Good morning, and welcome to the Sonic Automotive Fourth Quarter 2021 Earnings Conference Call. The conference is being recorded today, Wednesday, February 16, 2022. The presentation materials accompanying the Management's discussion on the conference call can be accessed at the company's website, ir.sonicautomotive.com. At this time, I would like to refer to the Safe Harbor statement under 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 by 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.

Great. Thank you very much, and good morning, everyone, and welcome to Sonic Automotive's fourth quarter and full year 2021 earnings call. As he said, this is David Smith, the company's CEO. Joining me on the call today are Sonic President, Jeff Dyke; our CFO, Heath Byrd; our Chief Digital Retail Officer, Steve Wittman; and our Vice President of Investor Relations, Danny Wieland. Also joining us is Mr. Tim Keen, who is recently promoted to EchoPark Automotive Chief Operating Officer. Today, Sonic Automotive reported all-time record results delivering all-time record revenues for both the fourth quarter and the full year 2021. We are very proud of our team's performance for the quarter, which capped off a year of significant growth for our company. In addition to our record financial performance, we achieved several important milestones that position Sonic for continued growth in 2022 and beyond. On a consolidated basis, Sonic delivered record revenues of $3.2 billion for the fourth quarter of 2021 and $12.4 billion for the full year, up 14% and 27%, respectively. We continue to see increased customer traffic at our stores and robust consumer demand, which, combined with our sales and marketing activities and improved digital channels, drove our strong sales growth during the quarter. This was achieved despite the challenging conditions that have persisted throughout the industry, including inventory constraints and supply chain issues. At the same time, we continue to see benefits from the steps we took in both 2020 and 2021 to permanently reduce our expense structure, enhancing operating efficiency throughout the organization. For the fourth quarter, adjusted SG&A expenses as a percentage of gross profit was 63.3%, a 480 basis point improvement year-over-year. This contributed to fourth quarter adjusted EPS of $2.66 per diluted share compared to fourth quarter 2020 adjusted EPS of $1.50 per diluted share, a 77% increase. This represents our 12th consecutive quarter of year-over-year EPS growth. For the full year, we delivered adjusted EPS of $8.46 per diluted share compared to adjusted EPS of $3.85 per diluted share in 2020, a 120% increase and our third consecutive year of record-setting adjusted EPS. In the fourth quarter, we took significant measures to continue the strategic expansion of our nationwide footprint. Our landmark acquisition of RFJ Auto, one of the largest transactions in automotive retail history, is projected to add $3.2 billion in 2022 revenues, which are incremental to Sonic's previously stated target of $25 billion in total revenues by 2025. With 33 locations in 7 states and a portfolio of 16 automotive brands, this strategic acquisition has added 6 incremental states to Sonic's geographic coverage and 5 additional brands to our portfolio, including the highest volume Chrysler Dodge Jeep RAM dealer in the world and Dave Smith Motors. Through this single transaction, we have substantially increased our geographic footprint, brand presence and added considerable upside to our growth trajectory. In addition to RFJ Auto, we also completed several other strategic acquisitions to drive further growth in our franchise dealership segment. We would like to welcome our newest teammates at Momentum Chrysler Dodge Jeep RAM in the Greater Houston market, Volkswagen and Fallston in Maryland, and Sun Chevrolet in Upstate New York. These follow our earlier acquisitions of four Audi, Subaru and Volkswagen franchises in Colorado during the previous year or previous quarter rather. With these strategic additions, we have significantly enhanced our geographic coverage and brand portfolio while ensuring that we remain disciplined in investing in the right businesses at the right return. We want to take this opportunity to sincerely thank all of our manufacturer partners for their amazing support and dedication to our industry without which we couldn't have achieved our record growth in 2021. Turning now to our EchoPark business. In the fourth quarter, we continued the nationwide expansion of our unique preowned vehicle concept, adding five locations in four states, bringing our EchoPark brand to over 30% of the U.S. population, which is ahead of our target of 25% reach by the end of 2021. With our progress to date in growing our EchoPark distribution and digital network, we are well positioned to achieve our previously stated goal of 90% U.S. population coverage by 2025. In the interim, we have continued to invest in the human capital necessary to support the long-term success of EchoPark. With the promotion of Tim Keen to the Chief Operating Officer of EchoPark; and the addition of Thien Truong, Chief Revenue Officer; Dino Bernacchi, Chief Marketing Officer; Steve Wittman, Chief Digital Retail Officer; and a Chief Technology Officer, who will be appointed shortly. As an update on the development and launch of our proprietary e-commerce platform, echopark.com, starting late in 2021, we have now gone live with a percentage of web traffic in select markets. Early results are very positive with a 68% increase in website cars sold conversion rate, which is overwhelmingly positive feedback from our guests and better-than-expected F&I sales by the new platform. To date, over 90% of the end-to-end online transactions were out-of-market sales and were completed in as little as 10 minutes. Our rollout continues to progress, and we expect to roll out our new digital platform to our entire EchoPark network later this year, allowing us to market our entire EchoPark inventory nationwide. Turning now to our balance sheet. During the fourth quarter, we continued to strengthen Sonic's balance sheet and liquidity resources, including an amendment to increase the total capacity of our credit facilities to $2.95 billion. We also took advantage of attractive capital markets conditions and a corporate credit rating upgrade to refinance our existing debt maturities at favorable terms, lowering our borrowing costs and supporting our long-term growth plan with the issuance of $1.15 billion of unsecured senior notes to complete the RFJ Auto acquisition and for other general corporate purposes, including the repayment of debt. We ended the year with over $700 million in available liquidity, including approximately $400 million in cash and deposits on hand. As part of our balanced capital allocation strategy, since the end of the third quarter of 2021, we purchased over 1 million shares of Class A common stock for an aggregate purchase price of $50.4 million. In addition, I'm pleased to report that our Board of Directors approved a quarterly cash dividend of $0.25 per share, which is a 108% increase from its previous level of $0.12 per share payable on April 14, 2022, to all stockholders of record on March 15, 2022. This dividend increase reflects the strong performance and cash flow generation of our business, our positive outlook for the future and our commitment to delivering returns to our stockholders. Our fourth quarter and full year 2021 results demonstrate the strong consumer demand we've continued to experience despite pandemic-related headwinds, our success in maximizing operating efficiencies at our franchise dealerships, continued expansion of the EchoPark brand and the constant commitment and diligence of our valued team members. We are especially grateful to our teammates for their continued dedication and commitment to Sonic and EchoPark, which ultimately makes our success possible. Our distinctive guest-centric culture that is at the heart of everything we do, combined with our enhanced operating model has enabled us to post another year of record results in 2021. Looking ahead, we remain focused on implementing our strategic plans to fuel further expansion throughout our franchise dealerships as well as EchoPark. We are very excited to enter 2022 with a strong foundation to increase profitability and drive our future growth. We look forward to effectively executing our road map to deliver long-term value for our guests, our teammates and stockholders alike. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you.

Our first question today comes from Rick Nelson at Stephens. Rick, please go ahead, your line is now open.

Thanks a lot. Good morning. And great quarter. I'd like to start by asking about inventory supplies on the new car side. When you think the challenges will abate? And is there any visibility into when inventory might start to normalize? Maybe you could speak to BMW, Honda, two big brands of yours, what you're hearing from them.

Rick, it's Jeff Dyke. Thanks for the question. Look, new car inventories from our perspective are going to continue to be tight. We ended the quarter at about 11 days supply. That's where we are right now. We got some unfortunate news yesterday from some of the manufacturers, Toyota, Lexus, BMW included, that they're cutting back on some of the allocations for February and March due to microchip shortages. So we expect this to ebb and flow as we move through the first and second quarter. But all indications are that as we move towards the end of the year, things are going to start to get better. That's with all of our brands, including BMW and Honda. Yesterday was a bit of a surprise, to be quite honest with you. We were not expecting that. And so it goes; we've dealt with that for the last couple of quarters. And as you can see what happened in the fourth quarter, we've made adjustments. Obviously, our SG&A is in great shape. We've moved our margins up. We had record front-end margins, over $6,500 a copy in a new car for the December quarter. We see that continuing. We had a great January. The margins are still high. And that's going to persist as long as the day supply is going to stay tight. I said this before; I don't think new car supply is going to come back ever to where it was prior to the pandemic starting. I look for BMW to get to a 16- to 20-day supply for us; they're at about a 10-day supply now as we move towards the summer, hopefully, without any more of the announcements that we had yesterday. But new inventory is going to be tight. We think it's going to get better as the year goes on and then progress a bit better as we move into '23.

Thanks Jeff. What is your expectation for GPU pricing once inventory levels recover to pre-pandemic standards? Or do you believe you will maintain tighter control, allowing some of those higher GPU prices to persist?

Yes, I am fully supportive of participating in as many brand meetings as possible. We are actively urging them not to return inventory levels to what they were before the pandemic. As a result, margins are expected to remain high. Before the pandemic, margins were lower, and we should be selling cars at MSRP. This industry needs to move away from negotiation; it simplifies the process, enhances value for the vehicle, and is more straightforward. Before the pandemic, Sonic Automotive's funding margin was around $2,000 to $2,300. Moving forward, that figure should remain above $4,000, if not higher, and I will incorporate that into all future models. I do not anticipate margins returning to pre-pandemic levels at any point, especially not in 2022 or 2023. This is positive for the industry as it enhances our financial health, increases cash flow, and allows us to invest as we did with RFJ and in EchoPark, continuing our current strategies. As David mentioned earlier, with the ongoing reduction of SG&A, we have a solid foundation for a successful future if we can align our manufacturer partners with supply levels, which we are actively addressing. The only factor that could disrupt this is if manufacturers increase supply back to the 60-, 70-, or 80-day levels we previously experienced, but I just don't foresee that happening.

And Rick, this is Heath. I'll just add to, if you look at Sonic specifically, all of our models indicate the same thing that Jeff is saying—that it's going to stay well over $4,000 at least in 2022. Some of it is going to be impacted by RFJ's mix. Their mix is a little bit different than ours and that brings the GPU down a bit. So it's going to be a combination of that lower inventory driving the higher GPU, keeping it higher and a little bit of an impact of our RFJ's mix that reduces ours.

Good to hear. Speaking of RFJ, I'd like to hear about any early learnings, any positive or negative surprises kind of come about there.

Yes. Fortunately, this is David. So unfortunately, everything has been very, very smooth. We've got so far, have been very pleased with the team and Rick Ford and his leadership team are still in place and everything has been going very smoothly.

Yes. The only thing I would add to that is I think that we can learn a lot from each other. They do a fantastic job running smaller stores in mid- to small markets. And so they've got a lot to offer there. I also might open the door for us to do some tuck-in acquisitions of those types of stores. It really has not been on our radar in the past; that might be on our radar now. But overall, as David said, them coming into our culture, the cultures were so similar already. Rick Ford, Myron Heronema, and that whole team are doing a fantastic job running their platform. Early results have been fantastic, beat our expectations. So we're very, very excited and bullish on this acquisition. It was a fantastic acquisition for our organization at this time, just an absolute great addition to the family of Sonic Automotive.

Good to hear. I'm curious about your appetite for additional acquisitions. Do you go slower now while you integrate RFJ or are you in the market to do more deals?

This is David. We are focused on integrating RFJ and are also concentrating on EchoPark to continue our growth there. We will be disciplined regarding further acquisitions, but if the right opportunity arises, we will certainly consider it. That was the case with RFJ, which came together in a remarkably short time of about three months. It was a great team, and we were familiar with many of the individuals involved, making it a special deal. However, unless we encounter something similar, our main focus will be on driving the growth of our existing businesses and continuing on the growth path we have already outlined.

Finally, if I could ask on EchoPark. I believe you previously had targeted profitability in late 2022. I'm curious if that expectation has changed; I don't see it in your slide deck?

This is Jeff. In our mature stores, that's true. With the current used car market, the margins are challenging. The average retail selling prices have increased from about $21,000 to around $29,000, leading the average customer payment to rise from $400 to approximately $500. This has posed some difficulties. However, as new car inventory levels recover and prices start to decline, we've observed a drop of about $2,000 per car over the past six weeks at the auctions. As a result, we expect our stores that are 3 to 5 years old to become profitable, and our stores older than 5 years will definitely reach that point as we approach year-end and realign our EBITDA. I believe the first and second quarters will continue to be tough. We are already starting with the 5-year-old model cars at EchoPark, and there is demand from consumers for us to offer more than just the 1-to-4-year-old models. We are considering 5-, 6-, and 7-year-old cars. We currently do this in a few stores and will monitor its progress. We need some retooling to tackle the complexities of reconditioning for this change. However, we are taking a quarter-by-quarter approach. We will reassess as the year progresses and make necessary adjustments. We plan to expand EchoPark, aiming to reach 50% of the nation by year-end. With Dino Bernacchi joining our team, we will kick off our marketing and branding campaigns this summer. Consequently, we anticipate an impact on the stores and marketing expenses, estimated to be in the $40 million to $50 million range for the year when we combine these factors. If the markets continue to decline as we expect in the pre-owned segment and we can lower average retail prices to below $25,000, it will significantly benefit EchoPark. We are closely monitoring the situation and will take additional steps to reduce average retail selling prices over the next couple of years, but for now, it's a watchful wait each quarter before implementing changes.

Yes. And this is David; I may want to chime in on this. But we achieved the number one position in our reputation.com surveys from our customers. And as Jeff said, our customers are telling us what they want, and they want more than just the 1- to 4-year-old cars in many markets. So I don't know if you guys want to touch on that, but that was just incredible performance to be able to open as many additional stores as we did and still achieve that #1 spot and being able to deliver that guest experience to our customers is absolutely incredible.

I would like to emphasize that our focus is shifting beyond just pricing. This strategy has significantly driven our traffic, and now we are enhancing the guest experience. By the end of this year, a large portion of the nation will have the opportunity to experience EchoPark. With these developments, EchoPark is becoming increasingly robust, as we had anticipated. We expect our margins to keep improving, and while inventory levels are on the rise, the recovery will be gradual until new car inventories stabilize, and rental car companies transition back to purchasing cars instead of selling them. This will lead to a slow adjustment in the coming months, but it's a temporary situation. The appreciation of used cars is unlikely to continue, which is typical for this market. We are likely already entering a depreciating market as we advance through the next few quarters, but we expect to return to normal EBIT levels at EchoPark soon.

And Greg, this is Heath. I'll just add. I view 2022 as really the coming-out party for EchoPark. We've got, as Jeff mentioned and David mentioned, our branding has begun. With Dino, we're building the infrastructure to make that happen. And we're also getting the digital retail platform being rolled out this year. And so once you combine that branding and it becomes a household name, coupled with the ability to buy online, that's going to be a tipping point for us. And so this is, from my perspective, really a coming-out year for 2022.

And Steve Wittman, I think, needs to comment here on where we are from an e-commerce perspective. Rick, for you guys in our digital retailing platform, Steve?

Yes, sure. So as David mentioned in his opening comments, we've launched a website and proprietary digital retailing tool in North Carolina. We've expanded to South Carolina recently as well. Overall, the results are very positive. The new site is driving a 68% incremental increase in cars sold versus the old site. Of those cars sold end-to-end online, financing penetration is at 100% and extended warranty penetration is at 50%. Additionally, we've enabled nationwide shipping on our new website. So the consumer can go onto our website, find a car in Long Beach and have it shipped to Charlotte, and we enable the consumer to do that. And what's really interesting is that 90% of the cars we sold online have been shipped from outside of North Carolina. So that new ability to shop nationwide inventory is really driving incremental volume for us. Additionally, we're seeing very strong internal technical metrics on the website. It's 30% faster than the old site, bounce rates are down 70%, and time on site is up 75%. And lastly, we've talked to consumers who have used the new tool. They love it. They talk about the simplicity of it, the ability to go end-to-end online in an automated way with no human interaction and also the transparency. We are very transparent about the price, the payments, the products we sell to the consumer, and we're getting great feedback from them early on here. So it's going to be a huge enhancement to our overall business.

Thanks a lot for the commentary there. Much appreciate it, and good luck.

The next question comes from John Murphy from Bank of America. John please go ahead, your line is open.

Good morning, everyone. I wanted to revisit the topic of used vehicles in EchoPark. Jeff, regarding your target, I believe you aim for the vehicles sold here to be priced about 40% less, or 60% of the value of newer models, creating a typical pricing gap. Can you clarify where that gap stands currently? Is it around half that or possibly even less in the used market compared to new pricing?

No, I mean—that's a great question. That's the big issue is the new car prices are butting up closer and closer to new car prices. So it typically runs in the 50% range, 55% range, it's now pushing up towards 70%. 67%, I think, is the automotive number. That's just too high. And so what happens is the used car customer can switch off and buy a new car a lot easier, in particular, if there was inventory out there; I think it would even be tougher. But we've got to get back down to that 55% range and bring that monthly payment down closer to $400. That's where EchoPark and the wind really kicks in. And we're in such really good shape with our base supply we don't have a lot of inventory. This is on the franchise side and the EchoPark side. We're sitting at a 36-day supply, something like that, a little higher maybe at EchoPark for store openings. But we're in really good shape with the inventory. What you worry about is the rest of the market out there that might have a 60, 80, 90-day supply; they're still sitting on cars that they pay if the height of the market, they're going to have issues. So all that inventory needs to bleed through, and that average cost of sales needs to come down on preowned, that's going to put us back closer to that 55% level. That's going to drive the big, big volumes that we're very accustomed to at EchoPark. So we're being very patient. We've got this great franchise business that's printing a lot of money. It gives us a lot of flexibility. And so we're being real patient with EchoPark. I don't want to go change the model up, given what's going on in this appreciating used car environment. But if we have to, and we're being asked to by our customers, as David said, 'Hey, could you guys start selling some 5- and 6- and 7-year-old cars?' We're looking at it. We put that inventory into the Tampa market, and that store took off. We put it in Birmingham, and that store is taking off. So we're going to play around with a little bit. That will drop that average retail selling price, and it needs to get below 25,000 and really get to 22 or 23%; that's when we really start seeing the volumes come back.

So Jeff, when considering new vehicle sales for 2021 and 2022, RFJ for 2022 is projected at 14.5. We are below the average of many others. However, we anticipate three years of reduced supply-constrained sales, which means there will be fewer young used vehicles available because they haven't been produced and sold. Consequently, aren't we going to have to shift towards 4- to 7-year-old vehicles in the coming years since the 1- to 3-year-old vehicles simply won't be available? I'm interested in how this will impact your model. You've mentioned potential changes on the production side, but beyond that, will it just involve acquiring good vehicles at lower price points that are a year or two older? It's possible to deliver quality products at that age. I'm curious about the differences this brings to your business model.

We need to update our reconditioning system. It's easier to recondition cars that are 1 to 4 years old compared to those that are 5 to 7 years old due to parts availability. Therefore, we need technicians with different skills, but we can quickly adjust to that. It would take us about 90 to 120 days to start selling 6, 7, and 8-year-old cars, and that's achievable. This year, we're seeing a return of off-lease cars, which is about 25% to 30% more than last year. Even though it might seem like fewer cars will come back next year, many customers have stayed in their leases and bought them out. As a result, the cars are coming back differently, mainly through us buying them directly from customers instead of traditional lease channels. We've increased EchoPark’s street purchases from around 10% to 12% in the fourth quarter to about 18% in January and February, and we aim to raise that to 30%. Logically, we can retool and sell 5, 6, and 7-year-old cars, but selling 1 to 4-year-olds is simpler. You're likely to see us discussing the sale of 6 to 8-year-old vehicles and purchasing those off the street more in the second quarter. It's easier to acquire these vehicles off the street, which we do daily at our franchise stores. We can also use our franchise stores to enhance EchoPark’s inventory, a strategy we haven't employed before. The inventory is available, and customers visit us every day, so we'll be able to utilize our service lines to buy more cars. Therefore, as we move into summer and the third quarter, you'll likely see us making those adjustments.

And John, this is Heath. Just to add a couple of the differences in that model, the way you generate profits on a 1- to 4-year-old car compared to 5% to 8% will differ. With the 5% to 8%, you would notice a higher front-end gross profit per unit and less finance and insurance revenue due to the different underwriting for 5 to 8-year-old warranties.

Got it. Okay. And then just flipping back to the franchise side. I mean the parking service recovery is pretty good, but it seems like there's a lot of legs left there. I mean, how do you see that progressing through '22 and maybe even into '23 as the world, knock on wood, hopefully normalizes? I mean, it just seems like there's a huge opportunity still there in backlog.

Yes, we agree 100%. Our customer pay grew over 18% in the fourth quarter, which is great. Really can't control warranty. That's down. I think it was 11%, if I'm not mistaken. But we agree with you; there’s a lot of room there. We're hiring technicians left and right now, adding capacity into several of our brands, and there's a lot of upside. In particular, on the West Coast, they were sort of first in and last out of all of this, so there's certainly opportunity to grow there, and we're budgeting that way.

As the supply chain improves, we anticipate significant growth in that area. There has been a historically high amount of work in process at our dealership. The issue hasn't really been the shipping of parts, but as we expect the supply to increase over time, we believe that will lead to improvements.

Yes, we experienced challenges in the fourth quarter due to numerous attacks that impacted us significantly. However, there is considerable potential for growth in the fixed business.

Okay. And then just lastly, real quick on rising rates. I mean, is this an issue? I mean you've got a one-for-one to give a duration of the loans and leases. You don't go up one-for-one with Fed funds rate. So I'm just curious how you think about rising rates. I mean have you just gauged the backlog in both new and used; is it just so strong and not supplied at the moment that this is going to be largely subsumed or overwhelmed with the backlog of demand? I mean, how do you think the balance of power is there?

Well, from a demand perspective, I think we budgeted in four rate hikes for the year. And as long as those are moderate, we don't think that it's going to become an affordability issue. Actually, the actual vehicle prices becoming a more affordability issue than the financing. And from a standpoint of expenses from our perspective, obviously, we factored in those increases if it impacts our floor plan, et cetera. But at this point, we think the demand is so high and the supply is so low that rate increases are not going to impact the demand to the point that it's material for the industry.

Great. Thank you very much, guys. Appreciate it.

The next question today comes from Rajat Gupta of JP Morgan. Rajat please go ahead. Your line is now open.

Great. Thanks for taking the question. Just wanted to follow up again on the used car market. You're hearing some mixed commentary there around demand and growth. Industry data continues to suggest a pretty bleak picture year-to-date. Can you get a sense of what you're seeing at your franchise stores on the used car side, maybe quarter-to-date? What’s the demand backdrop really look like, particularly as we head into the tax season? And maybe relatedly, any views on pricing? I mean you did suggest earlier that you do expect it to correct over the next couple of quarters. But do you see another leg up here into the tax season before we start to see the leg down? I'm just curious how you view that dynamic here in the near term? And then I have a follow-up.

Yes, the volume of used cars is expected to increase in March, April, and May compared to January and February, as is typical. There is significant demand, and we anticipate selling between 36 million and 40 million used cars in the U.S. this year, which has been a fairly stable range over the past decade. The high prices of used cars are driving demand for new cars since consumers are looking for options within their budget. However, we believe that used car prices, which have been rising, are starting to show signs of depreciation based on recent trends. Demand for used cars remains strong, but it is crucial to have the right inventory available at a price that works for consumers, many of whom focus on monthly payments. Our franchise stores have seen the average retail price of used cars rise from $23,000 to $30,000 or $31,000, which is getting too close to new car prices. We expect to face this challenge over the next few quarters, but conditions will gradually improve. This aligns with what the manufacturers and our teams are indicating, and it is reflected in our budgeting.

And Rajat, this is David. As you can imagine, as the new car day supply is 10, 15 days, naturally, customers who can't get a new car are going to buy a car from our franchise stores; that's a 2- or 3-year-old pre-owned car that's in great shape because that's just the only thing they can get. And so it may be closer to the price of a new vehicle but they're still going to—they need a new vehicle. So they're going to go for a 2- or 3-year-old pre-owned vehicle.

Got it. Great. I have a follow-up regarding EchoPark, specifically the full year outlook. You indicated that the reduced unit volume is expected to persist for the next couple of quarters. Can you provide any specific numbers regarding volume expectations or EBITDA losses? Are we likely to see continued improvement in the EBITDA loss, or should we expect it to remain at this level for some time? I would appreciate any insights on how the volume and loss trajectory for EchoPark might unfold this year, as well as any other factors related to the overall business for the full year.

Yes. So let's just call it depending on what happens to the inventory. This is a little bit of a guess, but 110,000 to 120,000 cars, somewhere in that ballpark for EchoPark this year. EBITDA progressively getting better as each quarter goes through the year and we get to the fourth quarter positive EBITDA; possibly even in the third quarter. I think the first quarter is going to be tough. It's certainly going to be tough just because of where the inventory levels are right now—getting a little better in the second quarter, progressively getting better in the third quarter, and then in the fourth quarter. But some of the EBITDA is dragged from moving to 50% coverage in the country. So drag from opening the stores— that $10 million to $15 million range we've been talking about on an annualized basis. And then the investment of that $30 million to $35 million, maybe even $40 million. We'll see how it goes in our marketing and branding campaigns that Dino is working on that we'll launch this summer. This is, as he said earlier, a coming-out party kind of year for EchoPark. We're very, very bullish on what our customers are telling us. Our reputation.com scores, as David said earlier. We're ranked #1 in the nation for a preowned dealership group in those reputation dotcom stores. And so when you add it all together, this is just a great year. It's going to be a great year for EchoPark. We're going to increase our revenue, increase our volume. EBITDA is going to continue to improve as we move through the year. Inventory is going to get better. It's going to roll us into being in an even better position when we roll to '23 as inventories come back to hopefully a 25- to 30-day supply level. So hopefully, that gives you enough insight on what EchoPark is going to look like as we move forward.

Yes. And this is David, and as Jeff was talking about earlier, the fact that we've kept our day supply in line and been disciplined about that, it's sure a whole lot easier to crank up the volume as the market drops— as the market value of the pre-owned vehicles drops. We can crank up that volume rather quickly versus if we were carrying a large day supply going into that situation. It's a real drag on performance.

Yes. Sorry. I mean we could have sold more cars in the fourth quarter on preowned. There's no question about that, but we had no idea from September through December or January what the appreciation issue was going to be. Is it new car inventories are tighter and tighter? So we maxed out our gross profit, had the biggest grossing quarter fourth quarter we've ever had in pre-owned, and the biggest grossing year we've ever had in pre-owned, and took advantage of the market. We can do that because our day supply is so nimble. We carry 10 days in the pipeline, 20 days on the front line, and we can move very, very quickly to adjust for the market versus some of those competitors that are out there that are sitting at 70, 80, 90-day supply of product. There's a lot of water in that inventory that they're going to have to deal with.

And one of the things that's a big positive for EchoPark for this year is the rollout of the digital retailing platform. Not only creates the incremental opportunity for consumers, but the efficiencies are going to really show through the SG&A because it truly is a humanless transaction. There's no one behind the scenes that's doing paperwork; it is done completely automated. And so that will get us from units sold per month to higher 30, 35 because the work is being done by the consumer online.

We look forward to showing the tool, and we look forward to really rolling that out and showing everybody. It is a very special tool weapon and the team did and BottleRock, our business partner, just did a fantastic job with the development of the tool. And when we get to the point where we're ready to display it, we'll put it out there for everybody to really see first time where you got a tool that someone can buy a car online beginning to end with no human interaction. Robots or bots, as we call them, and a lot of great technology driving what is a fantastic guest experience. And we'll be excited to share that with you in the coming quarter or two.

Yes. And we will be setting up an Analyst Day to walk all of you through that as well.

Got it. Got it. And maybe just to clarify the advertising number in the $30 million to $50 million, that's a year-over-year number? I think you spent like $36 million for the full year in EchoPark advertising in '21.

Yes, that's totally incremental.

That's all incremental. Okay. Got it. And just lastly, you gave us some color on the EchoPark EBITDA trajectory. You mentioned, Heath mentioned, like 4,000-plus new GPUs for the year. Services continue to recover? I mean where do you think like any range around what SG&A to gross might look like for the company for 2022 in the ballpark just for modeling?

I think if you do the modeling and look at the math, understanding that there are a couple of things to drag on SG&A: If you look at wages, everyone's experiencing this, but it's an incredible increase in wages from a standpoint of merit increases and retaining good talent. And so that's up about 6.4% from a corporate perspective. So that's going to be a drag on your SG&A. And then you add in the $50 million that Jeff was talking about, about the investments with EchoPark. And then finally, we've got a little bit—it's probably $5 million to $10 million of what I would call RFJ transition work that we need to run through SG&A. We've got a lot of opportunity with synergies with RFJ, but there needs to be some double work to get that in place. So it will definitely have a return, but you'll have that drag in the SG&A as well. So you got 6.4% increase in the wages. That's not the total comp that you see in the reports, but that's our corporate team, coupled with the investments that Jeff mentioned, and 5% to 10% on expenses for RFJ transition, and that gets you to the number that we're expecting for 2022.

Got it. That’s helpful. Thanks and good luck.

One thing more, just to be aware of, as you look at SG&A and overall, I think it's very important that everyone understands the sequencing of our earnings. In Q1, it is always around 15%. It's never been more than 19% of the total year. Two, second quarter and third quarter run around 25% each quarter. And then the fourth quarter is the remaining profitability. We've run that type of percentage and cadence for the last 15 years. And so as you model our bottom line, that is typically the way that it works.

Yes. And I think if you guys refer—this is Jeff. I think if you guys referred back to Heath's comments last year, we gave the same kind of guidance. And for whatever reason, the third and fourth quarter always get tossed up. They're always wrong. And I can't be stated any clearer; here's the secret sauce. It's 15% in the first quarter, 25% in the second quarter, 25% in the third quarter, and 35% or better in the fourth quarter. That's how our profit works, and we've been very, very consistent in that over the years, and it played out exactly like that in '21. And guess what, it's going to play out like that in '22.

Got it. And you ultimately depend a lot on the new vehicle gross margin cadence, I guess, right? And it's such a big lever, but below that total?

I'm sorry. Can you repeat that?

I was just saying, like, I mean, the new vehicle gross GPU is such a big unknown or, I would say. That has such a big influence on the cadence or the seasonality of it, which just makes it a little difficult.

Keeping in mind is the new vehicle GPU that we mentioned earlier is that decreases that we're also going to increase the volume of new vehicle sales as well.

Yes, it’s going to be 15%, 25%, 25%, and 35%; it's going to be right in that ballpark.

Did you say what percentage of your EchoPark product came from auction in the quarter?

Yes. So about 82%, 83%, somewhere in there. That number is pushing up or pushing down going into the first quarter. We're buying about 18% of our cars off the street now, keeping about 18% of our cars with trade-ins and vehicle purchases off the street. So that's been a big focus for us. A little harder to buy 1- to 4-year-old cars off the street than it is to buy 5, 6, 7-year-old cars off the street, as John Murphy was talking about earlier from BofA. But we believe we can move that number up to about 30% of our overall inventory, and we're working diligently on that. We've launched our first marketing and branding plan around that; that went out sort of December-ish timeframe, and that continues to gain strength. We're getting a lot more traffic into our site to buy vehicles. So you can expect that number of purchases off the street and trade-ins for EchoPark to grow to the 30% range. And then it will grow even further as we expand the portfolio to selling 5 and 6 and 7-year-old cars.

Okay. And on pricing, I mean, obviously, your deck shows that you're selling 3-year-old or 4-year-old cars at prices that would be comparable to 5 or 6. As you sell 5 to 8, are you pricing more in line with the market? Or are you still trying to be below the competitive price significantly?

Yes, we'll still be below the—we'll still have a competitive price advantage, but we'll have positive margins on those vehicles. And we see that right now in the stores that we're selling those vehicles that our margins are much better overall in the stores from a front-end perspective in the stores that sell 1 to 8 than we do in the stores that sell 1 to 4. It's just the 1- to 4-year-old stores, the volume is significantly higher because the price advantage is so much greater in normal times. That's how we look at it. But for a blended number overall, that's about that same $2,500 range.

Yes, absolutely. We're seeing extended warranty penetration at over 50%, which is in line with what we're seeing in the store. And what consumers are saying is they love the transparency, and they love the value reframing we do with them online. You talked about how much the extended warranty costs but versus repairs that they would potentially have to make down the road. So very positive feedback from consumers, and our F&I penetration has exceeded our expectations to date.

Yes. That's been the best single—I mean, the performance of the website is fantastic from a metric perspective, but may ensure it's a great relief given our model; we roll that side out and here comes our warranty penetration, and here comes our finance penetration. And for those to really improve over what we've seen at the store level is just great. That's fantastic news for us and gives us a lot of energy in rolling that side out everywhere.

Yes. And this is David Smith. And that's really to highlight—that's our benchmark, right? That's our best for success, seeing that new website work in that way; we're making at least, if not more, than we are in an in-person transaction. That's the key. And that's what we're seeing. That's a big takeaway from this call.

Okay. And then I guess I might have missed this. But I mean, obviously, you talked a few quarters ago or a couple of quarters ago about sort of evaluating EchoPark and alternatives. Is the disruption in the market and obviously the craziness around used vehicle sourcing and margin delaying that? I mean, is there any update on that strategy?

This is David. No, we don't have any additional comment on that from our—just please refer to our previous disclosure.

Great. One last question regarding the quarterly profit contribution breakdown of 15, 25 to 25, 35. What's your view on whether GPUs will remain relatively stable for the full year, considering that we are operating at high levels?

Yes. If you look at our internal models, it's basically flat across the board. Again, the RFJ impacts and their mix has a little bit of an impact. It’s just going to be sort of the mirror image of 2021. You're going to—we're going to end up, if you put them together, they're going to be sort of a mirror image when it comes to our new gross.

And Brett, this is Danny. I mean I think to Heath's point, if you look at what the second quarter of last year looked like when we were in the high 30-day supply, we were running just shy of 4,000 new GPUs, but it was close to an 18 million saw because we had the inventory to support that. And as GPUs come down, that's going to imply that inventory or at least production is increasing. So we believe, as David just said, that the volume could offset from an overall earnings perspective; the volume could offset the GPU compression to where it may affect the overall earnings level for next year, but it doesn't affect the cadence in our view from the quarter-to-quarter.

Yes. And Brett, if you look at it, I don't care what branded; we are substantially sold through the pipeline on all new vehicles that we have at Sonic. It is substantially sold through. So the demand is there. A little more inventory. I believe the margins may come level off a little bit but a lot of volume. So we don't want 60-day supply inventory. We don't need more 45-day supply inventory. They could just get it back to the 20- and 30-day supply. You've got great demand, great margin, and it sets up '22 and really '23 to be just fantastic years for the industry.

Okay, great. Thank you.

There are currently no further questions. So I will now pass the conference back over to David Smith for closing remarks. Dave Smith, please go ahead.

Thank you very much, and thank you, everyone, and you all have a great rest of your week. We appreciate you attending the call.

This concludes the Sonic Automotive Fourth Quarter 2021 Earnings Conference. Thank you for your participation. You may now disconnect.