Sonic Automotive Inc (SAH) 2013 Q4 法說會逐字稿

Good morning, and welcome to the Sonic Automotive fourth-quarter and year-end results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (Operator Instructions). As a reminder, ladies and gentlemen, this call is being recorded today, Wednesday, February 19, 2014.

Presentation materials which management will be reviewing on the conference call can be accessed on the Company's website at www.SonicAutomotive.com by selecting Investor Relations under our Company drop-down box and then choosing Webcasts and presentations on the right side of the page.

At this time I would like to refer to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995.

During this conference call management may discuss financial projections, information or expectations about the Company's products and markets or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made.

These risks and uncertainties are detailed in the Company's filings with the Securities and Exchange Commission. Thank you. I would now like to introduce Mr. Scott Smith, President and Chief Strategic Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

Great, thank you. Good morning, ladies and gentlemen, welcome to Sonic Automotive's fourth-quarter 2013 earnings call. I'm Scott Smith, the Company's President. Joining me today on the call are David Smith, our Vice Chairman; Heath Byrd, our CFO; and Jeff Dyke, our Executive Vice President.

I will start today's call with a brief overview of the quarter, after which I will turn it over to Heath for his review of our financial results, followed by Jeff with a look at our operating results. We'll then have closing comments and open the call for your questions.

If you could please turn to the slide Q4 Results. Adjusted income from continuing operations for the quarter was at an all-time record level of any quarter with the Company earning $36 million. Revenue growth up 5.8%; new retail revenue up 3.1%; volume up 0.7%; leased retail volume up 12.7%; volume up 10.1%; F&I revenue up 6.6%; [QR] of 11.43[%]; fixed ops revenue up 10.4%; gross profit growth up 7.8%.

SG&A was 75.2% which includes our initiative expenses, including initiative expense and ex ramp SG&A would have been 70.1%. Adjusted income from continuing ops is up $6.8 million or 23.4%. Adjusted diluted EPS from continuing ops was up 29%. With that I will go ahead and hand the call off to Heath.

Thank you, Scott, good morning, everyone. I'm going to be starting on slide 7 of the presentation. As Scott mentioned, revenue was up 5.8% over Q4 of last year, strong growth in pre-owned, F&I and fixed. For the year revenue was up 5.7% with new retail, leased retail and fixed all up 6% and F&I up 8.8%.

Gross profit was up 8% for the quarter and 5% for the year. Total gross margin for the quarter was at 14.6% and 14.7% for the year. Incremental flow-through was at 21% for the quarter and is at 42% excluding our pre-owned and customer experience initiative.

As Scott also mentioned, adjusted diluted EPS was at $0.67 for Q4, a 29% increase and $2.03 for the full year which is an 18% increase from last year and at the top of our annual guidance.

Next slide, please. SG&A as a percent of gross was at 35.2% for the quarter, 20 basis points better than last year and 77.1% for the full year, our internal target was at 77%. The increase was due to expenses related to the acceleration of our pre-owned and customer experience initiatives offset slightly by a reduction in rent.

Next slide, please. If you dig deeper into the SG&A for the quarter it is the core business without the future investments was at actually 73.4% of gross. This is 200 basis points better than last year. Total fourth-quarter spend for initiatives includes $3.2 million for pre-owned initiative, $2.1 million for customer experience and $800,000 for the SOX remediation, for a total of $6.1 million.

Next slide. Full-year SG&A for the core business without our future investments, 75.6% of gross which is 120 basis points better than last year. Total year spend for initiatives $7.6 million for our pre-owned initiative, $6.7 million for customer experience and $4.3 million for SOX remediation for total of $18.6 million.

Next slide, please. CapEx for the year we purchased 12 properties at $52.5 million and added four mortgages. Additional CapEx included $76 million in facility improvement, $17.5 million in IT and $9.3 million in general maintenance. In 2014 CapEx is expected to grow to $170 million net of mortgages as we continue to implement our strategy of [no set] acquisitions and begin the rollout of our pre-owned and customer experience initiatives.

Next slide. Debt covenants -- this slide shows we are compliant with all of our covenants and all internal models indicate that we will continue to be compliant.

Next slide, please. Share repurchases -- for the year we repurchased 759,000 shares at an average price of $22.50. We currently have authorization of an additional $132.5 million.

Overall we are very pleased with our financial performance for the quarter and for the year as we continue to execute on the priorities of investing in the base business, owning our own properties, share repurchases and investing in our standalone pre-owned initiative.

Thank you for your time this morning and now I will turn the call over to Jeff Dyke for a review of our fourth-quarter operations.

Thanks, Heath, and good morning, everyone. I am very proud to present our fourth-quarter 2013 operating results on behalf of our team here at Sonic Automotive.

New-car volume was up just under 1% for the quarter and new car revenue was up 3.1% with EUR increasing $154 per copy and that drove (inaudible) of $2,415 with gross increasing 7.6% to $82.1 million. These numbers represent all-time records for Sonic in new-car volume for the quarter and the year. We also set an all-time Q4 record for new-car gross.

I'm particularly pleased with this segment because it coincides with further development of our True Price strategy and the execution of this strategy in our stores. It further demonstrates our ability to price and manage inventory on a centralized basis which is one of the keys to the implementation of our One Sonic-One Experience strategy being rolled out later this year.

Our Sonic Inventory Management System and pricing tool [stems] continues to improve each month and our ability to execute is really gaining momentum. It has taken time for our associates to get comfortable with our True Price strategy, but it is starting to become part of our culture and we're very excited about the results we are seeing.

We ended the quarter with a 54-day supply and are comfortable with our inventory levels as we head into the March selling season.

Next slide, please. I am very proud to present our pre-owned results for the quarter. Retail volume was up 10.1% for the quarter with revenue increasing 12.7% and PVR relatively flat at $1,358 per unit. We averaged 86 units per store per month and that is up from 80 prior year.

This performance was an all-time Q4 volume and gross record; we also sold more pre-owned units and generated more pre-owned gross in 2013 than any other year in Company history. We ended the quarter with a 26-day supply, further demonstrating our ability to manage inventory while driving record sales volume and gross dollar.

Our retail trade center combined with our SIMS technology gives Sonic Automotive advantages [such as] managing inventory which will allow for One Sonic-One Experience to be rolled out this year and is one of the key factors in our ability to introduce the Denver market to a new way of buying pre-owned cars later in the year.

I could not be more proud of our pre-owned team and all that they have accomplished in the development of these tools, processes and the culture. This will allow our business to grow in ways that others will not be able to follow.

Next slide, please. We continue to demonstrate our strength in fixed operations. As you can see from the slide, our fixed revenue was up 10.4% for the quarter and our gross was up 8.3%. Our playbook execution combined with the technologies that we are implementing across our platform are really paying off. We set both fourth-quarter and full-year gross profit records in fixed operations in 2013.

We are particularly excited about our customer pay growth which continues to improve, up 6.6% for the quarter. One Sonic-One Experience is not just about what we can do to our guest sales experience, it also covers the experience our guests will enjoy in fixed operations. And the development of a relationship between our talented team of technicians and our guests.

We're very excited to bring new technologies and processes to our shops as well -- and look forward to updating you as we progress in this area.

Next slide, please. Just a quick update on our standalone pre-owned concept. We are also excited about the progress we are making here. We've accomplished a lot in a very short period of time. We are on schedule to open in the Denver market in Q4 of this year.

They have a facility design and look to break ground later this month. Hiring and training will begin in the second quarter and we are fired up about this as we bring a whole new level of hiring, training and development to this industry. We have worked with our outside vendor partners also to develop a fun and exciting marketing introduction of our new concept and that is going to begin late Q2, early Q3.

We look forward to keeping you updated on our progress and we will be happy to answer your questions -- all the questions that I can during our Q&A session at the end of the call. Just keep in mind that we are working to keep most of what we are doing confidential at this time.

Next slide, please. A quick update on One Sonic-One Experience, we are on schedule to begin, as we said last quarter, our rollout test store in July of this year. And that is going to include CRM tool introductions; showroom application, this is the application that is going to allow our sales associates to handle the transaction -- the entire transaction with our guest; branding elements and materials; loyalty programs; a guest garage application which is kind of a customer information portal.

We are going to have great new updated Web applications and we will update our playbooks and there's a whole lot more that goes along with this. We will also introduce a new pay concept along with fully integrated training programs to guarantee the success of this launch. I am happy to also answer any questions you have at the end of the Q&A period -- at the end of the call.

Before I turn the call back to Scott, I'd like to take a minute to thank our associates for their hard work and dedication in creating one of America's greatest companies to work and shop. It has been a fantastic year and I look forward with great anticipation to all the success our team will enjoy in 2014 as we launch our new strategies. And with that I will turn the call back to Scott. Scott.

Thank you, Jeff. Heath and Jeff covered most everything that I had for my closing comments here. But I do want to say that 2013 was an all-time record for us and we sold more vehicles than we have ever sold before. We still believe there's a tremendous amount of upside in the existing stores.

2013 was a transition year for us; we are very pleased with the year. We've covered a tremendous amount of (inaudible). We are looking very, very forward to 2014. Going forward, we are committed to following growth and operating strategies, we talked about our standalone pre-owned stores, our One Sonic-One Experience, which is our customer experience initiative.

I believe that franchise acquisitions could be possible, while they are not the primary focus I can't rule them out. We want to continue owning our dealership properties, this past year we invested $75 million in our property. We added 10 stores to our portfolio of properties increasing the percentage owned to 31%.

We believe by the end of 2017 that we will own approximately 45% of our stores. And in looking at these strategies, the return to capital -- returning capital to shareholders is also a priority. During 2013 we returned $17.1 million to shareholders through share repurchases and approximately $5.3 million in declared dividend.

At December 31, 2013, our common stock repurchase authorization was at $133 million. We believe that our stock is undervalued and we will continue to opportunistically repurchase share.

If you go to the next slide, please, 2014 Plan. We expect 2014 new car industry volume of 15.75 million units to 16.25 million units. Based on this we expect 2014 diluted earnings per share from continuing ops to be in the range of $2.09 to $2.19 for our new car franchise operation. This excludes the effect of our standalone pre-owned activity.

As we have discussed in previous calls, we will continue to incur startup expenses related to our standalone pre-owned operations in 2014 which will be slightly offset by revenues after our planned opening in the fourth quarter of 2014. With the inclusion of our standalone pre-owned operations we expect total diluted EPS from continuing ops to be between $1.95 and $2.05.

Before we take your questions, I would like to just take a minute to thank all of our associates and vendor partners who join together every day to help us build one of America's greatest companies to work and shop. It is an honor and a privilege to (inaudible). Thank you. We will now open the call for your questions.

(Operator Instructions). Rick Nelson, Stephens.

I would like to follow up on the used car business. And if you could kind of stack it up there with CarMax where you see similarities, where you see differences and does the concept have a name at this point?

Yes, Rick, this is Jeff Dyke. Yes, the concept does have a name. We are not ready to reveal the name. And it is going to be significantly different than what you would see from a traditional auto retailer or a CarMax, which is really kind of in the same light.

We've really built a different kind of facility; the experience is going to be different for the guest both electronically and at the physical plant. And I'm trying very hard to keep most everything under wraps. We will have a really good launch and we do have a good launch plan to begin to let the Denver market sort of understand what is coming their way.

And so, I would tell you that there is not a lot of similarity. It is just going to be a different way to go to market and one that we are very excited about, one that we have been working on and we said this the last call for the last six or seven years, the plan has been in our heads. We've just not been in a position to pull it off and now we are and we are very excited about it and there's just a lot of really neat things that are coming.

We really feel like there is no barriers to entry for us from inventory management to pricing. We feel like we have shown what we can do on the pre-owned side of the business at Sonic Automotive; we have used a lot of those tools that will help us implement these things at the new division. So we are very excited about it and we will share more as we get closer to that launch date.

Thank you for that. I would also like to ask about the new car business, what you are seeing in terms of market share. It looks like the comps lagged some of the peers that have reported also for the fourth quarter.

You know, we are playing around with our margins, we are very pleased with where the margin was in Q4 and we have got really good inventory, our BMW business was good, our Honda business was okay. I mean you look across the brands.

We really, Rick, are working to make sure that True Price is doing what it is supposed to do and that it is becoming a part of our culture. And so some of the brands could have suffered a little bit from share but they grew in margin. We did have a record-breaking gross quarter in new.

And as we move into March I might lighten some of that up a little bit. And it is not that we can't turn the volume on. I feel like January and February were (technical difficulty) so far been a little bit tight.

Most of that is weather oriented. And I just -- the lag is not so much the industry as it is just us playing around with our margins and our pricing systems and learning here over the last couple of quarters.

It looks like (technical difficulty) paid off on volume for margin. I would like to ask also if you found the tax rate, the adjusted tax rate from 29% came in quite a bit below where we were thinking. What was the driver there and what is the expectation for 2014?

You know, some of it will be related to the taking out the converts in some of the third-quarter activity. But the majority of it is just the normal cadence of going through our return provision and getting the tax right, getting the taxes filed and completed. Our models for going forward are at 38.5%.

Thank you. Also if I could ask one more. The One Sonic-One Experience and the SOX costs, are those in that $0.14 number that you called out or is that exclusive to the used-car business?

I'm sorry, could you say it one more time? I didn't hear you.

The $0.14 expense that you are anticipating for 2014, that is for the used-car format. I'm curious if that also includes [SarbOx] (sic -- SOX) remediation costs and the customer experience cost (multiple speakers)?

No, it does not. If you do the math we are looking at about a $12 million to $13 million pre-tax expense that is coming directly from that pre-owned initiative. It does not include anything for SOX or customer experience.

In 2014 that SOX remediation will be completed that will then start moving into transitioning into centralization. And the -- that expense we have budgeted for about $1.75 million compared to the $4.3 million we spent this year.

Customer experience we expect the same kind of spend that we have had in the last year, 2013. And so our models right now are at $7 million for the customer experience that will be running through SG&A.

But that is not part of the --.

It is not --

The $0.14.

The only piece of the business that we are breaking out separate is just the standalone pre-owned initiative.

Has the customer experience strategy, has that been pushed out a bit, the 18-months from July or is that consistent with what you were thinking a few months ago.

No, Rick, this is Jeff Dyke. No, it is still right in line. We might get in the store in June but our CRM tool is already in the store, we are testing it, UAT testing. And the other elements, heck, we just reviewed them yesterday, we will start with some tweaks here and then we will start implementing in one store in the July timeframe. And that is right on target, right with our timeline as we projected early last year that we would do. So there has been no change there.

And, Rick, this is Heath again. I want to give you some more color around the taxes. I misspoke a little bit, [T. J.], if you can give us some details.

Yes, the accounting related to the 5% notes really didn't have anything to do with the tax rate. The tax rate -- it will fluctuate from period to period based on when we actually complete tax returns or when certain audits are completed by the state or by the IRS. So we just had more of that activity that occurred that affected the rate during this year. It didn't have anything to do with the 5% note.

Thanks, T.J., and thanks guys and good luck.

Scott Stember, Sidoti & Company.

Could you just talk about how your luxury sales did in the quarter versus volume imports and domestic? And just separately, the gross margin expansion in the quarter, would you tie that into just the benefits of the new True Pricing methodology?

Yes I would tie it in 100%, there is no question. We moved our pricing, We are doing a lot better job of not negotiating. We're not there yet; we still have a lot of work to do. We also believe that our consumer is getting used to what it is that we are doing and they like it. There is not a lot of back-and-forth negotiation and so that has certainly really helped out.

As far as our business mix, our luxury business was really good during the quarter driven by BMW and Mercedes. Our domestic business was also solid driven by Ford. And our import business was okay; Honda was a little bit less than we would have liked it to have been, but we kept pace with the brand in the quarter and we would like to have seen maybe a little more aggressiveness with the brand during the quarter. But other than that no surprises for us.

Okay. And as far as True Pricing goes, could you remind us, is that process in 100% of your stores right now?

It is in 100% of our stores, yes. It is.

Okay, got you. That is all I have for right now. Thank you.

Patrick Archambault, Goldman Sachs.

I guess going back to just the -- I think one of the first questions which was that the volume kind of lagged peers a little bit or the industry a little bit. I just wanted to -- like, how much was that due to both kind of pricing aggressively and the impact of True Price, which people are still getting used to or is it one more than the other?

No, it is just our team getting used to executing our True Price strategy. When you change something this large in your stores it takes a while for everybody to get used to it and that is it. One of the things we have been very focused on is establishing our margins and stopping the negotiating in the stores, the back and forth, which our customers love. And we are hearing from them that they love it.

So I could move some numbers around, we're doing that essentially here from the home office and ramp up volumes any time we want. We are getting to a point where we can start to push some buttons and make things happen. We do that all the time on the pre-owned side and we have very stable margins and really nice growth on that side and we have demonstrated that for a long time now; we're just learning how to do it on the new car side.

So this is nothing unexpected. We're delighted with our margins; we're delighted with how we've been managing that and how the team is adjusting to True Price. We made a lot of progress from the beginning of the year to the end of the year and we are going to make a lot more progress this year with it and it is a key factor in One Sonic-One Experience.

We have got to get the back-and-forth negotiations out, which takes up a lot of time and is a pain point for what the customers cannot stand. And so we are fixing that. And there is just one small piece of a big puzzle that we are putting together here with our technologies and processes and it doesn't bother us at all.

We are right where we thought we would be at this point in time and we are very delighted with the margin. We are pushing buttons to make our margins go up and that is working nicely and the consumer loves it. So, we don't see it as a big issue.

No, I mean, and certainly the margin did sort of speak to that this quarter. I guess just maybe so I understand the objectives of True Price. Is it -- I don't know, maybe this is kind of -- maybe it is both again. But in aggregate, is True Price expected to be something that drives up margins over time just because there is more discipline in the sales process? Or is it something where ultimately you'd actually expect to get volumes because you are kind of taking a page from the CarMax model where people actually enjoy the no-haggle experience? Is it -- like what is going to be the main objective?

Yes, so, if you look, there's three. One is we're going to drive significantly higher market share. We are going to take share once One Sonic-One Experience is put in place. We do expect margins to go up because the consumer enjoys the process, and you are a consumer as well. We all pay more for something that we enjoy.

And then customer satisfaction scores are going to go up. We are already seeing that. We had record-high sales satisfaction scores. So those are the three things that are going to happen. We are going to take market share. We've developed the KPIs around that, and in some of our locations we are already seeing it. It is a bit early yet because we don't have our total process in place where the sales associate handles the entire transaction.

But it is a very fine time for us because we sort of made it through the headwinds of getting True Price put in place without really blowing everything up. And that was a very difficult thing to do. So we've accomplished that. We feel like it is stabilizing. It is not that big a story around Sonic anymore; it is in place. Whatever turnover we have had because of it, it is done. And we are really moving forward and very excited about it.

We are managing our inventories right. There is no question that the lead driver in all of this will be an increase in market share, and we have those defined. And as we get a little further into all of this, we will be happy to share it with you.

Okay, that is helpful.

This is Heath. I just wanted to add too that I think we are just adapting to the behavior of our customers and pricing that's transparent. So that leads to trust, which leads to market share. And Jeff mentioned our new car pricing analytics, those are just getting underway and that is just going to make pricing that more precise, and we think all of that leads to market share.

That is helpful. One other one if I may. You had a pretty large public dealership competitor kind of announce a series of kind of -- I don't know -- economic impacts or charges, however you want to describe them, based on just the weather. And -- that you have seen in the first quarter. I just kind of wanted to get your characterization of the impact of that.

I know obviously your geographies are different and your demographics are different in terms of what you sell. But I wanted to get the impact of that.

And then as a second, interestingly enough, they were talking about also parts and service being hit and some of that kind of not really coming back, right, just because your service bays may not -- when you lose somebody you may not be able to accommodate them later or something like that. So thoughts on that would be great as well.

So we got a lot of East Coast stores that got impacted in January and February and our net store level income is going to be hit $1.5 million to $2 million for the first couple of months, that translates into $0.02, maybe $0.03, somewhere in there.

But March is coming and March is a really, really strong month for us. And there is no question that we have the ability to make up those numbers. So, is there an impact, yes, on an EPS basis, I think Heath and I were talking about it earlier; it's maybe 8% or something.

8%, $0.02 or $0.03.

But it is not catastrophic. And our teams -- one of the things that we have done is we have extended our operating hours, we have opened stores where we can later and earlier. And so we are doing everything we can to take care of our guests and to make up the lost business.

So there are stores where it does a ton of fixed operations gross and we have got them, some in our Atlanta market and make that kind of gross up is going to be difficult. But it is not a game changer, maybe -- like I said, it may be $0.02 or something for the first two months, but that doesn't mean we can't make that up in March. It certainly had an impact but it is not catastrophic.

Okay. Very helpful, guys, thanks a lot.

Brett Hoselton, KeyBanc.

The customer experience expenses, the $7 million in 2013 and 2014, what are your expectations as you kind of move through 2015 and 2016? Does that continue or do you see maybe a step function reduction in that as you kind of rollout the plan?

Yes, the expenses are going to change what we are actually utilizing them on. But we have got in our models -- when we get out to 2015 we have still got a total spend of IT in development around $6 million and it starts to go down in 2016 and 2017 to $4 million and then $3 million and then $3 million. So we see it the same level for 2015 and starting to go down in 2016, 2017, 2018 for development.

And then as we think about the rollout of the True Price experience, the gaining of the market share, the gross profit going up and the customer satisfaction scores. It sounds like you have seen some of the customer satisfaction initially, the gross profit per unit, new vehicle obviously, benefited there.

Market share kind of a mixed bag maybe based on fourth-quarter results. But I guess my question here is as we kind of look out through 2014 and 2015 is there a point in time that you hope to see a more meaningful acceleration or do you see it just kind of a slow steady ramp up or improvement?

Here is how it is going to work, we are going to roll out our Toyota store and put the processes in, but we are going to brand the market once we have a total market rolled out. So we expect that once the entire package is in a particular market like the Charlotte market, and our five stores here, that we will start to see immediate impact in growth in those stores.

We have got a two-year rollout schedule here; it is going to take all of 2014 to get just this market rolled out, tested and making sure that everything is working right. If you will remember when we rolled out SIMS three years ago, it took us a long time to get SIMS up and right and the way we wanted it.

And so we will spend all of 2014 getting this one market right and once we do we will put together an aggressive rollout schedule that will cover most of 2015 and probably the first half of 2016. So we will see market share gains I think once a market is rolled out immediately.

We are going to offer the consumer something that nobody else can offer. And that's a pretty special thing when you are in a marketplace that is as mature as ours and we can market and do something that nobody else is doing.

And the work that our competition would have to do to get here -- well, you know what we have been through the last couple of years, you have watched it. It has been pretty spectacular. So we look to begin to grow share relatively quickly as a market gets rolled out. And that is what's in our forecast and our plans.

Okay, thank you. And then as we think about parts and service, margins down a little bit year-over-year, warranty work obviously up quite significantly. Generally people perceive that the warranty work carries with it maybe a little bit higher margins.

So I am kind of wondering, how do we think about your parts and service margins on a year-over-year basis? And how do we think about the outlook for your parts and service margins?

Some of that is just mix and the big story in our parts and service business is our customer pay growth. Up nearly 7% for the quarter, that is really a big story, we see that continuing, especially with market share growth as we move forward.

Not quite as worried about the margin here, we are still working on pricing and some quote/unquote True Price things in fixed operations where we become more consistent there and we use our tools to help us price our parts and labor there and more effectively and efficiently.

And then, we are creating a really neat relationship between our technicians and our customers. So we have got a lot going on here, the margins are going to move around a little bit but the growth that we think is just going to continue to roll, especially in our high line stores, we have just got a lot of really neat things cooking and I expect those percentages to stay pretty consistent as we move forward.

And our gross margins for customer pay and warranty are basically the same.

Thank you very much, gentlemen.

55% and 54%.

Yes, sir.

John Murphy, Bank of America Merrill Lynch.

Just sort of a follow-up question to what Brett and I think Rick was getting at when you were talking about the guidance for 2014. It sounds like a lot of the costs for the pre-owned store initiative and the customer experience are going to continue into 2014 and probably into 2015.

But as we think about this, obviously this is just not a cost equation, there are going to be some benefits and some revenue and upside to these investments.

And I'm just trying to understand when you think we'll sort of hit the fulcrum point from these things being a bit of a wait and a drag to really being sort of additive and then sort of breaking away maybe two or three years out where the cost is being more than covered by sort of the benefits.

I am just trying to understand if you are thinking about this -- is that a late 2015, 2016 or 2017 event?

I will start, this is Heath. In our models we have got our pre-owned initiative, it starts cash flowing in its third year of operations as we open up another market. But each market the models have them cash flowing in three years, profitability in four years.

And of course on the customer experience side, as Jeff mentioned, once we get that two-year roll out going that market share does exactly what you are saying, will create that additional gross and it actually starts paying off. So that is a two-year process and each pod on the standalone is, again, cash flow in three and profitability in four.

Yes, I mean that covers it, John. I think that gives you a real good idea of where we see it. So 2016, 2017 you start seeing some really nice returns for One Sonic-One Experience, in particular in market share growth, that is the big KPI out of all of this is driving market share. But we will see it earlier on in markets that we roll out.

Right.

And so, you will see little bits and pieces of it and we will share that with you. Once we get Charlotte up and running on these quarterly calls we will come back and say here is our schedule for rolling out but here is how Charlotte is doing. Here is how much share we have taken, here is how much growth we are seeing, and now apply that to the rest of the Company and you come up with some numbers, they are pretty spectacular.

And on top of that we also will be providing reporting separately so you will understand this is how the core new car franchise business of Sonic is doing and this is how the standalone pre-owned business is doing. So we will try to make that as transparent so you can see how well we are doing on both models.

And to make it clear, the Denver market is not going to open until the fourth quarter of this year. So we are going to do some things to begin to market in the market earlier than that, but we will not be open for operation until Q4 of this year.

Okay, that is very helpful. Then just a second question on the location of the first store. Why did you guys pick Denver? Is that because you will have a big luxury in truck mix and it will be sort of higher price points and more CPOs? Or what was the rationale for starting in that specific market?

Well, one, we know the market very well. Two, the demographics fit what we are doing. Three, it is the 15th largest pre-owned market in the country. And the throughput per store, if you really study the market, the volume throughputs per store on the new car franchise is really high.

Our stores there sell a ton of pre-owned cars. CarMax has opened up there and they are doing 300 plus cars in their stores relatively quickly. Their ramp-up period has been short. So there is just a great pre-owned market there and a lot of wear and tear on the cars, it is a quicker trade in. And so all of those things led to that market.

And what we have got -- and we told you this when we first did this -- we have got 15 other markets identified. Let's get one open and then we will start attacking some other ones.

Okay, that is very helpful. Then just a follow-up on new vehicle sales growth that is lagging the market. I understand you have some levers that you can pull if you wanted to play the game on pricing or lowering grosses to juice volume. So I understand that. And that might make sense in the short run.

But as we think out over the next couple of years and think about UIOs around your dealerships. This may have a multiyear impact on your parts and service business. And how are you thinking about that and balancing that in the equation?

Yes, it is going to be significant. The biggest problem we are going to have is the need for more bays. We are talking about that and as we build new facilities we are building for that. For example, we've got a brand-new Audi store in Houston that we just built and we built enough space to accommodate the growth in fixed.

We are building a new BMW store there; we are doing the same thing there. In other words we are overbuilding that space from what we would typically do given the fact that we think what we think our market share is going to be in the markets that we do business in.

So you are spot on, you are thinking right and it is -- that it is a dividend that is going to keep on paying for a long time. That is one of the key success factors or KPIs to this whole strategy.

So even with growth on the new unit volume kind of lagging the total market, you think you actually will have enough UII growth to really drive high parts and service same-store sales growth?

Yes, absolutely. Keep in mind though it was only 2013 where we bounced around a couple of quarters in terms of market share learning how to handle True Price. I mean it is not -- this hasn't been going on for long and literally I need to get the team to learn that strategy.

Literally if we wanted to I could go push a couple of buttons and send our market share skyrocketing right now. But that is not what we want to do. We want to have nice steady growth and get our team focused on the guest experience and not just selling cars from a low price and building value in the brands that we represent. And that is really important in how all this comes together.

So it is worth it to us to instead of growing at 5% or 6% or 5% to grow at 3.5%, it is worth that little bit there to get our team lined up to learn how to sell in this type of environment. The changes that we are bringing to our stores are significant. They are very significant. So we have got to put these processes in and do them in a certain way and do them in a certain order and that is what we have done.

We did the same thing in pre-owned, five, six, seven years ago and you just look at the pre-owned growth that we have had over that period of time and that is our strategy and we have been very successful with it and this is just going to take some time.

And we're going to bounce around a little bit, we are telling you guys that ahead of time, we told you that at the beginning of the year. Margins have really settled down and we are learning how to deal in this environment and the consumer loves it. And that is the big story here. Our guests love it and we don't even have it rolled out yet and they love the pricing strategy.

Okay, that is helpful. And then just lastly, I mean obviously you've got a lot of initiatives going on right now and it seems like they ultimately will have some big payoffs. But it is somewhat of a distraction versus making acquisitions and we are hearing from a lot of other groups that there are some really ripe targets out there and the pace of bidding is going to pick up.

Could you see in 2014 really ramping up your acquisition activity or do you really feel like you have too much going on internally to execute on that? Because it seems like there is a big wave coming here and I just want to make sure you guys aren't missing out on opportunities.

This is Scott. The way that we kind of think about acquisitions in positioning the Company is really to transform into a large specialty retailer of pre-owned vehicles. That is not to say that we wouldn't look at deals.

I wanted to get it out there, yes, we are in the market and are looking at deals all the time. But if you look at our acquisition last year of the Mercedes and BMW dealers in Denver, those are fairly strategic and have turned out to be great deals for us.

As we look at how we allocate our cash, again, we're investing in ourselves in our pre-owned initiative, we are purchasing our real estate, we are buying back stock, again we feel that we are very undervalued, we have $133 million of authorization to purchase stock. And so, we will evaluate deals but it is not our top priority for acquisitions.

Okay, thank you very much, guys.

Ravi Shanker, Morgan Stanley.

This is Vijay in for Ravi. If I could talk about the used business for a second. On a same-store basis your used -- I'm sorry, ASPs were up about 2% while your front-end growth per unit was down 5%. Could you talk a bit about that divergence and what drove that?

Our used car PR was off on a same-store basis was it I don't know, $20 or $30, something of that nature? I am not -- I mean we were very pleased with our used car business in the fourth quarter. We thought our growth was right in line with sort of where we have been all year long. We continue to work on our pricing and our SIMS, but we were very pleased with the growth that we saw and where we are.

Probably if you look at it at the end of the quarter, we ended with a 26-day supply of product. Our team is looking at ramping that inventory level up. I think we are executing at a really high level right now and can afford to have a little higher day supply.

So we are going to -- we're looking to move that days supply up into the 28, 29, 30 day range as we move into the selling season here. And maybe you will see a little higher -- a little higher volume growth, but I think margins will continue to stay where they are.

Okay, got it. Maybe moving into the parts and service for a second. The same-store growth was up pretty nicely at 7% and that was driven primarily by the 18% growth in warranty, although partially dragged down a bit because customer pay grew about three.

Is that a dynamic that you expect to continue in 2014 where it is really driven by warranty? Or is there a point in which you think customer pay will start to inflect and warranty will start to normalize down a bit?

I mean warranty is a shot in the dark, right; you can't ever count on it.

And our customer pay trends have been improving on a same-store basis. So we think as we implement One Sonic-One Experience our market share continues to grow that that trend is going to go up. In particular in the high line business, there are more and more cars that are out there. So on the road.

So we are seeing that trend, we have been asked that by everybody and that trend is certainly coming to truth here. And so we are very pleased with where we are and we think that as we implement our One Sonic-One Experience strategies that that is going to continue to grow, right, so we will have the same attraction to the service drive as we do to our sales core.

All right, that is all for me. Thanks very much.

Scott Stember, Sidoti & Company.

Just a follow-up on the One Sonic-One Experience. Just to clarify you said that that would be rolled out by the end of 2014, correct?

No.

2015.

Oh --.

And, Scott, let's clarify that. We are going to roll out the Charlotte market in 2014. And if all goes well there then we will begin the process of rolling out in 2015. And based on my experience, I expect that to go into the first quarter or second quarter of 2016.

So this is not something that is going to roll out in one year and we've got a lot of work to do between July and December to make that work. But based on past experience and what we have done I think that is kind of the timeline.

So basically Charlotte will be the first group to go in and I guess is there a timeline for that in 2014? Are we talking towards the end of the year, the middle part of the year?

We are going to start in July. We have already put in our CRM tool. So we are going to start in July and depending on how our store goes through the first store we do we will roll out the other stores and hopefully by the end of the year we will have all of that done.

Got you, got you. All right, that is all I have. Thanks a lot.

(Operator Instructions). Bret Jordan, BB&T Capital Markets.

This is actually David Kelly in for Bret. And just a couple questions and really a follow-up to the earlier warranty question. Significant growth in the fourth quarter, up 21.5% or so. I was just wondering if you could provide some color or commentary on the impact of recalls in the fourth quarter and maybe what you are seeing, year to date so far in 2014 as well.

I mean obviously it helped, Lexus, Toyota, BMW are all having -- are giving us opportunities there. And to be honest with you we are still seeing it in January and February, Toyota in particular. Lots of stopped sales on many different lines and which is a bit of a surprise, but it is continuing on.

But it is nothing that we forecast or included in any of our forecasts, that is just not business that you can count on and that is not the business we want to grow. We want to grow our internals through our pre-owned sales and we want to grow customer pay. So those are the things that we are focused on and if our warranty grows that is just gravy for us.

Okay, great. Thank you. And then with the -- just kind of following up on that as well, the Toyota Prius in particular the recalls getting a lot of press over the last couple of days or so. Any impact there as well? Is that a decent piece of the pie or is that such a small drop in the bucket that we won't -- that it won't be quantifiable?

Yes, it is the second comment, it is just not -- there is not enough volume out there and even the Toyota recalls are all very small, not a lot of parts and labor there, real quick turnaround. So it is certainly nothing that is going to even register on the scale.

Okay, great, thanks. And then just one final question more high level touching on the 2014 plan. Just looking at your SAAR outlook, 15.75 million units to 16.25 million units. I know at the low end in particular this seems to be somewhat below what maybe the market is building in right now for 2014.

Is this just a conservative outlook that we are setting up for the earnings guide or is this reflective of something we are seeing in any regional markets?

Well, if you look at what went on in December -- I mean the market did slow down in December. December from a volume perspective was not as robust I think as the industry thought it was going to be. January came along and it is a little slow, and February came along and it is okay, those are probably driven by weather events.

But I don't know if I would call it conservative. It is the same way we forecast the SAAR every year. We are always a little bit I guess a little bit conservative in our viewpoint and we have had a lot of great growth here over the last few years. So I mean some of our competitors have gone out between 16 million units and 16.5 million units I think. So it is not that big of a difference. And any comments?

Well, I can tell you a lot of the economists are blaming the weather, but there are indications in the economy that are a little concerning. I think everyone saw housing and the reports that just came out around housing down 16%. And there is a direct correlation between housing and auto sales.

Auto loans actually decreased in December. So think of growing or slowing a bit, still some growth there but consumer confidence index was down. So there are some warning signs there that we just think it may not be as high as some of the other estimates that came out, and we feel comfortable with that range.

All right, great. I appreciate the color. Thank you.

At this time we have reached the allotted time for questions. I would like to turn the call back over to management for closing remarks.

Great. Thank you, ladies and gentlemen, we appreciate your time and interest in our Company. Have a wonderful day.

Thank you.

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