Good morning and welcome to the Sonic Automotive, Third Quarter 2017 Earnings Conference Call. This conference call is being recorded today, Tuesday, October 24, 2017. Presentation materials which management will be reviewing on the conference call can be accessed at the company's website at www.sonicautomotive.com by clicking on Our Company, then Investor Relations, then Webcasts & Presentations. 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 risk and uncertainties are detailed in the company's filings with the Securities and Exchange Commission. I would now like to introduce Mr. Scott Smith, Co-Founder and CEO of Sonic Automotive. Mr. Smith, you may begin your conference.

Good morning, and welcome to Sonic Automotive's third quarter 2017 earnings call. I'm Scott Smith. Joining me on the call today are David Smith, our Vice Chairman; Heath Byrd, our CFO; Jeff Dyke, our Executive Vice President of Operations; and CG Saffer, our Chief Accounting Officer. I trust everyone has read the documents released earlier this morning. I’ll provide some brief comments and then turn the call over for questions. For the quarter we generated $0.45 per share from continuing operations on a GAAP basis and $0.40 per share on an adjusted basis. Our GAAP results were higher as a result of gains from disposal of a franchise offset by impairment charges, weather-related physical damage costs, impairment charges and legal matters. The third quarter was challenging from an operational standpoint and I’m very proud at how our team responded to the challenges. The hurricanes that affected the southern states impacted so many people. I can’t tell you how many hours our local and corporate team spent repairing our stores from the storms and then dedicating the time and resources to get our associates and our stores back on their feet. We are also grateful to the local leaders and first responders who were tirelessly assisting people in need. All of our stores in the hurricane impacted areas were able to continue operations by September 15. From the reopening dates to the end of the month, store activities in these areas was very strong, more so in the Harvy affected areas than in the Irma affected areas, as people began to repair and replace vehicles. The largest impact we experienced was the loss of fixed operation days during that time we were closed and that is quite noticeable in our results. We continue to see strength and opportunity in the used vehicle and fixed ops and F&I areas of our business, but new vehicles remain under pressure as dealers compete for volume while trying not to erode GPU. We remain committed to returning capital to shareholders and again announced the dividend of $0.05 per share for shareholders of record as of December 15, with the payment occurring on January 12, 2018. Our stock repurchases were fairly robust during the quarter at a level of $11.4 million as we continue to remain opportunistic in our repurchase strategy. We ended the quarter with a remaining repurchase authorization of approximately $107.7 million. EchoPark results were in line with expectations. Our store platform in Colorado was again cash flow positive during the third quarter and moving towards overall profitability. Current plans include opening approximately 10 stores by the end of 2018. We’ll provide some more color on this during our Q&A. At this point I’d like to open up the call to your questions.

[Operator Instructions] And our first question comes from the line of Rick Nelson with Stephens, Inc.

Hey guys, this is Nick Zangler on for Rick here. First off, I’d like to commend some of your efforts that I’ve read about post the hurricane, but you know looking into – you know diving into that post the hurricane, I guess both in Huston and in the Florida markets, how would you describe the replacement demand between the two immediately after and if you could comment on how that demand has continued into October and if that’s tapered off a bit or if it has remained strong quarter-to-date.

Hey, it’s Jeff Dyke. Two different stories when it comes to Florida and Houston, because Houston there were so many flood cars that were damaged and those kind of were all over the board, but immediately after, the business couldn’t have been more robust. We were selling more cars than we ever sold in the marketplace. Gross was good and business continues to be strong today although it’s not as strong as it was you know in the last couple of weeks of September and the first week of October, but still not bad. Florida, we really didn’t see you know a major pick up there afterwards. A little bit, but nothing really, really strong, not anywhere near where Houston is and business has returned to normal you know other than little issues that we’ve had with facilities, electricity and stuff. But other than that business was back to normal fairly quickly and we lost service days there and we lost service days in both. I mean, I would say that’s the worst thing that happened to us anyway in the Florida market.

Got you. Do you expect this replacement demand to have a long tail? Do you think that it benefits you going into 2018?

It’s Jeff again. No, I mean look, I think it’s going to have a benefit and it certainly did in September and it’s going to have a benefit in October. That’s going to wean off in November and we expect to have sort of a normalized December. So it’s a short term effect, not some long term ongoing effect that we’re going to get.

Got you. And the F&I per unit was really strong this quarter. Was that driven in part by the hurricanes, I guess the sales post the hurricanes or more customers are willing to opt into or are they taking advantage of the financing or are they opting into protection plans. Is that what drove the upside there?

It’s two-fold. You know our mix; you know in fact just our F&I numbers are stronger than anywhere in the country. So as the mix goes up, our F&I numbers go up. At the beginning of the year we switched over the JM&A which we announced back then and we just continue to get better every single quarter, every month. So it was an all time [inaudible] record for us and we expect that to continue to grow.

Got you. And then finally, can you just update us on the challenges with BMW and did the hurricane, you know does that benefit you at all in regards to that challenge and what’s just the outlook there going forward?

You bet. Its Jeff again. We’ve got two big BMW stores in Houston, so that certainly helped. But you know BMW is at the bottom of their cycle in terms of product and so while we’ve had a new product series, there is a lot more products to come as we get towards the middle to the end of 2018. So and as you’re aware, it’s 30% of our profit mix and when they struggle its more difficult for us to overcome. But they’ve got a great leadership team and we have a lot of confidence in them and you know we are sitting on their dealer board. We do a lot of things to work with them just because of how much they mean to our business and we have all the confidence they’ll come back. We expect that to continue to be a struggle for us through the middle part of next year.

Great. Thanks you very much guys. I’ll pass it on. Thanks.

You bet. Thanks.

Your next question comes from the line of Colin Langan with UBS.

Oh great. Thanks for taking my question. Can you just like you know put an estimate around the impact of the hurricane within the quarter? I mean it sounds like – it didn’t seem like a big impact on overall volume, I mean if you assume 20% of your dealers are in Houston, it was down a week, maybe was that a 1.5%, 2% impact. Is that the right way to think about it on the full quarter? And then if you take out the Houston impact to the Florida market, I mean is parts and services more stable through the rest of your business or is that down for all related to those markets?

Yeah Colin, this is Heath. You know it’s hard to determine the exact impact because you probably got – even though we can throw in the impact of closed days, you got a lack of business leading up to the storm and then obviously after even they were reopened. So we estimate the impact of both of the storms on EPS basis was between $0.04 and $0.07.

And then on a fixed operations basis, our fixed operations business is good. You know certainly the storm had a role to play. We had one less fixed operations day this year versus last year and we do about $2.5 million. So if you adjust for that, we’re about flat; you adjust for the storm, we would be up normally. So you know fixed operations business is solid. Customer pay business was down about 1% for us overall for the quarter and warranty was up 6%, that’s a problem we’re all facing. The more warranty hours are in the shop, it just takes hours away from customer pay. So that’s something that we’re dealing with operationally, but overall our fixed operations business was solid.

Got it, and just secondly, how should we think about the impact of EchoPark as your – I think you have six stores now is that right, and then you’re going to add another 10 next year. You’re losing I guess roughly at a run rate of a little less than $0.30. I mean does that increase next year? Do those current stores actually start turning profitable?

Yeah, so the current stores, the original few are profitable and then so we’re in a cycle here where you open up a store there’s a run rate where it takes us a few months to ramp up. Our Colorado Springs store ramped up in 90 days to cash flow positive, which was great. That’s probably six to nine months ahead of the fastest store that had done it previously. So you know we’re going to have you know stores that have been on for a while, that are making money, new stores that are going to be ramping up. So I don’t expect it to be any less or any more than what it was this year. It’s probably going to be budgeted about the same for 2018.

Yeah, and Colin, this is CG. We’re right in the middle of budgets too. So we may have a little bit better color on the next quarter call.

Okay, alright. Thank you very much.

Your next question comes from the line of John Murphy with Bank of America.

Good morning. This is Aileen Smith on for John. As you think about EchoPark and your expansion of those stores into markets outside of Colorado, do you believe it’s necessary or even possible to establish a nationwide footprint for that brand or similar in geographic exposure to your core business or are there particular markets like Denver that just make more sense to operate in than others?

Well, there’s certainly more particular market than others – this is Jeff, but absolutely it’s a national brand, a national footprint and we’ll be opening EchoParks in markets where we currently do not have Sonic Automotive new car stores. That’s been our intention all along and we are growing as quickly and efficiently as we can. But you can expect to see an EchoPark in most of the major metros and used car markets across the country.

This is Scott. I think if you look at the model that CarMax has had over the last 25 years and the build out, I think that would give you an idea of what the future looks like for us as far as footprint and markets that we would be interested in moving into.

Great, that’s helpful. And just switching gears on the core business. It appears that gross margins and gross profits per unit are starting to stabilize in the New Vehicle side and your slide deck had indicated that GPU support was aided by the Huston stores. Outside of Huston, are you seeing a similar trend in stabilization in GPUs across your dealerships and do you think that GPUs might hold in at current levels going forward given a more normalization of inventory levels in the quarter?

Yeah, that’s a million dollar question. We actually said last quarter that we thought new car margin for us was stabilizing, and they are. They seem to be if you look at the trend on the chart that we gave you, quarter after quarter after quarter we’re in and round the same number. You know the margins coming in from different ways, not so much how much you make on the car but more incentives that we are getting paid, so it’s heavily dependent upon that and you know that’s the coin toss. That can change at any given time depending on what the manufacturer decides to do, so you know we’ll see. Right now as we forecast 2018 we will forecast stabilized new car margins. With Audi coming with new products, with Mercedes coming with new product and BMW for the back half of the year coming with new product, that’s certainly going to help because new product launches help margins. But there are other brands that are certainly struggling and we are going to look at ’18 sort of flat to this year and we’ll go from there. But it is a big tough question. You know margins have been all over the board in a decreasing trend. They do seem in the last couple of quarters to have stabilized.

Great, and one last one. The impact of the Hurricanes in the quarter on your business and other dealer businesses appear pretty well understood at this point. But can you give us some color on the impact of the California wild fires on your business if any, especially given your over exposure to the region?

Yeah, actually our stores are further south than where the wildfires are, so we’ve had very little impact other than – we’ve have had employees that were focused on, in making sure that they are taking care of just like we did in Huston and in Florida. But overall for our business there has not been a major impact.

Okay, great. That’s very helpful, thank you.

Your next question comes from the line of [inaudible] with Morgan Stanley. Q – Unidentified Analyst: Thank you for taking the question. When we look at guidance for the fourth quarter, it implies a bit of a step-up relative to the third quarter in EPS more so than we’ve seen in the last couple of years. Can you walk us through the basic assumptions on how you see the fourth quarter playing out?

Yeah, this is Heath. There’s a couple of things here. We do see additional volume and business that is related to making up in Harvy and Huston. That’s going to be a driver in October and November and then December always is a very strong month for us and so if we do the math based on our trends and based on historically what we see in December, those are the two biggest items that are increasing in our fourth quarter. Q – Unidentified Analyst: Okay, and then just generally, can you talk about the health of the consumer, what you seeing perhaps outside of the hurricane markets?

I mean the business is good – look, at the end of the day you have an anomaly in the SAAR here for the last quarter and the last month. We expect it to come back down. But you know business has been steady. I wouldn’t tell you it’s terrible and it’s obviously, it’s not as good as it was a few years ago but it’s certainly been steady. We’ve seen a lot worst times and we are expecting to have a decent fourth quarter.

And just to see if you can– I want to add one more point through the fourth quarter, we’ve discussed that we do have expense reduction initiatives going on. If you look at September, we had our best SG&A as a percent of gross and so that is another factor that is going to be impacting the fourth quarter. Q – Unidentified Analyst: Got it, thank you.

[Operator Instructions] And our next question comes from the line of Bret Jordan with Jefferies.

Good morning guys. Its David Kelley on for Bret. Just a quick follow-up on California; could you provide some color may be on your retail performance in that market and parts and service trends as well?

I mean our California market, in particular Northern California has been strong. Our business there is good. The retail business from a used car perspective is up in both markets. I think one market is up 7% and the other 4.3%, somewhere in that market. F&I is really strong. Fixed operations is good, but stronger in Northern California than Southern California and a little bit of that is because we have a big BMW mix is Southern California we’ve been storming a little bit with BMW and that’s driving that.

Okay, great, perfect thanks. And also looking at your day supply inventory chart, you know it looks like supply has come down both new and used here. Is the hurricane playing a role there and I guess how do we think about day supply going forward given some of the production cuts we are hearing from manufacturers these days?

Yeah, a great question. I think we ended at 53 days or something like that on the new car side and we’ve been steady if you follow the trend dropping our new car day supply, one dealing with interest rates hikes and the slower SAAR. And then on the premium side we’ve got a higher day supply in Texas because we’ve moved, oh gosh! 1,500 plus cars pre-owned into the market place to support that inventory. We typically would have 2,500, 2,400 cars in the market and I’ve got maybe 3,200 cars in the market. So from a day supply that’s driven that particular marketing upward so just pulling up the country. I would expect our used day supply to continue to drop between now and the end of the year on the Sonic side and then we start adding EchoPark in stores and adding inventory there, that could play a role overall and I would expect our new car inventory to actually come up a little bit in December as we you know peak for a great selling season at the end of the year and then it will begin to flatten out January, February.

Okay, great and do you see BMW as an outlier from that or is this kind of all inclusive most brand shift in day supply here?

Oh, no! Yeah that was total day supply. You know BMW is right in the middle of all of that.

Okay, perfect last one for me and I’ll pass it along here. I guess could you update us on your EchoPark inventory procurement strategy? I guess what have you learnt, how is that evolving and as we add some additional stores in 2018, how do we think about inventory procurement going forward just for EchoPark here?

Yeah, if I told you everything I’ve learnt I’d have to shoot you afterwards. But we have a warranted fund, but I’m going to keep that under my breath and hold that for ourselves. You will see our inventory management on the Sonic side is the out of Premium Perspective and procurement has always been really strong. We’ve always controlled our day supply in our wholesale and we’ve just carried over those best practices that EchoPark. We’ve learnt a lot from a pricing perspective and from a purchase perspective and as we move down the road we get bigger and more successful and we’ll share some of that.

Alright, great. Perfect. I really appreciate the color. Thanks guys.

Thank you.

And we have no further questions in queue at this time. And I would like to turn the call back over to our presenters.

Great. Well, I’d like to thank everyone for joining us today and hope you have a wonderful day. Thank you.