Sonic Automotive (SAH) Q2 2014 Results - Earnings Call Transcript

| About: Sonic Automotive (SAH)

Sonic Automotive, Inc. (NYSE:SAH)

Q2 2014 Results Earnings Conference Call

July 22, 2014 11:00 AM ET

Executives

David Smith - Vice Chairman

Heath Byrd - Chief Financial Officer

Jeff Dyke - EVP of Operations

Analysts

Rick Nelson - Stephens

Scott Stember - Sidoti & Company

Patrick Archambault - Goldman Sachs

John Murphy - Bank of America

Paresh Jain - Morgan Stanley

Bill Armstrong - CL King & Associates

Brett Hoselton - KeyBanc

Bret Jordan - BB&T Capital

Operator

Good morning and welcome to the Sonic Automotive Second 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, July 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 clicking on the For Investors tab and choosing Webcasts & Presentations on the right 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 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. David Smith, Vice Chairman of Sonic Automotive. Mr. Smith, you may begin your conference.

David Smith

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

I will start today’s call with an update on strategic initiatives, I will then turn it over to Heath for a review of our Q2 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 please turn to the slide labeled strategic focus. Our strategic focus remains the same grow our base business, own our real estate and return capital to shareholders. Our growth strategy is a three fond approach that includes growing the current base business by implementing our brand of One Sonic-One Experience, grow our new car franchise locations by acquisitions as well as working with our manufacturer partners on potential open foreign opportunities and grow our pre-owned business by developing a national presence as a standalone pre-owned retailer.

Before we go over the second quarter performance, I would like to give you a quick update on the progress we have made on these initiatives.

Next slide please? One Sonic-One Experience. As a reminder, One Sonic-One Experience's objective is to put the power into the customers’ hands where they can enjoy the automotive purchasing experience with one associate at one price and in one hour. We believe that our experience will be unique in the industry and it will improve transparency and increase trust which will result in greater market share, higher customer retention and increased profitability. A full version of One Sonic-One Experience is now in beta testing at pilot store. One Sonic-One Experience will be fully implemented in the Charlotte market by the end of 2014. We expect that the companywide implementation will take approximately 18 months after we have perfected the Charlotte market. Jeff Dyke will give you more details on this in a moment.

Next slide please? Pre-owned initiative update. We are still on schedule to open the Denver market in October of 2014. We have broken ground on the construction of our facilities. Hiring and training has begun. And market and branding efforts will begin in Q3.

Next slide please? Own our properties. This strategy has not changed and as you can see, we're on track to own 45% of our real estate by 2017. Also by 2017, we will have added about $450 million in real estate assets to our balance sheet.

Next slide please? This brings us to our third strategic focus, returning capital to shareholders. We will continue to purchase shares dependent upon market conditions. We have unused authorization to repurchase shares of approximately $121.4 million. We also announced today our quarterly dividend of $0.025 per share an additional mechanism we are using to return capital to shareholders.

With that, I will pass over to Heath for a review of the quarter. Heath?

Heath Byrd

Thank you, David. Good morning, everyone. If you'll please turn to slide 10, for Q2, revenue was up 6.8% driven by pre-owned revenue growth up 12%; new retail growth up 7%; F&I revenue up 10.9% and fixed revenue up 7.2%. Gross profit was up 7.1% with gross margin of 14.7%. Excluding one-time items, SG&A was at 79.2%. This includes 90 basis points of pre-owned initiative expense, 50 basis points related to One Sonic-One Experience and 10 basis points related to our centralization of accounting. Adjusted diluted EPS from continuing ops was at $0.44 which is in line with our annual guidance.

Next slide please? EPS adjustments, as you can from this slide, second quarter EPS was impacted by an $0.08 benefit from the sale of two franchise offset partially by hail damage and legal settlement costs for a net benefit of $0.07.

Next slide please? This slide illustrates the impact on the EPS related to our ongoing strategic initiatives. For the quarter our pre-owned initiative expense $3.2 million; One Sonic-One Experience $1.8 million; centralization of accounting $300,000 for a net impact to EPS of a little over $0.0.6.

Next slide please. Total gross, total gross is up 7.1% driven by a 10.9% increase in the retail, where we achieved 7.2% increase in GPU, a 5.8% increase in fixed and a 10.9% increase in F&I.

Next slide. Adjusted SG&A as percent of gross was at 79.2% compared to 76.6% last year significant variances during the year comp and other and are associated with our strategic initiatives as illustrated on the next slide.

Next slide. As I indicated this slide illustrates the impact of SG&A related to our ongoing initiatives. As we talked about earlier, our pre-owned initiative expense was 90 basis points One Sonic-One Experience was 50 basis points and centralization was 10 basis points for the total impact of a 150 basis points which gets us to 77.7% SG&A as a percent of gross.

Next slide. Strategic initiative spend year-to-date and estimated full year 2014. For pre-owned $5 million year-to-date $12 million estimated for the full year, One Sonic-One Experience $3.6 million year-to-date $7 million full year, centralization and accounting $600,000 year-to-date $3 million for the full year estimated.

Next slide please. CapEx for the quarter, we spent $27 million which included $6.4 million for real-estate $11.6 million to facility improvements $5.6 million in IT and $3.4 million in general maintenance. For the year, we’re estimating a CapEx spend of $175 million, $31 million in real-estate, $94 million in facilities, $20 million for business application development related to One Sonic-One experience and our pre-owned initiatives, 10 million in facility upgrade related to One Sonic-One experience and 20 million in general IT and dealership maintenance. This has been offset by two mortgages of 40.4 million. For total CapEx of 135 million for the year.

Next slide liquidity, we ended the quarter with swinging liquidity at $276 million an increase of 55 million over Q4, 2013 announced.

Next slide. Debt covenants, as you can see we are currently compliant with all of our covenants and we have plenty of room to spare.

And with that I'll like to turn the call over to Jeff Dyke for an operational review. Jeff.

Jeff Dyke

Thanks, Heath and good morning everyone. I am proud to have the opportunity to discuss our second quarter 2014 operating results. As you can see on the slide, new car revenue were up 7% while volume was up 3.4% for the quarter. Our growth per unit grew $143 to $2,119. This resulted in an increased gross profit nearly 11% to $74 million for the quarter. We are all enjoying steady growth in new product as a result two product strategy and improving that over the last several quarters.

Our next step is to begin rolling out our new car centralized pricing methodologies driven by proprietary sense system along with centralized new car ordering which began in our Toyota, still in effective July 1st, and very early returns have our share up 240 basis points the unit growth tracking up 21.5%.

Again this is very early in the process that one I wanted you to have a flavor for what's going on in the store. We're still selling out of our old facility, but moving into updated facility including technology in September, I personally worked this desk last Saturday and can confirm our systems which are still being testing and used by our management we are working fantastic I was very delighted with them we are delivering cars in less than an hour, the average for the day about an hour and half but more due to detailed delivery than our system and are working on solutions for that issue at this location. As we have been stating for a few years now we will offer an experience in technology at this location and others that came up be replicated by our competition in any timely manner and are happy to keep you updated as our progress continues with the store and others in the Chevrolet market as we began our rollout. Our day supply in the quarter was 57 days in line with our expectations.

Next slide please, now to used vehicle retail. As we have been saying for years there is no downside to the pre-owned business and our associates proprietary technology, central trade centers, central buying system and playbooks keep proving that this space is limitless.

We have another all time record quarter for volume 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 Sonic retail stores and with our new upcoming pre-owned concept opening in Denver during the fourth quarter of this year.

As you can see from the slide, our retail revenue was up 12% and unit volume was up 7.2%, the increased used related grosses which grew by $9 million or 8.3% to $106 million, another all time record. Manned with our single largest volume month in company’s history just under 10,500 units sold. We believe our current store base is capable of selling more than 15,000 units per month at an average of about 150 per store as we patiently grow our team and its capabilities.

Our used to new ratio was 0.82 to 1. we averaged 90 per unit per store for the quarter including 100 units per store in the month of May for the first time ever We look to improve on that number in the coming quarters as we work to surpass the 100 unit per store per month mark on a quarterly basis. I am very proud to say our day supply was 27 days and in excellent shape for the level of volume that we are selling. Next slide please.

Titled fixed ops. As you can see from the slide our fixed gross grew 5.8% for the quarter and just under 3% on a same store adjusted basis. Customer pay gross grew almost 6% and with our pre-owned business continuing its growth, our internal gross grew by over 7%.

Warranty was down 2.7% due to recall activity in prior year quarter, but in light of recent warranty announcements 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 that they show every day, as we build one of America’s greatest companies to work and shop, and 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 David Smith. David?

David Smith

Thank you Jeff. We are very pleased with the second quarter and direction and pace with which we are moving on our strategic initiatives. At the end of Q2, we were on track with our internal projections for the year. We would like to thank our customers for choosing Sonic Automotive. Again, we would like to also 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 exciting time in our company's history and we are about to embark on a journey that will truly differentiate Sonic Automotive from the rest of the industry.

It is an honor and a privilege to help lead our great team. Thank you very much and with that we like to now open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line Rick Nelson with Stephens.

Rick Nelson - Stephens

Thanks, good morning.

David Smith

Hi Rick.

Jeff Dyke

Good morning.

Rick Nelson - Stephens

I ask on a new car side of the comps, like some of your peers have reported and some of the market data that's come across. If you could discuss the driver and what you see going forward it sounds like the Sonic-One Experience is leading to some better numbers in the Chevrolet market?

David Smith

Yes Rick, we have not been overly aggressive on new car pricing yet, while we're building our same system we have been very careful there. As you can see we had a 11% increased in our new car gross year-over-year which is really nice and probably eluding the goods or close to the top of that. I'm satisfied with PUR that grew on a total store basis 3.4%. So I think the rest of grew 6% or 7% and I am not too clearly concerned about it, we have got so much going on with our pricing tool that I am being very, very careful, we started at the Toyota store in July as I said earlier ordering all of our cars and pricing all of our cars and immediately got share lift, and we've moved up like I said 240 basis points in share, back those are numbers from before the weekend it's going to go higher than that after the weekend and yesterday we are monitoring very closely. Our grosses are down a little bit in the store, but certainly the share growth is enough to offset it.

And I'm just being really, really careful about where we are, I could the push button tomorrow and make our share go up. But I'm trying to balance the last 50 of our pricing and the gross growth that we're getting in new and just being very cautious. And so we're learning a lot from our pricing methodologies and I suspect that as we move past the first quarter of next year that we will become a lot more aggressive as we've got a little more time under our belt with our new car pricing tool. And if you go back three or four years, we saw this exact same thing with pre-owned and we’re seeing it now with new, we’re just being overly cautious. I don’t want to go out and start plugging our pricing into all the stores. There is a training mechanism that goes along with that and so not too terribly concerned. As long as I’ve got the gross growing, we’re going to be in fine shape.

Rick Nelson - Stephens

Okay, thanks for that Jeff. I’d like to ask about capital allocation also, how you rank the alternatives at this time including buybacks?

Heath Byrd

Yes. Rick, this is Heath. I think our first rank is going to have to be [growth] based business. To us, there is two ways to grow organically and that is the big initiatives that we’re working on One Sonic-One Experience and our pre-owned initiative. And so with those we want to have dry powder for proper allocation to support both of those initiatives and then add to that. We’re always in the market from a buyback perspective and in the right market conditions we will be buying back. And again once the management team believes it’s a best use of capital after we’ve funded those initiatives then buyback becomes a priority.

Rick Nelson - Stephens

Thanks. Also carry us on the full year guide if that incorporates the gain that you have this quarter, is it based on the $0.44 or the $0.50 or $0.51 for the quarter?

Heath Byrd

Yes. A couple of things on the guidance, right now we are within our guidance lower to mid part of our guidance at this point. We’ve got some initiatives in the back end. And as you know our fourth quarter is so strong because of our portfolio that that could easily move up. But we are definitely within our $1.95 to $2.05 and that does not include the gain from the disposal, it is the $0.44 for Q2.

Rick Nelson - Stephens

Okay. Thanks a lot and good luck.

Heath Byrd

Thank you, Rick.

Operator

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

Scott Stember - Sidoti & Company

Good morning.

David Smith

Hey, Scott.

Scott Stember - Sidoti & Company

Can you maybe just touch based on the new car pricing truly end and talk about how that will interface with One Sonic-One going forward just so we could clarify that a little bit?

Jeff Dyke

Yes, sure, it's Jeff Dyke. The tool, I mean works in concert with our true price pricing strategy and our whole One Sonic-One Experience methodology. So the idea there is to not average 3 or 3.5 pencils with the sales and going back and forth to the (inaudible) and then negotiate a price. And so our pricing to which we’re happy to have you come down and look through really uses algorithms to determine on a zip code basis, how other dealers or what they're selling cars for, not what they’re pricing cars for, but what the actual transaction prices are for and then allows us to price accordingly on a minute-by-minute basis if we want to. We’re not doing that yet, we’re really pricing on a daily basis, but we got some new technology that we're getting right to add to our vehicles that will allows us to change the price on a dime if that's what we want to do without having to change a window sticker.

So that's how it works in with One Sonic-One experience. And the whole idea here is got us so that we can reduce the amount of time. And I spend a lot of time in this, so obviously as I said in my comments on Saturday and the feedback on the customers was just amazing. We were getting deal, we literally penciled a deal and it was a cash buyer but pencil a deal with products in less than a minute. And that’s a system and the algorithm, it’s all working together. And you can imagine when the store gets all trained up and the advertising and marketing starts, what’s going to happen. We’ve had great returns early on and now don’t even have a great inventory in the store yet. So that’s kind of how it all works together and you certainly welcome to come visit us and we can take you through the details of that and take you through the store and show you some of the great things that are happening.

Scott Stember - Sidoti & Company

We’ll take you up, you guys up definitely. And that 240 basis points that was share gains within that market that you had referred to?

David Smith

So far in the Chevrolet market for Toyota, portfolio based on RDRs so far through Friday of last week that’s where we stayed and that represented a 21.5% increase in terms of volume pace year-over-year. And that we expect to, be quite honest with you, that’s not good enough; I mean we expect weigh more than that and we expect market leadership in this market. Selling 140 to 150 new cars, should sell close to 230 new cars in July with little bit of the technology running at not in our new location and really hampered inventory but that will all begin to change over the next six to eight weeks and we expect the store to sell 300 to 400 cars a month and be a market leader.

Scott Stember - Sidoti & Company

Okay, got you. And just going to the parts and service again; 6% I guess is pretty much consistent with what we were looking for on the customer pay side but warranty being down 2%, I know you guys are going up against a difficult comparison; was there anything else in there, just since some of your competitors already have reported pretty stout results in that sub segment?

David Smith

No, that’s about it. I think when you look Scott, at our fixed operations as we have a very mature per store fixed operations growth business, I mean gross. And so if you compare where Sonic is and the amount of gross that we generate on a per square basis, it's at the upper end, if not the top in our sector. And so, sometimes the percentages aren't as great, but we're happy with where we are with the fixed, warranty, we had a big warranty quarter last year in the second quarter. So, we also our wholesale parts business, our mix changed a little bit, so margins were down a little, we are up by 5 million in revenue in wholesale parts for the quarter as well. So, that was about a 12% to 14% increase and that certainly played a role in the margin percentage.

Scott Stember - Sidoti & Company

Okay. And just one more quick question. Just if you look into July, can you maybe just give some high level commentary on what you see so far?

Jeff Dyke

Yes, new car volume, obviously with the volume pressure, we've been a little more aggressive on our pricing. So new car volume right now is up a little bit ahead of our pace that we've been running. And I would say the margins are not quite as stout as they were, but still certainly within region.

Our used car business is solid as it always is, we'll have a decent used car quarter and so is fixed. Actually our fixed business looks pretty good in July. So, I was doing the math yesterday on July and we are right in line with where we thought we would be for the month, as we're in line with where we thought we'd be for the first six months of the year.

Scott Stember - Sidoti & Company

Got you. That's all I have. Thank you.

Jeff Dyke

Alright Scott.

Operator

Your next question comes from the line of Patrick Archambault with Goldman Sachs.

Patrick Archambault - Goldman Sachs

Yes, thank you. Good morning.

Jeff Dyke

Good morning Patrick.

Patrick Archambault - Goldman Sachs

I guess maybe two questions. First, I mean used came in, the used-to-new ratio came in pretty good, sort of up for kind of the second, actually probably even the third or the fourth quarter in a row. So can you give us a little bit of the landscape there? Is that something that's kind of loosening up because off lease vehicles are providing more inventory or just give us a little bit of the layer land of how you see that market playing out in the second half if you can continue to see that ratio go up? That would be my first question and then I'll have a follow up especially.

Jeff Dyke

Yes Pat as you know I've started off the second quarter pushing our team so we've been selling 9,500 cars a month with about 7,800 cars online for 24 months now we've been doing the same business every month, very consistent. And I have started in the second quarter pressing our team to add more inventory. So when we have the buying system in the trades and are likely adding inventory is not a problem, there is plenty of inventory up here to get. We moved our inventory up as high as we are ahead over 11,000 cars on the ground and we moved our sales way up.

So we are looking at because we really have a good handle on the inventory management if we can sell 10,000 callers on a 20 basically online we got 23, 24 [basic lots]. I am going to push our team at the back half of this year by procuring more inventory and we'll see -- and I am not going to buy a bunch of inventory in August this is the wrong time but as we move into September, October, November we're going to push our inventory up.

And see if we can push our volume into the 11,000 may be 11,500 amount the range. I know it's capable because we did it in May I mean I really pressed in May to grow our inventory pick in a lot of trades we have an easy way to just really sort of the side we're going to take and more trades because we're trading everything out of the central location. So we pull a little more money in cars then grew our business faster.

So we're going to see sort of what happened to answer your question in the back half of the year I am hoping to move our inventory levels up a bit and challenge our team to break the 10,000 mark and moving to the 11,000 mark on a consistent basis.

Patrick Archambault - Goldman Sachs

And then I mean I guess is as you acquire that inventories is like a larger proportion of it coming from like off-lease or are you still having to turn to the auction market for a lot of it?

Jeff Dyke

No we are, we’re working with our auction partners to Manheim specifically to sort of pinpoint pause before they even get to the auction so we can fulfill our needs. And so we are buying cars to the auction. We did increase our purchase units in the second quarter which put a little compression about $100 a car on our margins, but it’s not off lease although I think we have an opportunity there more buying and we just traded for more cars. I mean we have the ability to really just increase our trade ratio when we want to and put a little more money in cars and that’s all we did so from the auction and from trade.

Patrick Archambault - Goldman Sachs

Got it. And then just on the used side, the margins on new vehicle rate like I mean they held I think for the first time in a while in Q1 and actually were a little bit above in Q2. Now I guess just based on the commentary, is that maybe a little bit of a function that you guys over steered on price and there was some sort of volume implications of that or do you feel like you’ve calibrated that right because I guess it seem to suggest some of your commentary that in July you might have backed off on the margin side a little bit. So maybe just additional color on how that plays out?

Jeff Dyke

Yes. Everybody -- as we said the growth isn’t 7% or the 3.4% is obviously a little pressure to grow your volume so I am getting a little more aggressive in July and more seeing at as a result. But if it is, I mean it’s not what I would call over-steering, it's we made the determination to be very consistent in our new car PBR this year and I think were $2,190 a car which I am very satisfied with on the front, we had an 11% growth in gross on new car, which I think is very satisfactory. And as we start rolling One Sonic-One experience and the competition decides they are going to try to 100, kind of stuff 504 that lineate, we're going to deal with that. And so it might put a little pressure on the margin as we move forward, but there is no question that we were right where we thought we would be car volume wise or right where we thought we would be gross wise and we're dictating that from a pricing perspective for your corporate. But we have been more aggressively absolutely.

But we've got so much going on in our pricing tool, I'm trying very hard to have a consistency there before we just open the flood gates on pricing. So we've been conservative I guess is a good work.

Patrick Archambault - Goldman Sachs

And I guess I mean just on the back of that like as you think about the second half if you're like a little bit less conservative so it sounds like you are sort open to being, like is that gap between sort of the 3.5% and the 7% market growth, is that something that you expect to narrow in the back half?

Jeff Dyke

I do, but I'm going to watch my gross real closely because the gross dollar is what we think (inaudible). There is no question that the margins have come down in the (inaudible) right since we started, but our volume is going to be up over a 100 new cars this month alone year-over-year. So that makes up for every hit different incentive levels and there is all kinds of other issue that come into play when that happens. And so as long as our inventory is in good shape we're going to open the flood gates and be a lot more aggressive and as we roll out more stores we will do that. And right now we have a plan to rollout the rest of the stores in Charlotte by the end of the of the year with a very aggressive advertising and marketing campaigns go along with it, starting in our favor and November and December. And then as the process proves out the way we think it’s going to it won’t be really hyper aggressive as we move forward into next year.

So yes we are a little open minded about being a little more aggressive on the price sensitivity.

Patrick Archambault - Goldman Sachs

Okay, terrific. Thanks a lot guys.

Jeff Dyke

Yes, sir.

Operator

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

John Murphy - Bank of America

Good morning, guys.

Jeff Dyke

Hey, John.

John Murphy - Bank of America

First question on sort of slide 14 and 15. I may have missed something on this, because I just had hop off the call for a second there, but you guys go through on slide 15 talking about sort of the one time initiatives or the initiatives here that are impacting SG&A yet we are still looking at an SG&A to grow to 77.7% and you guys did 76.6% last year so there is still negative 110 basis points that slide in from increased cost. I am just trying to understand what that is other than the initiatives?

Heath Byrd

Yes this is Heath. I can tell you a part of that is there is a lot of operational decisions that were made that we it’s difficult to carve out again specifically this is One Sonic-One Experience or this is pre-trunk. For example we increased our regional management per payer for all of these changes coming for One Sonic-One Experience. So that’s not included I didn’t carve that out as part of our initiative spend because it is not directly in that area but you have got a lot of moving parts in our retail business that are really supporting both of these initiatives but we have then carved them out. So that’s part of the 110 basis points.

Jeff Dyke

Yes. And John I would just get it in all of us in our minds. Our SG&A these next few quarters is going to be in this ball park, but as we're ramping up, it's all in our projections as where we thought we'd be. But we've come a long way and we're now ready to launch and so that's increased headcount, increased training. And so the SG&A is just going to be where it is here for a little bit until we start selling cars and generating gross at the Sonic pre-owned project and then as One Sonic-One Experience starts hitting the road.

So, we are certainly within the guidance range that we said at the beginning of the year and we try to do a very good job of getting you guys kind of this is where we are going to be. Sometimes it doesn't match up to the models that you all put together, but it's certainly within inline of what we thought we would do and Heath is exactly right, it's just with that the personnel and support his projects.

Heath Byrd

Yes. Just for a additional color, we modeled that at the beginning of the year to be 78% and we have all expectations to 78% and that includes all of these initiatives for year-to-date, I mean full year.

John Murphy - Bank of America

Okay. That's helpful. And when we think about the implementation here of all these initiatives, a lot of it is focused on centralization of pricing and costs. I'm just curious as you look through this, are you getting any push back from your general managers at your stores or are they all on board, or have you had any problems with potentially with attrition because of this? Because some of them like to operate their stores the way they operate them and are not necessarily on board with all of these initiatives?

Jeff Dyke

Hey John, it’s Jeff. That's what we went through last year and year before. And we've had nothing but great support here the first six months of the year. Our stores, our regions are all begging us to figure out how to move faster with our One Sonic-One Experience roll out. The technology is really slick and again, by year and by us come look at it. But no, I mean we -- as far as this year goes, no, we had nothing but please come move faster, no question in years past. That's been a pretty theme and that's been part of -- we've been talking in the years past about it's been a tough way to how to get all the culture right and to get our processes right so that we get people on board that are supportive of where we're headed.

The industry is going to change, we're just going to change a little bit ahead of it. And we got a team in place that I've got 110% confidence in, in terms of their support for where we’re headed. As a matter of fact, many of them participated in developing all of this. So, we have a lot of support and that is not something that is worried some at this point.

John Murphy - Bank of America

Okay. And then just a last question, or sort of two part question on capital allocation and shareholder value. I mean given where your stock is right now I am sure you are not real happy with that. But for an outside investor I think it's pretty interesting, would you guys entertain a bit for the entire company in the 20% to 30% range higher than what the stock is trading right now?

David Smith

Absolutely not.

John Murphy - Bank of America

Okay. So then conversely, would you consider being much more aggressive on your buyback and for taking -- potentially taking on leverage to buyback a lot more of the company because you won't consider a bid, its' 20% to 30% higher, you must make the stock screaming chip right now.

David Smith

Again we evaluate it regularly; we’ve actually looked on taking more leverage to support that kind of program and once management believes it’s the best use of our cash and our capital, will be in the market.

John Murphy - Bank of America

Okay, great. Thanks.

Heath Byrd

John, you've taken us down the road and certainly we understand your question and certainly know that we will act accordingly when the opportunities arise.

John Murphy - Bank of America

Okay. Thank you very much.

Operator

Your next question comes from the line of Ravi Shanker with Morgan Stanley.

Paresh Jain - Morgan Stanley

Good morning. This is Paresh Jain in for Ravi Shanker. I had a couple of questions, one on new and one on used. On the new side, we recently heard of one other public dealer testing something similar to true pricing at one of its stores. So I was just wondering outside product dealer group, are you seeing any traction in the industry for no haggle pricing? And do you see the other public dealers eventually following your lead here?

Jeff Dyke

No. This is Jeff Dyke again, here is the story. We do see, we’re getting a lot of questions from our competition asking us all kinds of things, how things are going. You’ve been asking about buying our inventory tools. So the answer is yes. There is certainly other dealers out there that are in a wait and see mood, see what happens with Sonic as far as this goes and others who are trying. But it’s just a matter of time. The consumers are going to have applications, we’re going to give it to them. The consumers are going to have applications that telling where the prices are on cars and the deterring, the three pencils back and forth and deterring, this is something that’s going to go away. People may not want to hear about today and they may think that we’re crazy over here at Sonic. But the pricing issue is not going to be the reason people are going to buy cars in the future. It’s going to be the experience you can provide and hopefully pricing gets a lot more stable as we move forward and lets margins grow instead of doing some of the silly things that are done in our industry today. So, there is no question that at some point in time the industry is going to make a step that way. Again sometimes people are first to doing things and sometimes they went until the end and we're first and obviously there is a lot of attention being put towards it.

Paresh Jain - Morgan Stanley

Got it. And on the used side, you guys did very well with volumes but GPU declined and perhaps this is in direct contrast to what the other dealers do so far. And I was just wondering, again the other dealer pointed out that new incentives particularly in May and June hurt their used sales. So, wondering if you guys saw something similar and would that explain your used and GPU performance?

Jeff Dyke

No, not at all. I mean we made the decision to become more aggressive on our pricing and our volume; in the second quarter, we did. As a result, we had a record gross and gross related month, did $106 million in that category and it was a record quarter for us. We’re going to do more of it. I can't speak to our competition on used. Most of our competition is very, very traditional. What they do, they used to have a certain used GPU. They want to be at and they’re willing to take the volume that goes with it. We don't have any barriers to entry there. We whether our GPU at a $1,000 or $1,400, we don't pay a whole a lot of attention to the GPU, we a whole lot of attention to gross and related gross that goes with that.

So, I've got to generate $106 million for us, $1,100 or $1,200 used car GPU, then $90 million or $95 million in gross at $1,700 copy GPU. And our systems tell us where to price, we plug in where we want to be, our systems give a pricing methodology and they’re mature enough now to where that’s where -- what we end up selling. And like I said earlier to I believe it was Rick or Scott's question, we're going to get more aggressive in terms of pre-owned volume in the coming quarters and we'll see how that works for us.

Paresh Jain - Morgan Stanley

That's good color. Thanks so much.

Operator

Your next question comes from the line of Bill Armstrong with CL King & Associates.

Bill Armstrong - CL King & Associates

Good morning, guys. Getting back to the used, you had some nice comp. I was wondering if you could talk about CPO within that 5% used comp. What was the CPO comp for the quarter?

Jeff Dyke

It was I think about 31% of our overall, I now have to get you the CPO growth number, they are looking it up real quick. But I think that the percentage of our total mix, it was 30%, 31%. Yes, 30%, okay. So it was 30% of our overall mix. In terms of year-over-year growth, that’s probably about flat. It maybe up a little bit. Okay never mind. It was between 30% and 31% this year and that’s about equal to where it was last year, it was our overall mix.

Bill Armstrong - CL King & Associates

Got it. Are you seeing any influx in supply of used cars whether it’s coming from off lease or other sources that are more late model, low mile, Jeff that would kind of your more suitable for a certified program than maybe you have in the past?

Jeff Dyke

I mean there is a little more off lease inventory there but we are a little different from our competition and the fact that we don’t ever have any issues gaining used vehicle inventories. I mean it’s the 45 million pre-owned cars sold a year in America there have been for the last 20 years plus or minus 2 million; there are plenty of used cars out there you just have to know just have the right systems and process in place to get them. And I think there are -- well there is definitely more off lease cars coming, definitely more opportunity for certified pre-owned but that is the third of our business, we’ve always kept it as a third of our business and we don't expect it to be any higher than that. That doesn't mean that third can't be a bigger unit number, but it also means the rest of the pie is going to grow too. But as a key job, if all of a sudden CPO becomes 50% of your business, the other non-CPO business is shrinking and at a time the CPO has an opportunity to grow the rest of the business has an opportunity to grow too.

So, we try to keep it all right in that ballpark.

Bill Armstrong - CL King & Associates

Okay, got it. Thanks for that. And just you had a gain on some franchise disposals during the quarter. I think I saw that you sold a couple of Cadillac dealerships in Michigan. Were there any others, or was it just those two?

Jeff Dyke

No, just those two.

Bill Armstrong - CL King & Associates

Okay. Alright, thanks very much.

Jeff Dyke

You bet.

Operator

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

Brett Hoselton - KeyBanc

Good morning gentlemen.

Heath Byrd

Good morning.

Jeff Dyke

Good morning.

Brett Hoselton - KeyBanc

First question, how do we think about the expenses in your three different initiatives as we move into 2015? Are those expenses likely to go down, possibly go to zero, are they likely to continue at the same level, are you potentially going to increase those expenses?

Heath Byrd

Yeah, if you look at, this is Heath. Its strong with the pre-owned initiative all of that's going to depend on how quickly we ramp up our gross, our business at that one hub as well as how quickly we grow and how quickly we go to the next market. But you should see generally, we don't, we have a cash flow positive model up one part after year three. And so we're still going to have some relative expenses probably around that some level going forward in '15.

On One Sonic-One Experience, definitely the next 18 months you are going to have the same kind of trend in expenses as we roll this out to the other dealerships. This expense is going to change right now we have spend a lot on technology development and starting next year it will be more on travel and train.

And in synchronization of business office that's going to start actually producing a net gain as we roll out business office and move everything to Chevrolet you obviously have opportunities to eliminate headcount in the field and so we'll start getting gains from that starting in 2015.

Brett Hoselton - KeyBanc

And switching gears to the One Sonic-One Experience the pilot story I think it sounds like the Toyota store 21% increase in volume what about gross profit per unit, what about total gross profit, what kind of changes are you seeing there on a year-over-year basis?

Jeff Dyke

Yeah it's a great question so I was saying earlier. You remember that 21% is a projected based on what we did last year and what we're travelling to do this year. But the PURs I would tell you right now based on our normalized run-rate if we do not hit the Toyota level the next and same level which we think we're going to, but if don't, I would say it's down $200 a car or something like that.

A lot of that to be honest with you is driven by what I would call a less than perfect inventory mix for what the market and doing in our systems have told us to buy. So now that we're ordering inventory on a centralized basis from Toyota in the store. As that mixed it right your margins go up so I expect that once we push through the inventory that we had on the ground which was a 200 cars which I'll begin in September, excuse me in July and first part of August. Then our margins will actually increased and we saw over the weekend margins up gosh may be $400 a car from our run rate first two weeks ago of the month. And that’s going to continue to get better as we move through the end of the month and on into August and September. So, a little early now I’ve got, I certainly have a travel rate and the market share rate based on what’s out there today but in month end and during the next quarter I’ll certainly give everybody a much more detailed preview of where we’re at with that one location.

Brett Hoselton - KeyBanc

And as you roll out down this pilot new roll on Chevrolet and so forth, your expectations for obviously for total grosses I think are increased, but gross profit per unit, are you going to sacrifice a portion of that which will offset potentially some of the volume increases you anticipate, what are your general thoughts on gross profit per unit as you roll this out?

Jeff Dyke

Yeah. I think in the beginning because we’re making a statement here and remember we don’t really start our official October 1st with marketing and advertising. But our goals that our GPUs are going to go up along with our market share. But if we grow the market share to the level that we think we can get to and have our GPU stay flat it’s a big win. But I think there is a dip in GPU the first couple of months getting inventories in line and adding inventory, remember I said earlier we had about 225 or so cars on the ground at the Toyota store between now and October 1st when we moved that up to over 400 cars on the ground from new. And really we’ll make a big difference overall mix as well as the GPU because as you know when you get your mix right, gross comes along with that both on a PUR basis and a total gross basis.

Brett Hoselton - KeyBanc

And then in the past couple of quarters, first quarter and second quarter your new car volume has underperformed the industry. Your gross profit units remained relatively stable let’s say but that’s kind of your core business it’s not necessarily your pilot store. What is disrupting the core business at this point in time, is it or we also implementing the One Sonic to some extent to that quarters than still resulting some disruption. Is it you talked a little bit about kind of some turnover two or three years ago, is that potentially. Why is the core business underperforming at this point in time?

Jeff Dyke

Yeah, couple of things, GPU number we are up $70 somewhat in the first quarter up a somewhat $140 in the second quarter on car GPU, so our GPU is actually growing and generating much more new car growth dollars up 11% for the second quarter. But we've rolled out two prices, as you aware for the last couple of years, we've bought two price and that is certainly been a disruptive, right.

When you move a company from a completely have all environment where all you're doing is going back and forth to pencils to the gas and you move into a less than 500 we did, about less than 300 in negotiation it disrupts all kinds of different things, you got somebody asked the question or I think John mostly people we don't want to be follow that leave so you got a cultural issue, you got your competition they want, they catch on in there advertising will just under kept by $500 and that's great, but One Sonic-One experience on top of that and you got one associate delivering the vehicle and taking you through you're try to appraisal, taking through F9 you can do that all in less than an hour, then all of a sudden you have got something my competition can say under content by $500, but they can't say that they could good things done less and play all the game to get play today.

So that's very experiencing, the marketing advertising that we're going to put out there is going to expose that and make a big different as we move forward that we have a total package together.

You were definitely right, we did rollout through price, it has been a disruptor and its caused I have not been hyper aggressive on our pricing stores we've just been learning how pricing last this affects our margin. But I haven't been too concerned about it, I mean its not like the market just totally run away from us and we will be a little more aggressive in July in the third quarter you will see how that plays out, but we know we watched the share everyday, we know exactly where we are and we watch our gross dollars everyday and those dollars we are totally satisfied with.

Brett Hoselton - KeyBanc

And one final question, used vehicle gross profit per unit if I get back several years your used vehicle gross profit per unit used to 1,959 in 2005 and it kind of steadily declined seemed to stabilize around $1,400 a copy in 2012 same in 2013, but it looks like we had a slight dip here in this quarter but that maybe an anomaly how do we think about gross profit per unit going forward, should we consider it to be maybe stabilized in this what are your expectations?

Jeff Dyke

We don’t really, I don’t pay a whole lot of attention to that GPU number, I mean if you had if you held me on a dime, I might say somewhere in the 1,300 range would be reasonable we look at the gross dollars that we generate by the sale of the used car from the front to the back to where we generate and fix operations and combined all those for a total gross number. So for example ,if you sold cars at a $1,000 versus selling cars at $1,400 or $1,700 we are selling our competition is, but I am doing twice as much volume on a per store basis and I am generating more gross in F9, more gross in fixed operations as a total result that gave us a $106 million growth and all time record used and related gross quarter last quarter.

So what we pay attention to is the volume and the total gross dollars that we generate, the product stores are $100 less than last year but we generated $9 million more in gross which would you chose the $9 million less and a higher PUR or the more $9 million in gross I mean obviously its right.

So if you put me if you have to say Jeff I need a number I would say that we are going to be somewhere between 1,300 and 1,350 on a go forward basis but that could move around a little bit based on the level of volume and gross that we want to generate out of the department.

Brett Hoselton - KeyBanc

Great. Thank you very much gentlemen.

Jeff Dyke

More than welcome.

Operator

(Operator Instructions). Your next question comes from the line of Bret Jordan with BB&T Capital.

Bret Jordan - BB&T Capital

Hi, good morning. Most of them have been asked but just a couple of follow-ups and one is I guess clarification. That Toyota store and the 240 basis points, is that market share growth and it is outperforming it's market, the Toyotas in that region, or is that growth off of its base prior to the program?

Jeff Dyke

No, that's market share growth. So we were at 14.5% market share and we're at 16.9% or something now that was through Friday I think. And again those are based on what everybody punched up or, we won't totally punched up either, probably 10 units or so missing or 12 units missing out of our numbers. But, that's what it is.

And if I just pace it and I'd say here is how many cars we've done first couple of weeks of the month, here is a lot of things we are going to finish, it's going to be somewhere in the low end of 215 new cars to the high end of 200 it's totally 40 new cars the pitting on how this week can go. And so last year I think in the same month we sold 165 or something like that, maybe one more or something like that from there.

So, that's about a 21.5% increase. And again the market leader is in the 300 to 350 range. So that's what we intend to be. And we have the traffic and the pricing to make that happen, I don't have the inventory in the ground to make that happen this month bit if I did we would. But over the next couple of months with the investments we have made and the facilities we are getting inventory and so that should fix itself.

Bret Jordan - BB&T Capital

And then one directional question. I guess given the puts and takes of higher promotional spend around the new initiatives and maybe some gross margin benefit with the scale of One-Sonic, would you expect that SG&A to gross improves in '15 or is your spending on new initiatives going to continue to sort of offset the pick up on gross?

Heath Byrd

I would expect SG&A as a percentage of gross as we rollout One-Sonic after 60 to 90 day introductory period as a percent of gross to begin to drop because of the growth that we're going to get out of the project or want to do the project.

Jeff Dyke

But it is going to take time to build the brand and to build the gross up to have the leverage of the SG&A.

Bret Jordan - BB&T Capital

Right. I think Jeff in that automotive news article last week I think you’d said you expected a fairly significant level of spend but I am just trying to get ballpark figures that the will the promotional spend offset the benefits on gross on a may be 12 month forward basis.

Jeff Dyke

I don't think on a 12 month basis but certainly for the first four, five, six months we're going to -- we're not going to build all of this and we were having this discussion internally every day. We're not going to build everything but we work so hard to get to. Now we are ready to launch and then not market the hell out of it.

So there is a pretty substantial I believe I’ve described it as analogy, a pretty substantial advertising marketing spend that goes along with this, so we haven't even done yet. And so that's building the brand kind of spend that's expensive. And we're working on those budgets right now for '15. But the spend for the Charlotte market in the fourth quarter is going to be significant as we really test our capabilities. And the biggest issue that I see coming out of all of this is it's being in the storm, Saturday is just any indication, it’s only one day is I had more customers than I knew what to do with. And so there were several times during our day on Saturday where I had 33,000 people on the floor and I had every sales person had two guests. So I am scrambling now to hire more sales people and by the time we open, I am going to hopefully have 40 to 45 sales people on the floor and hopefully that will be enough to handle the traffic that we’re beginning to see in the store. And remember, all we’ve done is become aggressive on pricing and a little more aggressive on letting the consumer know about that pricing from an internet perspective. We’ve done nothing else. We’ve launched our tool through our manager for our sales associated store using the tool yet. So, it’s going to really make a big difference as we get launched.

Bret Jordan - BB&T Capital

All right. Thank you.

Operator

And at this time, there are no further questions. Gentlemen, I hand back to you for any closing remarks.

David Smith

Thank you very much everyone. Have a great day.

Operator

Thank you. This concludes Sonic Automotive second quarter earnings conference call. You may now disconnect.

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