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Edited Transcript of SAH earnings conference call or presentation 24-Oct-19 3:00pm GMT

Q3 2019 Sonic Automotive Inc Earnings Call

CHARLOTTE Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Sonic Automotive Inc earnings conference call or presentation Thursday, October 24, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Bruton Smith

Sonic Automotive, Inc. - CEO & Director

* Frank Jeff Dyke

Sonic Automotive, Inc. - President & Director

* Heath R. Byrd

Sonic Automotive, Inc. - EVP, CAO & CFO

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Conference Call Participants

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* Armintas Sinkevicius

Morgan Stanley, Research Division - Associate

* John Joseph Murphy

BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst

* Mark David Jordan

Jefferies LLC, Research Division - Equity Associate

* Nels Richard Nelson

Stephens Inc., Research Division - MD

* Rajat Gupta

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Sonic Automotive Third Quarter 2019 Earnings Conference Call. This conference call is being recorded Thursday, October 24, 2019. 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 Webcast & 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 the 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, Sonic and EchoPark's Chief Executive Officer. Mr. Smith, you may begin your conference.

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David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [2]

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Thanks very much. Good morning, and welcome to Sonic Automotive's Third Quarter 2019 Earnings Call. I'm David Smith, the company's CEO. And joining me on the call today are our President, Mr. Jeff Dyke; our CFO, Mr. Heath Byrd; and our Executive VP of Operations, Mr. Tim Keen. We are very excited to share our results with you all.

First, we want to thank our teammates, customers, vendors and manufacturer partners for helping us achieve an outstanding third quarter. Sonic Automotive increased diluted earnings per share from continuing operations in the third quarter by over 83% compared to the prior year quarter. Earnings per share from continuing operations were $0.66 per diluted share compared to $0.36 per diluted share in the prior year quarter.

EchoPark continued to build upon its success from the prior quarter, and we believe revenues will now exceed $1.2 billion for the full year of 2019, which would represent a 71% increase over 2018 annual revenues. EchoPark's revenue for the third quarter of $312.2 million increased $126.3 million, which is up 67.9% compared to the third quarter of 2018. This increase was driven by a retail unit sales improvement of 71.6%. EchoPark also improved its pretax profits during the third quarter of 2019 by $7.6 million or up 138.9% compared to the third quarter of 2018.

As we continue to grow our top line revenues, absent the effect of new store openings, we expect a disproportionate amount of gross profit to flow to the bottom line. It's very important to note that the EchoPark growth story is not just about the number of traditional bricks-and-mortar locations. Through our proprietary EchoPark technology and our echopark.com website, we are drawing customers from over 140 markets across the United States to our only 8 existing locations. Our customers have shown they are very happy to travel to our EchoPark locations for our industry-leading guest experience. While we believe our existing EchoPark stores have much more revenue and profit growth potential as they mature, we're also very excited to announce we'll be ramping up our growth strategy as we open new EchoPark locations in major metro markets in California, Georgia and Florida that will give us a nationwide footprint by the end of 2020.

Our core franchise stores also had an outstanding third quarter. Our franchise stores benefited from overall higher gross profit from used vehicles, Fixed Operations and F&I during the quarter. Notably, F&I gross profit improved $14.1 million from the third quarter of 2018. This was an improvement of $217 per unit retailed, up 15.2% compared to the prior year quarter. These increases in gross coupled with active expense management resulted in a $10.3 million increase in franchised store pretax income, which is up 36.8%.

Some other highlights for the third quarter of 2019 on a total Sonic consolidated basis include an all-time quarterly record pre-owned unit sales of 42,453 units; an all-time quarterly record F&I gross per retail unit of $1,771; an all-time quarterly record F&I gross of $126.8 million, an increase of $28.8 million or 29.3% from the third quarter of 2018. Our same-store Fixed Operations gross increased 7.3% during the third quarter of 2019.

SG&A to gross profit ratio of 76.7% in the third quarter of 2019, an improvement of 350 basis points compared to 80.2% in the prior year period.

Inventory days supply for new units was only 63 days. Inventory days supply for pre-owned units was just 27 days, down 4 days from the prior year quarter. Lastly, we are also pleased that our Board of Directors approved a quarterly cash dividend of $0.10 per share payable on January 15, 2020 to all stockholders of record on December 13, 2019.

At this point, we would like to open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is from the line of John Murphy with Bank of America.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [2]

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Just a first question on F&I. It sounds like it's a point of strength because you're focusing on it, but it seems like there's some incremental opportunity there. I'm just curious. As you think about F&I PVR or sort of the best-case scenario, what is sort of the highest that you think you get on any individual transaction on average, so we can understand maybe sort of the headroom there and maybe what the components of it are? I mean it's like $300 or $400 on origination fee, but there's a lot of other stuff going into this number. Trying to understand the opportunity.

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [3]

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John, this is Jeff Dyke. The warranty penetration is what really drives a big piece of that, and there's a lot of upside left. I mean AutoNation is sitting out there. They haven't announced their quarter, but last quarter, they were $1,900. We're sitting at $1,771, I think was the number we announced. So I certainly could see a $2,000 number. I mean there's plenty of upside there. Our warranty penetrations can get even better than they are today. We've got plenty of upside there. We run almost 40% penetration on the franchised side. We're running mid-50s on the EchoPark side. So as we train better with Ally and with JM&A and our partners, we'll get better. There's plenty of upside there for product penetration. It's not so much on the rate that we're getting, that's sort of settled in, but the product penetration is where the opportunity is, and there's still plenty of upside there for us.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [4]

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Okay. That's very helpful. When you -- and then second question on EchoPark. I mean when you look at new markets that you're heading into -- I think it was Slide 23 of the deck you guys put out this morning, you showed sort of the medium and large stores. When you identify a new market that you're going into, I think Long Beach, California is what you kind of had talked about as sort of the next market. I mean, how are you identifying that market? And it would seem that you'd want to be going into new markets where you're doing the larger-format stores because you're getting better profits and returns there. I'm just trying to understand sort of the nexus of sort of the decision-making process and how you're thinking about this growth.

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [5]

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Well, number one, it's data-driven. So when you look at the Long Beach market or the L.A. market, it's the largest 0 to 4-year-old car market in the country, so it's a huge opportunity for us. Our market share continues to grow in these markets. And we sort of started off at 4% or 5%, 6% market share. Now we're seeing double-digit share in some of our more mature stores. So we're going where that 0 to 4-year-old market is. And the markets that David called out earlier, those are big, big potential markets for us, but there's plenty more across the country. And those markets, for us, are just a stepping point to reach out to other markets all over the country. We're selling now, those 8 locations, into 140-plus markets across the country, and so this just gives us a great footprint across the U.S. to continue to drive that percentage higher.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [6]

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And the format of the store, on Slide 23, you have large versus medium. I mean why would you ever consider doing a medium as sort of you're greenfielding facilities if you have better returns on that.

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [7]

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There's an opportunity -- opportunities come around when we have -- to be able to buy real estate. So that drives a little bit of it as well and the speed in which we can move to get that done.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [8]

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Okay. And then just I'll follow up on this. When you look at EchoPark versus your used vehicle business inside of your existing new vehicle franchise dealers, have you find -- found any sort of cannibalization or any kind of conflict that you've come across that have been maybe less than optimal? Or is there something that you could share that would be -- show there's really not a big issue here at all between the 2?

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [9]

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Not at all. I mean it's a huge help because all the trades ...

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David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [10]

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It's obviously the opposite.

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [11]

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Yes, it's the opposite. With all the trades that we're taking at EchoPark, we push those cars that are older than 4 years old into the Sonic stores, and we're selling a lot more cars. An example of that is our Toyota store in Denver, Colorado is selling well over 300 cars now, a lot from trades that are coming from the EchoPark stores. So it's made -- it's been a huge help for us to have the EchoPark stores in markets where the Sonic stores are located.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [12]

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Okay. And then just lastly, sort of a more random question. I mean has there been any change in the relationship you're seeing with the automakers? And it just seems like, I mean, there's some sort of change that's kind of been talked about with Nissan and their dealer support. But is there anything else that's going on in the relationship between the automakers and the dealers that's either good or bad that you've seen occur in the last quarter or 2? Or is it more status quo?

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [13]

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No, it's actually, I think, getting better. I mean, I think that the manufacturers are thinking outside of the box. They're not -- they are so focused on these huge facilities, much more technology and efficiencies. And I've participated on a lot of different dealer Boards, and I'd tell you what, our relationships have never been better. Our partnerships are great, and I think it just keeps getting better. And I see no downside to that as we move forward.

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David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [14]

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Yes. This is David Smith, and I would echo that. It seems like we are working together with our manufacturer partners better than I've ever seen it since we went public with Sonic in '97.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [15]

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Do you feel like they're leaning into you as large -- I mean large, well-run companies are willing to commit capital and create a good customer experience maybe more than they have in the past and they understand that and that might advantage you versus some of the smaller players that can't necessarily keep up?

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [16]

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I certainly think that, that is a big opportunity. I mean they're leaning on us for technology, for guest experience, and success breeds that. And so when you're selling a lot more cars, they become very interested in you. And we're seeing that right now. We're selling a lot more new cars, we're selling a lot more certified pre-owned cars. Our service business is good. And so it's all clicking, and that makes a big difference.

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Operator [17]

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Your next question is from the line of Rick Nelson with Stephens

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Nels Richard Nelson, Stephens Inc., Research Division - MD [18]

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Was there an impairment at EchoPark that was not added back, that adjusted results would have been even better than what you printed this morning?

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Heath R. Byrd, Sonic Automotive, Inc. - EVP, CAO & CFO [19]

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Rick, this is Heath Byrd. That is accurate. We had about a $1.1 million impairment related to real estate.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [20]

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Got you. At EchoPark, I'm looking at the expense ratio, 75.3%. We're seeing a decline in SG&A per store from a dollar standpoint. Is that accurate? And I guess, what is coming out of the ...

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Heath R. Byrd, Sonic Automotive, Inc. - EVP, CAO & CFO [21]

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Rick, this is Heath. I didn't hear everything. But it is accurate that the SG&A is improving because of the leverage that we can get on the EchoPark stores compared to the franchised stores.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [22]

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And is SG&A per store actually lower?

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [23]

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At EchoPark than it is at Sonic franchised stores, yes.

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Heath R. Byrd, Sonic Automotive, Inc. - EVP, CAO & CFO [24]

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Yes.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [25]

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But at EchoPark, you're also seeing declines in SG&A per store?

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Heath R. Byrd, Sonic Automotive, Inc. - EVP, CAO & CFO [26]

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Yes. The gross is also up so that's driving part of that.

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [27]

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That's correct.

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Heath R. Byrd, Sonic Automotive, Inc. - EVP, CAO & CFO [28]

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And as we have more locations, obviously, there's not a lot of expense creep on the management company side. So that pretty -- stays the same regardless of how many stores that we open. Therefore, it will help our SG&A as a percent of gross.

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [29]

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As we open these next 3 markets, we're not going to have to add, if any, to the operating company. So you just have better flow-through and more efficiencies. That's part of the model.

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David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [30]

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And Rick, this is David. And I would say that our team has gotten a lot better and more efficient about the speed and the time that it takes to get a new location open, and getting it up and running and profitable has changed it a ton over the last 4 or 5 years since we started this.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [31]

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And would you expect Long Beach to be dilutive in the fourth quarter?

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [32]

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Not a lot, I mean some. There's going to be some carrying costs but -- maybe the fourth quarter a little bit and the first quarter, right? It's sort of $1 million on the front of opening and about $1 million worth of drag once we get it opened for a couple of months. So there's going to be some dilution in the fourth quarter and then on into the first quarter.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [33]

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And I'm curious about the share count also. From 2Q to 3Q, it was up about 1 million shares.

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Heath R. Byrd, Sonic Automotive, Inc. - EVP, CAO & CFO [34]

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That's correct. We didn't buy any back as you can see from the slides. And so it does increase because of where we are from an incentive compensation standpoint at the current time, so we had to start going ahead and accounting for the additional shares.

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [35]

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And Rick, this is Jeff. As we open more markets for EchoPark, you can expect each market to have about a $2 million drag. So $6 million to $8 million is what you should sort of target for 2020 as we move into next year and start opening these other markets in terms of drag for the new locations.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [36]

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And is the kind of plan still 3 stores for next year? (inaudible)

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [37]

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Yes, 3 markets. And right now, you're in the 3 rooftop range, but that doesn't mean that there won't be some other opportunities there for us. We'll see. But then the current store base will continue to grow in profitability. And we've seen that each quarter this year, which has been just great.

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David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [38]

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Yes, we can't really emphasize that enough, Rick, that the existing stores have a lot of runway left to grow.

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [39]

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We're at about half maturity, somewhere, is what we're thinking. So we've got a lot of upside in the 8 locations that we have and selling into more markets. Again, we're selling into over 140 markets in those 8 locations, and that number is just going to continue to grow. It grew 20 markets from the last time we had a call, so.

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David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [40]

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And just to be clear, that's 3 additional stores on top of Long Beach, so a total of 4.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [41]

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Right, right. And how many stores do you think over the long haul for EchoPark? How many do you need to...

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [42]

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Yes. It's not really rooftop count that we want you to focus on. It's just what we can penetrate and where we strategically place those rooftops. Again, there's just a lot of throughput that we can get out of these locations. And so who knows? I mean the number could be 25, it could be 100. Who knows? It just depends on our penetration as we open up strategically locations around the country so that we can penetrate out further and further from the base markets that we put the stores at.

And that's real important -- that's a real important fact as we move forward. It's not rooftop count, it's how many markets we can penetrate using the technologies that we have and the great, incredible guest experience that we have. The guests are saying, "Hey, we'll travel a long way to come to you because we like what you're doing so much."

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David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [43]

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And Rick, this is David. And some of the key to that is that they really -- our customers would prefer to come and see the car before they actually complete the transaction.

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [44]

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And that's what they're telling us.

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Operator [45]

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Your next question is from the line of Armintas Sinkevicius with Morgan Stanley.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [46]

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When I look at your GPU and the F&I that you're getting at EchoPark, roughly $2,200. And I compare that to the online-only competitor here running at about $3,000 last quarter. Your growth being comparable to them, it's interesting to see the profitability here. And what surprises me is your SG&A as a percentage of gross is significantly lower here. And I think at the Laguna conference, you said 55% to 60% SG&A to gross. How are you driving that lower SG&A/gross if we compare it to the online platform where you would expect the SG&A to be lower because it's effectively call center reps versus employees at the store level? So if you could compare the 2, just where are you able to see more efficiencies on the SG&A line?

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [47]

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Yes. I mean our operating platform is a heck of a lot cheaper to operate and way less complicated. We don't have a whole bunch of people going around trying to deliver cars to individual [clients]. That creates a lot of expense and a lot of complexity. We don't have those complexities in our model, and the customer is coming to us. So it's a heck of a lot easier to operate. We don't spend the ad dollars or anywhere close to the ad dollars, and we sell -- our technology allows us to sell a lot more cars per associate. So -- and our average sales associate, or experience guide is what we call them, is approaching 20 units an associate. The industry average is around 9. So our efficiencies are a lot higher. Our model is a lot less complex and a lot more effective from our perspective.

We just don't see how -- I'm not saying that it's not going to be part of the model as we move forward, but we don't see ever us delivering each individual unit all over the country. That operating model is very, very expensive, very, very complex. And we're going to always be able to operate at a much lower SG&A, from my perspective, because of the least amount of complexity that we have in our operating model. And we built the model that way. So the throughput, as you see in these 8 stores -- and we've had our best throughput yet, and that's going to continue to get better. It doesn't mean that we're not going to have drag on the stores that we open because, as we said, that'll be $6 million to $8 million next year, but a much more effective and efficient model, from our perspective, in what we're trying to accomplish.

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Heath R. Byrd, Sonic Automotive, Inc. - EVP, CAO & CFO [48]

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And ironically, to add to that, it's not in the SG&A section, but our CapEx is a lot lower than theirs as well.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [49]

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Okay. What I'm hearing from you here is you don't have the logistics costs, you don't have the advertising expense. If I look at their model and last quarter results, I back out the advertising, back out logistics and back out some more logistics because some of it is included in their cost of goods sold, I'm running at, call it, 73% of SG&A as a percentage of gross profit. You're still optimizing 55% to 60%. Just -- coming down there to see it in person in September, I really appreciate the efficiencies of the model. Maybe you could talk to -- is it on the comp and benefit side where the employees are more efficient? Is it on the reconditioning side? Maybe just a couple of other nuggets here to better understand the SG&A/gross dynamic.

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [50]

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Well, we have a lot less people. I mean we're doing a lot more with a lot less people, and our technologies are allowing that to happen. And so...

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David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [51]

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I mean last time I looked, I think it was like 1/3 of the number of people...

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [52]

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That they have, yes.

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David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [53]

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That we have.

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [54]

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Yes. We have 1/3 of the number of people that they have. And so it's just -- it doesn't cost us as much to sell a car in our model as it costs them to sell a car. Now I'm not saying that their model is not going to work for them. We're cheering for them. We want them to be successful because it helps the overall industry. But at the end of the day, it costs us a whole lot less.

And we also try to figure out what we can say no to, to keep our expenses down. We're really, really focused on making sure that our model stays really effective and really efficient so we can provide our customer with a really low price point that keeps them coming to us. And that's really important. Our prices are incredibly competitive, and that makes a big difference. We've got to keep that lower price point to drive that traffic. And the amount of leads that we're getting at these stores is astronomical. Our Dallas store is receiving seeing 10,000 individual leads a month. That's unheard of in our industry. So our operating model is simply less complex, less expensive to run and more efficient.

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Operator [55]

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Your next question is from the line of Bret Jordan with Jefferies

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Mark David Jordan, Jefferies LLC, Research Division - Equity Associate [56]

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This is Mark Jordan on for Bret. So thinking about EchoPark, I believe it was mentioned previously that around 90% of the inventory is sourced from auctions, and the remainder is primarily sourced off the street and from CarCash. So I was wondering, does that mix still stand? And if so, should we expect the mix of vehicles sourced at auctions to decline over time? And what sort of impact that could have on the front-end margins?

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [57]

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Yes, yes and the impact on margin is going to go up. That's the great thing is we haven't even scratched the surface yet. CarCash, our app just launched at one location here in Charlotte on the new car side, and we're beginning to work with the app to drive more cars coming to us from off the street. So the mix is below 10% now, but you should expect that to grow as time goes on and our app becomes more efficient. And that app, we're using not only for the consumer, but we're providing it to our competitive set as well so other dealers are now beginning to use the app for us to appraise vehicles for them.

We're also doing that with Camping World. There's just a lot of different companies out there that can use the application that are trading for vehicles. So we expect that to become a bigger percentage of our mix. What that number is, we don't know yet. We'll see over time. But when that does happen, we all know that when you trade for a car at the door, your margins go up. There's less expense through transportation, auction fees, you name it. And so our margins can improve on the front end by doing that.

That said -- or our prices can get more competitive because we're always looking for ways to drive that retail price down to offer that consumer that great experience at a really good value, sort of a Costco model, right, just really low price. And so one way or the other, the margins will probably stay where they are, the prices might get a little more competitive. But we're going to trade for more cars at the door because of the application, and we'll keep updating you as time goes on.

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Mark David Jordan, Jefferies LLC, Research Division - Equity Associate [58]

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Okay. Great. And during the prepared remarks, it was mentioned that buyers are coming from over 140 markets to visit EchoPark. So I was curious if you have the mix between maybe local market buyers and sort of out-of-market or out-of-state buyers.

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [59]

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So the way we're looking at it is the drive time. So if you look sort of 30 minutes to 1 hour, that's about 60% to 70% of our business, and the balance is outside of that. And then we're defining the market as multiple sales from each market across the country. And we've got customers that have come to our Dallas store from as far away as Alaska. And really, they're coming from all over the country, but that's kind of how we're looking at it.

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Operator [60]

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(Operator Instructions) Your next question is from the line of Rajat Gupta with JPMorgan.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [61]

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Appreciate the color on the drag from the new store openings in 4Q and next year. Just had a couple of follow-ups related to that. Firstly, I mean, where are you in terms of the maturity curve of the existing EchoPark stores that you have, and assuming that those should keep getting more profitable going into fourth quarter and next year? And then with the new stores that are going to come up, how quickly can they be profitable versus what you saw in some of your earlier stores that you opened? Basically just trying to get a sense of how much of this drag can be easily offset, and what kind of EBITDA run rate should we be looking at going into the fourth quarter and next year. And I have a follow-up.

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [62]

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Yes. So this is Jeff Dyke. We're -- we think our existing stores are at about 50% maturity. And so there's a lot of upside left in those stores, and that's the point David Smith was making earlier, just lots of upside. If you look at our Charlotte store, it was profitable in its first full month of operation. Houston took about 6 months. So we're thinking within a 6-month time frame, at the outmost, our stores will be profitable. So that's kind of where we guide you to look.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [63]

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Got it. And so just looking at the fourth quarter. I mean you had $6.4 million EBITDA in the third quarter. With the Long Beach store coming in, I mean, I'm assuming that the fourth quarter run rate would be higher than what you did in the third quarter given the existing stores would continue to improve. Is that a fair characterization? Or should we expect a step down?

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [64]

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In terms of volume?

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [65]

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Just in terms of EBITDA.

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [66]

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In terms of income?

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [67]

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EBITDA, yes.

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Frank Jeff Dyke, Sonic Automotive, Inc. - President & Director [68]

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EBITDA, yes. I would say flat. Sort of flat is the way to look at that for Q3 versus Q4.

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Heath R. Byrd, Sonic Automotive, Inc. - EVP, CAO & CFO [69]

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Again, you've got $1 million drag before you open and $1 million drag after you open for each store on average.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [70]

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Got it. Okay. And then in terms just funding the new Echo -- or EchoPark store openings next year and potentially down the line, it seems like all of that is going to be funded by the free cash flow from the franchisee stores. By when would you expect just the EchoPark store to generate enough free cash flow to be just self-funding future growth? I mean, are we looking at 3 years down the line or 4 years down the line? Just trying to get a sense of when it's not a drag on the franchisee free cash flow.

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Heath R. Byrd, Sonic Automotive, Inc. - EVP, CAO & CFO [71]

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Yes. This is Heath. From an overall capital allocation plan, we're sticking with our exact same plan as EchoPark is still a priority. We will opt to initially look at franchise acquisitions. And again the debt reduction, which we mentioned before, we'll kick it off. We kicked off $6.5 million in EBITDA in Q3. So you're going to get -- you're still going to have some franchise support into '20, but after that, I think, once the other stores mature, and we have 4 new stores, then EchoPark is going to start supporting its own growth.

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Operator [72]

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And at this time, there are no further questions. I will now turn the call back to Mr. Smith for closing remarks.

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David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [73]

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Thank you very much. Thank you, everyone, for your questions, and we appreciate your time. Have a great day.

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Operator [74]

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Ladies and gentlemen, this does conclude the Sonic Automotive Third Quarter 2019 Earnings Conference Call. Thank you for your participation. You may now disconnect.