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Executives

B. Scott Smith – President, Chief Strategic Officer

David Cosper – Vice Chairman, Chief Financial Officer

Jeff Dyke – Executive Vice President, Operations

David Smith – Vice Chairman

Analysts

Rick Nelson – Stephens, Inc.

John Murphy – Bank of America/Merrill Lynch

Colin Langan – UBS

Patrick Archambault – Goldman Sachs

Bret Jordan – BB&T Capital Markets

Brett D. Hoselton – KeyBanc Capital Markets Inc.

Sonic Automotive, Inc. (SAH) Q4 2012 Earnings Call February 20, 2013 11:00 AM ET

Operator

Good morning and welcome to the Sonic Automotive Fourth Quarter and Year End Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions) As a reminder ladies and gentlemen, this call is being recorded today, Wednesday, February 20, 2013.

Presentation materials which management will be reviewing on the conference call can be accessed on the Company's website at www.sonicautomotive.com by clicking on the Investor Relations tab under Our Company and choosing Webcasts and Presentations on the right side of the page.

At this time, I would like to refer to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectations about the Company's products 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.

B. Scott Smith

Thank you, Kimberly. Good morning and welcome to Sonic Automotive's fourth quarter 2012 earnings call. I am Scott Smith, the Company’s President and Co-founder. Joining me on the call today are, David Smith, our Vice Chairman, Dave Cosper, our CFO; Jeff Dyke, our Executive Vice President of Operations, and Heath Byrd, our CIO.

I will start the call with an overview of the quarter, after which I'll turn it over to Dave for his review of our financial results followed by Jeff, with an outlook of our operating results. We'll then have closing comments and open the call for your questions.

With that if you please turn to the first slide overall results. Our record fourth quarter results were driven by strong revenue growth in all areas of our business. New retail vehicle revenue increased nearly 16% from the prior year quarter driven by solid unit volumes. Along with improvements in our pre-owned business, our overall retail unit volume for the quarter increased 11%. These increases along with improved penetration yielded 19% increase in our F&I results.

Fixed operations grew at a healthy 3% rate. SG&A for the quarter was 75.4%, which continues to include incremental technology and training expenses that we anticipate will continue into the next year. Income from continuing operations for the quarter was also at record levels, with the company earning $28.8 million. These results allowed us to increase our diluted earnings per share for the quarter to $0.52, an increase of 21% from adjusted prior year amount of $0.43.

I’ll now hand the call over to David Cosper to review our financial performance. Dave?

David Cosper

Thank you, Scott, and good morning everyone. Revenue grew 10% in the fourth quarter and reached nearly $8.4 billion for the full year. Profit after-tax for the fourth quarter was $29 million, up 13% from the prior year and EPS for the quarter was $0.52, up $0.21. Adjusted EPS for the full year was $1.71, up 20%. SG&A as a percentage of growth was 76.8% for the year and a little bit than our 78% target that we established, and more on this as we turn to the next side.

This slide shows our SG&A performance and for the fourth quarter we came in at 75.4%, up slightly from the prior year. As I mentioned for the full year, we were at 76.8% 20 basis points better, and substantially better than our target of 78%. Now as we’ve discussed several times, we remain in an investment mode with our IT infrastructure and training initiatives. We expect pretty much the same level of spending we had in 2012 to continue into 2013. Nonetheless, we do expect to see further improvement in SG&A as a percent of growth as we continue to grow our business. Next slide please.

Capital spending in 2012 after mortgage funding was $70 million. For 2013, it’s projected at $97 million and included in this is a purchase of five existing stores that today are on leased properties and we are acquiring these stores as part of our strategy to own our properties overtime. Also included are three all new stores, one in Nashville, a new Audi in Houston and a new Honda store in the West Coast, and all of these are our owned properties.

Mortgage funding for the year is projected at $66 million with another $19 million expected to close in early 2014. Our owned property is projected to increase this year to 30%, up from 23% in 2012. So we are making good progress on this big initiative for us.

Next slide, as shown on this slide, we are comfortably compliant with all our financial covenants and expect to remain so going forward. Our syndicated credit facility matures in 2016, so we have a fair bit of time there.

Next slide, this slide shows our public debt maturities and as you know, we took out a 5% convertible notes in the third quarter and with that debt gone, we have no public debt maturities for five years all the way out to 2018. And importantly, our balance sheet and share count are much less complex for investors and for us.

Next slide, as part of that plan to take out the 5% convertible debt, we issued 4.1 million shares of common stock and this was really done to facilitate the transaction helping our debt holders cover their short positions in our stock. And following the successful tender that we did have for the converts, we went to work buying back the shares that we issued and in total last year we repurchased nearly 4.4 million shares at an average price of $19 a share.

Next slide. This really shows the progress that we’ve made in reducing our fully diluted share count. We are now at 54 million shares for 2013, down from nearly 66 million shares in 2011, a 17.5% reduction in our fully diluted share count.

In our most recent Board Meeting, we just received board approval for another $100 million of share repurchase authorization and overtime we’ll continue to be opportunistic and reducing further our outstanding shares.

So with that, I'll turn the call over to Jeff Dyke.

Jeff Dyke

Thanks, Dave, and good morning everyone. I once again appreciate the opportunity to share the Sonic Automotive 2012 fourth quarter operating results. Before I start, I want to take a minute to thank my partner Dave Cosper for all that he has done for our company and me; I want to wish him the best of luck in his retirement. He’s made a lot to the Sonic organization and always be remember it for his great leadership and unending smile, thanks a lot Dave.

With this said, let's take a look at the numbers. New retail revenue was up 15.7% and our new retail volume was up 14.5% and the fourth quarter was the largest new car volume quarter in company history on a same-store sales basis. Beating the third quarter record we set last quarter in helping Sonic achieved its largest new car volume year on a same-store basis as well up 18.5% year-to-date. I want to congratulate our new car team for setting this record and we look forward to an even bigger 2013.

As we discussed during our Q3 call, new car margins per unit returned to normal in Q4 with our BMW inventory levels coming back in line. Our PUR ended the quarter at $2,260 per unit, which is in line with our expectations, we were little down to last year, but this is simply a mix issue as Honda was a larger part of our overall volume this year and carries a smaller PUR, our overall growth was up 11.2%. With the brand color, we were up 18% with BMW during the quarter, 26% with Honda, 29% with Toyota, 4% with Mercedes Benz and 23% with Audi. Our new vehicle base supply ended the quarter at 51 days and in line with our thoughts and our targets. Next slide please.

Our pre-owned business continues to improve as well, as you are aware, we completed our SIMS rollout this month which centralizes 100% of our pre-owned inventory management from appraisals, to pricing, to buying and shortly even selling at auctions. This move was a significant change for us and pushed our store management teams into a new environment and culture. With all of the change our team continue to drive year-over-year growth, pre-owned was up 5.1% for the quarter and volume was up 6.4%. Overall volume for store grew to 80 units in the quarter versus last year 75 year-to-date our volume per store was at 86 units versus last year at 80.

We believe we can surpass the 100 unit volume per store goal that set for ourselves as a company in the back half of this year, as our team settles into the use of SIMS. Then once we hit that level we believe we can get into 150 unit per store mark at SIMS as inventory management capabilities become more stable within our culture.

Congrats to our pre-owned team for setting an alternate volume in pre-owned record and also pre-owned related gross record for the company in 2012. And we expect 2013 to be even bigger. Our pre-owned day supply was 30 days and that’s in line with our expectations. Next slide please.

As you can see from the side fixed operations revenue was up 3% and gross profit was up 2.7% for the quarter. Customer pay revenue was up 1.6% while customer paid gross was up 1%. Internal and sublet revenue was up 7.2%, while gross was up 8.8%. Our service pad rollout is nearing completion in just as was sensed has been a major culture change for our team, as this technology begins to take hold we see significant upside to our current store base performance, and we’re already seeing some stores really take off or others are getting used to the change. 2012 was an all-time fixed gross record for the company, our fourth year in a row such performance. And congrats to our fixed team and we look forward to a bigger 2013.

I’d like to take this opportunity to thank our team for their hard work and dedication. In the fourth quarter, our company made more money for our shareholders than any other time in company history no matter the store count solidifying our focus on getting the most out of each location at Sonic Automotive owns. These locations have even more to offer, and maybe ups and downs we look forward to 2013 is a great opportunity to continue to prove that Sonic Automotive is one of America's greatest companies to work, shop and invest. Thanks team for a great year and all which you do.

And now I would like to turn the call back over to Scott Smith.

B. Scott Smith

Thank you, JD. We're very pleased with our record fourth quarter and annual results. We’ve accomplished a lot over the last several years as a result of our strategic focus. Between 2009 and 2012, we've grown adjusted net income from continuing operations from just $45 million to $100 million resulting in a compounded annual growth rate of 31% in our earnings.

This has been achieved through continued execution of our strategic initiatives as Jeff mentioned in 2012, we retailed more vehicles than we ever have in Sonic history. These retail activities help fuel our fixed operations and F&I activities. Our associated gross profit generation in 2012 is $1,235 billion this compares to gross profit generation in 2009, $981 million resulting in an increase of over $254 million without buying any additional stores.

In 2012, we're very busy buying our dealership properties as Dave mentioned. We believe by the end of 2013, we will own approximately 30% of our operating properties. This remains a focus for Sonic Automotive. Our Board has shown their commitment to shareholder value by increasing the company’s ability to repurchase stock. Our repurchase authority stands at approximately $144 million after an increase in authorization of $100 million received last week.

We believe the current year’s share repurchase and the elimination of the 5% convertible notes from our capital structure bolstered shareholder value and cleared a path for steady growth in the future. We believe we are now positioned to take advantage of open points and acquisition opportunities. We don’t anticipate significant activity in 2013, but may look for tuck-ins or open points where it makes sense.

Next slide please, 2013 outlook. We appreciate the time you’ve given us today to review our quarter. We are very pleased with the results this quarter and benefits we are seeing from our continued execution of various operational and financial strategies. As we look forward to 2013, we are expecting new vehicle industry volume to range between 15.0 million and 15.5 million units.

We expect our pre-owned vehicle volume to grow in the mid-single digits. Fixed ops should grow in the low to mid single digits with overall revenue growing in the high single digits. Our expectations for SG&A is below 78%. We are currently targeting 2013 diluted EPS from continuing operations at $1.93 to $2.03 which represents a 13% to 19% growth over adjusted EPS of $1.71 in 2012.

Just want to echo JD’s comments about Dave, this is his last earnings call with us, but he has been a wonderful friend to the Company and to the shareholders, and we are going to miss him, and wish him nothing but the best.

Before we take the questions, we’d like to take a moment, thank all of our associates and vendor partners who join together every day to help us build one of America's greatest companies to work and shop. It is an honor and privilege to lead our great company.

With that, thank you very much. And we'll now open the call for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Rick Nelson, Stephens.

Rick Nelson – Stephens, Inc.

To ask you about the discounts, it looks like there is some revenue that came out through discounts, if you could provide some color there, the size of revenues that we're looking at?

David Cosper

Yeah, Rick, this is Dave. I think the full year number is right around $360 million.

Rick Nelson – Stephens, Inc.

Okay.

David Cosper

That's probably $100 million a quarter something like that.

Rick Nelson – Stephens, Inc.

Okay, gotcha. And if you hit your EPS target, I’m curious where you see free cash flow and how you rank the alternatives between acquisition which there is some discussion in the release about and buybacks where you’ve stepped up the authorization?

David Cosper

Yeah, we probably generate $70 million, $80 million something like that, I cannot view it is as for balance sheet actions or growth actions that we would want to take. And of course, it's a little tougher discussion item, we took out nearly 4.5 million shares at $19 and something, and even though we are down its probably $23, $24 range. So that becomes a little tougher. You need to balance both those things, I don’t think we’ve had an acquisition in five years. And we’ve done a great job as Jeff and Scott mentioned growing our business with the assets we have, but at some point you need to look for growth.

And I think we’ll be prudent and use good judgment as we try and grow our business. But I would see as, our share count, it’s not going to be going up, it’s going to be going down, you are going to for sure whittle away stock plans and things like that. And we’ll just keep an eye on it and make that decision based on what we see, based on the opportunities we see.

Rick Nelson – Stephens, Inc.

On the acquisition front, are you focused on primarily on luxury, or are you more open in that?

B. Scott Smith

Hi Rick, it’s Scott. I think we’re really looking to replace some of the revenues. We have sold a lot of franchises over the years. And we are more so looking to replace the revenues with brands that we excel. I don’t leave anybody out here. But like Audi, BMW, Mercedes, Porsche, Honda, for some of these Land Rover, Jaguar, some of these franchises that we really do a very good job, and we’re looking primarily for tuck ins in markets where we currently are doing business, but I think if the right situation came along, we could own the real estate and one of the brands in the market where we don’t operate, we would certainly look at it.

Rick Nelson – Stephens, Inc.

Thanks, Scott. And some commentary about the first quarter, I think will be helpful as concerns about payroll tax changes and the impact on the consumer and carriers are seeing any impact?

Jeff Dyke

Hi, Rick, it’s Jeff Dyke not really, I mean business was good in January. February, the first couple of days were a little slower, but the last week and weekend were real good. So business is steady as she goes, it’s been good.

Rick Nelson – Stephens, Inc.

The BMW inventory that was challenging in the summer months and seem to come back in the fourth quarter, what are they telling you, I guess about supplies in the New Year 2013?

B. Scott Smith

Yeah, we are in great shape.

David Cosper

Our inventory supply is in great shape across the board and we could use some more Audi’s, because we are selling everyone we get our hands on, but at the end of the day our inventory levels and the issues that – not that we have, but the BMW had during the summer months are resolved and inventory levels are back, and as a result you saw our margins come back up and our volume growth was real nice in the fourth quarter.

Rick Nelson – Stephens, Inc.

Good. Thanks a lot and good luck.

David Cosper

Thank you.

B. Scott Smith

Thank you, Rick.

Operator

Your next question comes from the line of John Murphy, Bank of America/Merrill Lynch.

John Murphy – Bank of America/Merrill Lynch

Good morning guys and Dave, congratulations on a great long automotive career.

David Cosper

Thank you.

John Murphy – Bank of America/Merrill Lynch

Couple of questions, first, on the change in a stance in acquisitions, what has changed it’s led you to reconsider this and think about making acquisitions. Is it price, opportunity, you are running out of rope on your internal organic growth. Just trying to understand what’s changed?

David Cosper

Yeah, I’ll start on this one. I think one big change is our balance sheet. And we’ve done a great job of cleaning that up following the horrible situation we had in 2008, 2009 with everybody else and we’ve got a very nice balance sheet and we made huge improvements operationally. We are doing very well there and the culture is establishing itself nicely and I think it's about time that we take a look. Scott, you want to add anything to that?

B. Scott Smith

John, as I mentioned few minutes ago, we were primarily looking to replace some of the revenues that we sold, because at one point I think we had about 178 franchises and now we're down to about 108. And our Chairman is very interested in growing in some of those brands that I mentioned earlier. We are being very prudent with our investment, our priorities are still to invest in the base business in real estate and strengthen our balance sheet.

Jeff Dyke

And John, this is Jeff Dyke, you'd mentioned that something you certainly want to make sure that – we make sure that air is clear, where there is still lots of runway left in the current store set that we have. As I mentioned earlier, we're going to approach the 100 unit mark in the pre-owned volume this year, but we think we're going to take that up to 150. So there is plenty of room left and what we got, but like Scott was saying, there are also opportunities that we can tuck-in some stores, we can tuck-in some stores and markets we are already doing business and just support our core business. So we've never been in a position from our estimation to do that over the last five, six, seven years, and today we are to great position to be in. And so still lots of opportunity in our core business.

John Murphy – Bank of America/Merrill Lynch

Okay, thanks great. And just one follow-up question on that, I mean one of the big risks and I think you guys ran into the late 90s with CEO was sort of the management bench as we're making acquisitions and doesn't sound not suggesting you're going back to that hyper acquisition growth at all. But I mean that was one of kind of the big risks or problems back in. Have you been working on the pipeline of general managers and management talent to push out to these new stores or into integrate them or is that something that still want to come?

Jeff Dyke

Absolutely, we have a succession plan in place it’s been in place for several years from now. And we are ready to roll, it’s up got names and numbers of the people that I’m going to call and put in position, should Scott come along and say, here we’ve got this acquisition in place. And immediately I have the ability to install our culture and our processes in any stores that we purchase, so very, very – it is a great question. That’s not going to be a problem for us.

John Murphy – Bank of America/Merrill Lynch

That’s great, that’s great to hear. Second question, just on the parts and service business, we’re kind of hearing a differing sort of timing on the units and operation around different dealerships growing. And it sounds like some of the public groups are seeing the UIOs grow, its going to feed the parts and services business, sooner some sound like its more late 2013. What are you seeing around your dealerships, I mean, do you think you are at the infection point where the UIOs are actually growing enough that you’ll really see this real positive bump or is it sort of later 2013, early 2014 that you’d see that kind of benefit?

Jeff Dyke

John, if you go back a couple of years, our fixed operations business never went backwards. I mean we think growing 2% to 5% a year for the last four or five years, and I expect as Scott stated in his numbers earlier, I expect this to grow in that range this year, 3% may be 4%, 5% to 3% really humming. And if there is a bump there, because we’re certainly selling a lot more of cars, if there is bump there, more power to us, but I certainly didn’t budget that way, I’m not forecasting that way. I really think 3%, 4% or 5% is where we’re going to be, and looking at the same number in 2014 as well unless something really changes, I don’t see that number changing too much, and we’re not complaining, it was a record year for us in fixed operation grows and it’s going to be another record year for us in 2013.

John Murphy – Bank of America/Merrill Lynch

Okay. That’s great to hear. And then just lastly, you mentioned what the SIMS program and your other focus on used, you might ultimately get up to 150 vehicles per store per month. And that based on current numbers would be much greater than one to one on used to new, is that ultimately a target that you would be selling more used vehicles per dealership than new or is this something that’s way down the line when the SAAR is back in the 16 million unit range and it would be close to one to one.

B. Scott Smith

No, we should be selling more used than new anyway. There are 45 million used cars sold in America each year. There are 15 million new cars. So it’s just a huge opportunity. There is plenty of business out there and it took five, six, seven years to get our house in order just to get to approaching to 100 unit mark, and I know we can do a lot more.

Centralizing our inventory management, this was a big change for our company. We appraise every single car in this company centrally out of our Charlotte headquarters, so we also price every single car. So that’s a big change and that’s no longer a decentralized process in our company, it centralizes and as we get better and better at pricing and appraising.

We’ve already seen our appraisal ratio move from 4 out of 10 to we are approaching 6 out of 10. So we are doing a much, much better job, that just going to allow us to trade for more cars, we sell everything we trade for, so our volume is naturally going to up. We’ve got stores that have gone from selling 50, 60 a month a few years back to now selling 250 to 300 a month and there is just a lot of upside opportunity there. We should be selling more used than new and that’s what you are going to see here at this company.

John Murphy – Bank of America/Merrill Lynch

But structurally that would mean you have to source cars from the auction as oppose to just vehicles from trade to get above one to one. Is that something you’d see doing more of the sourcing cars from auctions?

B. Scott Smith

I think there's a couple of different models, we're going to store some auction, but the other think in CarMax has shown this a majority of their cars come from people they just bring their car to them, because they put the right money on the car, and that's a pretty easy model to follow, and they've been successful on it. So you're going to see a straight for more cars that's going to help, the consumers going to bring Sonic Automotive stores more cars, because we're putting the right money in the car, and then we’ll source, more cars from auctions.

John Murphy – Bank of America/Merrill Lynch

So you envisioned buy a car from a consumer coming into your lane or your dealership without they’ve even buying another new user that’s actually sort of a source for that used vehicle business?

David Cosper

You bet.

John Murphy – Bank of America/Merrill Lynch

Okay, great, thank you.

Operator

Your next question comes from the line of Colin Langan, UBS.

Colin Langan – UBS

Okay, thanks for taking my question. Do you have any thoughts on your branding strategy, I know your competitors are going out national brand, any thoughts on following that or is that something it doesn't make sense at this point?

B. Scott Smith

Hey Colin, this is Scott. Jeff and I are going to answer this one together. First of all, I think its fantastic with AutoNation has done, I think it build some transparency for consumers, get for them and being able to leverage their brands or advertising spend, et cetera, I think it's great for the manufacturers. But I look at what AutoNation has done is more of the naming initiative, right then a brand because the brand has brand promise with it.

What can customers expect when they come into an AutoNation store? So you heard me say over the years that we have to be predictable, repeatable and sustainable. So we’ve been working on putting in processes in these dealerships for years through our playbooks where when a customer comes into any Sonic Automotive store regardless of where it is, with the brand they will be able to identify it’s a Sonic Automotive store.

To date, we have not had a plan to brand our stores. I think in the future that there will be some form of a branding strategy that comes along, but it’s important to keep in mind that a lot of our manufacturer partners don’t want to see another brand up there on the dealership. For instance BMW or Audi or Mercedes or any of these luxury stores, they tend to want their brand name up there.

JD, you’re going add anything?

Jeff Dyke

Yeah, I echo Scott’s comments. I congratulate AutoNation, I think they did a very nice job putting together their naming strategy as Scott called it and agree with that. I think there is a great opportunity for Sonic Automotive to be included in what it is that we do down the road. But as Scott said, we are working on making sure that the same french fry for example, is in every single store that we have. So when a consumer comes in they know that it’s a Sonic Automotive experience and we are a little bit of ways from that, but given little time and something of that nature will come to life at Sonic Automotive as well.

Colin Langan – UBS

Okay. In terms of your acquisition strategy, is this all going to be similar to what we have seen in the past? U.S. dealers and the Sunbelt-type states, or are you thinking more outside the U.S. or other parts of the country at this point?

B. Scott Smith

Colin, its Scott. We are remaining strictly domestic here aren’t sure. You’re not going to see us over in Europe, you are not going to see us down in Brazil or any of these other areas. I think what coupon has done, it just differentiates them a little differently then our strategy, but we have no plan to go to Russia or China or any of those things either. So I’d say acquisitions primarily will remain in what we call the smile-belt, which is kind of mid-Atlantic, south-east, west we really like Colorado, Denver is a great market for us, Texas. I wouldn’t see a tremendous amount of growth in California market areas but I certainly can’t rule it out.

Colin Langan – UBS

Okay. Now when we think about M&A as to SG&A next year, you have some pretty sizable investment this year. Is that going to be, it sounds like that you are going to continue to invest, but is that going to still be a year-over-year talent as the investment level kind of levels off of that? Or do you still see that investment creeping up kind of plenty of thing?

B. Scott Smith

I think Colin, I think run rate is going to be about the same year-to-year and where we’re going to get some leverage is, what we can do to grow gross. I don’t see a lot of cost increases coming.

Jeff Dyke

Colin, this is Jeff Dyke. You used a word challenge for us. I want to make sure that we clear out here as well. It’s not a challenge, I mean we are investing in our business, we’re investing in our technologies that long-term are going to grow our business and so on a short-term basis is that post SG&A this year to the little bit below our target. Then that’s fine, this is not a year-over-year deal for us. We run a marathon, we are investing in our business long term and these investments are making a huge difference and how we perform today, and they are going to make an even bigger difference tomorrow. We believe its going to give us a big competitive advantage. So SG&A is going to be in and around where we were this year in 2013 and probably in 2014 as well.

Colin Langan – UBS

Okay. Does the outlook is based on leverage, because I thought your guidance is slightly better. Just one last question, tax rate seemed to come in lower in the quarter. How should we be thinking about taxes going forward from a modeling perspective?

David Cosper

Tax is going forward at 38% to 40%, hopefully closer to 38%, it moves around based on where we earn our income and then minor adjustments as we settle things with taxing authorities, and that’s really what drove the slight improvement in Q4.

Colin Langan – UBS

Okay.

David Cosper

Unless maybe you can get our government to do something a little different for us.

Colin Langan – UBS

Okay. Thank you very much.

Operator

The next question comes from the line of Patrick Archambault, Goldman Sachs.

Patrick Archambault – Goldman Sachs

Thank you. Yes, just actually two items, one related to that last question. I thought I remember hearing that investments were going to be in the SG&A side more front-end loaded in 2013, more in the first half for the second half. Is that still the way you're thinking about it, if indeed that was correct? And maybe just related to that, maybe you can just talk a little bit about how you see the cadence of earnings playing out, given the relative puts and takes on the expense and gross margin side.

David Cosper

Yeah, let me start – hi, Patrick, this is David. I think the dollar spend is fairly level, and what we had talked about is these initiatives take hold your gross goes up, so your percent tends to decline over time and that’s how we've been thinking about it. So it may be a little heavier in the first half of this year than the second, but I don't think its material difference, and it's going to move our earnings. We tend to have a very lighter first quarter, pretty good Q2, Q3 and then heavier in Q4. It is principally driven by our luxury brands in Q4 really moves it and lot of people buy in December and then it falls off in January, February.

Jeff Dyke

Yeah Patrick, this is Jeff Dyke. This is one that I would love for us to all get right, because I have been dealing with this now for ever since I got into this position. But our Q4 is bigger than our Q3, and it's always going to be bigger, because of our brand mix. And every time everybody steps up and starts looking at our Q3, we always have this much bigger projection from the Street on Q3 and a lower projection on Q4. In every year, I would say the exact same thing to you guys, at the exact same time, and every year it happens, our Q4 is bigger than our Q3. And if we could get everybody to buy into that, we'd all be happy because we wouldn’t miss your Q3 number and we wouldn't blow away your Q4 number, I mean it's just – it be wonderful to be able to get that straight.

Patrick Archambault – Goldman Sachs

Okay. I am writing that down on my notepad as we speak here so...

B. Scott Smith

Thanks for the question.

Jeff Dyke

You are a good man, and we appreciate the question, I'll pay you later.

Patrick Archambault – Goldman Sachs

All right, all right. Lastly, Dave congratulations on a terrific career, we miss working with you.

David Cosper

Thank you, Patrick.

Operator

Your next question comes from the line of Bret Jordan, BB&T Capital Markets.

Bret Jordan – BB&T Capital Markets

Hi, good morning.

B. Scott Smith

Good morning.

Bret Jordan – BB&T Capital Markets

A couple questions really around the SIMS rollout. I guess as prior to rolling it out companywide you probably had some regional marketing experience, but the productivity of SIMS, is that more weighted to being able to access more vehicles? Or because you are getting the vehicles at better pricing and you're picking up the incremental margin per unit?

David Cosper

I mean, I think it’s all the above. It allows us to trade for more cars, all right, because if you have a group at your trade center, we’ve got 15 people looking at 20,000 to 30,000 cars a month. They are going to be a lot more; their ability to look at a car and place it in the right market is a lot greater than a single person sitting at one dealership in a marketplace. It allows us to price our cars better, because we’re using data to make decisions, instead of how we feel about our car, which is very important.

And then it allows us to purchase cars online, and represent our cars they are live from our trade center at the auctions via video link. So we’re controlling 100% of our inventory, a 100% of the time through our trade center and our SIMS inventory management system. And just getting online in all of our stores this month, we just see all kinds of fun things happening and our business is going to go, that’s why I’m so confident we’ll get on past 100 unit mark towards the back half of this year as everybody gets used to the tool, and then we can set our sights on our 150 units.

Bret Jordan – BB&T Capital Markets

Do you have any anecdotal data points as far as from test markets as you ramped, or the beta on the ramp-up of the program that you see what the productivity difference was between a traditional market and a SIMS market?

B. Scott Smith

Well, the big thing right, the one that I gave earlier is, we were trading for 3.5 to 4 cars out of 10, prior to SIMS coming to live. Today we’re trading for 5.5 to 6 cars out of SIMS. So we’re trading for more inventories. When we sell everything…

Bret Jordan – BB&T Capital Markets

Would the gross dollars per unit have -- would there be a delta between the 3.5 to 4 and 5.5 to greater number and the margin on the number?

Jeff Dyke

No, our margin has been, if you go back and look we’ve been running for the last year and half or so in between $1,350 to $1,400 a copy and that the pricing elasticity has driven that. We pay a little bit of attention to that PUR, but the more important thing is just get the price right how much gross dollars can you generate that's what we take to the bank. And we generate more gross dollars in the $1,350 to $1,400 range then we do a $1,500 or $1,600, because our volume comes down and we become less competitive.

So we feel like we found the sweet spot there from a PUR perspective, and now is just fine tuning, its having the right vehicle at the right price at the right store. We tried for a BMW and Mercedes store and we move it over to our BMW store, it turns faster and makes higher gross, so it generates more gross dollars. So the system is helping us move cars to the right store once we trade for it. It is helping us price the car right. The first time instead of having to put our customer to a position where we are negotiating back and forth, and it’s helping us trade for more cars. So all across the board, its making a big difference and we will make a huge difference as we forward and everybody gets used to centralize inventory management.

Just you know we're not far from behind from doing the exact same thing on new, we're working on pricing mechanisms and tools to handle the new car inventory, the exact same way as we move forward. And that would be developed and built this year and really implemented and put into practice next year.

Bret Jordan – BB&T Capital Markets

And would you see turning the used inventory faster, because you know what market it needs to go to via SIMS?

B. Scott Smith

We turn our inventory already at least one-time a month, and so if we can turn it faster than that great, but we are turning our inventory 12 times a year and now we feel ready good about that.

Bret Jordan – BB&T Capital Markets

Great, thank you.

Operator

(Operator Instructions) And your next question comes from the line of Brett Hoselton KeyBanc.

Brett D. Hoselton – KeyBanc Capital Markets Inc.

Good morning gentleman.

B. Scott Smith

Hi Brett.

David Cosper

Hi Brett.

Brett D. Hoselton – KeyBanc Capital Markets Inc.

I wanted to ask you a little bit about gross profit throughput as it relates to some of your spending, additional spending throughout this year and into next year. Your gross profit throughput in the quarter – very good relative to your peers, and so nice job there, congratulations. I know that you've bumped up your spending in anticipation of growing your business, iPads, that sort of thing. I think you started kicking that in first, second quarter of this year. So it seems like you would have some fairly easy comps as you move through the first half of next – or this year. So what are your thoughts there? Do you see that being a nice tailwind from a throughput standpoint as you move through the first half of this year and into the back half of this year?

B. Scott Smith

I think you’ve got a great question, by the way and I think we got another year to go. We’ve been in practice with our pre-owned. If you remember, you go back five, six, seven years, we were selling 30 cars a month, and so we moved that up to over 85 now. And from our pre-owned perspective, our fixed operations gross is set record after record each year. So I don’t know that we had easy comps, but I think that the investments that we’re making today, as we move into 2014 and the technology really becomes a way of life at Sonic, that we begin to perform a little bit better than what we’re performing today.

So a great question I think you’re eight months to twelve months early.

Brett D. Hoselton – KeyBanc Capital Markets Inc.

Fair enough. Yeah that answers my questions. Thank you very much gentlemen.

B. Scott Smith

Thank you.

Operator

At this time there are no further questions. I’d like to turn the conference back over to management for closing remarks.

B. Scott Smith

Great thank you, Kimberly. Just wanted to take a moment to once again thank Dave Cosper for his service to our shareholders and wish him all the best. And I want to thank everyone on the call today and appreciate your time. Have a great day.

David Smith

Thank you.

Jeff Dyke

Thank you.

Operator

And thank you for participating in today's conference call. You may now disconnect.

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