Good morning and welcome to the Sonic Automotive Third Quarter 2022 Earnings Conference Call. This conference call is being recorded today, Thursday, October 27, 2022. Presentation materials, which accompany management's discussion on the conference call can be accessed at the company's website at ir.sonicautomotive.com. At this time, I would like to refer to the Safe Harbor statement under the Private Securities and Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information, or expectations about the company's products or market or otherwise make statements about the future, such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the company's findings with the Securities and Exchange Commission. In addition, management may discuss certain non-GAAP financial measures as defined in the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables and the company's current record on Form 8-K filed with the Securities and Exchange Commission earlier today. I would now like to introduce Mr. David Smith, Chairman and Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

Thank you very much and good morning, everyone, and welcome to Sonic Automotive's third quarter 2022 earnings call. As she said, I'm David Smith, the company's Chairman and CEO. Joining me on today's call is our President, Mr. Jeff Dyke; our CFO, Mr. Heath Byrd; our EchoPark Chief Operating Officer, Mr. Tim Keen; our Chief Digital Retail Officer, Mr. Steve Wittman; and our Vice President of Investor Relations, Mr. Danny Wieland. I'd like to begin by sincerely thanking all of our amazing teammates, customers, manufacturer, and vendor partners for helping Sonic Automotive achieve another period of record-breaking financial performance, including record third quarter revenues, gross profit, net income, and earnings per share. Highlights from our quarterly results include record third quarter revenues of $3.4 billion, which is up 12% year-over-year. Sonic also posted record third quarter gross profit of $581 million, up 23% year-over-year. This drove us to achieve record third quarter net income of $87 million or $2.23 per diluted share. During the third quarter, we continued to see strong new vehicle pricing, consistent consumer demand for new vehicles, and sustained growth in our parts and service business. While we experienced lower new vehicle sales volume on a year-over-year basis due to ongoing supply chain constraints and limited vehicle inventory, we also continued to see strong new vehicle GPU and a sustained pre-order bank. Our used vehicle volume was consistent with industry trends year-over-year, reflecting ongoing affordability concerns as a result of near-record high used car prices and a rising interest rate environment. I'm happy to say that since quarter-end, we have continued to see stability in our overall business despite macroeconomic headwinds and concerns around rising interest rates, heightened inflation, and ongoing global supply chain constraints. Our financial results reported earlier today demonstrate the fundamental strength of our…

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

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

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

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

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

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

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

Yes, so we opened Tulsa and Sacramento in the third quarter, great expansion for us. We're now over 50% of the market. We don't see a problem getting to 90% of the market by the end of '25. But we're not going to open any stores for the remainder of the fourth quarter, first quarter, second quarter, but we're at an average retail or we're at an average wholesale price right now, down from 31,500 to just below 26,000 that we're buying in the auction lanes. We expect that to continue to drive, John, that's going - the rental car companies are out of the auction lanes, some other competitors are struggling, so we have access to inventory and as prices drop, EchoPark, this is a great time for us because recession happens, it doesn't happen, but things are slowing down and that's when EchoPark really thrives. So these prices are going to drop, I think that by the middle of next year we'll be buying in the auction lanes, maybe in the 23,000 to 24,000 range and that's where the average monthly payment gets back down to where it was pre-COVID somewhere in that 450 range, last quarter, we - on average customer paid $630 with warranties and everything wrapped in, it's still too close to the new car payment. So we'll tap the brakes here for a couple of quarters, get back to really focusing on the EBIT situation at EchoPark and what's going to create positive EBITDA is just that average price in the monthly payment for the consumer to continue to drop. We're really excited, we had an EchoPark senior management team the other day. The team is pumped up. We see the volume coming back. Our big store in Thornton in the month of September…

That's helpful, thank you, guys.

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

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

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

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

Thank you for clarifying that.

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

Thanks, John.

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

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

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

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

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

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

Yes. Thanks for the question. The fixed - the expenses from an SG&A perspective are pretty fixed at EchoPark that's when we had big volumes, you see the kind of profit we got out of Thorton. If you look back, you look at August, we're a little below 4,000 cars, you look at September, a little above 4,000 cars, you look at October, we're a little above 5,000 cars, we expect that to continue to grow. We're going to do better in November, better in December and it is a volume piece. Our big stores need to be at that 400 level in order to breakeven and then once they fly pass the dollars bottom line quickly, and again that's what you see happen at Thornton. We believe that the prices on the wholesale market for a one-to-four-year car going to continue to drop. Like I said earlier, the rental car companies are coming out of the lanes, some of our competitors having a lot of problems, so inventory is there for us and if for some reason the wholesale prices stop dropping, we would have to take some different - different strategical moves in order to get to positive EBITDA, but we just don't foresee that. We've been saying this all year, we've been predicting this is what's going to happen and it's happening, just exactly as we've laid out and we think as we move into the first quarter, we'll see continued drop. I think by the end of this year, Rajat, we're going to see $24,000 price point at the wholesale loan, which is great for us, that gets us below that $500 monthly payment, and we think that that'll maybe flatten out a little bit and then continue to drop a little more as we move…

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

It's common.

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

Yes. So we're building our '23 budgets now or in the budget season, from a front-end perspective on new car, I think margins maybe the back half of next year we get to 4,500 box somewhere in that ballpark, certainly not in the first half. It's going to be 6000, 5500, 5300 somewhere in there. We're going to have more new car volume next year just because the supply is going to be bigger. I think our used car business will be real solid, just real strict inventory management and our gross will be there, it will be solid, maybe on a PR basis we step back a little bit in F&I, but not a lot, I mean if it's 25 bucks a car or something of that nature, but the overall gross revenue is going to grow just because the volume will grow and then our fixed operations business is on fire. We're growing that each quarter, we had a record quarter all-time quarter last quarter and that's going to continue to be good. So as I'm looking at next year from a gross perspective, it looks a lot like this year to us in total gross dollars. I think that maybe we're up a little bit, I think in our latest budget, we had maybe $12 million more in gross in our budget than we did this year based on how we think this year will end, but it's going to look a lot like this year from a gross perspective, and then Heath has got some SG&A.

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

And the total gross dollar comments, flat next year, the gross profit dollars, just for the franchise business, is what you're referring to or as the overall company?

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

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

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

Yes, that's how we see it.

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

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

Thank you.

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