Good morning, and welcome to the Sonic Automotive First Quarter 2022 Earnings Conference Call. This conference call is being recorded today, Thursday, April 28, 2022. Presentation materials, which accompany management's decisions 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 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 Exchange and 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.

Thank you, and good morning everyone, and welcome to Sonic Automotive's first quarter 2022 earnings call. As I mentioned, 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 Chief Operating Officer of EchoPark, Mr. Tim Keen; our Chief Digital Retail Officer, Mr. Steve Whitman; and our Vice President of Investor Relations, Mr. Danny Wieland. Building on our record-breaking results in 2021, today, we reported record first quarter 2022 revenues and earnings per share, driven by strong customer demand, the continued execution of our operating playbooks, and a team focused on accomplishing our strategic growth plans. We continue to expand EchoPark's nationwide footprint and digital network, while also strategically growing our franchise dealership network with our acquisition of Sun Chevrolet in Upstate New York. This performance would not have been possible without the amazing effort and execution by our Sonic and EchoPark teammates. Congratulations, and thank you all. We would also like to thank our customers, manufacturers, and vendor partners for helping us achieve another record quarter. Now, let's briefly review our financial highlights. During the first quarter of 2022, Sonic delivered all-time record quarterly revenues in a 13th consecutive quarter of year-over-year EPS growth. On a consolidated basis, we posted first quarter revenues of $3.6 billion, up 29% from the previous year, and record first quarter EPS of $2.33, up 89% year-over-year. These exceptional results were driven by strong performance across our business amidst a challenging operational environment. We continue to see further benefits from our initiatives to enhance operating efficiencies and permanently reduce expenses throughout our entire organization. As a result of these efforts, we reported record low first quarter SG&A expenses as a percentage of gross profit of 67.7%. And on a franchise dealership segment basis, this figure was 59.8%, a 1,060 basis point improvement year-over-year. Our team remains committed to optimizing our expense structure to drive long-term profitability improvements. Taking a look at the larger industry picture, we have continued to generate record results in spite of the lingering effects of the pandemic, with ongoing new vehicle inventory constraints, inflation, and supply chain issues. Despite these headwinds, we achieved record revenues and profitability in the first quarter as a result of persistent consumer demand, our targeted sales and marketing initiatives, as well as our improved digital channels. Additionally, as an organization, we continue to realize the enhanced operating efficiencies and cost management measures that we implemented during the height of the pandemic, which demonstrates the inherent strength and flexibility of our business model. Based on a positive operating outlook and continued execution of our long-term strategic growth plan for Sonic and EchoPark, we remain confident in our ability to reach our stated goal of $28 billion in total revenues by 2025. Looking at our franchise dealership business, first quarter 2022 revenues were a record $3 billion, up 30% from $2.3 billion in the prior year. On a same-store basis, franchise dealerships' first quarter revenues were up 5% year-over-year, while gross profit improved by 27%. Parts and service gross profit continues to improve, up 10% on a same-store basis, with a 21% increase in customer pay gross profit. Same-store F&I gross profit was up 7% despite a 15% decrease in retail unit volume, driven by all-time record F&I per unit of $2,448 in our franchise dealership segment. We continue to see supply chain disruptions during the first quarter that limited new vehicle production and inventory levels. This contributed to a 15% decrease in same-store retail new vehicle unit sales volumes, slightly better than the industry retail SAAR decline of 11%. Offsetting the lower sales volume, same-store retail new vehicle gross profit per unit was $6,709, a 134% year-over-year increase and in line with the fourth quarter of 2021, which typically represents our highest GP quarter due to our luxury brand mix. On a trailing quarter cost of sales basis, our franchise dealership segment new vehicle inventory had approximately 15 days supply or 3,500 units, down from 13,200 units a year ago. Our franchise dealership segment used vehicle inventory had approximately 33 days supply or 10,600 units, up from 9,400 units a year ago. Turning now to EchoPark, we posted record first quarter revenues of $625 million, up 23% year-over-year. In addition to solid revenue growth, we also continued the nationwide expansion of the EchoPark automotive brand, opening EchoPark locations in three new markets since the end of 2021. Beyond expanding our fiscal footprint in recent months, we have also grown EchoPark's digital network. As previously announced, during the first quarter, we launched our proprietary e-commerce platform, echopark.com in select geographic markets. Since our last earnings call, we have continued to make substantial progress with the national rollout of this digital platform. As of today, the platform has now been rolled out to 80% of our nationwide traffic at echopark.com. We continue to see positive early results and customer feedback from the new platform with a 30% increase in our website conversion rate and out-of-market buyers representing over 70% of our online sales. Given our success to date with our expansion of EchoPark's nationwide geographic and digital network, we remain on target to achieve 90% population coverage by 2025. Upon reaching this coverage level, we continue to anticipate delivering 575,000 vehicles and generating $14 billion in annual EchoPark revenues by the same year. We remain dedicated to the growth and expansion of our unique pre-owned vehicle concept as we continue to invest in necessary human capital to support EchoPark's future growth. This includes the first quarter promotion of Mr. Tim Keen, the appointment of Stephen Carrelli as Chief Technology Officer of both Automotive and EchoPark. These and other recent C-suite hires at EchoPark represent our commitment to EchoPark's long-term success as a key part of our strategic growth plan for Sonic Automotive. Turning now to our balance sheet, we ended the first quarter with $785 million in cash and floor plan deposits on hand. Our consistently strong sales performance, cash flow generation, and balanced capital allocation strategy have all contributed to our solid financial position to return capital to stockholders by increasing our quarterly dividend by 108% and repurchasing approximately 1.7 million shares of stock since the end of 2021. To that end, I'm pleased to report that our Board of Directors approved a quarterly cash dividend of $0.25 per share, payable on July 15, 2022, to all stockholders of record on June 15, 2022. In summary, our record first quarter results reflect strong consumer demand, the success of our targeted sales and marketing initiatives, our enhanced e-commerce network, our continued success in maximizing operating efficiencies throughout our operations, and of course, the unwavering dedication of our talented teammates. As we look forward, we remain committed to implementing our long-term strategic growth plans for Sonic Automotive and for EchoPark Automotive. By continuing to execute on this vision, we expect to realize further revenue growth and increased profitability while continuing to enhance our best-in-class guest experience, driving long-term value for our guests, our teammates, and our stockholders. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you.

Thank you. We have our first question from John Murphy with Bank of America.

This is Aileen Smith on for John. The first question I wanted to ask is around the performance of EchoPark, which has been pretty disappointing. Can you give a little bit more color on what is going on there? Is it your franchise stores trying to ground more vehicle flow through to EchoPark, or is it more of a focus on getting the new EchoPark stores up and running rather than running the old ones more aggressively?

Yes. Thanks for the question. This is Jeff Dyke speaking. Regarding the inventory from our franchise stores, when we first started EchoPark, that was a lesson that Tim Keen and I learned from a different life. We built these two businesses to not really share inventory overall. So, that actually has nothing to do with it, but to educate in anticipation of some of the industry headwinds that we're facing. I'll give everybody a second to get there. With that being said, I sort of broke this slide down into three buckets regarding the overall industry and some of the headwinds that we all face today. One is supply chain disruption. We all know that low new vehicle inventories coming from the manufacturers are slowing down the ability to acquire one to four-year-old vehicles. So, that's a major issue. The second bullet point would be rental car companies. Typically, what we see at this point in time is rental car companies in the auctions waning, selling cars, and we're all buying cars that they had purchased new. The rental car companies are now in the auction lanes buying cars. Because of their depreciation model, they're able to pay more for that, leading to competitive issues and pushing prices up. Lastly, the used vehicle price has moved at EchoPark from $21,000, which is a major headwind, up to about $31,000 when buying that car in the auction lane. Overall, we are now approaching a price point on used cars in the auction lanes of 70% that of what a customer would pay on a pre-owned car, upwards of $490 to $525 a car. This is causing some major headwinds. Customers are either deciding they're going to wait to see if prices come back down, or they're moving to a new car since payments are so close. We previously talked about this on the last call. We had mentioned extending out from a one to four-year-old model to a one to eight-year-old model, potentially going to nine and ten-year-olds depending on the inventories that we can acquire. That is something that is now in play. We are also launching a new echopark.com to modernize our e-commerce offering. This offering, which Steve Whitman can discuss further in a moment, has shown fantastic early results. The results are fantastic, and we'll get into some of those details shortly. We are also launching our EchoPark brand; Dino Bernacki, our new CMO of EchoPark, is driving that process, and we'll launch from a marketing perspective. Remember, we've really never marketed EchoPark. It's primarily been a SEM/SEO focus from a low price perspective. Our entire brand launch will start this summer, and we're very excited about that. As for some of the initiatives that we're taking, we have improved non-auction sourcing from 7% last year to over 20% this year, and we expect that number to continue to grow. Our Denver hub location leads the way, returning to profitability in March with a profit of $458,000 and having another good April. So, we see some signs of our initiatives beginning to take hold from a profit perspective. We have also shared our by-month profitability for the first quarter, and you can see how our mature stores are performing. We have achieved the highest guest satisfaction scores in the pre-owned competitive segment. We know our customers love our process, and we understand the headwinds not just facing us, but also the industry. We believe the action plans we are implementing are addressing these headwinds, and while it might take a few months to sort out, we are very confident in the direction we are heading.

Yes, this is Steve. To build on what Jeff said about the new echopark.com, we're very pleased with the progress so far. We've launched the new website to 80% of national traffic now, and it will reach 100% by the end of Q2. Early results show that the new website is driving a 30% increase in conversion rates. This will drive incremental volume as we continue to roll it out. F&I is reaching $23.25 per unit, exceeding our expectations. Our F&I penetration online is consistent with our in-store metrics, and in our mature stores – those that adopted the new echopark.com first – we are seeing F&I penetration higher in those stores than in-store. From a nationwide inventory standpoint, our new website enables consumers to access any car anywhere and have it shipped to them. Interestingly, over 70% of the cars we've sold online have been shipped from another market. We are truly extending our inventory and appeal to consumers, driving incremental volumes. More updates on the new echopark.com will be shared, but initial results are very strong.

Okay, fantastic. That's really helpful color. I wanted to dig in on one of the industry headwinds. One of the larger players in the vehicle market that reported a couple of weeks ago characterized some of what they saw in the quarter as demand weakness, which seems a little odd to us given everything going on from a price perspective suggesting that demand is still clearly there, but supply is constrained. As you think about the affordability dynamics that you mentioned and the lack of supply available, is there anything from a consumer perspective on the demand side of the equation that has you concerned that the consumer may be getting exhausted? Is there any other pushback other than price, which would be somewhat understandable?

Yes. This is Jeff Dyke again. I would disagree with the comment made a few weeks ago regarding demand weakness. I don't think that characterization is accurate. There's still plenty of demand, with an estimated 37 million to 40 million cars being sold in America this year in terms of pre-owned vehicles. The problem is that we are pushing monthly payments towards $500, whereas previously they averaged around $400, which is too close to new vehicle pricing. If you study used cars, you would want your average used vehicle selling price to be half that of your new vehicle selling price – historically it has been around 50% to 55%. Right now, it is at 70%, which is problematic. Pay rates are too high for what's considered normal. If these used vehicle prices fall back below $25,000, we expect a considerable uptick in sales. However, I do not anticipate that happening this year given COVID and geopolitical events affecting the used car market.

This is Heath Byrd. I just want to add that we are maintaining our course during these times. While we see some degradation in credit and affordability in the lower-income brackets, which represent a minor portion of both our franchise and EchoPark consumers, there’s no material impact observed among other segments.

Correct. Our staffing levels aim to support higher volume sales. It's better to maintain our experienced team for when the market rebounds than to hire and train new staff later. That's one ongoing drag on resources you may observe as we progress.

Great. Thanks for all that clarification on EchoPark. But maybe just to expand, do you have a contingency plan in place if used car prices do not moderate? You mentioned transitioning to five to eight-year-old vehicles, but it will take time to establish a steady mix. Considering ongoing investments, how flexible is your cost structure and capital expenditures? How nimble can you be on that front?

Thanks for the question. This is Jeff. We are very nimble and have the ability to adjust quickly; we can halt facility rollouts and adjust our headcount as necessary. Our model is historically focused on one to four-year-old vehicles, and we have a well-established profit margin setup. We're working on translating our high guest experience scores into higher margins. In our Austin market, we're testing pricing adjustments to see if we can add more years while improving margins.

This is David Smith. I would just add that we have strong franchise dealerships generating solid returns. Our investment in growing EchoPark is long-term, as we do not believe current used car prices are here to stay. We are positioning ourselves for when the market stabilizes.

Got it. Great. Just a follow-up on the auto lending environment. Are you seeing any signs of stress developing there? With interest rates rising, are lenders passing on these rate increases to consumers, or are some lenders absorbing them to remain competitive?

This is Heath Byrd. From a macro perspective, we are not seeing any significant impact on prime and near-prime consumers. However, there’s some slight degradation in credit access within lower-income brackets, which is a very small segment of our customer base.

This is Ethan Huntley on for Bret. Thanks for taking our questions. Have you provided any updates on your strategic alternatives for EchoPark recently?

We have not.

Okay. And how about regarding the parts and service segment? Can you discuss the difference in traffic versus average ticket and how much inflation has affected that segment?

I'm digging up some numbers for you. If you look at our warranty and customer pay segments, customer pay is rising about 1% for the quarter, while warranty has seen a 4% increase. We haven't increased pricing across the board, and there has been minimal inflationary pressure affecting the overall growth.

Got it, thank you. Lastly, can you discuss the long-term outlook for franchise new GPUs? I think it was close to $600-$700 on a same-store basis. Where are those shaking out?

These levels are not returning to pre-COVID norms. Previously we were around $2,000 per car; we're currently running around $6,800 per vehicle. Some adjustments will occur as inventory increases, but I don't foresee a drastic change this year. Our discussions with manufacturers indicate healthy inventory levels for the coming months. We could expect a stabilization towards the end of the year or next, depending on various external factors.

As you think about it, our manufacturer partners are motivated to maintain controlled inventory levels, which is beneficial for all stakeholders.

If you review the first two quarters of last year, we operated around a 40-day supply of new cars in the first quarter and just below $3,000 in new GPU. The second quarter saw a 25-30 day supply and just over $4,000 GPU. With manufacturers noting low 20 days supply moving forward, it appears we might settle into a $3,000 to $4,000 range longer term. The question is how quickly inventory replenishment can occur.

Crucially, these levels are still significantly higher than pre-COVID.

Thank you very much. I appreciate the insights.

You bet.

Thank you.

Thank you. We now have Joe Enderlin from Stephens. Please go ahead.

Hi, guys. Thanks for taking my question. For EchoPark, after reviewing results from the quarter, how large do you envision five to eight-year-old vehicles being as a percentage of the mix long-term? Additionally, are you observing any signs of order mix changes on the franchise side? As vehicles age, how may this impact parts and service over the coming years, particularly with fewer warranty repairs? Thanks.

The older the vehicle, the more cars will enter the service drive, resulting in increased service throughput. From a franchise perspective, we are seeing customers retain their lease returns; that is a common trend. The aging vehicle mix in our inventory is evident. Very few of our vehicles sold in the first quarter came from auction. Instead, 94% came from franchise sourcing.

It's crucial to examine this from a customer-first perspective. Our goal is to meet customer demand, especially for the five to eight-year-old models. The demand is evident, and we must fulfill that need. We were previously focused only on the one to four-year-old segment.

When we analyze total annual used vehicle volume, the five to six-year-old segment accounts for about 18%. Moving forward, as we transition from one to four-year-old vehicles to five to eight-year-old cars, we anticipate this segment's proportion to increase.

Thanks for giving me another question. I just wanted to follow up on the seasonality comments you made last quarter. You mentioned that the first quarter should be around 15%. Has anything changed regarding gross profit outlook on that front?

Did you mention seasonality of earnings?

Sure. We indicated that the first quarter traditionally accounts for 15-20% of annual EPS. With the elevated GPU environment and production uncertainties for the latter half of the year, we might see fluctuations in that pattern. Nonetheless, we anticipate that the quarterly cadence remains broadly consistent, especially regarding luxury vehicle sales. The delivery delays affecting vehicles may also have shifted some inventory into the first quarter, thus resulting in elevated GPU. Overall, the first quarter should maintain its importance in our annual performance, with the second and third quarters falling in similarly. We expect the fourth quarter to be our strongest.

It's likely that the percentage of estimated EPS from the first quarter could exceed 22%. Our strong pre-orders may position us uniquely this year.

Our projection was that the first quarter would provide about 20-23% of the total contribution. This could vary depending on how the inventory situation develops through the year.

Please be assured that as things stabilize, we will continue to engage actively with our investor community. Thank you all for your participation and inquiries.

This does conclude today's call. Thank you for attending today's presentation. You may now disconnect.