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Sonic Automotive, Inc. (NYSE:SAH)

Q2 2012 Earnings Conference Call

July 23, 2012 11:00 AM ET

Executives

David Smith - Executive Vice President, Director

David Cosper - Vice Chairman, Chief Financial Officer

Jeff Dyke - Executive Vice President, Operations

Analysts

Rick Nelson – Stephens

Brett Hoselton – KeyBanc

Colin Langan – UBS

Scott Stember - Sidoti & Company

Clint Fendley – Davenport

John Murphy – Bank of America Merrill Lynch

Operator

Good morning and welcome to the Sonic Automotive’s 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, Monday, July 23, 2012. Presentation materials which management will be reviewing on the conference call can be accessed on the company’s website at www.sonicautomotive.com by clicking on the Investor Relations tab under our company and choosing Webcast and Presentations on the right side of the page.

At this time, I would like to refer to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectations about the company’s products or 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 those 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, Executive Vice President of Sonic Automotive. Mr. Smith, you may begin your conference.

David Smith

Thank you, good morning and welcome to Sonic Automotive’s second quarter 2012 earnings call. I am David Smith, the company’s Executive Vice President. Joining me on the call today are Dave Cosper, our CFO and Jeff Dyke, our Executive Vice President of Operations.

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

With that, please turn to the next slide. Our business model and strategy continue to yield positive results. Our team delivered a record setting sales performance with nearly $2.2 billion in sales during the quarter, an increase of over $239 million, or over 12% from the prior year quarter. All of our revenue lines experienced sales growth, particularly our new retail vehicle sales improving over 22% versus a SAAR improvement of only 16%. We continue to keep expenses in line with our yearly expectations, and collectively we were able to increase net income from continuing operations nearly 20%.

There were two items affecting our reported results, as can be seen from the slide, and Dave will speak to those in his comments. We have been very busy over the last several months and we were implementing a plan that we believe will benefit our shareholders and strengthen our company. If our outstanding tender offer for our 5% convertible notes is successful, we believe the benefits from an improved capital structure will be an important step toward higher overall profitability. We are excited about how these actions will affect the future of Sonic Automotive.

Now, I will hand the call over to Dave Cosper to review our financial performance.

David Cosper

Thank you David. As David mentioned, revenue increased 12% for the quarter and reached $2.2 billion. Gross profit was up 5% and operating profit increased to $60 million. After tax profit was $28 million, up 20% from last year and EPS was $0.46 for the quarter, up 21% from last year.

During the quarter, we repurchased $20 million of our 5% convertible notes, and recorded a loss of $1.6 million after taxes. This reduced EPS by $0.03 for the quarter. We also successfully resolved the state tax matter that resulted in favorable tax accrual and valuation allowance adjustments, and this increased EPS by $0.06 for the quarter.

Next slide please. SG&A as a percentage of gross profit was 77.8% for the quarter and this is in line with our full-year projection of 78%. The slight increase from last year is much about softer gross PURs [ph] as anything else. Our investment in technology and training remains on track as we move to substantially improve our sales effectiveness and shopping experience for our customers. Jeff will have some details on that in just a few minutes.

Next slide. Net CapEx after mortgage funding was $24 million for the first six months of the year. Full-year expenses is expected at $95 million. Presently, we have three new stores under construction, and these are all are known property. And as these stores are completed, we plan to secure mortgage funds --

Next slide, please. This slide shows our bank covenants and as you can see, we’re comfortably compliant with all of them. David mentioned our efforts on improving our capital structure and basically we have a two set process to do this. For step 1, on July 2nd we closed on $200 million of 10-year notes with a 7% coupon, and we are in the middle of step 2, which is a tender offering for all of our 5% convertible notes, and the tender offer period ends this Friday.

We believe these actions will improve and simplify our capital structure and be beneficial for all our debt and equity holders, consequently, we view this as a win-win all the way around.

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

Jeff Dyke

Thanks, Dave and good morning everyone. I appreciate the opportunity to share the Sonic Automotive 2012 second quarter operating results. Before I speak about the results on this slide, I would like to take a moment to thank our team for recording our best customer satisfaction quarter in company history, as we embark to revolutionize the way customers purchase, sell cars to us, and service their vehicles at Sonic Automotive. I would like to also thank them for continuing our dedication to our associates as turnover is tracking an all-time low for the year between 20% and 25% as we strive to lower our turnover to below 15% as a company.

Now on to the new vehicles slide. As you can see from the slide, new retail revenue was up 21.3% and our new retail volume was up 22.3%, while gross was up 6.2%. We continue to see strong new retail volume across all segments and all markets. New vehicle day supply was 46 days ending June.

Next slide, please. Our pre-owned business continues to improve as the second quarter was the largest pre-owned volume quarter in company history. Pre-owned revenue was up 4%, while volume was up just under 3% for the quarter. Total pre-owned and related gross was up just over 1% as inventory mix in newer model pre-owned import vehicles cost some margin in volume erosion for the category. The mix has been adjusted and margins have returned to normal levels in July. As you can see on the slide, we hit 87 units per store for the quarter, up 6% from an average of 82 units in our record breaking first quarter that we set in Q1 and ahead of the 79 that we averaged in 2011. We have two out of our five regions now, averaging over 100 units per store, with the others making progress towards our goal. The exciting news for us is that our SIMS initial test phase in Texas is coming to an end and a full company launch schedule begins in August of 2012. Our day supply was 31 days and certified pre-owned was 26% of our total pre-owned sales in line with our strategy.

Next slide, please. As you can see from the slide, fixed operations revenue was up 3.2% and gross profit was up 2.2% for the quarter. We broke the record for revenue and gross that we set last quarter, having our all-time largest fixed revenue and gross quarter in company history.

Customer pay revenue was up 3.6%, or customer pay gross was up 3%. Internal and sublet revenue was up 7.6%, while internal and sublet gross was up 12.9%. We are on schedule to have all stores operating with our service iPad [ph] process by year end, results we are seeing from this launch were fantastic and we will share more details as all of our stores come online.

Warranty revenue was down 7.9% and warranty gross fell 9.4%, as warranty continues to shrink as part of our sales, just over 14% of the total fixed operations revenue mix.

I would like to take this opportunity to thank our team for their hard work and dedication to creating one of America’s greatest companies to work and shop, with that now I will turn the call back over to Mr. David Smith.

David Smith

Thanks, Jeff. Our team really appreciates the time you have given us today to review the quarter. We are very pleased with the results this quarter and the benefits we are seeing from the continued execution of our various operational and financial strategies.

As we look into the last half of 2012, we are hopeful that the positive trend of growth in automotive retailing continues and anticipate a full year 2012 SAAR to be in the low 14 million unit range. Based on our performance through the first half of the year, we are increasing our continuing operations diluted EPS guidance to the range of $1.62 to $1.70.

Before we take questions I want to thank the management to thank all of our associates and vendor partners that joined together every day to help us build one of America’s greatest companies to work and shop. It is an honor and a privilege to help lead our great company and we thank you. With that I will open it up for questions.

Question-and-Answer Session

Operator

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

Rick Nelson – Stephens

Thank you. Good morning.

David Smith

Hi, Rick.

Rick Nelson – Stephens

Thank you. To ask you about the incremental training for IT and those costs actually absorbed in 2Q, was there anything unusual and your expectations for the SIMS launch in August from a cost standpoint?

David Cosper

No, Rick this is Dave. The cost for the IT and training were basically flat with Q1 and roughly in $3 million neighborhood incremental year-to-year and up frankly, Jeff, I don’t see any increase with the SIMS launch.

Jeff Dyke

No, I mean, we have been absorbing the SIMS parcel [ph] on a monthly basis, Rick, starting in January. It’s all expected, the costs are all right in line with what we projected them to be and we are just very excited to get SIMS up and running in the store. We are launching, it’s been a little bit disruptive because you are really moving from a decentralized pricing and appraisal model to a centralized pricing and appraisal model. So you are really changing the culture of all our stores. So, I am real pleased with where we are with the product and we are real excited to get it launched. All the costs are right in line with what we projected them to be.

David Cosper

Yes. So we got the cost and now the revenue, the margin, and the volume we will look forward to see.

Jeff Dyke

Yes.

Rick Nelson – Stephens

The other SG&A in your breakout, it looks about $5 millions, is that incremental IT or I guess, where exactly does that tender cost show up in the financial statement?

David Cosper

That tender cost really haven’t hit our incomes statement. A lot of those will be amortized over the life of the deal.

Rick Nelson – Stephens

That should fall out to $0.03 in EPS related to the --?

David Cosper

Yes, I am sorry. Yes, that’s in other income and that’s related to the $20 million we bought back in April and that was before we even undertook this latest strategy to issue long term debt and do intend to offer. That was part of our normal retirement program of the convertible notes. You are exactly right, that was worth the $0.03.

Rick Nelson – Stephens

Okay. And then in terms of priorities for the free cash flow, how would you right now, buyback ownership of properties, other CapEx?

David Cosper

Yes. Our three priorities of course that we have been on for several years now, base business, number one; owning your property, number two; and reducing our debt, number three. We are going to take care of the base business first and we are going to own properties as they present themselves. Those actually would be ahead of reducing debt. This structure that we are undertaking right now, of course pulls ahead, our effort to take out the converts if our tender is successful and gives us a nice long-term funding ten-year debt at a good rate. Now the cash we had targeted for the converts over the next two years of course is – we are going to look at all options and what’s best for the company, but we clearly are focused on making sure dilution is handled well over time.

Rick Nelson – Stephens

Got you. Because here rising market capital and the converts will require, should we assume that type of handled will be buybacks?

David Cosper

Yes, and you probably saw in our press release we got 100 million authorization for repurchase of common stock. So, it’s about as close to a yes is you are going to get from me, Rick.

Rick Nelson – Stephens

Okay. Thanks a lot and good luck.

David Smith

Thank you, Rick.

Operator

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

David Smith

Good morning, Brett.

Brett Hoselton – KeyBanc

How are you guys doing?

David Smith

Great.

Brett Hoselton – KeyBanc

I want to dive into the SIMS a little bit, the investment there. I guess my first question is, it sounds like you kind of had a run rate of 3 million. I presume that’s the run rate you probably are going to continue out through the remainder of this year? Is that a fair assumption?

David Cosper

That’s correct.

Jeff Dyke

That’s correct.

Brett Hoselton – KeyBanc

And now, as we get into the first quarter of next year, does that investment essentially go away in its entirety or in it’s entirety or does it continue and ramp down over some period of time?

David Cosper

I think it continues and starts to ramp down probably in the second half of 2013, that is a lot more SIMS. There is a lot of things going on here at Sonic in each part of our business.

Jeff Dyke

Right. We’ve got the service pad which is iPad rollout on all of our service drives which makes life a lot more convenient for our customers and helps us execute better. We’ve got sales pads, iPads that are going in the hands of all of our sales associates which is a long term part of our customer experience process. So, all of those projects rap into that dollar amount – dollars will ramp down over time, but when you look at SG&A as a percentage of growth, the lift that we’re going to get by centralizing and the early results that we’re getting back in some of these stores it won’t be felt anymore. It is just sort of get bloodied a little bit going through the door because you’re launching all of these activities that we want to have in the store with the value of new IT products that are out there and the process that we want in place at the same time you are changing the culture that is going on in the store. It is very rare for an automotive company to have all their appraisals done centrally and all their pricing done centrally. That is not something that has happened in our industry, but we’re going to have such great control over our inventory and our pricing that it is going to make us a heck of a lot more effective. Our margins will go up, our volume will go up and we’re seeing that in our test stores. And when our volumes are up and our margins are up and so it is going to make a big difference for us moving down the road.

Brett Hoselton – KeyBanc

And as you think about the iPads, those in the service firm and in the sales department, in the rollout there. How does it benefit? Let say the service writer or the assistant service manager. How does it benefit them or how does it benefit the sales associates?

Jeff Dyke

Well. First of all, it makes life a lot easier if you ever spend any time in the service drive and you saw what a service writer has to do now with a big T tablet and number two pencil or some sort of form that they have to fill out with a clip board and run back to the computer and put information in, which inconveniences the customer. Now, you can take a service pad and it actually forces the service writer to do the full walk around at the car with the customer, (inaudible) in the store the other day and the customer has actually taken the service pad out of the service writer’s hands and filling it out themselves. And it makes a big difference, our effective labor rates are growing, the number of hours per RO are growing significantly and so it is just an overall easier process using technology and process to enhance how we do business which in our industry has been a little bit archaic over time and then the same thing on the sales side. You can imagine how long it takes you to buy a car. I don’t care where you go, you need an average of somewhere between 2.5 and 3.5 hours once you’ve made a decision to buy a car. With the processes that we’re putting in place we’re going to be able to – after you had made the decision to buy a car, our target is to be below one hour, we’ll have you out the door and that is a big significant difference especially if you think about the generations of buyers that are coming on will have no time. And you think about your children and how they use technology today. They spend all their time on their iPads and their phones, texting and doing all those things. They don’t have the heck of a lot of time at least in their minds, I am not so sure what they’re so busy doing, but at the end of the day it is going to make the buying process a heck of a lot easier for the consumer. You just have to come experience it and I invite you to come in to one of our stores here over the next few months and enjoy the process. I’ll sell you a car while you’re at it.

Brett Hoselton – KeyBanc

Thank you. And then just think about used days of gross profit per unit. In the past couple of years it kind of ranged around $1400 to $1500 per unit. You’re done more in a $1300 this past quarter. Is there anything in particular going on there and what are your expectations going forward? Do you see a kind of staying in that $1300 range or do you expect you are going kind of push back up in to that more typical $1400 to $1500 range.

Jeff Dyke

Yeah, now I expect us to be somewhere between $1400 to $1450 somewhere in that ball park, really we came out of March with a lot of current year model and one year old Honda and Toyota products and Honda and Toyota are running incredible specials on their new vehicle Camry’s and Accords and Corollas. So, it has put a lot of pressure on that product almost to a point where you can sell new cheaper than you can sell used. And so it creates a little bit of mess for us, but that’s why you want to have a centralized inventory management process in place because it stops all that and I think you’ll see margin shrinkage in a lot of different, not just us. You saw it in others, you’ll see in others too. I expect it to bounce back in or around the $1400 mark is where we sort of target to be, that is our sweet spot and we are already seeing the numbers back up 75 may be even close to a $100 a car for March and it will keep marching north after that. Jeff Dyke (inaudible) it was just a little bit of a blip there for us.

Brett Hoselton – KeyBanc

Thank you very much gentlemen.

Operator

Your next question comes from the line of Raghu Shata [ph] of UBS.

Colin Langan – UBS

Hi, this is Colin Langan, can you hear me?

David Cosper

Hey Colin, how are you?

Colin Langan – UBS

Yeah. Can you just clarify the revised guidance range, is that putting in any estimate for the convert tender or is that per the impact of the convert.

David Cosper

Collin, this is David. That is excluding any impacts associated with the tender offer. That thing is still outstanding and there is a whole number of things related to that and we just assume – see the dust settle on that before we speculate on what that might do to us.

Jeff Dyke

Yeah.

David Cosper

I can tell you this, if everything goes the way it should, the way we were expecting and hoping, it’s a good thing for everybody and we’ll get a lift out of it.

Colin Langan – UBS

Okay, and when is the timing about it going to be announced?

David Cosper

Friday is the end of the tender period, and then I think it takes a day or two to, you know assess things and clean things up and close and so we’ll know, first and next week.

Colin Langan – UBS

Okay, and so then I guess the guidance went up at least a mid point here. What is driving the improvement for us through the rest of the year, is that mostly the sales outlook getting a little bit better?

David Cosper

Sales outlook is better and then we’ve held our guidance, you know we’d it for a while and the 155, the 165 and I think we’ve noted on one of our calls that, things continues that way we’ll be at the high end of the range. And if you do the average between what we’ve provided, it’s a penny or two over the high end of our range. So, I think it’s very consistent with what we’ve been saying since the last call.

Colin Langan – UBS

Okay. And on a total sales basis, other deals seem to perform better than you have performed in the market, any thoughts? Was geography working against you this quarter?

Jeff Dyke

This is Jeff Dyke, here is the thing, if you look at your brand mixed, we’re really heavily weighted with BMW and Honda, and if you got some other groups out there, that is more heavily weighted than Mercedes Benz and Toyota, and those few brands just outperformed BMW and Honda. BMW is up at 16 big stores for us, I think we saw more and more BMW’s being bought in the country, and they were only up about 4.5%, so far for the year. And so that certainly a piece of it, and Honda as well, they are up but they are not up like 80% with Toyota and we’re outperforming them, maybe by a 100% in terms of their growth. So it’s a little bit of mixes playing a role and that’s why we’re so focused on pre-owned, quite honestly. And what we’re doing fixed operation because it all sets that. And in years past, we would not have had the pre-owned growth and the lift that we’ve seen and we’d be stuck with low volume in BMW. Good news is when you talk to BMW, I met with your executives the other day, they look at the back half of the years being much much better than the first half of the years, they’ve got new products coming online and some inventory issues that they’ve resolved, and so we look to have all that behind us by the end of July and some wind in our BMW sales as August gets going.

Colin Langan – UBS

Okay, and then just one last one. You talked used revenue per unit thought ___8:55__ a new side, you’re actually a little bit lower than your target of 21 to 23, is it the same reason that caused that to be a little bit below the target range?

Jeff Dyke

It is. We’re being very aggressive with Honda, just because of that. The last thing I might do is give up market share which we’re not doing right, we’re holding on to our share and you that gets a little bit of expensive while BMW’s recalibrating and getting some inventory issues settled, so that’s what causing them

Colin Langan – UBS

Okay great, thank you very much.

David Cosper

Thanks Colin.

Operator

Our next question comes from the line Scott Stember of Sidoti

Scott Stember - Sidoti & Company

Good morning.

David Cosper

Hey Scott

Scott Stember - Sidoti & Company

If we circle back to the U side, we talked about you had a mix issue, does that also largely explain the mid single digit revenue growth in the quarter?

David Smith

Yeah, despite couple of things going on there, Scott, that’s one of them and the other thing too is that we are really going through a metamorphosis here with the changeover to SIMS. And I’ve got my entire regional team focussed on that launch. My (inaudible) said actually rearranged some training and refocused my used vehicle director’s on some of the things that they’ve been doing for last four years where we have seen double digit growth. I expect is we move towards the end of the third quarter and the end of the fourth quarter will return to those normal growth levels. We are really changing a lot of things that Sonic might comes to pre-own and to prepare for the launch of SIMS, and it’s created a little bit of a slow down there, but you know, I expect it to return. It’s not something I’m worried about, it’s actually something that we knew we would be faced with.

Scott Stember - Sidoti & Company

And in general, could you just comment on what you guys are seeing for the

vehicle sales so far in July?

David Smith

Good, good we like July. July has been good so far both new end and pre-owned shaping up kind of like a man for us and has been solid.

Scott Stember - Sidoti & Company

Okay. And just lastly, I know there has been a lot of questions on SIMS and all the IT spending, but did you give any examples, for instance, where it seems like you are pretty more far along with rolling out the iPads than most other things. Maybe give some examples of some of the stores that have these in place, what the comps look like, the customers they work looks like compares to stores that are on the iPads?

David Smith

Yes, we are seeing growth and we have got, our Toyota stores have been rolled out. We have seen – we are not giving you real specific numbers, we have seen and hopefully stay ahead of the curve. Our effective labor rate growth has been real solid, up $3, $4, $5. The number of hours per RO have grown and most importantly, CSI is better, which is just real, real interesting. Our customers really like the process, and you have to understand, when you got a company that’s been doing one thing for decades in an industry that’s been doing one way for decades, it’s a big change to go in and bring technology and to do the things that we are doing and we are doing it all very, very quickly. So, there is just to be expected, it’s got some bumps in the road, but our performance has been spectacular when it gets especially on the fixed operations side, the numbers are just great. And I will have everything rolled out on fixed operations by the end of the year, the team will, and I will begin to – I will make a note in next quarter, we will have a lot, more of the stores rolled out. We will start specifying some of the details that we see behind the launch.

Scott Stember - Sidoti & Company

Great, that’s all I have. Thank you.

David Smith

Thank you.

Operator

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

Clint Fendley – Davenport

Thank you, good morning guys.

David Smith

Hi Clint.

Clint Fendley – Davenport

I know lots of questions on the SIMS today, and I am sorry if I have missed it, but did you guys indicate how long do you think the entire launch will take here?

David Smith

Okay. I did a launch of 17 stores at the beginning of the year, then we added the Texas market, which is now all done, Texas and Oklahoma. So, that gives us about 35 stores or so that are on the product. I should have the whole thing complete by the end of Q1. If I can do it faster, I will, but there is a lot that goes into this. So, my goal is to have it all done by the end of the first quarter.

Clint Fendley – Davenport

Okay. Good deal. And I know you indicated that your volume and your margins have improved there in Texas due to the centralized pricing. Can you give us an idea maybe how much and what the experience has been?

David Smith

In our Toyota and Honda stores, it’s a little bit more difficult because of the mix issue, but we have got stores that are up $200 to $250 in PUR, and Texas is such a hot market right now from a volume perspective and we are just selling everything we have there. So, I expect – I have sent a note out to our senior team this morning – I expect with SIMS rolling out that we are going to see a $200 to $300 lift, couple of hundred dollars lift in PUR from the SIMS rollout and the volume upside is exponential. We are doing, we are going to approach 90 units this year per store, maybe a little better, and I think once we have SIMS in full rollout, we blow by our goal of 100 and maybe at 125 a store, maybe even better, who knows. There is so much upside in the pre-owned business that is just tons and tons of upside. This system is going to help and make a big difference for us.

Clint Fendley – Davenport

Good to hear. And final question, I wonder if you guys were planning to update your guidance then again after this Friday?

David Cosper

(inaudible) To be perfectly, I want to get it done and then we will worry about it.

Clint Fendley – Davenport

Okay, right.

David Cosper

Because there is a lot of moving parts today, Clint.

Clint Fendley – Davenport

Okay, thank you.

David Smith

Thank you.

Operator

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

John Murphy – Bank of America Merrill Lynch

Good morning, guys.

David Smith

Hi, John.

John Murphy – Bank of America Merrill Lynch

Just got a few follow-up questions here, just in particularly on new margins down at 5.8%. I know Toyota and Honda have gotten a little bit more aggressive in the market and we have heard that for a number of different dealers, but is there anything else that’s going on in the market that you think is unusual as far as pricing or support use, if to the customer to really get deals done, because it sounds like the demand is coming back pretty strong? So, just a little bit curious the margins on a percentage basis and an absolute basis might be so low right now.

David Smith

I mean, look, the market is hot, and it’s really Honda and Toyota that are grabbing all of that. Some BMW, just because their sales are down, I mean, not down, but they are flat in comparison to some of the major out there, but when you compare it on a year-over-year basis, it’s just not a fair comparison, because the Lexus and Toyota and Honda and the Japanese import, so you sort of got to throw that comparison out of the window. Today, we have got plenty of supply in Toyota and Honda and it’s just a – it’s a very hot market and we are all fighting for market share. We are not going to back off and I know our competition is not going to back off and it’s putting pressure on the margin. And that’s unusual, and that’s why you got to have a big brand on business and big fixed operations business and that’s where we have been focused on for so long. But I don’t find it to be unusual, I would find it unusual if someone were growing their margins in this environment, I would like to see that, but overall, I just think that that’s just – it’s part of a very, very competitive market. The consumer is coming back, there is no question, we are selling more cars and that’s great and we have got inventory to sell, the manufacturers have done a good job, getting us inventory and behaving on an inventory production schedule. So, they are not overproducing, but they are producing, there’s enough inventory for us to all be very competitive with each other and that’s what you are seeing in the marketplace.

John Murphy – Bank of America Merrill Lynch

Great. And so, there is nothing with the share of the traffic that’s slowing down or consumers’ willingness to buy, it’s really a more of a function of what’s going on at the Toyota and Honda level?

David Smith

Yes, there is no – traffic is not an issue.

John Murphy – Bank of America Merrill Lynch

Okay. Second question, as we think about parts and service of 3.2% in the quarter, it’s had a pretty good string, almost for the last three years. There was just kind of big fear in the market, the UIOs will decline as we sort of went through this big decline in new vehicle sales and we would be seeing that, pay (inaudible) and it just doesn’t seem to be coming through. I am just curious if you think that cloud is really on the horizon or we are just lowering rates through it and people are coming back, repairing their cars and you are doing a good job with your efforts. So, we would just never going to see that real hole and things will pick up even further from here.

David Smith

I mean, we seem to be every quarter setting a new revenue and gross record, and second quarter was nonetheless. We just set another record and it’s not slowing down. That theory was a good theory for years past, but I just don’t think and I don’t see that happening. I have been surprised by a lot of different things, but I don’t see that happening. Our business is good and our business, you know, if you go back and think about it, John, we stayed really aggressive the last few years on our new car business. So, we didn’t have the kind of falloff that a lot of other dealers had in new car volume. And so, we didn’t have that bigger shrinkage. We put plenty of inventory out there and my customers were coming back and our pipelines were full and our service drives were full and there is no sign of that slowing down.

John Murphy – Bank of America Merrill Lynch

That’s great to hear. Then, just lastly, the buyback got tweaked by about $100 million. I know you guys are somewhat active out there in the market. I know acquisitions are off the table right now. Are you seeing pricing of your stock just wildly more advantageous or cheaper should I say, than what you are seeing out there in the market and potential to acquire dealerships? And I know you are not that active, you are not active at all right now in purchases, but it seems like that you are trading at extreme discounts that what might be going on in the private market. I am just trying to get your thought process there.

David Smith

Yes, you see it exactly as I do, John. And that makes acquisitions problematic for us. I think at some point they will make sense, but with all the other things we have got going on and the business growing the base business, it’s been our focus to keep focused on that and not go out and acquire. We think there is a lot of upside in our base business and sooner or later, it’s going to flow through to the stock price and if it’s not, then we will have to just use that buyback authority.

John Murphy – Bank of America Merrill Lynch

Okay.

(audio gap)

David Smith

And it’s much lower risk, we are investing in ourselves and things that we know are going to produce instead of going out and buying a dealership that you have to pay a lot of money for that there is risk in. So, we see it as the right way, we have had the same strategy now for the last four or five years and at some point in time, the Street is going to see the same thing.

John Murphy – Bank of America Merrill Lynch

But to be fair, your stock is so underpriced that you guys were seeking out more authorization to buy it back, in addition to the investments you are making internally. I mean, that would be the rationale, increase to buyback. I am just trying to make sure we got that logic straight.

David Smith

It’s what you would do, too.

John Murphy – Bank of America Merrill Lynch

Yes, okay. I appreciate it. Thank you very much, guys. Keep it up.

David Smith

Thanks.

Operator

We have reached the allotted time for questions. I will now turn the floor back to Mr. Smith for any closing remarks.

David Smith

Great. Thank you for joining us on the call today, and hope you guys have a great week. Thank you.

David Cosper

Thank you very much.

Operator

Thank you everyone for joining today’s conference call. You may now disconnect.

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