Sonic Automotive Inc (SAH) 2014 Q2 法說會逐字稿

Good morning and welcome to the Sonic Automotive second-quarter earnings conference call. (Operator Instructions).

As a reminder, ladies and gentlemen, this call is being recorded today, Tuesday, July 22, 2014. Presentation materials which management will be reviewing on the conference call can be accessed on our Company's website at www.sonicautomotive.com by clicking on the for investors tab and choosing webcast and presentations on the left side of the monitor.

At this time I would like to refer to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this conference call management may discuss financial projections, information or expectations about the Company's products or 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. David Smith, Vice Chairman of Sonic Automotive. Mr. Smith, you may begin your conference.

Thank you. Good morning and welcome to Sonic Automotive's second-quarter 2014 earnings call.

I am David Smith, the Company's Vice Chairman. Joining me on the call today are Heath Byrd, our CFO; Jeff Dyke, our Executive Vice President of Operations; and CG Saffer, our Chief Accounting Officer.

I will start today's call with an update on strategic initiatives. I will then turn it over to Heath for a review of our Q2 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, please turn to slide labeled strategic focus. Our strategic focus remains the same, grow our base business, own our real estate and return capital to shareholders. Our growth strategy is a three-pronged approach that includes growing the current base business by implementing our brand of One Sonic-One Experience, grow our new car franchise locations by acquisitions as well as working with our manufacturer partners on potential open point opportunities and grow our pre-owned business by developing a national presence as a standalone pre-owned retailer.

Before we go over the second-quarter performance I would like to give you a quick update on the progress we have made on these initiatives. Next slide, please.

One Sonic-One Experience. As a reminder, One Sonic-One Experience's 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 and in one hour. We believe that our experience will be unique in the industry and it will improve transparency and increase trust, which will result in greater market share, higher customer retention and increased profitability.

A full version of One Sonic-One Experience is now in beta testing at a pilot store. One Sonic-One Experience will be fully implemented in the Charlotte market by the end of 2014.

We expect that the company-wide implementation will take approximately 18 months after we have perfected the Charlotte market. Jeff Dyke will give you more details on this in a moment.

Next slide, please. Pre-owned initiative update. We are still on schedule to open the Denver market in October of 2014.

We have broken ground on the construction of our facilities. Hiring and training has begun and market and branding efforts will begin in Q3.

Next slide, please. Own our properties. This strategy has not changed and as you can see we are on track to own 45% of our real estate by 2017.

Also by 2017 we will have added about $450 million in real estate assets to our balance sheet.

Next slide, please. This brings us to our third strategic focus, returning capital to shareholders.

We will continue to purchase shares dependent on market conditions. We have unused authorization to repurchase shares of approximately $121.4 million.

We also announced today our quarterly dividend of $0.025 per share, an additional mechanism we are using to return capital to shareholders. With that I will pass it over to Heath for a review of the quarter. Heath?

Thank you, David. Good morning, everyone. If you will please turn to slide 10.

For Q2 revenue was up 6.8% driven by pre-owned revenue growth of 12%, new retail growth of 7%, F&I revenue up 10.9% and fixed revenue up 7.2%. Gross profit was up 7.1% with gross margin up 14.7%.

Excluding one-time items SG&A was at 79.2%. This includes 90 basis points of pre-owned initiative expense, 50 basis points related to One Sonic-One Experience and 10 basis points related to our centralization of accounting.

Adjusted diluted EPS from continued ops was at $0.44, which is in line with our annual guidance.

Next slide, please. EPS adjustments, as you can see from this slide, second-quarter EPS was impacted by an $0.08 benefit from the sale of two franchises offset partially by hail damage and legal settlement cost for a net benefit of $0.07.

Next slide, please. This slide illustrates the impact of the EPS related to our ongoing strategic initiatives. For the quarter our pre-owned initiative expense was $3.2 million; One Sonic-One Experience, $1.89; centralization of accounting $300,000 for a net impact to EPS of a little over $0.06.

Next slide, please. Total gross is up 7.1% driven by a 10.9% increase in new retail where we achieved 7.2% increase in GPU, a 5.8% increase in fixed and a 10.9% increase in F&I.

Next slide. Adjusted SG&A as a percent of gross was at 79.2% compared to 76.6% last year. Significant variances are in the areas of comp and other and are associated with our strategic initiatives as illustrated on the next slide.

Next slide. As I indicated, this slide illustrates the impact of SG&A related to our ongoing initiatives. As we talked about earlier, our pre-owned initiative expense was 90 basis points, One Sonic-One Experience was 50 basis points and centralization was 10 basis points for a total impact of 150 basis points, which gets us to 77.7% SG&A as a percent of gross.

Next slide. Strategic initiative spend year to date in estimated full-year 2014. For pre-owned, $5 million year to date, $12 million estimated for the full year; One Sonic-One Experience $3.6 million year to date, $7 million full year; centralization of accounting $600,000 year to date, $3 million for the full year estimated.

Next slide, please. CapEx for the quarter, we spent $27 million, which included $6.4 million for real estate, $11.6 million in facility improvements, $5.6 million in IT and $3.4 million in general maintenance. For the year we are estimating a CapEx spend of $175 million, $31 million in real estate, $94 million in facilities, $20 million for business application development related to One Sonic-One Experience and our pre-owned initiative, $10 million in facility upgrades related to One Sonic-One Experience and $20 million in general IT and dealership maintenance. This spend is offset by two mortgages of $40.4 million for a total CapEx of $135 million for the year.

Next slide, liquidity. We ended the quarter with plenty of liquidity at $276 million, an increase of $55 million over Q4 2013 amounts.

Next slide, debt covenants. As you can see, we are currently compliant with all of our covenants and we have plenty of room to spare.

And with that I would like to turn the call over to Jeff Dyke for an operational review. Jeff?

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

As you can see on the slide new car revenue was up 7% while volume was up 3.4% for the quarter. Our gross profit per unit grew $143 to $2,119. This resulted in increased gross profit of nearly 11% to $74 million for the quarter.

We are enjoying steady growth in new car gross as a result of our True Price strategy and have proven that over the last several quarters. Our next step is to begin rolling out our new car centralized pricing methodologies driven by our proprietary SIMS system along with centralized new car ordering.

This began at our Toyota store in Charlotte effective July 1, and very early returns have our share up 240 basis points with unit growth tracking up 21.5%. Again this is very early in the process but wanted you to have a flavor for what is going on in the store. We are still selling out of our old facility but moving into our updated facility including technology in September.

I personally worked a desk last Saturday and can confirm our systems, which are still being tested in use by our management, were working fantastic. I was very delighted with them.

We are delivering cars in less than an hour. We averaged, for the day, about an hour and a half but more due to detail delivery than our system and are working on solutions for that issue at this location.

As we have been stating for a few years now, we will offer an experience in technology at this location and others that cannot be replicated by our competition in any timely manner and are happy to keep you updated as our progress continues with this door and others in the Charlotte market as we begin our rollout. Our day supply to end the quarter was 57 days in line with our expectations.

Next slide, please, titled used vehicle retail. 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 the space is limitless.

We have another all-time record quarter for volume. There is simply so much upside to this part of the industry and we are poised to continue to take advantage of it in both the 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 12% and unit volume was up 7.2%. We increased used related grosses, which grew by $9 million, or 8.3% to $106 million, another all-time record.

May was our single largest volume month in Company history, just under 10,500 units sold. We believe our current store base is capable of selling more than 15,000 units per month; that's an average of about 150 per store as we patiently grow our team and its capabilities.

Our used-to-new ratio was 0.82 to 1. We averaged 93 units per store for the quarter including 100 units per store in the month of May for the first time ever. We look to improve on that number in the coming quarters as we work to surpass the 100 unit per store per month mark on a quarterly basis.

Very proud to say our day supply was 27 days and in excellent shape for the level of volume that we are selling.

Next slide, please, titled fixed ops. As you can see from the slide, our fixed gross grew 5.8% for the quarter and just under 3% on a same-store adjusted basis.

Customer pay gross grew almost 6% and with our pre-owned business continuing its growth, our internal growth grew by over 7%. Warranty was down 2.7% due to recall activity in prior-year quarter. But in light of the recent warranty announcements by several manufacturers we expect warranty to remain at or above average in the coming quarters.

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

Thank you, Jeff. We are very pleased with the second quarter and direction and pace at which we are moving on our strategic initiatives.

At the end of Q2 we were on track with our internal projections for the year. We would like to thank our customers for choosing Sonic Automotive. And again we would also like to also thank all of our associates for their hard work and dedication to bringing One Sonic-One Experience and our specialty pre-owned stores to life.

This is a very exciting time in our Company's history and we are 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 help lead our great team.

Thank you very much. And with that we would like to now open the call to your questions.

(Operator Instructions). Rick Nelson, Stephens.

Thanks, good morning. I'd like to ask you on the new car side, the comps lagged. Some of your peers have reported and some of the market data that has come across, if you could discuss the driver there and what you see going forward?

It sounds like the Sonic-One Experience is leading to some better numbers in the Charlotte market?

Yes, it is, Rick. We have not been overly aggressive on new car pricing yet while we are building our SIMS system. I have been very careful there.

As you can see we have an 11% increase in our new car gross year over year, which is really nice and probably leading the groups or close to the top of that. I am satisfied with our PUR. We grew on a total store basis at 3.4%, so I think the rest of the group is running at 6% or 7%.

And I'm not too terribly concerned about it. We have got so much going on with our pricing tool that I'm been very very careful.

We started at the Toyota store in July, as I said earlier, ordering all of our cars and pricing all of our cars and immediately got share lift. And we have moved up, like I said, 240 basis points in share.

Those are numbers from before the weekend. It is going to grow higher than that after the weekend and yesterday. We are monitoring it very closely.

Our grosses are down a little bit in the store. But certainly the share growth is enough to offset it and I'm just being really really careful about where we are.

I could push a button tomorrow and make our share go up. But I'm trying to balance the elasticity of our pricing and the gross growth that we are getting in new and just being very cautious.

And so we're learning a lot from our pricing methodologies. And I suspect that as we move past the first quarter of next year that we will become a lot more aggressive as we've got a little more time under our belt with our new car pricing tool.

And if you go back three or four years, we saw this exact same thing with pre-owned. And we are seeing it now with new. We are just being overly cautious.

I don't want to go out and start plugging our pricing into all the stores. There is a training mechanism that goes along with that and so not too terribly concerned. As long as I've got the gross growing we are going to be in fine shape.

Thanks for that, Jeff. I'd like to ask you about capital allocation also. How you rank the alternatives at this time including buybacks?

I think our first rank is going to have to be grow the base business. To us there is two ways to grow organically and that is the big initiatives that we are working on, One Sonic-One Experience and our pre-owned initiative.

And so with those we want to have dry powder for proper allocation to support both of those initiatives. And then after that we are always in the market from a buyback perspective and in the right market conditions we will be buying back. And again once the management team believes it's the best use of capital after we have funded those initiatives, then buyback becomes a priority.

Thanks. Also, curious on the full-year guide if that incorporates the gain that you had this quarter? Is it based on the $0.44, or the $0.50 or $0.51 for the quarter?

A couple of things on the guidance. Right now we are within our guidance. It's the lower to mid part of our guidance at this point.

We've got some initiatives in the backend and as you know our fourth quarter is a strong because of our portfolio that that can easily move up. But we are definitely within our $1.95 to $2.05 and that does not include the gain from the disposal. It is $0.44 for Q2.

Got you. Thanks a lot and good luck.

Scott Stember, Sidoti & Company.

Good morning. Could you maybe just touch base on the new car pricing tool again? And talk about how that will interface with One Sonic-One going forward just so we could clarify that a little bit?

Yes, sure. The tool works in concert with our True Price pricing strategy and our whole One Sonic-One Experience methodology. So the idea there is to not average 3 or 3.5 pencils with a salesman going back and forth to the desk trying to negotiate a price.

So our pricing tool, which we are happy to have you come down and look through, really uses algorithms to determine on a ZIP Code basis how other dealers -- what they are selling cars for, not what they are pricing cars for but what the actual transaction prices are for. And then allows us to price accordingly on a minute-by-minute basis if we want to.

We are not doing that yet. We are really pricing on a daily basis. But we've got some new technology that we are getting ready to add to our vehicles that will allow us to change the price on a dime if that's what we want to do without having to change a window sticker.

So that's how it works in with One Sonic-One Experience. And the whole idea here is, Scott, so that we can reduce the amount of time -- and I spent a lot of time in the store, obviously, as I said in my comments on Saturday, and the feedback from the customers was just amazing.

We were getting deals -- we literally penciled a deal, and it was a cash buyer, but we penciled a deal with products in less than a minute. And that is a system and the algorithms all working together. And you can imagine when the store gets all trained up and the advertising and marketing starts what is going to happen.

We have had great returns early on and I don't even have a great inventory in the store yet. So that's kind of how it all works together. And you are certainly welcome to come visit us and we can take you through the details of that and take you through the store and show you some of the great things that are happening.

I will take you guys up on that, definitely. And that 240 basis points, that was share gains within that market that you had referred to?

So far in the Charlotte market for Toyota based on RDRs, so far through Friday of last week, that's where we stood. And that represented a 21.5% increase in terms of volume pace year over year. And we expect, to be quite honest with you, that's not good enough.

We expect way more than that. We expect market leadership in this market where it's selling 140 to 150 new cars, should so close to 230 new cars in July with a little bit of the technology running, not in our new location and a really hampered inventory. But that will all begin to change over the next six to eight weeks and we expect the store to sell 300 to 400 cars a month and be a market leader.

Okay, got you. Just going to the parts and service again. The 6% gets us with what we were looking for on the customer pay side.

But the warranty being down 2%, I know you guys are going up against a difficult comparison. Was there anything else in there just since some of your competitors already have reported pretty stout results in that subsegment?

No. That's about it. I think when you look, Scott, at our fixed operations business, we have a very mature per store fixed operations growth business -- I mean gross.

So if you compare where Sonic is and the amount of gross that we generate on a per store basis, it's at the upper end if not the top in our sector. So sometimes the percentages aren't as great but we are very happy with where we are with fixed -- warranty -- we had a big warranty quarter last year in the second quarter.

So we also, our wholesale parts business, our mix changed a little bit so margins were down a little. We were up probably $5 million in revenue and wholesale parts for the quarter as well. So that was about a 12% to 14% increase and that certainly played a role in the margin percentage.

Okay. And just one more quick question. If you look into July, can you maybe just give some high-level commentary on what you see so far?

Yes. New car volume, obviously with the volume pressure we have been a little more aggressive on our pricing. So new car volume right now is up a little bit ahead of our pace that we've been running.

And I would say that margins are not quite as stout as they were but still certainly within reason. Our used car business is solid as it always is. We will have a decent used car quarter and so is fixed.

Actually, our fixed business looks pretty good in July. So I was doing the math yesterday on July and we are right in line with where we thought we would be for the month, as we are in line with where we thought we would be for the first six months of the year.

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

Patrick Archambault, Goldman Sachs.

Yes, thank you. Good morning. I guess maybe two questions.

First, used came in -- the used-to-new ratio came in pretty good, sort of up for the second, actually probably even the third or the fourth quarter in a row. So can you give us a little bit of the landscape there? Is that something that is loosening up?

Because off-lease vehicles are providing more inventory, or just give us a little bit of the lay of the land of how you see that market playing out in the second half, if you can continue to see that ratio go up. That would be my first question and then I will have a follow-up, actually.

Yes, Patrick, I started off the second quarter pushing our team -- we've been selling 9,500 cars a month with about 7,800 cars online for 24 months now. It's been the same business every month, very consistent.

And I started in the second quarter pressing our team to add more inventory. So when you have the buying system in the trade center like we do adding inventory is not a problem, there's plenty of inventory out there to get.

We moved our inventory up as high as, God, at one point we had over 11,000 cars on the ground and we moved our sales way up. So we are looking at because we really have a good handle on inventory management, if we can sell 10,000 cars on -- basically online we've got a 23-, 24-day supply, I'm going to push our team the back half of this year to carry more inventory.

And we will see -- they are not going to buy a bunch of inventory in August, that's just the wrong time. But as we move into September, October, November, we are going to push our inventory up and see if we can't push our volume into the 11,000, maybe 11,500 a month range.

I know it's capable because we did it in May. I really pressed them in May. We grew our inventory, took in a lot of trades.

We have an easy way to just really decide we're going to take in more trades because we are trading everything out of a central location. So we put a little more money in cars and grew our business faster. So we're going to see sort of what happens.

To answer your question in the back half of the year I am hoping to move our inventory levels up a bit and challenge our team to break the 10,000 mark and moving to the 11,000 mark on a consistent basis.

And I guess as you acquire that inventory, is a larger proportion of it coming from off-lease or are you still having to turn to the auction market for a lot of it?

We are working with our auction partners to -- Manheim specifically -- to pinpoint cars before they even get to the auction so we can fulfill our needs. And so we are buying cars through the auction. We did increase our purchase units in the second quarter, which put a little compression -- about $100 a car -- on our margins.

But it's not off-lease although I think we have an opportunity there. More buying. And we just traded for more cars.

We have the ability to really just increase our trade ratio when we want to and put a little bit more money in cars and that's what we did. So from the auction and from trades.

Got it. And then just on the used side, the margins on new vehicle -- they held for the first time in a while in Q1 and actually were a little bit above in Q2. I guess just based on the commentary, is that maybe a little bit of a function that you guys oversteered on price and there was some sort of volume implication of that, or do you feel like you've calibrated it right?

Because I guess you seem to suggest in some of your commentary that in July you might have backed off on the margin side a little bit. So maybe just additional color on how that plays out?

Yes, you know -- everybody when the growth is at 7%, we are at 3.4%, there's obviously a little pressure there to grow your volume. So I am getting a little more aggressive in July and we are seeing that as a result. But if it is, it is not what I would call over steering.

It's we made the determination to be very consistent in our new car PBR this year. And I think we are at $2,119 car, which I am very satisfied with on the front.

We had an 11% growth in gross on new car, which I think is very satisfactory. And as we start rolling out One Sonic-One Experience and the competition decides they are going to try to undercut us by $500 and pull all that baloney, we are going to deal with that. And so it might put a little pressure on the margins as we move forward.

But there is no question that we are right where we thought we would be. New car volume wise we are right where we thought we would be gross wise and we are dictating that from a pricing perspective here at corporate.

Could we have been more aggressive? Absolutely.

But we've got so much going on in our pricing tool I am trying very hard to have a consistency there before we just open the floodgates on pricing. So we have been conservative, I guess is a good word.

Just on the back of that, as you think about the second half if you are a little bit less conservative, which it sounds like you are sort of open to being, is that gap between the 3.5% and the 7% market growth, is that something that you expect to narrow in the back half?

I do but I'm going to watch my gross real closely because the gross dollars are what we take to the bank. And so I'm just going to -- there's no question that the margins have come down in the Toyota store since we started. But our volume is going to be up over 100 new cars just this month alone year over year.

So that makes up -- we hit different incentive levels and there's all kinds of other issues that come into play when that happens. And so as long as our inventory is in good shape we are going to -- at Toyota we are going to open the floodgates and be a lot more aggressive and as we roll out more stores we will do that.

Right now we have a plan to roll out the rest of the stores in Charlotte by the end of the year with a very aggressive advertising and marketing campaign to go along with it starting in October and November and December. And then as the process proves out the way we think it's going to, we will be really hyper aggressive as we move forward into next year. So, yes, we are a little more open-minded about being a little more aggressive on the price sensitivity piece.

Okay, terrific. Thanks a lot, guys.

John Murphy, Bank of America.

Good morning, guys. First question on slide 14 and 15, I may have missed something on this because I just had to hop off the call for a second there. But you guys go through on slide 15 talking about the one-time initiatives, or the initiatives here that are impacting SG&A yet we are still looking at an SG&A to gross of 77.7%, you guys did 76.6% last year.

So there's still a negative 110 basis points that slide in from increased cost. I'm just trying to understand what that is other than the initiatives.

I can tell you part of that is there's a lot of operational decisions that were made it's difficult to carve out and identify specifically this is One Sonic-One Experience, or this is Tree Trunk. For example we increased our regional management to prepare for all of these changes coming for One Sonic-One Experience, so that's not included.

I didn't carve that out as part of our initiative spend because it's not directly in that area. But you've got a lot of moving parts in our retail business that are really supporting both of these initiatives but we didn't carve them out. So that's part of the 110 basis points.

Yes, and John, I would just get it in -- all of us in our minds, our SG&A these next few quarters is going to be in this ballpark because we are ramping up. It's all in our projections. It's where we thought we would be.

But we've come a long way and we are now ready to launch. And so that's increased headcounts, increased training. And so the SG&A is just going to be where it is here for a little bit until we start selling cars and generating gross at the Sonic pre-owned project and then as One Sonic-One Experience starts hitting the road.

So we are certainly within the guidance range that we stated at the beginning of the year. And we try to do a very good job of getting you guys this is where we're going to be. Sometimes it doesn't match up to the models that you all put together but it's certainly within in line of what we thought we would do and Heath is exactly right, it's added personnel to support these projects.

Just for additional color, we modeled at the beginning of the year to be 78% and we have all expectation to be at 78% and that includes all of these initiatives, for full year.

Okay. That's helpful. And when we think about the implementation here of all these initiatives, a lot of it is focused on centralization of pricing and cost.

I'm just curious as you look through this, are you getting any pushback from your general managers at your stores, or are they all on board, or have you had any problems with potentially with attrition because of this? Because some of them like to operate their stores the way they operate them and are not necessarily on board with all of these initiatives?

That's what we went through last year and the year before. And we have had nothing but great support here the first six months of the year.

Our stores, our regions are all begging us to figure out how to move faster with our One Sonic-One Experience rollout. The technology is really slick and again I would like you and everybody else to come look at it.

But no. As far as this year goes, no, we have had nothing but please come, move faster. No question in years past that has been a true theme and that has been part of -- we've been talking in the years past about it has been a tough row to hoe to get all the culture right and to get our processes right so that we get people on board that are supportive of where we are headed.

The industry is going to change. We are just going to change a little bit ahead of it. And we've got a team in place that I've got 110% confidence in in terms of their support for where we are headed.

As a matter of fact many of them participated in developing all of this. So we are -- we have a lot of support and that is not something that is worrisome at this point.

Okay. Then just a last question, or sort of a two-part question on capital allocation and shareholder value. Given where your stock is right now I'm sure you're not real happy with that.

But to an outside investor I think it's pretty interesting. Would you guys entertain a bid for the entire Company in the 20% to 30% range higher than where the stock is trading right now?

Absolutely not.

Okay. So than conversely, would you consider being much more aggressive on your buyback and potentially taking on leverage to buyback a lot more of the Company? Because if you won't consider a bid that's 20% to 30% higher, you must think the stock is screaming cheap right now?

Again, we evaluate it regularly. We have actually looked on taking more leverage to support that kind of program. And once the management believes it's the best use of our cash and our capital, we will be in the market.

John, you are taking us down the Yellow Brick Road. And certainly we understand your question and certainly know that we will act accordingly when the opportunities are right.

Okay, thank you very much.

Ravi Shanker, Morgan Stanley.

Good morning this is Yejay Ying in for Ravi Shanker. I had a couple of questions, one on new and one on used.

On the new side we recently heard of one other public dealer testing something similar to True Pricing at one of its stores. So just wondering outside the public dealer group are you seeing any traction in the industry for no haggle pricing and do you see the other public dealers eventually following your lead here?

No. Here's the story. We do see -- we are getting a lot of questions from our competition asking us all kinds of things, how things are going, even asking about buying our inventory tools.

So the answer is yes. There's certainly other dealers out there that are in a wait-and-see mood to see what happens with Sonic as far as this goes and others who are trying.

But it is just a matter of time. The consumer is going to have applications. We are going to give it to them.

The consumer is going to have applications that tell them what the prices are on cars. And the dickering, the three pencils back and forth and the dickering on it, this is something that is going to go away. People may not want to hear that today and they may think that we are crazy over here at Sonic, but the pricing issue is not going to be the reason people are going to buy cars in the future.

It's going to be the experience that you provide. And hopefully pricing gets a lot more stable as we move forward and lets margins grow instead of doing some of the silly things that are done in our industry today.

There's no question that at some point in time the industry is going to make a step that way. Again sometimes people are first at doing things and sometimes they wait until the end. And we are first and obviously there's a lot of attention being put towards it.

Got it. And on the used side you guys did where you were with volumes but a GPU decline, perhaps this is in direct contrast to what the other dealers do so far. And I was just wondering again the other dealer pointed out that new incentives, particularly in May and June, hurt their used sales. So wondering if you guys saw something similar and would that explain your used and GPU performance?

No, not at all. We made the decision to become more aggressive on our pricing and our volume. In the second quarter we did.

As a result we had a record gross and gross-related month. We did $106 million in that category and it was a record quarter for us. We are going to do more of it.

I can't speak to our competition on used. Most of our competition is very very traditional at what they do with used. They have a certain used GPU they want to be at and they are willing to take the volume that goes with it.

We don't have any barriers to entry there. Whether our GPU's at $1,000, or at $1,400, we don't pay a whole lot of attention to the GPU. We pay a whole lot of attention to the gross and the related gross that goes with that.

So I'd rather generate $106 million for us at $1,100 or $1,200 used car GPU, than $90 million or $95 million in gross at $1,700 a copy GPU. And our systems tell us where to price.

We plug-in where we want to be. Our systems give a pricing methodology and they are mature enough now to where that's where we end up selling.

And like I said earlier, to I believe it was Rick, or Scott's question, we're going to get more aggressive in terms of our pre-owned volume in the coming quarters. And we will see how that works for us.

That's good color. Thanks so much.

Bill Armstrong, CL King & Associates.

Good morning, guys. Getting back to the used. You had some nice comp.

I was wondering if you could talk about CPO within that 5% used comp? What was the CPO comp for the quarter?

It was, I think, about 31% of our overall -- I will have to get you the CPO gross number. They are looking it up real quick. But I think as a percentage of our total mix it was 30%, 31%?

29% or 30%.

Yes, 30%, okay. So it was at 30% of our overall mix. And in terms of year-over-year growth, that's probably about flat. It may be up a little bit.

Flat is (multiple speakers) 30%, 32%, between (inaudible) this year.

Last year. Oh, this year? Okay, never mind. It was between 30% and 31% this year, and that's about equal to where it was last year as a percent of our overall mix.

Okay. Got it. Are you seeing any influx in supply of used cars, whether it's coming from off-lease or other sources that are more late model low mileage that would be more suitable for a certified program than maybe you have in the past?

There's a little more off-lease inventory there, but we are a little different from our competition in the fact that we don't ever have any issues getting used vehicle inventory. There are 45 million pre-owned cars sold a year in America. There have been for the last 20 years, plus or minus 2 million. There are plenty of used cars out there. You just have to know -- you have to have the right systems and processes in place to get them.

And I think there are -- well, there's definitely more off-lease cars coming in, definitely more opportunity for certified pre-owned, but that is one-third of our business. We've always kept it at one-third of our business, and we don't expect it to be any higher than that. That doesn't mean that one-third can't be a bigger unit number, but it also means the rest of the pie is going to grow too.

Because if all of a sudden CPO becomes 50% of your business, the other non-CPO business is shrinking and every time the CPO business has an opportunity to grow, the rest of the business has an opportunity to grow too. So we try to keep it all right in that ballpark.

Okay. Got it. Thanks for that.

You had a gain on some franchise disposals during the quarter. I think I saw that you sold a couple of Cadillac dealerships in Michigan. Were there any others, or was it just those two?

It was just those two.

Okay, all right thanks very much.

Brett Hoselton, KeyBanc.

Good morning, gentlemen. First question, how do we think about the expenses in your three different initiatives as we move into 2015? Are those expenses likely to go down, possibly go to zero, are they likely to continue at the same level, are you potentially going to increase those expenses?

Yes, if you look at -- you start with the pre-owned initiative, all of that is going to depend on how quickly we ramp up our gross, our business at that one hub as well as how quickly we grow and how quickly we go to the next market. But you should see generally we have a cash flow positive model up one POD after year three.

And so we're still going to have some relative expenses, probably around that same level going forward in 2015. On One Sonic-One Experience definitely in the next 18 months you are going to have the same kind of trend and expenses as we roll this out through the other dealerships. Just the expense is going to change.

Right now we are spending a lot on technology development and starting next year it will be more on travel and train. And in centralization of business office, that is going to start actually producing a net gain as we roll out the business office and move everything to Charlotte. You obviously have opportunities to eliminate headcount in the field and so we will start getting gains from that starting in 2015.

And switching gears to the One Sonic-One Experience, the pilot store, I think it sounds like it's a Toyota store, 21% increase in volume, what about gross profit per unit? What about total gross profit? What kind of changes are you seeing there on a year-over-year basis?

Yes, that's a great question. That's what I was saying earlier.

And remember that 21% is a projected based on what we did last year and what we are traveling to do this year. But the PURs I would tell you right now based on our normalized run rate, if we do not hit the Toyota level, the next incentive level, which we think we are going to, but if we don't, I would say it's down a couple hundred dollars a car or something like that.

A lot of that, to be honest with you, is driven by what I would call a less-than-perfect inventory mix for what the market is doing in our systems it told us to buy. So now that we are ordering inventory on a centralized basis from Toyota in the store, as that mix gets right your margins go up.

So I expect that once we push through the inventory that we had on the ground, which is a couple of hundred cars, which will be gone in September -- excuse me in July in the first part of August, that our margins will actually increase. And we saw over the weekend margins up, gosh, maybe $400 a car from our run rate the first two weeks of the month.

And that's going to continue to get better as we move through the end of the month and on into August and September. So a little early now. I certainly have a travel rate and a market share rate based on what is out there today.

But let's let the month end. And during the next quarter I will certainly give everybody a much more detailed preview of where we are at with that one location.

And as you roll out this pilot and you roll out in Charlotte and so forth, your expectation for total gross is to increase. But gross profit per unit, are you going to sacrifice a portion of that which will offset potentially some of the volume increases you anticipate? What are your general thoughts on gross profit per unit as you roll this out?

I think in the beginning because we are making a statement here, and remember we don't really start our official rolloff until October 1 with marketing and advertising, but our goal is our GPUs are going to go up along with our market share. But if we grow the market share to the level that we think we can get to and have our GPU stay flat, it's a big win. But I think there's a dip in GPU the first couple of months getting inventories in line and adding inventory.

Remember, I said earlier, we had about 225 or so cars on the ground at the Toyota store. Between now and October 1 we will move that up to over 400 cars on the ground for new. And really will make a big difference in our overall mix as well as the GPU because as you know, when you get your mix right, gross comes along with that both on a PUR basis and a total gross basis.

And then in the past couple of quarters, first quarter and second quarter, your new car volume has underperformed the industry. Your gross profit has remained relatively stable let's say.

But that's kind of your core business. It's not necessarily your pilot store. What is disrupting the core business at this point in time?

Are we also implementing the One Sonic to some extent at that core business and store resulting some disruption? Is it -- you talked a little bit about some turnover two or three years ago -- is that potentially -- why is the core business underperforming at this point in time?

Yes, a couple of things. I don't agree with your GPU number. We are up $70 some odd dollars a car in the first quarter, up $140 some odd dollars in the second quarter on new car GPU.

So our GPU is actually growing and generating much more new car gross dollars, up 11% for the second quarter. But we have rolled out True Price. As you are aware, for the last couple of years we have plugged in True Price and that has certainly been a disruptor.

When you move a company from a completely haggle environment where all you're doing is going back and forth with pencils to the guest and you move into a less than 500, we did two years ago, now less than 300 in negotiation, it disrupts all kinds of different things. You've got -- somebody asked the question earlier, I think it was John Murphy, you've got people who don't want to be part of that that leave, so you got a culture issue. You've got your competition that once they catch on, says in their advertising we will just undercut by $500 and that is great.

But when we roll One Sonic-One Experience on top of that and you've got one associate delivering the vehicle and taking you through your trade appraisal, taking you through F9, you can do that all in less than an hour, then all of a sudden I've got something my competition can say I'm undercutting them by $500 but they can't say that they can get things done in less than an hour and play all the games that get played today.

So that is transparency. The marketing, advertising that we are going to put out there is going to exploit that and make a big difference for us as we move forward and we have the total package together.

You are exactly right. We did roll out True Price. It has been a disruptor and it has caused us -- I have not been hyper aggressive on our pricing in the stores.

We've just been learning how pricing elasticity affects our margins, but I haven't been too concerned about it. We have not let the market just totally run away from us. And we will be in the more aggressive in July in the third quarter here and see how that plays out.

But believe me, we watch the share every day. We know exactly where we are and we watch our gross dollars every day. And those dollars we are totally satisfied with.

And one final question. Used vehicle gross profit per unit, if I track back several years your used vehicle gross profit per unit used to be $1,959 in 2005.

And it kind of has steadily declined, seemed to stabilize around $1,400 a copy in 2012, same in 2013 but looks like we had a slight dip here in this quarter but that may be an anomaly. How do we think about gross profit per unit going forward?

Should we consider it to be maybe stabilized in this? What are your expectations?

To be honest with you, I don't pay a whole lot of attention to that GPU number. If you held me on a dime I would say somewhere in the $1,300 range would be reasonable.

We look at the gross dollars that we generate by the sale of a used car from the front to the back to what we generate in fixed operations and combine all of those for a total gross number. So for example, if you sold cars at $1,000 versus selling cars at $1,400, or $1,700 where some of our competition is, but I'm doing twice as much volume on a per store basis and I am generating more gross in economic, more gross in fixed operations as a total result, that gave us $106 million in gross and an all-time record used and related gross quarter last quarter.

So what we pay attention to is the volume and the total gross dollars that we generate. If our stores are $100 less than last year but we generated $9 million more in gross, which would you choose? The $9 million less and a higher PUR, or the more $9 million in gross? And the answer is obvious, right?

So if you had to say, Jeff, I need a number, I would say that we are going to be somewhere between $1,300 and $1,350 on a go-forward basis. But that could move around a little bit based on the level of volume and gross that we want to generate out of the department.

Great. Thank you very much, gentlemen.

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

Hi, good morning. Most of them have been asked but just a couple of follow-ups and one is I guess clarification.

That Toyota store and the 240 basis points, is that market share growth? And it is outperforming its market, the Toyotas in that region, or is that growth off of its base prior to the program?

No, that's market share growth. So we were at 14.5% market share and we are at 16.9% or something now. That was through Friday, I think.

And again those are based on what everybody has punched up RDR-wise. We weren't totally punched up either. There were probably 10 units or so, or 12 units missing out of our numbers.

But that's what it is. And if I just pace and I say okay, here's how many cars we have done the first couple of weeks of the month, here's where I think we're going to finish, it's going to be somewhere in the low end of 215 new cars to a high end of 230 or 240 new cars depending on how this weekend goes. And so last year I think in the same month we sold 165 or something like that, maybe one more or something like that from there.

So that's about a 21.5% increase. And again the market leader is in the 300 to 350 range, so that is what we intend to be. And we have the traffic and the pricing to make that happen.

I don't have the inventory on the ground to make that happen this month. And if I did, we would. But over the next couple of months with the investments that we've made in the facilities, we are getting inventory and so that should fix itself.

And then one directional question. Given the puts and takes of higher promotional spend around the new initiatives and maybe some gross margin benefit with the scale of One-Sonic, would you expect that SG&A to gross improves in 2015, or is your spending on new initiatives going to continue to offset the pickup on gross?

I would expect SG&A as a percentage of gross as we roll out One-Sonic after a 60- to 90-day introductory period as a percent of gross to begin to drop because of the growth that we are going to get out of the project, or why do the project?

But it is going to take time to build the brand and to build the gross up to have the leverage from the SG&A.

Right. In that Automotive News article last week I think you had said you expected a fairly significant level of spend. I am just trying to get a ballpark figure as to the -- will the promotional spend offset the benefits on gross money on a maybe 12-month forward basis.

I don't think on a 12-month basis but certainly for the first 4, 5, 6 months we're going to -- we are not going to build all of this, and we were having this discussion internally the other day -- we are not going to build everything that we have worked so hard to get to, now we are ready to launch, and then not market the hell out of it.

So there is a pretty substantial -- I believe I described it as [announcing], a pretty substantial advertising and marketing spend that goes along with this that we haven't even done yet. And so that is a building the brand kind of spend that is expensive. And we are working on those budgets right now for 2015.

But the spend for the Charlotte market for the fourth quarter is going to be significant as we really test our capabilities. The biggest issue that I see coming out of all of this is if me being in the store on Saturday is just any indication, it's only one day, is I had more customers than I knew what to do with.

And so there were several times during our day on Saturday where I had 33 salespeople on the floor and I had every salesperson had two guests. So I am scrambling now to hire more salespeople. And by the time we open I'm going to hopefully have 40 to 45 salespeople on the floor.

And hopefully that will be enough to handle the traffic that we are beginning to see in the store. Remember all we have done is become aggressive on pricing and a little more aggressive on letting the consumer know about that pricing from an Internet perspective.

We have done nothing else. We have launched our tool through our manager, but our sales associates still aren't using the tool yet. So it's going to really make a big difference as we get launched.

All right. Thank you.

At this time there are no further questions. Gentlemen, I'll hand it back to you for any closing remarks.

Thank you very much, everyone. Have a great day.

Thank you. This concludes Sonic Automotive's second-quarter earnings conference call. You may now disconnect.