Sonic Automotive Inc (SAH) 2015 Q1 法說會逐字稿

Good morning and welcome to the Sonic Automotive first-quarter earnings conference call. (Operator Instructions). As a reminder, ladies and gentlemen, this call is being recorded today Tuesday, April 21, 2015. Presentation materials which management will be reviewing on this conference call can be accessed at the Company's website at www.SonicAutomotive.com by selecting investor relations under our Company drop-down box and then choosing webcast and presentations on the right side of the page.

At this time I would like to refer to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this conference call management may discuss financial projections, information or expectations about the Company's products or markets or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risk and uncertainties are detailed in the Company's filings with the Securities and Exchange Commission. Thank you.

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

Great. Thank you. Good morning, ladies and gentlemen. Welcome to Sonic Automotive's first-quarter 2015 earnings call. I am Scott Smith, the Company's President, Chief Strategic Officer and co-Founder.

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 will start the call today with an overview of our strategic initiatives. I will then turn the call over to Heath for a review of our first-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, please turn to the slide 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 shareholders. This strategic focus will continue for the foreseeable future.

As most people who follow the Company are aware, Sonic Automotive is growing its base business through two very unique and bold avenues that I believe will give us a competitive advantage and differentiate Sonic from others in retail automotive through our customer centric One Sonic-One Experience and through our pre-owned specialty retail 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 One Sonic-One Experience. Simply put it is an exercise in brand building. The building of brands is centered around customer experience, the objective is to put the power into the customers' hands where they can enjoy automotive purchasing experience with one associate at one price in one hour. We believe that our experience will be unique in the industry and it will improve transparency and increase trust and ultimately profitability.

One Sonic-One Experience has been fully implemented in the Charlotte market since the end of 2014. We expect that the Companywide implementation will take approximately 36 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 and customer retention rates. We will have more to share with you on this later.

Next slide please. Roughly nine years ago when we first began thinking about EchoPark we wanted to build something that was totally unique in the industry and could he eventually dovetail with our new car franchise dealerships which is not your mom and pop used cars store. We have invested in and built what will become a substantial national brand that is predictable, repeatable and sustainable.

We did extensive market research to learn exactly what pain points are in the automotive purchase experience and we set out to eliminate 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 the traditional automotive retail model.

Through the use of process and technology to support and enable we have built a customer experience that is unique in the industry. I am very proud of the team of ladies and gentlemen who have worked so hard to bring this to life. Pleased to announce that our hub location in Thornton opened November 3. We have two neighborhood locations, one in Centennial and one at Highlands Ranch that are now currently open. We expect one additional location to open in the Greater Denver market in 2015 and another location in 2016.

We are currently searching for real estate to begin planning for opening a second market for EchoPark in 2016. Preliminary sales results are exceeding our internal projections. Jeff will provide some more color in just a minute.

Next slide, acquisitions and open points. As a continuation of our strategic focus, we have been looking at acquisitions and open points through our manufacturer partners. We are working very closely with a number of our manufacturer partners on open points. We are pleased to announce that we will complete construction of our Mercedes-Benz open point in the Dallas market in 2016, our Audi open point in Pensacola, Florida will open as well in 2016, and our Nissan open point in the greater Chattanooga market will also open in 2016.

We continue to work closely with our manufacturer partners in our market representation plants. So we are very excited about the award of these open points and we believe that they demonstrate the strength of our relationship with our partners. We continue to be active in the acquisition market and we would welcome the opportunity to have discussions with dealers.

Next slide please. Owning our real estate continues to be a strategic focus for us as well. As you can see in this slide in 2007 we owned zero real estate. In 2017, we project that we will own approximately 49% of our $1 billion plus portfolio. Putting these terrific assets on our balance sheet is much more efficient use of our capital than entering into long-term expensive leases. While the market isn't recognizing the value of these investments, we believe that there is significant value here. If you think about it, our market cap is roughly $1.3 billion and our real estate value is roughly $500 million.

Next slide please. Sonic Automotive is committed to returning capital to our shareholders. Through the end of the first quarter, we had repurchased 477,000 shares at an average price of $24.89 per share returning nearly $11.1 million in capital to our shareholders. We currently have an unused share repurchase authorization of approximately $68 million. Also I am pleased that we are continuing our quarterly dividend of $0.025 per share.

With that I will now turn the call over to Heath for our financial review. Heath?

Thank you, Scott. Good morning, everyone. In an effort to better illustrate our performance in both our core franchised business and EchoPark, I will be providing the Q1 financial results for each of these segments separately as well as consolidated.

Starting with our franchised operations on slide 12. Revenue was up 3.9% with growth in all sectors of the business. Gross profit up 1.3% driven primarily by fixed and F&I. SG&A as a percentage of gross was better by 50 basis points resulting in an adjusted diluted EPS of $0.43, an increase of 7.5%.

Next slide please. This slide normalizes our SG&A to gross for our core business. Factoring out our investments, our adjusted SG&A as a percent of gross in Q1 is 77.6%, an improvement of 210 basis points from last year.

Please flip to slide 15 for EchoPark Q1 results. As you can see, Q1 represents our first full quarter of operations for EchoPark. Revenue was $15.7 million, gross profit $1.8 million resulting in a pretax loss of $4.9 million and diluted EPS of negative $0.06. Total units sold was 660 with a gross profit per unit of $1385. Our first-quarter performance at EchoPark is within our expectation and forecast of a net loss of $13.3 million for 2015.

Please flip to slide 17 for our consolidated results. On a consolidated basis, revenue was $2.2 billion, an increase of 4.6%; gross profit of $335 million, an increase of 1.8%. With the inclusion of EchoPark, SG&A as a percent of gross was at 80.6%, resulting in adjusted diluted EPS of $0.37.

Next slide please. Breaking down total revenue and gross, all sectors were up in revenue led by new, used and F&I. New retail gross was down driven by rate. Used gross was flat, fixed up 2.8% and F&I up 7.2%.

Next slide please. Consolidated adjusted SG&A to gross Q1 results were better in variable comp, other variable and rent offset by increases in fixed comp and other fixed expenses related to One Sonic-One Experience, centralization and medical insurance.

Next slide please. Summarizing Q1 adjusted and GAAP EPS, core franchised business had an adjusted EPS of $0.43 compared to $0.40 a year ago. EchoPark offset EPS by $0.06 for a total adjusted EPS of $0.37 compared to $0.38 in Q1 2014. Applying one-time adjustments of $7.3 million results in a GAAP EPS of $0.28.

Next slide please. Capital spend for Q1, a total spend of $47 million for facilities, IT and general maintenance offset by $25.6 million in mortgages related to the EchoPark properties in Denver. Estimated 2015 total spend of $247 million offset by $87 million in mortgages.

Next slide please. Liquidity at the end of Q1, we had total liquidity of $243 million compared to $250 million last year.

Next slide please. Debt covenants as you can see from this slide, we continue to be compliant with all of our debt covenants.

With that, I will turn the call over to Jeff Dyke for a review of our operations for Q1.

Thanks, Heath, and good morning, everyone. It is my pleasure to update you on the first quarter 2015 operational performance for Sonic Automotive.

As you can see on the slide on a same-store basis, we had a year-over-year increase of nearly 7% in new car volume. First quarter was the biggest new car volume first quarter in the Company history on a total store basis. Our GPU was $2018 per unit, down $182 per unit driven by our import brands. As we stated last quarter, we will continue to be aggressive in our import pricing as we work on pricing algorithms along with our effort to drive higher throughput in our import stores.

This effort has resulted in increased market share and profit in our import brands. The throughput is driving higher gross dollar levels.

Our new car days supply was 54.8 days and that is in line with our expectations.

Next slide please. To add a little color to our brand performance, you can see on the slide our major brands and how they performed in their local markets versus how the brands performed on an industry basis. Our luxury and import brands performed well during the quarter while our domestic brands performed below average. We are excited about our Honda and Toyota performance, in particular our Town & Country Toyota, a One Sonic-One Experience store leading the way with 36% growth for the quarter and nearly 66% growth from March.

Of note, we had a Cadillac facility totally collapse in the bad weather and we are rebuilding the facility and that has caused a slowdown for us. The store was down 30% in sales year-over-year heavily contributing to our Cadillac performance.

Next slide please. We had another record-breaking pre-owned first quarter and a solid 93 units per store performance. On a total store basis, we also had our largest first quarter in Company history as well as our largest gross profit first quarter in Company history. At the end of Q4, we told you that we were not happy with our base supply and waited too long to start buying in the quarter. We have since corrected that and our inventory levels could not be in better shape going into the summer selling season.

Margins were flat year-over-year but in line with our expectations. Pre-owned days supply was 34 days at the end of the quarter.

Next slide please. We had another record first-quarter in fixed operations gross on a total store basis driving over $156 million in fixed gross. As you can see from the slide on a same-store basis our revenue was up 3.2% with our fixed gross up 4.9%. We highlighted last quarter that we are seeing tremendous growth in warranty and I wanted to illustrate that for you today as our warranty business was up 21.4% heavily driven by BMW MINI, up 32.4%; Honda up 57.9%; Cadillac up 59.2%, and Chevrolet up 39.7%. This has created a customer pay performance issue for us that we spoke to you about in Q4. We have been working on rectifying this issue through increased levels and adding multiple shifts to help sort proper workloads which has added more available hours to our customer pay business. We finally saw a turnaround in CP gross in March up 2% and look for that to continue in the coming months.

Next slide please. Let's take a look at market share and volume performance of our One Sonic-One Experience stores in Charlotte.

Next slide. I'm proud to announce that we are back on track at Town & Country Toyota after our website issues were resolved. The performance of the store continues to improve. Our biggest issue right now is simply getting enough product to support the volume needs of the store. We had a 22 days supply ending March and our friends from Southeast Toyota are doing what they can to help support the store with more inventory. Our pre-owned volume has withstood the onslaught of the new car volume growth and is starting to grow with the trades that we are taking in.

Our F&I performance is excelling, up 19.5% on a PUR basis and up 53% on a total gross basis in March. This is being driven by our experienced guys as they work with the store leadership to improve their performance delivering a great experience which includes them delivering the entire guest experience supported by our proprietary technology and training. We believe that with the growth of new car volume our fixed business will see ample upside with more units in operation from this facility.

Profitability in the stores is also starting to improve sequentially. We believe if this works at Toyota then it can work with any brand due to the competitiveness of the brand. More important for long-term growth and profitability is our CSI which is high green green and the guest feedback is outstanding.

Next slide please. Town & Country Ford is several months behind our Toyota store and while we had a market share slide going on long before the introduction as you can see on the chart of One Sonic-One Experience, we have seen shares stabilize and April is running nearly 17% as of today. We look to see further improvement as the store gets used to the processes and technology and we will keep you posted.

As of today, our pricing tool and technology for the Ford brand is not operational. We believe that we will have that result sometime this summer. Like Toyota, the store CSI is fantastic and the feedback from our guests is excellent.

Next slide please. Our Fort Mill Ford store has struggled more than any of the other locations driven by pricing and inventory mix which we are resolving as I stated earlier. Our pricing tool for Ford is not yet complete. Market share in April is nearly 17% month to date. This store is 100% bought into the experience and the CSI reflects that here as well as does the guest feedback.

Next slide please. Infiniti of Charlotte has done a great job with the install of One Sonic-One Experience and the results are beginning to show but the same comments fit here as well. We are early on in the rollout and it will take a few months for the store to get settled into providing the guest experience supported by other technology. Our guest feedback is overwhelmingly positive at this store and the results are starting to show. We are having a very good April. Market share is nearly 52% month to date.

Next slide please. They Cadillac brand in the market has been a big struggle with the total market selling so few cars between six stores that one or two cars can make a big swing. We like the progress in the store and the leadership in the store has really brought into what we are going to accomplish. With this said, the market has flattened out, the market share has flattened out and in April we are running at 51.2% month to date with 22 of the 43 Cadillacs delivered in the marketplace. Our CSI is very good at Cadillac as well and once again the guest feedback is excellent.

Next slide please. As you can read from the slide, we are very excited about the results we are getting from One Sonic One-Experience. As I've stated the feedback we're getting from our guests in Charlotte is fantastic and we believe we should allow our associates and our guests the opportunity to experience the technology and applications we have developed Companywide.

With this said, we are developing a strategy that will allow us to roll out technologies and will come behind the technology rollout with the remainder of the One Sonic-One Experience element as soon as we have the pricing inventory tool operational and we have a couple of more months of success under our belts in the Charlotte market.

Next slide please. Let's take a look at the performance of EchoPark. Next slide. We could not be more excited with our initial rollout and first full quarter of operations of EchoPark. We are tracking at our forecast and about the only thing that is not going right with the EchoPark launch is the weather in Denver has created some opportunities for us in particular with the opening of our neighborhood locations.

As you can see from the slide, we sold nearly 300 units in March and look for these stores to continue to grow as we move into the summer selling season. We are in line with all of our financial forecasts and we will look to begin to build on local neighborhood customer pay fixed business in the coming couple of quarters.

We have learned a lot with our facilities and we will launch a next-generation neighborhood store in Dakota Ridge which is Southwest Denver in the fourth quarter of this year which will allow us to have lighter operating expense and equally as important, a quicker bill time. We will also have two more locations that will open up in the second quarter of 2016 in Denver. We have selected the EchoPark II market and hope to have it operational late next summer.

I want to take a minute to thank our team. The work they have done to create one of America's great companies to work and shop has been inspiring. It is a privilege for me to present their numbers to you each quarter.

With that, I will now turn the call back over to Scott Smith. Scott?

Great. Thanks, J.D.. To summarize the quarter, it was a great quarter for the Sonic Automotive team. We experienced growth in each revenue category achieving record results. We gained expense leverage in our franchise dealership segment including One Sonic-One Experience expenses. We expect that our open points will drive further growth and we will continue to repurchase shares and we will be monitoring our capital requirements as 2017 lease maturities approach.

As J.D. said, it is an honor and a privilege to lead our great Company. I would like to thank all of our associates and partners for making this one of America's greatest places to work.

With that we will now open the call for your questions.

(Operator Instructions). Rick Nelson, Stephens.

Thanks. Good morning, guys. Curious if the guidance has changed at all, I think your standalone guidance was 185 to 195, and that included costs associated with the pre-owned as well as One Sonic?

Yes, Rick, this is Heath. Our guidance has not changed. We are tracking directly with our forecast and the guidance has not changed at all.

About EchoPark, I think the estimate there was for a $0.06 loss for the year, minus $0.06 for the first quarter with a new market?

That is correct. We have a pretax in our models; pretax loss for EchoPark is $13.3 million which equates to about $0.16 and we are on track with that as well.

Okay. Curious on the One Sonic-One Experience, you are going to wait for this pricing tool to be perfected before you start to roll that. Is that right?

Rick, it is Jeff Dyke. We are going to go ahead and roll the technologies out, the CRM will roll out, the F&I tool, the desking tool, all of those technologies are working beautifully and quite honestly our other stores deserve to have them as well as the guests so we are putting a plan together to roll that out.

I am not yet comfortable, we are not yet comfortable with our pricing tool. It still has work to do but that is not a surprise and so we are going to roll those technologies out first and then we will come behind as we get more comfortable with the pricing tool and we understand that it can handle all the brands.

We've got a lot of brands in the Company obviously and we've got work to do to get it ready for all of the brands so no sense in holding up the technology. We are going to go ahead and get that in place and then we will come behind. We will stairstep the rollout and it will make it a smoother rollout for the stores so that they are not taking on so much at one time. We did that in Charlotte but just to get everything into the stores, we can be a lot more effective and a lot smoother by rolling it out in pieces.

Would the one price [selling] be rolled out to those stores with the technology or that waits for the pricing tool?

Yes, it would wait for the pricing tool. We won't be ready for that until the pricing tool is ready.

Thanks a lot and good luck.

Paresh Jain, Morgan Stanley

Good morning, everyone, and thanks for taking my question. The first one is more on management bandwidth here. You have talked about availability of man hours and the slowdown of the pricing tool, but with all these various initiatives in place and that need management attention, would you say it may have impacted other aspects of your business and when do you feel management bandwidth can start improving again?

So it is Jeff Dyke. Look, there is no question in the very beginning some of our time was spread thin. But I don't think it has had an impact on our core business. We certainly would like to have more man hours available for things like our pricing tool to be able to move faster but at the end of the day, there is just not enough, the right kind of man hours to go around to deal with that. But it hasn't affected our core business.

If you look at our core business other than fixed operations where our customer pay has really been overshadowed by our warranty business, our business is solid as a rock and we continue to grow nicely and we are very comfortable there. That team, that operations team that is focused on that has really had very little to do with any of the other projects that we have going on.

Got it. And then just a second one on acquisition, Sonic has obviously [preferred] investments One Sonic-One Experience over the last seven years and kind of lagging here is with acquisitions. Is the thinking here that once you have One Sonic-One Experience fully implemented it can help you be more competitive with acquisitions in the long run as you bring in these systems and processes that can make post integration multiples look better for you versus your peers?

Yes, this is Scott. I agree completely with you. I think as we continue to go forward, you will see us be more active in the acquisition arena and we are currently looking at deals now in the market. We don't have a target on revenue that we are looking to hit. We are more opportunistic and certainly we do a better job at luxury than just about anything. So they would be our top priority.

But we would not be against looking at a platform of deals either. I think if you look at our balance sheet, it is in the best shape that it has probably ever been in and I think you will see acquisitions in the future.

This is Heath. Just to add to that, as you know, One Sonic-One Experience is specifically to create uniformity in technology and process so obviously once you have that in 100 locations bringing on new stores is dramatically easier because you just take that uniformity and you put it into that acquisition.

This is Jeff. We have developed a training team that can handle all of that now so it makes it a lot easier for us to transform a store and we began to see that as we rolled out the fourth and fifth stores in Charlotte versus the Toyota store which was our first store. So that whole transition will happen easier and easier as we go along.

Understood. That makes a lot of sense. Thank you, guys.

Patrick Archambault, Goldman Sachs.

I just wanted to follow up on one of the questions. So on the OS OE, you are rolling out certain tools to I think you said pricing -- sorry, you said the CRM and desktop tools but not the pricing tools yet. And so I just wanted to like -- what are the benefits? What are the differences that those franchises are seeing in this kind of like intermediate rollout before the full one price thing gets layered on on top of that? What are the differences between those stores and your other legacy stores just in that sort of interim period?

So our CRM tool and our desk tool and our F&I tool quite honestly make the job a lot easier for our management team and our sales associates or experienced guides to accomplish their job. So they become more efficient and more effective in their role. The pricing tool in order to be one price you have do price effectively and you have to be right. You can't be off 10% or 5%. So the pricing tool, it creates a real-time now price that allows us to execute and today for the five stores, there are too many man hours that go into pricing all the cars all of the time. Our tool in the future will do that automatically.

And so our tool is learning right now and we are making adjustments to it and I'm just not comfortable with it yet. I think in the summer sometime we will have the Ford puzzle figured out and we will be ready to begin to talk about when we can start rolling that out to the other stores. But there is no question we are going to get lift because we are going to be more effective and efficient just putting in our CRM tool, putting in our desking tool.

The other thing is the CRM tool gives us visibility to the consumers. The CRM tool follows the consumer so it is not just set store by store. So if I am sitting in a Toyota store in another market and a customer comes in that has visited a Sonic store before, I get to see everything that they have done within our enterprise and it gives us just a lot more opportunity to communicate with that guest.

So the tools are more advanced than what we have in those stores today. They are more effective and efficient and they will make us better operators.

And lastly, this is Heath. Also we've got two current vendors -- right now we have a CRM system at the non-One Sonic-One Experience stores for the sales associates and a different one for service so combined, you get the whole lifecycle of the customer and we also eliminate the expense of those two vendors.

Okay, understood. And then one just on the used to new ratio, I know that had -- maybe I'm looking at the numbers but I think that had at the beginning of last year that was tracking really nicely. And then I think to your point which you mentioned on this call you had run into some inventory issue. You just sort of got a little bit tight and now you are better. But it seems like your used to new was still kind of flat with last year's so when do we see that accelerating? Is it realistic for the used to new ratio to accelerate a little bit at this stage in the cycle? Just wanted your view on that?

Yes, that is a good question. Look, we are happy with the number of units per store that we sold for a first quarter at 93. The used to new ratio was actually just a little bit down year-over-year. That is all being driven out of our import stores. If you look at Honda and you look at Toyota, we are way outpacing those brands and it is just putting a lot of pressure. Our used to new ratio shortfall is coming out of imports and our growth in new cars pricing we are being very aggressive there. That is where we had our shortfall and it is not really a shortfall, it was planned. We are being more aggressive in our import brands, that is why you saw $183 decrease year-over-year for an NPUR, and it is putting pressure on used cars sales.

When you have a 2015 Toyota Camry LE selling at $17,000, $18,000 and that is what you are paying for a 2014 on the used car side, it just puts pressure. So that is what is driving that. We are not concerned about it at all as you know. That is something I follow like a clock and that is not something that is too concerning. As long as we have our constant growth, our units per store increasing, the import stores are going to do what they do and as long as we are being really, really aggressive on the new car side, it is going to put some pressure on the ratio. But that ratio doesn't mean we are selling less cars, it just means we are selling a lot more new cars.

Got it. That is helpful. One last one just while I have you guys, any sort of initial thoughts on the SAAR? Clearly you had a pretty nice March after a weak beginning to the year. Just from an industry perspective since you guys obviously see some of the data, do you see that being sustained here into the spring selling season in April?

So far -- the weather kind of sucked a little bit at the end of January and February so I think we got a little pickup in March from that. But April is still rolling along and so I don't think anything is going to change anytime soon. The economy, everybody keeps saying the economy in Houston is going to drop off because of oil. I think we are a lot more insulated today than we have been in the past with that marketplace because I don't think it is all built on oil anymore.

But look, at the end of the day, the SAAR is relative somewhere in the 17 million range I think is where we forecasted, 16.5 million to 17 million and it looks like it is tracking in the 17 million range.

Okay, great. That is helpful. Thanks, guys.

Bret Jordan, BB&T Capital Markets.

Good morning. This is actually David Kelley in for Bret this morning. Thanks for taking my questions and just a couple of follow-ups here. The first one, I am looking at slide 37 and the EchoPark unit volumes and I think you just touched on maybe the seasonal trends. But if you could just maybe provide some color on what you are seeing in unit volumes versus your prior expectations, whether March is tracking ahead of what you were hoping for and maybe on April trends month to date as well. That would be great.

Look, we had high expectations going in and so in or around the 300 unit mark was what we thought we would do and we think we will do in and around that mark again this month, may being a five Saturday month it is going to hopefully reach 400 and maybe plus that.

So our inventory is in really good shape. It got a little bit light at the end of February but we have fixed that and so we've got 850, 900 cars on the ground between those three stores right now so we are ready for the summer selling season. Business is good, we are meeting our expectations. We had very high expectations to start as we told you all that when we were getting ready. We didn't feel like we had any barriers to entry and everything is green light, everything has been really, really good. Other than Denver, the February, we had the highest snowfall on record for a month but other than that EchoPark is doing great.

Okay, great. Thank you. Then switching gears just a quick question on the leasing market. Maybe if you could provide some color on maybe lease penetration rates you saw in Q1 and expectations for the leasing market going forward through 2015, that would be great.

Here we go again. I mean the lease penetration rates are going up. We are leasing more cars. Hopefully the world is smarter about that as we move forward but our expectations are it is going to continue to be a bigger part of our business.

All right, great. Thank you.

Brett Hoselton, KeyBanc.

Good morning, gentlemen. A few quick questions here. First of all, Texas or those areas that are exposed to energy prices, it sounds like you really just haven't seen any change in demand which I think would be consistent what other people are saying. Is my understanding correct?

Yes, we really hadn't seen any change whatsoever. Business is good. We just had a huge weekend down there and I think in the past, Brett, the Houston corridor was always so one-sided when it came to what was going on in the energy sector but it is a much more diversified city now and while it certainly has an energy influence, that is not everything that is going on down there. We haven't seen any big issues yet.

And switching over to the One Sonic-One Experience, you talked about some challenges on the pricing tool side and it sounds like there is a shift from manual entry to automated entry which I might incorporate some scraping and various other things along those lines. I guess what I'm wondering here is can you maybe just elaborate a little bit of what is the challenge that you are seeing on the pricing tool side of the equation?

Have you got about four hours? I could educate you. So really the biggest challenge is there is three or four different groups that are working on it and a lot of it is having the right man hours, the right people with the right skill sets finalizing some of the inputs. And in particular when you get to Ford, there are so many stairstep programs, so many different pricing programs that come around and so many different iterations of products that the model is really sophisticated.

Perhaps we should have started a pricing tool with Ford because that is probably as sophisticated as it is going to get and then worked our way to the others. But who knows, we couldn't guess our way right there.

So at the end of the day, that is the big piece and I think over the next couple of months -- we had a big meeting yesterday and I think over the next couple of months we are going to be able to figure out the Ford issue. Feel pretty good about where we are with Toyota and as competitive as that brand is, our pricing tool is starting to be much more predictable. And we also quit using as much historical data on the new car side and started using all a lot more 90-day data to help us with the algorithms. We were trying to plug may be too much information into the system.

So this hasn't been built before, nobody has this. There is plenty of applications out there that tell you what cars are being advertised for. But there is none out there that tells you what they are actually selling for and that is where we have to get to so that we can cut the transaction time. So we don't have customers going back and forth and back and forth and back and forth which is something they hate doing and so we've got to have the right price on the car and we are getting there. It is getting closer and closer. We are fine tuning it and hopefully in the coming months we will have it resolved.

Thank you. And then just switching gears, just EchoPark, I guess my question here is what is your commitment level to EchoPark? In other words, one of your peers who is doing something fairly similar, there is kind of a sense of experimenting and then maybe a year or two from now maybe decide whether or not they're going to go or no go and that sort of thing.

With regard to EchoPark, I mean are you guys -- do you consider yourselves to be kind of wed to this idea all in or is it like look, if it is not working out well for us in a year we may pull back on this?

We are not experimenting. I think I know who you are referring to, they are experimenting and they are doing it in a much different way than what we are doing. We don't feel like we had any barriers to entry into this. We feel like there is one major player with 45 million pre-owned cars being sold a year and this is something that we have been working on for the last seven years as Scott Smith said earlier; this is no experiment.

We have got our second market picked out. We even have her third market picked out. We are in, we are rolling forward and we are meeting and/or beating our expectation so something drastic would have to happen for us to pull back on that.

Okay. Thank you very much, gentlemen.

John Murphy, Bank of America Merrill Lynch.

This is Liz Suzuki on for John. Similar to what we saw at one of your competitors today, it looks like you are experiencing some compression in new vehicle gross profit per unit despite the higher average selling prices. And you mentioned that you are getting more aggressive there. But can you talk about the trade-off of margin versus volume and how much you are willing to cut into the new vehicle gross profit in order to push volume and get this subsequent F&I and future parts and service work, etc.?

First of all, our domestic and our luxury in particular our luxury are (inaudible) are fine. We are not being anywhere near as aggressive but on the import side which is driving 100% of our GPU decrease, we are. And we are driving more gross, a lot more volume. As you saw in the chart, I mean you look at how we are performing versus Honda for example, we are up 11% or 12%. I think the brand being up 2%. And is paying off for us and we are driving more F&I dollars, we are driving more fixed dollars and we are certainly driving more profitability.

So we also want to have the top volume import store in the markets that we do business in and we are driving after that.

So unless we see a major reduction in profitability which we obviously haven't, we are going to keep on with our strategy, we are going to continue to be competitive. The market is competitive for imports in particular with Honda and even more so with Toyota from our perspective and we're not going to back off of that. It's how you earn your inventory for those guys and if you back off of that you miss out on inventory, it costs you a couple of months worth of business so we are not backing off.

We are also heavily invested in our pricing tool and we are experimenting a lot with our import stores in particular the one here in Charlotte in terms of our pricing tool. So we are not going to back off, we are going to keep going and we are going to keep you posted as the quarters come along.

Great, thanks. And just on parts and service the growth of 3.2% on a same-store basis seemed a little light compared to what we are seeing in the industry but warranty was very strong but it was kind of offset by customer pay which was down. Can you just talk a little bit about any planned initiatives to improve the customer pay growth since that is the largest portion of your (inaudible) shops?

Yes and that is having a little bit having to do with our mix just because we are so heavily ladened in BMW and Honda and that is where we are getting our biggest warranty. We are hiring more techs right now, we are doing a lot of repair order surveys, really understanding where we are. We are rearranging putting on multiple shifts and moving out internal work into evening shifts so that we open up more hours for our CP business. And we started doing that, we noticed this happening sort of late fourth quarter. We have been working on that and we finally got a positive bump in our CP dollars in particular in those brands towards March.

So we were up 2% in customer pay in March and hopefully that trend will continue now with the work that we are putting in. It is getting a lot of our attention.

Great, thanks very much.

(Operator Instructions). Bill Armstrong, CL King.

Good morning, guys. Just a question on the vehicle mix at EchoPark. It looks like your average selling price for the quarter was almost $24,000, a little bit higher than your Company average. I was wondering if you could just comment on the brand mix over there and is that something that is still evolving or are you intentionally going for maybe a little bit higher mix than the rest of your stores?

Well, you got to remember it is a Denver market. We are selling a lot of four-wheel-drive SUVs and pickup trucks and it is driving that price up. We started out with our average cost of sale being somewhere around $18,000. It has moved north of that just because that is what the consumer has been asking for.

But we had a meeting on this yesterday and it is about as high as we are going to let it get unless the consumer just keeps pushing us that way. We have one neighborhood store, our Highlands Ranch store, it is more of a high-end neighborhood store so we are carrying a little bit of higher end mix there. We've got more high line cars there and so we will see. I don't think it is going to get any higher than that and more than likely will come down a little bit.

We just added 300 or 400 cars to the mix so as those cars come online, that is going to bring our average selling price down and we will kind of see how it goes. But it has definitely gone up since we first started and that it is a mix issue, you are spot on. It is just we are selling a lot of four-wheel-drive trucks and SUVs.

Got it. Thanks for that detail.

(Operator Instructions). There are no additional questions at this time. I would like to turn it back over to management for closing remarks.

Thank you ladies and gentlemen for joining us today. We look forward to our next call with you. Take care.

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