMS. Then once we hit that level we believe we can move to a 150-unit per store mark as SIMS and its inventory management capabilities become more stable within our culture.

Congrats to our pre-owned team for setting an all-time volume and pre-owned record and also a pre-owned related gross record for the Company in 2012. And we expect 2013 to be even bigger.

Our pre-owned days supply was 30 days, and that is in line with our expectations.

Next slide, please. As you can see from the slide, Fixed Operations revenue was up 3% and gross profit was up 2.7% for the quarter. Customer pay revenue was up 1.6% while customer paid gross was up 1%.

Internal and sublet revenue was up 7.2% while gross was up 8.8%. Our service pad rollout is nearing completion and, just as with SIMS, has been a major cultural change for our team. As this technology begins to take hold we see significant upside to our current store base performance, and we are already seeing some stores really take off while others are getting used to the change.

2012 was an all-time Fixed gross record for the Company, our fourth year in a row of such performance. And congrats to our Fixed team. We look forward to a bigger 2013.

I would like to take this opportunity to thank our team for their hard work and dedication. In the fourth quarter, our Company made more money for our shareholders than any other time in Company history, no matter the store count, solidifying our focus on getting the most out of each location that Sonic Automotive owns. These locations have even more to offer; and while there may be ups and downs, we look forward to 2013 as a great opportunity to continue to prove that Sonic Automotive is one of America's greatest companies to work, shop, and invest. Thanks, team, for a great year in all that you do.

And now I would like to turn the call back over to Scott Smith.

Thank you, JD. We are very pleased with our record fourth-quarter and annual results. We've accomplished a lot over the last several years as a result of our strategic focus.

Between 2009 and 2012 we have grown adjusted net income from continuing operations from just $45 million to $100 million, resulting in a compounded annual growth rate of 31% in our earnings. This has been achieved through continued execution of our strategic initiatives. As Jeff mentioned, in 2012 we retailed more vehicles than we ever have in Sonic history. These retail activities helped fuel our Fixed Operations and F&I activities.

Our associated gross profit generation in 2012 was $1.235 billion. This compares to a gross profit generation in 2009 of $981 million, resulting in an increase of over $254 million without buying any additional stores.

In 2012, we were very busy buying our dealership properties, as Dave mentioned. We believe by the end of 2013 we will own approximately 30% of our operating properties. This remains a focus for Sonic Automotive.

Our Board has shown their commitment to shareholder value by increasing the Company's ability to repurchase stock. Our repurchase authority stands at approximately $144 million after an increase in authorization of $100 million received last week.

We believe the current-year share repurchase and the elimination of the 5% convertible notes from our capital structure bolstered shareholder value and cleared a path for steady growth in the future. We believe we are now positioned to take advantage of open points and acquisition opportunities. We don't anticipate significant activity in 2013 but may look for tuck-ins or open points where it makes sense.

Next slide, please. 2013 outlook. We appreciate the time that you have given us today to review our quarter. We're very pleased with the results this quarter and the benefits we are seeing from our continued execution of various operational and financial strategies.

As we look forward to 2013 we are expecting a new vehicle industry volume to range between 15 million and 15.5 million units. We expect our pre-owned vehicle volume to grow in the mid single digits. Fixed Ops should grow in the low to mid single digits with overall revenue growing in the high single digits.

Our expectations for SG&A is below 78%. We are currently targeting 2013 diluted EPS from continuing operations at $1.93 to $2.03, which represents a 13% to 19% growth over adjusted EPS of $1.71 in 2012.

Just want to echo JD's comments about Dave. This is his last earnings call with us, but he has been a wonderful friend to the Company and to the shareholders, and we are going to miss him and wish him nothing but the best.

Before we take the questions we would like to take a moment to thank all of our associates and vendor partners that join together every day to help us build one of America's greatest companies to work and shop. It is an honor and a privilege to lead our great Company. With that, thank you very much, and we will now open the call for your questions.

(Operator Instructions) Rick Nelson, Stephens.

(technical difficulty) to ask you about the disc ops. It looks like there is some revenue that came out through disc ops. If you could provide some color there on the size of the revenues that we are looking at.

Yes, Rick. This is Dave. I think the full-year number is right around $360 million.

Okay.

That is probably $100 million a quarter, something like that.

Got you. If you hit your EPS target, I am curious where you see free cash flow and how you rank the alternatives between acquisition, which are there is some discussion in the release about, and buybacks, where you have stepped up the authorization.

Yes, you know, we'd probably generate $70 million, $80 million, something like that. I kind of view it as for balance sheet actions or growth actions that we would want to take.

Of course it is a little tougher discussion item. We took out nearly 4.5 million shares at $19.00 and something; and I don't know -- even though we are down, it is probably $23, $24 range. So that becomes a little tougher.

You need to balance both those things. I don't think we have had an acquisition in five years. We have done a great job, as Jeff and Scott mentioned, growing our business with the assets we have.

But at some point you need to look for growth. I think we will be prudent and use good judgment as we try and grow our business. But I would see us -- our share count is not going to be going up. It is going to be going down. We are going to for sure whittle away stock plans and things like that.

We will just keep an eye on it and make that decision based on what we see. Based on the opportunities we see.

The acquisition front, are you focused primarily on luxury? Or are you more open than that?

Hey, Rick. It's Scott. I think we are really looking to replace some of the revenues. We have sold a lot of franchises over the years, and we are more so looking to replace the revenues with brands that we excel in.

I don't want to leave anybody out here, but like Audi, BMW, Mercedes, Porsche, Honda, Ford, Land Rover, Jaguar -- some of these franchises that we really do a very good job in.

We are looking primarily for tuck-ins in markets where we currently are doing business. But I think if the right situation came along and we could own the real estate and one of the brands in a market where we don't operate, we would certainly look at it.

I got you. Some commentary about the first quarter I think would be helpful. There is concerns about payroll tax changes and the impact on the consumer. Curious if you are seeing any impact.

Hey, Rick. It's Jeff Dyke. Not really. I mean business was good in January; February, the first couple of days were a little slower, but last week and weekend were real good.

So business is steady as she goes. It's been good.

And the BMW inventory? That was a challenge in the summer months and seemed to come back in the fourth quarter. What are they telling you, I guess, about supplies in the new year, 2013?

Yes, we're in great shape. Our inventory supply is in great shape across-the-board. I mean, we could use some more Audis, because we are selling every one we get our hands on.

But at the end of the day, our inventory levels and the issues that -- not that we had, but that BMW had during the summer months are resolved, and inventory levels are back. And as a result you saw our margins come back up, and our volume growth was real nice in the fourth quarter.

Good. Thanks a lot and good luck.

John Murphy, Bank of America Merrill Lynch.

Good morning, guys. Dave, congratulations on a great long automotive career.

Thank you.

Couple questions. First, on the change in the stance in acquisitions. What has changed that has led you to reconsider this and think about making acquisitions? Is it price? Opportunity? You are running out of rope on your internal organic growth? Just trying to understand what has changed.

Yes, I will start on this one. I think one big change is our balance sheet. We have done a great job of cleaning that up, following the horrible situation we had in '08/'09 with everybody else. And we have got a very nice balance sheet.

And we have made huge improvements operationally. We are doing very well there. And the culture is establishing itself nicely. I think it is about time that we take a look. Scott, you want to add anything to that?

Well, John, just as I mentioned a few minutes ago, we are primarily looking to replace some of the revenues that we sold, because at one point I think we had about 178 franchises and now we are down to about 108. Our Chairman is very interested in growing in some of those brands that I mentioned earlier.

We are being very prudent with our investment. Our priorities are still to invest in the base business and our real estate and strengthen our balance sheet.

John, this is Jeff Dyke. You had mentioned something here a second ago. I want to make sure that we make sure the air is clear. That we are -- still lots of runway left in the current store set that we have.

As I mentioned earlier we are going to approach the 100-unit mark in pre-owned volume this year, but we think we can take that up to 150. So there is plenty of room left in what we have got.

But like Scott was saying, there is also opportunities where we can tuck in some stores. We can tuck in some stores in markets we are already doing business in and just support our core business.

So we have never been in a position, from our estimation, to do that over the last five, six, seven years. And today we are. It is a great position to be in, and so still lots of opportunity in our core business.

Okay. That's great. Then just one follow-up question on that. One of the big risks -- and I think you guys ran into this in the late '90s with Theo was the management bench, as you are making these acquisitions. It doesn't sound -- I'm not suggesting you're going back to that hyper-acquisition growth at all. But that was one of the big risks or problems back then.

Have you been working on the pipeline of general managers and management talent to push out to these new stores or to integrate them? Or is that something that is still on the come?

Absolutely. We have a succession plan in place that has been in place for several years now and we are ready to roll. I have got names and numbers of the people that I am going to call and put in position should Scott come along and say -- here, we've got this acquisition in place. And immediately have the ability to install our culture and our processes into any store that we purchase.

So, very, very -- it is a great question. That is not going to be a problem for us.

That's great. Great to hear. Second question just on the parts and service business. We are hearing differing timing on the units in operation around different dealerships growing. It sounds like some of the public groups are seeing the UIOs grow; it's going to feed the parts and service business sooner. Some sound like it is more like late 2013.

What are you seeing around your dealerships? Do you think you are at the inflection point where the UIOs are actually growing enough that you will really see this real positive bump? Or is it later 2013, early 2014 that you would see that kind of benefit?

You know, John, if you go back a couple years, our Fixed Operations business never went backwards. We have been growing 2% to 5% a year for the last four or five years. And I expect, as Scott stated in his numbers earlier, I expect us to grow in that range this year, 3%, maybe 4%; 5% if we are really humming.

If there is a bump there because there's -- we are certainly selling a lot more cars. If there is a bump there, more power to us. But I certainly didn't budget that way or I am not forecasting that way.

I really think 3%, 4%, 5% is where we are going to be, and I am looking at the same number in 2014 as well. Unless something really changes I don't see that number changing too much. And, look, we're not complaining. It was a record year for us in Fixed Operations gross, and it's going to be another record year for us in 2013.

Okay. That's great to hear. Then just lastly, you mentioned with the SIMS program and your other focus on used that you might ultimately get up to 150 vehicles per store per month. That, based on current numbers, would be much greater than 1-to-1 on used-to-new.

Is that ultimately a target, that you would be selling more used vehicles per dealership than new? Or is this something that is way down the line when the SAAR is back in the 16 million unit range and it would be close to 1-to-1?

No, we should be selling more used than new anyway. There are 45 million used car sold in America each year; there are 15 million used new cars. So it is just a huge opportunity. There is plenty of business out there.

And we are just -- we just kind of -- it took five, six, seven years to get our house in order just to get to approaching the 100-unit mark and I know we can do a lot more. Centralizing our inventory management, this was a big change for our Company. We appraise every single car in this Company centrally out of our Charlotte headquarters. We also price every single car.

So that is a big change and that is no longer a decentralized process in our Company. It is centralized, and as we get better and better at pricing and appraising, we have already seen our appraisal ratio move from 4 out of 10 to we are approaching 6 out of 10.

So we are doing a much, much better job. That is just going to allow us to trade for more cars. We sell everything we trade for, so our volume is naturally going to go up.

We have got stores that have gone from selling 50, 60 a month a few years back to now selling 250 to 300 a month. There is just a lot of upside opportunity there. We should be selling more used than new, and that is what you are going to see here at this Company.

But structurally that would mean that you have to source cars from the auctions, as opposed to just vehicles from trade, to get above 1-to-1. Is that something you see doing more of, is sourcing cars from auctions?

Well, I think there is a couple of different models. You are going to source from auctions. But the other thing, and CarMax has shown this, that a majority of their cars come from people that just bring their car to them because they put the right money on the car. That is a pretty easy model to follow, and they have been successful at it.

So you're going to see us trade for more cars. That is going to help.

The consumer is going to bring Sonic Automotive stores more cars because we are putting the right money in the car. And then we will source more cars from auctions.

Say you envision buying a car from a consumer coming into your lane or your dealership without them even buying another used or new. That is actually sort of a source for that used vehicle business?

You betcha. Absolutely.

Okay, great. Thank you.

Colin Langan, UBS.

Great. Thanks for taking my questions. Do you have any thoughts on your branding strategy? I know one of your competitors is going out with a national brand.

Any thoughts on following that? Or is that just something that doesn't make sense at this point?

Hey, Colin, Scott. Jeff and I are going to answer this one together. First of all, I think it is fantastic what AutoNation has done. I think it builds some transparency for consumers. It is good for them. And being able to leverage their brand, their advertising spend, et cetera, I think it is great for the manufacturers.

But I look at what AutoNation has done as more as a naming initiative, right, then a brand. Because a brand has brand promise with it. What can customers expect when they come into an AutoNation store?

So you have heard me say over the years that we have to be predictable, repeatable, and sustainable. So we have been working on putting in processes in these dealerships for years through our Playbooks where, when a customer comes into any Sonic Automotive store, regardless of where it is or the brand, they will be able to identify it as a Sonic Automotive store.

Now to date we have not had a plan to brand our stores. I think in the future that there will be some form of a branding strategy that comes along.

But it is important to keep in mind that a lot of our manufacturer partners don't want to see another brand up there on the dealership. For instance BMW or Audi or Mercedes or any of these luxury stores, they tend to want their brand name up there. JD, you got any --?

Yes, I echo Scott's comments. I congratulate AutoNation. I think they did a very nice job putting together their naming strategy as Scott called it, and agree with that.

I think there is a great opportunity for Sonic Automotive to be included in what it is that we do down the road. But as Scott said, we are working on making sure that the same french fry, for example, is in every single store that we have. So when a consumer comes in they know that it is a Sonic Automotive experience. We are a little bit aways from that, but give it a little time and something of that nature will come to life at Sonic Automotive as well.

Okay. In terms of your acquisition strategy, is this all going to be similar to what we have seen in the past? US dealers and the Sunbelt-type states, or are you thinking more outside the US or other parts of the country at this point?

Colin, it's Scott. We are remaining strictly domestic here, onshore. You are not going to see us over in Europe, you're not going to see us down in Brazil or any of these other areas.

I think what Group 1 has done, it just differentiates them a little differently than our strategy. But we have no plans to go to Russia or China or any of those things either.

So I would say acquisitions primarily will remain in what we call the smile-belt, which is mid-Atlantic, Southeast, West. We really like Colorado, and Denver is a great market for us. Texas. I wouldn't see a tremendous amount of growth in California market areas, but I certainly can't rule it out.

Okay. When we think about M&A -- I'm sorry, SG&A next year, you had some pretty sizable investments this year. Is that going to be -- it sounds like you're going to continue to invest.

But is that going to still be a year-over-year challenge as the investment level kind of levels off a bit? Or do you still see that investment creeping up (multiple speakers) ?

Colin, I think the run rate is going to be about the same year to year. And where we are going to get some leverage is what we can do to grow gross. I don't see a lot of cost increases coming.

But, Colin, this is Jeff Dyke. You used the word challenge for us. I want to make sure that we clear the air here as well.

It is not a challenge. We are investing in our business. We are investing in technologies that long-term are going to grow our business.

So on a short-term basis, if that pushed SG&A this year to a little bit below our target, then that is fine. This is not a year-over-year deal for us. We are in a marathon.

We are investing in our business long term, and these investments are making a huge difference in how we perform today and they are going to make an even bigger difference tomorrow. We believe it is going to get us a big competitive advantage. So SG&A is going to be in or around where we were this year in 2013 and probably in 2014 as well.

Okay, so the outlook is based on leverage. Because I thought your guidance was slightly better -- okay. Just one last question.

Tax rate seemed to come in lower in the quarter. How should we be thinking about taxes going forward from a modeling perspective?

Yes, taxes going forward at 38% to 40%, hopefully closer to 38%. It moves around based on where we earn our income and then minor adjustments as we settle things with taxing authorities. And that is really what drove the slight improvement in Q4.

Okay.

Unless maybe you can get our government to do something a little different for us.

Okay. Thank you very much.

Patrick Archambault, Goldman Sachs.

Thank you. Yes, just actually two items, one related to that last question. I thought I remember hearing that investments were going to be in the SG&A side more front-end loaded in '13, more in the first half for the second half. Is that still the way you're thinking about it, if indeed that was correct?

And maybe just related to that, maybe you can just talk a little bit about how you see the cadence of earnings playing out, given the relative puts and takes on the expense and gross margin side.

Yes, let me start. Hey, Patrick. This is Dave. I think the dollar spend is fairly level. What we had talked about is these initiatives take hold, your gross goes up, so your percent tends to decline over time. That is how we have been thinking about it.

So it may be a little heavier in the first half of this year than the second, but I don't think it is a material difference. And it is going to move our earnings. We tend to have a very -- a lighter first quarter; pretty good Q2, Q3; and then heavier in Q4.

It is principally driven by our luxury brands, and Q4 really moves it. A lot of people buy in December and then it falls off in January and February.

Yes, Patrick, this is Jeff Dyke. This is one that I would love for us to all get right, because I have been dealing with this now for -- ever since I got into this position. But our Q4 is bigger than our Q3, and it is always going to be bigger because of our brand mix.

And every time everybody steps up and starts looking at our Q3, we always have this much bigger projection from the Street on Q3 and a lower projection on Q4. And every year I say the exact same thing to you guys at the exact same time. And every year it happens, our Q4 is bigger than our Q3.

If we could get everybody to buy into that, boy, we would all be happy because we wouldn't miss your Q3 number and we wouldn't blow away your Q4 number. I mean it just would be wonderful to be able to get that straight.

Okay, I am writing that down on my notepad as we speak here.

Thanks for the question, Patrick.

You're a good man, and we appreciate the question. I will pay you later.

All right, all right. Lastly, Dave, congratulations on a terrific career. We will miss working with you.

Thank you, Patrick.

Bret Jordan, BB&T Capital Markets.

Good morning. A couple questions really around the SIMS rollout. I guess as prior to rolling it out companywide you probably had some regional marketing experience, but the productivity of SIMS, is that more weighted to being able to access more vehicles? Or because you are getting the vehicles at better pricing and you're picking up the incremental margin per unit?

I think it's all of the above. It allows us to trade for more cares, all right? Because if you have a group at your trade center, we have got to 15 people looking at 20,000 to 30,000 cars a month; they are going to be a lot more -- their ability to look at a car and place it in the right market is a lot greater than a single person sitting at one dealership in a marketplace.

It allows us to price our cars better because we are using data to make decisions instead of how we feel about a car, which is very important. And then it allows us to purchase cars online and represent our cars there live from our trade center at the auctions via video links.

So we are controlling 100% of our inventory 100% of the time through our trade center and our SIMS inventory management system. And it's just getting on line in all of our stores this month. We just see all kinds of fun things happening, and our business is going to go.

That is why I am so confident we will get on past the 100-unit mark towards the back half of this year as everybody gets used to the tool, and then we can set our sights on 150 units.

Do you have any anecdotal data points as far as from test markets as you ramped, or the beta on the ramp-up of the program, that you see what the productivity difference was between a traditional market and a SIMS market?

Well, the big thing, the one that I gave earlier is we were trading for 3.5 to 4 cars out of 10 prior to SIMS coming to life. Today we are trading for 5.5 to 6 cars out of SIMS. So we are trading for more inventory. And we sell everything --

Would the gross dollars per unit have -- would there be a delta between the 3.5 to 4 and the greater number and the margin on the number?

No, our margin has been -- if you go back and look, we have been running for the last year and a half or so in between $1,350 and $1,400 a copy. The pricing elasticity has driven that.

We really pay a little bit of attention to that PUR; but the more important thing is get the price right. How much gross dollars can you generate? Because that is what we take to the bank.

And we generate more gross dollars in the $1,350 to $1,400 range than we do at $1,500 or $1,600, because our volume comes down and we become less competitive. So we feel like we have found the sweet spot there from a PUR perspective, and now it is just fine tuning.

It is having the right vehicle at the right price at the right store. We trade for a BMW at a Mercedes store, and we move it over to our BMW store. It turns faster, it makes higher gross, so it generates more gross dollars.

So the system is helping us move cars to the right store once we trade for it. It is helping us price the car right the first time, instead of having to put our customer in a position where we are negotiating back and forth. And it is helping us trade for more cars.

So all across the board it is making a big difference and will make a huge difference as we go forward and everybody gets used to centralized inventory management.

Great, thank you.

And we are not -- just so you know, we are not far from behind from doing the exact same thing on new. We are working on pricing mechanisms and tools to handle the new car inventory the exact same way as we move forward.

That will be developed and built this year and really implemented and put into practice next year.

Would you see turning the used inventory faster, because you know what market it needs to go to via SIMS?

We turn our inventory already at least 1 time a month. So if we can turn it faster than that, great. But we are turning our inventory 12 times a year, and I feel pretty good about that.

Great, thank you.

(Operator Instructions) Brett Hoselton, KeyBanc.

Good morning, gentlemen. I wanted to ask you a little bit about gross profit throughput as it relates to some of your spending, additional spending throughout this year and into next year. Your gross profit throughput in the quarter -- very good relative to your peers, and so nice job there. Congratulations.

I know that you've bumped up your spending in anticipation of growing your business, iPads, that sort of thing. I think you started kicking that in first, second quarter of this year. So it seems like you would have some fairly easy comps as you move through the first half of next -- or this year.

So what are your thoughts there? Do you see that being a nice tailwind from a throughput standpoint as you move through the first half of this year and into the back half of this year?

I think you've got -- great question, by the way, and I think you've got another year to go. You have got to -- we have been in practice with our pre-owned. If you remember, you go back five, six, seven years, we were selling 30 cars a month. So we have moved that up to over 85 now from a pre-owned perspective.

Our Fixed Operations gross has record after record each year. So I don't know that we have easy comps. But I think that the investments that we are making today, as we move into '14 and the technology really becomes a way of life at Sonic, that we began to perform a little bit better than what we are performing today.

Good.

So a great question. I think you are eight months or 12 months early.

Fair enough. Yes, that answers my questions. Thank you very much, gentlemen.

At this time there are no further questions. I would like to turn the conference back over to management for closing remarks.

Great. Thank you, Kimberly. Just want to take a moment to once again thank Dave Cosper for his service to our shareholders and wish him all the best. And want to thank everyone on the call today and appreciate your time. Have a great day.

Thank you.

Thank you for participating in today's conference call. You may now disconnect.