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Sonic Automotive Inc. (NYSE:SAH)

Q1 2012 Results Earnings Call

April 23, 2012 11:00 AM ET

Executives

Scott Smith – Co-Founder and President

Dave Cosper – Chief Financial officer

Jeff Dyke – Executive Vice President, Operations

Analysts

John Murphy – Bank of America-Merrill Lynch

Rick Nelson – Stephens

Patrick Archambault – Goldman Sachs

Scott Stember – Sidoti & Company

Brett Hoselton – KeyBanc

Clint Fendley – Davenport

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, Monday, April 23, 2012. Presentation materials which management may -- will be reviewing on the conference call can be accessed on the company’s website at www.sonicautomotive.com, by clicking on the Investor Relations tab under our company and choosing Webcast and Presentations on the left side of the monitor.

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

Such statements are forward-looking and subject to a number of risk 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, Co-Founder and President of Sonic Automotive. Mr. Smith, you may now begin your conference.

Scott Smith

Thank you, [Jodie]. Good morning. And welcome ladies and gentlemen to Sonic Automotive’s first quarter 2012 earnings call. I’m Scott Smith, the company’s President and Co-Founder. Joining me on the call today are Dave Cosper, our CFO; and Jeff Dyke, our Executive Vice President of Operations.

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

If you please turn to the first slide, overall results. We’ve been on a path for [technical difficulty] Sonic Automotive that I believe will ultimately differentiate us greatly from the peer group. At its core, our strategy is built on our people and our culture. Relative to our priorities, we continue to focus on investing in our base business, acquiring our real estate and opportunistically reducing our debt.

Our commitment to being predictable, repeatable and sustainable through the execution of our playbooks and the development, and deployment of our proprietary technologies to support our processes will yield higher returns and acquisitions at this time.

The overall result for the first quarter met our expectations and has us on track for the high-end of our annual guidance for the year. Allow me to repeat, our overall results for the first quarter met our expectations and has us on track for the high-end of our annual guidance for the year.

We posted record revenues with sales almost $2 billion and our income from continuing operations rose just over 24% to $19.5 million. Growth was experienced in all revenue categories. This translated into diluted EPS from continuing operations of $0.33 share or 22% improvement over the prior year period.

I’ll now turn the call over to Dave to review our financial results. Dave?

Dave Cosper

Thanks Scott, and good morning, everyone. As Scott mentioned, revenue for the quarter was $2 billion, up 9% from a year ago, operating profit was up 10% and net income at $19 million was up 24%. I’m very pleased with the profit growth we’re achieving through improved operations at our existing stores without acquisitions. It shows me what this business can do when you get the people and processes right and take care of the customer. Continuing ops EPS was $0.33 for the quarter, up 22% from last year.

Next slide please, SG&A as a percent of gross improved 30 basis points to 79.4%. As I mentioned on our last call, this year and into next is a fairly heavy investment period for us. We’re investing in technology and training for our people to improve even further our sales efficiency and effectiveness, and our ability to take care of our customers.

Obviously, our investment spending puts pressure on cost but our success in selling is driving higher gross profit. And frankly, we’re just getting started. We expect SG&A as a percent of gross to be below 78% for the year.

Next slide please, our gross capital spending for the first quarter was $12 million, which is fairly light given the outlook for the year. We have several projects we’re getting underway presently. Suspending is going to ramp up for the balance of the year. We closed on two mortgages in the quarter providing funding of almost $11 million, so net cash used for CapEx was $1 million for the quarter.

Next slide please, this slide shows the covenants for our syndicated credit facility. As you can see, we’re comfortably compliant with all our covenants and expect to be compliant going forward. In terms of capital allocation, as Scott mentioned, we remain focused on investing in our base business, owning our properties and reducing our debt.

With that, I’ll turn the call over to Jeff Dyke. Jeff?

Jeff Dyke

Thanks, Dave, and good morning, everyone. I appreciate the opportunity to share the Sonic Automotive 2012 first quarter operating results. As you can see from the slide, new retail revenue was up 12.1% and our new retail volume was up 11.2%, while gross was up nearly 10%.

We continue to see strong new car volume and market share growth across all regions. From a brand perspective, all brands saw growth with the exception of Acura, Infiniti and Nissan. Some of the big volume increases came from Volkswagen, Audi, GM, Honda, Toyota, Mercedes-Benz, BMW, Ford and Cadillac.

We continue to take significant market share with these brands in the markets that we operate. The vehicle day supply was 49 up from 37.5 ending December that breaks down with domestic at 62 days, import at 39.5 days and luxury at 51 days.

Next slide please, our pre-owned business continues to improve as we execute our playbook strategy and install our sonic inventory management system across all of our dealers, about 30% of our dealers are complete as of this date.

Pre-owned revenue up 9% and gross was up nearly 8% and as you can see on the chart, retail volume was up 6.6%. We accomplished a couple of milestones in Q1 that were of importance in our pre-owned strategy.

First, as I stated earlier, we began the rollout of our proprietary SIMS inventory pricing and management tool. This tool has been under development for several years. It is now ready for deployment and will provide Sonic with a competitive advantage in inventory and pricing management. Second, I’m proud to announce we sold nearly -- sold over 90 pre-owned units per store in March, as we continue our charge towards 100 units per store average. Third, March was the largest pre-owned volume month in company history. And finally, the first quarter was the largest pre-owned gross quarter in company history.

Our results for the quarter continue to show that our playbook execution and inventory -- in our inventory management capabilities. Our days supply was 31 days, certified pre-owned was 26% of our total pre-owned sales.

Next slide please, as you can see from the slide, fixed operations revenue was up 5.1% and gross was up 3.9% for the quarter. We’re very excited about our fixed operations gross as the first quarter was the all-time largest fixed gross quarter in company history.

Customer pay revenue was up nearly 9% and customer pay gross is up 8.1% driven by our playbook execution and the initial service line process and iPad rollout that is underway which will be complete by the end of this year.

Warranty revenue was down 12.5% and warranty gross was down 14.2%, as warranty as a percent of revenues continues to shrink, it was at 14.8% for the quarter that was down from 17.8% last year.

Next slide please, in summary, the first quarter was an all-time record gross quarter for Sonic Automotive. We continue to take new car share at record pre-owned volume and gross along with record fixed operations gross.

We continue to show that our strategy of investing in our associates, reducing turnover, playbook execution and increasing our spend in technology and training is clearly beginning to pay off.

We expect the recovery to continue steadily in 2012 and are well-positioned to take full advantage of the improving environment. I’d like take this opportunity to thank our team for their hard work and dedication to our strategy.

And now, I’ll turn the call back over to our leader, Mr. Scott Smith.

Scott Smith

Thank you, JD. Thank you everyone. We appreciate the time that you’ve given us today to review the quarter. We maintain our continuing operations, diluted EPS guidance of the $1.55 to $1.65 for the full year.

As I mentioned earlier in the call, our first quarter results were in line with our expectations and we’re on track with the higher end of our guidance. As I discussed at the beginning of the call, we continue executing our strategy of strengthening and growing our base business that began several years ago.

We plan on doing so through the proven processes that are predictable, repeatable and sustainable. We’re making significant investments in technology and training that will continue to be reflected in our SG&A through the year. These investments are paying off already and there is much more to come.

Before we take questions, I want to take a minute to thank all of our work -- all of our associates and vendor partners that join together every day to help us build one of America’s greatest companies to work and shop. Thank you everyone. It’s an honor and a privilege to lead this great company.

With that said, we’ll now open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of John Murphy from Bank of America-Merrill Lynch.

John Murphy – Bank of America-Merrill Lynch

Good morning, guys.

Scott Smith

Hey. Thank you.

Dave Cosper

How are you, John.

John Murphy – Bank of America-Merrill Lynch

Your first question is, are you guys have been talking about your guidance based on the 13.5 million unit SAAR in the U.S. And I’m just curios if that still stands or if maybe that number has crept up given what we saw in the first quarter? And if it hasn’t, what gives you a sort of that pause for caution to keep that number that low?

Jeff Dyke

Well, John, it’s Jeff Dyke. Obviously, fleet played a big role in that number in January and February, pushing the SAAR number up. I need another couple of months before I would tell you that we’re going to push too far north. Our guidance right now is somewhere between 13.5 and 14, if it pops up above that that’s fantastic, our numbers will get better.

And as Scott told you, we’re now sort of indicating the upper end of our guidance that we gave at the beginning of the year and that’s reflective in the better business environment that we’re seeing.

We’re not just seeing it in new. We’re seeing it in pre-owned. Our fixed operations customer paid business up 9% was fantastic. So we’re seeing it across the board. So the opportunity is there for it to grow. We expect things to get stronger as we move forward.

John Murphy – Bank of America-Merrill Lynch

And if we were to think of each of those three categories that you just mentioned on new vehicles, so just curious what you’re seeing in showroom traffic and interest levels through the quarter and maybe into April, and the same thing on the used vehicle side, because you sound like they’re running very strong for you as well. I’m just curious on those two businesses. What was the cadence through the quarter and maybe what you’re seeing, maybe a little bit more recently in April?

Jeff Dyke

Yeah. I mean the quarter built, it got stronger every month and April was strong too, I mean there’s no question that showroom traffic is great and it’s not just one or two brands that’s driving, it’s across the board and so that’s been fantastic.

And our pre-owned business just continues to grow. We’ve been projecting that we’re going to get to this 100 car per store average, its coming, we are very excited. It was our biggest quarter yet and March we did over 90 cars per store, which is just great. We’re going to get -- hopefully get that 100 number this year and we’re having a great April, so with pre-owned. So it feels good.

John Murphy – Bank of America-Merrill Lynch

And then if we just think about the parts and service business also, I mean, what was the cadence there, I mean, are you seeing more break jobs, more transmission jobs, are you still seeing a lot of maintenance work? Just curious what kind of tickets and what kind of cadence you’re seeing in parts and service? Just trying understand the mix of business through the quarter once again in April and if there’s anything there in that parts and service, in those parts and service lines that leads you to believe that people might stop fixing their cars and actually just buy a new used car or new car, just trying to understand that what’s going on in parts and service tickets?

Jeff Dyke

No. Our parts and service business just continues to get better and better, and those numbers are great. I mean increased 9% is just a fantastic number at our best yet and we had our biggest quarter yet. And the cadence got better as the quarter went along and it’s good again in April and so the business is good.

The more new cars you sell. The more pre-owned cars we’re selling, internal grosses are up in fixed operations, customers are coming back through the service drive and I mean it’s coming across all brands, there’s nobody who is lagging behind other than warranty, but we’re getting used to that. Warranty is dropping off and it’s a much smaller percentage of our mix. We don’t rely on it as much anymore. We’ve been able to change the game and execute better on our services.

Our playbooks really kicking in, our iPads we’ll have installed between now and the end of the year, on the service drive are really helping the process, it sort of forces our service provider to execute 100% of our game plan, 100% of the time, the customers seem to like it. So we’re very excited. It’s arguably one of our best performing areas in the company.

John Murphy – Bank of America-Merrill Lynch

That 9% increase was that because of a greater number of customers or larger tickets or a combination thereof?

Jeff Dyke

It’s a combination there and higher effective labor rate as well. So we’re doing a better job with the mix of business that we have. We’re doing a better job attracting customers into the service drive and we’re doing a better job selling pre-owned which is driving higher internal grosses. So it’s across the Board.

John Murphy – Bank of America-Merrill Lynch

Okay. Thank you very much.

Jeff Dyke

This results, John, it’s right on our budget. We projected that we would be up at that level. So it’s not a surprise. It’s exactly where we projected we would be.

Scott Smith

And we’re seeing the closing ratios on our supplemental repair request going after as well.

Jeff Dyke

Yeah. We are.

Scott Smith

On the SAARs.

John Murphy – Bank of America-Merrill Lynch

Okay. Great. Thank you very much.

Jeff Dyke

Thanks, John.

Operator

Your next question comes from the line of Rick Nelson from Stephens.

Rick Nelson – Stephens

Thank you. Good morning.

Dave Cosper

Good morning, Mr. Rick.

Rick Nelson – Stephens

I want to ask you about the SG&A. As a percent of gross, it looked like it narrowed down year-over-year, but ticked up a bit from the fourth quarter to the first quarter? What was the driver of that? Is that the technology and [I mean] investments that you talked about, and where…

Dave Cosper

Yeah. Year-to-year…

Rick Nelson – Stephens

Ratios…

Dave Cosper

You’re right, Rick. We did see some improvement year-to-year. We’re expecting more improvement or a better rate of improvement as we progressed through the year, on a year-to-year context. First is fourth quarter is a tough one because Q4 is so big for us. I mean, it’s a gross issue as much as anything else and then there is some unique cost that hit you, payroll taxes and things like that in January, February that you don’t have in December. So I don’t think it’s so much of an incremental spend issue as it is just seasonality of our business and some unique things that hit our cost in Q1.

Rick Nelson – Stephens

Got you. But those ratios should come down in Q2 and Q3 because the…

Dave Cosper

I would expect that they would, yeah.

Rick Nelson – Stephens

Yeah.

Dave Cosper

Yeah. We’re projecting that 78…

Rick Nelson – Stephens

…issue that we’re reading more about, what are you hearing from the OEMs on the supply front?

Dave Cosper

Yeah. Most of the things we’ve seen are saying no issue. But it’s very short-lived, that there is other bit of supply, nobody is really -- we haven’t heard of any manufacturer cutting back on production. But it always makes a little nervous, right, until all the facts are in. So, we’re sort of wait-and-see mode on that.

Jeff Dyke

Rick, this is Jeff. Our days supply is growing from Q4, you can see that, and our manufacturer partners are getting us inventory. There is one brand that’s out there. It’s a little bit short of inventory, its Lexus. We could always use some of the hot moving items from all the brands, but we’re steadily getting better to start to put inventory on the ground. So it’s really helping and make for a great summer.

Rick Nelson – Stephens

Okay. Got you. (Inaudible) ask about the debt outstanding at the end of the quarter and did you make any progress taking up to convert what…

Dave Cosper

Yeah. We took out $17 million of the convert last year. We didn’t take out anything in the first quarter. We were working with our banks to -- our liquidity ratio was scheduled to have a step-up on March 31, so we were holding back on that. It was going from 1.05 to 1.1.

Together with our banks, we’ve made an adjustment, so we’re holding at 1.05, that freeze up some liquidity for us to be more active in reducing our debt. And we’ve actually so far this quarter picked up $4 million, $5 million for the reduction of our debt. So we’re going to be back opportunistically picking that off.

Rick Nelson – Stephens

And it looks like wholesale losses are going away. You’re doing a much better job on the wholesale front the last of couple of quarters. What is driving now do you think?

Dave Cosper

The prices continue to get better inventory is at short supply. We’re being more aggressive on the retail front than probably we’ve ever been. We’re selling more wholesale as a percentage of our total number and shrinking and we just continue to do a better job on pre-owned.

So actually we’ve had wholesale profits here as of late which to be honest with you, I really don’t like, I like to have a little bit of loss as these were being as aggressive is we can be. But, overall, I feel real good about the job that the team has done in managing our wholesale inventory and they’re doing a great job.

Rick Nelson – Stephens

Okay. Thanks a lot and good luck.

Dave Cosper

Thanks, Rick.

Scott Smith

Thank you, Rick

Operator

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

Patrick Archambault – Goldman Sachs

Hi.

Dave Cosper

Hi, Patrick.

Scott Smith

Good morning, Patrick.

Patrick Archambault – Goldman Sachs

I wanted to just ask about new sales to start. You were up 9%, I’m sure that was revenue, you were up 12%, excuse me, which -- and volume up 11%, which is kind of in line with the industry until recently you’d been kind of outperforming the industry pretty consistently over the last several quarters, now you’re kind of more in line.

Is there -- is that kind of going back to maybe some of the fleet commentary that you said at the beginning or is there may be a brand or kind of regional thing going on that’s kind of making it more in line with the industry on the new side?

Scott Smith

Let me start on that. The best data we’ve got on the industry growth in the first quarter was that retail was up about 10.4% and fleet was up about 23%. So we’re looking at our 11.2% increase versus retail up 10.4% and we’re better than in line. We’re a little bit better. Not as much as we were last year. But it’s difficult to continue to take share. It in -- the way we’re viewing it as we took a lot of share last year. We’re maintaining that and in fact growing it a little bit more. Jeff, you got any other…

Jeff Dyke

Yeah. I mean, we did grow share in the first quarter. It was a very light winter in the northeast and so you see a lot of volume pickup in some of those market areas, which maybe drove the SAAR up a little bit over some unusual versus what we had last year, a big winter, so which we all experienced. And in fleet and so, let’s everybody get reported and we’ll see kind of how we stack up.

But I feel very good about our new car growth and where we are. In particular, I feel good about the market share that we continue to take in our big brands across the markets that we do business in. We had a very, very good market share quarter and virtually took share in all of our brands across all of our markets.

So I feel real comfortable. We’ll see -- we’re sort of the first to report. So let’s kind of see where everybody stacks up once that’s all said and done with.

Patrick Archambault – Goldman Sachs

Right. Okay. And that’s helpful. I mean, on that note, how would you gauge the level of competition in terms of the new side? It does look like the sort of gross profit margins have kind of stabilized somewhat here on the new and for you guys. Is that kind of an indication that in this higher SAAR environment people are less desperate for share and the pricing has eased off a bit or how would you kind of characterize that?

Jeff Dyke

I don’t know about that. We’re still staying very competitive. I mean, we’re a very aggressive retailer from a pricing perspective in terms of understanding what’s going on in the marketplace. Our technologies allow us to do that and do it quickly. So we’re moving prices on a weekly basis in all of our stores from a new car perspective.

And so, it’s competitive out there. There is no question about that but our margins are stable. They have been here for the last few quarters on new and I don’t see any reason why they would drop in terms of PUR.

We range always somewhere between $2,100 and $2,300 a car and then, obviously, mix of selling price drives your percentage up and down. But I feel very comfortable with where we are. I think it’s going to be a hot competitive summer and we look forward to it.

Patrick Archambault – Goldman Sachs

Got you. Okay. And then one last one just on [technical difficult] color, if I may, just you kind of hinted that. Traffic was pretty good. J.D. Power was out with I think a high 13s estimate for April, which is obviously a pretty big sequential drop from weather and I guess, Japan pre-buys the way I suppose. Is that that sounds kind of inconsistent than with what you guys are seeing on the showroom floor. It sounds like things have held up nicely?

Jeff Dyke

Well, I think they have, but look, don’t get fooled by the SAAR in January and February and all the fleet business. We need to pay attention to what, most of the retails were out there projecting somewhere between 13.5% and 14%, maybe upwards of 14% too.

It’s where it’s going to fall. It’s going to come back in line and heck, if we end up at 13.7% or 13.8% or 13.9% or even 14%, that’s a blessing. I mean it’s a continuing, improving steady environment. That’s what we want.

And as long as it just keeps trudging on and doing that, we’re well positioned to take advantage of the marketplace. You really got to understand the difference between what fleet is driving and what retail is driving and it’s been very consistent and it’s consistent in April, business is good.

Patrick Archambault – Goldman Sachs

Okay. Great. Thanks for all the color.

Jeff Dyke

You got it.

Operator

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

Scott Stember – Sidoti & Company

Good morning.

Dave Cosper

Good morning, Scott.

Scott Stember – Sidoti & Company

Good. Can you maybe just talk about the heightened expenditures that we’re going to see related to the iPads and employee training and so forth? And you’re talking about seeing some benefit, I guess, as the year progresses. What are some areas that we can look at to gauge that progress as the year progresses? Is it basically, sales, gross profit or both?

Jeff Dyke

I’ll start. This is Jeff Dyke. First of all, what you’re really going to see is the increase in fixed operations and you’re beginning to see a little bit of it in the first quarter. I’m interested to see how everybody else does but 9% revenue growth is very nice and we’ve got iPads rolled out in our service drives now and maybe 40% of the company. So and we’ll hit the balance for the rest of the year.

SIMS is a huge investment for us and we’ve got that rolled out now in the third of the company and what we’re beginning to see there is our trade ratios are increasing, which is what we want. We trade for about 0.48 cars, out of 4.8 cars out of 10, which is actually a high in the industry.

We want to trade for about seven, eight, nine cars out of 10 and our stores are on. SIMS’ are actually beginning to see that number pick up and when you trade for a car, obviously, we’re telling everything we get. So you sell a car plus you trade, you get two cars for yourselves, so we are going to have more volume increases with SIMS going out both on the new car side and the pre-owned side.

So it’s going to affect all the areas. It will affect F&I and it just takes a little while to roll out. We don’t do anything fast. We just try to do it right and it’s going to take all our power to get everything rolled out in SIMS this year and the same thing for the iPad process.

Of course, you’ve got your investment upfront. So we’re eaten some of those costs right now. But in the stores that we’ve got rolled out and the numbers were significantly different and it’s just is how quick can we get it rolled out and get in place, so we can begin reaping those benefits across all of our locations.

Scott Stember – Sidoti & Company

Just to break out what the investments are again, we’re talking iPads, right, we’re talking…

Jeff Dyke

You’ve got the technology piece, the Sonic inventory management system. We have iPads. We have huge training investment to go along with that.

Scott Smith

The incremental spend was $25 million this year in iPads. If you think about it, the Apple called Sonic out on their -- in their quarterly earnings report in their -- I think it was October of last year after Steve Jobs passed away. They called Sonic out as one of their leading innovators.

We’ve been on a path with Apple for over three years and using their technology to interface with our customer and support our processes. So a lot of the cost has already been incurred. And we’re in the process now of rolling these out to our customers through the customer experience.

Jeff Dyke

And we really stepped up our training investment and it’s significant. If you’re going to have the technology, you’re going to have all the processes and have it, you better have the training to go along with it and we’re bringing some of those costs upfront. That’s okay. We’ll eat those up real quick and I’m very -- we’re very pleased with the quarter and where we ended up, and we’ve just got nothing but upside ahead of us.

Scott Stember – Sidoti & Company

Okay. And just looking at your comments about G&A as a percentage of gross profit being below 78%, one could deduce that there would be upside to your -- the high-end of your range. Is there anything out there that is maybe keeping you guys or making you nervous about raising guidance, or it’s just more of a conservative nature just wanting to see how the year plays out?

Dave Cosper

I think it’s more of a conservative nature. I mean, we’ve already handed the midpoint higher in our guidance, Scott did that. I think the quarter came in strong relative to our expectations and would put us on a track at the high-end of the guidance.

Jeff Dyke

It’s just April yet.

Dave Cosper

Yeah. And I’m a good conservative forward background guy. It’s just good business.

Jeff Dyke

And you never know, I mean this resin thing is a risk, it came out of nowhere and then all of a sudden, geez is there a risk, is there not a risk and there’s always something going on. So it’s -- we’re in April and we’ll see how it plays out.

Scott Stember – Sidoti & Company

Okay. And just lastly, were there any one-time items embedded in the G&A number or was everything pretty much just smooth?

Scott Smith

We had a hailstorm that was probably worth $0.5 million. We didn’t call out. We hadn’t planned on it and there was probably another $800,000 of something else in there. And for perspective on the cost we’re talking there’s a good $2 million, $3 million of incremental cost on training and IT that are in there. That -- it is an investment that with brackets around it and the good stuff comes later.

The thing I like about it is, that spend is in there and we still reduced SG&A as a percent of gross. So when some of the cost starts taper off and gross doesn’t, and we get better run rates at, we are 30% and 40% of our stores then it’s really going to make a difference. That’s how I think about it. You’re covering it up with good performance today and there’s a lot more good performance to come.

Scott Stember – Sidoti & Company

Got you. That’s all have. Thank you.

Scott Smith

Thanks, Scott.

Operator

(Operator Instruction) Your next question comes from the line of Brett Hoselton from KeyBanc.

Brett Hoselton – KeyBanc

Good morning, Scott. Good morning, Dave. Good morning, Jeff.

Scott Smith

Good morning.

Dave Cosper

Good morning.

Brett Hoselton – KeyBanc

Just hoping to talk to you just continue on the SG&A leverage. I calculated just on a year-over-year basis in the quarter it was around 72% and it sounds like, you got some additional spend here this year. I guess I’ve got two questions, really as we go forward, at what point in time do you think that additional spend starts to come down?

And then secondly, as you think about the impact on your SG&A leverage going forward kind of the SG&A spend reach incremental dollar of gross profit? Do you see that 70% start to come down maybe closer to 60% or 50% or do you think that 70% is kind of a realistic number going forward for the next year or two years?

Dave Cosper

Well, on the last question I just mentioned, there was $2 million to $3 million of incremental costs in Q1 versus -- Q1 of a year ago.

Brett Hoselton – KeyBanc

Got it.

Dave Cosper

And I see that spend level at that level for the balance of the year and probably into the first part of next year. So I don’t think there is going to be, we’re always looking for opportunities in other areas, but we’re not going to back off, what we view is the right thing for the business in terms of investment in this area. So a lot of the good news that we’re projecting is going to come from gross, which we’re seeing in and it’s pretty much as I described on the other question.

Brett Hoselton – KeyBanc

Okay.

Jeff Dyke

But I -- this is Jeff Dyke.

Brett Hoselton – KeyBanc

Yeah.

Jeff Dyke

I mean, we don’t see our SG&A as a percent of gross dropping into the 50s. There is nobody in the industry that’s at that level and…

Scott Smith

On an incremental basis.

Brett Hoselton – KeyBanc

Yeah. I was talking on an incremental basis, Jeff, I apologize.

Jeff Dyke

Okay. Okay.

Dave Cosper

There is a good report that was put out by one of the analysts here recently and when I looked at it for 2011, and it really just took SG&A and excluded rent and then laid out everybody in the peer group and we were top quartile, top third in terms of our competitiveness on cost. We look really good. And we’re increasing from that level, but we’re expecting more return from that investment.

Jeff Dyke

If you just think about it, our first quarter was the highest gross quarter that we’ve ever had. And it’s because of the investments that we’re making that we’re starting to get that. And we’re just beginning. I mean we’re just scraping the tip of the iceberg here. So there is a lot more to come.

Brett Hoselton – KeyBanc

And then, switching gears, thinking about gross profit per unit on a new vehicle side, so on a year-over-year basis you’re up slightly sequentially from the fourth quarter, you’ve come down quite significantly. My question is going forward as you move into the second, third and fourth quarter, you’ve said that you kind of like to stay within that $21 to $2,300 range, do you anticipate that you’re going to be able to push your way back up into that range again, do you think you might be towards the higher end of that range, lower end of that range, do you have any sense?

Jeff Dyke

Well, there is a cadence to new car growth as you move throughout the year. In our fourth quarter typically you’ve got a lot of manufacturer incentive moneys that you’re picking up in the quarter in particular in December and it pushes our PUR up.

So, but, yeah, I mean, I don’t really foresee any change in our PUR on the continuing basis versus prior year. I mean it’s going to be in or around the ballpark that we’ve been in here for the last year and a half or so.

Brett Hoselton – KeyBanc

Yeah. I guess, what I’m wondering is as your Honda inventory rebuilds and you possibly see some more competition there or something along those lines that might be a bit of a headwinds. But it sounds like your thought is that overall you think you’re going to continue to see your normal seasonal pattern of some improvements throughout the remainder of the year?

Dave Cosper

Yeah. I mean, we’re very aggressive and our pricing as it is. I don’t see that getting any more aggressive. And Honda is a large part of our business, we were -- we weigh outperforming the brand and most of our competition in that particular brand. And so there won’t be any change. You’ll just see is just more volume, more throughput, some more growth.

Brett Hoselton – KeyBanc

And then switching over to the service and parts margins, warranty obviously have been trending down for quite some time here. Do you have any sense as to when you think you might see some sort of a bottoming out there, maybe an inflection point?

And I guess specifically as you think about your service and parts margins, what I’m kind of driving at is, do you have any sense as to when you think you might see your service and parts margins actually start to maybe bottom out here, is this something that might take place later on in 2012, or do you think it’s going to take another year, or two before you start to see those service and parts margins?

Dave Cosper

No. Margin percentages, we’re about where – we’re about where we’re going to be, I don’t see it dipping too much further from where we are. But it’s just not something. We pay attention to what the elasticity in that margin percentage that drives the most gross for us. So we’ve moved that number around and obviously, we’ve come down on the margin percentage and look how much more gross we’re getting, how much more money we’re making. We just had a record gross quarter for fixed operations.

So we sort of like where we are and as long as it brings more dollars to the bottom line and more value for our shareholders, we’re going to keep driving it, bringing more customers in. We are battling against not just our own competitive set but the mom and pop dealers that are out there, the Jiffy Lubes and all that, and we’re taking those customers and bringing them into our shops.

And that to you face those customers, that competition you’ve got to be aggressive in your pricing, but there’s got to be a return for it. And right now from a gross perspective we’re seeing that return. We’re very pleased with our performance in fixed operations over the last few years and in particular our first quarter of 2012 and that’s going to continue right on through the remainder of this year.

Scott Smith

So it’s going to get better as we continue to rollout our iPads.

Dave Cosper

There’s just nothing but upside.

Brett Hoselton – KeyBanc

Thank you very much, gentlemen.

Dave Cosper

Thank you very much, Brett.

Scott Smith

Thank you.

Operator

Your final question comes from the line of Clint Fendley from Davenport.

Clint Fendley – Davenport

Thank you. Good morning, gentlemen.

Scott Smith

Good morning, Clint.

Clint Fendley – Davenport

Most of my questions have been answered here, but I wondered on the pre-owned side. Obviously, the pre-owned to new ratio was down a bit year-over-year, but we’ve had a really nice improvement on the related gross. And I just wondered, is this the early benefits already of the SIMS or maybe just color on what’s happening there?

Jeff Dyke

It’s the benefit for us is, is having more new car volume throughput and us getting used to having that new car volume throughput in trading for more cars which will allow us to sell more. I still think we’ll lead the competitive set in terms of used to new ratio will be right there at the top.

And that SAAR moves up real quick, it’s hard to keep pace, but I’ve got a recon and bring more inventory in. But we’re doing a good job. Our pre-owned team is doing a really, really good job and it just takes a little getting used to. But I expect us to be in a 0.9 to one-to-one ratio between now and when the year ends, and that’s kind of where we’ve been all along. It may fluctuate up and down a little bit just depending on the specials that come out and the things that the new car manufactures do.

But I feel real good about where we are at pre-owned. We’re getting a good balance of gross along with volume increase. We’re trading for more cars. Wholesale is down. And we’re still continuing to really grow. We push past that 90 mark on a per store basis, which was a big feat for us and now we’ve got 100 units per store in our sites and then we’ll move on up from there, so…

Scott Smith

That’s really the metric we measure is how many per store per month and then the used new is kind of a fallout.

Jeff Dyke

Yeah.

Clint Fendley – Davenport

Do you see…

Jeff Dyke

Our, go ahead.

Clint Fendley – Davenport

Do you guys see any opportunities for efficiency improvements on the reconditioning work that you’re doing?

Jeff Dyke

I mean, I think, we’re pretty effective where we are. One of the things that we’re very proud of is that when that vehicle hits the front line, it really stands tall. We’ve really recon our vehicles and do a great job of that and are there some inefficiencies. Certainly can you get better?

I’ll be honest with you. I mean it’s a focus point for us, but our major focus point in fixed is our service drive, taking care of our customers and getting them in and out as effectively and efficiently as we can. We do a really good job of reconditioning our cars and our customers are telling us that because they keep going back and buying more and more and more.

Clint Fendley – Davenport

Okay. And then last question here, you guys alluded to it earlier, but just what is your latest thoughts maybe on the resin issue here?

Scott Smith

I don’t know which issue?

Jeff Dyke

The resin issue.

Scott Smith

Oh!.

Jeff Dyke

All right. We haven’t heard anything other than, we’ve not had a supply issue yet. There is all kinds of stories going back and forth. There are industries outside of our industry that are selling resin into our industry and no one has thrown up a red flag saying, hey, you’re going to have inventory issues as of this point.

Clint Fendley – Davenport

Got it. Thank you, guys.

Jeff Dyke

Thank you very much, Clint.

Operator

Thank you. I would now like to turn the conference back over to management for closing remarks.

Scott Smith

Great. Well, thank you, Jodie. Ladies and gentlemen, thank you very much for listening to our call this afternoon. We look forward to speaking with you on our next call. Take care.

Operator

Thank you. That does conclude today’s conference call. You may now disconnect.

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