Sonic Automotive Inc (SAH) 2014 Q1 法說會逐字稿

Good morning, and welcome to the Sonic Automotive first-quarter earnings conference call. (Operator Instructions). As a reminder, ladies and gentlemen, this call is being recorded today, Tuesday, April 22, 2014. Presentation materials which management will be reviewing on the conference call can be accessed on the Company's website at www.SonicAutomotive.com. Also linked to Investor Relations under the Our Company drop-down box under (inaudible) Webcasts & Presentations on the right side of the page.

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

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

Thank you very much. Good morning, everyone. I think that we have some fun and exciting things to talk with you about today.

I want to welcome you to Sonic Automotive's first-quarter 2014 earnings call. I am Scott Smith, the Company's President and Co-Founder. Joining me today on the call are David Smith, the Vice Chairman of the Company; Mr. Heath Byrd, our CFO; Jeff Dyke, our Executive Vice President, Operations; and C.G. Saffer, our Chief Accounting Officer.

I will start the call today with an overview of our strategic initiatives, then I will turn the call over to Heath for a review of our Q1 financial results; followed by Jeff, with a look at our operating performance; we will then have closing comments and open the call for your questions.

With that, let's get this party started, and please turn to slide, strategic focus.

Our strategic focus has been consistent for the last several years: grow our base business; own our real estate; and return capital to shareholders. This strategic focus will continue for the foreseeable future.

As most people who follow our Company are aware, Sonic Automotive is growing its base business through two very unique and bold avenues that will certainly give us a competitive advantage and differentiate Sonic from others in the retail automotive sector who are customer-centric, One Sonic-One Experience and who are pre-owned specialty stores.

In addition, Sonic Automotive is working very closely with our manufacturer partners on open points and we'll evaluate acquisition opportunities continuously.

Let's take a closer look at these strategic initiatives. Next slide, please.

One Sonic-One Experience: simply put, it is an exercise in building a brand, but building a brand that is centered around the customer experience. The objective is to put the power into the customer's hands where they can enjoy the automotive purchasing experience with one associate at one price in one hour. We believe that our experience will be unique in the industry and that it will improve transparency and increase trust. The full version of One Sonic-One Experience will be in beta testing at a pilot store in July 2014. We will not roll out the other stores until we've worked out all the bugs.

If things go according to plan, which often they do not when building new brands, One Sonic-One Experience will be fully implemented in the Charlotte market by the end of 2014. We expect the Company-wide implementation will take approximately 18 months starting in July of 2014. As we gather data related to implementation in the Charlotte market, we plan on sharing this information with you.

There are two basic KPIs that will be good indicators: changes in retail market share that are brand weighted and customer retention rates. If you will turn to the next slide, please.

Our second significant strategic initiative involves our pre-owned specialty stores that will be introduced initially in the Denver market. As many of you are aware, this is a plan we believe has enormous potential. Bear in mind that the largest player in this segment, Carmax, which we very much admire, has approximately a 1% share of the industry -- a 1% share of the industry. That means there is 99% still out there to be had. That leaves an enormous amount of opportunity.

We have zero barriers to entry. We have the culture, the people, the processes, the technology and the determination to capture and realize this opportunity. Imagine what Sonic will look like after we capture 1% share. And we believe that there are opportunities far beyond the 1% share.

We're on schedule to open the Denver market in Q4 this year. We have broken ground on the construction of our facilities. Hiring and training will begin later this quarter, and we are fired up about this as we believe it will bring a whole new level of training and personnel development to the industry.

We have worked with our outside vendor partners in the development of a fun and exciting market introduction of our new concept that we will begin sharing later in Q2 and early Q3. Next slide, please.

We continue to be on track with our property ownership plans. In addition to the pre-owned stores, which we plan on owning all of these properties, we expect to occupy three additional owned new vehicle dealership facilities in 2014 that replace previously leased properties. This puts us on track to own approximately 34% to 35% of our real estate, or about $350 million of our $1 billion portfolio.

So why own our real estate versus leasing? Well, one, cap rates on leases are high. Rates range from 8% to 10% where mortgage rates on 80% LTV run us in the 4% to 6%.

Second, it enables us an easier investment decision when considering a manufacturer partners mandated facility modification requests.

And third, as the mortgage is being repaid and eventually eliminated, we are improving the strength of our balance sheet with hard assets that provide us flexibility and possible sources of liquidity in the future. In addition, at the end of the term, we will own assets with substantial value and we will eliminate the stream of outgoing cash that is required by leasing. Next slide, please.

This brings us to our third strategic focus, returning capital to shareholders. As you can see, we've returned -- we've bought back 377,000 shares, basically in the first quarter. We are ahead of last year's pace of stock repurchases and will continue to purchase shares. We have an unused authorization of share repurchases of approximately $124.1 million.

We also announced today our quarterly dividend of $0.025 per share, an additional mechanism we're using to return capital to shareholders.

With that, I will turn the call over to Heath for a review of the quarter. Heath.

Thank you, Scott, and good morning, everyone.

If you will please turn to slide 10. Q1 revenue was up 2.6%, driven by pre-owned revenue growth of 6.4%; F&I revenue up 6.2%; and fixed revenue up 7.5%. Gross profit was up 5.1% with gross margins up 40 basis points to 15.4%.

SG&A was at 80.2%, including 50 basis points of our pre-owned initiative expense. This resulted in diluted EPS from continued ops of $0.38, which is in line with our internal forecast and our annual guidance. Next slide, please.

As you can see from this slide, the impact of weather on operations reduced our quarterly EPS by $0.02. Expenses related to our pre-owned initiative also had a $0.02 impact. Considering these factors, our adjusted EPS was $0.42, which is flat to last year. Next slide, please.

Total gross was up 5.1%, driven by a 7% increase in used; 5.5% increase in fixed; and a 6.2% increase in F&I.

Next slide, please. SG&A as a percent of gross was 80.2% compared to 78.5% last year. This includes $1.7 million in pre-owned initiative expense. IT and training expenses were also up $1.7 million year over year as we prepare for our One Sonic-One Experience launch in our dealerships in July of this year. Excluding these expenses we were at 79.2%.

Next slide, please. CapEx -- for the quarter we spent $21.6 million, which included $3.3 million for real estate; $9.1 million in facility improvements; $4.5 million in IT; $4.6 million in general maintenance. This spend was offset by two mortgages of $40.4 million or a cash inflow of $18.8 million.

For the year we're estimating a CapEx spend of a total of $193 million; $33 million in real estate; $110 million in facilities; $20 million for business app development related to One Sonic-One Experience and our pre-owned initiative; $10 million in facility upgrades related also to our One Sonic-One Experience; and $20 million in general IT and dealership maintenance. Again, this spend is offset by the two mortgages for a total CapEx of $152.5 million. Next slide, please.

Liquidity: we ended the quarter with $255 million of liquidity, an increase of $34 million over Q4 of 2013. Additional liquidity was provided by mortgages obtained on properties where construction was completed in the prior year. As we complete construction projects we anticipate recapturing portions of the CapEx spend through mortgage financing. This spending and subsequent mortgage financing may not occur in the same periods and in fact in some cases, not even in the same year. So liquidity may fluctuate from period to period based on the flow of funds. Next slide, please.

Debt covenants: we ended the quarter compliant with all of our covenants and we have plenty of room to spare.

And with that, I would now like to turn the call over to Jeff Dyke for an operations review. Jeff.

Thanks, Heath, and good morning, everyone. I am proud to have the opportunity to discuss our first-quarter 2014 operating results.

New-car revenue was up 1% while volume was down 1.8% for the quarter. Our GPU grew $58 per unit to $2,191. This resulted in an increased gross profit of nearly 1% to $66 million for the quarter.

We continued to adjust True Price, which is a key ingredient to our One Sonic-One Experience strategy that Scott talked about earlier. Both market share and gross grew sequentially as we zero in on our pricing methodologies for new cars. What is important for our investment community to note is when combined with One Sonic-One Experience that will begin in July, we expect significant market share gains as well as to continue to improve in our gross per unit, which if you are watching, has made tremendous progress over the last several quarters.

To provide a little color in market share, we outperformed the industry in Mercedes-Benz, Audi, Cadillac, and Honda. We were relatively flat with the industry in Lexus, Toyota, and Ford. And we were behind the industry in BMW and Chevrolet.

Of special note, our recently finished seven-story Audi store in Houston, Texas, which we believe to be one of the largest or the largest Audi facility in the world, also finished as the number-one-volume Audi store in the nation; that is a first ever for that store.

Our [goal] supply -- to the end the quarter was at 61 days, in line with our expectations.

Next slide, please. As we have been saying for years, there is no downside to the pre-owned business. And our associates, proprietary technology, central trade center, central buying system and playbooks keep proving that this space is limitless. Another all-time record quarter for volume, and we look to improve on this performance in Q2. There is simply so much upside to this part of the industry, and we're poised to continue to take advantage of it in both the retail -- Sonic retail stores and with our new upcoming pre-owned concept opening in Denver during the fourth quarter of this year.

As you can see from the slide, our retail revenue was up 6.4% and unit volume was up 4.5%. We increased gross per unit along with related grosses, which combined, grew by $7 million or 8.4% to $90 million, another all-time record.

March was our single-largest volume month in Company history, just under 9,900 units. We believe our current store base is capable of selling more than 15,000 units per month. That is 150 units a store, as we patiently grow our team and its capabilities.

Our [new-to-new] ratio was 0.92 to 1.00. We averaged over nine units per store for the quarter and look to improve on that number in the coming quarters as we will surpass the 100 units per store per month mark.

Our days supply was 29 days, in excellent shape for the level of volume that we are selling. Next slide, please.

While the weather did impact our fixed gross performance for the quarter, which we estimate to be about $2.5 million at the store level, we still had a very respectable fixed-gross quarter. Our team continues to execute our playbooks and with new technologies on the horizon for One Sonic-One Experience, we are poised to expand our fixed performance into the mid- to upper-single digits for years to come.

As you can see from the slide, our fixed gross grew 5.5% for the quarter and just over 2% on a same-store adjusted basis. Again, without the weather in Texas and the East Coast, we think we would have grown the business in the mid-single digits on a same-store basis and the upper-single digits in total.

Customer [paid] gross grew over 5%. And with our pre-owned business continuing its growth, our internal gross grew by almost 7%.

Warranties are up over 5.6%. In light of the recent warranty announcements by several manufacturers, we expect warranties to remain at or above average in the coming quarters.

With this said, I am very proud of our operations team, and I want to thank them from the bottom of my heart for the character they show every day as we build one of America's greatest companies to work and shop as they work to deliver an experience with One-Sonic, one experience that will not be matched in this industry for years to come.

So now I will turn the call back to Scott Smith. Scott.

Great. Thank you, J.D.

To briefly summarize before we open the call up to your questions, I am very pleased with the first quarter and the direction and pace at which we are moving on our strategic initiatives. At the end of Q1 we are ahead of our internal projections for the year. The business environment continues to be favorable to retail automotive.

We will provide performance metrics on One Sonic-One Experience and our pre-owned specialty store performance beginning in the Q4 earnings call.

We are pleased to reaffirm 2014 continued ops EPS guidance of $1.95 to $2.05. Net of our pre-owned specialty retail operations, EPS, a negative $0.14.

I would like to thank all of our associates for their hard work and dedication to bring One Sonic-One Experience and our specialty pre-owned stores to life. This is a very, very exciting time in the Company's history. We're about to embark on a journey that will truly differentiate Sonic Automotive from the rest of the industry. It is an honor and a privilege to lead our great team and I just want to thank you.

With that, we would now like to open the call to your questions.

(Operator Instructions). Rick Nelson, Stephens.

Scott, you are clearly taking a long-term approach to the business. If you could discuss when you think these strategies are going to pull together; the Sonic ones -- we could take them individually. The Sonic-One Experience, for example, when do you see that as accretive to market share and to earnings? And then the used-car business, as well, if you could address that.

Rick, it is Jeff Dyke. One Sonic-One Experience, we start the rollout in the Toyota store here in Charlotte in July. I am hoping that within 60 days, we begin to see the results. We're already doing some pre-rollout testing now, but within 60 days, we begin to see the results that will allow us to move onto the rest of the market. So then I believe you begin to see shared gain and margin gain in the Charlotte market between now and the end of the year. And then it is just how fast can we roll out in 2015, it will probably leak over into the first quarter of 2016, to be honest with you.

So to see a total Company move, we're talking back half of 2016, the beginning of 2017. But in terms of individual markets, which we are going to probably update you on as we move forward, you will begin to hopefully see that by the end of this year. That covers One Sonic-One Experience.

In terms of pre-owned, we are going to attack the Denver market. That is going to start in Q4 of this year. We have got a three-year horizon for each market that takes the market from cash flow negative to cash flow positive in profitability. So I would say anywhere from 24 to 36 months for that project to really gain some momentum and to be delivering at the levels that we expect.

(inaudible)

And as it relates to the pre-owned initiative, as we've indicated before, right now we are modeling cash-flow positive in that third year with profitability in year four.

Okay, thank you for that. You are getting closer to rolling out that freestanding used-car strategy. Are you in a position now to discuss more about it; how it will be different from a Carmax, for example?

We want one more quarter, Rick.

Okay.

We are trying to keep it as tight under the lid as we possibly can.

I would say, Carmax, we again very much admire their -- they are the kings of the industry right now in pre-owned and probably will be for a long period of time.

But I would say that if they are the Walmart of this model I would say that we are somewhere between Target and a Starbucks. It's a completely different feel and different model than what Carmax has.

And if I could ask, Heath, on the expense for the pre-owned, the $0.14 -- you incurred $0.02 in the first quarter. Should we assume that the remaining $0.12 is evenly spread or is that pretty lumpy?

No, it will be lumpy. You're going to see as we bring on more associates in the third and fourth quarter, as well as provide more training in the third and fourth quarter, the expenses will ramp up. But we are right on target for that $0.14 overall. But the second quarter won't be as high as third or fourth.

Okay, thanks. And then finally, if I could ask you about stock buybacks, how that might rank in terms of priority versus the other alternatives. I recognize the used-car rollout is probably going to require some capital.

Yes, Rick, this is Scott. I would say that we recognize that buying back our shares is probably the most popular thing out there among our investors. And we realize that the stock is grossly undervalued; that is why we have been in the market. Between the dividend and the share repurchase we have already returned nearly $10 million to shareholders in the first quarter.

We are very supportive of repurchasing shares. We're watching our cash right now because we do have a significant amount of CapEx in trying to retain some cash for our specialty stores as we launch because they may require a little more capital to move a little more quickly than what we had forecasted.

But I will tell you, I had extensive conversations with our Chairman over the Easter holiday regarding share repurchases. And he understands where we are.

Okay, very good. Thanks and good luck.

Brett Hoselton, KeyBanc.

A couple of questions here. First, just regarding BMW performance, it sounds like -- and BMW overall outperformed the industry. It sounds like for you it has underperformed the industry. And I guess what I am wondering is what do you think drove maybe the underperformance for BMW for yourselves? Is there anything in particular?

No; we have got a store on the East Coast that caused us some issues. And it primarily drove all of the underperformance, and that is about it. Most of our stores actually outperformed the brand, but we had one store that caused us some problems. So that was it.

We typically -- if you go back and look -- we typically outperform with BMW. And that is sort of a one time. I think April and May we have got some tough comps with that store. And then other than that that is behind us for the year.

And then more broadly speaking, just thinking about new vehicle sales in general, the units, how do we think about your performance relative; the industry obviously underperformed a little bit. Is that, do you think, primarily weather related? Or are you trying to get a little bit more gross profit and not worry so much about the volume at this point in time? Obviously, you are looking for some market share gains going forward here, but how do we think about the quarter relative to the industry?

Yes; I mean, look, the weather played a little bit of a role in new car sales, but not really big. I would not call that out as a major hit. But we are working and we have been saying for the last several quarters that we're working on honing in on our True Price -- pricing methodologies.

The Honda brand being down 4% or 5% for the quarter and it played -- it is our largest volume brand. It didn't [help]. We had well out-performed Honda. But overall, we are driving margin and we have been very successful in doing that. And getting our team used to the new pricing environment. And so we are not at all unhappy with where we are. We know exactly where we are at and why we are there.

I guess if I could pick on a brand I would just say that Honda hurt us more than we would like. When you have a brand that does that significant of a percentage of volume and it is down that much, that stings a little bit. But other than that -- it is one -- it is True Price and One Sonic-One Experience and that is just adjusting to all of that.

I might just add, J.D. You have to look at one, brand mix and weight that versus the industry.

And two, we have zero fleet. We don't sell any fleet at all. It is all retail. So when we look at the SAAR numbers, and I haven't been able to find a really good retail number out there, but it's important to take a look at that and take that into consideration as far as performance.

And then as we think about the One Sonic-One Experience and the additional details you plan to provide it sounds like in the fourth quarter, I guess what I am wondering, what are you expecting to provide? It sounds like your focus is market share, customer retention and that sort of thing. Is that the kind of data that you are hoping to provide as you roll out that pilot?

Oh, yes. We're going to provide you market share growth. We will look at it and can provide detail by model line. We've really set up some great measurement tools.

We will also -- don't want to lose focus on the great progress we have made margin-wise, and so we will be able to show you in the marketplace here is where we were margin-wise; here is where we are.

Because we believe this -- we believe that our margins will improve because we're going to provide the consumer something they simply can't get in our industry today. You can't get it.

And so if you think about that, we can provide a shopping experience with one individual. We can do it in a much faster time with little to no paperwork, this is something that nobody else can provide. So the consumer -- there's going to be a benefit there.

And our margins have really begun to stabilize. Even with True Price, our margins have really stabilized. So we will be able to provide you with several different KPIs that will let you know exactly how we are doing and how we're progressing against our targets.

And one key KPI will be -- as Jeff mentioned, that retention rate in the service, and the fixed ops area. We all know that is one of the most profitable parts of the business. And with our new CRM we will be able to really dissect retention rates by segment, by year of vehicle, et cetera.

And so that is one of the things we are excited about; just in running the business, but from the standpoint of being transparent of the performance of One Sonic-One Experience, that will be a KPI that will show each market as we roll it out.

And then finally, can you describe the acquisition environment? What are you seeing as far as deal flow -- better, worse than it was six months ago? Valuations -- better, worse than they were six months ago?

And then, how do we think about the number of deals or amount of revenue or something like that that you might do within a given year? Is it every once in a while $100 million or are you looking to accelerate or decelerate? How do we think about that?

Let me tackle that. This is Scott.

I would say as far as opportunities that are out there, it's pretty robust. There are a lot of great opportunities out there. It is not our top priority. In fact, it is much, much lower on our priority list to do acquisitions right now. I think in years to come once we get our pre-owned specialty stores up and running and they are generating their own free cash flow and such, that we may be more aggressive in the acquisition market. But today it is primarily deals that complement platforms that we have currently existing. And our focus has really been on open points and working with our manufacturer partners there, which has been very good for us.

And so I would not go and model excessive growth. I think $100 million a year in revenues or something like that is -- that's a pretty easy hurdle. But I wouldn't build acquisition growth into your model by anything really significant.

If you want to think about honey holes in growth of how do we grow this business, the base business and what does One Sonic-One Experience do for us and all that, if you look at what Heath mentioned in service retention, if we can bump that by 5%; that is huge. Those are big, big numbers.

If you look at what we would leave our -- our experience would be in F&I with the sales force will be doing -- all of the F&I presentation where people can buy rather than being sold something -- if we can move the needle from where we are now in the $1200 range to $1400, $1500 range and you multiply that across how many vehicles we sell, that is a huge, huge opportunity for us that translates into hundreds of millions of dollars of gross.

I think that when you really look at maximizing the assets that we have where we continue to move on, those honey holes in parts and service, in finance, and increased market share -- we currently have 1% of the new vehicle industry. What happens when we move that up 10 basis points or 20 basis points, or look at once we launch this pre-owned initiative -- and Carmax. You know Carmax, again, we respect them so much. Their market cap is larger than AutoNation, Sonic Automotive and Penske combined. And they have 1% of the industry.

So there is just so much opportunity out there without having to go out and spend tens and hundreds of millions of dollars in goodwill. We are in the luxury retail business and Asian business in a strong, strong way. So we have plenty of access to those deals. So I would just throw that out there (multiple speakers) over.

Thank you very much, gentlemen.

Scott Stember, Sidoti.

Can you maybe talk about -- how the cadence of sales throughout the quarter? And then maybe talk about how the new car sales environment is looking so far for you guys in April?

You know, new car sales were actually pretty strong in January coming off a big December. February slowed down a little bit. The storms did not help. And then March came back with a lot of robust. And then believe it or not, in terms of year-over-year performance, April was stronger than all three of those. So we're very pleased with where we are so far in April.

Okay, and if we just go over the parts and service side, looking at the margin, down on a same-store basis, 110 basis points. Was that directly related to the outperformance in the wholesale parts business?

Partially that. In terms of margin percentage it's also dollars and technologies that we are spending in that particular area; advertising that we are spending in that particular area, and some personnel changes that we have made from an accounting perspective. But that is about it. It is not geared around our wholesale business.

Okay. And maybe you can talk about the warranty being up 0.9%. Were we going up against a tough comparison with a year ago or is there anything else in there?

No; in terms of dollars it is running about the same. We did have a good quarter last year because we had (inaudible) and some other things that happened that drove it; it ended up driving some warranty work for us. But overall, like I said in my notes, in my speaking notes, it's been about flat with where we have been in terms of dollars.

And we actually, based on announcements as you are very well aware of, expect it to continue to either be where it's at or even a little better as we move forward.

Okay. And just to confirm, I missed part of the call in the beginning -- the gross in the new side the last few quarters has been firming up. Would you relate that to success in the true pricing initiative? And (multiple speakers) I'm sorry, go ahead.

That is 100%. You know, the True Price process is helping us grow our PUR. And we expect that. The consumer, if you just listen to the feedback from them, they love it. I mean they really love it. And we haven't even gotten started yet and we're getting great feedback. So there's no question that our margins are growing because of that.

And just to confirm, you are utilizing this strategy in the use side as well, correct?

Yes, we are.

Okay, great. That's all I have. Thank you.

John Murphy, Bank of America Merrill Lynch.

Just a first question on the used-car business and strategy. Obviously, you are focusing on the standalone stores, but also, obviously, you are focusing on increasing your used vehicle sales per store. Yet you are still wholesaling about 7,500 units or wholesaled about 7,500 units in the quarter. How are you making the decision to wholesale those vehicles and maybe not move them around in your system or retail them first? I'm just curious how you think about it. Because it's almost 25% of your -- it would be 25% of your total supply.

Yes; but John, if you compare us to the rest of the world, it is a really low percentage in terms of overall volume. And the way we make that decision is we actually have to push the car. We don't wholesale a lot of cars through the auction. We wholesale to each other from one store to the next, which is internal wholesale. But we do not send a lot of cars to the auction. The only way a car gets out of our system, actually goes to an auction is if it is six months of age; it has gone from one store to the next because we don't allow a third transfer between stores. Or it doesn't run, steer and stock properly; there's a safety-related issue and we get rid of it.

If you just think about it, in order to sell the number of cars we are selling at the days supply that we have, we have to keep as much inventory as we can possibly get our hands on. And there is a reason why if we are sending a car to an auction.

So there's far fewer than 7,500 going to the actual auctions; that was representive of (multiple speakers) the wholesale.

Yes, that is a correct statement. A lot of those cars are wholesaled internally.

That is incredibly helpful.

Then a second question, obviously, you alluded to some lost days on the parts and service business because of the weather. Do you guys have any -- what kind of impact that had on the gross margin in the business? Because it was down year over year. I was just curious if that had any impact on the margin.

Yes, on the gross margin percentage, I don't know the answer to that. I could go back and figure it out and get it to you, but it costs us anywhere around about $2.5 million in gross.

And here is the issue. On the East Coast we have got some big highline stores, which carry a little higher margin percentage. And that would play a role in all that, just from a mix perspective.

We lost a couple of days in Texas and then we lost four days or so, maybe a little bit more; it depends on who is counting, on the East Coast. And so with our store mix over here, some stores are better than margin -- brands are better -- higher margin than others on a natural basis. And so that probably played a little bit of a role in it.

Okay. And then just lastly on SG&A, I think you guys had talked about this in the discussion around SG&A, that if you excluded the pre-owned initiative as well as the One Sonic initiative, SG&A would have been about 79.2%, SG&A as a percent of gross. And that is still up year over year. Is there anything else that is going on in this SG&A where the costs are up for other initiatives that might be bloating that number that would come down over time?

Yes, we have got a couple of things. One thing is, obviously, the centralization. As you know, we're taking our business offices and centralizing that here in Charlotte at the headquarters. So we've got some expense related to that and some overlap in staffing because of that. You are probably looking at, in the first quarter, around $1 million. We have budgeted about $3 million for this year for that initiative. So obviously, once that is fully in place, you're going to have a significant impact in a good way, on SG&A.

Other things, we have got some stores that their net of gross is a little bit off because (technical difficulty) normal management perspective we need to go look at and manage. But other than that, the big drivers are those three big initiatives: pre-owned; One Sonic-One Experience; and centralization of accounting.

Okay. And then just lastly, if we think of the flow of your new vehicle sales into the parts and service base over time, obviously, right now you are making a concerted effort to take grosses and not push new vehicle sales, so your UYOs are not growing massively because your same-store sales on a unit basis are not growing on a year-over-year basis.

Are you seeing still a pretty good capture rate of others sales coming from other dealers in your service base? Because what I am trying to understand, if we go through this One Sonic experience and for some reason you are not able to gain market share, will that have a long-term impact on your parts and service business on the tail? Or are you already in a position where you are underperforming the market a little bit but you still getting the growth in parts and service base because people don't drive as far for the parts and service work, and that's actually really not even having an impact on your parts and service work right now?

John, first of all, we could push a button and grow our share tomorrow. It's not hard to do. And our share in terms of units, it's not that far off. So we're keeping a real close eye on it. We know the brands that are back a little bit. And so we are not seeing any profound impact from lack of new car sales in our service drives. Quite to the contrary, our service business continues to grow and grow nicely. And we are seeing that even into the month of April.

And long term, One Sonic-One Experience -- if we don't grow share, we won't roll One Sonic-One Experience out. We are 100% confident that we're going to have share growth which is going to help us fill the lanes.

But also, because of One Sonic-One Experience on the service side, on the Fixed Operations side of the business, we expect to take share in fixed operations and to provide the consumer with something that they can't get in the service lane at other dealerships, as well.

And what will be fun for us is when we start advertising it. When we start really daring the consumer to compare us to our competition -- can they do this? Can they offer this; and the answer is going to be no, and which is going to have our competition scrambling to figure out what to do.

There has been five or six years worth of -- hell, you have been on this call with us for five or six years. Think about all the calls we have had and all of this conversation that we have had. If we don't gain share and maintain margin and gain share both on the new-car side, the pre-owned side and fixed operations, then this would be a total -- we would stop it. But we don't see that happening at all. As a matter of fact, we are obviously very excited about where we stand today and the roll out over the next 18 months.

Great. We are looking forward to it. Thank you very much.

Bret Jordan, BB&T Capital Management.

A question sort of follow-up; it sounds like you might have just answered it. But the negative weather impact you saw last quarter, are you seeing any positive impact in the current quarter on either customer pay our wholesale parts as failure parts demand may have been driven up in that event?

It is a good question. We might be seeing a little bit of it from a new car volume perspective. We saw some in March obviously and carrying over into April.

I don't know that we get that back in service. Our service business was real solid in March; so was the parts business, the wholesale parts business. And it is really good in April. Maybe you could say that.

The problem is that it happened so long ago that it seems like most guests, if they had had an issue with a vehicle would have gotten that done already. So it's not something when you have a problem with a car that you typically put off. And so I don't know, our business is certainly solid, very solid in April.

Okay.

And I think Easter weakened, Good Friday, we had nearly 400 more appraisals than Good Friday last year.

Yes, we did. We appraised 450 more appraisals year over year on Good Friday, which was a pleasant surprise, right, and then had a nice volume weekend to go along with it.

You've had sort of comparable promotions year over year, too? You didn't run a -- there was no special being run this year that would offset that?

No, probably fewer. To be honest with you, we are waiting for a few of those special promotions from a few of our manufacturer partners to come along. But certainly fewer. But we appraised a heck of a lot more cars.

On the used vehicle initiative, as we look at it in the fixed ops -- and I think I asked this question last quarter -- but as you are a little closer to it, do you see the service mix on a per-box basis being materially different because you are not going to be doing a warranty and it might be harder to keep some of these brand -- the customers coming back for service? Are you going to offset service with more F&I focus? Or is the box just going to be somewhat different economics?

We didn't build in our forecast a huge parts and service business. But secretly between me and you, I think that was a mistake. Because I think that when we reveal what we're doing in the marketplace and you see the strategy, you're going to say, oh, you guys have way, way under-forecasted fixed operations. I think it will be a much bigger fixed-operations business than what a Carmax would do in their model.

They have got a lot of internal business that they do, but customers coming back to their facility is not as big a percentage of their model I think as it is going to be of ours, based on the way we are laying out our business model. So -- and we will -- on the next call, the horse will be outside the barn. We will start talking about it and tell you the entire strategy and what it is going to look like.

Okay. And I guess as we get closer and closer to Denver, should we be thinking about another new geography, another market for 2015? Or are we going to get Denver up and rolling into that three-year time horizon you laid out before you begin to roll other markets?

We are not going to wait three years, no. We are already thinking about the next market. We have got four or five identified. We actually have seven -- many more than that identified. But we are going to perfect the model before we start buying property in the next market.

Okay. I thank you.

And I would say that -- you have so many opportunities outside of Denver right up and down the front range right there that would be natural expansion that may go on simultaneously in expanding into our next market there.

(Operator Instructions) Patrick Archambault, Goldman Sachs.

Two questions I had is -- I know you guys have probably said this, but in terms of True Price, how far has that rolled out in terms of the percentage of your overall footprint?

100%.

Okay, so we are there.

We have been there.

For how many quarters have you been --?

A year.

Okay, so True Price -- so the year-on-your comps -- right. I guess what I'm trying to get at is when I look at your used vehicle comps -- your used vehicle gross margins, excuse me, and your new margins, as well, both of those came in nicely. And to a previous question, in particular for new that stabilized after having gone down for a while. I'm just trying to separate like how much of this is True Price, which has now obviously been fully implemented? And how much of it is other things, either better inventory acquisition costs on the used side; or maybe more discipline by some of the OEMs on the import side; some of the other things we've heard from some of your other competitors?

On the preowned side we have probably been True Price for five, six, seven years, ever since I got here. We have been negotiating less than $500 a car for five or six years now.

So margin growth that we are seeing on the pre-owned side, margins are always better in the first quarter than they are in any other quarter because you buy a lot of good inventory coming out of November, December. In January it is a great -- it is seasonal, it's a great time to buy and you have strong margins (inaudible). We expect that preowned margins in the second quarter and the third quarter as the summer selling season heats up may contract a little bit or be flat, somewhere in that ballpark. But on the new car side, our whole True Price strategy is definitely having an impact on our business.

Now, the other thing that happens is, margin mix plays a significant role. And if you listened earlier, Honda is down. And so Honda in terms of our overall volume mix is down, so that's going to bring margin down a little bit, as well. But True Price is stabilizing what we are negotiating on a car. So you really don't have a customer coming in and negotiating $2,000 and $3,000 on a car anymore, which takes up two hours or 1.5 hours. We have gotten rid of all of that.

And it is just teaching the culture how to deal with that process. And that can erode margin at time;s it can erode volume at times but we're seeing it stabilize. We actually grew share and grew margin in Q1. And I expect to see that to happen again in Q2, in or around that same kind of area.

And then as we begin to roll out One Sonic-One Experience, then I am expecting as we start advertising and marketing our brand and what it is all about that we're going to gain substantial share and either hold onto and/or grow our margins a bit more.

Okay. Yes, I suppose if it has been rolled out for a year, I suppose I would think that you have the benefits already in the comps. But it sounds like even though the tool has been around, people are using it better?

Yes, but not really, because we have had -- for example, True Price has been in our Honda stores for almost three years now. When we first rolled it out in the Honda stores we sort of caught everybody by surprise, and our market share was incredible. We were selling a ton of Hondas. And then as our competition began to wake up and start making adjustments to their pricing, or start copying our model, then things began to level out a little bit. So we went through this huge gain in share when we first rolled it out, to sort of that leveling off. Our competition started to undercut us.

And now we just sort of stabilized our pricing. We are really studying the elasticity; how high can we go? Where does the margin come in at? And we have had months where we went a little too high and margins were nice but the volume was too low, and we had to come back the next month and lower our pricing.

But the point here is that we can do that. We can push buttons and begin to make that happen. And we are becoming much more sophisticated at it as our pricing tools come to life. So I would tell you in another six months the comps are going to be really fair and stabilized.

And the true value and benefits of True Price will be -- you will see that once you have all the components of One Sonic-One Experience in place at each store and can actually brand it. We need to let the market know we are different, and that is when you're going to see all of this come tgether. And that starts in July of this year.

Okay, helpful color. Thanks, guys.

There are no further questions at this time. I would now like to turn the call back over to Scott Smith for any closing remarks.

Great, thank you, Melissa.

Thank you, everyone, for joining us on the call today. We are very, very excited about the future for the Company and we hope that you are, too. Have a wonderful day. Thank you.

This concludes the Sonic Automotive first-quarter conference call. You may now disconnect.