Good morning and welcome to Sonic Automotive's First Quarter 2021 Earnings Conference Call. This conference call is being recorded today, Thursday, April 29, 2021, and presentation materials which management will be reviewing on the conference call can be accessed at the Company's website at ir.sonicautomotive.com. At this time, I would like to refer to the safe harbor statement under the Private Securities and 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 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. In addition, management may discuss certain non-GAAP financial measures as defined by the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables in the Company's current report on Form 8-K filed with the Securities and Exchange Commission earlier today. I would now like to introduce Mr. David Smith, Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

This is Sonic Automotive. That was very choppy from our perspective. I want to be sure that the listeners can hear. That must be a bad connection. Thank you very much. Good morning, everyone and welcome to Sonic Automotive's first quarter 2021 earnings call. I'm David Smith, the Company's CEO. Joining me on the call today is our President, Mr. Jeff Dyke; our CFO, Mr. Heath Byrd; our Executive Vice President of Operations, Mr. Tim Keen; our Chief Digital Retail Officer, Mr. Steve Wittman; and our Vice President of Investor Relations, Mr. Danny Wieland. First, I would like to thank all of our teammates, customers, manufacturers and vendor partners for helping us achieve another record quarter. During the first quarter of 2021, we continued to build on our strong momentum coming off record adjusted earnings in 2020. We generated record first-quarter total revenues of $2.8 billion, up 21% on a year-over-year basis and record first-quarter EPS of $1.23 per share, tripling our adjusted EPS of $0.40 per share in the first quarter of last year. These results were driven by strong performance in our franchise dealerships, and another all-time record quarter for our EchoPark business, reflecting increasing consumer demand and continued execution by our team. I'm pleased to report positive trends in the first quarter have continued into the second quarter, and we continue to see strength in all facets of our business. We remain extremely confident in our long-term growth targets based on our current results and near-term outlook, and the increasing number of Americans that are receiving vaccinations and beginning a return toward normalcy. Given these trends in our progress to date, we are confident we can attain our goal of more than doubling total revenues to $25 billion by 2025, and significantly increasing profitability going forward. In our core franchise dealership segment, first-quarter revenues were $2.3 billion, a 15% increase from last year. Total franchise pre-tax income was $70.5 million, an increase of $47.9 million or 211% compared to last year. On a two-year comparison compared to the first quarter of 2019, same-store franchise dealership revenues increased 14% and pre-tax income increased by $49.8 million, which is a 240% increase, reflecting the impact of our lower expense structure as a result of strategic actions that were taken last year. Turning now to EchoPark. We continue to experience rapid growth during the first quarter, achieving all-time record quarterly revenues of $507 million, which is up 53% compared to the same period last year. We also achieved record quarterly retail sales volume of nearly 19,700 units, which is up 41% year-over-year and ahead of the 18,000 to 19,000 units we guided to on our February call. In addition to top-line growth, we have to build our EchoPark model that currently uses vehicle pricing environment during the total gross profit per unit of $2,339 and above our target of $2,150. Our first EchoPark delivery center in Greenville, South Carolina continues to outperform our model selling 160 vehicles in March at nearly $1,750 in total gross profit per unit. Generally $100,000 and store level profit for the month. Our outlook in the EchoPark stores and delivery centers also continues to ramp aggressively. With our Phoenix hub selling 228 vehicles in its full month in March, driving $125,000 of store level profit. The unit ratio of December's Used Car King acquisition is already ramping up nicely selling 305 units in the month of March and over $22.50 in total gross profit per unit. And we continue to apply our learnings to each new EchoPark store we opened or acquired. And results are proving the scalability and momentum of the EchoPark model. We believe these results showcase the flexibility, value proposition and consumer demand for EchoPark's unique pre-owned vehicle shopping concept as more guests choose to visit our stores and or shop echopark.com for the incredible inventory selection, unbeatable pricing and a unique guest experience that we offer. As an update on our expansion, EchoPark's nationwide distribution network and omnichannel retailing platform, we opened five new locations in the first quarter. And in April, we opened our latest retail hub in Birmingham, Alabama, and our third delivery center in Charleston, South Carolina. We remain committed to opening 25 new EchoPark locations in 2021 and we're on track for our 140 plus point nationwide distribution network by 2025, which we expect to retail over 0.5 million pre-owned vehicles annually by that time. With our progress to date and the continuing development of our omnichannel retailing platform, we are confident that we can reach $14 billion in EchoPark revenue by 2025. In addition to the year-over-year comparisons for the first quarter, this morning's earnings press release includes comparisons. We grew EPS in the first quarter of last year compared to 2019 due to the strength of our January and February results despite the initial impact of the pandemic in March of 2020. Since that time, we have substantially improved our expense structure, which is reflected in the current quarter's profitability and operating margins and our expectations for the remainder of 2021 and beyond. In 2021, total SG&A expenses as a percentage of gross profit were 72.2%, representing an 830 basis point improvement compared to the first quarter of last year and 790 basis points better than the first quarter of 2019, which in dollar terms was increased 34.9 million. Same store franchise SG&A expenses decreased demonstrating the permanent expense reductions we had previously communicated. Turning now to our balance sheet, we ended the first quarter with $435 million in available liquidity and set an all-time high liquidity mark in April at $570 million which included over $300 million in cash on hand. More recently, the Company closed a new four-year $1.8 billion credit facility. The credit facility was substantially oversubscribed with strong support from both new and incumbent financial partners. We are very pleased with this transaction which has extended our debt maturities, improved our borrowing costs and raised our total available liquidity and forward-leaning capacity to facilitate our growth plans. In summary, our record first quarter performance reflects steadily increasing automotive retail demand, as well as constantly improving operating conditions. EchoPark has rapidly become one of the leading success stories in the pre-owned automotive retail industry, and we look forward to continuing its rapid expansion in 2021. We expect to see continued strong demand for both new and pre-owned vehicles in the near term, which should drive further growth for our franchise dealerships and the EchoPark brand. At the same time, our efficiency improvements have enabled us to operate in a much leaner and more profitable manner. Despite the challenges we all faced in the last year during this global pandemic, Sonic and EchoPark has emerged as a much stronger organization. We are encouraged by our successes to date and remain confident in our long-term strategic plans. This concludes our opening remarks and we look forward to answering any questions you may have. Thank you very much.

Your first question comes from Rick.

Thanks. Good morning. Great quarter. Can you hear me okay?

It's a little bit choppy, Rick, but go ahead, we'll make it.

Yeah. I think that …

We finished the first quarter with a 43 basis point new car inventory, which puts us in a good position. I categorize this situation into three areas. Domestic conditions may be the most challenging, and I expect May to be particularly tough. However, we have inventory coming in from other parts of the world which should benefit us in the second quarter, along with strong margins that I believe will persist throughout the year. Both imports and domestic sales are likely to become more difficult, but our strategies will help us navigate these tougher conditions in the second quarter.

I think May is going to be the toughest month in terms of digital product from other parts of the world. We have inventory, so we should experience a strong second quarter with great margins, and those margins are likely to continue for the rest of the year. Imports and domestic conditions are going to become more challenging, but our efforts will really help us navigate the tougher circumstances in the second quarter.

January, February, and March have been exceptionally strong. Over the past few months, we've experienced the best performance we've ever seen. The auctions are generating more revenue for cars right now, particularly in the one- to four-year-old category, and we anticipate maintaining a growth pattern to exceed 100,000 cars this year.

Okay. And what happens in January, February, and March is very positive. Having been in this industry for a long time, I can say that the last couple of months have been the best we have ever experienced. The auctions are currently yielding more money for cars due to available inventory, especially in our one- to four-year-old category in the first quarter, with a growth trend expected to exceed 100,000 cars this year.

Thanks, Rick.

Next question is from Rajat Gupta with JPMorgan.

Good morning. Hopefully things will improve from here, but let's give it a try. Regarding EchoPark, can you discuss Jeff, as EBITDA levels are expected to align with 2019 figures in 2021, projected at $20 million to $22 million, considering the $6 million start in the first quarter?

Yes, Rajat, I understand your question despite it being a bit unclear. Regarding EchoPark, we provided guidance at the end of last year and at the start of this year in February, indicating that we would experience a drag of about $12 million to $14 million. In the first quarter, we only faced a $600,000 drag, but we still anticipate that $12 million to $14 million drag for the year. We expect to sell over 100,000 cars quicker than we initially projected. We were close to selling 300 cars and achieved a profit of $125,000, which typically takes a couple of months or even six months to accomplish. We are progressing much faster than we anticipated. This positive trend is evident in Birmingham as well, which is ramping up more quickly. We hope there is some good news regarding that $12 million to $14 million range. We will provide updates in the second quarter about our newly opened stores, which are certainly improving at a much quicker pace than those we opened last year. We've learned significantly and are executing better, with a strong team in Phoenix that has been well-established for some time. It felt like flipping a switch, as we quickly reached nearly 300 cars sold and turned a profit, and we hope to replicate this success moving forward.

And I think the one thing, this is Danny, and I would add to that, is it up to five locations we opened in the first quarter, four of those were conversions and the acquisitions we did in New York and in Maryland. And one of the benefits to the acquisitions is they do come online much more quickly, there's much less pre-opening delay. The remaining 20 stores that we have this year will be more greenfield like Phoenix, like Birmingham, like Charleston which we've opened in the last month or past. So that's where the majority of drag comes from, and it is going to be back weighted. And that's one benefit of having the flexibility and doing acquisitions versus during the traditional greenfield that we do in the EchoPark.

Yeah. After that, the synergies platform, it just topped on, hold over 300 cars and it's profitable just immediately there, so we're hoping that and expecting that in our platform in Baltimore we did same.

Got it.

Rajat, this is Heath Byrd. It's really choppy. But I think I heard capital allocation. And again, our priorities have not changed, EchoPark will be the main area of capital allocation. But it is interesting, because of the success of the franchise and what we're seeing, as well as how quickly EchoPark is becoming profitable and creating net EBITDA even with the drag. We do see opportunity. We get a lot of opportunities for acquisition on the franchise side. And for the first time, we're starting to get a little more active on that side. And because of the free cash flow, we're producing, we got the opportunity to continue growing EchoPark, as well as look at some of these opportunities on the acquisitions on franchise. Of course, we raised the dividend, which is part of the capital allocation, 20% returning capital to shareholders and we did get the share repurchase authorization, I think you can see we bought almost 1 million shares back in Q1 at like $44. We believe it's undervalued. We believe it's undervalued now. And so opportunistically, we'll continue looking at share repurchase as well.

Got it. Great.

Thank you.

Thank you.

Your next question is from Mark Jordan with Jefferies.

On the EchoPark side as you move to increase your mix of purchases directly from South Carolina…

Hey, Mark, this is Jeff Dyke. Now, the problem with that is when you're buying cars off the street, we have one- to four-year-old model. Customers are bringing one- to four-year-old cars to sell. Typically they're still upside down, whatever. So you can see, some of our competition is out there buying a lot of cars off the street. But they're buying 5, 15-year-old cars, not one- to four-year-old cars. And the majority of those cars are going to the wholesale market. So it is not growing; it is a source for us. And right now, as a percentage of our overall sales, is in the 10% range. But it is never going to be a big, big source for us, because of the nature of the business and customers not selling that one- to two-year-old car straight off the street. So our sourcing is coming from the auctions where we're buying a lot of vehicles. Obviously, we're buying some of them off the street. And then we're enjoying being able to buy some from our new car dealership. So the combination of all that allows us kind of to carry the inventory levels we've prepared.

And this is Heath. I would just add to this as well. When we buy from the auctions, we have a very predictable product, we buy at very high condition range. And so that allows us to keep the recon low, and to do it quickly. And as you know we've returned the vehicle very quickly. And so you get very predictable source of supply. Depending on when you go out the street, you've got some of that - that takes a lot more return and a lot more time to get through the line. So that's another component of why we focus on the auction.

And I'd add one more thing we got. Our trade ratio of EchoPark is running almost 70%. And so we are getting inventory from trades. And then the great luxury of that is, the trades that don't fit our one- to four-year-old models are being moved over to our franchise side of the business. And we're selling the heck out of those cars. That's just a big home run for us.

Okay, great. And then can you talk about the differences in F&I on the EchoPark side between customer that might show up in store and some of them are like buying online?

I think you're saying that F&I, I'm sorry to say, choppy, Mark, I think you're saying that performance in F&I online versus in-store and…

Yeah…

That's the one thing that we've learned a lot about. It's - we can sell up on iPhone products, particularly when the e-commerce platform comes along to make it even easier for our consumer to use our platform. You know we're going to be, we'll see that - there's really not going to be a big difference between the F&I online versus F&I for selling in stores. And Heath, can you add to that?

Just to add to that. I mean, that's exactly where we've seen the penetration with F&I products online, about the same even a little bit better than in-store because we offer that transparency to the consumer. They can really understand what the product does and how it helps them over the short and long-term.

Okay, great. Is there any change on that front?

Yeah. That's been a great story for us so far this year. We're running up against 19 in the first three months of the year, up 9% in customer paying. Our warranty is down about the same, but it looks even better, if we get into April, we're running at 15% in customer pay. And that's just a big home run. So we feel like fixed operations is back from a CPE perspective. And that's just going to be huge for us as we move through the rest of this year, in particular, the back half of last year where customers are really more traveling and it will be huge in California, obviously, where we have a huge footprint. That California reopening will be a big addition to this. So far so good. That kind of growth in April versus '19, not '20 is really fantastic for us.

Great, thank you.

Thank you.

Thank you.

And your next question is from John Murphy with Bank of America.

Good morning, guys.

Hi, John.

Good morning.

The EchoPark inflection point seems to be just around the corner. Is it expected to occur in the second or third quarter, or is it more likely to take place in 2022 and 2023, once enough stores have been opened? I’m trying to figure out how significant the opening of 25 stores a year will be in terms of the cost ramp. Can you clarify the timing of the inflection point for EchoPark?

Yeah, so '22, I mean, look, we are really having some great success with these stores we're opening right now and getting them profitable and then selling right immediately the three-year cars, but we're still opening more stores this year than we started the year with. And that'll be the last time that happens. So '22 is going to be the inflection point here, where you really start seeing the profitability compared carrying the drag and really not having as big of an impact on us, we're just doing right now. But it's - put down the gas pedal, we know we have a model that produces both volume and profitability. We slowed down in order to speed up. We've done all that and we're going to have a bunch of stores this year, and EchoPark is really picking up. It's a lot of fun to watch. While years going into this big number thought here, we're today, we put a decade into getting this all right. And we've learned a lot and now it's just be a great year, even that we have that $12 million to $14 million for the drag; the inflection point comes in '22.

To emphasize our team is really - we made so much progress in how we opened stores, both the scalability of the - the cost is going down and the speed to market is going up. But our training and the way we bring, as Jeff mentioned earlier, the Phoenix store track on those 300 cars in the first month and then the addition of the acquisitions of this you know, like used cars in e-commerce and we brought online quickly integrated. And they're now EchoPark stores and so the speed to market, I think, is a huge part of our growth story. The only thing I'll add more and more about John, the other thing we're doing is building our management bench and so there's a lot of investment going into that right now. We didn't see quite as much in the first quarter, but you're going to be more in the second and third quarter. That's why you know, the $600,000 drag in the first quarter was just sort of understated. And that's why we told, that we'll still be in that range for the year. And if you want to look at anything sort of Phoenix when we put the right management team to strengthen on day one it just was up and that's exactly what happened. And so, we're adding more and more people in order to help with this aggressive rollout schedule to be added to the rest of the year.

You anticipated my next question, on human capital. What is the cost of developing general managers either internally or searching them externally for all the stores that are being opened?

Yeah. We have several layers of management. And we have plans to basically have each layer continue to move up as we open stores. We've had to go to the outside a few times, we bring them in six months early to look at that capacity in the stores for future openings. And so we're ahead of that schedule and don't forget about it, and we expect p$art of the drag that Jeff was talking.

John, that was 17.

Okay, thank you. And then just last one. On gross margin, how sticky, do you think this is ramping on the new side, I mean, on the new side, it seems like part of this size is going?

I mean, I think I understood your question, John. Again, sorry, it's a little choppy. But the new car margin, one of the things that's great is the manufacturers are learning and have learned that they're going to - they're going to keep doing supply side. That Force made announcement, BMW has made announcements and supplies are going to stay flat, and keep margins up. So I think more than stick and who knows, if they are going to be quite as good as they are right now with - but certainly not going back to pre-pandemic day. I just don't see that happening. In the used car margins are good too. We sort of run at a little lower margin on the front, much higher margins on the back in many of our competitors and you combine that it gives us a total growth of package on a per rig car basis, but typically puts us up in the top one or two of our competitors. And so I think you said margins are going to stay strong. And remember on the EchoPark model, large model that have no margin. Our models drive traffic through being $2,500 to $3,000 price point of the retail market, sort of wholesale price in retail. And so you're going to see us in that minus $100 to minus $300 sort of range that may move around a little bit depending on what's going on in the wholesale markets, but certainly will drive the big volumes that our model requires from an EchoPark perspective.

Great. Thank you very much.

You bet.

And there are no further questions at this time.

Okay. Thank you very much, everyone. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.