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Sonic Automotive Inc (NYSE:SAH)

Q1 2014 Earnings Conference Call

April 22, 2014 10:00 AM ET

Executives

Scott Smith - President and CSO

David Smith - Vice Chairman

Heath Byrd - CFO

Jeff Dyke - EVP, Operations

C.G. Saffer - CAO

Analyst

Richard Nelson - Stephens

Brett Hoselton - KeyBanc

Scott Stember - Sidoti & Company

John Murphy - Bank of America Merrill Lynch

Bret Jordan - BB&T Capital Management

Patrick Archambault - Goldman Sachs

Operator

Good morning and welcome to the Sonic Automotive First Quarter Earnings 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, Tuesday, April 22, 2014.

Presentation materials, which management will be reviewing on the conference call, can be accessed on the Company’s website at www.sonicautomotive.com by selecting Investor Relations under our company drop down box and then choosing Webcasts & Presentations on the right side of the page.

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

Scott Smith

Thank you very much. Good morning everyone. I think that we have some fun and exciting things to talk to you about today. And welcome you to Sonic Automotive’s first quarter 2014 earnings call. I’m Scott Smith, the Company’s President and Co-Founder. Joining me today on the call are David Smith, our Vice Chairman; Mr. Heath Byrd, our CFO; Jeff Dyke, our Executive Vice President Operations and C.G. Saffer, Chief Accounting Officer.

I’ll start the call today with an overview of our strategic initiatives then I’ll turn the call over to Heath for a review of our Q1 financial results followed by Jeff with a look at our operating performance. We’ll then have closing comments and open the call for your questions. With that let’s get this party started and please turn to slide, strategic focus. Our strategic focus has been consistent for the last several years grow our base business, in our real estate and return capital to shareholders. This strategic focus will continue for the foreseeable future. As most people who follow our company are aware Sonic Automotive is growing its base business with two very unique and bold avenues that will certainly give us a competitive advantage and differentiate Sonic from others in the retail automotive sector through our customer centric, One Sonic-One Experience and through our pre-owned specialty stores.

In addition, Sonic Automotive is working very closely with the manufactured partners on open forms and we evaluate acquisition opportunities continuously. Let’s take a closer look at these strategic initiatives, next slide please. One Sonic-One Experience, simply put it’s an exercise in building a brand. The building a brand that’s centered around the customer experience. The objective is to put the power into the customers’ end where they can enjoy the automotive purchasing experience with one associate at one price in one hour. We believe that our experience would be unique in the industry in other word improved transparency and increased trust, full version of One Sonic-One Experience will be a beta testing at Charlotte store in July 2014. We will not roll-out the other stores until we work out all the bugs, if things go according to plan which often may be not in building new brand, One Sonic-One Experience will be fully implemented in the Charlotte market by the end of 2014.

We expect the companywide implementation will take approximately 18 months, starting July 2014. As we gathered data related to implementation in Charlotte market, we plan on sharing this information with you. There are two basic KPIs that will be the good indicators. Changes in retail market share that are brand-weighted and customer retention rate. If you turn to the next slide please. Our second significant strategic initiative involves our pre-owned specialty stores that will be introduced initially in the Denver market. As many of you are aware, this is a plan we believe has enormous potential. Bear in mind that the largest player in this segment CarMax which we very much admire, has approximately a 1% share of the industry, a 1% share of the industry that means there is 99% still out there to be had that leaves an enormous amount of opportunity.

We have zero barriers to entry. We have the culture, the people, the processes, the technology and determination to capture and realize this opportunity. Imagine what Sonic will look like after we capture 1% share and we believe that there are opportunities far beyond a 1% share. We are on schedule to open the Denver market in Q4 this year and working ground on the construction of our facilities. Hiring and training will begin later this quarter. We are fired up about this as we believe this will bring a whole new level of training and personnel development to the industry. We work with our outside vendor partners in the development of the fun and exciting market introduction of the new concept that we’ll began sharing later in Q2 and early Q3.

Next slide please. We continue to be on track with our property ownership plans, in addition to the pre-owned stores which we plan on owning all of these properties. We expect to occupy three additional owned new vehicle dealership facilities in 2014 that replace previously leased properties. This puts us on track on approximately 34% to 35% of the real-estate or about $350 million of our $1 billion portfolio.

Our own real estate versus leasing. Well one, cap rates on leases are high. Rates range from 8% to 10% or mortgage rates on 80% of [indiscernible] run us in the 4 million to 6 million. Secondly, it enables us in easy investment decision and considering the manufacturer partners mandated facility modification. And third as the mortgage is being repaid in a bench we eliminated we’re improving the strength of our balance sheet with hard assets to provide us flexibility and possible sources of liquidity in the future. In addition, at the end of the term we owned assets with substantial value and we will eliminate the stream of outgoing cash as required by leasing.

Next slide please. This brings us to our third strategic focus, returning capital to shareholders. As you can see we have returned, we brought back 377,000 shares basically in the first quarter; we’re ahead of last year’s pace, stock repurchases and will continue to purchase shares. We have an unused authorization of share repurchases of approximately $124.1 million. We also announced today a quarterly dividend of $0.025 cents per share, additional mechanism we’re using to return capital to shareholders.

With that I will turn the call over to Heath for a review of the quarter. Heath.

Heath Byrd

Thank you Scott and good morning everyone. Please turn to Slide 10; in Q1 revenue was 2.6% driven by pre-owned revenue growth of 6.4%. F&I revenue up 6.2% and fixed revenue up 7.5%. Gross profit was up 5.1%, the gross margin up 40 basis points to 15.4%. SG&A was at 80.2% including 50 basis points of our pre-owned initiative expense. This resulted in diluted EPS from continued ops of $0.38 which is in line with our internal forecast and our annual guidance. Next slide please.

As you can see from this slide the impact on weather on operations reduced our quarterly EPS by few pennies. Expenses related to our pre-owned initiative also had a $0.02 impact. Considering these factors our adjusted EPS was $0.42 flat to last year. Next slide please.

Total gross, total grosses of 5.1% driven by a 7% increase in used, 5.5% increase in fixed and a 6.2% increase in F&I. Next slide please.

SG&A as a percent of growth was 80.2% compared to 78.5% last year, this includes 1.7 million in pre-owned initiative expense. IT and training expenses were also up $1.7 million year-over-year as we prepare for our One Sonic-One Experience in our dealerships in July of this year. Excluding these expenses we were at 79.2%.

Next slide please. CapEx for the quarter we spent $21.6 million which included $3.3 million for real-estate, $9.1 million in facility improvements, $4.5 million in IT, $4.6 million in general maintenance. This deal was all set by two mortgages of $40.4 million for a cash inflow of $18.8 million. For the year, our estimated CapEx spend of a total of $192 million. $33 million in real estate, $110 million in facilities, $20 million for business development related to One Sonic-One Experience and our pre-owned initiative, facility upgrades related also to our One Sonic-One Experience, and meaning general IP and dealership maintenance.

Again this spend is all set by the two mortgages for a total CapEx of $152.5 million.

Next slide please. Liquidity, we ended the quarter with $255 million of liquidity an increase of $34 million over Q4 2013. Additional liquidity was provided by mortgages obtained in properties while construction was completed in the prior year. As we complete construction projects we anticipate in capturing portions of CapEx spend through mortgage financing. This spending and subsequent mortgage financing may not occur in the same periods and in fact in some cases not even in the same year. So liquidity may fluctuate from period-to-period based on the flow of bonds.

Next slide please. Debt covenants, we ended the quarter compliant with all of our covenants and we have plenty of room to spare. And with that I’ll now like to turn the call over to Jeff Dyke for an operations review. Jeff.

Jeff Dyke

Thanks, Heath and good morning everyone on call to have the opportunity to discuss our first quarter 2014 operating results. New car revenue was up 1% while volume is down 1.8% for the quarter. Our GPU grew $58 per unit to $2,191. This resulted in an increased gross profit of nearly 1% to 66 million for the quarter. We continue to adjust True Price which is a key ingredient to our One Sonic One Experience strategy that Scott talked about earlier, both market share and gross grew sequentially as we zero-in on our pricing methodologies for new cars. What’s important for our investment community to note is when combined with One Sonic One Experience that will begin in July, we expect significant market share gains as well as to continue to improve in our gross per unit which if you are watching has made tremendous progress over the last several quarters.

To provide a little color on market share, we outperformed the industry in Mercedes-Benz, Audi, Cadillac and Honda. We are relatively flat with the industry in Lexus, Toyota and Ford and then we are behind the industry than BMW and Chevrolet. On special note, our recently finished seven-storey Audi store in Houston Texas which we believe to be one of the largest or the largest Audi facility in the world, also finished as the number one volume Audi store in the nation, that’s a first ever for that store. Our day supply to end of quarter was at 61 days in line with our expectations. Next slide please.

As we have been saying for years there is no downside to the pre-owned business and our associates to proprietary technology, central trade center, central buying system and playbooks keep proving that this space is limitless.

Another all-time record quarter for volume and we look to improve on this performance in Q2. There is simply so much upside to this part of the industry and we are poised to continue to take advantage of it in both the retail, Sonic retail stores and with our new upcoming pre-owned concept opening then in Denver during the fourth quarter of this year. As you can see from the slide, our retail revenue is up 6.4% and unit volume is up 4.5%. The increased gross per unit along with related grosses which combined grew by $7 million or 8.4% to $90 million, another all-time record. March was our single largest volume month in company history just under 9,900 units. We believe our current store base is capable of selling more than 15,000 units per month, that’s 150 units per store as we patiently grow our team and its capabilities.

Our used to new ratio was 0.9 to 1. We averaged over 90 units per store for the quarter and look to improve on that number in the coming quarters as we will surpass the 100 units per store from month March. Our day supply was 29 days and in excellent shape for the level of volume that we were selling. Next slide please.

Although weather did impact our fixed gross performance for the quarter which we estimate to be about 2.5 million at the store level, we still had a very respectable fixed gross quarter. Our team continues to execute our playbooks and with new technologies on the horizon for One Sonic One Experience, we are poised to expand our fixed performance into the mid to upper single-digits for years to come. As you can see from the slide, our fixed gross grew 5.5% for the quarter and just over 2% on a same store adjusted basis.

Again without the weather in Texas and the East Coast, we think we would have grown the business in the mid-single-digits on a same store basis and the upper single-digits in total. Customer pay gross grew over 5% and with our pre-owned business continue its growth, our internal gross grew by almost 7%. Warranties up over 5.6% and in light of the recent warranty and reference by several manufacturers, we expect warranty to remain at or above average in the coming quarters.

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

Scott Smith

Great, thank you, JD. To briefly summarize, before we open the call up for your questions, I am very pleased with the first quarter and the direction and pace at which we are moving on our strategic initiatives. At the end of Q1, we are ahead of our internal projections for the year. Business environment continues to be favorable to retail automotive that provide performance metrics on One Sonic One Experience and our pre-owned specialty store performance beginning in the Q4 earnings call. We are pleased to reaffirm 2014 continue to up EPS guidance of a $1.95 to $2.05. Net of our pre-owned specialty retail operations EPS of negative $0.14. I would like to thank all of our associates for their hard work and dedication to bring One Sonic-One Experience and our specialty pre-owned stores to life. This is a very, very exciting time in the company’s history. We are about to embark on a journey that will truly differentiate Sonic Automotive from the rest of the industry. Now we are privileged to lead our great teammates, we want to thank you.

With that we would now like to 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 with Stephens.

Richard Nelson - Stephens

Scott, you are clearly taking a long-term approach to the business. If you could discuss when you think these strategies are going to pull together; the Sonic ones -- we could take them individually. The Sonic-One Experience, for example, when do you see that as accretive to market share and to earnings? And then the used-car business, as well, if you could address that.

Scott Smith

So, we can still update. With one Sonic-One Experience you start to roll out inventory out of the store here in Charlotte in July. I am hoping that, you know within 60 days we begin to see the results. We are already doing some pretty rollout testing now. But within 60 days we begin to see the results that will allow us to move on to the rest of the market. So then I believe you begin to see shared gain and margin gain in the Charlotte market, you know between now and the end of the year, and manage to as how fast can we rollout in 2015, it will probably a week over into the first quarter of ’16 to be honest with you. So to see a total company move, we’re talking back half of ’16, the beginning of ’17; but in terms of individual markets which we are going to probably update you all as we move forward, you will begin to hopefully see that by the end of this year. That covers One Sonic-One Experience. In terms of pre-owned, we’re going to attack the Denver market. That’s going to start in Q4 this year. We have got a of a three-year horizon for each market that takes the market from cash flow negative to cash flow positive, and profitability. So I would say anywhere from 24 to 36 for that project to really gain some momentum and to be delivering and levels that we expect. And as you related to the pre-owned initiative, as you have indicated before; right now we are moderately cash flow positive in that third year with profitability in the year forward.

Richard Nelson - Stephens

Okay, thank you for that. You are getting closer to rolling out that freestanding used-car strategy. Are you in a position now to discuss more about it; how it will be different from a CarMax, for example?

Scott Smith

We want one more quarter for it. We’re trying to keep it -- it’s tight under the lid as we possibly can.

David Smith

I would say your CarMax -- we again very much admire, you know they are the Kings of the industry right now in pre-owned and probably a little bit for a long period of time. But I would say if they are the Walmart of this model I would say that we are somewhere between the Target and the Starbucks. It’s a completely different field and different model than what CarMax has.

Richard Nelson - Stephens

And if I could ask, Heath, on the expense for the pre-owned, the $0.14 -- you incurred $0.02 in the first quarter. Should we assume that the remaining $0.12 is evenly spread or is that pretty lumpy?

Heath Byrd

Yes, it will be lumpy. You can see as we bring on more associates in the third and fourth quarter as well as provide more training in the third and fourth quarter, the expenses will ramp up. But we are right on target for that $0.14 overall, but second quarter will be as high as third or fourth.

Richard Nelson - Stephens

Okay, thanks. And then finally, if I could ask you about stock buybacks, how that might rank in terms of priority versus the other alternatives. I recognize the used-car rollout is probably going to require some capital.

Scott Smith

Yes, Rick this is Scott. I would say that we recognized buying that our shares is probably the most popular thing out there among or investors, and we realize that the stock is basically having the value, that’s why we’ve been in the market and paying the dividend and share repurchase. We have already returned nearly 10 million to shareholders in the first quarter. We are very supportive of repurchasing shares. We’re watching our cash, right now because we do have a significant amount of CapEx in trying to retain some cash for our specialty stores as we launched, because they may require little more capital to move little more quickly than what we’re forecasted. I’ll tell you, I had extensive conversations with our Chairman, at Easter holiday, regarding share repurchases, and he understands where we are.

Operator

Your next question comes from the line of Brett Hoselton with KeyBanc

Brett Hoselton - KeyBanc

A couple of questions here. First, just regarding BMW performance, it sounds like -- and BMW overall outperformed the industry. It sounds like for you it has underperformed the industry. And I guess what I am wondering is what do you think drove maybe the underperformance for BMW for yourselves? Is there anything in particular?

Scott Smith

No. we got a store in the East coast that cost is some issues and it’s primarily drove all of the performance and that’s about it, most of our stores actually outperformed the brand but we had bid one store cause us some problems, so that was it. We typically if you go back look, we typically outperformed with BMW and that sort of a one-time I think April and May we’ve got some tough comps with that store and then other than that that’s behind us for the year.

Brett Hoselton - KeyBanc

And then more broadly speaking, just thinking about new vehicle sales in general, the units, how do we think about your performance relative; the industry obviously underperformed a little bit. Is that, do you think, primarily weather related? Or are you trying to get a little bit more gross profit and not worry so much about the volume at this point in time? Obviously, you are looking for some market share gains going forward here, but how do we think about the quarter relative to the industry?

Scott Smith

Yeah I mean look the weather played a little bit of role in car sales but not really big. I mean I would not call that as a major hit. But we’re working and we have been saying for the last several quarters that we’re working on holding in on our true price prizing methodologies. The Honda brand being down 4% or 5% for the quarter and it’s our largest volume brand didn’t we well outperform?

But overall we’re driving margin and we have been very successful in doing that and are getting our team used to the new pricing environment. And so we’re not at all unhappy with where we’re. We know exactly where we’re at and why we’re there. I guess if you could pick on a brand I would just say to Honda hurt us more than we would likely, when you have a brand that does that significant percentage of volume and it’s down that much, that stings a little bit. But other than that it’s true price and One Sonic-One Experience and that’s just adjusting to all of that.

David Smith

I might just add JD. You have to look at one brand mix and weight that versus the industry. And two we have zero fleet, we don’t sell any fleet at all, it’s all refill. So when we look at the start numbers and I haven’t been able to find a way to retail number out there. But it’s important to take a look at that and take that into consideration as far for us.

Brett Hoselton - KeyBanc

And then as we think about the One Sonic-One Experience and the additional details you plan to provide it sounds like in the fourth quarter, I guess what I am wondering, what are you expecting to provide? It sounds like your focus is market share, customer retention and that sort of thing. Is that the kind of data that you are hoping to provide as you roll out that pilot?

Jeff Dyke

Yeah, we’re going to provide you market share growth, we’ll look at it and can provide detail by model line, we’ve really set up some great measurement tools. We also don’t want to lose focus on the great progress that we’ve made margin wise. And so we’ll be able to sort of show in the market place here, where we were, here is where we are. We do believe yes we believe that our margins will improve because we’re going to provide the consumer something they simply can’t get in our industry today. You can’t get it.

And so if you think about, if you think about that we can provide a shopping experience with one individual we can do it in a much faster time with little to no paper work, it’s just something that nobody else can provide. So the consumer is going to be a benefit there, and our margins have really begun to stabilize even with true price our margins have really stabilized. So we’d be able to provide you with several different KPIs that will let you know exactly how we’re doing and how we’re progressing against our targets.

David Smith

And one key KPI will be as Jeff mentioned that retention rate up in the service and the fixed area, we all know that’s one of the most profitable parts of the business and with our new CRM we’ll be able to really dissect retention rates by segment by year of vehicle et cetera. And so that’s one of the things we’re excited about just business but from a standpoint of being transparent of the performance on One Sonic-One Experience, that will be a KPI that would show each market as we go out.

Brett Hoselton - KeyBanc

And then finally, can you describe the acquisition environment? What are you seeing as far as deal flow -- better, worse than it was six months ago? Valuations -- better, worse than they were six months ago? And then, how do we think about the number of deals or amount of revenue or something like that that you might do within a given year? Is it every once in a while $100 million or are you looking to accelerate or decelerate? How do we think about that?

Scott Smith

Let me start with that, this is Scott, on some stores opportunities that are out there is pretty robust, there are lot of great opportunities out there. It is not our top priority but it’s much, much lower on our priority list to do acquisitions right now. I think in years to come once we get our pre-owned specialty stores up and running, and they are generating their own free cash flow and such that we made the more aggressive in the acquisition market. But today its primarily deals that complement platforms that we have currently existing. And our focus has really been on open points working with our manufacture partners there which has been very good for us and so I wouldn’t go and model excessive growth, I think 100 million a year in revenues or something like that is, I mean that’s a pretty easy hurdle but I wouldn’t build acquisition growth in to your model grow significantly.

David Smith

If you want to think about honey holes in growth of how do we grow this business, the base business and what is One Sonic One Experience do for us and all that. If you look at what Heath mentioned in service retention, if we can book that by 5%, that’s huge, these are big, big numbers. You look at, what we believe our experience would be in F&I, our sales first, we are doing all the F&I presentation where people can buy rather than being sold something. If we can move the needle from where we are now in the 1,200 range to 1,400, 1,500 range, we multiply that across how many vehicles we sell, that’s a huge, huge opportunity for us that translates into hundreds and millions of dollar of gross. So, I think when we really look at maximizing the assets that we have before we continue to move on, those honey holes in products and service and finance and increase market share, you will currently have 1% of the new vehicle industry, what happens when we move that up 10 basis points or 20 basis points or look at once we launch this pre-owned initiative.

And CarMax, CarMax again we respect them so much, their market cap is larger than AutoNation, Sonic Automotive and Penske combined and they have 1% of the industry. So, there is just so much opportunity out there with Al having to go out and spend tens and hundreds and millions of dollars in goodwill and we are into luxury retail business and Asian business in a strong, strong way. So, we have plenty of access of those deals. I will just throw that out there and move over.

Operator

Your next question comes from the line of Scott Stember with Sidoti.

Scott Stember - Sidoti & Company

Can you maybe talk about how the cadence of sales throughout the quarter and then maybe talk about how the new car sales environment is looking so far for you guys in April?

Jeff Dyke

New car sales were actually pretty strong in January coming of a big December, February slowed down a little bit, the storms didn’t help and then March came back with a lot of robust and then believe it or not in terms of year-over-year performance April is stronger than all three of those. So, we are very pleased with where we are so far in April.

Scott Stember - Sidoti & Company

Okay. And if you just go with the products and services, looking at the margin down on a same-store basis a 110 basis point, was that directly related to the outperformance in the wholesale parts business?

Jeff Dyke

Fortunately that in terms of margin percentage it’s also dollars and technologies that we are spending in that particular area, advertising we are spending in that particular area and some personnel changes that we have made from an accounting perspective. It’s not geared around our wholesale business.

Scott Stember - Sidoti & Company

Okay. And maybe you talk about the warranty being up 0.9%, where we going up against the tough comparison with a year ago o is there anything else in there?

Jeff Dyke

No, I mean in terms of dollars, it’s running about the same. We did have a good quarter of last year for sales jobs and some other things that happened that ended up driving some warranty workforce. But overall like I said in my notes, in my speaking notes, it’s been about flat with where we have been in terms of dollars and we actually, based on announcement that you are very well aware of expected to continue to either be better even a little better.

Scott Stember - Sidoti & Company

Okay. And just to confirm, I missed part of the call in the beginning. The gross in the new side in the last few quarters has been firming up, do you relate that to success in True Pricing initiative? And I am sorry, go ahead.

Jeff Dyke

That’s 100%. The True Price process is helping us growing our PUR (Ph) and we expect that the consumer, if you just listen to the feedback from them, they love it I mean they really love it and we haven’t even started yet and we are getting great feedback. So, there is no question that our margins are growing because of that.

Scott Stember - Sidoti & Company

And just to confirm you are utilizing the strategy in the used side as well correct?

Jeff Dyke

Yes, we are.

Operator

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

John Murphy - Bank of America Merrill Lynch

Just a first question on the used-car business and strategy. Obviously, you are focusing on the standalone stores, but also, obviously, you are focusing on increasing your used vehicle sales per store. Yet you are still wholesaling about 7,500 units or wholesaled about 7,500 units in the quarter. How are you making the decision to wholesale those vehicles and maybe not move them around in your system or retail them first? I'm just curious how you think about it. Because it's almost 25% of your -- it would be 25% of your total supply.

Scott Smith

John if you compare us with the rest of the world, that’s a really -- it’s a really low percentage in terms of overall volume. And the way we make that decision is we actually have to push the car, we don’t wholesale a lot of cars through auction, we wholesale to each other from one store to the next which is internal wholesale. But we do not send a lot of cars to the auctions only when a car gets out of our system actually goes to an auction if it’s six months of age. It’s gone from one store to the next as we don’t allow third transfer from joint stores. And or it doesn’t run here and stop proper with, there is a safety related issue and we get rid of it.

I mean or if you just think about it in order to sell the number of cars, we’re selling the day supply that we have we have to keep as much inventory as we can possibly get our hands on. And there is a reason why if we’re sending a car to an auction.

John Murphy - Bank of America Merrill Lynch

So there is far fewer than 7,500 going to the actual auctions? Those represent wholesale?

Scott Smith

That’s a correct statement. Lot of those cars are wholesale internally.

John Murphy - Bank of America Merrill Lynch

That’s incredibly helpful. Then the second question obviously you alluded to some loss days on the parts and service business because of the weather. Do you guys have any -- do you know what kind of impact that had on the gross margin in the business, because it was down year-over-year that has the impact on the margin.

Jeff Dyke

I know on the gross margin percentage I don’t know the answer to that. I mean I could go back and kind of figure it out and get it to you. But it costs us around about $2.5 million in gross. And here is the issue, on the East Coast we got some big highline stores and which carry a little higher percentage and that would play a role in all of that just from a mix perspective. We lost a couple of days in fact we lost four days or so, maybe a little bit more it depends on the East Coast. And so with our store mix over here, some margin stores -- some stores are better than margin better higher margin than others on a natural basis. And so that probably played a little bit of a role.

John Murphy - Bank of America Merrill Lynch

And then just lastly on SG&A, I think you guys had talked about this in the discussion around SG&A, that if you excluded the pre-owned initiative as well as the One Sonic initiative, SG&A would have been about 79.2%, SG&A as a percent of gross. And that is still up year over year. Is there anything else that is going on in this SG&A where the costs are up for other initiatives that might be bloating that number that would come down over time?

Jeff Dyke

We’ve got a couple of things; one thing is obviously the centralization as you know we’re taking our business opportunity of centralizing that as here in Charlotte at the headquarters. So we’ve got some expense related to that and some overlapping staffing because of that. You are probably looking at in the first quarter around $1 million we have budgeted about $3 million for this year for that initiative. And so obviously once that is put in place you’re going to have a significant impact in a good way on SG&A.

Other things, we’ve got some stores that their net growth is little bit offset as normal management perspective we need to go look at and manage. But other than that the big drivers are those three big initiatives, pre-owned One Sonic-One Experience and centralization of accounting.

John Murphy - Bank of America Merrill Lynch

And then just lastly if we think if the flow of the new vehicles sales in to the parts and service days over time. I mean obviously right now you are making conservative efforts to take grosses and not push new vehicle sales. So UYOs are not growing massively because your same store sales on a unit basis are not growing on a year-over-year basis. Are you seeing still a pretty good capture rate of other sales coming from other dealers in your service base?

David Smith

What I am trying to understand is if we go through this One Sonic-One Experience and for some reason you’re not able to gain market share, will that have a long-term impact on your parts and service business on the tail or are you already in a position where your underperforming the market a little bit but you’re still getting the growth in parts and service base because people don’t drive as far for the parts and service work, and that’s actually really not even having an impact on your parts and service work right now.

Scott Smith

First of all I mean we can push a button and grow our share tomorrow, I mean that’s not -- it’s not hard to do. And in our share in terms of units it’s not that far off. So we’re keeping a real close eye on it. We know the brands that are back a little bit and so we’re not seeing any growth impact from lack of new car sales in our service drives quite the contrary our service businesses continues to grow very nicely, and we’re seeing that even into the month of April.

In long-term One Sonic-One Experience if we don’t grow share we won’t grow One Sonic-One Experience out. We’re not that -- we’re a 100% confident that we’re going to have share growth which is going to help us in fill the lanes. But also because of One Sonic-One Experience on the service side, on the fixed operation side of the business we expect to take share in fixed operations and to provide consumers with something that they can’t get in the service lines in other dealerships as well. And well it will be fine for us as when we start advertising it. When we start really daring with consumer to compare us over competition, can they do this, can they offer this, and the answer is going to be no. And we’re just going to have our competition scrambling to figure out what to do. And there’s been five or six years as well. Have you been on the call whether it is some five or six years, think about all the calls we’ve had and all of those conversations that we have had. If we don’t gain share and maintain margin and gain share both on the new car side, the pre-owned side and fixed operations, then this would be a total -- we would stop it and we don’t see that happening at all, as manufacturer were obviously very excited about where we are stand today, and you know the rollout over the next 18 months.

Operator

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

Bret Jordan - BB&T Capital Management

A question sort of follow-up; it sounds like you might have just answered it. But the negative weather impact you saw last quarter, are you seeing any positive impact in the current quarter on either customer pay our wholesale parts as failure parts demand may have been driven up in that event?

Jeff Dyke

That’s true, it’s a good question. We might be seeing a little bit of it from our new car buying perspective, and we saw some of them most obviously carrying over in April. I don’t know that we get that back in service. Our service business is very solid in March. Service of parts business, the wholesale parts business, and it is really good in April. Maybe you could say that. The problem is that it happened so long ago that it seems like you know most suggested say it had an issue with the vehicle would have done and that have gone already. So it’s not something when you have a problem because it is typically put off. And so, I don’t know our business is certainly solid, very solid in April.

Bret Jordan of BB&T Capital Management

And I think, Easter, we think Good Friday you had nearly 400 more prices in Good Friday last year?

Jeff Dyke

We did, we’re trying, 450 more prizes year-over-year on Good Friday, which was a pleasant surprise, right, and then had a nice volume weekend to go on with this.

Bret Jordan of BB&T Capital Management

That’s sort of comparable promotions year-over-year too, you didn’t run out. There was no special being around this year that would offset that.

Scott Smith

No. probably if you were? Want to be honest, what you’re ever waiting for few of those special promotions from a few of our manufacturer, it’s always, it’s kind of long but certainly few of the real price that, I don’t want more falls

Bret Jordan of BB&T Capital Management

On the used vehicle initiative, as we look at it in the fixed ops -- and I think I asked this question last quarter -- but as you are a little closer to it, do you see the service mix on a per-box basis being materially different because you are not going to be doing a warranty and it might be harder to keep some of these brand -- the customers coming back for service? Are you going to offset service with more F&I focus? Or is the box just going to be somewhat different economics?

Jeff Dyke

We didn’t build in our forecast a huge parts and service business but secretly between me and you, I think the that that was a mistake and so I think that when we revealed what we’re doing in the marketplace and you see the strategy you are going to say, oh you guys are way-way under forecast of fixed operations. I think it would be a much bigger fixed operations business and -- you know what a CarMax would do in their model. You know they’ve got a lot of internal business that they do but customers coming back at their facility is not as big a percentage of their model. I think it’s going to be of ours based on the way we are laying out our business model. And we will, on the next call the horse would be outside the boulder. We will have the school start talking about an Italian sort of the entire strategy and what it is going to look like.

Bret Jordan of BB&T Capital Management

Okay. And I guess as we get closer and closer to Denver, should we be thinking about another new geography, another market for 2015? Or are we going to get Denver up and rolling into that three-year time horizon you laid out before you begin to roll other markets?

Scott Smith

We’re not going to wait three years now. We are already thinking about the next markets. We got four or five identified. We actually have seven, many more than that identified. But we are going to perfect the model before we start buying property in the next market.

David Smith

And I will tell you we also invest into the opportunities outside of Denver, right up and down the frontline in fact there that it would be a natural expansion to take them on simultaneously to expanding into the next market.

Operator

(Operator Instructions) Your next question comes from the line of Patrick Archambault of Goldman Sachs.

Patrick Archambault - Goldman Sachs

I guess two questions I had is, I know you’ve sort of probably said this, but you know in terms of true price, how far is that rolled out in terms of percentage of your overall footprint?

Jeff Dyke

100%.

Patrick Archambault - Goldman Sachs

Okay, so we’re there.

Jeff Dyke

We have been there.

Patrick Archambault - Goldman Sachs

For how many quarters, how many of it?

Jeff Dyke

A year.

Patrick Archambault - Goldman Sachs

Okay, so True Price -- so the year-on-your comps -- right. I guess what I'm trying to get at is when I look at your used vehicle comps -- your used vehicle gross margins, excuse me, and your new margins, as well, both of those came in nicely. And to a previous question, in particular for new that stabilized after having gone down for a while. I'm just trying to separate like how much of this is True Price, which has now obviously been fully implemented? And how much of it is other things, either better inventory acquisition costs on the used side; or maybe more discipline by some of the OEMs on the import side; some of the other things we've heard from some of your other competitors?

Jeff Dyke

On the pre-owned side we probably been true priced for five six seven years, since I got here. We have been negotiating less than $500 a car, since for five or six years now. So margin growth that we’re seeing on the pre-owned side, margins are always better in the first quarter than they are in any other quarter because you need to buy a lot of good inventory coming out of November, December and January. It’s great, it’s seasonal. It’s a great time to buy and you have strong margins, right. We expect that pre-owned margins in the second quarter and the third quarter, is the summer selling season heats up, you know may contract a little bit or be flat somewhere in that ball part. But on the new car side, our whole true price strategy is definitely having an impact on our business now. The other thing will happen is this margin mixed price have a significant role and if you listened earlier, Honda is down, so Honda in terms of our overall volume mix is down. So that’s going to bring the margin down a little bit as well. But true prices is stabilizing, what we’re negotiating on a car so, we really don’t have a customer coming in negotiating $2000 and $3000 on a car anymore which takes up two hours or an hour and a half we got rid of all of that. And it’s just teaching the culture how to deal with that process. And that can you road margin at times. That can erode volume at times. But we are seeing it stabilized. We actually grew share and grew margin in Q1 and I expect to see that happen again in Q2, in or around that same kind of area. And it’s that we begin to roll out One Sonic-One Experience, then I’m expecting as we start advertising and marketing, you know our brand and what it’s all about, we are going to gain substantial share, and you need to hold onto and/or grow our margins a bit more.

Patrick Archambault - Goldman Sachs

Okay. Yes, I suppose if it has been rolled out for a year, I suppose I would think that you have the benefits already in the comps. But it sounds like even though the tool has been around, people are using it better?

Jeff Dyke

Not really. Because we’ve had, true price has been in our Honda stores for almost 3 years now, and when we first rolled it out in the Honda stores, it should have caught everybody by surprise and our market share was incredible. We were selling, a ton of Hondas and then as our competition began to wake-up and started making adjustments to their pricing or sort of copying our model, then things began to level out a little bit. So we went through this huge gain in share when we first rolled it out, sort of that leveling off, our competition started to undercut us and now we do sort of stabilized our pricing. We’ve been really studying the elasticity, how high can we go? What is the margin coming at? And we’ve had months were we were a little too high and the margins were nice but the volume was too low, and we had to come back the next month and lower our pricing. But the point here is that we can do that. We can push volumes and begin to make that happen in overcoming much more sophisticated added as our pricing tools come to life. You know I would tell you in another six months the comps are going to be a really fair and stabilized. And the true value of benefits of true price will be, you’ll see that once you have all the components of One Sonic-One expansion in place on any store, and can actually brand it. We need to let the market know we’re different and naturally you’re going to see all of this come together and that starts in July of this year.

Operator

There are no further questions at this time. I’d now like to turn the call back over to Scott Smith for any closing remarks.

Scott Smith

Thank you everyone for joining us on the call today. We’re very-very excited about the future for the company and we hope that you are too. Have a wonderful day. Thank you.

Operator

This concludes the Sonic Automotive first quarter conference call. You may now disconnect.

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