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Sonic Automotive, Inc. (NYSE:SAH)

Q2 2009 Earnings Call

July 28, 2009 11:00 am ET

Executives

B. Scott Smith - President, Chief Strategic Officer0x08 graphic

David P. Cosper - Vice Chairman, Chief Financial Officer

Jeff Dyke - Executive Vice President - Operations

Greg Young - Vice President of Finance

Rachel Richards - Vice President of Retail Strategy

Analysts

Matthew Fassler - Goldman Sachs

Jordan Hymowitz - Philadelphia Financial

Rick Nelson - Stephens Inc.

Ben Brigadier - Imperial Capital

John Murphy - Merrill Lynch

Colin Langan - UBS

Derek Langer - Jefferies & Company

David Blecher - Robert W. Baird

Adam Wright - Analyst

Operator

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

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 For Investors tab and choosing webcasts and presentations on the left-side of the monitor.

At this time, I would like to refer to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information, or expectations about the company’s products or markets, or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These 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. Please go ahead.

B. Scott Smith

Great. Thank you. Good morning, ladies and gentlemen. I am Scott Smith, co-founder, President, and Chief Strategic Officer. Welcome to Sonic Automotive's second quarter 2009 earnings conference call. Joining me on the call today are the company’s Vice Chairman and Chief Financial Officer, Mr. Dave Cosper; our Executive Vice President of Operations, Jeff Dyke; Rachel Richards, our Vice President of Retail Strategy; and Greg Young, our Vice President of Finance.

If you will please turn to the first slide, Sonic Automotive Q2 2009 conference call topics. Today we will be discussing an overview of the quarter and then turn the call over to Dave for a more detailed financial review. Jeff will follow Dave and give an update on our operational trends and additional color, and then we’ll summarize and make closing statements.

If you will turn to the slide, quarter in review, against a fairly weak but improving economic backdrop, Sonic once again delivered strong operating results. Our ability to stay focused on the basics, on our people, and what we can control continue to benefit our overall bottom line.

In a below 10 million SAR environment, we again picked up market share in the quarter. We posted quarterly used vehicle retail volume record, our service lanes are seeing improved traffic, our fixed operation margins were up on a year-over-year basis for the first time since the third quarter of 2007, and our total SG&A expenses were down $27 million for the second quarter. Our controllable expenses as a percent of gross were also down from the prior year.

Our operating margins before impairment charges was 2.9%, which we feel is an outstanding job in light of this recession.

For those of you who have been following us for the past year or so, you are aware that we’ve been preparing our organization to optimize our opportunities regardless of the external factors around us. We continue to build for the long-term and not quarterly. As a result, our performance will be sustainable for a long time.

I would now like to turn the call over to Dave Cosper for his financial comments. Dave.

David P. Cosper

Thank you, Scott and good morning, everyone. I have to tell you things feel a lot better on many fronts than they did just a few short months ago. Of course, we successfully addressed our maturing debt in May and I want to thank again all of our lenders for working with us.

A key part of what helped us through that was the underlying strengths of the business. In this quarter’s results, we see those strengths emerging further in essentially every aspect of our business.

Turning to the slide, revenue for the quarter was $1.4 billion, down 22%, or $400 million from a year ago. Income from continuing operations was $3.1 million, down $13 million from a year ago. And really not unexpected, considering the challenging economic environment and restructuring costs from our debt exchange. And I’ll have more on that in just a moment.

I am very pleased with our operating margin, which was 2.9% for the quarter, excluding impairment charges and those were related to a restructuring, GM's restructuring. And EPS for the quarter was $0.07.

Please turn the slide and we’ll talk about some of the color on the numbers. The successful negotiation of our debt resulted in several accounting impacts, including increased non-cash interest and debt restructuring costs. These costs total $10.6 million for the quarter and these are noted on the slide.

In addition, we had an impairment charge of $3.8 million, and this is on several GM franchises that will be closed as part of GM's restructuring.

Excluding these charges, we earned $20 million for the second quarter compared with $11.7 million in the first quarter on a comparable basis.

Given this difficult operating environment, I think it’s important to assess whether our improvement actions are having the desired effect, and our results show that they are. This slide shows two things. First, strong sequential profit improvement from the first quarter and second, the fact that even in a flat SAR environment, our performance is not driven just by cost reductions alone.

So basically on flat industry volume, revenue is up 10%, gross profit is up 5%, cost is flat and operating income is up 20%.

Impressively, excluding the charges I mentioned, pretax income is up 70% quarter to quarter -- again in a flat industry, we grew revenue and gross, were able to hold costs flat and that allows gross to flow through to the bottom line. Next slide.

This slide looks at EPS and makes the same adjustments for the debt related costs and impairments that we just talked about. This slide goes on, however, to show the impact of the potential change in our diluted share count. The EPS accounting for this transaction is complex. Our actual diluted share count for the quarter was 41.6 million shares. This share count includes no impact from the new 6% notes that we just restructured, as these notes were not dilutive in the quarter.

We do, however, expect them to be dilutive in future periods and have therefore shown both Q1 and Q2 as if these shares had been outstanding and dilutive in both quarters.

Recall that this new convertible debt is not convertible into shares until August 2011, so we have a fair bit of time to take this debt out and avoid dilution and that certainly is our plan.

As you can see, after these adjustments, EPS increases from $0.14 for the first quarter to $0.22 for the second quarter. Next slide, please.

For accounting purposes, a value of $11 million has been ascribed to the embedded derivative included in the new convertible notes that we issued, a non-cash interest cost of $2 million to $3 million per quarter will be amortized over the next five quarters. Next slide.

This slide shows our present debt structure, post the debt exchange. As you can see, our revolver balance was $80 million at June 30, down from $100 million at March 31 and including, of course, the $15 million draw on the revolver as part of the debt exchange.

We have a strong focus on cash generation and are pleased with the progress we are making. The revolver balance is about $45 million today and we are working to reduce it further.

Note that floor plan borrowings are down 26%, or $286 million from year-end. At the moment, we are finalizing administrative matters on the recently issued 6% bonds and thinking through all options for addressing the 4.25 debt that matures in November of 2010 and our syndicated credit facility that matures in February 2010. Next slide, please.

Comments here are short -- this slide shows we are comfortably compliant with all our debt covenants and that’s a good thing. Next slide, please.

Capital spending for the second quarter dropped to $6 million as we focused even more intensely on cash flow and we were able to put several large projects on hold. Spending for the year is projected at $63 million but this is contingent on us getting mortgage funding for the projects that we have on hold and if that funding isn’t forthcoming, we will not spend the money on these projects. Next slide, please.

I am very pleased with our cost performance for the quarter and frankly for the year. Our entire team is working together to reduce costs in the best possible way. I feel we are spending smarter and optimizing our cost levels to complement our revenue generation and that’s a really delicate balance that I believe we struck nicely in the quarter.

In total, SG&A as a percent of gross was 79.7%, down from 83.5% in the first quarter. Compared with a year ago, excluding rent, SG&A as a percent of gross was down 100 basis points. We reduced essentially every cost element in our business.

Last quarter we indicated we were on track to reduce total costs by $135 million and within that, reduce structural costs by $85 million. We remain comfortable with that target for the year.

And with that, I’ll turn the call over to Jeff Dyke. Jeff.

Jeff Dyke

Great. Thanks, Dave and good morning, everyone. Echoing the sentiments of both Scott and Dave, I am really proud of our results this quarter. Our performance is a testament to our strategies and the ladies and gentlemen of Sonic Automotive.

Before I get into the numbers, I would like to talk about one of the major contributors of our success so far this year, in a differentiating factor as we continue to execute our strategies.

For those of you who followed us, Scott has mentioned repeatedly that our business is a people business and that our goal is to become the automotive employer of choice, plain and simple. While we’ve always focused on turnover, starting in August of 2008, we’ve really attacked this important opportunity. Obviously compensation, benefits, and work environment are critical but just as important is the vision that we are building as a company and our ability to communicate this vision.

The great news for our investment community is we are just beginning. So far this year our turnover is down about 50% company-wide, from this time last year and that is a record low for Sonic.

Since the beginning of the year, our associate engagement index has gone up significantly, which is completely counter to what is happening in the industry. Record levels of engagement, coupled with increasing longevity, has resulted in improved execution and higher productivity. Our investments in training, technology, and strategies are paying off. We are executing our game plan and the results are beginning to show just how powerful this company can become as it matures its ability to execute.

I want to thank our team for the hard work and dedication to executing our game plan and I am proud to present the following numbers on their behalf.

Now let’s review the segment results for Q2. Please turn to the next slide.

With regard to new vehicle sales, Sonic Automotive has gained market share in each of the last five months. Our focus on associate retention and the ability to execute our new vehicle inventory management, e-commerce, and pre-owned game plans have contributed to the success of our all-time high new market share levels.

Total retail volume for the quarter was 19,300 units, a decline of about 32%. I am happy to report that year-over-year rate of decline diminished each month of the quarter. In the month of June, approximately 15% of our dealerships actually increased their volume over last June.

We finalized centralizing 100% of our new car ordering approvals at the end of last year. This move has yielded significantly better new car inventory controls. Since the end of the first quarter 2009, we’ve reduced our new vehicle inventory by about $45 million. Our new vehicle days supply at the end of the quarter was 62 days, a level that we are very comfortable with, given the current business environment.

Our inventory process is showing positive results in our new margin as well. New retail margin for the quarter was 7.1%, flat with last quarter. As you are aware, we ended 2008 with an all-time high customer satisfaction score for our company with 80% of our scores at or above national average. Thanks to our great team of associates at Sonic, we are tracking to be ahead of that level in 2009. Next slide, please.

Turning to pre-owned, I am very proud to report that we not only set a quarterly used retail volume record but we’ve also set a record for the first half of the year. Additionally, as you can see from the slide, for the first time in our company’s history, our used-to-new ratio in the quarter was over 1-to-1.

Total used retail volume was up 12.8% compared to the second quarter last year and up 19.7% from the first quarter. Once again, the focus that we have placed on associate retention, e-commerce, and the execution of our pre-owned game plan over the last several years is really paying off for the company. Right now, it’s fun to watch. We’re generating more pre-owned traffic than ever, thanks to our strategy and at the same time, we have a more seasoned and better trained group of associates that are driving the numbers you see.

And this is just one part of what I’m excited about. In just a few short years, this group of stores has been able to improve their average monthly used retail volume by about 50% and what’s really encouraging is that we have the opportunity and the ability to increase this number significantly.

The momentum is continuing into July. Currently we are projecting about a 20% increase over last year and we had a good pre-owned July last year. Our team is delivering the results and it’s great to watch. Quarter after quarter, they just keep getting better.

Our used vehicle margin was 8%, down from last year and last quarter. All brands and regions experienced the decline. Increased valuations and competition put stress on our grosses; however, so far in July, we are seeing a bit of a pick-up to that -- to those numbers.

We’d also like you to please keep in mind that while the margins were off, the additional unit volume yielded more F&I and internal gross. Our used vehicle inventory continues to be in fantastic shape. We closed the quarter with roughly a 30-day supply of used vehicles on hand. Next slide, please.

Finally, overall our continuing fixed operations revenue was down 3.3%. As you can see from the slide, customer pay revenue was down 1.1%, the majority of which was Detroit big three driven and department wise, body shop driven.

We are also extremely excited about the margin increases we are seeing in the customer pay segment. Service was up 100 basis points, body shop was up 40 basis points while parts was down slightly.

Total same-store warranty revenue was down 1.1% and we continue to experience increase year over year in warranty in our Lexus dealerships. This increase, however, is offset by declines in our other brands. Same-store internals were off about 12.3% and that’s primarily due to lower PDI but in line with our new vehicle volume declines.

For the quarter, continuing fixed operations gross profit was down 2.3%, continuing gross margin was 50.3%, up 50 basis points from last year.

Just as a note, we have hired a national body shop director that has just recently joined our team and while it’s not a huge portion of our business, we are excited to start moving in the right direction on our body shops. The shops add a decent amount of parts revenue and brings some overhead coverage to the dealerships that actually operate body shops. We know there’s some low-hanging fruit here and expect to see positive results in the very near term. Next slide, please.

I want to take a minute to show our service customer pay trends -- our customer pay performance has been improving each quarter, as you can see on the slide. This performance trend is in line with the trends we are seeing in other segments of our business. Our focus on retaining associates and executing our game plan in fixed operations is having a positive impact on our performance. As you are aware, the adjustments that we have made in fixed operations have only recently been put into place so the results that we are seeing are in their infancy and we look forward to continued progress as our fixed operations game plan matures to the level of our other business segments.

Before I turn the call back over to Scott for his closing comments, I would like to summarize the first half of the year. While the last six months have been challenging, both economically and professionally, I think I can speak for everyone at -- every associate at Sonic when I say that I’ve never experienced such a gratifying time. For the first two quarters of the year, despite a rather weak economic environment, our associates came through for us month in and month out by executing our game plan. So far this year, I think our results have shown the investments that we have made in our people, technologies, and strategies that Scott so eloquently laid out every quarter of 2008 were worth the investments. We took our, developed the right strategies, and developed our people. This slide really illustrates our path to progress.

Sometimes the best investments take time to mature but once they do, they usually are sustainable. In a down market, we have managed to outperform expectations and every Sonic associate should take pride in their part of our continued success.

So with that, I’ll hand the call back over to Scott.

B. Scott Smith

Thanks, Jeff. The numbers kind of speak for themselves, so my closing comments will be very brief. Our business is sound and we will continue to focus on what’s important, which is our people and our strategies. We reported a lot of great news today and I am proud of all of our associates and before I end the call, I just want to say thanks to each and every one of you who continue to work so diligently to make all of our success possible. Thank you, team, very much. I am very proud to be a part of this team and it’s an absolute honor and privilege to lead this company.

We will now open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Matthew Fassler with Goldman Sachs.

Matthew Fassler - Goldman Sachs

-- but I actually want the first question to be a financial one related to the EPS calculation. If you could talk to us about how you get to the weighted average shares that you deploy and just any moving pieces in the EPS calculation, given the financings that you just did, that would be great.

David P. Cosper

I’m going to let Greg handle that. It’s fairly technical accounting.

Matthew Fassler - Goldman Sachs

Good. Thanks. Then I’ll have an operational follow-up, thanks.

Greg Young

We talked a little bit about this on last quarter as we tried to lay out for everybody some of the impacts that we could start to quantify at that point in time. And we were fully expecting that we would have some fairly significant dilution from the conversion feature on the 6% notes. But when you go through the if converted method and you add back the interest and then add in the share count, the interest add back more than offsets the impact of the share count. So for the quarter, it was actually anti-dilutive so you do not add it back. So that’s why we ended up at the 40 million shares versus the high 50 million that everyone was expecting.

But as Dave said in his comments, I would model going forward somewhere in the mid 60 million shares because in a full quarter, it’s going to -- if it is dilutive, it will amount to about 21.5 million shares on top of our 40 million shares already.

Matthew Fassler - Goldman Sachs

And we can follow-up offline but just the moving pieces that will determine whether it’s dilutive or anti-dilutive in a given quarter would relate to the level of earnings or does the stock price have any impact on that?

Greg Young

I think it’s really related to the level of earnings. The stock price really would not impact that calculation at all.

Matthew Fassler - Goldman Sachs

Okay. I guess the second question I have relates to the -- to your used car business. Clearly you are really cleaning up from a revenue perspective. From an aggregate gross profit perspective, maybe a little bit less so as you look at your used car gross margin rate, you know, in a market where we -- I think a lot of your competition probably has been showing higher margins year-on-year. If you could just talk to us about how you think you are positioning yourselves competitively on pricing, because it does seem like there are some margin tailwinds, maybe some headwinds on the LTV side but generally some margin tailwinds, so any insight you could give us there would be great.

Jeff Dyke

Actually, what we are doing, we are looking at that a little bit differently. We are playing with the elasticity of our pricing, which is helping, if you noticed, in the second quarter along with the first half of the year, we’ve got record volume levels in our used car volume and we are actually taking a lot of new car market share, so we are being very aggressive with trades. And then when you combine that with the thought process of looking at used car margin not just on the front margin that you make but when you look at it front margin, F&I, and what we make on internal gross, if you combine all that, our gross is actually up.

So while there’s a little bit of a dip in terms of the margin percentage, when you look at the total picture, we feel real good. You should expect that number to move around a little bit as we play with the elasticity of our pricing moving forward this year.

Matthew Fassler - Goldman Sachs

Got it. Much appreciated. Thank you.

Operator

Your next question comes from Jordan Hymowitz with Philadelphia Financial.

Jordan Hymowitz - Philadelphia Financial

First question just follows up I think it was Matt’s question -- you said the 60 million shares should be assumed going forward?

Greg Young

Yes, I think so, Jordan. If you do the math on the 85.6 million of bonds at a strike price of $4, you get about 21.5 million shares, and add that to our normal weighted average share count of between 40 and 41, and that’s where you get to the mid 60 million all in for a full quarter.

Jordan Hymowitz - Philadelphia Financial

And then just so I understand, how come on page 8 you only assume 52 million shares?

Greg Young

They weren’t outstanding for all of the second quarter. They didn’t --

Jordan Hymowitz - Philadelphia Financial

Okay, but if they were outstanding for this entire quarter, you would use 60 million for the number?

Greg Young

That is correct, yes.

Jordan Hymowitz - Philadelphia Financial

Okay. Second question on notes due, the 8-5/8s, those are due next fall, right?

B. Scott Smith

No, the 8-5/8s are 2013.

Jordan Hymowitz - Philadelphia Financial

The 160 is due next fall?

B. Scott Smith

That’s correct - November.

Jordan Hymowitz - Philadelphia Financial

And at this point, what are some of the options you are looking to take those out? Are they -- I guess first of all, are they many of the same bond holders that had the first deal and might a similar deal be available or are you thinking about either some sort of capital raise or some sort of sale of dealerships, or is it some combination of all three?

B. Scott Smith

It’s really a combination of all three. There is some common ownership of folks with the 4.25s and the notes, the 5.25s that we retired or exchanged. And we are looking at all options. I mean, the markets have opened up a little bit. The convertible markets, but -- and our stock price is up. There’s a number of different moving pieces that we are looking at. And we are thinking about it now.

Jordan Hymowitz - Philadelphia Financial

Okay, and without naming which dealerships, can you say approximately how many millions of dealers are in the market to be sold, or would there be an interest or it all depends on price, so to speak? In other words, if you don’t raise capital, most likely you’ve got to sell something, so to speak, which would reduce your dealer base. And I guess as you think about that, would that be in one region you would look to get rid of or would it be broadly on what’s available or what’s the thought process there?

B. Scott Smith

I mean, it’s a pretty fluid environment. We have raised $16 million year-to-date and are looking at maybe another $14 million in the very near term. We are keeping all our options open. It’s not a fire sale, that’s for darn sure. And interestingly, along with the increase in our debt price and our equity price, our asset values of course are up as well and we’ve got very good stores.

But we are going to play this smart and we are going to use the balance of everything -- we’re going to use the capital markets and selective dispositions where it makes sense for us.

Jordan Hymowitz - Philadelphia Financial

And you said $16 million has been raised -- can you say what valuations you’ve received for the dealerships that have been sold?

B. Scott Smith

Probably the best valuation was probably about six times earnings, kind of back to what we were seeing previously for a very nice import store.

Jordan Hymowitz - Philadelphia Financial

Six times pretax, I assume?

B. Scott Smith

Yes.

Jordan Hymowitz - Philadelphia Financial

And would that be trailing three years or would it be the current number?

B. Scott Smith

It’s closer to the current.

Jordan Hymowitz - Philadelphia Financial

Really? That’s a great number.

B. Scott Smith

Yeah, it’s pretty good. But as Jeff said, some of these stores are -- I mean, many of our stores are earning more profit this year than last year, with everything we are doing in pre-owned and what we are doing on the cost front.

Jordan Hymowitz - Philadelphia Financial

Thank you very much. Congratulations on a very good job.

Operator

Your next question comes from Rick Nelson with Stephens Inc.

Rick Nelson - Stephens Inc.

I wanted to ask about cash for clunkers, what you are seeing there in terms of store traffic and how do you think that [impacts] on a used car values and the overall used car business?

B. Scott Smith

Rick, I am going to let Rachel provide just a little background on what we’ve done to prepare for cash for clunkers and then Jeff will give some highlights from weekend. Rachel.

Rachel Richards

Hi, Rick. We have seen significant traffic at our store level, walk-in and also on our dealership websites. We actually early on this year under the direction of our Chairman went out and purchased cash for clunkers URL, so we actually own that URL. If you go on www.cashforclunkers.com, you’ll go right to a site that we own and we are referring customers directly into our dealerships and we launched that Friday afternoon and we are up almost 5,000 hits per day just on that website, in addition to the internal pages on our dealership website.

So our traffic has been significant online and walk-in. We sold over 400 vehicles over the weekend, Friday through Sunday. Jeff, I don’t know if you want to touch on yesterday’s volume or --

Jeff Dyke

Rick, so far right now in terms of our volume, it’s representing about 20%, 18% to 20% of our total volume for the last four or five days, so we’ve been very pleasantly surprised. Customers are coming in, they are bringing in the cars. They had a little bit of trouble getting the stores signed up but everybody else did, so equal playing field. We feel pretty good about the program and where we are at.

Rick Nelson - Stephens Inc.

Are you seeing any impact on the used car side since the program debuted?

Jeff Dyke

No, as a matter of fact, interestingly enough, we were talking about this earlier today in California -- you know, our California market is just on fire from a used car perspective. Our Southern California market is tracking to be up nearly 70% over last year this month and in Northern California, up 40%.

So when you add those two numbers together, it’s looking like we’ll be up 50% in used car volume in California and they had a very, very good cash for clunker weekend, so not at all. Both sides of the business are doing extremely well and like I said earlier, we are tracking to be up 20% for the month of July so far this month, so I feel very, very comfortable from both categories.

Rick Nelson - Stephens Inc.

Some of the dealers are talking about the price rise in the used cars at auction and having to pass that on at retail and the LTV limitations that the banks have in place. I’m wondering if you can comment there and how sustainable you think this used car business improvement is.

Jeff Dyke

Rick, we’ve been improving our used car business quarter after quarter after quarter for the last couple of years and it’s very sustainable. We are going to continue to grow. The prices are expensive -- I mean, we’re in short demand. The trades are in short demand and so we are out buying inventory and when you do that, it puts pressure on your retail pricing. And if you run that right, like we think we are doing, you are going to have to bring your prices down in order to get more competitive and to stay in the right price range. And that’s going to put some pressure on your margin, which you saw. But you’ve really got to look past just pricing and margin on the front PUR or the front profit per unit. You’ve got to look at the whole picture and when we run and we sell a used vehicle, typically we’re trading a vehicle in, we’re creating new car business and creating market share for our company. We’re creating F&I gross and we’re creating internal gross, so we really look at our used car margin with that total picture and not only do we think it’s sustainable, we think we can grow from where we are at.

B. Scott Smith

Rick, you know, the used car industry is probably what, 43 million, 45 million units? And even if it shrinks some, we’re playing in it smarter and better so I don’t think it’s going to impact us any.

Rick Nelson - Stephens Inc.

Good to hear. Can you talk about how much revenue is in discontinued operations?

B. Scott Smith

We’re going to hunt for it. We made a few adjustments. One of the stores that we ended up selling actually wasn’t in previously. There’s probably $600 million to $700 million, something like that.

Rick Nelson - Stephens Inc.

And are those considered prime area type dealerships or --

B. Scott Smith

I’d say it’s a mix. I mean, some of them are ones that we’ve been wanting to help along for a while and there’s a few good stores in there as well. We are going to be very selective and I think we can be right now.

Rick Nelson - Stephens Inc.

Okay. Thank you very much and good luck.

Operator

Your next question comes from Ben [Brigadier] with Imperial Capital.

Ben Brigadier - Imperial Capital

I was wondering with respect to your revolver, in the [inaudible] you showed $80 million outstanding but then at the call, you said -- you gave a 45 number. Is that how much is available or outstanding?

David P. Cosper

No, that’s the outstanding and it moves around. It’s volatile, depending on payroll hits and other payables, what have you. So that is the amount outstanding. Availability at June 30 was about $45 million, $47 million.

B. Scott Smith

$40 million was outstanding today. The number on the slide is what was outstanding at June 30, the $80 million. So it’s come down substantially since the end of the quarter.

Ben Brigadier - Imperial Capital

Okay, perfect. Thanks for that clarification. Thanks, guys.

Operator

Your next question comes from John Murphy with Merrill Lynch.

John Murphy – Merrill Lynch

Sort of a follow-up question on the clunkers -- it sounds like you are having great success there, but given your brand mix, you typically don’t have a lot of folks, I would imagine, coming in with trade-ins less than $4,500. I’m just wondering how that is going -- I mean, the residual value on these vehicles that are being traded in as you are taking advantage of these vouchers -- I mean, what is really going on there? It seems like an odd thing that you have a lot of trade-ins coming in with less than $4,500 in value in them.

B. Scott Smith

Actually, John, interestingly enough at the BMW stores, you’re right. We’re not seeing a bunch of those trades but when you get -- we have a lot of Toyota stores, a lot of Honda stores, and a lot of Chevrolet stores and when you get off into those brands, we’re getting a lot of customers coming in and so obviously each and every one of the 450 plus cars that we did over the last few days, everybody came in with one of those vehicles and that’s the brand mix that those customers are playing in, otherwise the other brands really don’t have the vehicle to sell that customer under the guidance of the program.

John Murphy – Merrill Lynch

So do you feel like these are buyers that are real incremental buyers coming into the market? Because once again, it would be tough to believe that you would still have people come in with cars less than $4,500 in value trading into a straight new car. I mean, that seems like a real incremental buyer. Is that correct?

B. Scott Smith

Yeah, it is an incremental. If you look at our run-rate over the last six, seven, eight weeks, I mean, we pretty much track out how we’ve been doing and clunker volume has absolutely been 100% on top of that, so it’s certainly incremental.

John Murphy – Merrill Lynch

That’s a big number. Then on slide 8 if we think about the first half earnings of $0.36, and I know there’s a lot of moving parts in the denominator here in the earnings per share as far as the share count but if we were to think of it -- that share count ramping up to the 60 million unit or 60 million share range, that earnings would be maybe 10% lower, give or take. So when you think about that and flip that into the second half of the year and try to ballpark the second half of the year earnings, I mean, shouldn’t your second half of the year earnings be similar to what they were in the first half, maybe 10% lower? And shouldn’t we be looking at earnings close to $0.70 a share for the full year, given what’s gone on in the market? Is that a reasonable way to think about that?

David P. Cosper

I’d like to say -- if you think in millions first and forget about the share count for a second, I would like to think we are going to improve because our costs are gaining -- our cost reductions are gaining momentum. We’re gaining momentum on the revenue side and one of the key points we wanted to make was even though industry volume was flat in the first quarter to the second quarter, we grew revenue and we grew gross and that flew through to the bottom line. So I would like to see the second half stronger than the first half, plus with any luck the industry is going to go up and cash for clunkers, maybe that will get extended, you know, who knows. But that should help us.

And then you’re right -- when you divide through by higher level number of shares, that’s going to pull us down. But the millions should be higher.

John Murphy – Merrill Lynch

So you are saying that the net income line, forgetting about what would happen, is going to happen with the share count and the adjustments there, should theoretically be a lot higher than it was in the --

David P. Cosper

I would guess.

John Murphy – Merrill Lynch

Okay, gotcha. No, I’m just -- and then if we think about the used vehicle business, it seems like you are pretty supply constrained at 29, or almost 30 days, 29.7 days supply. Is there anything that you need to do there differently? I mean, is it -- could you buy more aggressively in the auctions or is there anything to do there to help out? And how constrained are you in that business as far as executing sales by just pure supply dynamics?

B. Scott Smith

You know, John, we’ve been running at about a 30-day supply, so we’re there because we want to be there. We are turning our inventory once a month, so it’s not an issue for us. If we wanted to ramp up inventory higher, we could but we are keeping very, very tight inventory controls. We are buying about a little over 50% of the inventory that’s on our lot today versus what we are trading for and we are very, very comfortable with where we are, our processes and our game plan that we execute in our stores and have been for the last couple of years have put us at this number.

In times past, we’ve been running -- at this time of the year we’d be in the 33 to 35 day supply range. But we’ve actually pulled it back a little bit and if I wanted to, I mean, we could certainly push a button and go out and raise our days supply a little bit. It is not hurting our volume -- obviously if you look at it, it is not hurting our volume at all.

John Murphy – Merrill Lynch

Got it. And then just lastly, I know you talked about disc ops and I apologize, I might have missed it in some of the commentary here but was there anything to change as far as the brand mix or the intention to sell more dealerships in the second quarter versus the first quarter, because the disc ops seemed to ramp up pretty significantly from the first quarter to the second quarter. Is there anything going on there as far as capital raise that we should be thinking about, now that you are seeing better valuations in the market?

B. Scott Smith

No, I don’t think so. I think we made some adjustments for some of the GM franchises that are going away. We sold one of the stores that wasn’t in the list that we -- you know, it’s a fluid environment and we made a few changes to make sure we got the right set in there to market.

John Murphy – Merrill Lynch

So really the big change is really the GM stores that --

B. Scott Smith

Yeah, it’s not a material change and our strategy is unchanged.

John Murphy – Merrill Lynch

Great. All right, thank you very much, guys.

Operator

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

Colin Langan – UBS

Good morning. I just want to clarify -- I mean, in terms of your -- so all the debts coming due over the next year or two years, do you still intend on the recently refinanced convert at 4%, the $85 million, you intend on prepaying that still or are you sort of more questioning whether you can do that now?

B. Scott Smith

We’re definitely going to take that out before it goes to conversion, which is August of 2011, so absolutely it’s our intent to prepay that.

Colin Langan – UBS

And can you do that without -- if you can’t access the credit markets in any way? I mean, I’m not saying you can’t -- I mean, is that dependent upon accessing the -- being able to --

B. Scott Smith

No, not necessarily. As part of the negotiation on that deal, we have conceptually a sinking fund concept related to asset dispositions and if we meet certain thresholds, we can use the proceeds to take that -- retire the $86 million.

Colin Langan – UBS

Okay.

B. Scott Smith

It has to do with getting our revolver down to about $25 million, and we’re headed that way.

Colin Langan – UBS

So you think the proceeds of asset sales would be enough to generate enough --

B. Scott Smith

It certainly could be. But there’s also a call provision in there as well and you’ve got a couple of years -- you know, I don’t want to let it go that long but you do have a couple of years until August of 2011 to retire it.

Colin Langan – UBS

Okay.

B. Scott Smith

And even though there is a call framing, it’s a hell of a lot less than the dilution associated with it, so we’ll take it out.

Colin Langan – UBS

Okay, I just wanted to check. And in terms of -- how many dealers are now in discontinued ops? Because I noticed in the first quarter 10-Q that some were re-classed and moved in and out of I guess in that quarter, and then when I look at the financial statements today, the balance sheets, the number of assets held for sale is dramatically down.

B. Scott Smith

Yeah, it’s probably 16, 18 stores, something like that. It’s down from where it was. As I mentioned, a couple of franchises have gone away because they are GM and you can’t sell it because it’s going away. We sold one of them and we’ve re-jiggered it based on what we feel is best going forward.

Colin Langan – UBS

How many were in there at year-end now, compared to the 16, 18 today?

B. Scott Smith

Maybe somewhere in the mid 20s or so.

Colin Langan – UBS

Okay, mid 20s. And how many -- and you sold how many to date?

B. Scott Smith

We have sold or disposed of four -- four stores, a GM, Cadillac, Nissan, and another store.

Colin Langan – UBS

And do you have any color in terms of how many of your dealerships were impacted by the GM dealer plan to shut dealerships down?

B. Scott Smith

There was 12 franchises.

Colin Langan – UBS

Twelve franchises -- okay. Was it less in terms of the number of absolute dealers?

B. Scott Smith

I think it was about six physical dealerships, Colin.

Colin Langan – UBS

And were they already in the discontinued ops or --

David P. Cosper

No, just one of them. One or two of them were.

Colin Langan – UBS

Only one or two?

B. Scott Smith

Yeah, there’s six doors and 12 franchises. Thanks, Greg.

Greg Young

And the disc op rules are really strange, Colin. They actually won't go into the disc op group until we actually terminate those franchises because in reality, they are no longer held for sale. That’s what Dave was saying. We had a couple of the stores that were in disc ops but now we’ve had to move them back out because we are not marketing them any longer.

Colin Langan – UBS

Okay. All right, that makes sense. And what was your -- did you generate positive -- you generated positive cash flow in the quarter? I mean, how much free cash flow were you able to generate this quarter?

David P. Cosper

Well, we reduced the revolver by what was it, $20 million?

Greg Young

Yeah, we’re generating probably between $20 million and $25 million of EBITDA.

Colin Langan – UBS

Okay. Okay, and I guess the last one, I noticed F&I per unit had been down. Is there any reason for that, the decline in F&I per unit? Is that getting tougher to --

Jeff Dyke

Our reserves are down a bit. A little bit of that has to do with some mix of inventory that we are playing with in used cars and the elasticity on pricing there. We are really retailing everything we trade for, other than the clunker vehicles. And so that’s playing a role in the overall issue and we’ve got two markets that are really generating most of that decline and we are working on them right now.

Colin Langan – UBS

Okay. All right. Thank you very much for taking my questions.

Operator

Your next question comes from Derek Langer with Jefferies & Company.

Derek Langer - Jefferies & Company

Let me go through several questions -- what is the total size of the revolver, and is there more than one tranche of that? And what is the availability on the facility at quarter end and now? And then secondly, are you restricted from buying back debt right now, any of the debt? And if you could define the liquidity ratio, and then just give me a D&A estimate for the year.

David P. Cosper

Why don’t you --

Derek Langer - Jefferies & Company

Size of the revolver.

David P. Cosper

Yes, we are restricted from buying back our debt at present.

Greg Young

And the revolving facility is a syndicated facility. There’s three tranches. It covers new vehicle floor plan, used vehicle floor plan, and our revolving credit facility. And Dave just gave the availability number -- can you pull that out again?

David P. Cosper

$47 million.

Greg Young

Roughly almost $50 million available at the end of June under the revolving facility and it’s a round number, about $200 million revolving credit facility.

Derek Langer - Jefferies & Company

$200 million -- is that the borrowing base or is that the actual size of the three tranches?

Greg Young

That’s not the size of the three tranches. It’s about a $1 billion facility with all three tranches in it. The revolving credit facility, the borrowing base is slightly under that $200 million.

Derek Langer - Jefferies & Company

The borrowing base is slightly under $200 million but what is the size of that revolver?

David P. Cosper

I had that number. I don’t have it in front of me. It was 2.25. It’s reduced by asset dispositions. I just don’t have it in front of me.

Derek Langer - Jefferies & Company

Okay, and what is your estimate for depreciation and amortization for the year, and then if you could just define that liquidity ratio that you put in your press release or you have on your website, the covenant?

David P. Cosper

D&A is probably going to be about $18 million, because we’re not spending a heck of a lot right now. And liquidity ratio --

Greg Young

Liquidity ratio is just your current assets minus your current -- let me back up. Current assets plus availability under your revolver over your current liabilities but for current liabilities, you have to add back some of the debt that for GAAP purposes is shown as current but for covenant purposes, it doesn’t go current until it’s within six months of maturity. So there’s a little bit of math you have to do there to get to that ratio.

David P. Cosper

We could probably take you through that separately.

Derek Langer - Jefferies & Company

Okay. All right, great. Thank you very much.

Operator

Your next question comes from David [Blecher] with Robert W. Baird.

David Blecher - Robert W. Baird

A question for you on the service side -- you’ve been running negative 3% to 5% here for the last four quarters. Are you seeing any stabilization in that sequentially that that can improve here by the end of the year?

Jeff Dyke

It has been at about that same level. What we are seeing is customer pay increasing, if you look at the last slide that we presented. Our customer pay numbers have gone from Q3 of ’08 being just slightly down to now up 1.7%. A lot of that also depends on the year-over-year new car volume because of the PDI that goes on in the shops, and along with body shop, our body shop business is down I think some 12%, and we’ve hired a new body shop manager that is helping us correct that trend.

So you really have to break fixed operations down into several different categories. The most primary category for us is looking at customer pay and customer pay is doing better and it is continuing to get better moving forward. So we do see that between now and the end of the year, that not only will our margins continue to get better but our revenue should continue to increase.

David Blecher - Robert W. Baird

Are you seeing drivers hold off on deferring maintenance? Has that kind of run its course or is that still an issue?

Jeff Dyke

Some but we’ve made some adjustments in our pricing methodologies to help try and drive customers in for some of the more big ticket items, and that’s playing a role. Our oil counts are up and so that is certainly helping us out.

David Blecher - Robert W. Baird

Okay, and then on the cash for clunkers, are you -- of the buyers who are coming in, are you seeing a difference -- and I realize it’s only a couple of days but are you seeing a difference in the mix between cash buyers versus those who are looking for financing?

Jeff Dyke

It’s a mix. It’s a blended mix. It’s a little too early to tell but we’ve had both. We’ve had certainly plenty of cash buyers as a part of that mix and also consumers looking for financing. It’s a blend.

David Blecher - Robert W. Baird

And then on the finance side, are you seeing any difference in the approval rates versus those who would have been buying before cash for clunkers?

Jeff Dyke

No.

David Blecher - Robert W. Baird

Okay, great. Thank you.

Operator

Your next question comes from the line of Adam [Wright] with [inaudible].

Adam Wright - Analyst

A caller had asked my question before, which was the impact on the used market. I thought when you responded, you were talking about California in particular. It sounds like there was no impact, positive or negative. But I was wondering outside of California, it sounds like potentially California was [an outlayer], it sounds like that -- potentially growing from a small base here but outside of that market, was there any impact either on the good or the bad side?

B. Scott Smith

I mean, our used car business -- I think if I understand your question, are you asking cash for clunkers effect on --

Adam Wright - Analyst

Yes.

B. Scott Smith

Okay. It has not affected our used car business in any market. Our used car business is strong in every single market that we have. We are up year over year in every market that we have for the quarter. All markets I think set pre-owned records for the quarter and July has been very good. We are up in every single market that we have in July.

So California is just overstated because in the past, we have not driven the used car volumes that we could have but we are certainly becoming more and more mature there and really across all of our markets, our used car business is strong.

Adam Wright - Analyst

Okay. And going forward, do you expect this to continue, basically continue meaning have no impact from the cash for clunkers program?

B. Scott Smith

We expect it to not affect our used car business at all.

Adam Wright - Analyst

Perfect. Thank you very much.

Operator

Your next question comes from Jordan Hymowitz with Philadelphia Financial.

Jordan Hymowitz - Philadelphia Financial

Can you use your mortgage financing for maintenance CapEx?

David P. Cosper

No. No, that’s store level typically, Jordan and the mortgage financing has been on hold, properties, buildings and land that we’ve owned.

B. Scott Smith

We don’t have a mortgage facility, Jordan. We do it on one-off project by project as we complete them.

Jordan Hymowitz - Philadelphia Financial

So the $13.5 million of maintenance CapEx has to be funded from cash flow this year?

B. Scott Smith

Correct.

Jordan Hymowitz - Philadelphia Financial

Okay. But facility improvement could be funded from that?

David P. Cosper

Yes.

Jordan Hymowitz - Philadelphia Financial

Okay. Second, as you just said you don’t expect any changes from cash for clunkers, I’m confused by that. I mean, if someone was looking at buying a used car for let’s say $15,000, a new car was 20 and that new car is now $15,000 because of a $4,500 tax credit, why would the used car price not either go down or the sales be impacted? I mean -- I’m confused by that.

B. Scott Smith

Well, I mean, we’re just not seeing it. I think that’s a 100% incremental business. And our used car business, I mean, you look at the numbers and you can see from what we are telling you, our used car business has not been impacted at all.

There’s such a -- if you really look at the used car market, I mean, we sell about three times as many used cars in the nation each year as we do new, so there’s just a huge pool of customers for pre-owned that from a retail perspective, from an auto retailers perspective, we don’t tap as much as sometimes a private market does, so we are doing that and that’s why you see us playing with the elasticity of our pricing and I think because of those moves that we made, it’s just not going to affect our overall volume or it hasn’t.

If it has, I’ll take the 20% increases that we have and the new car market share that we’ve gained. We’re enjoying success on both sides of the table.

Jordan Hymowitz - Philadelphia Financial

But it’s only been in practice three days at this point, correct? Cash for clunkers?

B. Scott Smith

It has but you have to think that -- you have to think that early results -- I think the consumer base was saving up for the evolution of this starting and so we’ll see ongoing what happens but we are not projecting in any of our numbers that our used car business is going to be affected by cash for clunkers. It shouldn’t be. There’s just too big of a customer base out there for used cars. It’s incremental business to our company.

Jordan Hymowitz - Philadelphia Financial

Okay.

Operator

We have time for one more follow-up question and that comes from the line of Matthew Fassler with Goldman Sachs.

Analyst for Matthew Fassler - Goldman Sachs

This is Mark actually filling in for Matt for a quick follow-up; I was just looking at total sales that were down less than comps this quarter, which was different from last quarter and I just wanted first to know if you could confirm that this was due to taking some stores out of disc ops. And secondly, were these dealerships above or below average profitability and how did they do when they were in disc ops and if you could quantify the impact on the sales and profit from these different moving pieces, that would be great. Thank you.

David P. Cosper

The comparisons that are shown are comparable. We’ve adjusted both sides, so the change in revenue percent that you are calculating have nothing to do with the change in disc ops, okay? You with me on that? We’ve adjusted both sets of financial statements.

Analyst for Matthew Fassler - Goldman Sachs

Right, yes.

David P. Cosper

Okay, and actually the change in what we did with disc ops actually pulled down our Q1 results a little bit, continuing ops results. So it really didn’t move -- I mean, it’s just a few hundred thousand. It really didn’t move our profits one way or the other. Some stores went in, some stores came out and net net, profits didn’t move much continuing or discontinuing, and certainly not the total.

Does that help? Is that what you were asking me?

Analyst for Matthew Fassler - Goldman Sachs

Yes, and actually just -- it pulled down first quarter, but just to be clear, did it pull up second quarter results of taking these dealerships out of disc ops?

David P. Cosper

No, it’s really no impact either quarter. It was just a few hundred thousand dollars. It’s insignificant.

Analyst for Matthew Fassler - Goldman Sachs

Okay. Thank you.

Operator

There are no further questions at this time. I turn the conference back over to Scott.

B. Scott Smith

Great. Well, we’d like to thank everybody for joining us on the call today and we look forward to a successful quarter. Thank you very much.

Operator

This concludes today’s conference call. You may now disconnect.

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