Good morning, and welcome to the Sonic Automotive Second Quarter 2025 Earnings Conference Call. This conference call is being recorded today, Thursday, July 24, 2025. 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 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, Chairman and Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

Thank you very much, and good morning, everyone. Welcome to the Sonic Automotive Second Quarter 2025 Earnings Call. I'm David Smith, the company's Chairman and CEO. Joining me on today's call is our President, Jeff Dyke; our CFO, Heath Byrd; our EchoPark Chief Operating Officer, Mr. Tim Keen; and our VP of Investor Relations, Danny Wieland. I would like to open the call by sincerely thanking our amazing teammates for continuing to deliver a world-class guest experience for our customers. We believe our strong relationships with our teammates, our guests and manufacturer and lending partners are key to our future success. And as always, I would like to thank them all for their continued support and loyalty to the Sonic Automotive team. Turning now to our second quarter results, primarily as a result of a noncash charge relating to our annual franchise asset impairment testing, reported GAAP EPS was a loss of $1.34 per share. Excluding these noncash impairment charges and the effect of certain other items as detailed in our press release this morning, adjusted EPS for the second quarter was $2.19 per share, which was a 49% increase year-over-year. Consolidated total revenues were a second quarter record, up 6% year-over-year, while consolidated gross profit grew 12% and consolidated adjusted EBITDA increased 22%. Moving now to our Franchised Dealerships segment results. We generated second quarter record franchise revenues of $3.1 billion, up 6% year-over-year on a same-store basis. This revenue growth was driven by a 5% increase in same-store new retail volume and a 10% increase in same-store fixed operations revenues. Second quarter results benefited from an increase in consumer demand and new vehicle sales in April and early May, which we expect was the result of customers buying in advance of anticipated tariff-driven price increases. Our fixed operations gross profit and F&I gross profit also set all-time quarterly records, up 12% and 15% year-over-year, respectively, on a same-store basis. These two high-margin business lines continue to increase their share of our total gross profit pool, approaching 75% of total gross profit for the second quarter, mitigating the potential tariff impact on vehicle pricing and margin to our overall profitability while also leveraging our SG&A expenses more efficiently than vehicle-related gross profit. Our same-store new vehicle GPU was $3,391, down 6% year-over-year, but up 10% sequentially from the first quarter due to a surge in pre-tariff consumer demand. On the used side of the franchised business, same-store used volume decreased 4% year-over-year, driven by lower supply of late-model used vehicles and ongoing consumer affordability challenges. Same-store used GPU increased 2% sequentially to $1,590 per unit. Our F&I performance continues to be a strength with all-time record quarterly franchised F&I GPU of $2,721 per unit in the second quarter, up 12% sequentially and 14% year-over-year. The continued growth in our F&I per unit supports our view that F&I per unit will remain structurally higher than pre-pandemic levels even in a challenging consumer affordability environment as we continue to fine-tune our F&I product offerings and cost structure. Our parts and service or fixed operations business remained strong with a 12% increase in same-store fixed operations gross profit in the second quarter. Same-store warranty gross profit continued to be a tailwind in the second quarter, up 34% year-over-year, and same-store customer pay gross profit grew 9% year-over-year and 7% sequentially. We believe this continued strength in customer pay revenues is attributable to the increase in technician headcount we achieved in 2024 and our efforts to not only retain these technicians, but to continue to grow our technician capacity in 2025. Turning now to our EchoPark segment. Second quarter segment income was an all-time quarterly record $11.7 million, and adjusted EBITDA was an all-time quarterly record of $16.4 million, up 128% year-over-year. For the second quarter, we reported EchoPark revenues of $509 million, down 2% year-over-year and second quarter record EchoPark gross profit of $62 million, which was up 22% year-over-year. EchoPark segment retail unit sales volume for the quarter increased 1% year-over-year, and EchoPark segment total GPU was an all-time quarterly record of $3,747 per unit, up $669 per unit year-over-year and $336 sequentially from the first quarter. We continue to believe that our data-driven centralized inventory management strategy is a key differentiator for EchoPark, which should help to minimize disruptions from market volatility in the short term while maximizing EchoPark's long-term growth potential. When combined with the strategic adjustments we made to our EchoPark business model, we believe we are well positioned to resume disciplined long-term growth for EchoPark in 2026, assuming used vehicle market conditions sufficiently improve. Turning now to our Powersports segment. We generated record second quarter revenues of $48.1 million, up 21% year-over-year and second quarter gross profit of $12.5 million, up 17% year-over-year. Powersports segment adjusted EBITDA was $2 million, down 13% year-over-year, but beginning to ramp up ahead of what is typically a seasonally strong third quarter. We are beginning to see the benefits of our investment in modernizing the Powersports business, and we remain focused on identifying operational synergies within our current network before deploying capital to expand our Powersports footprint. Finally, turning to our balance sheet. We ended the quarter with $775 million in available liquidity, including $210 million in combined cash and floor plan deposits on hand. Our focus on maintaining a strong balance sheet and liquidity position allowed us to complete the acquisition of four Jaguar, Land Rover dealerships in California using cash and floor plan deposits on hand. And I'd like to take this opportunity to welcome these teammates to the Sonic Automotive family. This acquisition closed on June 30, so there was no impact to our second quarter results, but we do anticipate these stores will contribute approximately $500 million in annualized revenues to our franchise dealership segment and make Sonic Automotive the largest Jaguar, Land Rover retailer in the U.S., further enhancing our luxury brand portfolio. Going forward, we remain focused on deploying capital via a diversified growth strategy across our franchise dealerships, EchoPark and Powersports segments to grow our revenue base and enhance shareholder returns. In addition, I'm very pleased to report today that our Board of Directors approved a 9% increase to our quarterly cash dividend to $0.38 per share payable on October 15, 2025, to all stockholders of record on September 15, 2025. As we told you back in April, we continue to work closely with our manufacturer partners to understand the impact of tariffs on manufacturer production and pricing decisions and the resulting impact tariffs may have on vehicle affordability and consumer demand later this year. To date, we have not seen a material impact on vehicle pricing as a result of tariffs, but that could change as the model year 2026 vehicles begin to arrive at our dealerships late in the third quarter. Despite this uncertainty, our team remains focused on near-term execution and adapting to ongoing changes in the automotive retail environment and macroeconomic backdrop, while making strategic decisions to maximize long-term results. Furthermore, we remain confident that we have the right strategy and the right people and the right culture to continue to grow our business and create long-term value for our stakeholders. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you.

Our first question today comes from Jeff Lick of Stephens.

Congrats on a great quarter again. I was wondering, look, there's a lot of crosscurrents and noise in Q2. Obviously, the beginning of the quarter maybe looks a little different than the exit. You have some tariff deals. I'm just curious of the things, what surprised you the most? What are you pleased with the most? And as we kind of head into the back half, what are the things you think are kind of indicative of how the back half will go versus you might say to the analyst community, hey, those particular metrics, I'd be cautious with those and don't read too much into them.

Jeff, it's Jeff Dyke. Yes, I mean, obviously, the first part of the quarter took off due to the tariff noise. It did slow down at the end of June and was slow a little bit the first week or two of July. But what is surprising a little bit is the business, the back half of July is picking up nicely. We're going to have a great July, and that's not something that we really anticipated. We thought it would be more average given all the noise with the tariffs. Obviously, the Japan deal is going to help. We need to secure something with the EU, but that's a surprise. I'm very proud of our F&I performance. We've worked very hard to increase our product penetration above the 2.0 mark, and we've worked very hard on reducing cost with our partners that provide the products. And the combination of those things has really driven, as you can see in the quarter, a nice, nice increase. And we expect that increase to continue. The $2,700 number is a number that feels good for us moving forward from a franchise perspective for the rest of the year. And then obviously, we're very, very proud of the work that we've done at EchoPark. EchoPark is just on fire, selling a lot of cars, a little more margin pressure, I think, in the third quarter than we might anticipate in maybe the back half of the year. But we're hitting all of our expectations. Obviously, the profit is great, and that's putting us in a position to really begin to expand EchoPark as we move into 2026.

And this is David. I want to highlight that our EchoPark stores still have significant potential for growth and performance improvements in our existing locations, which is exciting. Our team has done an exceptional job. Additionally, our Powersports business is seasonal, and we're thrilled that next month marks the 85th Annual Sturgis Motorcycle Rally. We anticipate around 800,000 attendees and expect to report substantial numbers from this event in the upcoming quarter.

I'm curious about your thoughts on the lease return situation this year compared to next year. I don't want to say it's going to be a boom, but it would be hard for it not to be considerably better than this year. I'm interested to see how that affects both your franchise business and EchoPark.

Yes, that's huge. I mean we are at the bottom of this now. And obviously, as lease returns pick up, that makes a huge difference in our used vehicle inventory and our ability to grow our volume, makes it a lot easier to access inventory. So it's going to make a difference in '26. There's no question, it will help EchoPark as well. And then as we get into '27 and '28, it really gets back to the pre-pandemic levels. And that is a game changer from an EchoPark perspective. It does help our franchise business, there's no question, but it allows EchoPark to have access to inventory that's just really not as accessible right now. We're doing a great job buying more cars off the street. We're hitting at times above 40% of our total mix off the street in trades, which is huge. That's double what we were doing last year. But the lease returns are going to make a big, big difference, and that's just a honey hole that's coming for us.

The next question is from Rajat Gupta of JPMorgan.

I had one question on EchoPark and just one follow-up on GPU. On EchoPark, if you look at just the volume trajectory in the second quarter, obviously, GPUs were very strong. Is there an element over here of trading off one for the other? Because we would have expected volumes to do better, just relative to the industry seasonality. So curious if there is a bit of a change in approach or strategy as to how you want to grow overall EchoPark profits versus just like historically how you had wanted to grow the business? And I have a quick follow-up.

We're approaching inventory management with caution, and Tim can add his thoughts shortly. We're careful about how much inventory we're purchasing while looking to maximize our margins, which is positively affecting our bottom line. I anticipate this trend to continue for the remainder of the year, staying within a similar range compared to last year. Additionally, we have revised our EBITDA guidance from $30 million to $35 million up to a new range of $50 million to $55 million for the year. This doesn't mean we aren't capable of handling more volume; we are simply being prudent to avoid overbuying and the mistakes we see others making. It's not a concern for us, as we can increase our volume when needed. We're focused on managing our gross, profit, and volume effectively, and I believe Tim and his team are performing exceptionally well. Tim, would you like to add anything?

Yes. I mean, the second quarter, we saw a fairly unstable MMR market going on the upside, probably caused by the tariff scares as well. And so we managed through that very strategically, held on to our gross, didn't buy up, kept day supply where we wanted it and thought we managed through that well, and we'll continue to do that through the rest of the year as we see opportunities.

And I think one more point, this is Danny. If you look at the trend in SG&A at EchoPark, despite the fact that we saw that sequential step down in volume, the SG&A actually levered about 110 basis points from Q1 to Q2. So it just proves we've got some flexibility in the model based on the different contributions of gross, be it volume, front-end gross or F&I that we can adapt and flex over the next couple of quarters here as the used market becomes more of a tailwind for us.

It was good to see the decline in SG&A. I have one more question regarding F&I before moving on to the GPU question. You mentioned some changes in your agreements with partners that contributed to the increase in F&I. Could you provide more details on that? Was it related to warranties or lending? Additionally, was this something that was overlooked in the past, and now there are higher entitlement levels? I would appreciate any further insight you can provide.

Yes, sure. This is Jeff, mainly discussing the product side. We issued RFQs and RFPs and renegotiated all our positions, and our team has done an outstanding job. We've been working on this since late last year, and it’s starting to yield significant savings. Our partners are generating substantial revenue by selling their products, and as we analyzed their profits, we saw an opportunity for us to benefit from some of those earnings. This has become a reality. We are not only improving our performance at the store level, but we are also successfully cutting costs. These efforts are aligning, resulting in higher penetration and improved margins. What's particularly encouraging is that even without selling additional cars or products, we are still increasing our profits. This has been a key priority for us this year, just as technicians were a focus for us the first half of last year, and we anticipate these positive trends to continue.

Got it. Got it. That's very clear. And just lastly, just on new GPUs, just more housekeeping question. Any color you could give us on how like the different months of the quarter did on the new vehicle GPU, April, May, June, how that trended, that would be helpful.

Yes. GPUs in the beginning of the quarter were stronger than they were at the end of the quarter.

Yes. As we mentioned, the demand spike that I talked about in our opening comments with the anticipation of the tariffs coming in, people did absolutely rushed out to buy. So...

Yes. I mean we're $3,600 in that ballpark in April, maybe $3,250 in May and $3,300, but it's the end of the quarter, so we get some pickups and stuff in June. But the front-end margin for new is materially higher than what we even anticipated it to be for this calendar year. And I think it's going to stay in the same ballpark that we've been running. There's not any reason for it to massively drop off, which is great. That's a great tailwind for us for the remainder of the year.

The next question is from Chris Pierce of Needham & Company.

Can you just go in deeper on Rajat's question there. If we look at front-end growth at EchoPark, I just want to confirm, is that sort of a change in strategy or it's due to certain market dynamics in this point in time? Because I noticed now you're guiding to total vehicle GPU, not F&I GPU. So I just kind of want to get a sense of if it's just a unique moment in time, you're able to take advantage of that or due to inventory or if it's sort of business as usual going forward?

Look, at the end of the day, we're buying more cars off the street. And as we buy more cars off the street, margin is going to go up. And that's that 40% number I was talking about. makes a big difference there. But we do expect margin pressure in the third and fourth quarter. Used car inventory is moving around. Manheim, as Tim said earlier, the Manheim indexes are moving around. A lot of that's being played off just because of the tariffs. So it's going to be in and around the same ballpark. But if there's $50 or $100 worth of margin pressure there is probably somewhere in that ballpark in total and should get better as we go towards the end of the year, but there's a little uncertainty out there right now, and we'll see how that plays out. Not concerned in terms of the overall volume and the profitability. That should continue to stay solid, that's why we took our forecast up for the year.

Chris, this is David Smith. I want to highlight that we opened our first EchoPark stores in 2014. If you look at our guest experience and market penetration, we are the leading used dealer in many markets. We currently have over 100,000 5-star reviews. A significant part of our guest performance is linked to our customer experience, with many repeat customers choosing to buy from us again. We've even seen multiple sales to the same family, and they often mention that the overall guest experience is what drives them to return. As a result, we have the highest-rated guest experience in the industry.

And Chris, to your point, this is Danny. On the total GPU shift in the guide away from the F&I piece, you've seen now for the last two quarters, we've improved our EchoPark F&I per unit by about $200 a unit quarter-over-quarter, both in Q1 and in Q2 and driven by some of the cost structure negotiations that Jeff was talking about. But that gives us more flexibility in terms of the total gross profit equation for EchoPark, and it's something where if we face front-end margin pressure, as Jeff and Tim have said in the coming quarters, the F&I gains help us maintain that kind of total $3,400 to $3,800 range, which is pretty comparable to what we make on our franchise side despite the pricing differences at EchoPark.

Okay. Perfect. And then just to follow up, you mentioned the RFQs you sent to your existing lenders. Are you noticing new lenders entering the auto loan market, similar to how Carvana is discussing new partnerships? Is this creating a shift in dynamics that allows you more pricing power, or is it more about leveraging relationships with your current lenders as you continue to foster those long-standing connections?

Yes. This is product providers that we're talking about, more along the lines of warranty and GAP and those products that we sell, that's where we're getting the leverage. We're not seeing a run of new lenders coming into the marketplace. Our margin that we're making from financing is relatively the same. Where we're getting our pickup is through product sales and the cost reductions that we're seeing there. And that's just going back and really working hard. The teams worked very hard on restructuring deals, still giving great wins to our partners. There's no question. But sharing in some of the wins that they've had over the years on the backs of our team working really hard to grow their business. And so we want to share in some of that, and that's what's happening. And you're seeing our cost reduce, thus growing our margin, which is great. Like I said earlier, we're not selling another car. We're not selling another product. We can keep the same numbers and have better results because of the work the team has done.

Okay. Perfect. And just lastly for me real quick. EchoPark unit guidance is unchanged, which implies maybe a little bit of a modest pickup in the second half, not pick up, but in a sense of pickup in terms of the growth you just printed at EchoPark units. Is that driven by easier comps in the second half of the year? Or is that just some end market view?

It's a little bit of a combination of the two. If you were to look at the back half of '24, there were some challenges. There were some pockets of consumer weakness on the used car side. So it's a combination of those two things, I think, as we look forward.

Our next question is from Bret Jordan of Jefferies.

This is Patrick Buckley on for Bret. On the franchise used GPU side, with the first half settling a bit above the upper end of the $1,500 annual guide, should we expect some moderation into the second half? And what sort of headwinds could you be expecting there?

I think that we're going to be in and around that number. It could be just a little bit like at EchoPark. July and August, we're just not quite sure from a tariff perspective, what's happening. It's putting day supply pressure and manufacturers are acting a little quirky, trying to get us to take inventory and put inventory in loaner cars and do things that they had been getting away from. So it might put a little pressure, but in and around that number, I feel comfortable. Yes, the volume should be higher.

Got it. That's helpful. And then I guess going off that, as you said, a lot of moving pieces with tariffs you have to shake out. But could you talk a bit about your expectations for new vehicle SAAR trajectory from here and expectations for second half and maybe the annual year?

Your guess is as good as mine. In the quarter, we decreased from 17 million to 15 million. It’s all over the place, but a SAAR of 15 to 16 million seems reasonable unless something unexpected occurs, like another pull ahead. A lot will depend on interest rates; if they drop, that could significantly change things. We’ll have to see, but I believe it will stay within that range.

There are no further questions at this time. I'll turn the call back over to David Smith for closing comments.

Well, thank you, everyone, for joining us for the call. We'll speak with you next quarter. Have a great day.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines, and have a wonderful day.