Good morning, and welcome to the Sonic Automotive Fourth Quarter 2022 Earnings Conference Call. This conference call is being recorded today, Wednesday, February 15, 2023. 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 of the Private Securities and Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectations about the company's products or market or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission. In addition, management may discuss certain non-GAAP financial measures as defined by the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables in the company's current report on Form 8-K filed with the Securities and Exchange Commission earlier today. I would now like to introduce Mr. David Smith, Chief Executive Officer, Sonic Automotive. Mr. Smith, you may begin your conference.

Thanks very much. Good morning, everyone, and welcome to the Sonic Automotive fourth quarter 2022 earnings call. As you said, I'm David Smith, the company's Chairman and CEO. Joining me on the call today 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. Today, Sonic reported another period of record financial results, including record fourth quarter and full year revenues. Highlights from our fourth quarter performance include all-time record quarterly revenues of $3.6 billion, up 13% year-over-year and record fourth quarter gross profit of $576 million, up 9% year-over-year. Fourth quarter GAAP EPS reflects a $320 million pre-tax non-cash impairment charge, again, that's a non-cash impairment charge, resulting in a net loss of $5.22 per share. Excluding the effects of the non-cash impairment charge and other non-recurring items, we reported adjusted earnings per share of $2.61. For the full year, we reported all-time record annual revenues of $14 billion, up 13% year-over-year and all-time record annual gross profit of $2.3 billion, up 21% year-over-year. Full year GAAP EPS was $2.23, including the effects of the previously mentioned non-cash impairment charge. Excluding one-time items, adjusted EPS was $9.61, our fourth consecutive year of all-time record annual adjusted EPS. I'm extremely proud of our team's performance in the fourth quarter, capping off another incredible year for Sonic Automotive. We could not have achieved these results without the continued support of our guests, teammates, manufacturers, and lending partners. Our team remains committed to delivering a world-class guest experience and executing our long-term strategic plan, and we are excited to carry this momentum into 2023. Before looking ahead to 2023, I'd like to add some color on the fourth quarter. During the quarter, we began to see improvement in new vehicle production, which supported higher new vehicle retail sales volume at our franchise dealerships, outperforming the industry volume change, both quarter-over-quarter and year-over-year. New vehicle gross profit per unit declined quarter-over-quarter and year-over-year, but was offset by higher volumes and incremental F&I gross profit, driving growth in overall new vehicle related gross profit despite GPU compression. Our used vehicle business similarly outperformed the change in industry volume due to our diversified business model despite ongoing affordability concerns for the used vehicle consumer. Used vehicle average selling prices have begun to decline, but still remain well above levels required to return to a monthly payment that is affordable for the average buyer at current interest rates. Despite a rising interest rate environment, F&I performance continues to be a strength, benefiting from higher retail unit volume and near record F&I per retail unit. Our parts and service or fixed operations business remained strong with stable margins and volume and customer pay being complemented by improvements in warranty repair transaction volume. So far in 2023, we have seen sequential declines in new vehicle GPU and volume due in part to the seasonal nature of our business as a result of our luxury brand weighting. We believe this, coupled with ongoing macroeconomic uncertainty and concerns around the effect of rising interest rates and elevated inflation on the average consumer could drive volatility in consumer demand and vehicle margins through at least the first half of 2023. However, we believe that our diversified automotive retail model positions us favorably to adapt our business to changes in market conditions as we progress through 2023. As vehicle inventory supply demand began to rebalance and new and used vehicle pricing begins to move towards a new normal level, we believe any headwinds we may face in the franchise business should be a tailwind to EchoPark profitability and revenue growth, minimizing the earnings downside to the consolidated results. Coupled with our strong balance sheet and commitment to returning capital to stockholders, we believe we are well positioned to continue to generate returns well above pre-pandemic levels. Turning now to our franchise dealership segment for the fourth quarter. Total franchise revenues were an all-time quarterly record of $3 billion, up 14% from the prior year period. Adjusted segment income was $160 million, down 3% year-over-year due to higher interest rates and segment adjusted EBITDA was $213 million, which was up 4% from the prior year. On a same-store basis, fourth quarter franchise dealership revenues were up 12% from the prior year while gross profit was up 3%. New vehicle gross profit was flat with a 5% increase in retail unit volume, offset by a 6% decrease in new retail GPU to $6,301 per unit. Used vehicle gross profit was down 29%, driven by a 33% decrease in used retail GPU to $1,405 per unit, offset partially by a 6% increase in retail unit volume. Parts and service gross profit increased by 12%, with same-store customer pay gross profit up 14% and same-store warranty gross profit up 15%. Same-store F&I gross profit increased 11% on higher retail unit sales volume and fourth quarter record reported franchise dealership segment F&I gross profit per retail unit of $2,421, up 3% from the prior year. As of December 31, our franchise dealership segment had approximately 24 days' supply of new vehicle inventory, up from 18 days' supply at the end of the third quarter, but well below the typical pre-pandemic December level of 55 to 60 days' supply. As you are aware, this days' supply figure includes in-transit inventory. Our franchise dealership segment had approximately 26 days' supply of used vehicle inventory down five days from the third quarter and in line with our optimal target level heading into the first quarter. Given ongoing new vehicle inventory constraints, recent declines in wholesale market pricing and our current outlook, we continue to be disciplined in managing our used vehicle inventory, volume, and pricing in order to optimize gross profit levels as we go through 2023. Now let's turn to EchoPark results. We reported record fourth quarter revenues of $589 million for EchoPark, up 2% from the prior year, and gross profit of $41 million flat year-over-year. EchoPark retail sales volume for the quarter was 17,435 units, up 14% from the third quarter and 11% year-over-year. EchoPark average used vehicle selling price decreased 12% from the quarter from the third quarter, but at $29,500 per unit still remains well above target affordability levels. We continue to focus on optimizing our inventory sourcing mix and expand our inventory affordability by including five plus year old vehicles in EchoPark inventory. For the fourth quarter, five plus year old vehicles represented 19% of EchoPark retail used vehicle unit sales volume, which was flat from the third quarter of 2022, and our nonauction sourcing mix was 28% of sales in the fourth quarter compared to 32% in the third quarter. For the fourth quarter, we reported EchoPark segment loss of $33.3 million compared to $31 million in the third quarter and adjusted segment loss of $20.3 million in the prior year. EchoPark reported an adjusted EBITDA loss of $25.4 million in the fourth quarter compared to a loss of $23.2 million in the third quarter and a loss of $14.6 million in the year-ago period. This sequential increase in adjusted EBITDA losses reflects a steeper than anticipated decline in used vehicle pricing during the fourth quarter, which resulted in a $533 per unit decrease in front-end used vehicle GPU compared to the third quarter. At the end of December, our EchoPark segment had approximately 40 days' supply of used vehicle inventory, which was down from 57 days' supply at the end of the third quarter. We believe maintaining a five day supply of used inventory is critical as we proceed through 2023 with the expectation for further declines in used vehicle pricing in the coming months, benefiting overall affordability and consumer demand, but potentially pressuring GPUs during the transition period. As discussed on our third quarter call, we are continuing to take a strategic, measured approach to our EchoPark expansion plans as we balance our commitment to long-term growth with our current priority to improve EchoPark profitability and maintain a strong overall liquidity position in light of an uncertain macroeconomic outlook. In the interim, we believe that the continued evolution of our EchoPark e-commerce platform will allow us to expand EchoPark brand reach without investing the capital to open additional store locations. For the fourth quarter, omnichannel sales through our new e-commerce platform accounted for 38% of EchoPark's retail unit sales volume compared to 31% in the third quarter. Furthermore, 9% of EchoPark volume during the quarter was sold end-to-end online, up from 7% in the third quarter as guests continue to utilize our enhanced e-commerce purchase experience with out-of-market buyers representing nearly 50% of our e-commerce sales. We continue to believe that our omnichannel e-commerce platform, combined with the measured expansion of our physical footprint over the next two to three years, will allow EchoPark to reach 90% of the U.S. population by 2025, supporting our long-term goals for this business. We continue to adapt the EchoPark strategy based on current used vehicle market conditions and remain confident in this segment's long-term growth prospects as the used vehicle market continues to normalize. We are seeing the initial benefits of expanding our inventory offering to include five plus year old vehicles and shift our inventory sourcing away from wholesale auctions and expect adjusted EBITDA losses to improve throughout 2023, now targeting breakeven adjusted EBITDA in the first quarter of 2024. As we gain further visibility on our future used vehicle market conditions and the effects of strategic adjustments we've made at EchoPark, we will provide an updated EchoPark economic model and long-term guidance. As we announced earlier this morning, we are very excited about our newly created Powersports operating segment, which further diversifies Sonic's retail portfolio. We are very optimistic about the growth opportunity in this space and we'd like to welcome the teams from Black Hills Harley-Davidson and Sturgis, South Dakota; Team Mancuso Powersports in Houston, Texas; and Horny Toad Harley-Davidson in Temple, Texas to the Sonic Automotive family. In partnership with this group of historic Powersports brands, we believe we can realize incremental growth opportunities and expand our reach in this adjacent retail sector worth an estimated $34 billion in the U.S. with significant opportunity for consolidation. In 2023, our Powersports segment is expected to add approximately $200 million in annual revenues and adjusted EBITDA margins between 8% and 10%. Now turning to our balance sheet and capital allocation. We ended the fourth quarter with $805 million in available liquidity, including $501 million in cash and floor plan deposits on hand. As an update on our share repurchase activity, since October 1, 2022, we repurchased approximately 700,000 shares of the company's stock for approximately $35.8 million or an average of $48.25 per share. In total, during 2022, we repurchased 5.6 million shares, representing 14% of shares outstanding as of the end of 2021 for approximately $262 million or an average of $47.8 per share. As of today, we have a total of $455 million in remaining share repurchase authorization, representing approximately 20% of Sonic's current market cap. Additionally, I'm pleased to report today that our Board of Directors approved a quarterly cash dividend of $0.28 per share payable on April 14, 2023, to all stockholders of record on March 15, 2023. In closing, our team is prepared to continue to execute at a high level in 2023 while remaining adaptable to changes in the automotive retail environment and macroeconomic backdrop. Further, we continue to operate our business with a long-term view and remain committed to a disciplined return-based balanced capital allocation strategy to maximize long-term stockholder returns. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you.

Thank you. We will now start the question-and-answer session. Our first questions come from John Murphy with Bank of America. Please proceed with your questions.

Good morning, guys. Maybe if I could start with a sort of a quick broad question here. What are your planning assumptions generally for the SAAR for 2023, where you think GPUs will go, and what kind of SG&A leverage that you may have in 2023 roughly?

John, it's Jeff Dyke. We are projecting an increase of about 10% over this year, estimating a range between 14.5% and 15.3%. Margins are a significant concern and are unlikely to remain at the over $6,300 level we observed in the fourth quarter. Currently, we are seeing margins in the high-5s for the first quarter, which we expect to continue. However, as the year progresses, we anticipate that number could fall into the high-4s, around $4,800. Meanwhile, we expect an increase in new car volume. Therefore, we foresee higher new car volume, reduced front-end margin, and healthy F&I profitability. Our F&I targets for the year will be around $30, fitting within the $25 to $50 range based on last year's performance. From our perspective, it should be a robust year for new cars. The mix will change, with increases in volume and lower gross running, and we expect this trend to continue throughout the year. Would you like to discuss SG&A?

I believe that when we look at the franchise business, our SG&A will be in the mid-60s range. Overall, I anticipate it will be between 65 and 70, still in the upper 60s for the entire company. This is due to a couple of additional investments this year, including ongoing branding efforts for EchoPark in certain markets and investments in technology for future innovation. These factors are contributing to an increase in our forecast for SG&A.

That's incredibly helpful. Thank you. Just a second question on the Powersports business. I mean, it seems like you're walking into this, not running into it. It's an interesting sort of adjacency. Just curious where you think that ultimately goes in size and scale inside the company because it sounds interesting? It sounds pretty profitable and relatively fragmented?

It's quite fragmented. We're acquiring at valuations between two to five times, which is in line with our assessments. Franchise dealerships are valued at six to ten times. Our initial purchase at Horny Toad Harley-Davidson has proven successful; we've implemented technology and revised pay plans, resulting in record volumes and profits, which is beneficial for us. We believe we can achieve similar results with our other stores. Over the next 12 to 18 months, we'll be laying the groundwork by developing playbooks, processes, and technology, as their current technology lags behind what we see in automotive retail. The teams we've encountered in our acquisitions have been incredibly talented and capable. There may be minor additions to our portfolio in the coming 12 to 18 months, but the diversity of our offerings makes this acquisition a strategic move. It aligns with our existing operations and seems like a smart choice. In terms of our diversification and the outlook for EchoPark this year, we anticipate improved EBITDA performance as the franchise business faces challenges. By the first quarter of 2024, we expect EchoPark to reach EBITDA profitability, contingent on our depreciation projections for preowned vehicles. Overall, we see this as a positive opportunity with attractive valuations, but we will continue to monitor the situation over the next 12 to 18 months.

And maybe I'll just sneak one last one on used vehicle sourcing. I mean I'm just curious, as you see this year progress, what is your expectation for used vehicle sourcing at the franchise side as well as the EchoPark side? I mean how reliant would be on auctions versus self-sourcing?

Hey, John. This is David Smith. I wanted to finish up on the Powersports. Our team has been very involved, including a large group visiting Sturgis and experiencing the incredible atmosphere there. It's crucial to highlight that the acquisitions we've made are extremely high quality. We see the Sturgis acquisition as a historic moment for the Powersports industry. The opportunity is significant, with around 500,000 people attending Sturgis. It's an impressive phenomenon with remarkable profitability and considerable potential, which we all recognized when assessing it along with Mancuso, Horny Toad, and Harley-Davidson. Every day we analyze the numbers, and the opportunities keep presenting themselves; we see new possibilities emerging every week.

Yeah. There are plenty of opportunities to buy stores. However, this is new for us, and we want to take our time and do it the right way. It provides nice revenue and great profitability, and we'll see how it develops. We're just excited about it.

We're going to be disciplined about our next steps. So, regarding your earlier question about...

We are changing our sourcing strategy and increasingly purchasing more cars directly from the street. As retail prices for pre-owned vehicles decrease, we expect to see an increase in available cars at auction, allowing us to return to our EchoPark operations. It would not be unexpected for some of our sourcing percentages to shift into the 15% to 20% range for cars sourced outside of auctions. We will monitor this as the year progresses. As prices drop, more vehicles in the one to five year old category will be accessible, which aligns with our expectations. We had forecasted this during our third quarter call. The pace of depreciation has been quicker than we anticipated but is stabilizing now and should remain steady for a couple of months. However, as we approach April and May, we anticipate that the depreciation trend will resume, and we expect to see prices under $25,000 as we move toward the fourth quarter. When that occurs, it will create opportunities for EchoPark. This is part of our diversification strategy and will help us return to pre-pandemic levels of profitability. We observed strong performance in the fourth quarter with EchoPark, and January's volume increased by 30%, with February's performance on track to mirror that. Margins in February are improving, which is expected with market stabilization, but current prices are still too high. The difference between new and used car pricing is not yet sufficient, but it is improving. As these factors come together, they will benefit us. Based on our projections, we anticipate that EchoPark will experience a significant recovery in EBIT.

Jeff, I appreciate your comments regarding the franchise business. Can you share more about the used business and franchise dealers?

We are currently purchasing significantly more cars off the street than we ever have before. However, we are beginning to acquire more vehicles at auction. In the third and fourth quarters, we were buying around 500 cars a month, and now that number has increased to approximately 1,200 to 1,500 cars a month. We expect this pace to remain consistent for the remainder of the year. Our increased sourcing of cars off the street is benefiting our margins and our franchise situation. With a very low day supply, we can quickly adapt to any changes in the marketplace. Our current supply is at 26 days, while EchoPark has a supply of 30 days. Following the RFJ acquisition of Northwest Motorsport, our total supply increases to 40 days. Both EchoPark and our franchise stores maintain excellent day supply levels, and we plan to continue managing them effectively throughout 2023.

And one more please. Return involved, please, returns will actually help that as well. We don't expect that to be very large in the beginning of the year. But as that increases, that's going to help us sourcing at the franchise as well.

Okay. Thank you very much, guys.

Thank you. Our next questions come from the line of Daniel Imbro with Stephens. Please proceed with your questions.

Good morning. Thank you for taking my question. I want to follow up on your previous answer. I believe you mentioned that demand at EchoPark was up 30% in January. I'm interested in your thoughts on whether this increase is due to declining prices, the early tax refund season, or other factors. What do you think is behind this significant rise? Additionally, do you believe this trend is sustainable, or have you gathered enough data to suggest that we may have reached a bottom in used car demand at EchoPark?

Jeff addressed this earlier, so I'll contribute by saying that I find it truly remarkable. If you were to attend some of our internal meetings, you would see that things have unfolded precisely as we anticipated, aside from the rapid and historic decline in used vehicle prices. Apart from the speed of that change, our EchoPark team’s expectations regarding used vehicle values have been spot on.

Yeah. 100%, don't think it's a head fake. It's flattened out now in the first quarter. 100% is the average retail selling price dropping. That's the difference.

It's all about the payment.

We've seen a decrease from $31,500 to about $27,000 for EchoPark non-Northwest Motorsports, and we expect this trend to continue downward. It will stabilize until the end of March, possibly into April, before it starts to decline again. As this occurs, we anticipate a growth rate that aligns with our expectations. In January, we sold approximately 5,700 to 5,600 cars, and we anticipate doing slightly better in February. By the end of the year, we project sales of 9,000 to 10,000 cars per month, which would help us achieve a positive EBIT or at least break even, moving into the fourth quarter or the first quarter of 2024. We're optimistic as long as this trend persists, and I believe it is sustainable. The inventory of new cars is returning, and supply levels are rising, particularly domestically. Consequently, we expect to see a decline in used vehicle valuations, which we've been predicting. This is why it's crucial to maintain a tight day supply; if you're dealing with a 40 to 60-day supply currently, you're likely facing challenges ahead. We've maintained a disciplined approach, possibly now more than ever, and we're prepared for these changes, which makes for an exciting time for EchoPark.

And that's a great update. Thank you. And as you've learned more about that demand, it's picking up, what do you think the long-term mix of these older vehicles? Last few years, the 5% to 8% was kind of a plug to meet that affordability headwind. I guess as you see your core coming back, what have you learned about where that 5% to 8% mix could fit? And then what it means ultimately for long-term economics given the higher profitability on those units?

Yeah. Look, it's going to be 15%, maybe 20%. Our EchoPark model is one to five year old cars, and it works and we've proven that. The five to eight year old brings a lot more complexity and they're a lot harder to get, great margin. We agree with you, and we sell them every day in our franchise business, and we're selling a lot of them now at the EchoPark stores. But it's a whole lot easier to sell one to five year old cars in our model. And as that inventory comes back, I think you'll see a drop in the overall mix. It won't go away, it will be higher than it's ever been historically because we like the margin, it's there, but it's just not going to be as big a percent of the mix as it is today. So I'd call it 15% to 20%, somewhere in that ballpark.

Got it. And then the last question for me is regarding the franchise side of EchoPark. I'm trying to understand the long-term effects on your business from the significant decline in lease penetration over the last few years. Given that there is a high mix of luxury vehicles, I would assume your lease penetration was higher. We've observed that decline, which indicates fewer lease returns in the coming years. Will this impact your parts and service business since those customers will visit you less frequently? Will it affect sourcing at EchoPark? I'm trying to consider the implications for years two, three, and four following this notable reduction in leases underwritten over the last couple of years.

Yeah. It hurts. Just you can't say it any other way. I think we'll see 12% to 18% increases in leases this year, something of that nature. It will be primarily in the big lease markets that are driving that but it certainly hurt the business. That's a big chunk of our overall used car inventory for franchises. It usually represents around 30% to 35% of our overall volume. And the high line stores could be higher than that. And they're auction lane cars too for EchoPark. So it certainly hurt us. But with the decline in pricing and inventory coming back, we can find that inventory elsewhere and we're showing that. We're buying more cars today than we bought in a long time at EchoPark and we'll continue to be able to do that as the prices come down. So most important thing is the gap between the payment that you make on a used vehicle and the payments being made on a new vehicle. That gap is why the new vehicle payments are going up, prices have increased, MSRPs are going up, used vehicle prices are coming down. That gap needs to be between 55% and 58% that of a new vehicle payment. And when that happens, it's game on for us.

Got it. And so to be clear, you're not thinking the lack of lease returns will be a hindrance to the core franchise used volume going forward? You can overcome that headwind?

Not any more than it has been in the last 12 months. I mean, it's already been a hindrance, and we expect that to continue. But we're doing a good job in going and sourcing that inventory from the customer that's buying that lease out. The car is not gone. It's there with a customer. They still have the car, and we're sourcing that inventory and buying it from them. So it's just moving from off lease to buy off the street. And as leasing comes back, then that's just a big help to the industry, not a hindrance.

Yeah. This is David. You mentioned before the call, Jeff, about how our team and our business adapt to the changing market. I believe they have become more effective than ever at following up. Our traffic management and our focus on that have been unprecedented in how we reach our customer base to acquire those cars.

Great. Well, thanks for all the color and best of luck.

Thank you.

Thank you. Our next questions come from the line of Rajat Gupta with JPMorgan. Please proceed with your questions.

Thanks for taking the questions. I want to follow up on EchoPark. The last time you were profitable in that business, it was at a much lower volume of around 6,000 to 7,000 cars per month. You're indicating it should be closer to 9,000 to 10,000. Is the difference mainly due to higher fixed expenses in the base or having more stores? I'm trying to understand the reasoning behind this change. I also have a couple of follow-up questions.

Yes, it's a combination of factors. We designed EchoPark for growth, which has led to significantly increased corporate expenses compared to when we were breaking even or profitable at 6,000 to 7,000 vehicles monthly. Now, it’s more like 9,000 vehicles to reach breakeven, a point we expect to achieve before year-end. The front-end margin is crucial as prices drop below $25,000, nearing $24,000, and with depreciation normalizing, we anticipate significant improvements. We're structured for substantial volume, but if needed, we can take measures to reduce overhead. However, we believe maintaining our current strategy is the right choice. Our model is effective, and we’re enthusiastic about it. Our strong franchise business provides stability as we move forward. I hope this clarifies your inquiry.

This is David. We see EchoPark as a long-term investment. We're investing in our EchoPark teams through training and hiring, which is reflected in the numbers. We have a world-class guest experience, as shown by the feedback. We're also continuing to enhance our e-commerce platform. This is a long-term commitment, not just focused on short-term results.

And Rajat, this is Danny. One more point to add there. We've got probably $10 million to $15 million of floor plan interest headwind at EchoPark this year with the higher volumes, to anticipate higher volumes on top of the higher rates that we've experienced and seen come about over the last three to five months. So that's another piece of what has helped us or caused us to raise that overall breakeven volume targets.

And the branding.

Yeah. We'll launch the EchoPark brand in Houston, Texas starting in this month in March. And so there will be some incremental expense that goes along with launching that brand. It's something that we did in Denver at our Thornton location, which is a store that's really almost returned back to pre-COVID levels from a profit perspective and a volume perspective. And we just expect to start seeing that across the entire enterprise as we move through this year.

Got it. Regarding the franchise side, it was 60% in 2022, and you mentioned mid-60s for 2023. Is that mainly due to the moderation of the GPUs, or are there other factors contributing to that increase or other areas of investment you would highlight?

There are a couple of key factors. The main additional investment will be in the IT innovation that we are implementing, which will be applied to both EchoPark and the franchise. The primary challenge is the decrease in growth.

Got it. Just lastly, in parts and services. Any color you can give in terms of puts and takes for 2023 maybe across different segments? Obviously, very strong trends here exiting the year. But how do you see 2023 playing out there? Thanks.

Yes. This is Jeff. Mid- to high-single digit growth, if not a little better. We saw a 12% growth, I think, in January. And we couldn't be more excited about where we are from a fixed perspective. We've got a lot of internal projects going on there, including sourcing technicians, which is really important piece of this overall mix. And so it should be a fantastic year from a fixed perspective.

And to be honest, these internal projects is really the first time that we're putting a focus on traffic management as it relates to service marketing, even at the upside level, some innovative things that the manufacturer is helping us with. So there's a lot more focus on bringing customers in and retaining them than we really have done in the past. So I think we'll see that pay off as well.

Got it. Great. Thanks for all the color.

Thank you.

Thank you. Our next questions come from the line of Bret Jordan with Jefferies. Please proceed with your questions.

Hey. Good morning, guys.

Good morning.

Could you give a little more color on the Powersports segment, sort of ASP and GPU ranges for new and used? And maybe what does the service business look like in that space?

The margins in the Powersports business are impressive. We're seeing front-end margins averaging between $3,000 and $3,500, while back-end margins are around $1,000. We believe we can significantly improve these margins through warranties and related initiatives we're developing. The volume varies depending on whether we're discussing Harley or metric brands. At Mancuso, we offer products like Sea-Doos and Polaris, and we've experienced solid volume since the acquisition, which we expect to maintain. While I wouldn't characterize it as pent-up demand, there is a strong interest in these products. Similar to last year's new car sales, we've faced challenges in availability due to manufacturers not delivering products timely, but that situation is improving. Overall, we have great margins, volume, profitability, and multiples, presenting a clear opportunity. We currently operate 13 locations and plan to invest the next 12 to 18 months in developing our playbooks, processes, and technology to set the stage for future growth.

I would just add that this is David, and we conducted our research. I mentioned earlier that we also met with Harley-Davidson. We really appreciate the team there, their leadership, and we are excited about their direction. The brand loyalty and customer loyalty are absolutely incredible. So we aimed to invest in the top-notch stores, and we believe we succeeded with the acquisitions we've made so far.

Okay. Great. And then a question on incentives. Obviously, you're not big in Ford and Stellantis, but one of your peers was talking about increasing promotional activity. Are you seeing that more broadly across other brands now as supply comes back or is it really pretty localized?

It's localized. We're certainly not seeing that on the high-line brands. It may be just a little bit to incentivize leasing. We do have one very large Chrysler store and Dave Smith Motors, which is the largest Chrysler store in the world. And where that service is really just to stop sales on 2,500 and 3,500 trucks. Incentives are going to come back as inventory comes back. And as that starts rising, and they've got to turn out of inventory, that's going to happen, and margins are going to fall. We're working with our manufacturer partners to make sure they understand keeping that supply at a reasonable level, call that 25 to 35 days instead of pre-pandemic 60 to 80 days is the right way to run this business. And I think they all agree with that. I haven't heard one of them say that they don't because profits are at all-time high. And the only way to screw that up is ourselves. And so I think the manufacturers recognize that, and they'll do a good job of trying to keep incentives down which will keep pricing somewhere in the MSRP range as we move forward.

Okay. And then one last question. I know historically, you were not moving inventory from franchise dealerships to help feed EchoPark. Is that still the case or is there an opportunity to internally source some of the EchoPark inventories you're getting to older cars that maybe you don't want to sell at a franchise dealership?

No, that's still the case. We sell everything at the franchise dealerships unless we have to push it to an auction. So that's still the case. We typically don't move inventory around between the two. We did that Tim Keane and I did that in a different life and that really didn't work. And so we've tried to stay away from that. It's a great idea. But what you end up doing is the franchise stores lose out on volume and you mess up their rhythm. And so we prefer not to do that unless it's just absolutely necessary.

Yes. We wanted the EchoPark stores to be able to survive on their own, what they do.

Thank you. We will now move to our next question.

Good morning. I'm here on behalf of Adam Jonas. So I have a quick question. ABS data is showing that the auto borrowers are starting to feel some pressure. I'm curious on your view on the consumer and demand going into 2023. You mentioned that volumes should be higher and especially with increasing affordability of the monthly payment, but I was just curious on your consumer views going into the year. Thanks.

I mean we haven't seen anything yet that would tell us that consumer demand is just dropping way off. I think it has a lot more to do with the average retail selling price of the vehicle than it does at this point, the interest rate, depending on what happens with rates as we move forward. It certainly can cause some volatility and certainly can cause floor plan issues because our floor plan number is going to be hell a lot higher this year than it has been in recent years. But overall, we've just not seen that. The demand for pre-owned cars is there. And as that average retail price starts dropping, there's pent-up demand there, and we'll see that both on our franchise and EchoPark business. Certainly, it can play a role if you're financing an $80,000 high-line car or a luxury vehicle, that certainly can play a role. We just haven't seen it yet.

And if you look at general industry media, definitely credit is tightening and this is a way. If I look in my one concern going into 2023 is affordability. It's the economy. And as rates go up, I do think that it has a potential of impacting finance penetration. People shop around a little bit more and so the affordability is an absolute concern. We haven't seen it materially impact us at this point, but it is one of our concerns going into the year.

People have been waiting for used car prices to decrease, and once that happens, they are likely to enter the market and purchase the car they have been holding out for.

And we're seeing that now. I mean you look at our EchoPark volume, it's up, like I said, in January, 30% trending the same in February, if not even a little better. And the franchise business is really strong as well used business is really strong. That will continue to get stronger as the prices drop because there's definitely pent-up demand there.

Thank you. We have reached the end of our question-and-answer session. I would now like to hand the call back over to David Smith for any closing comments.

Great. Thank you, everyone. We appreciate you being on the call. Have a great day.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time and enjoy the rest of your day.