Sonic Automotive Inc (SAH) 2013 Q2 法說會逐字稿

Good morning and welcome to the Sonic Automotive second-quarter 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 session. (Operator Instructions). As a reminder, ladies and gentlemen, this call is being recorded today, Tuesday, July 23, 2013.

Presentation materials which management will be reviewing on the conference call can be accessed on the Company's website at www.SonicAutomotive.com. Then click on the Investor Relations tab under Our Company and choose Webcasts and Presentations on the right side of the page.

At this time, 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. David Smith, Vice Chairman of Sonic Automotive. Mr. Smith, you may begin your conference, sir.

Thank you and good morning and welcome to Sonic Automotive's second-quarter 2013 earnings conference call. I'm David Smith, the Company's Vice Chairman. Joining me on the call today is Mr. Heath Byrd, the Company's CFO; Mr. Jeff Dyke, the Company's Executive Vice President of Retail Operations; Mr. CG Saffer, the Company's Chief Accounting Officer.

I will begin the call with a brief review of the quarter. I will then turn the call over to Heath for a financial recap, and then Jeff will give an operational recap. After some closing comments from me, we will open the call for your questions. With that, please turn to the slide titled Overall Results.

Our revenue was up nearly 4% at 3.8%. New vehicle volume was up 1.7%. Our pre-owned volume was flat. F&I was up 8.6%. Fixed ops was up 4.5%. SG&A was flat at 76.6%. Income from continuing operations was $26.4 million for the quarter. Our Q2 EPS was $0.50, up 11.1%.

With that, I will now turn the call over to Heath for more color on our financials. Heath?

Thank you, David. Good morning, everyone. As David mentioned, on this slide on the adjusted results, you can see the revenue is up 4% at $2.2 billion, driven by a 5.2% increase in new and a 4% increase in fixed, 8.6% increase in F&I.

This growth in revenue resulted in gross profit of $324 million, an increase of 4%; adjusted diluted EPS from continued ops of $0.50, up 11%.

Q2 S G&A was flat compared to last year. Increases in advertising and variable compensation were offset by the reductions in rent. As I mentioned on our Q1 call, 2013 SG&A will include incremental expenses related to strengthening our internal controls of our financial reporting as it relates to compliance with SOX. Total spend year to date is at $1.8 million.

SG&A also includes IT expense for development and ongoing support of business applications to enable our Customer Experience launch in mid-2014. This totals $3.7 million year to date.

Flowthrough excluding these items is at 37%. We are still targeting to be at below 77% for the year, in line with our internal forecasts.

Total CapEx year to date stands at $89 million, which included the acquisition of four properties in Q1. With mortgage offsets, total cash used was $63 million. Estimates for the year remain the same at $67 million for real estate and $105 million for facilities, store-level CapEx and IT spend.

Debt maturities, as reported in May, we took out our 9% notes for the bond offering of $300 million at 5%. This was obviously a very successful offering for us and resulted in pushing out our maturity to 2023, moving our average coupon rate down to 5.8% and providing an annual cash interest savings of $3.9 million.

Debt covenants, this slide shows you that we are complying with all covenants at the end of Q2, and we expect to be compliant going forward.

Share repurchases, on this slide, you can see our share repurchase activity year to date is 627,000 shares, and we have an additional authorization of $135 million.

So overall, a very productive quarter, with double-digit growth in EPS. Staying true to our strategy, we will continue our focus on investing in the core business, owning our own properties and improving the capital structure. Based on year-to-date results and our internal forecasts, we are reaffirming our EPS guidance of $1.93 to $2.03.

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

Thanks, Heath, and good morning, everyone. I appreciate the opportunity to provide color on the Q2 2013 Sonic operating results.

Q2 new car revenue was up 5.1%, with volume up 2% for the quarter. As you are aware, we are in the middle of training our True Price model to support our Customer Experience process being rolled out next year in July. This change has created some opportunity to build volume and PUR as our team get used to selling in this new environment.

We are very pleased with where we are at this point in the year, and saw improvement throughout the quarter as our training and focus on execution took hold. We have stores within each brand group that are delivering volume and PUR numbers that are extraordinary, and our customer base loves it. As a matter of fact, we had our highest CSI quarter in Company history last quarter.

It's just a matter of time until our entire team catches on to this critical part of our Customer Experience process that we will roll out, again, next year.

We expect to continue to improve as the second half of the year progresses. We ended the quarter with a 53-day supply.

While our preowned margins are improving and we were at 89 units per store per month, we are transitioning in preowned as well to our True Price selling process, which, just as in new, created some opportunities for our team. We will see continued improvement in preowned as the team becomes more comfortable with the process.

Again, we had about two thirds of the Company in great shape on volume and PUR as the training and consistency of execution begins to take hold. I fully expect our team to continue and to improve as the second half of the year progresses and we fully execute True Price in preparation for Customer Experience rollout, again, next July.

We ended the quarter with a 29-day supply on the ground as we continue to grow in managing our inventory appraisals and pricing from our centralized retail freight center.

Both revenue and gross profit grew 4% and 4.5% for fixed operations, respectively, in the second quarter. We had the same number of selling days year-over-year for Q2 and we are pleased with our fixed operations execution. Customer pay gross was up 3%, while warranty was up 19%, which is nice to have, but it's over a small warranty base and still represents about 15% of our overall revenue, up slightly over last year.

Our service iPads are now 100% rolled out to the stores, and the next phase of preparing for our Customer Experience process rollout install next July will focus on rolling out iPads and application technologies for our technicians.

Before I turn the call back over to David, I want to take the time to thank our incredible team for all their hard work and dedication to creating one of America's greatest companies to work and shop. I also want to thank them for the fantastic effort they are putting forth as we revolutionize the way customers both shop and service at Sonic Automotive.

With that, I will turn the call back to our Vice Chairman, Mr. David Smith.

Thank you, J.D. Q2 was a busy quarter for us. Financially, the second quarter was our 15th consecutive quarter -- that's nearly 4 years -- of quarter-over-quarter revenue growth without any acquisitions.

We had double-digit EPS growth of 11%. We announced our first acquisition since 2007 with Murray Mercedes-Benz of Denver and Murray BMW of Denver, which we will close on in the third quarter.

We strengthened our balance sheet by taking out our 9% notes and issuing $300 million of 5% notes. I believe that it is important to reiterate our investment principles as Heath noted on earlier in the call. We will continue to invest in our base business, owning our real estate and strengthening our balance sheet.

Operationally, we continue to focus on True Price, as J.D. noted. In addition, over the next 18 months, we will be rolling out our Sonic Customer Experience as we move closer to branding. We believe that our Sonic Customer Experience will position us with a competitive advantage.

The business environment continues to be favorable. Therefore, we are maintaining our full-year earnings guidance of $1.93 to $2.03 EPS.

Before we open the call to take your questions, I would like to thank our Sonic associates and our manufacturer and vendor partners for making Sonic Automotive one of America's greatest companies to work and shop. With that, we will now take your questions.

(Operator Instructions) Rick Nelson, Stephens.

Thanks. (inaudible) have unit sales which seemed to have lagged the overall market, as well as the margin pressure, and then how True Price impacted that result. And I guess why you think things are going to get better from a market share standpoint and a margin standpoint.

Rick, yes, it's Jeff Dyke. Look, this True Price strategy that we are putting in place, which is one step closer to being a one-price company, really is a change in the environment in the store. And it's really important for us next year when we roll out Customer Experience so that we can accomplish all of our Customer Experience processes.

It has caused problems, but it's only in about a third of our stores. It's just getting around and getting them trained. And it has hurt us both on a PUR and a volume basis. And we've got stores where -- heck, we've got BMW and Honda stores where we are seeing 120% growth and just fine on PUR, and yet then we've got a couple others that just haven't quite caught on to the selling process. It's just not easy, and anybody who has been through that in a conversion like this understands that.

So the good news is May was a little better than April, June was a little better than May, and July, who knows. We are really off to a good start great start in July. We are on record pace in the used car department for volume, with stronger grosses. So we will see.

This is just a very difficult transition, but one that is critical for us to be able to -- as David said earlier, for us to be able to brand, for us to be able to have our Customer Experience process put in place. We have got a sales process that's going to allow our sales associates, as we talked about on the last call, to sell the car entirely. They will do the appraisal, they will do the F&I, they will do the desking themselves, and it will be paperless.

So this entire process -- you can't have all the negotiation going back and forth. You've got to get the price right, and we are working very hard to make that happen. Quite honestly, we are very, very pleased with where we are at this point. We built that into our forecast models. We knew that we would have struggles with it, and that's why we are reaffirming our guidance. We are right in line with where we thought we'd be internally.

We are seeing our highest customer satisfaction scores in five years.

Yes, our customer satisfaction scores are off the charts. The customers love it, because you don't have to go back and forth and do all the typical waste of time, non-transparent processes.

We could not do any of this and have higher volume and have higher-margin. But in the long run -- if you take a three, four-year look at this, this is going to really revolutionize the way we are selling cars and make a big difference for us, and we believe give us a competitive advantage.

Have you changed the rollout plan for True Price as you go back and train the third of the store base where it is out?

We are 100% rolled out on True Price. I think we've got every store but two done. And now it's going back and going back and going back. You can't imagine how much time we are spending teaching the environment how to not negotiate. If you are pricing one way and the next day you start pricing a different way, and your team is used to negotiating and negotiating $1000, $1500 a car, and now we want them to negotiate less than $300 a car and eventually nothing, it's a big step, and we think it's a step in the right direction. But it's certainly cost us some opportunities.

But nothing -- we have had no surprises. There is nothing that we did not expect. In my career, I have been through this before, and this is just something that comes along with doing something like this. It's not easy to do. It is heavy lifting, but in the end it's going to be a big difference-maker for us.

Is this (technical difficulty) that you tested before you rolled it out to the chain? And is it working better in some segments of the market, like luxury, than in the midline import or domestic side?

Yes, that's a great question. We tested it in Honda and we tested it in BMW. It is working exceptionally well in our BMW stores. We've got two or three that are still catching on.

And for two years, the last two years, we have been testing it in Honda. And the last two years in a row, I think we were the fastest-growing Honda public company out -- I think we were the fastest-growing Honda company out there in terms of percentage growth.

And we are learning a lot from that rollout. And we have made adjustments to it. We are learning how to handle margin and the negotiation piece. There's just a whole lot of issues that come along with it once you put it in place. Every brand is a little different, every market is a little different. But we are going to have that pricing consistency across all of our stores.

We also, in SIMS, it has been a lot easier on preowned, because we have the pricing models already built. The new car pricing models are under construction now, and that's part of the analytic spin that Heath talked about. And that will be ready at the beginning of next year, so it will make it a lot easier.

Right now, we are doing a lot of heavy lifting from a new car pricing perspective. But our analytics tools -- and I've seen just some early renditions -- are really, really good. In another few months, we will start testing and then roll those out in May and make it a lot easier for our teams to price inventory.

Got you. Thanks a lot and good luck.

Brett Hoselton, KeyBanc.

Good morning. Can you talk about the progression through the remainder of the year and into next year of the expenses associated with these initiatives?

Yes, sure. This is Heath. How are you? As I indicated, we spent $3.7 million year to date; it is reporting through the SG&A. And we are going to spend, again, $7 million for the year, that will continue to run through the SG&A in 2013 and in 2014.

On the capital side, we've got $7 million in CapEx that is related to the development of business applications analytics, like Jeff mentioned. And that's the number we are going to start seeing come down. There is going to be less and less capital spend as we move into 2014, 2015, 2016. And by the year 2016, we are estimating no more than $2.5 million in capital spend for enhancements to those tools.

Now, in the SG&A, there will be some reduction as it relates to development, but a lot of that expense will continue to run through the SG&A as we support the applications that we are building.

But now the other piece that's running through SG&A that will dissipate and be gone by the end of the year is the SOX remediation expense. We've spent $1.8 million year to date in that category, and we expect to spend $3 million to $4 million this year. Once we put in the new designs of controls, implement the controls, that will start going away and we will go down to more like $1 million reoccurring.

And kind of from a conceptual standpoint, taking a long step back, a follow-on with Rick's question basically is, as we look through the history of the automotive industry, we see a number of different attempts at one price selling, whether it be Saturn, Oldsmobile from an industry standpoint, or whether it be individual dealers or dealership groups.

As you kind of think about your True Price strategy, which seems similar to a one price strategy, how do you see your strategy possibly differing from some of these previous strategies such that you think you are going to be successful in implementing this?

Well, one, there are a couple of things here. I think if you look at one of the most successful companies out there from a market cap size, CarMax is just a huge company and they are all one price; maybe one high price, but they are one price.

This is just a significantly different day and time than what Saturn and Oldsmobile and all these guys went through. The technology that is there today, the consumer's changed 180 degrees. And if you just spend any time in the stores, and what the processes that we have versus what we had and the amount of time it's going to take -- I mean, once you make a decision on buying a vehicle, the car that you want, our goal -- we are going to have you in and out of there in less than 45 minutes, depending on the amount of time you want to spend with us. And that includes no paperwork, that includes not having to go back and forth to the desk; on average across the industry, that's happening 2.5 times.

There's just no comparison. And for us, we believe that the consumer says -- and we see it in all of our numbers, we see it in our customer satisfaction scores -- that the consumer says, look, I would like to come into your store, I would like to pay a fair price and I'd like to get out of there. I don't want to spend 3.5 hours buying a car from you. I know the information that I need before -- long before I get there, because of the digital age and the information that we provide. And it's just a totally different package.

We are 100% confident that what we'll gain where we're headed is going to provide us with a competitive advantage. It's just not easy to get there. We have got people in our organization that have been selling cars one way for the last couple of decades.

And the consumer is wanting a change. We have seen it, we've practiced it in different stores. We've tested it. And there's just no question, it's a much simpler, much easier process. But it takes a lot of heavy lifting to get there in terms of changing the culture and getting the right people to support what we are trying to do. It is just not easy.

I would like to reiterate. The biggest difference between Oldsmobile and Saturn and today's world is the digital age. The pricing information is so transparent and that didn't exist when they attempted the same strategy.

And then how do we think about this then evolving into -- or let's say dovetailing into the Customer Experience? How do you see the Customer Experience that you plan to implement, that strategy, how does that relate and work with the current strategy that you are implementing here as far as the True Price strategy?

Well, in order to have the Customer Experience process that we want, you've got to take the back-and-forth negotiation out of the process. That has got to come out. Because that part is, one, if you talk to the customers and survey them, that's the part that they hate the most. They don't trust -- there is no transparency and it takes the most time -- whether it's on the trade or on the car that they are purchasing.

So all of that has to be eliminated in order to accomplish the goal of having a customer come into a retail environment or a specialty retail environment and enjoy the shopping process.

Right now -- just think about the last time you bought a car or talk to anybody. They'd come in and go out of a store. They love maybe the individual that they're working with, but the entire overall process is not something the consumer base is in love with in our industry. And that has got to change -- well, at Sonic, it is going to change. And that all dovetails together.

If you cannot price your car right the first time, the process won't work. The Customer Experience process is not going to work because you are going to have all of this back-and-forth negotiation.

There's too much information in the consumer's hand today, and it's going to be even more. Five years from now, the consumer is going to walk up and say, look -- there will be an application for it -- they'll say the last 15 Volkswagen Passats in this market, in Houston, Texas, in this ZIP Code, sold for $23,500, and I'm not paying a penny more than that. That data, you've got to be able to use to your advantage.

And I'm not telling you that we have to be the lowest priced, but I'm also telling you we have to have a fair price. And when you provide a great experience, I think we all know that a great experience allows for a higher margin. And that's what we are seeing. Our stores that are really doing a great job, our margins are pulling up above what we have been averaging. And that makes a big difference.

It's just there's a lot of heavy lifting that goes on between starting with a store on day one and teaching them, going from a negotiating environment into an environment that encompasses our full Customer Experience. And it's a big transition, but one that we are heavily committed to, and we've been working on for the last three or four years. This is all bits and pieces and steps that we are taking to get to this point where we will start rolling out next July.

Very good. Thank you very much, gentlemen.

John Murphy, Bank of America Merrill Lynch.

I have a first question on slide 11. As we look at the average selling price, it's up more than $1100. And if you were just to look at that alone, you'd assume that the grosses would go up in absolute terms on a dollar basis, and they are actually down about $100.

We have seen this at a number of other dealers, and I'm just trying to really understand what's going on here. Because obviously, the automakers are making more money, the ATPs are going up for them. Your selling prices are going up, but the absolute gross is coming down. I mean, I could understand if the dollar gross was staying flat and the percentage was coming down, but we have now the percentage and the dollar basis coming down.

Is there something that's going on here in your relationship with the automakers or in the market that's driving this? Because it just seems kind of odd.

No, Jeff. This is just a mix issue, right? You've got True Price going on with us. But from an industry perspective or you are looking at Sonic, when Honda becomes a larger percentage of your overall mix or Toyota becomes a larger percentage of your overall mix, your PUR is going to change. And I have tried to tell you guys quarter after quarter after quarter, that PUR number is just not the big focus point.

I can sell used cars at $1400 a copy, and I know -- and I'm selling about 90 cars a month. Right? You take my 90 cars times $1400, that's generating $125,000 to $130,000 in gross. Where I got a competitor that's out there that's selling 73 cars a month at $1600 a copy, and that's generating $118,000 a month of gross per store for them. Which would you rather have?

And it's the elasticity of that PUR that you really have to pay a lot of attention to. And we talk about that a lot in these calls. I haven't just quite gotten everybody to think that way, but we do here at Sonic. We really watch that PUR number. If you sell more Hondas at $1000 a copy than you do BMWs at $3000 a copy in one quarter versus another, your overall average PUR is going to come down and (multiple speakers).

But something is odd in a business where the volume is up and the selling price is up, but the gross profit is down in absolute terms, in total. That's an odd thing.

I understand what you are saying as far as the elasticity, and that if you run the Lagrangian profit maximization equation, if you drop your marginal profit, and you drive your total profit higher, that's a good business decision. But when your absolute gross profit is down from $69 million to $67 million, that is odd.

Yes, but it's not odd for us because of the True Price process. I mean, our margins have been squeezed in both new and -- I mean used, don't pay attention to right now -- but in this conversation, from a new car perspective, our margins have definitely been squeezed from a True Price perspective. It's been a challenge in about a third of our stores.

We have got 25 to 30 stores that are still learning how to handle this process. And when you have a BMW store that was making $3500 in gross and they are making $3000 in gross now or $2800 in gross, that's going to affect your margin and provide for a higher selling price. Right?

So there's just a little bit of a shift that we are going through because of our True Price process. But if you were to just remove that thought process for a second, mix is what's driving that, in my guesstimation, across all the dealers.

Okay. And then just a second question on SG&A at 77%. If you guys -- have you guys done an ex-rent or a rent adjustment to understand what that is ex-rent, so we could kind of compare it to other companies? We have heard a lot of other companies are operating in the mid-60% to high 60%, SG&A to gross, ex-rent. Do you have an adjusted number?

Yes, you can confirm this, but I think it's 71% plus rent.

Hang on. We will give you a number here in one second.

Yes, 71%.

71%.

Got you. And you think -- as you target everything that you are working on here -- and you've got a lot of moving parts -- I mean is that the kind of thing that you -- number that you think could be a few hundred basis points lower as you get leverage, as you work through everything that you are working on right now and the market recovers? Is that realistic?

It is, but there's two things here. Number one, again, we've got that -- of course that incremental spend related to SOX. That's driving part of that SG&A.

But the strategy of building the technology, the leverage needs to come on the top line. Like I said, there's going to be some expenses that continue to support those business applications that support the Customer Experience, and your leverage should be coming on the top line by generating more gross.

So the biggest reduction is going to be when that SOX starts going away in 2014, and then you are going to have maybe 20% reduction in your IT spend just related to development.

John, you need to recognize, you look at -- from top-line growth, we've got stores that have gone from selling 100, 120, 130 pre-owned cars to 300, to 280, as this process has come to life. We are not talking about small steps here. And that's what happens when you start spreading that across this entire organization, the lift that we are talking about.

I mean, we had years and years of growth of 20% and 25% growth on preowned volume, and that sort of -- we have stymied that with this True Price process. And as I get that leverage in the store and I get those guys understanding how to execute in this environment, there's a whole other gear that we get here. And I see it happening and some stores and in others not, and it is just a training process that we are going through. And it is going to take us a little bit of time, but we will continue to improve as the year and next year go along.

Got you. That's very helpful. And then just lastly, it was a great capital markets move you guys made with the debt maturities, really great stuff and great timing.

Is there anything else that you see out there that you might be able to do to bolster your capital and maybe set up for acquisitions or other actions in the future that you might take? Because it just seems like this was such a great move; there might be other opportunities.

We second-guess that sometimes, maybe we should have gone for more. But the reality is we are going to always look at certain plans and see how the yield is in the high-yield markets, and monitor those to see if there's other opportunities.

There's also -- as we look at acquisitions, of course, we have got the Murray deal closing in Q3, but we do look at using our capital, as you always know, in growing the base business, own your own properties, that Murray acquisition, and potentially looking at taking out some of our debt in the public markets opportunistically. As we know, the yields are going up. That may create an opportunity for us, as well as opportunistically share repurchases.

We are looking at adjusting our revolver as well to increase our borrowing base. So those are some things we are doing in the capital planning.

Great, thank you very much.

Bill Armstrong, CL King and Associates.

Good morning. Your warranty gross profit was up about 19%. What were the major drivers there?

There were recalls. Honda had a recall, BMW had a recall, that's what was driving that. And those are one-time, Bill. They come and they go. They are one-time blips. It still only represents about 15% of our overall fixed operations revenue, and I think last year, it was 14.5% or something like that. So it's not a big portion of our overall mix.

When you look at our fixed operations business, you look at the gross that we generate, we have a really mature fixed operations team and performance. So we are very pleased with the 4% and 4.5% gross that we saw in revenue and gross profit in this category. Still opportunities on the customer pay side, especially -- and internally, as our used car business begins to grow again. And once True Price is laid in, that will help us grow from a gross perspective.

Got it. Maybe looking at this True Price from another perspective, I'm trying to put myself in the shoes of a salesman or sales manager in one of your stores. What are my challenges then in adapting to this new True Price system? What would my major challenges be and what's the process that I have to go through to adjust the way I'm doing business?

Well, the biggest one is we've trained the American consumer to come in and negotiate buying a car. And when they say, no, no, no, I need $500 off of this number, we don't have the room to negotiate $500 anymore, and I've still got some stores that are still doing it.

And so we are training and working and training and working to teach them how to overcome that, and that it's okay to have a customer leave the showroom in order to stick to your strategy. We have got stores right now that are doing that and doing a great job, and we have the growth, we have the margin, we have everything we need. And that builds trust and transparency with the consumer.

And that's something that in our industry, I don't care who you talk to, you do your surveys, that just doesn't exist. It's very, very difficult to find places where people point to and say, I trust and they are very transparent in how they handle their business model. We are making that come to life here at this company, but it's not easy to do. If it were easy, everybody would be doing it.

We are another 6, 7 months away from me feeling really, really comfortable where we are and getting a few of our guys that are still learning on board.

So if a customer walks out of your store because he's not getting that $500 or $700 off that he wants, you're only giving him $300 maybe, is he finding a better deal at a competitor or might he actually end up coming back and saying, hey, the price you were offering me actually was a good price?

You can always find a better deal. Here's a car salesman telling you. I can always find you $200, $300, $400 off a better deal. It is the experience that they are not going to be able to find. Where else are they going to go find a sales associate that's trained, iPad in hand; they can do the entire transaction right there and you can put your finger, your index finger on the iPad, sign in and you are done. And then be gone once you've made the decision in 45 minutes.

There is no other place that comes even close to being able to do that, and that's what's going to come to life at Sonic in the next 12 months. We have been working, investing and working on this process for four years now. And slowly but surely, we talked to you guys about playbook introduction, we talked to you about pay plan changes. We have done all these things methodically to get to this point. Once you get to that point, I've got consistency across all the stores, I've got the technology in the stores, the processes both from a sales and a service perspective, then I can hang my name on my building.

We can put Sonic Automotive out there and begin to brand this company and show the world, introduce the world to Sonic and how we do things differently. This is something that's been in the works at this company for a long, long time, and we are really close to being able to introduce it.

But we knew going into this year -- and I come from a one-price environment, I've tried to convert to one-price environments in another life, and I understand it's a very, very, very difficult transition. That's why we are taking a step. And that step for us is our True Price strategy, which allows our associates a little wiggle room, but not enough that can hang us. And we've got some stores out there that just simply hadn't quite caught on yet.

They will, they will come to the party, and we will sell more cars because of it and we will make higher than traditional margins because of it.

It does sound difficult. And is there any way that you can kind of educate the consumer about this new pricing approach? Maybe you're doing that through advertising or other methods, so they may be are more prepared coming in for this new, different kind of experience.

Yes, we will -- when we roll out -- Bill, when we roll out our Customer Experience process -- which True Price is a part of, that's not the whole process, right -- so when we roll all that out, then we will have -- and we're budgeting for a very big national branding campaign that shows what the experience is all about and how all that's going to work. And that will start sometime the second half of next year.

What I don't want to do is start advertising that -- you can imagine this -- I've got a city, I've got 15 stores in a city, I've got 10 stores that are doing it great, five stores that aren't doing it well, and if one customer goes through and relates one store to another, if you're not executing properly, this is a bad scenario.

So I don't go advertise something that I'm not good at yet. And we are becoming good at it, we are getting better and better as we move along, but boy, it's been a challenge. And look, had we not seen the cadence January to February, February to March, March to April, April to May, May to June and now July, we are getting stronger and stronger as we go along. But I will tell you, it's been a heck of a tough assignment -- and we are getting it done.

You will see as time goes on and progresses, the consumer, they don't want to go through all that baloney. They want to trust you and they want transparency. All of our surveys that we have done, in word searches and surveys that we've done with all of our customers, those are the two biggest things that pop up, is trust and transparency, and we are going to give it to them.

Great, okay, thanks. Thanks for that color.

Scott Stember, Sidoti & Company.

Can you guys talk about on the used side how SIMS is operating for you on the retail trade center and whether or not there is still a learning curve there that has maybe impacted sales?

There is -- first of all, SIMS right now is running as good as it has ever run. Our trade center is running great. Our trade ratio at this Company went from the high 30% range to now over 55%, as high as 58%.

One of the things that I did -- we have been running our days supplies a little light. One of the things that we started the quarter off online with about 7500 cars and we are selling 9000. So when you look back and you say, well, my margins are okay, they are not horrible, and I've got 7500 cars online and I'm selling 9000, I'm doing a really good job. I need more cars online.

So we increased our inventory by about 1100 cars to begin the third quarter of July, and right now, we are tracking to have the single largest used-car month in our Company's history.

So I feel real good about where we are from an inventory perspective. And then when you've got True Price, which we've been doing a little bit more on the used car side than we have new, because we've been pricing since January -- or even a little bit before that in some of our stores -- we've been pricing centrally. It has slowed us down a little bit there. But I think the inventory, the lack of inventory really slowed us down a little more than True Price on the preowned side.

It is certainly picking up in July and we will see how it goes through the rest of the year. There's no question we are battling the same issues as we are on new, but I just don't think to as great as an extent.

SIMS in our retail trade center are well ahead of where I thought they'd be at this point time, and we are very, very pleased with where we are at.

Great, thanks. And on the parts and service side, could you just talk about what you are seeing, the theme of more cars on the road in the coming quarters and the coming years, and the potential impact that will have on your customer pay and warranty business, and if you're seeing any of that currently?

Obviously, there's some warranty business out there, but it's not something that we budget for or count on. It's going to run between 13.5% and 15% of our revenue, and that's kind of where it is.

There are certainly upside opportunities from a customer pay perspective and from an internal perspective. So especially as we get Customer Experience rolled out, we've got a process with iPads and our technicians communicating directly with our customers. A picture is worth 1000 words. You can imagine a car on a lift, a technician taking pictures of the cars and communicating directly and creating a relationship with our customer.

We are going to roll out a new CRM tool next year. We start that process this year. That's part of the IT spend. And that CRM tool will help us keep a customer with a technician instead of that customer going through a rotation and ending up with just any technician. We are trying to create that relationship between technician and customer, and we've got some really neat things that are happening there.

So yes, there is plenty of upside, not just internal upside; there's plenty of customer pay upside there we see this year and in the coming years.

Scott, this is CG. That is the most-asked question that's out there. When are we going to see that lift? We haven't necessarily budgeted anything in the last half of this year. But probably if we see some lift coming into 2014, we may push that into some of our estimates for the 2014 year. But we haven't seen kind of that way that everyone is expecting yet. So we are cautiously optimistic that it will begin in early 2014.

Great. And last question, could you just tell me how much of your real estate you own currently?

We own about 30% of our real estate now, projected to be up to 44% by 2017.

Great.

All based on the lease terms.

Got you. That's all I had. Thank you.

Bret Jordan, BB&T Capital Markets.

Just a quick question. I'm trying to understand more about this one third of the store base that is underperforming on True Price. I guess, is there a common denominator? Are they -- I think the question was asked earlier -- is there a particular vehicle line? Is it the lower price point units?

I don't understand why a third of the consumers are walking in wanting to negotiate and being upset that they can't and walking out, while two thirds are posting their highest CSI scores. I'm trying to understand what's wrong with this one third of the base.

Bret, this is Jeff Dyke again. It doesn't have anything to do with the consumer. It has to do with us and our ability to execute and getting the culture right in the store.

It is not -- if there was one common denominator, it would have been fixed. It's just heavy lifting. You've just got stores have been doing business for one way for so long, and to walk in one day and to change all that, in some cases, is difficult.

I'm not saying that it's a smaller store -- we have got some of our bigger, better stores that have struggled with the transition. And we've got some stores that were small that have now become bigger stores because we put the transition in. So there is no common denominator there. It is just time. It takes time to execute this process and it's just a big step for us. It's a big culture change.

And I wish there was a button I could push and say, okay, this is what we are going to do today, but it just doesn't work that way. There is a big adjustment that we are going through. And we've got about two thirds of our stores on board and running in the right direction and delivering both on a volume and a margin perspective, higher than what we anticipated. And about a third of them, maybe about 30 stores, we've got that some are doing a little better than others, but we are just not done with yet.

And we've got training and focus on them and they are continuing to get better. If you had asked me this in April, I would have told you there were 50 stores out there that we're doing that. So it's a progression that we have to go through.

Is this that customers aren't walking in the door because it's not being locally promoted correctly? Or is it that customers are walking in the door and they are not being converted to purchase because the experience they have [once again] with this salesman's not working?

We are not advertising this at all. It would be foolish to advertise it, because there's no consistency across the stores yet. So we are still learning.

And there's no -- again, I'm going to go back to it's a training opportunity for us and an execution opportunity. There's no customers that are coming in and leaving. There are customers that we have in stores that are exceeding our expectations that might come in, leave, and then come back. But until you combine the True Price pricing methodology with the Customer Experience that we are going to roll out next year, all of that is meant to fit together in a puzzle.

But it had to be rolled out in bits and pieces. And the pricing piece was the one we wanted to get started with, because we knew it was going to be the one that was going to cause us the most trouble. The biggest opportunity for us; it would be the hardest to execute.

Okay, all right, thank you.

Ravi Shanker, Morgan Stanley.

Thanks. Good morning, everyone. You restated your numbers last year and your SG&A to gross improved significantly. I'm assuming that's because you got rid of a really, really underperforming store. And if that is the case, how many more such stores do you think you have, where you can kind of just improve your SG&A in one (inaudible)?

Ravi, I think you're talking probably about divestiture of Oklahoma.

Yes.

Okay.

The numbers are recast, so it's an apples-to-apples comparison in the P&L that you are seeing. But from a standpoint of additional stores just closing up, there aren't any current plans.

We have no plans to dispose of any stores.

Okay. But do you see any stores that were kind of underperforming at that same level where you have like big chunks of improvement?

Not even close.

Oklahoma was a very unique situation.

Okay, understood. And also, just on F&I, we are hearing from some other dealers that they are seeing some signs that the CFPB rules are starting to cause a change in behaviors at some banks. Are you guys seeing anything at your end?

This is Heath. We haven't seen any of our preferred lenders change their procedures or rules at all. We get this question at every investor meeting we have as well. And the Bureau has been a little bit more active. We saw back in June they had this procedural ruling where they now have jurisdiction over non-banks, and that's a little concerning.

But we've got caps in place, have for years. We have procedures in place to ensure against discrimination. And so we don't view it as a large risk. And even if we go to the flat rates, we think that we can live in that environment as well. We have a couple that have flat rates now. So for us, it's business as usual until something dramatic happens. We don't view it as a huge risk.

Okay, thank you.

(Operator Instructions). Jordan Hymowitz, Philadelphia Financial.

Most of my questions were answered. Just one quick follow-up to Ravi's question. So you are saying that not a single lender you do business with has lowered their yield spread participation they give you guys since the CFPB has started investigating?

There has not been one of our preferred lenders that has changed their procedures, no. In fact, I questioned our director of that area just last night to see if there's been any updates, and there has been no change.

And I'm sorry, when you say preferred lender, how many names would be on the preferred lender list?

Gosh, 12 to 15.

Okay. So it may have -- some smaller banks that you may not do business with may have changed, but none of the 12 to 15 that are your primary lenders have changed?

That is correct.

Okay, thank you.

At this time, there are no further questions.

All right. Thank you.

Thank you, everyone. Appreciate it.

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