Sonic Automotive Inc (SAH) 2013 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, Monday, October 21, 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 for investors tab and choosing webcasts and presentations on the left side of the monitor.

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

I would now like to introduce Mr. Scott Smith, Co-Founder, Founder, and President of the Sonic Automotive. Mr. Smith, you may begin your conference.

Thank you, Lisa. Good morning and welcome to Sonic Automotive's third-quarter 2013 earnings conference call. I am Scott Smith, the Company's Co-Founder, President, and Chief Strategic Officer.

Joining me today on the call is Mr. Heath Byrd, the Company's Chief Financial Officer; Mr. Jeff Dyke, the Company's Executive Vice President of Retail Operations; Mr. CG Saffer, the Company's Chief Accounting Officer; and Mr. David Smith, the Company's Vice Chairman.

As we disclosed in Sonic's press release issued earlier this morning, we are currently in the process of evaluating the impact of a positive tax gain relating to the extinguishment of Sonic's 5% convertible senior notes and various transactions occurring in 2011 and 2012, including the allocation of this gain, if any, over prior reporting periods. Once this process is completed, Sonic will issue a new press release disclosing net income and earnings-per-share amounts for the third-quarter 2013.

Accordingly, please understand management will refrain from answering any questions on this conference call related to net income, earnings per share, or any other metric that may be affected by the final calculation and allocation of this tax gain.

I will begin the call with a brief review of the quarter, then I will turn the call over to Heath for a financial recap, and then Jeff will give the operational recap. For summary comments from me, then we will open the call for your questions.

With that, please turn to the slide titled overall results. It's a great day for Sonic Automotive. We are pleased with our operating results for the third quarter. Our revenue was up 5.4%. Our new vehicle revenue was up 5.5%. Volume was up 2.5%. Our preowned volume was up 3.8%. F&I revenue was up 6.8%. Fixed ops revenue was up 7.8%.

Gross profit was up 7.1%. SG&A was 78.1%, including initiative expenses that we will talk about shortly.

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

Thank you, Scott. Good morning, everyone.

As Scott mentioned, revenue was up 5.4% at $2.2 billion, driven by 5.5% increase in new, 6% increase in used, 7.8% increase in fixed, and 6.8% increase in F&I. This growth in revenue resulted in gross profit of $326 million, an increase of 7%, outpacing the growth in revenue.

Next slide, please. SG&A was up 80 basis points compared to last year. Increases are related to the stock's remediation, development of One Sonic-One Experience, and development of our preowned initiative.

The next slide provides more color on those expenses. On this slide, you can see the walk from Q3 SG&A percent to adjusted SG&A percent related to the base business, which you will see as 60 basis points lower than last year.

Expenses related to the preowned initiative equal $1.7 million for the quarter and $4.5 million year to date. Customer experience expenses, $1.5 million for the quarter, $4.6 million year to date. SOX remediation expenses, $1.4 million for the quarter, $3.6 million year to date.

So total spend for all initiatives for Q3 was $4.6 million and $12.7 million year to date, all running through the SG&A. Q3 flowthrough would equal 34% adjusted for these initiatives.

Next slide. Capital spend total for year to date stands at $127.5 million. This includes the acquisition of five dealerships, which brings us to 31% ownership. With mortgage offsets, total cash used was $74 million. Estimates for the year remain the same at $66.4 million for real estate and $105 million for facilities, store-level CapEx, and IT spend.

Next slide, please. Debt covenants, this slide shows that we are compliant with all the covenants at the end of Q3 and we expect to be compliant going forward.

Next slide, share repurchases. On this slide, you can see our activity year to date is 642,000 shares, and we have an additional authorization of $135 million.

So overall, we're very pleased with the Q3 performance. We continue to hit or exceed our internal goals even with the incremental expenses associated with the initiatives related to SOX, preowned, and customer experience.

Based on year-to-date results and our forecast, we're adjusting our annual earnings guidance to the higher end of the previously announced range. We are now targeting 2013 fully diluted earnings per share from continued ops at $1.96 to $2.03.

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

Thanks, Heath, and good morning, everyone. I am proud to present the third-quarter operating results on behalf of the team at Sonic Automotive.

As you can see from this slide, new car volume was up 2.5% for the quarter with PUR increasing $99 and gross increasing 7.5% as we continue to tweak our True Price model.

Our statistical team is working around the clock on our SIMS new car pricing model, which we expect to launch in the first quarter of 2014. We have proven we can move pricing to create share and margin, and we will continue to make adjustments as we get closer to our new car SIMS launch date, which will significantly improve our pricing model.

I would also add that our customer base loves the True Price model. Its feedback is outstanding and our CSI continues to improve. As we announced today, True Price is an important ingredient to our customer experience launch next summer, so I'm very pleased with our progress.

Third quarter was our largest volume third quarter in Company history on a same-store basis, as we enjoy improvements in our playbook execution and improvements in the SAAR. I also want to point out that we are among leaders in new car volume throughput per location at 101 units per store for Q3, and we will start to track this performance and provide quarterly updates moving forward, just as we do for preowned.

We ended the quarter with a 55-day supply as we begin the fourth quarter and are geared for a great close to the year. Next slide, please.

I am very proud of our continued improvement in preowned. Q3 2013 marked the largest volume preowned quarter in Company history. We are getting closer to our 100 units per month goal -- per store per month goal -- as we hit 96 units in July, 95 in August, and 84 in September, averaging 91 units for the quarter, as you can see on the slide.

There are a few other highlights I'd like to point out. First, our retail trade center and SIMS are fully developed and handling 100% of the trades in the Company, averaging about 3.5 minutes for each appraisal submitted. Our trade ratio has risen since inception, which is contributing to our success.

Our margins are showing signs of improvement as our True Price pricing model, SIMS, and trade center execution continue to improve.

Our day supply is running at 28 days. That's about where we have been all year long, proving our inventory management model is working exceptionally well as we are growing sales and margin on a lower day supply on hand.

I am really excited about the improvements we are seeing within our preowned category, as many of the technologies and trade center processes are key ingredients to the launch of our stand-alone preowned facilities that we announced earlier today. We have been working on these models and processes for years and are now in a position to fully leverage their capabilities.

Next slide, please. While we have a mature fixed-operations business, we believe there is plenty of upside as our new and preowned volumes continue to grow. Our growth in the third quarter reflects outstanding performance from our fixed team as they continue to execute our Playbook processes. We're also gaining efficiencies from our iPad rollout, which is a key ingredient for the launch of customer experience next summer.

As you can see from this slide, we grew revenue nearly 8% and gross over 6% during the quarter. Customer pay gross grew 4.5%, internal and sublet grew 6.7%, and warranty was up again this quarter nearly 15%.

Next slide, please. We thought it would be useful for the investment community to see a list of several of the applications and areas of investment we have been making over the last several years. While I won't read the slide to you, with respect to everyone's time, I'm happy to answer questions on anything that may interest you or I would be happy to take calls later to discuss.

What's important to note with this information is not only the significant financial investment being made here, more than some $45 million over the last couple of years, but also the significant investment we have made in time it has taken to create the culture that would accept the level of change in order to provide our guests with a specialty retail experience unlike they have seen in our industry before.

Next slide, please. Just a few comments on our standalone concept. It's an exciting time for our Company, but more important for the preowned buying community at large. We're really going to have fun providing the guests in our communities with a preowned specialty retail experience never seen before in retail automotive.

While I do not want to get into the details of the land, facility, and asset investments we are making in the Denver market, I did want to share with you the SG&A expense levels we have seen so far year to date, and what we project our expenses to be prior to opening in the latter half of 2014. On a year-to-date basis, and as Heath said earlier, we've spent about $4.5 million in SG&A, and expect the spend to be between $5.5 million and $6 million for all of 2013. Then prior to opening our doors in the latter part of 2014, we expect about the same amount of spend as 2013, in the $5.5 million to $6 million range.

Before I turn the call back to Scott, I want to thank the ladies and gentlemen at Sonic Automotive for their dedication and drive creating one of America's greatest companies to work and shop, and with that, now I will turn the call back to Scott. Scott?

Thank you, Jeff. Q3 was obviously a very busy quarter for us. Financially, Q3 was our 16th consecutive quarter, four years, of quarter-over-quarter revenue growth.

We are beginning to see sequential traction in our True Price strategy and our inventories are positioned for a successful Q4. We closed our first acquisition since 2008 with the Murray Mercedes-Benz of Denver and Murray BMW of Denver, adding nearly $200 million in revenue.

I believe that it's important to reiterate our investment priorities for everyone. We will continue to invest in our base business, such as our preowned specialty retail concept and our Sonic customer experience, One Sonic-One Experience. In addition, owning our real estate and strengthening our balance sheet.

We believe that our equity is undervalued and we'll continue to opportunistically acquire stock in the market as our excess cash allows.

We are pleased to announce our preowned specialty retail concept and our Sonic customer experience. These two initiatives have been years in the planning and investment. We are targeting their launch for the second half of 2014. There has been significant investment supporting these initiatives running through our SG&A for several years. We believe that these investments in our base business will yield a competitive advantage and fuel our future growth with very little barriers or significant investments in the form of goodwill for new franchise dealerships for many years to come.

The business environment continues to be favorable, and as Heath stated earlier, we are adjusting our annual earnings guidance to the higher end of our previously announced range. We are now targeting 2013 fully diluted earnings per share from continuing operations at $1.96 to $2.03.

Before we open the call to take your questions, this is a fantastic day for Sonic Automotive, as I mentioned in my opening statements. We really have positioned our Company for a predictable, repeatable, and sustainable growth. We are back in growth mode.

I would like to thank our associates, our manufacturers, and vendor partners for making Sonic Automotive one of America's greatest companies to work and shop. It's truly an honor and a privilege to lead our great Company.

With that, we will now take your questions.

(Operator Instructions). Rick Nelson, Stephens Inc.

I'd like to ask you about the guidance. It appears that you are raising your fourth-quarter expectations. Wondering if you can comment there and how the third quarter came in relative to your internal forecast?

Rick, this is Heath. We haven't changed our internal guidance on fourth quarter. And we feel like the cadence has always been a little off from the external guidance.

Fourth quarter, as you know, is the biggest opportunity for us with December almost in two months. But our forecast for fourth hasn't changed materially from the beginning of the year.

And then, the SG&A, you point out, I think, 140 basis points differential between what was reported and adjusted for some of those costs. How much of that difference do you believe is truly temporary? It seems like some of these costs, SARBOX, for example, are going to continue.

First of all, just so everyone, for clarity, our guidance, our new guidance does include the actual 78% SG&A. We are not going to call out these initiatives as one-time initiatives. So, to be clear about that.

Secondly, of course the tree trunk will continue to grow, and once get operational, that cost will continue. The SOX remediation this year has been $4.5 million so far. I truly believe you are still looking at about $3 million of spend next year as it relates to our internal controls. And then, of course, customer experience will also continue as we get prepared for the rollout in July of 2014.

And if I could ask you about the rebranding strategy, what you anticipate that might cost, and if you could provide some more color on that? Is the Sonic name going to go on all of your nameplates, including the luxury stores?

Rick, it's Jeff Dyke. We are in the middle of working with our manufacturer partners on that.

Our branding initiative will be a sub-branding initiative, as we wrote in our notes and our releases. So you are not going to see -- where you see AutoNation putting their name real big all over their facility that competes with the OEM brands, you won't see us doing that. We will stick with the names that we have in the local communities where we have invested in those names.

But you're going to see a Sonic Automotive company on the facility, and we're in the middle of negotiating with our OEM partners exactly how that's going to fit into all of that. But we fully intend to have that happen on all of our facilities, whether that's Highline, import or domestic.

And is that expense, Jeff, built into the numbers that you laid out for next year (multiple speakers)

(Multiple speakers). It is, Rick, it's built in. It is a nominal expense from a signage perspective, and then, of course, there will be a marketing and advertising campaign, but the rollout of One Sonic-One Experience is going to take some middle of next year to the end of 2015. So the big advertising and marketing expenses will be primarily geared towards 2015, and we will include that in our forecasting at that time.

Rick, this is Heath. I will reiterate that. Obviously, branding expense, additional customer experience expense, our preowned initiative expense, and any lingering SOX remediation expenses, all of that will be in our guidance for next year.

Okay. Thanks a lot and good luck.

Patrick Archambault, Goldman Sachs.

I had, I guess, just one, just on the guidance, as well. The item that you are working on, the tax gain, right, I think you said that it applies to retroactive periods rather than 2013. So I guess it's safe to say that there's no impact of the tax gain on the guidance, correct? Even if it did apply to 2013, I suppose it would also be a one time?

If it did apply to 2013, it would be a one-time. Again, the issue is related to the extinguishment of those converts in 2011 and 2012. However, obviously, balances will accrue, so you've got to determine which period to apply that number. But you are correct. If it did apply in 2013, it would be a one-time callout.

It wouldn't be part of the guidance. Okay.

My other question was, because a couple of mine were answered in the last series of questions, but also, in terms of the new vehicle sales, which was up, I think it was, 2.5% if -- on a volume basis same-store sale. That was considerably below where the market was for the quarter, and I believe it's the second quarter where that's happened. If I have it right, I think first quarter you were pretty close to what your brand exposures would have suggested you would have done, but you underperformed them pretty significantly in Q2, and now in Q3.

How much of this is due to some of the initiatives that you have going? Are you substituting margin for volume? Is this something that -- just a new way of doing business that we have to get used to, substituting volume for profitability, or is there some transitional issues here that ought to just roll out and eventually you ought to come back to closer to market growth?

This is Jeff Dyke. We expect as we get better with our True Price pricing model that we will be more in line with the market as we move forward, or above the market, and we launch One Sonic-One Experience.

All of these things sort of go together, so it's really important that we learn how to manage in our True Price environment prior to the launch of One Sonic-One Experience next summer. So you can expect things to move around a little bit. Obviously, we moved our margins up in the quarter, having one of the best margin quarters that we've had in years, other than a December-ending quarter. And so, we are very pleased.

It was a record Q3 for us in terms of new car volume, and we did all that with the ability to move our pricing around and to deal with what's going on store level-wise with our True Price model.

So, we had a huge third quarter last year in terms of volume, so when you look at year-over-year percent increases, they don't tell the story as much as the amount of throughput that we have going through the stores, and I think it's important that we all look at that as we move forward. We are among the higher groups with the number of units that we are selling through our stores, and if you go do the math, whether it's new or used, our combined volume in new and used is as high or higher than anybody maybe to Carmax. Probably the highest, other than Carmax.

So with the margin that we've got, we feel pretty darn good about where we are, especially with what we put our stores through in terms of moving to our True Price model.

Understood. I guess, is the limited number of dealer points, perhaps, like a constraint, which is why you're moving back towards acquisitions or should we think about it that way?

No, not at all. We see lots and lots of upside. We did about 101 units, on average, per store per month in new. There is no reason why we can't do 150, even higher than that, as One Sonic-One Experience rolls out.

And I think if you read all the press releases that we put out there, we've been working around the clock. This has been years' worth of work to get to this point, and as the technology rolls into the store, this is major disruption in the life of an associate for Sonic Automotive at the store level. So, we are very pleased with what our team has accomplished so far, and sometimes you got to slow down to speed up.

We really, really changing how cars are sold inside our Company, and we think that we are positioning ourselves for the future and the type of buyer that is going to come on into this industry as we move forward.

Patrick, this is Scott. You mentioned acquisitions and growth. I really want to reiterate that we are pursuing our growth opportunities in the preowned field right now.

Just like you look at Carmax, who has maybe 4% of the national industry with virtually unlimited access to the market, we believe that there is a tremendous opportunity in the preowned industry for Sonic to take our preowned strategies that we've been working on for years and provide a different and unique customer experience.

As you know, the preowned market is at least three times bigger than the new market, and we have built these technologies to dovetail the Sonic Automotive and our specialty retail preowned model to work in conjunction with each other. So we believe that we are the best of the franchised dealers in preowned, undisputedly. I think Carmax is the best overall. I think that they have obviously done a fantastic job and they have 20 years' experience on the organization, but if this were easy, everybody would do it. And I think our team has proven that we can do it and that we know what we are doing in preowned.

As we develop this out, I think we will be opportunistic in our acquisition of new vehicle dealerships, but it's not the primary area that we are focusing on for growth going forward.

Okay, great. Thanks a lot, guys.

Ravi Shanker, Morgan Stanley.

Another question on the 4Q guidance. I'm just having a little bit of a hard time trying to bridge the gap between the $0.52 that you did in the last quarter -- last year in the fourth quarter and the high $0.60s number you are guiding to at the midpoint of your guidance for the fourth quarter. I know you had acquisitions in there, but can you just talk about what you are expecting in terms of the new make-whole SAAR, maybe associated growth, and maybe some of the components of that pretty big step up in earnings?

This is Heath. I think that you're going to see the same -- the SAAR is leveling off, to some degree. I think we saw 15.2 million in September. For the quarter, we were at a 15.6 million, and our models have always been projected on that range for the fourth quarter.

I think maybe the disconnect is obviously until we have the third-quarter EPS number out and available, it's hard to do the walk for the model, and I completely understand that. The good news is, obviously, our Q is due November 11. This will be resolved and we will have another call to discuss the EPS well before the 11th. And then, I think it becomes clearer on why we are maintaining and actually narrowing our guidance to the $1.96 to $2.03.

Understood, so we will wait for that call, then. And also, can you quantify any recall impact that may have flowed through the warranty business in 3Q? Was there anything large like it was in 2Q?

No, it was spread across -- this is Jeff Dyke -- it was spread across a lot of different lines, from Lexus to Toyota to BMW, Honda. It was spread across several different lines. But not much greater as a percentage of our overall revenue than it has been, but certainly bigger on a year-over-year basis because there was very little warranty last year, so the percent looks -- increase looks bigger than the numbers really are.

Understood, thank you.

Scott Stember, Sidoti & Company.

Last quarter, you gave some statistics about the percentage of stores that were not 100% adopting the true pricing methodology, and it sounds like you have certainly moved along the learning curve nicely for some of those stores. Could you talk about where you are now versus last quarter? I think you said 30% or one-third of the stores? It sounds like it's quite a bit better than that now.

It is. We've got about half of those, and some of that came with some people leaving and some of that came with some people beginning to understand what we are trying to accomplish.

And this announcement today will help even more the stores center and focus on One Sonic-One Experience and where we are headed. We have obviously been quiet with all of the strategies that we have been trying to develop, and we are very excited about the announcements that we've made today. Our stores have made remarkable progress over the quarter. It doesn't mean that we're not going to have hiccups here and there.

It's really, really difficult to handle the pricing model without the statistical analysis like we have on the preowned side. And that will all be developed here shortly, and sometime throughout the first quarter, we will really start to see some leveling out of our pricing strategies as we move forward.

And we are playing around with it. We are very pleased with the margin growth. Actually very pleased with the volume that we had in the quarter, both on a new and a preowned perspective, so we are -- I appreciate you noticing. We're definitely getting better at managing this and we're going to continue to improve.

Okay. Could you talk about how the core used business within your new stores, how the methodology or the thought process, how they stand once you start getting these standalone stores up, just how the two stores, the concepts, will co-exist with each other?

It's not unlike a Carmax and a Sonic Automotive store operating today. They are going to operate completely independent of each other, but use many of the great -- and we're building two separate organizations to run both, but we're going to use the great economies of scale in terms of our -- of the technologies that we've built and the processes that we have developed.

So we've got a team that is going to run the standalone preowned concept and the team that is going to run our core business, and right now, you would think that sharing of inventory and all these things might be primary on our board, but they are not. We have the experience. We have the expertise. We have the ability to purchase and trade for inventory, and we are building a brand-new standalone business that is going to live and thrive all by itself.

There is a huge, huge market on the preowned side, as you are well aware of. For lack of competition -- I mean, Carmax is out there. Scott said in the markets they do business in, they command 4% or 5%, something like that. They got 1% of the US market, and there is just too much open -- too much upside with the experience that we have, the technology we have developed not to go attack that.

But they're going to stand alone, stand on their own two feet, and we're going to run the businesses totally separate.

Okay, and on the margin side, on the new, there has been talk about accelerated pricing pressure on midline imports. Could you talk about what your experience was during the quarter on that?

Yes, you know, our margins are actually going up, and they are going up because the experience is a little bit different.

When the customer can come in and -- our guests come in and they don't have to negotiate and they don't have to go through all the crap that the traditional dealer puts the customer through, that mousetrap, if you will, the consumer is willing to pay a little bit more, and we're actually starting to see that.

And we haven't even come close to rolling out One Sonic-One Experience yet, but just the language and the processes that our team is using in the store, if you ever have the opportunity to go into one of the stores and experience it, even now, you should. It's just different.

And it's going to become a whole lot more different, and we believe as we move forward with One Sonic-One Experience that we're going to command higher margins. Carmax does, and they are a true one price model, and so we believe that we're going to continue to get better at managing our margins. We continued to see that in October. As we moved forward, our new car margins have been pretty solid, and I don't -- I see us getting better and better at pricing.

So you're going to exchange a little bit of margin that is going to be pushing up when you bring in a greater experience or a really good experience that the consumer likes when they come into an automotive retail dealership and the processes that we're going to offer our guests.

All right, and just last question, real quick, on October. Could you just talk about how things have been shaping up on the new side?

Yes, volumes are good. And as I said a minute ago, margins -- I have been pleasantly surprised with October in terms of new car margin. Volumes are very good on the preowned side. Margins are okay. We got a little work to do between now and the end of the month, but we will be fine. But overall, we're having a nice October.

Great, that's all I have. Thank you.

Bret Jordan, BB&T Capital Markets.

A couple of questions around this used strategy. I think your press release said your sub [rata] facilities to support manufacture of partner brands. Are these going to be all brand used retail storefronts in the Denver market, and I guess as you look at your fixed strategy, are you going to be all brand service at the same time? It seems like Carmax has their finance operation to absorb a fair amount of overhead. Unless you're going to run a finance operation, what are you doing ex the unit sale to absorb the fixed?

Yes, the models being built a lot differently than the Carmax model, but we will sell all brands. We will probably stay away from the Ferraris and Lamborghinis of the world, but other than that, with price point ranges from $14,000 to $18,000, somewhere in there, and service all brands.

But it's more than that. It's the retail experience that they're going to get when they come to the facility. This is a very unique concept. This is not a big box on a 10-acre lot where you've got 1,000 or 1,500 cars sitting out there in a very traditional model. It is a nontraditional model, and I don't want to get into some of the details just yet, but we are very, very excited about where we are headed with this concept.

It's something we've been working on for many, many years. This is not a whim that we came up with in the last two years. We have been working on this model ever since this team came together, and we're just now in a position to be able to launch it because we just didn't have the technology, quite honestly, built and the processes built to be able to deliver it.

So it's a different model than Carmax, very different, but going to take advantage of the same big opportunities in the preowned industry. It's just huge, and other than them, there's really nobody out there taking advantage of that. So a lot of room there, and we're going to go in and take advantage of it.

I guess as you're not going to participate in the warranty side of the business on these used cars, is there a strategy to drive customer pay service? Is this either going to be a lower-cost service offering or are you going to promote tires? Is there some way to bring these customers back for your service versus the independent they may have gone to?

This is Scott. Just before Jeff answers the operational side, we will be participating in service contract and driving the customers back.

Our plans currently are not to get into owning our own captive finance company, but you can't rule that out somewhere down the road. When Carmax started, they had partners in there that helped them get it started. They didn't just come out with CAFs straight out of the box with complete ownership.

So it's something that down the road we may be able to grow into, and, of course, dovetail that into our new car business. I mean, we only do $6 billion in revenue on the Sonic Automotive side, so I got to think there's an opportunity down the road for automotive contracts and doing secured financing.

So from an operations perspective, the one thing I would challenge you to think about is anything automotive, and the wide breadth that is available to us in that when we say that.

And so, again, I don't want to give away any of the things that we are working on, but we have a very, very good model. It's not dependent upon having 60%, 70% of our income coming from a financial source, and we are very excited to launch it. It is one that is not as capital intensive as you might think and one that we believe we will be able to leverage in terms of the skill sets that we've created at Sonic Automotive for the last five, six, seven, eight years.

So it is really going to be something special. We are very excited. We've got the -- there is no barrier to entry for us. We've got all the expertise. We have the capital. We have everything that we need in order to really take advantage of this market.

Thank you.

John Murphy, Bank of America Merrill Lynch.

I know this question has been asked in a number of ways, and people are coming up with different numbers, but if we look at the fourth quarter, roughly, we are looking at a fourth quarter that is somewhere in the $0.62 to $0.68 range. Would it be fair to be thinking about this generally in our model sort of as a mid-$0.60 number, and we will get an update on November 11? Because we just have to come up with something here.

Obviously, I've got limitations on what I can do with that. Until we have the EPS comes out for Q3, then, as I mentioned before, it will be easy to map it to that -- to our new guidance.

I will tell you that our fourth-quarter forecasts internally have not changed materially from the first year -- I mean, beginning of the year to now. So, we're not expecting some large -- something extraordinary to happen in the fourth that we didn't foresee in the first quarter.

John, we have hit our forecasts internally for our quarters all year long, as we did last year and the year before.

And there has always been a little bit of a misnomer Q3 to Q4 at Sonic Automotive. The Street is always thinking we're going to do more in the third quarter than we do in the fourth quarter, and we always tell everybody every year, look, we always do more in the fourth quarter than the third quarter.

Five years in a row, we have done that, and five years in a row, we have hit our number. So I'd just challenge somebody to listen to us at some point in time from quarter to quarter. If you go back and listen to transcripts from last year, I gave this exact same speech, and so --

Got you. So something in a $0.60 number probably is something we should think about, but you guys can't bless just yet, but we will get there on November 11. I appreciate that.

Then just on the One Sonic-One Experience, as you look at the benchmarks, one of the keys that stood out to me in the press release is 45 minutes or less to close a deal, to get somebody in and out -- up, in, and out. And that's a big deal.

Where are you right now and what are the best-in-class benchmarks, because that seems like that could be a real game changer?

It's going to be a major game changer, and right now, we are held a lot higher than that because we don't have our processes in place to handle it, and if you don't have one associate in your store that can take the customer through the entire transaction -- that means F&I, that means the trade evaluations -- and you don't have the technologies and the culture to go along with it, you can't do this.

Best in class is probably Carmax. They are below an hour once you have made a decision on a car, and everybody else is in the back of the pack.

We believe that once a customer makes a decision on a car they're going to buy, it's up to them, but they are going to be able to sign an iPad and get the heck out of there, if they want to, and we're going to do it. And we put that benchmark of 45 minutes out there. My internal benchmark is a hell of a lot faster than that, and it's going to make a big difference.

The consumer is going to have to at least consider purchasing a car at Sonic Automotive in the markets that we are in because of the experience. It's going to be that different. And it's not something you can wake up tomorrow. Our competition can't wake up tomorrow, and say, well, we're going to go do this, too. It's taken years and years to develop the applications and to develop the culture at the store that would even accept this stuff.

And you guys know this. You can go back and look at our calls forever. We've been talking about culture and Playbook and process for a long time, and today, I'm very proud. When you go into a Sonic Automotive store, you know it is a Sonic Automotive store, and Sonic is not even on the store. And tomorrow, Sonic will be sub-branded somewhere on the facility, and we will be delivering a standard that is a specialty type retail standard of experience that you get not unlike when you go into a Ritz-Carlton or anywhere else that puts customer guest experience at a very high level.

Not to say that we don't do that today. We have great customer satisfaction scores, but those are scores that are measured against industry averages and standards, and those are no longer good enough. We're going to raise the bar here at Sonic and we're going to provide something that is very, very different than what we provide today.

And the $45 million investment that you have made over the past few years, how much more are we looking at going forward? I know you gave us some SG&A dollars on the preowned specialty -- store development side, but what should we be thinking about as the ongoing investment here? Is it something similar to what we saw this quarter? Is there a run rate?

No, I don't see that run rate changing up or down for the next several quarters. We have still got a massive training effort that is going to start in the middle next summer. Our training department has grown from five, six, seven people six years ago to north of 30 today, and that's going to grow a little bit more.

We're going to do all of our training internally, and so this is a massive effort and there is just expense that goes along with it. But we've included that in all of our guidance numbers, and we will continue to include that in 2014, and quite honestly, we are looking to have a great 2014.

So there is expense to go along with all this stuff. We are making adjustments to handle that as we move forward, and I don't expect to be -- have any major changes up or down from a One Sonic-One Experience expense perspective.

Okay, that's very helpful. And then on the preowned side and development of these stores, you keep citing Carmax as best in class, and they, obviously, do a very good job on the used car side and are very large. Is that what you're using as a benchmark in thinking where you could ultimately go?

I know this is still at the early stages, but is there the opportunity to have 100 used car stores down the line, or is this really just something that will be a smaller bolt-on in some markets where you have new car stores? Because the opportunity is huge, but I'm just trying to understand what you are envisioning or even thinking what the end game could be?

You get it, John. Think bigger than that is what I would tell you.

This is a huge opportunity, and this is a team that we've put together on the preowned side that has a ton of experience in doing this. And think bigger. We're thinking bigger. Carmax is a great big company that we have got a lot of respect for. They have done a good job. But they're all by themselves, and it's time for new player in this arena. And we believe that 100 stores is the tip of the iceberg.

We're going to go -- this has become a national brand. We're going to go from coast to coast, from the south to the north, and take advantage of the massive opportunity that is out there. And we all know it, it's there, but not everybody has the expertise to be able to do this, and that's what special about our Company. We have put the people together that have the experience.

We don't have any barriers to entry here. We are not out looking for experience to build all this. We have it. We have had it, and we have been just quietly -- and the word patient comes to mind. We have been very, very patient in developing our processes and techniques, technologies, in order to bring this to life, and I think you are going to be very, very surprised when we open up towards the latter half of 2014 in the Denver market and what you see out of that city. (multiple speakers) going to be fantastic.

Really sounds exciting. One last detail question, and I apologize, maybe I'm not understanding the accounting. Is there something where the floor plan interest expense wasn't disclosed in the quarter because it has some tie or there is some wash moving back and forth in some of your floor plan offset accounts or something like that that would be tied to the convert buyback? I'm just trying to understand why the floor plan interest expense wasn't (multiple speakers) quarter?

They are not connected at all. And obviously, our balances are going up. It's offset a little bit by a reduction in interest, but the floor plan and the tax gain mentioned earlier in the call have nothing to do with each other.

Okay, so the floor -- so we will get -- is it safe to assume that the floor plan interest expense, because the inventory didn't swing around too much, was relatively consistent with past couple quarters?

That's correct, and of course, the other interest expense is lower due to our taking the nines out with the 5%. That plays into the math I think you're trying to get to.

Okay, great. We will look for detail later. Thank you so much, guys.

Bill Armstrong, CL King & Associates.

So you've got a lot on your plate, obviously. True Price still -- you're getting that implemented, the one to one -- the One Sonic-One Experience concept. Why pick now to now launch a new front with the standalone preowned concept? What is driving that decision to do that now, rather than a couple years down the road after you have really gotten the core business really humming?

This is Jeff Dyke. The answer is why not. We have been developing this team -- it's not like we are picking right now. We are picking right now to announce it to you, but we have been developing this concept now for many years, and we are out buying property. People are beginning to pick up on what we are doing, and so it is important to announce it to the investment community and to everybody in what we are doing.

Like I said, and I think it's really important for everybody to note, this is not something in the last three quarters we came up with. This is something the last five, six, seven years that we came up with, and we are ready to roll out. And why not? The market is huge. It's untapped, other than one major player. We have got the independent resources in terms of personnel to manage this, and there's no better time.

If we could have done it any faster, we would have announced years ago, but in order to do this right, in order to get it right, it takes the patience of Job to make it all happen.

So we are very, very excited about it, and it has no bearing on -- other than the technology which we are developing for both sides of the Company, it really has no bearing on the day-to-day operations of what we are doing on the Sonic side on the new car side. They are just two separately independent-run businesses with two separate leadership teams running them.

Okay, and with One Sonic-One Experience, it sounds like we are seeing, obviously, less haggling on prices. I guess one salesperson guiding the customer through the process and then, hopefully, a much shorter process. If I am just a consumer and I have no idea that you guys are doing this, and I walk into your store to look to buy a car, what are the top three or four things that I'm going to notice through the experience that is going to make me say, wow, this is really great, and recommend it to my friends?

First of all, one person. If you go into a dealership today, a traditional dealership right now, you're dealing with a sales associate, a sales manager, an F&I person, and probably several other people, along with about 40 pieces of paper that you're going to sign in order to buy a car. So right off the bat, you're going to meet one individual who is trained to help guide you through whatever it is that you want to do when you're at our stores.

So we're putting the customer in charge, and we are not going to be in charge. And that's very, very different from what you see tradition in the industry.

Second is -- I don't know if you saw it or not, but what I suggested you should do is in the write-up that we sent out today, in the release, there is a video link, and that video link will really highlight to you all the differences of what we have today and what we're going to have tomorrow. I think it really captures the essence of what it is that we are doing with One Sonic-One Experience.

But much shorter timelines, much less -- down to maybe one or two pieces of paperwork that we are working on right now in terms that the consumer would have to sign, and we're trying to bring that to zero. Fresh facilities in terms of having -- imagine centers in our facilities that have more like the Progressive Insurance model where consumers can go in and view pricing up and down the street, all over the market, wherever they want. We are going to be an open book.

Very good transparency for the consumer, so we can try and build trust. And when we do that, trust and transparency equals margin, and when the consumer is comfortable, you know this, they're going to spend more to enjoy a process that we're going to give them, an experience that we're going to give them, that they can't get anywhere else.

And we have spent out of that $45 million, millions of that money has been with consumer groups, going around the country looking for, where is the right dealership that can provide all these experiences? Just where are they? And we don't -- we haven't been able to find it anywhere.

Maybe the closest is Carmax, and they don't sell new cars to any large extent, so we are very excited about bringing something that is truly a specialty retail-type experience that is focused on the guest, instead of getting the consumer through our processes that we traditionally have in a dealership.

Okay, great. Thank you very much.

(Operator Instructions). Jordan Hymowitz, Philadelphia Financial.

Two quick questions. One, somebody had asked this, but are you going to break out the expenses for the One Price initiative, the way that Lithia did when they tried something similar?

No, it's going to be included in our guidance all along and has been included in our guidance all this year.

But assuming that is going to lose money for the next couple years, why not break it out as a separate line item so people can track it? Lithia used to do that.

We have a totally different model from Lithia, Jordan (multiple speakers)

When they were going to start standalone used car stores, you remember?

Yes, I remember. They did L2 in Denver and it was a disaster. And it happened in 2008 and -- but it was a completely different set of circumstances.

And Jordan, this isn't a test. We have already tested everything for the last three, four, five years on the retail side of our Company, and so this is an infiltration, and we are planning on starting in Denver and then moving to many other markets as quickly as possible.

So we're going to have a great standalone business here, and we will be able to certainly tell you how that business is operating from an SG&A perspective, from a profit perspective as we get up and get running, but we will include all of that in our guidance as we move forward.

But it won't be broken out? It will be incorporated in the main number?

That's correct (multiple speakers). For the time being.

Okay, second question is you guys used to have a captive finance company. Someone else asked about whether you would be starting that again. Could you restart that company if you wanted to, and could you remind us what that company focused on when you had it?

Yes, Jordan, it's Scott. That company was sold several years ago. Dave Cosper helped to put that deal together, and it was primarily a sub subprime business.

And I think the opportunity for us down the road would be more similar to what you see at Carmax. If you read all their documents, there's a ton of history in there that can show you loss ratios, et cetera. We would not be looking to get back into the sub subprime area. I think that's a shallow end of the pond that we don't want to fish in.

Thank you, and I like the fishing analogy.

This concludes the Q&A portion of the call. Are there any closing remarks?

No, I think I just want to thank everybody for listening to us today. I hope that we have provided more transparency for you, that you understand that we are moving forward into becoming a growth company again in the preowned industry. We are very, very excited about this.

We look forward to sharing more information with you as we continue to go forward. We look forward to hopefully having everybody back on a call here before November 11. With that, have a wonderful day. Thank you.

Thank you.

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