Sonic Automotive Inc (SAH) 2014 Q3 法說會逐字稿

Good morning and welcome to the Sonic Automotive third-quarter conference call. (Operator Instructions). As a reminder, ladies and gentlemen, this call is being recorded today Tuesday, October 21, 2014. Presentation materials, which management will be reviewing on this conference call, can be accessed on the Company's website at www.sonicautomotive.com by selecting Investor Relations under the Our Company drop-down box and then choosing Webcasts & Presentations on the right side of the page.

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

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

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

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

I'll start today's call with an overview of our strategic initiatives. I'll then turn it over to Heath for a review of our third-quarter 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, if you will please turn to slide number 4 labeled 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 our 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 for two very unique and bold avenues that will certainly give us a competitive advantage and differentiate Sonic from others in retail automotive who are customer centric, One Sonic-One Experience through our preowned specialty stores called EchoPark.

In addition, Sonic Automotive is working very closely with our manufacturer partners on Open Points, and we evaluate acquisition opportunities continuously. Let's take a closer look at these strategic initiatives. Next slide, please.

One Sonic-One Experience simply put is an exercise in building a brand. We are building a brand that is centered around the customer experience. The objective is to put the power into the customers' 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 will improve transparency and increase trust and ultimately profitability.

A full version of One Sonic-One Experience has been in beta testing since August 1. Preliminary results are in line or better than anticipated. We'll further expand on this later in the call. One-Sonic One Experience will be fully implemented in the Charlotte market by the end of 2014. We expect that a companywide implementation will take approximately 24 months. As we gather data related to the 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. We'll have more to share with you in the next quarter's call.

Let's please turn to slide number 6 and then take a deeper look into One Sonic-One Experience.

I'm extremely proud of our team who has worked tirelessly to develop and implement One Sonic-One Experience. It took roughly seven years in planning and development to bring all of the pieces of the puzzle together from culture to compensation plans to price leads to processes and technology. The complexity is enormous and cannot be understated. One Sonic-One Experience is about building a brand that's predictable, repeatable and sustainable where the customer and the experience are the focal points.

Our model is designed to reduce transaction time by allowing our customers to build just one person through the entire purchase experience. Our sales associates handle the entire transaction. They appraise vehicles through our retail trade center in Charlotte. We utilize our True Price technology to eliminate negotiations. Our sales associates help customers through the F&I process and use electronic signatures to reduce transaction time.

None of this would be possible without our proprietary technologies that enable our model. Gone are the days of the back and forth with managers. Gone are the mounds of paperwork. And gone is the hassle and pain points of purchasing an automobile.

Some additional benefits of One Sonic-One Experience, besides speeding up transaction time or reducing headcount through attrition, is you simply don't need as many people that are used in the traditional model, which will create a substantial cost saving. Additionally creating trust and transparency increased CSI, ASI, market share and increased margins and a better experience for our customers much like that of an Apple store or Starbucks.

So please turn to slide 7. Let's talk about EchoPark for a moment. Again, seven years ago when we first began thinking about EchoPark, we wanted to build something that was totally unique to the industry, and we could eventually dovetail with our new car franchise dealerships, which is not your mom and pop's used car store. We've invested in and built what would become a substantial national brand. We did extensive market research to learn exactly with the pain points are in the automobile purchase experience, and we set out to eliminate them. All of them.

This is a customer-centric model where the customer is in control not the dealer. Our highly trained team is there to assist customers in any way possible, and they are compensated very differently from traditional automotive retail. Through use of process and technology to support and enable, we built a customer experience we feel is unique in our industry. I'm very proud of the team of ladies and gentlemen who have worked so hard to bring this to life. I'm pleased to announce that our hub location in Thornton, which is a suburb of Denver, opens November 3, and we'll have two neighborhood stores opening later in the fourth quarter and into the first quarter of next year. I'm looking forward to sharing more information with you on our next call.

So please turn to slide number 8. As a continuation of our strategic focus, we've been looking at acquisitions and Open Points through our manufactured partners. This year we purchased the Jaguar franchise in Birmingham, Alabama and Hunt Nissan in Chattanooga, Tennessee.

Additionally, we've been awarded an Open Point by Nissan in the greater Chattanooga market area. We continue to achieve -- excuse me, we continue to be active in the acquisition market and would welcome the opportunity to have discussions with dealers.

We're working very, very closely with other manufacturer partners on additional Open Points. So please turn to slide number 9.

Owning our real estate continues to be a strategic focus for us. As you can see on the slide in 2007, we owned 0% real estate. In 2017, we project that we will own approximately 45% of our nearly $1 billion portfolio. Putting these terrific assets on our balance sheet is a much more efficient use of our capital than entering into long-term expensive leases. Please turn to slide number 10.

Sonic Automotive is committed to returning capital to our shareholders. Through the end of the third quarter, we have repurchased 1,668,000 shares at an average price of $23.70, returning nearly $40 million in capital to our shareholders.

Since the end of the quarter, we purchased an additional 588,000 shares, roughly 13 (technical difficulty) million at an average share price of $22.98. We currently have an unused share repurchase authorization of approximately $93 million.

I'm also pleased that we are continuing our quarterly dividend of $0.025 per share.

With that, I'll now turn the call over to Heath for a financial review of the quarter. Heath?

Thank you, Scott. Good morning, everyone. If you'll please turn to slide 13 titled Q3 Adjusted Results. Revenue was up 5% driven by new retail revenue growth of 7.6%, used growth of 4.2%, F&I revenue up 12% and fixed up 5.2%. Gross profit was up 5% with a gross margin of 14.5%. Excluding one-time items, SG&A was at 79.4%. Adjusted diluted EPS from continuing operations was at $0.46. Next slide, please.

As you can see from this slide, third-quarter EPS was impacted by $0.04 benefit from the sale of two franchises, offset by storm damage for a net benefit of $0.01. Next slide, please.

This slide illustrates the impact of Q3 EPS related to our ongoing strategic initiatives. For the quarter, EchoPark expenses were $3.6 million, One Sonic-One Experience $3.1 million, and centralization of accounting $700,000 for a net impact to EPS of $0.10. Next slide, please.

Total growth was up 4.7%, driven by 5.8% increase in used, 12% increase in F&I and a 4.1% increase in fixed. Next slide.

Adjusted SG&A as a percent of growth was 79.4% compared to 78.1% last year. Significant variances are in the areas of medical and legal, as well as expenses associated with our strategic initiatives as illustrated on the next slide. Next slide, please.

The impact from EchoPark expense was 110 basis points, One Sonic-One Experience 90 basis points and centralization 20 basis points for a total of 220 basis points. Next slide, please.

Strategic initiative spend year-to-date and estimated full year for 2014, EchoPark $8.6 million year-to-date, $12 million for the full year; One Sonic-One Experience $6.6 million year-to-date, $10 million estimated for the full year; and centralization $1 million year-to-date, estimated $3 million for the full year. Next slide.

CapEx, year-to-date total CapEx spend net of mortgages is $49.6 million, which includes $12.3 million in real estate, $42.7 million in facility improvements, $17.6 million in IT and $17.4 million in general maintenance. For the year, we are estimated at total CapEx spend of $183 million, $39.6 million in real estate, $58 million in facilities, $35 million for EchoPark land and facilities, $20 million for business app development related to One Sonic-One Experience and EchoPark, $10 million in facility upgrades related to One Sonic-One Experience, and $20 million in general IP and dealership maintenance. Again, this is offset by two mortgages of $40.4 million for a total CapEx of $142.6 million. Next slide, please.

Liquidity. We ended the quarter with plenty of liquidity, $261 million, compared to or an increase of $40 million over Q4 2013 levels. Next slide.

Debt covenants. As you can see, we're compliant with all of our covenants, and we have plenty of room to spare in all. And now, I'd like to turn the call over to Jeff Dyke for an operations review.

Thanks, Heath, and good morning, everyone. I'm proud to present the third-quarter 2014 operating results for Sonic.

As you can see from this slide, new car revenue was up 8.5%, while volume was up 7.2%. This quarter marks the largest new car volume quarter on a same-store basis in Company history. We are in the beginning stages of rolling out SIMS new cars. We rolled out One Sonic-One Experience. I'll comment on the performance of our Toyota store further to what Scott spoke about in a moment.

With this said, we did get more aggressive in new car pricing this quarter and will continue to be aggressive through the remainder of the year as we build our new car SIMS architecture. That's similar to what we did with pre-owned in previous years. While our new car gross was down, the incremental volume versus our previous couple of quarters run rate, obviously drove higher F&I growth, offsetting what we lost in new car gross.

We plan to roll out One Sonic-One Experience in remaining Charlotte stores this quarter. We will then take the first quarter to measure results and make any adjustments needed prior to rolling out One Sonic in any other locations. We believe that we need this time to make certain that all key performance indicators are as expected prior to a full companywide launch.

New car day supply was 50.8 days, and that's in line with our expectations. Next slide, please.

We demonstrated another strong quarter in the pre-owned category. While volume was up slightly on a same-store basis, our GPU was up $92 per unit, which drove used and related gross up $6 million for the quarter.

As you dig into the numbers, our Honda and Toyota stores are both down year over year in pre-owned, driven by us getting more aggressive on new car pricing in these brands. With this said, the third quarter was an all-time record pre-owned growth quarter for us.

We sold 90 units per store for the quarter. Our pre-owned inventory is in solid shape, and we ended the quarter with a 27-day supply.

One quick remark on EchoPark. We currently plan to open the first store, as Scott said, in Denver on November 3 and have no trouble building inventory with our EchoPark SIMS model. We have purchased 95% to our ideal inventory model thus far. Next slide, please.

As you can see from this slide, our fixed revenue grew 5.3%, while fixed growth grew 4.4% on a same-store basis. Customer pay grew 3.1%, while internal grew 5.3% with continued strong performance from our pre-owned department. Another record for our fixed team as this marks our largest third quarter in fixed gross the Company has ever had.

As we projected last quarter, given the warranty recalls, our warranty business was up 8.9%, and we expect this to continue into the fourth quarter. Next slide, please.

Before I turn the call back to Scott, I wanted to take a minute to review the performance of One Sonic-One Experience rollout at Town and Country Toyota in Charlotte. First, I want to thank all the associates at the store and our regional teams for their hard work and dedication in making this initial launch a success.

With this said, and as you can see from the graph, our number one priority with One Sonic-One Experience was to gain market share. We've seen a significant increase in share versus prior year and from trailing months.

We officially launched One Sonic-One Experience in October with both store level and corporate level Sonic brand advertising and marketing, and we are optimistic about our early results. We're being very conservative in our rollout plans and will wait until Charlotte is completely installed with positive results across all franchises before we roll out any further stores. Once again, we expect to begin rolling out the remainder of the Sonic stores in Q2 once we've had enough time to measure Charlotte's results.

I want to take this opportunity and the time to thank all of our associates for their hard work and dedication to creating one of America's greatest companies to work and shop. And now I'll turn the call back to Scott. Scott?

Thank you, J.D. To briefly summarize before we open the call to questions, I'm very pleased with our third quarter and direction and pace at which we're moving on our strategic initiatives. Hey, if this stuff were easy, everybody would do it.

We'll provide performance metrics on One Sonic-One Experience and EchoPark performance beginning in our fourth-quarter call, as J.D. mentioned. Our full-year 2014 continuing ops EPS guidance is now projected to be $1.90 to $1.95 per share, net of startup expenses associated with One Sonic-One Experience, EchoPark and our shared service center.

I'd like to thank all of our associates for their hard work and dedication to bringing these initiatives to life. It's a very exciting time in our Company's history, and we're about to embark on a journey to truly differentiate Sonic Automotive from the rest of the industry. It's an honor and a privilege to lead our great team and I thank you.

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

(Operator Instructions). Ravi Shanker, Morgan Stanley.

This is [Birshan] in for Ravi. On OSOE I was hoping for more color on cadence of OSOE store rollout this quarter, as well as the One Sonic-One Experience commercials. If you could provide (multiple speakers).

The remainder of the Charlotte stores, we've started the rollout now. We're installing all the AV equipment as Ravi and you guys saw when you visited the Toyota store. So we've got two Ford stores, an Infiniti store and a Cadillac store that will all be rolled out. The soft rollout starts November 1, and then all the marketing and advertising for those stores will start on December 1.

And then as I said in my speaking notes, we'll wait for the first quarter to go by. I really would like to get some time under our belts and work out any kinks that we have before we move forward with the rest of the country.

That's helpful. As a follow-up, given everything you've learned from the pilot Toyota store, how quickly you feel you can ramp-up One Sonic-One Experience in the new store relative to the time you took with the Toyota one?

You know, it's a great question. If I were going to another Toyota store, I would tell you immediately. It wouldn't be a problem. But now we're moving into different brands, and I think those brands will react a little bit differently. So we're just going to have to wait and see. We've got a good selection of brands from the Charlotte market, and then the next market we'll pick will have several other brands so that we can speed up our rollout process. But I can't tell you until we get finished rolling out the Charlotte market.

Understood. And finally, last one if I may. I just wanted to confirm if I heard this correctly, you said $1.90 to $1.95 EPS for 2014 or was it 2015?

That is for 2014.

Got it. Thanks. Have a great day, guys.

Rick Nelson, Stephens.

I'd like to follow-up on the guidance. $1.90 to $1.95, does that compare to the $1.95 to $2.05, your previous guidance, or is that the franchise business only excluding --

No, that compares to the $1.95 to $2.05. That's full enterprise, diluted EPS.

Got you. And that revision, is it a core Sonic business, or is it bigger expenses related to pre-owned, or what is driving that revision?

Rick, this is Heath. You know, one of the bigger issues of some of the SG&A that's associated with starting up a brand-new company like EchoPark also as we are learning about One Sonic-One Experience and the rollout of that, and so that's a big driver.

We've also had a couple of items that popped up that were uncontrollable to some degree, and that's around medical and legal expenses that was not modeled in our very original $1.95 to $2.05.

Okay. Thanks for that color. Also, slide 5, the One Sonic-One Experience, I believe last quarter you had talked about an 18-month rollout. Now it's 24 months. I am wondering what caused that change and how that might affect financials as we look forward?

Hey, Rick. It's Jeff. It won't affect the financials, but we're just being prudent in the rollout. There's a lot that we've learned since we rolled out Toyota, and we've got EchoPark that's rolling out, and we are trying to be prudent in how we handle both of these, and I just think it's more realistic on a 24-month timeline than it is on an 18-month timeline.

The One Sonic-One Experience, if we could look at that maybe separate from the used car effort, when you see that kicking in really and being accretive to EPS, is it 24 months down the road and -- ?

Well, I mean our Toyota store is accretive now. (laughter) So we will see sort of how that works going forward, but hopefully every store that we put on becomes accretive as we move forward or we won't move forward.

So you know as you saw and have heard, we've had great success the first few months. October is no different, and we'll get the other stores rolled out. And the more stores we start seeing this lift in, obviously the more accretion that we're going to have as we move forward. So it's a median on a small term basis, but it's going to take us all of 24 months to roll this out.

So the costs that were incurred this quarter for Sonic-One Experience, that goes beyond the Charlotte market?

Well, it does because you have to hire a training team, for example, and that training team is going to train the entire organization. So you've got the headcount associated with that. They're just pieces of the puzzle like that that will -- are more enterprise-level cost, but it's an investment upfront, and that's one of those headwinds we've been facing here for the last six to eight months as we've developed and really gotten ready to roll out One Sonic-One Experience.

So, what I don't see is adding on another six or eight months to this project, increasing the cost, I've got it there, right? So, I don't think that that's going to change the overall scope of the cost of the project. It's just going to take us a little longer to roll it out.

And another example of the infrastructure that's in place that goes beyond the Charlotte market is you have to have the IT team and support team to manage the entire country once you go live. And so some of that -- the Charlotte market is bearing all of that until we roll it out to the other markets.

Got you. And Charlotte is accretive even allowing for those costs or net of those costs, I guess.

Especially if you put it on a one store basis, yes, but again, Rick, it's early yet. We've got eight weeks under our belt of results, and I really want to get Cadillac and Ford rolled out and Infiniti rolled out so I can see what happens with those brands.

As you are aware, we went from 13% market share in the Toyota store to 20.8% market share pretty much overnight. We didn't expect to grow that fast. So we learned a lot out of all of that, and I'm playing with the pricing now and doing a few different things in October to determine what's the best mix of price and gross for us. And so we're going to learn that same thing with Cadillac and Ford and Infiniti, and then we'll move forward from there. But yes, obviously the first couple of months have been a nice success for us.

Okay. Great. Thanks for that and good luck.

Thank you.

John Murphy, Bank of America Merrill Lynch.

This is [Liz Suzuki] on for John. Used vehicle sales were up about 5% on a same-store basis, which was a bit of a deceleration from the second quarter, but was pretty solid given what we've seen from some of the other retailers. And on a same-store basis, your revenue per used was up almost $900 and gross was up $92. But we've been hearing about pricing pressure from other retailers like [Lithios]. So is there something happening with mix or the year-over-year comp that caused your third-quarter used vehicle pricing and growth to be so strong, or is there really no industrywide trend of used vehicle pricing pressure?

You know, I can't comment on what the other guys are doing, but I just think that the great inventory management and our systems were running on traditionally versus the rest of the world -- a light day supply of 25 to 27 days. And we just don't -- if you go back and look at our performance, we just haven't had those inventory pressures that caused those kind of adjustments.

You've got to remember there are 43, 42 million used car sales or 45 million used car sales every year, and what makes a group go up and down or a dealer go up and down is just getting their inventory out of whack. And we just haven't had that kind of pressure here in a while. We have been using SIMS and our inventory management system for a number of years, and so I don't expect that to happen. I mean, you're going to fluctuate a little bit from here to there, but I think the used car business is pretty solid, and our volume was decent. We sold 90 cars per rooftop, which is -- we want to be at 100, but that wasn't too bad. Our gross was good. Actually over $1500 for us is the highest it's been in a while, a little bit of that is just mix shift from a fewer less Toyotas because we are selling more new and a few more BMWs, and that drives your PUR up. But no surprises for us on used cars at all. We expect it to continue just as it is.

Great. Thanks. That's really helpful. You called out about $25 million in estimated 2014 spend associated with the Company's initiatives. As we look ahead to 2015 with the expansion of the EchoPark concept presumably going on for some time if it's successful and then with the ongoing rollout of One Sonic-One Experience, do you think it's safe to assume that the 2015 cost base initiatives will be higher than 2014?

I think they're going to be at least equal to. We won't roll out EchoPark in another market until we prove that EchoPark is working well and hitting the numbers that we needed to hit in the Denver market. And we have markets that we have designs on, but again One Sonic-One Experience and EchoPark both need to stand on their own two feet and drive the return that we want before we will take one step forward in other markets.

So we believe that that will happen. We don't see any reason for it not to, and early results are good. But I expect the expense structure to be more of the same in 2015 as you saw in 2014.

We sort of said all along that as we approach 2017, we're going to start getting the real big lift that we expect from our projects and our work that we have been doing over the last five years.

And obviously we will have some growth to offset those expenses, and we are going to have a few months of gross to offset it for this year compared to 12 for next year.

Great. And just one more really quick one, which is what level of same-store sales growth do you think you need to achieve in order to get operating leverage given all of the initiative costs in the near term?

Well, if you talk One Sonic-One Experience, we modeled it gaining 200 basis points of market share. So we said we would go from roughly the mid-17% market share, which is based on our local markets, up to 19.5% to 20% market share.

Our first store we said we're going to go from about 13% market share up to 15% or 16%. We went to 24% and 8%, and it looks like this month we are going to be in the 18% to 19% range, which is maybe a little bit more reasonable as we start to push up our gross a bit. So if that's any indication, then we're going to zoom past the 200 basis points of share that we're looking to grow.

So, on a same-store basis, it's hard to answer that question, right? Because it's -- that is sort of not how we built the model.

Okay. Thank you.

(Operator Instructions). Brett Hoselton, KeyBanc.

It is actually Irina Hodakovsky for Brett this morning. How do you guys feel about the availability of used vehicles? Are you seeing any improvement in supply of late-model used cars?

The thing about it is is from an inventory perspective for us, we've never had -- we were challenged that at EchoPark we're going to have a hard time fulfilling our inventory levels. And it's just -- the cars are all out there, and there's plenty of late-model cars coming off lease. But there's plenty of inventory all the way across the spectrum, and we just don't have -- haven't had any of those issues.

Okay. And then a quick question from you on the capital allocations. We didn't really anticipate any acquisition activity from you at this time, and what you did put in the release is minor. However, wondering if you can update us on how we should think about your acquisitions appetite and annual targets, if there are any.

Well, from my -- this is Heath -- from my perspective, obviously we went through our capital priorities, and the initiatives, EchoPark and One Sonic-One Experience, take priority. You can see that we obviously were very active in share repurchase in the third quarter, as well as beginning of the fourth quarter. So but it's always been and will continue to be part of our capital plan to look at deals that fit our portfolio that are the right brands in the right markets.

There are several deals that pass our desks every day, and so we actively are looking at them. But it's got to fit our portfolio, and we did acquire two this year. And again, there are several others that are well along the process of other opportunities as well.

Yes, it wouldn't surprise us at all that a couple of more dealerships in through the Sonic family here in 2015, and that's both from an acquisition and an add point perspective.

Got you. And the follow-up to that share buyback comment, it did accelerate in the third quarter particularly. Wondering if the pullback within the space had anything to do with that, and how should we think about your base and target of buybacks going forward?

The pullback in the -- I'm sorry the pullback in what?

Overall, the auto retail space.

Yes, of course --

Back when they were kind of attractively priced.

Yes, absolutely. Obviously, market conditions will play a part of the timing of our repurchase, but we have targets that we go after, and at our current valuation, we still feel like it's an attractive investment.

Yes, we feel that going out on a -- look out on a little longer term basis, we feel that our stock is just absolutely grossly undervalued, and our near-term plans are to continue to be aggressive in our share repurchase going through 2015 and 2016.

Got you. Thank you guys very much. The Charlotte store is beautiful. Thank you for the opportunity to visit, and good luck on rolling out to the other brands.

Thank you very much. We appreciate you coming down.

Bill Armstrong, CL King and Associates.

So on a unit basis, your used same-store sales were essentially flat year over year. Is that in line with what you were expecting at the beginning of the quarter, and you know, you've got a pretty lean inventory position. Could you perhaps maybe drive more sales with a little bit more inventory?

You know, you never want have a heavy inventory coming out of July/August/September timeframe. All the dealers start selling their cars in October, November and December and all the mom-and-pops and single dealership owners and clearing up inventory. You can see some of the bigger dealership moves doing that now. It's a great time for us to buy. So you see us push our inventory levels up in the fourth quarter.

We got really aggressive. I felt like we were losing a little ground market share wise with Honda and Toyota. So we got really aggressive in our Honda and Toyota pricing in the third quarter and made up some of that share ground. It put pressure to the tune of about 600 or 700 units on pre-owned for the quarter out of those brands. And so that would have pushed us up in a total basis 3% to 4% and sort of been ahead of the market.

And so I didn't plan on being quite as aggressive probably at the beginning of the quarter because I saw our shares slipping in Honda and Toyota. We became a little more aggressive, especially with what we're learning with One Sonic-One Experience in the Toyota store. So that certainly played a role in us being flat. But, again, 90 units of store, 27,000 cars, over $1500 margin. I think our used car team did a great job. I don't think we'd have changed anything.

Could we carry more inventory? We could. But the minute you start getting in that 30-, 33-, 35-day supply, it really creates problems. And especially when the market changes or you have adjustments going on on the new car side, we're just conservative that way. On a same-store basis, pretty much lead everybody. So I'm very pleased with what the team is doing and where we're at.

Okay. Thanks for that. And on the market share numbers that you give for the Charlotte store, that's just your share of Toyota sales in the Charlotte market just to clarify, correct?

Actually what it is is they're district 12, and they've got a bunch of stores in there. But some of those stores we don't really consider as competitors. They're 100 miles from us. So we've just got the more direct competing stores through our store, and that's how we've always measured it. From a same-store basis, we've gone from 13.1% to [24.8%] over that initial eight-week period, and I think we're settling in at around 18% on that same-store basis for October.

Okay. And I think you said before is that I guess nationwide, you are -- once you fully roll out One Sonic-One Experience, you're looking for about a 200 basis point market share gain? Is that the way to look at it?

That's correct. That's how we measure the return, yes.

Okay. All right. Thank you.

(Operator Instructions). David Marino, Goldman Sachs.

Gentlemen, a quick question on One Sonic-One Experience. It appears to be performing pretty well in terms of market share. Just wondering how new vehicle margins have performed at that location? And then on top of that, have you seen any competitive actions from some of the other dealers within the area to date?

Hell, yeah. We've seen a lot of competitive Action. (laughter) Everybody's getting more aggressive. Our margins are -- if you go back to August, they were pretty rough. Just getting inventory clean and getting the inventory mix the way we wanted it. To have a lot of improvement in September, actually year-over-year our margins are better and in October significant improvement in margins.

So we're going to find out. We're using SIMS new car modeling to really understand the elasticity of pricing. And if you will go back and listen to us five or six years ago when we were talking about pre-owned, we had this exact same conversation. The more data that gets into our system, the smarter we're going to become. And so every month as we roll forward, we'll get better and better at pricing the Toyotas in the marketplace.

And advertising, if you hadn't been in the store, I suggest you come down and go into it, but advertising the experience that the consumer has. We had a Saturday a couple of Saturdays ago we delivered 26 new cars with an average transaction time of 43 minutes, and that's just unheard of in our industry. That just doesn't happen. So we're very excited about what we've done there, but we still have a lot to learn and a long way to go. That's why we're cautiously optimistic and being careful about over-committing, trying to go out too fast with One Sonic-One Experience. We'll get Charlotte done and then see how things progress in there.

One other comment, too, is that the Toyota margins traditionally and particularly in this market are very light. When you get to Ford and Infiniti and Cadillac, it's a different ballgame. So we don't expect that that margin erosion sort of like we've had with Toyota, but certainly improving every month as we go.

Interesting, okay. And then shifting gears to the guide, it looks like OSOE expenses were increased for the full year from $7 million to $10 million. That implies about $0.04. You took about $0.10 off the top end from 2005. Could you just explain what some of the other variances were to the top end of that?

And then after we get through that, could you just go through what some of the additional expenses for OSOE for the year are going to be, seeing as though you did push out the timeline? So I am just trying to understand what accelerated expansions you might be incurring.

A couple of things. The other items that impacted the guidance is that we had legal and medical are running higher than we had modeled in the $1.95 to $2.05 guidance. And as for additional One Sonic-One Experience expenses, we've got training as well as once we get into the store and we identify things that need to be changed from an IT perspective, that all runs into the staffing of that. And so that's what has really been increasing. Once we learn things in the pilot store, that played into that additional pre-event expenses so that we can build it right to roll it out to Charlotte and the rest of the country.

Understood. And then lastly, maybe can you just give us a little bit more color on your plans to start and grow your own captive financing arm over the next couple of years, seeing as though it seems as if there is going to be increased regulatory landscape given the proposed rules by the CFPB?

This is Heath. We plan to basically take a crawl, walk, run approach with the captive finance company. We have hired some individuals that have been involved in these kind of initiatives, and we'll start off with (technical difficulty) dealing with some of our preferred lenders. And once we get comfortable with that and we feel comfortable starting to look to grow into the captive finance, we'll start looking at that. But I think it's three to five years out before we start underwriting our own paper or doing any kind of securitization.

Understood. Thank you very much, gentlemen.

Bret Jordan, BB&T Capital Markets.

Question on the One Sonic Charlotte store and the market share gain. Has there been any repercussion, I guess, if you pick up market share with attractive pricing and you are accelerating these transactions, is there a risk that you start losing some of the F&I attachment as you are whipping the customer through? Is that something that we have to sort of know that we can look at on that sort of standalone store basis?

Yes, that's a great question. We sold so many cars to begin with our F&I department was just overwhelmed. And so we did have a little bit of degradation in F&I, but we have since recovered and are running at traditional levels now. So that in the last three or four weeks began to really get corrected. And it was more a training and, quite frankly, an education for us. We've added document specialists to our mix, and we've got fewer F&I directors. Not because we terminated them just because we had some attrition in the store.

So we've learned to bring on the document specialist earlier in the mix and we did from a training perspective. So for the rest of the Charlotte stores, those doc specialists, they are already employed and training and in position. So we think we can pretty much wipe out that valley that we created ourselves.

I expect our F&I to go up. Customers love what we're doing and how that process is working. So, again, we're back to traditional levels for the store, and the numbers are more than acceptable.

All right. Great. And then one question the housekeeping on the slide on CapEx and your year-to-date spend versus the estimates are pretty big delta there. Is it fair to assume that your estimates will prove high, or are you going to be spending a lot in Q4?

We've a lot of spend coming up in Q4. There's a couple of them that I think are conservative. For example, we've got $10 million in there for One Sonic-One Experience facility upgrades. We're not going to get anywhere near that number. (multiple speakers)

So it's conservative, but we do have certain things that are actually closing that will happen. Real estate, we've got some facilities that will be coming online. So it's going to be a big CapEx spend for the fourth quarter.

Okay. And then one last question. You said Honda and Toyota used was down. Was that units were down or gross were down due to the more aggressive promotion on new?

No, units were down both for our -- that's our total Toyota portfolio and our total Honda portfolio. Our used vehicle volume was down on both of those and 100% driven by how aggressive we have been on new car pricing. And we outperformed on both of those brands for the quarter in terms of what the brand performed versus where we performed, in particular with Honda.

Great. Thank you.

There are no further questions at this time. I will now turn the call back over to the presenters for closing remarks.

Well, thank you, ladies and gentlemen, for joining us today, and we look forward to speaking with you on our next call.

Thank you.

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