Good morning and welcome to the Sonic Automotive Third Quarter 2022 Earnings Conference Call. This conference call is being recorded today, Thursday, October 27, 2022. Presentation materials, which accompany management's discussion 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 findings with the Securities and Exchange Commission. In addition, management may discuss certain non-GAAP financial measures as defined in the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables and the company's current record on Form 8-K filed with the Securities and Exchange Commission earlier today. I would now like to introduce Mr. David Smith, Chairman and Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

Thank you very much and good morning, everyone, and welcome to Sonic Automotive's third quarter 2022 earnings call. As mentioned, I'm David Smith, the company's Chairman and CEO. Joining me on today's call is our President, Mr. Jeff Dyke; our CFO, Mr. Heath Byrd; our EchoPark Chief Operating Officer, Mr. Tim Keen; our Chief Digital Retail Officer, Mr. Steve Wittman; and our Vice President of Investor Relations, Mr. Danny Wieland. I'd like to begin by sincerely thanking all of our amazing teammates, customers, manufacturers, and vendor partners for helping Sonic Automotive achieve another period of record-breaking financial performance, including record third quarter revenues, gross profit, net income, and earnings per share. Highlights from our quarterly results include record third quarter revenues of $3.4 billion, which is up 12% year-over-year. Sonic also posted record third quarter gross profit of $581 million, up 23% year-over-year. This drove us to achieve record third quarter net income of $87 million or $2.23 per diluted share. During the third quarter, we continued to see strong new vehicle pricing, consistent consumer demand for new vehicles, and sustained growth in our parts and service business. While we experienced lower new vehicle sales volume on a year-over-year basis due to ongoing supply chain constraints and limited vehicle inventory, we also continued to see strong new vehicle Gross Profit per Unit and a sustained pre-order bank. Our used vehicle volume was consistent with industry trends year-over-year, reflecting ongoing affordability concerns as a result of near-record high used car prices and a rising interest rate environment. I'm happy to say that since quarter-end, we have continued to see stability in our overall business despite macroeconomic headwinds and concerns around rising interest rates, heightened inflation, and ongoing global supply chain constraints. Our financial results reported earlier today demonstrate the fundamental strength of our diversified automotive model, as well as our team's unwavering commitment to creating long-term value for our guests, manufacturer partners, and stockholders. While we remain optimistic about our long-term prospects and growth trajectory, we realize that we are not operating in a vacuum. As I mentioned on our last earnings call, this is not the first time Sonic has had to navigate through adverse economic cycles. Our team is well aware of the current challenges we are all facing and is monitoring our operations daily to adjust for any near-term obstacles related to the overall industry and economic environment while maintaining a long-term strategic view for our business. As such we remain adamant in maintaining our strong balance sheet position, which we consider to be essential in today's world. Our team remains very focused on maintaining high levels of profitability, generating strong cash flows, and proactively managing our cost structure. To this end, we are continuing to take a strategic measured approach to our expansion plans, both with our franchised dealerships, as well as with EchoPark as we balance our commitment to long-term growth with our current priority to maintain a strong liquidity position in light of uncertain macroeconomic outlook. Turning now to our franchised dealerships segment results. Third quarter 2022 revenues were $2.8 billion, up 18% from the prior year period. Segment income was $146 million, up 1% year-over-year, and segment adjusted EBITDA was $198 million, up 10% from the prior year. On a same-store basis, franchised dealerships revenues were up 3% from the prior year, while gross profit was up 5%. Parts and service gross profit increased by 10% year-over-year with same-store customer pay gross profit up 12% and same-store warranty gross profit up 7%. Same-store Finance and Insurance gross profit was down 5% on lower unit sales volume despite an all-time record quarterly franchised dealership segment Finance and Insurance gross profit per retail unit of $2,473, which was up 7% from prior year. Despite persistent new vehicle demand, sales volumes during the quarter continued to be impacted by ongoing vehicle production constraints. Same-store retail new vehicle unit sales volume was down 6% even as same-store retail vehicle gross profit per unit was up 28% year-over-year to $6,571. Same-store retail used vehicle unit sales volume was down 12%, while same-store retail used vehicle gross profit per unit was lower by 9% year-over-year to $1,669. As of September 30, our franchised dealerships segment had approximately 18 days supply of new vehicle inventory unchanged from the second quarter. Production continues to improve slowly, while demand for new vehicles remains strong, which continues to drive strong new vehicle Gross Profit per Unit. Our franchised dealerships segment had approximately 31 days supply of used vehicle inventory, again unchanged from the second quarter. Given ongoing new vehicle inventory constraints, recent declines in wholesale market pricing, and our current macroeconomic outlook, we continue to be disciplined in managing our used vehicle inventory, volume, and pricing. Now let's turn to EchoPark. For the third quarter of 2022, we reported revenues of $608 million, down 8% from the prior year. Despite this, we reported record third quarter EchoPark gross profit of $49 million, up 88% year-over-year. EchoPark retail sales volume for the quarter was 15,422 units, down 27% for the prior year as we continue to focus on executing our strategic adjustments to include five-plus-year-old vehicles in EchoPark inventory. Digging a little deeper here, five-plus-year-old vehicles represented 19% of EchoPark retail used vehicle unit sales volume in the third quarter, which was up from 9% in the second quarter of 2022. And our non-auction sourcing mix grew from 25% in the second quarter to 32% of sales in the third quarter. As we expected from the third quarter, we reported EchoPark segment loss of $29.9 million compared to $34.9 million in the second quarter, and $32.9 million in the prior year quarter. EchoPark reported an adjusted EBITDA loss of $21.4 million in the third quarter, an improvement from a loss of $27.9 million in the second quarter and a loss of $28.5 million in the year-ago period. This sequential improvement from the second quarter demonstrates the benefits of strategic shifts in inventory mix and sourcing that I mentioned earlier. At the end of September, our EchoPark segment had approximately 57 days supply of used vehicles. For EchoPark branded locations though, the days supply was just 40 days excluding new locations opened during the third quarter, positioning us well as we head into the fourth quarter. During the third quarter, we continued to strategically expand EchoPark's distribution network, including a new vehicle delivery center opening in Tulsa, Oklahoma, and a retail hub opening near Sacramento, California. Including our new location openings during the quarter, the EchoPark brand now reaches over 50% of U.S. population, on its way to 90% of U.S. population by 2025. In addition to growing geographically, we've also continued to expand EchoPark's digital footprint with the continued success of our new e-commerce platform, which was successfully rolled out this past June to 100% of our nationwide traffic at echopark.com. For the third quarter, omnichannel sales through our new e-commerce platform accounted for 31% of EchoPark's retail unit sales volume, compared to 19% in the second quarter. Further, 7% of EchoPark volume during the quarter was sold end-to-end online as guests continued to utilize our enhanced omnichannel purchase experience with out-of-market buyers representing 60% of our e-commerce sales. We continue to monitor EchoPark's performance and remain confident in this segment's long-term growth prospects, once the used vehicle market returns to normalized conditions in due course. In the interim, we continue to take steps to adjust our structure at EchoPark to better align with the current environment and target a return to breakeven EBITDA in the second quarter of 2023. We are already seeing the benefits of expanding our inventory offering to include five-plus-year-old vehicles, enabling us to reach additional customer segments, improve consumer affordability, and source more vehicles from non-auction sources, which will improve profitability. We began to see the benefits of these actions this past quarter and expect to see further improvement in EchoPark losses during the remainder of the year. We are still in the early stages of these initiatives. Once we have further visibility on future used vehicle market conditions and the effects of the strategic adjustments we have made at EchoPark, we will provide an updated EchoPark model and guidance. As an update on our share repurchase activity, during the third quarter we bought back approximately 3.1 million shares of the company's stock for approximately $151.5 million. Year-to-date, we repurchased 5.2 million shares, representing 13% of shares outstanding as of the end of 2021 for approximately $245 million. As previously reported, in July Sonic's Board of Directors increased the company's share repurchase authorization by $500 million. Taking this into account with our recent repurchase activity, this results in a total of $481 million in remaining share repurchase authorization, representing over 25% of Sonic's current market cap. Now turning to our balance sheet. We ended the second quarter with $488 million in available liquidity including $171 million in cash and floor plan deposits on hand. The decrease in liquidity from the end of 2021 was driven primarily by the share repurchase activity I just mentioned. Additionally, I'm pleased to report today that our Board of Directors has approved to increase our quarterly cash dividend to $0.28 per share payable on January 13, 2023, to all stockholders of record on December 15, 2022. Our strong sales performance, cash flow generation, and balanced capital allocation strategy continue to allow Sonic to return capital to shareholders through its quarterly dividend and share repurchases. In summary, our third quarter results reflect another quarter of record financial performance in spite of growing macroeconomic concerns. Looking forward, we will continue to advance our strategic growth plans for both our Sonic franchised dealerships and our EchoPark business, taking the necessary steps in the short term to maintain our strong balance sheet so we can continue to reach our longer-term goals, while still benefiting from the strength of our diversified business model. We remain confident in reaching these goals and look forward to delivering further revenue growth, increasing profitability, and generating long-term value for our stockholders. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you very much.

Thank you. We will now begin the Q&A session. Our first question comes from John Murphy with Bank of America Merrill Lynch. John, your line is now open.

Good morning, guys. A first question on inventory restocking and grocers – because you guys have a much heavier luxury import mix than most dealer groups, I'm just curious what you're hearing there. It kind of felt like domestics might be catching up a little bit faster than the luxury import brands, but maybe not; I’m just trying to understand what you think is going to happen here, and when we get back to normal and what that normal means?

Hi, John, it's Jeff Dyke. Yes, the import brands, in particular Honda, obviously the day supplies are really low – 3, 4, 5 days – and we expect that to continue for the foreseeable future. The High-Line brands are getting better – Mercedes, BMW, our day supply in total is growing there, not as quickly as we'd like, but certainly, it's growing. I think it's going to continue to get better as we move through the first and second quarter. I think the manufacturers are doing a great job; they're working hard to get inventory to us, but they still have supply chain issues – chips are still a problem, and that's going to weigh on the industry for the foreseeable future. But day supply, as we look into next year, if we're sitting at 18 days today, I hope day supply next year will be around 25 days. I don't think it gets to 30 days, but we'll keep our fingers crossed, because that's going to drive front-end pricing down, and that's a big piece of the puzzle for us from an EchoPark perspective.

And what do you think that means for grocers? I mean, it's still – from 18 to 25 days is still pretty tight relative to history. Does that mean grocers are still reasonably strong or do they weigh just a bit?

Yes, we're seeing just a little compression in this quarter, but not a lot. I mean, I think the grocers, certainly from a pre-COVID perspective, are going to be really high. If we’re running at $2,200, $2,300 a copy then, we’re well north of $6,000 now. Maybe a return to normal is in the $4,500 to $5,000 range, but I don’t see that happening this quarter or in the first and second quarter of next year; grocers continue to remain high from a front-end perspective.

And you guys did mention a measured approach to growth yet, when I think of the EchoPark expansion by 2025, it didn't sound like there was much throttling back at all there. I'm just curious, particularly around EchoPark, how you think about this macro backdrop of what's going on in the used car market, where it seems like it's going to be shrinking in supply for a number of years to come because we just sold fewer new vehicles. It might be challenging to grow in absolute terms, and you're really going to have to go after market share pretty heavily there. Just curious how you think about tapping the brakes a little bit on EchoPark growth or maybe not and this might be a great opportunity to go after some competitors that might be flailing and don't have the capital resources that you do?

Yes. This is David Smith. As it relates to EchoPark and our future expansion, we're going to – again some of our teammates here will jump in on this as well – but we're going to take a very disciplined approach to that. We're going to get back on track when we're seeing, as we mentioned, some huge progress in some of our EchoPark stores that Tim Keen and the team have been working on. Jeff Dyke, we're going to see that come to fruition before we start rolling out a bunch of other additional locations.

Yes, we opened Tulsa and Sacramento in the third quarter, great expansion for us. We're now over 50% of the market. We don't see a problem getting to 90% of the market by the end of '25. But we're not going to open any stores for the remainder of the fourth quarter, first quarter and second quarter, but we're at an average retail price or we're at an average wholesale price right now, down from $31,500 to just below $26,000 that we're buying in the auction lanes. We expect that to continue to drive, John; that's going – the rental car companies are out of the auction lanes, and some other competitors are struggling, so we have access to inventory. As prices drop, EchoPark, this is a great time for us because whether a recession happens or not, things are slowing down, and that's when EchoPark really thrives. So these prices are going to drop, and I think that by the middle of next year, we'll be buying in the auction lanes, maybe in the $23,000 to $24,000 range, and that's where the average monthly payment gets back down to where it was pre-COVID somewhere in that $450 range. Last quarter, on average, a customer paid $630 with warranties and everything wrapped in; it's still too close to the new car payment. So we'll tap the brakes here for a couple of quarters, get back to really focusing on the EBITDA situation at EchoPark, and what's going to create positive EBITDA is just that average price in the monthly payment for the consumer to continue to drop. We're really excited; we had an EchoPark senior management team the other day. The team is pumped up. We see the volume coming back. Our big store in Thornton in the month of September made right at $900,000 profit. I don't think there's another single-point used car store in the country doing that. We sold 700 cars out of that store. We will do over 800 cars in October. So the business for EchoPark is coming back. And we always said that it would. We're right on track with where we said we’d be. We'll see an improvement in EBITDA from the third quarter and the fourth quarter. We're already seeing that in October. So we're feeling really excited about the future as we move forward. But we're cautiously optimistic, and we're going to manage our capital properly and will tap the brakes here for a couple of quarters, not open any stores, and let's see what happens in the back half of next year, which will also include our thoughts on starting our branding campaign and really driving EchoPark. We really never advertised EchoPark; it's just sort of a price-driven company, and so we've got that on our plate too, but we're going to be smart, wait, and we'll see what happens with the pricing in the wholesale market. I would expect that one-to-four-year-old category comes back stronger in the next couple of quarters. We probably will sell fewer plus-five-year-old cars as a percentage, but it's certainly helping the bottom line.

That's helpful, thank you, guys.

Yes, something that Jeff mentioned, this is David, something that Jeff mentioned there is our advertising, our word-of-mouth advertising really couldn't be better. Something we're really proud of is that our guest experience is really an industry-leading five-star guest experience at EchoPark that we don't want to sacrifice that as we get back to growth. We've got some stores that - we've got some of our experienced guys as we call them; some of our salespeople are selling north of 50 cars and delivering on that guest experience. We want to make sure that they have the proper training and hiring processes as we continue to roll those stores out.

Yes, John, another good point is, prior to COVID our average experienced guy sold 25 cars a month, and we're now at about 23, and in some of our stores, they're being overrun, averaging 30, 35 cars a month. So we're starting to hire experienced guys again. The business is coming back and it's a lot of fun for us. Obviously, it's been a tough year from an EBIT perspective, but we've had measured growth this year. We'll be smart about that over the next couple of quarters and we're excited about where we stand with EchoPark, especially in comparison to a lot of the competition that is out there with real heavy day supply and struggling in an environment like this.

Yes, it's tough when you have 99 physical lots that you can use, but anyway, okay, thank you so much, guys; not for you guys, for your competitors.

Thank you. Yes, we did and we're watching them very closely.

Thank you for clarifying that.

Yes, definitely not you, somebody else there. I'll leave it there. Thank you, guys.

Thanks, John.

Thank you, John. Our next question comes from Joe Enderlin with Stephens. Joe, your line is now open.

Hi, guys, thanks for taking our question. On capital allocation - on capital allocation, share repurchase came in below our expectations. Just wondering if you think we can expect some continued elevated buyback or how are you thinking about priority here versus the M&A environment, given you are tapping the brakes on EchoPark growth?

This is Heath Byrd. As David mentioned in his opening comments, we always look at capital allocation as a balanced approach. I think we did show that one of the big buckets is returning capital to shareholders and we increased the dividend by 12%. As you mentioned, the share repurchase is over 5 million for the year. As we look at share repurchase, we always consider when it's undervalued, and we still believe it's undervalued, so we look at it from an opportunistic standpoint, balanced with the other priorities. There's no regular scheduled cadence that will come from us on the share repurchase; it's more opportunistically as we compare it to the other opportunities and the EchoPark expansion. As Jeff and David mentioned, it is slowing a little bit, maybe correlated with the market, so you won't have as much capital spend in the next quarter and the first two quarters of next year, which will free up opportunities for other buckets. Lastly, M&A is one of those things that's so hard to predict because the opportunities come along sporadically, but we're in a great position to take advantage of those when they do come up. So it's really like the share repurchases; there’s no cadence that we could actually predict on that as well. It's just when they come up, we use it. Those are the big buckets and priorities, and of course, all of that weighs against our liquidity and leverage. We're very comfortable where we are in both those categories, and so we hope to stay and plan to stay at the same levels. That's really our balanced approach.

Yes, this is David Smith. It's interesting; some of our peers have been saying this as well that the prices, franchised dealerships, while still high, historically, we have seen some signs that those prices are coming down. So it will be interesting to see, especially going forward into '23, what prices we're going to see and what opportunities that could come across our desk, but they've got to be extremely attractive in order to allocate capital towards acquisition.

Thank you, Joe. Our next question comes from Rajat Gupta with JPMorgan. Rajat, your line is now open.

Great, thanks for taking the question. Just wanted to follow up on the EchoPark comment, from the $21 million EBITDA loss to the breakeven by the second quarter. I think, Jeff, you mentioned that volumes were the big driver, right? But could you help us bridge that gap in a bit more detail as to how we get from $21 million to flattish? Is it just primarily volumes and leverage on that or do you expect Gross Profits continuing to move higher, any further SG&A actions that are driving that? Maybe if you could help us bridge that in more detail, it'd be helpful.

Yes. Thanks for the question. The fixed expenses from an SG&A perspective are pretty fixed at EchoPark. When we had big volumes, you see the kind of profit we got out of Thornton. If you look back, you look at August, we were a little below 4,000 cars. If you look at September, we were a little above 4,000 cars. If you look at October, we're a little above 5,000 cars. We expect that to continue to grow. We're going to do better in November and better in December, and it is a volume piece. Our big stores need to be at that 400 level in order to breakeven and then once they surpass that level, they should contribute positively then to the bottom line quickly, and again that's what you see happened at Thornton. We believe that the prices on the wholesale market for a one-to-four-year car are going to continue to drop. Like I said earlier, the rental car companies are coming out of the lanes and some of our competitors are having a lot of problems, so inventory is there for us. If, for some reason, the wholesale prices stop dropping, we would have to take some different strategic moves to get to positive EBITDA, but we just don’t foresee that. We've been saying this all year; we've been predicting that this is what's going to happen, and it's happening just exactly as we've laid out, and we think as we move into the first quarter, we'll see continued drop. I think by the end of this year, Rajat, we're going to see a $24,000 price point at the wholesale loan, which is great for us; that gets us below that $500 monthly payment, and we think that'll maybe flatten out a little bit and then continue to drop a little more as we move into the latter half of next year. We get to the 7,000, 8,000 car mark, we're breaking even at EchoPark based on our current expense structure. Pre-COVID, our store setup today would be in the 12,000 to 15,000 car-a-month range. Right now, based on the volumes that we have, we expect to move back to that, and as those prices keep dropping, that's what's going to happen. So that's the bridge; that's how we walk to positive EBIT. We think right now, whether it's in the first part of the second quarter, the latter half of the second quarter, even the first part of the third quarter, that's when we'll return to positive EBIT. We're really excited about it; it's a great opportunity. We've worked very hard on this model. We're very confident in the model, and you see a lot of other models flailing around. It's just the strict inventory management guidelines. Sometimes you might miss out on a little volume, but at the end of the day, our growth is there. We're going to get back to positive EBIT; that's going to happen in 2023, and we think later half of the second quarter or first part of the third quarter is when that's going to occur.

Yes, this is David. Just to remind – something to just remind investors is that prior to COVID, some of our EchoPark stores were some of our most profitable dealerships across the board including all of our franchised stores. So it's something to remember that Jeff knows what he's talking about there when he says there is a return to profitability.

Got it, got it; that's helpful color. Maybe going back to the franchise business and you know you've taken a lot of productivity actions over the last couple of years. What kind of scenario are you planning for into next year in terms of growth in the franchise business? Maybe the SAAR environment, the used car backdrop in that context. If there is a recession in the U.S. and the Gross Profits normalize sooner than expected, both in the new and used cars, where do you see SG&A growing stepping down for the franchise business for the company? So first, do you see that macro backdrop playing out, and if not, how should we think about any guideposts around SG&A growing next year? Thanks.

Yes. So we're building our 2023 budgets now or in the budget season. From a front-end perspective on new cars, I think margins in the back half of next year, we could get to about $4,500, somewhere in that ballpark; certainly not in the first half. It's going to be $6,000, $5,500, $5,300, somewhere in there. We're going to have more new car volume next year just because the supply is going to be larger. I think our used car business will be solid; just real strict inventory management and our gross will be there; it will be solid. Maybe on a per retail basis, we step back a little in F&I, but not a lot. I mean, if it's $25 a car or something of that nature; overall gross revenue is going to grow just because the volume will grow, and then our fixed operations business is on fire. We're growing that each quarter; we had a record all-time quarter last quarter, and that's going to continue to be good. So as I'm looking at next year from a gross perspective, it looks a lot like this year to us in total gross dollars. I think that maybe we're up a little; in our latest budget, we had maybe $12 million more in gross in our budget than we did this year based on how we think this year will end. But it's going to look a lot like this year from a gross perspective.

Yes, I mean, I agree with Jeff. The total gross dollars are going to look very similar; nothing materially that we can see that will change, especially down to the downside. It's just going to come from different areas. We’re seeing in warranty for the first time in years picking up as well, and I agree with him on the gross side. On the SG&A, we will be maintaining the same kind of expense reductions that we achieved from the pandemic. We also have automation and online activity that will help overall expense spend and improve efficiencies, but we are going to have some investments in technology and other areas for the future that are going to add to that spend. You could probably see a slight uptick in a percent of gross in SG&A; nothing that significant, but I do believe that there are going to be some big deals for the future that could impact that and make it grow a bit.

And the total gross dollar comments; are you referring to flat growth next year, the gross profit dollars just for the franchise business, or the overall company?

Yes, just the franchise business. I'm sorry; I thought that's what your question was. On EchoPark, the gross will be significant.

Yes, yes. No, the reason I asked that is because if you take that into account, maybe in the comment on SG&A and if EchoPark does better than breakeven for the full year, that should mean you should comfortably grow your earnings per share next year with the buyback, right? Is that what you're suggesting?

You're on it; that's how we see it.

Yes, that's how we see it.

Thank you. As there are no more questions in the queue, I will pass the conference back over to CEO, David Smith, for any additional or closing remarks.

Great, thank you very much, and thank you everyone for joining us on the call today. Have a great day. Thank you.

Thank you.

This concludes today's Sonic Automotive third quarter 2022 earnings conference call. Thank you for your participation; you may now disconnect your line.