Good morning and welcome to Sonic Automotive's First Quarter 2021 Earnings Conference Call. This conference call is being recorded today, Thursday, April 29, 2021and presentation materials which management will be reviewing 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, Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

This is Sonic Automotive. That was very choppy from our perspective. I want to be sure that the listeners can hear. That must a bad connection.

Yes. Everyone can hear.

Thank you very much. Good morning, everyone and welcome to Sonic Automotive's first quarter 2021 earnings call. I'm David Smith, the Company's CEO. Joining me on the call today is our President, Mr. Jeff Dyke; our CFO, Mr. Heath Byrd; our Executive Vice President of Operations, Mr. Tim Keen; our Chief Digital Retail Officer, Mr. Steve Wittman; and our Vice President of Investor Relations, Mr. Danny Wieland. First, I would like to thank all of our team mates, customers, manufacturers and vendor partners for helping us achieve another record quarter. During the first quarter of 2021, we continue to build on our strong momentum coming off record adjusted earnings in 2020. We generated record first quarter total revenues of $2.8 billion, up 21% on a year-over-year basis and record first quarter EPS of $1.23 per share, tripling our adjusted EPS of $0.40 per share in the first quarter of last year. These results were driven by strong performance in our franchise dealerships, and another all-time record quarter for our EchoPark business, reflecting increasing consumer demand and continued execution by our team. I'm pleased to report positive trends in the first quarter have continued into the second quarter, and we continue to see strength in all facets of our business. We remain extremely confident in our long-term growth targets based on our current results and near-term outlook and the increasing number of Americans that are receiving vaccinations and beginning a return toward normalcy. Given these trends in our progress to date, we are confident we can attain our goal of more than doubling total revenues to $25 billion by 2025, and significantly increasing profitability going forward. In our core franchise dealership segment, first quarter revenues were $2.3 billion, a 15% increase from last year. Total franchise pre-tax income was $70.5 million,…

[Operator Instructions] Your first question comes from Rick [Technical Difficulty]

Thanks. Good morning. Great quarter. Can you hear me, okay?

It's a little bit choppy, Rick, but go ahead, we'll make it.

Yeah. I think that [Technical Difficulty]

Yeah. So, Rick, this is Jeff. We ended the first quarter with a 43 basis point new car inventory. So we're certainly in good shape. I break it them then to three - buckets. What's reinforcing domestic, domestic maybe the hardest. And I think May it's going to be the toughest month in terms of that. Digitally [Technical Difficulty] product in from other parts of the world. We got inventory - and so we should enjoy second quarter and of course great margins. And those margins are going to continue. I think will continue through the rest of the year. Imports and domestic are going to get harder with domestic from our perspective to [Technical Difficulty] is really going to help us as we work through more difficult conditions in second quarter.

[Technical Difficulty]

[Technical Difficulty] And what happens, January, February, March is really, really good. And after this doing this for a long time, this last couple of months are something best we have ever seen. The auctions you know, obtained more money for cars right now because there is inventory out there as yet, in particular in our one- to four-year-old category [Technical Difficulty] in the first quarter, and continuing growth pattern to over 100,000 cars for this year.

Okay. [Technical Difficulty]

Thanks, Rick.

Next question is from Rajat Gupta with JPMorgan.

Hey, good morning. Hopefully, a little better from here, but give it a shot. On the EchoPark can you talk about Jeff, EBITDA levels are just to match 2019 levels in 2021, $20 million to $22 million, given the start you had to the first quarter with $6 million [Technical Difficulty].

Yeah. Rajat, your questions is a choppy, but I think I got it. I think [Technical Difficulty] EchoPark, we gave you guidance in the beginning or at the end of last year, beginning of this year, February, that we're going to have about $12 million to $14 million drag. We only had $600,000 drag in first quarter, but we still expect to have that $12 million to $14 million drag for the year. And still sell more 100,000 cars are being lot faster than we thought. We nearly hit 300 cars [Technical Difficulty] in margin. We made $125,000. Usually that's taking a couple of months to get that done or six months to get that done. We're just moving a lot quicker, that we've anticipated. And we can see that happening in Birmingham, also ramping up a little faster. Maybe there is some good news there [Technical Difficulty] that $12 million to $14 million range. And we can update you in the second quarter as to sort of what we're seeing on our newly opened stores, but certainly, the stores are opening right now are improving a lot faster than the stores that we opened last year. We just learned a lot. We're executing better, we have people in the pipeline to go out and meet our stores, have been a really good, fully mature team in the Phoenix, it's playing been for a while, and it was just like turn on the light switch. We just went straight to almost 300 cars and made money, and hopefully we'll be able to do that more and more up as we move forward. A - Danny Wieland And I think the one thing, this is Danny, and I would add to that, is it up to five locations we opened in the first quarter, four of those were conversions and the acquisitions we did in New York and in Maryland. And one of the benefits to the acquisitions is they do come online, much more quickly, there's much less pre-opening, much less delay [ph] The remaining 20 stores that we have this year will be more greenfield like Phoenix, like Birmingham, like Charleston which we've opened in the last month or past. So that's where the majority of drag comes from, it is going to be back weighted. And that's one benefit of having the flexibility and doing acquisitions versus during the traditional greenfield that we do in the EchoPark.

Yeah. After that the synergies platform, it just topped on, hold over 300 cars and its profitable just immediately there so, we're hoping that and expecting that in our platform in Baltimore we did same.

Got it. [Technical Difficulty]

Rajat, this Heath Byrd. It's really choppy. But I think heard capital allocation. And again, our priorities have not changed, EchoPark will be the main area of capital allocation. But it is interesting, because of the success of the franchise and what we're seeing, as well as how quickly EchoPark is becoming profitable and creating net EBITDA even with the drag. We do see opportunity. We get a lot of opportunities for acquisition on the franchise side. And for the first time, we're starting to get a little more active on that side. And because of the free cash flow, we're producing, we got the opportunity to continue growing EchoPark, as well as look at some of these opportunities on the acquisitions on franchise. Of course we raised the dividend, which were part of the capital allocation, 20% returning capital to shareholders and we did get the share repurchase authorization, I think you can see we bought almost 1 million shares back in Q1 like $44. We believe it's undervalued. We believe it's undervalued now. And so opportunistically we'll continue looking at share repurchase as well.

Got it. Great.

Thank you.

Thank you.

Your next question is from Mark Jordan with Jefferies.

On the EchoPark side as you move to increase your mix of purchases directly from South Carolina…

Hey, Mark, this is Jeff Dyke. Now, the problem with that is when you're buying cars off the street, we have one- to four-year-old model. Customers are bringing one- to four-year-old cars to sell. Typically they're still upside down, whatever. So you can see, some of our competition is out there buying a lot of cars off the street. But they're buying 5, 15-year-old cars, not one- to four-year-old cars. And majority of those cars are going to the wholesale market. So it is not growing, it is a source for us. And right now there's as a percentage of our overall sales, is in the 10% range. But it is never going to be a big, big source for us, because of the nature of the business and customers not selling that, one- to two-year-old car straight off the street. So our sourcing is coming from the auctions where we're buying a lot of vehicles. Obviously, we're buying some of them off the street. And then we're enjoying, being able to buy some from our new car dealership. So the combination of all that allows us kind of to carry the inventory levels we've prepared.

And this is Heath. I would just add to this as well. As - when we buy from the auctions, we have a very predictable product, we buy at very high condition range. And so that allows us to keep the recon low, and to do it quickly. And as you know we've returned the vehicle very quickly. And so you get very predictable source of supply depending on when you go out the street, you've got some of that - that take a lot more return and a lot more time to get through the line. So that's another component of why we focus on the auction.

And I'd add one more thing we got. Our trade ratio of EchoPark is running almost 70%. And so we are getting inventory from trades. And then the great luxury of that is, the trades that don't fit our one- to four-year-old models are being moved over to our franchise side of the business. And we're selling the heck out of those cars. That's just a big home run for us.

Okay, great. And then can you talk about the differences in F&I on the EchoPark side between customer that might show up in store and some of them are like buying online?

I think you're saying that F&I, I'm sorry to say, choppy, Mark, I think you're saying that performance in F&I online versus in-store and…

Yeah…

That's the one thing that we've learned a lot about. It's - we can sell up an iPhone [ph] products, particular when e-commerce platform comes along to make it even easier for our consumer to use our platform. You know we're going to be, we'll see that - there's really not going be a big difference between the F&I, online versus F&I for selling in stores. And Heath, can you add to that?

Just to add to that. I mean, that's exactly where we've seen the penetration with F&I products online, about the same even a little bit better than in-store because we offer that transparency to the consumer. They can really understand what the product does and how it helps them over the short and long-term.

Okay, great. And then just any change on the part [Technical Difficulty]

Yeah. That's been a great story for us so far this year. We're running up against 19 in the first three months of the year, up 9% in customer paying. Our warranty is down about the same, but it looks even better, if we get into April, we're running at 15% in customer pay. And that's just a big home run. So we feel like fixed operations is back from a CPE perspective. And that's just going to be huge for us as we move through the rest of this year, in particular, the back half of last year where customers are really more travelling and it will be huge in California, obviously, where we have a huge footprint. That California reopening will be a big addition to this. So far so good. That kind of growth in April versus '19, not '20 is really fantastic for us.

Great, thank you.

Thank you.

Thank you.

[Operator Instructions] And your next question is from John Murphy with Bank of America.

Good morning, guys.

Hi, John

Good morning.

[Technical Difficulty] The EchoPark inflection point, it sounds like it's right on the almost immediate horizon. Is that sort of a second or third quarter event or is that more like '22 and '23, when enough stores have been opened - that you know, opening 25 stores a year matters less on the cost ramp? I'm just trying to understand the inflection point on EchoPark?

Yeah, so '22, I mean, look, we are really having some great success with these stores we're opening right now, and getting them profitable and then selling right immediately the three-year cars, but we're still opening more stores this year than we started the year with. And that'll be the last time that happens. So '22 is going to be the - there's really going to be the inflection point here, where you really start seeing the profitability compared carrying the drag and really not having as big of an impact on us, we're just doing right now. But it's - put down the gas pedal, we know we have a model that produces both volume and profitability. We slowed down in order to speed up. We've done all that and we're going to have a bunch of stores this year, and EchoPark is really picking up. It's a lot of fun to watch. While years going into this big number thought here, we're today, we put a decade into getting this all right. And we've learned a lot and now it's just be a great year, even that we have that $12 million to $14 million for the drag, the inflection point comes in '22.

To emphasize our team is really - we made so much progress in how we opened stores both the scalability of the - the cost is going down and the speed to market is going up. But our training and the way we bring, as Jeff mentioned earlier, the Phoenix store track on those 300 cars in the first month and then the addition of the acquisitions of this you know, like used cars in e-commerce and we brought online quickly integrated. And they're now EchoPark stores and so the speed to market, I think, is a huge part of our growth story.

The only thing I'll add more and more about John, the other thing we're doing is building our management bench and so there's a lot of you know, investment going into that right now. We didn't see quite as much in the first quarter, but you're going to be more in the second and third quarter. That's why you know, the 600,000 drag in the first quarter was just sort of under-stated. And that's why we told, that we'll still be in that range for the year. And if you want to look at anything sort of Phoenix when we put the right management team to strengthen on day one it just was up and that's exactly what happened. And so, we're adding more and more people in order to help with this aggressive rollout schedule to be added to the rest of the year.

You anticipated my next question, on human capital. What is the cost of developing general managers either internally or searching them externally for all the stores that are being opened?

Yeah. We have several layers of management. And we have plans to basically have each layer continue to move up as we open stores. We've had to go to the outside a few times, we bring them in six months early to look at that capacity in the stores for future openings. And so we're ahead of that schedule and don't forget about it, and we expect the part of the drag that Jeff was talking.

John, that was 17.

Okay, thank you. And then just last one. On gross margin, how sticky, do you think this is ramping on the new side, I mean, on the new side, it seems like part of this size is going?

I mean, I think I understood your question, John. Again, sorry, it's a little choppy. But the new car margin, one of the things that's great is the manufacturers are learning and have learned that they're going to - they're going to keep doing supply side. That Force made announcement, BMW has made announcements and supplies are going to stay flat, and keep margins up. So I think more than stick and who knows, if they are going to be quite as good as they are right now with - but certainly not going back to pre-pandemic day. I just don't see that happening. In the used car margins are good too. We sort of run at a little lower margin on the front, much higher margins on the back in many of our competitors and you combine that it gives us a total growth of package on a per rig car basis, but typically puts us you know, up in the top one or two of our competitors. And so I think you said margins are going to the stay strong. And remember on the EchoPark model, large model that have no margin. Our models drive traffic through being $2,500 to $3000 price point of the retail market, sort of wholesale price in retail. And so you're going to see us in that minus 100 to minus 300 sort of range that may move around a little bit depending on what's going on wholesale markets that certainly will drive the big volumes that our model requires from an EchoPark perspective.

Great. Thank you very much.

You bet.

And there are no further questions at this time.

Okay. Thank you very much, everyone. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.