U.S. Markets closed

Edited Transcript of SAH earnings conference call or presentation 25-Apr-19 3:00pm GMT

Q1 2019 Sonic Automotive Inc Earnings Call

CHARLOTTE Jul 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Sonic Automotive Inc earnings conference call or presentation Thursday, April 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David Bruton Smith

Sonic Automotive, Inc. - CEO & Director

* Frank J. Dyke

Sonic Automotive, Inc. - President

* Heath R. Byrd

Sonic Automotive, Inc. - EVP, CAO & CFO

================================================================================

Conference Call Participants

================================================================================

* Armintas Sinkevicius

Morgan Stanley, Research Division - Associate

* Colin Langan

UBS Investment Bank, Research Division - Director in the General Industrials Group and Analyst

* 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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and welcome to the Sonic Automotive First Quarter 2019 Earnings Conference Call. This conference call is being recorded today, Thursday, April 25, 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 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 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 8K 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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, and good morning, and welcome to Sonic Automotive's First Quarter 2019 Earnings Call. I'm David Smith, the company's CEO, and joining me on the call today is our President, Jeff Dyke; and our CFO, Heath Byrd.

We're very proud of the results our teammates achieved for the quarter. Consolidated, Sonic Automotive delivered $0.99 per diluted share from continuing operations on a GAAP basis in the first quarter of 2019 versus a loss of $0.05 per diluted share from continuing operations in the prior year quarter. Our franchise business delivered a very solid performance while our EchoPark brand had an historic quarter, demonstrating the huge growth EchoPark will achieve as we add additional markets across the United States.

We expect 2019 EchoPark revenues to exceed $1 billion. We expect EchoPark to retail approximately 50,000 preowned vehicles in 2019, which is about 5x the volume we were selling just 2 years ago. Our website, EchoPark.com, and our existing network of 8 EchoPark locations are drawing customers from 121 markets across the United States and growing rapidly as more customers across the nation shop on EchoPark.com. EchoPark will also improve profitability dramatically as our network continues to mature. For example, just one of our EchoPark locations sold about 1,600 cars in March and was the most profitable store in all of Sonic Automotive for the month.

EchoPark's revenue for the first quarter of $249.6 million increased $118.1 million, up 89.8% compared to the first quarter of 2018. EchoPark also improved its pretax profits during the first quarter of 2019 by $14.9 million or up 101.2% compared to first quarter of 2018. This is before the effects of a $1.9 million noncash impairment charge related to strategic investment changes. Better yet, EchoPark was profitable on a GAAP basis in the first quarter of 2019, and we expect this profitability trend to continue.

Excluding the noncash charge, EchoPark pretax profit was $2.1 million for the first quarter of 2019. Additionally, EchoPark generated positive cash flow during the quarter of $5 million as measured by adjusted EBITDA, a non-GAAP measure. The cash generation improved $8.3 million or up 247.8% from the use of cash in the first quarter of 2018.

EchoPark will now move into growth mode and expand our network to additional locations across the United States. We believe that we can grow EchoPark revenue $500 million to $1 billion annually and continue to grow our profitability without going to the capital markets. We believe this level of growth and doing it profitably sets us apart from other disruptors in the preowned auto retail market.

From a combined company standpoint, we reduced overall Sonic debt during the quarter by over $139 million from the prior year quarter. Our overall liquidity at March 31, 2019, was $292.2 million. Today though, our overall liquidity is nearly $350 million and growing, not counting the equity in our real estate. The strength of our balance sheet and the cash flows that are being generated by both our franchise stores and now our EchoPark stores enable us to continue expanding the EchoPark footprint nationally with capital generated internally and again without having to raise additional cash from outside markets to achieve our growth goals.

Our hiring, training, technology, inventory management and logistics, expense control and leadership have all combined to put EchoPark in an exceptional position to capitalize on this highly fragmented industry. Without the pressure from manufacturers and after listening to our guests, we've invested in a customer experience that our guests have wanted and have created a culture of success that showed in our Q1 results. As we have said from day 1, there is nothing standing in our way from being exceedingly successful and profitable.

Also, as noted in our press release today, from a total Sonic consolidated basis, there are several items of interest that affect the comparability of first quarter 2019 results to the first quarter of 2018 results. Excluding the effect of these items from both periods, diluted earnings per share from continuing operations for the first quarter of 2019 was $0.39 compared to $0.26 per diluted share in the first quarter of 2018. These results exceeded our internal forecast for the quarter. See the materials provided in conjunction with the earnings release related to non-GAAP measures I have mentioned for a reconciliation of these non-GAAP measures to their closest GAAP counterparts.

Some other highlights for the first quarter of 2019 on a total Sonic consolidated basis include all-time quarterly record preowned unit sales of 38,463 vehicles; all-time quarterly record F&I gross per retail unit of $1,676; first quarter record F&I gross of $106.2 million, an increase of $12.5 million or 13.4% from the first quarter of 2018; new vehicle gross per unit of $2,135, up $210 or up 10.9% from the first quarter of 2018. Inventory days' supply for new units was 75 days. Inventory days' supply for preowned units was 28 days, which was down 3 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. The dividend will be payable in cash for our stockholders of record on June 14, 2019. The dividend will be payable on July 15, 2019.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Rick Nelson of Stephens.

--------------------------------------------------------------------------------

Nels Richard Nelson, Stephens Inc., Research Division - MD [2]

--------------------------------------------------------------------------------

Congrats on EchoPark turning a profit. So I've looked through your slide deck. It suggests half of the stores are at maturity or you're halfway to maturity. You've got 8 stores today. How many of those would be considered mature? And are they the medium or the large store format? And how many of those would be profitable or generating to your store model?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [3]

--------------------------------------------------------------------------------

This is Jeff Dyke. Just first of all, in March, all of our EchoPark markets were profitable. So that was a first for us. We're very excited about that, and of course, you saw the quarterly announcements. I would tell you that our Dallas store is our most mature store. The thing is, is every month we wake up and they keep selling more and more cars. We sold 1,600 cars out of that store in March, and it made over $2 million in profit. Then -- and our market share in 0- to 5-year-old cars is has double digit, I think, in March, so we keep growing our share. We've grown from 4.5%, 5% share up to double-digit share. And you move over to Denver, Colorado, I would tell you our Thornton store in Denver is the -- and we sort of look at the market not how many stores we have in the market, but our Thornton store there in Denver would probably be our next most mature store. It's doing north of 800 cars. It made nearly $600,000 in March. And it's -- both of those stores are continuing at that same level or if not better in April. The fun thing for us is when you get to Charlotte and you get to Houston -- in Charlotte, that store was profitable in its first full month, and it did over 400 cars in March and made nearly $300,000. And then our Houston store did $460,000, $470,000 and broke even in the month of March, and we expect that trend to continue and that store to be -- it's in its infantile stage. We opened it in the middle of December or so or December 10. So we expect that store to do the kind of volume that we're doing in the Dallas market. So really, the way we look at it is more on a market basis, not how many rooftops we have. That's why we think we can grow [0.5 billion to 1 billion] a year as we move forward into 2020. We will probably open one more store this year that was not planned just because of the progress. Remember, I told you in the fourth quarter, we didn't know if we'd get to profitability, if it was going to be the first quarter or the second quarter. But our team just continues to mature at a rapid rate and our inventory, our pricing management and all of that is coming along nicely. So we'll probably get another store opened this year, and we'll open a couple of more markets next year. What's fun is those 8 stores are serving now over 120 markets across the United States, and we're selling cars into New Mexico, all over the place. And what's happening is the customers are coming to us just because of the great pricing, and more importantly, our guest experience is just exceptional. And so when you get in the store, which I know you've visited, it's just a lot of fun and a lot of buzz. And so we've got a lot of really big markets that are out there. If you think about Atlanta and the size of market that, that is, you think about the L.A. market, you look at the Florida markets, whether it's Fort Lauderdale-Miami, you look at Orlando, you look at Pittsburgh, Pennsylvania, Philadelphia, Pennsylvania, there is just a ton of opportunity. And really, we haven't even launched our digital marketing piece where the customer can buy the car fully online. So that is something that will come to us in the next quarter or so. And we're getting ready. We put out on the App Store, the Apple App Store, our Car Cash app so customers can begin appraising their own vehicles. You guys are free to go ahead and download and play around with it. But it should take you 3, 4, 5 minutes to appraise your car and another 3 or 4, 5 minutes to get an answer back from our retail trade center. So it all just began to come together in the first quarter for us. We've been working really hard at it. Praise to the team, they've done a very good job. And now like David said in his opening, we can move from sort of our petri dish stage, if you will, in figuring everything out to now into a pretty significant growth mode as we move forward in 2019 and 2020.

--------------------------------------------------------------------------------

Nels Richard Nelson, Stephens Inc., Research Division - MD [4]

--------------------------------------------------------------------------------

Jeff, is the plan to saturate these markets like Atlanta and L.A.? Or do you go into multiple markets with a single store?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [5]

--------------------------------------------------------------------------------

Yes. We'll do one single store, to begin with. We're already looking at the Dallas market a little bit because, as you know, our original store, sort of mid-Dallas, in the Dallas city, and we

moved that store 33 miles away and basically doubled its volume. So what we know is the consumer really enjoys the guest experience and they enjoy our low pricing so they're willing to travel. But that store we've -- it's an old AutoNation megastore, which is a really big facility. We've got plenty of acreage, but we're busting at the seams there. I do see a day when we get 2,000 cars a month out of there, but that's going to be about it. And we might have to open a store in the northern part of Dallas. Won't be as big, but it will provide relief for that location. But we're going to continue to make a lot of money out of the market, so we would treat L.A. the same way. We already have some existing facilities there from the franchise side that we could go into, so it keeps our costs really low. And that's really important in order to provide that really low retail price. And we found a facility in Atlanta not too long ago so we're real excited about getting that market opened. Hopefully, we'll do that in the first quarter of 2020. And then we'll see which markets are going to come after that. Certainly, Florida is begging for, we're begging for an opportunity to get into Florida and attack that market. So we'll see how it goes, but so far, so good. We're very excited about where we're at.

--------------------------------------------------------------------------------

Nels Richard Nelson, Stephens Inc., Research Division - MD [6]

--------------------------------------------------------------------------------

Is the plan to tack on the home delivery? Or is there some end for that?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [7]

--------------------------------------------------------------------------------

Not right now, it's not. If you go onto our EchoPark website and you sort of read what we do and what our model is, we sort of try to figure out what we're not going to do. I know that sounds kind of ass-backwards, but at the end of the day it keeps our costs really low. And by operating in a really low SG&A environment, it lets us lay further out to reduce our pricing. So we look every day on how much cheaper we can sell a car. And by doing that, we drive more and more traffic. We have so much traffic coming to the EchoPark stores right now, our big opportunity is, let's see what we can do to take advantage of all the traffic that's coming in to us now from all over the country.

--------------------------------------------------------------------------------

David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [8]

--------------------------------------------------------------------------------

This is David. Plus, our customers, we listen to our guests. And our customers really enjoy -- they like going on our website, EchoPark.com and they enjoy coming to the store and going through the experience and actually putting their hands on the vehicle they're going to buy. And they enjoy that process.

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [9]

--------------------------------------------------------------------------------

If there becomes a big demand, and that's something that we need to do and we don't have the demand right now that we have, then of course we've got the websites built and we're ready to pretty much launch all of that. But we've got so much traffic coming in right now, that we need to take care of what we've got coming in the stores before we start thinking about home delivery.

--------------------------------------------------------------------------------

Nels Richard Nelson, Stephens Inc., Research Division - MD [10]

--------------------------------------------------------------------------------

And how many stores are you thinking by yearend 2020 and 2021?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [11]

--------------------------------------------------------------------------------

The way that I would get you to look at it is not a number of rooftops, it's just revenue generation. And I think we'll add a minimum of a half a billion in revenue. We'll open more than likely the L.A. market, more than likely the Atlanta market, and somewhere east coast Florida, if not Orlando, we're very interested in the Ft. Lauderdale/Miami market. That's a huge market, a great preowned market and we've got a lot of experience there. So that's another market that we'll probably be going to. So if you wanted to put it in store counts, we've got 8 today, we'll probably open number 9 this year and maybe 10, 11, 12, something like that, 11 next year, something like that.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

Our next question comes from the line of Colin Langan of UBS.

--------------------------------------------------------------------------------

Colin Langan, UBS Investment Bank, Research Division - Director in the General Industrials Group and Analyst [13]

--------------------------------------------------------------------------------

Any color on F&I per unit? It was quite strong. I mean what's driving the outperformance? And is that this new level sustainable?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [14]

--------------------------------------------------------------------------------

This is Jeff again. On both sides of the company, whether it's EchoPark or the Sonic franchise stores, our F&I continues to improve. Great relationships with JM&A on the Sonic side, the franchise side of the business. They've just done wonders for us and we had really nice increases there year-over-year. Our team is executing very well. And then on the EchoPark side, our Ally relationships, Capital One, all of them, in particular Ally, they've just done a wonderful, masterful job working with us. And we expect that to continue. We think there's more room there. Our warranty penetrations are good, but we think they can get better. And our pricing allows for a higher warranty penetration, so that's helping drive that F&I number. So nothing but upside there.

--------------------------------------------------------------------------------

Colin Langan, UBS Investment Bank, Research Division - Director in the General Industrials Group and Analyst [15]

--------------------------------------------------------------------------------

Okay. Then when we think about new margins, I think it's the first time in a while they were actually up slightly year-over-year. Is that starting to show signs of progress or are you still a bit worried about how the margins are trending going forward?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [16]

--------------------------------------------------------------------------------

Nah, it was intentional. We moved our new car margins up in the first quarter. We made some pay plan adjustments in the company for our sales management team and our associates and we focused very hard on driving our new car margins up. The market is down in terms of overall new car volume and we need to make the gross somewhere, so it's I think our best new car margin in 13 quarters, something like that. So that's a trend that we expect to continue to see for the remainder of this year. The other thing is, our days' supplies are pretty darn tight, in particular on used, but our new days' supply is not bad at all. You know, I've got to give credit to BMW, Honda. Last year was a pretty difficult year for us with those brands, but they've got new product coming out. They've done a very, very nice job with the new product, in particular, the BMW X7 is doing fantastic for us. And Honda is doing great. So it goes with those brands, as you know, it's a large percentage of our overall profit and as we improve margins there, it makes a big difference in our frontend margin on new for the company.

--------------------------------------------------------------------------------

Colin Langan, UBS Investment Bank, Research Division - Director in the General Industrials Group and Analyst [17]

--------------------------------------------------------------------------------

When you say it was intentional, I mean what was intentional? You focused on certain models or brands or what was it?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [18]

--------------------------------------------------------------------------------

It was intentional that we adjusted pay plans to a more balanced approach for gross and volume versus a more volume driven approach in particular in our import stores and our high line stores. That's certainly part of it. And then again, the new product that's coming out is helping. If you sell a bunch of X7s and you sell those at sticker because there's high demand for them, that's going to make a big difference in your frontend margin. We've got 15 BMW stores and that makes a big difference, it makes a big, big difference in our overall performance.

--------------------------------------------------------------------------------

Colin Langan, UBS Investment Bank, Research Division - Director in the General Industrials Group and Analyst [19]

--------------------------------------------------------------------------------

Got it. Then just lastly, any thoughts on the digital strategy right now? I mean where are you in terms of Digital One-Stop launch?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [20]

--------------------------------------------------------------------------------

Certainly, a two-pronged attack. One is our Car Cash app and finetuning how we trade for vehicles and how we buy vehicles off the street for the consumer. And that goes along with Digital One-Stop. I would tell you that we're going to be prepared --we're prepared to launch Digital One-Stop right now. We're working on a few bank opportunities that we have in terms of lending. But sometime third, fourth quarter, I think you'll see us making a much bigger announcement in terms of Digital One-Stop and where we're taking that piece of the puzzle, in particular on the franchise side where we're prepared to do home deliveries and do some things a little bit differently than we do at EchoPark.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Our next question comes from the line of Armintas Sinkevicius of Morgan Stanley.

--------------------------------------------------------------------------------

Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [22]

--------------------------------------------------------------------------------

Good morning. Thank you for taking the question. Last year EchoPark was a $0.34 drag to EPS. As we think about 2019, and I know you're no longer providing annual guidance, but what are some reasons why we can't just take the 2018 number, make an assumption on new vehicle sales and then add on $0.34 or more for EchoPark?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [23]

--------------------------------------------------------------------------------

You could. You could absolutely do that. EchoPark performed a little bit better than that trend in the first quarter. But you have to remember, we're going to open up another store that we didn't expect, that's going to add some expense. So I wouldn't just extrapolate the first quarter all the way through the end of the year and say you're going to do that 4 times. But you certainly could wipe last year's number to zero and say there's going to be no drag from EchoPark for 2019 and you'd be very safe doing that.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And just to add on, this is Heath, you'll also -- not only the new store in 2019, as we prepare for 2020, in the third and fourth quarter you're going to have startup expenses and training and resources to prepare for that opening in 2020.

--------------------------------------------------------------------------------

Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [25]

--------------------------------------------------------------------------------

Okay, so those are sort of the puts and takes to keep in mind.

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [26]

--------------------------------------------------------------------------------

I would tell you, the one other thing that you might add to that is, at one point in time our ramp up to profitability for the EchoPark stores was 8, 9 months to a year. And that now is less than 6 months. Of course, our Charlotte store was profitable in its first full month, but it took Houston 3 or 4 months. And a lot of that has to do with the level of experience and the team that we put into Charlotte was really experienced and it just made a world of difference just right away. But our Houston store is now coming along very well and the prep time that we put into our general manager and our head of sales and things like that, that go into EchoPark, and we pooled some of the experience we already have in the stores, reduces that ramp up time in terms of profitability. So we don't have to expect this huge carrying cost anymore for a long period of time to get an EchoPark profitable. They're profitable in a relative short period of time.

--------------------------------------------------------------------------------

Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [27]

--------------------------------------------------------------------------------

Okay. Then my other question is on when we think about the new stores that you're thinking about opening, how do we think about the balance of -- are they all EchoPark stores or are there going to be some Car Cash stores powered by EchoPark? How do we think about that mix on a go forward basis?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [28]

--------------------------------------------------------------------------------

No more Car Cash stores. Car Cash is a brand of its own just to trade vehicles and to buy cars off the street. It's our buying unit. Everything you should look at is EchoPark store moving forward.

--------------------------------------------------------------------------------

Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [29]

--------------------------------------------------------------------------------

Okay, so we have 8 EchoPark stores and then Car Cash is effectively the app, sort of the procurement of inventory?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [30]

--------------------------------------------------------------------------------

That's right. If you go into an EchoPark store, you will actually see branded Car Cash associates that do all of the inventory trading using our retail trade center and the applications that we've given them to trade for a car.

--------------------------------------------------------------------------------

Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [31]

--------------------------------------------------------------------------------

Okay. And can you talk about that opportunity to procure inventory? It's early days here, but what sort of legwork do you need to put into place in order to be able to appraise a vehicle? And any way you can size the opportunity? How many -- whether it's how many of your vehicles will be sourced this way or just how you think about that opportunity?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [32]

--------------------------------------------------------------------------------

It's a big, huge opportunity. Car Max, who we've got a lot of respect for, buys a bunch of their cars off the street and has a good reputation for doing that. We certainly will work down that road as well. But it's a small percentage of our overall purchases right now and we look to increase that. It's a bigger percentage quite honestly at our franchise store than it is at EchoPark, but we haven't really tried yet at EchoPark. We've been really focused on just getting our rhythms right and getting our processes right to drive our business. Our Car Cash app, we're going to offer, not only to the consumer, but we're going to offer it to other dealers. So that if we go ahead and put money in a car for another dealer and we put more money than they're willing to put, then we'll be happy to come pick the car up and give them the money for the car. So it's not just an application for the consumer, it's also an application for dealers. And we see more mom and pop, small retail chain type dealers using that application than you're going to see at Auto Nation or something. But we think there's a lot of opportunity to provide that application to other dealers to buy cars in that format as well.

--------------------------------------------------------------------------------

Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [33]

--------------------------------------------------------------------------------

What is the legwork that you have to put into it? Do you have to hire or train people differently to be able to appraise these vehicles without actually touching the vehicles? Or is there some sort of software development aspect to it that you need to put in place?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [34]

--------------------------------------------------------------------------------

We have a little training video that you can do, but I handed the app to my wife the other night and she appraised her own car. She's never appraised a car in her life. If you go download it right now and just follow the process, we're still working out a few little kinks, but we put it out here to let people begin to play with it. I suggest you go download the app and just see how easy it is and how fast we get a number back to you. And what's important here is we're not using some third-party generator to provide a valuation on a car. That's all coming from our algorithms and from our retail trade center that we built over the last 8, 9 years. So that's a very big difference setting us apart from many of our competitors out there who appraise cars online that are using some Manheim stuff. There's no phone call that's needed to talk to a consumer. Everything is done on average in less than 5 minutes you'll get a valuation back for your vehicle.

--------------------------------------------------------------------------------

Heath R. Byrd, Sonic Automotive, Inc. - EVP, CAO & CFO [35]

--------------------------------------------------------------------------------

If you actually download it today, that's Version 1 and the tutorial is coming in the next 30 days. But as Jeff mentioned, it's very intuitive and anybody that's never appraised a car before, it's very easy.

--------------------------------------------------------------------------------

David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [36]

--------------------------------------------------------------------------------

This is David. Anybody who has bought a car, traditionally a lot of times it would take 40, 45 minutes to get your car appraised, if not sometimes longer. So it's a big deal and a big savings in time for not just other dealers but for customers. They love it.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

Our next question comes from the line of Rajat Gupta of JPMorgan.

--------------------------------------------------------------------------------

Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [38]

--------------------------------------------------------------------------------

Congrats on the quarter. You just had a question on the bought and services piece. Growth looks like it started a little slower than your full year guidance that you provided on the last call and also according to some of the peers that reported, it looks like wholesale and other was a bit of a drag. Do we expect that to pick up through the rest of the year? And secondly, are you still maintaining your prior outlook of 3% to 3.5% same-store growth for fixed ops?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [39]

--------------------------------------------------------------------------------

Yes, we are maintaining that outlook. We had some opportunities last year where our fixed operations team really got taken off course. They were focused on some things that they just should not be focused on. We've made some adjustments to that and we saw some pretty good uptick in our customer pay growth in the first quarter. Our internals were down a little bit. But if you get off into April and sort of look forward, our April fixed operations numbers are running at par, a little bit better than what most of the other publics have announced for the first quarter. And so I would expect us to be in that ballpark that they've been running at as we move forward. But certainly that 3%, 3.5% growth rate is well within reason, and we should do that or better as the year goes on.

--------------------------------------------------------------------------------

Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [40]

--------------------------------------------------------------------------------

Got it. And just on the deal averaging profit, and you talked about some store you divested in the first quarter. You talked about some more opportunities later this year and next year. Could you provide an update on where we stand there and the expected profit from them?

--------------------------------------------------------------------------------

Heath R. Byrd, Sonic Automotive, Inc. - EVP, CAO & CFO [41]

--------------------------------------------------------------------------------

This is Heath. Yes, we did do some dispositions. There's a couple of things we're doing to reduce our leverage. And it's really -- some of it is proceeds from dispositions, but a big part of it is just more prudent CapEx spend. You're going to see CapEx spend really move from enhancements for facilities on the franchise to more of the EchoPark build. And so we will continue our capital allocation strategy of reduction of debt and growing EchoPark. We will always be looking at our current assets that we have and if they're underperforming and we have the opportunity to dispose of those at the right price and put them into a better return, that's something that we do every day and we'll continue that for this year and ongoing.

--------------------------------------------------------------------------------

David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [42]

--------------------------------------------------------------------------------

This is David. For example, the stores that we sold in this last quarter, there were a number of facility issues and lease issues and development, so that ROI, it was all about ROI to us. We thought well man, we could take this money and reallocate that money to something and get a much better return. So that was a big motivator.

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [43]

--------------------------------------------------------------------------------

And I think -- this is Jeff. I think that's just really, really important as some have looked at us and said, my gosh, a few years ago you had 150 stores, now you're down to a little less than 100 stores, what the heck are you doing in a market where we hadn't seen new car sales at this level for this extended period of time for a while. And honestly, for us, it's just an ROI. If we can invest that money in a store for example like our EchoPark store in Dallas that makes $2 million of $1.8 million a month, there are not many auto retail stores in the United States of America making that kind of money on a monthly basis. So I don't care what kind of store it is, the company is going to put its money where we get our best return on investment. And right now, we're seeing a lot of that in our EchoPark stores. But we're also seeing it in our BMW stores, we're certainly making investments there. We're certainly making investments in our Honda stores where we're getting really good ROIs, Mercedes Benz. But then there are others that, whether like David said, we have a real estate opportunity or we're being asked to spend just an ungodly amount of money on a facility. that we can sell it and get multiples that are not traditional multiples, then we're more than happy to take that money off the table in that arena and put it to work for us in another arena like EchoPark or BMW or some of the other brands that are really giving us a big return on our investment.

--------------------------------------------------------------------------------

Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [44]

--------------------------------------------------------------------------------

Just lastly, if I could follow-up on your SG&A leverage. Pretty solid execution I think in 1Q. Last time I think you guided to down 100 bps or so for the year. Is there a potential upside to that based on how you performed in 1Q?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [45]

--------------------------------------------------------------------------------

Yes. We're continuing to focus on our SG&A. We made great progress towards the end of the fourth quarter. As David Smith came onboard, he's really driven us to drive that SG&A number in the direction it always should have been driven. And we've made progress in the first quarter and we expect that progress to continue, not only by growing our gross and EchoPark becoming more profitable, but also being just much more prudent from an SG&A perspective on expenses, whether it's what Heath mentioned in terms of facility builds or it's everyday expenses, we are driving better SG&A and better than expected SG&A through our EchoPark stores.

--------------------------------------------------------------------------------

Heath R. Byrd, Sonic Automotive, Inc. - EVP, CAO & CFO [46]

--------------------------------------------------------------------------------

I'm not sure if I heard you correctly, from an adjusted basis I think we're down 230 basis points. As consolidated, from a consolidated basis. And as Jeff mentioned, SG&A at EchoPark is actually better than the franchise side. And I think throughput is around 64% at EchoPark when last year it was around 13%. So we're doing a good job of leveraging. And if you look at just individual items, other than medical, we've had some medical issues with some very few cases, but IT is down $2 million, training is down $1 million, advertising is down, compensation is down. So we've really seen the impact of what we did in the fourth quarter flowing through the bottom line.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

Our next question comes from the line of Brett Jordan of Jefferies.

--------------------------------------------------------------------------------

Mark David Jordan, Jefferies LLC, Research Division - Equity Associate [48]

--------------------------------------------------------------------------------

This is Mark Jordan on for Brett. Good morning. Just a follow-up on the SG&A. It looks like the majority of the difference here year-over-year came from the other bucket. I know you called out the IT and turning as lower spending. What were some of the other main drivers there?

--------------------------------------------------------------------------------

David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [49]

--------------------------------------------------------------------------------

IT and training are the biggest components in the other bucket.

--------------------------------------------------------------------------------

Mark David Jordan, Jefferies LLC, Research Division - Equity Associate [50]

--------------------------------------------------------------------------------

Okay. Then switching just to the EchoPark here, just to clarify, the $1 billion from EchoPark expected this year, is that all from existing stores or are we including maybe the new store in there as well?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [51]

--------------------------------------------------------------------------------

No, no, that's just from our existing store base. Yep.

--------------------------------------------------------------------------------

Mark David Jordan, Jefferies LLC, Research Division - Equity Associate [52]

--------------------------------------------------------------------------------

What's the sourcing mix right now between purchase, trade-ins and buying from auction or whatnot?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [53]

--------------------------------------------------------------------------------

At EchoPark?

--------------------------------------------------------------------------------

Mark David Jordan, Jefferies LLC, Research Division - Equity Associate [54]

--------------------------------------------------------------------------------

Yeah.

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [55]

--------------------------------------------------------------------------------

Remember our model is 0 to 5-year old cars, so we're buying mostly either off the street or from auctions through our buying system. We look to enhance that with Car Cash, but we have a very specific criteria in terms of the inventory that we carry. And we also I might add run on a really tight days' supply. Our frontline days' supply at EchoPark is 15, 16 days, 17 days at most. With about a 27, 28, 29-days' supply in the total pipeline. We do that on purpose because it allows us to stay very flexible and take advantage of what's going on in the market today and not have to worry about taking advantage of something down the road. So most of that is coming through the auctions at this point for EchoPark.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Great. Then thinking about GPUs, it looks like used GPU on a same-store basis was down quite a bit year-over-year. I think it was under $1,000. So how can we think about the breakout between what EchoPark is getting for a used GPU and what the franchises are getting?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [57]

--------------------------------------------------------------------------------

That's a really good question. And remember, the 2 models are definitely different. At EchoPark, our frontend margins are basically zero. They can run negative $100 to positive $100, somewhere in that ballpark. So when you combine everything, it pulls the overall consolidated GPU down. But our franchise GPU is actually up and we're north of $1,200 a copy. And we expect to just stay in that range as we move. Oh, Heath just corrected me, it was $1,340.

--------------------------------------------------------------------------------

Heath R. Byrd, Sonic Automotive, Inc. - EVP, CAO & CFO [58]

--------------------------------------------------------------------------------

Yeah, 4.4%.

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [59]

--------------------------------------------------------------------------------

So we were up 4% for the year and we expect that continue throughout the year. The franchise side is also doing an exceptional job. The overall pipeline days on the franchise side I think was actually a day better than EchoPark. And that is leading to our PUR increase there. And as long as we keep that up, I mean we averaged 111 cars per store on the franchise side in the first quarter. We actually sold more preowned for the first time in our history in the first quarter than we did new cars. And we expect that to continue. We're at 109%. A lot less risk when you manage your inventory that way. And we're having another fantastic April. The year is just carrying on right through this month and we don't expect that to change.

--------------------------------------------------------------------------------

Mark David Jordan, Jefferies LLC, Research Division - Equity Associate [60]

--------------------------------------------------------------------------------

Okay, great. So it kind of sounds like the EchoPark might be around $800 or $900 or so GPU?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [61]

--------------------------------------------------------------------------------

No, no. EchoPark is going to be in the zero frontend margin, maybe upwards of $100. And then you're going to find Sonic in the $1,300 range. That's why you're seeing the combined consolidated number somewhere in that $900 to $1,000 range. [cross talk]. We look at the whole round package. We do that and we've been doing that on the franchise side for years. But whether we get the money on the frontend margin or we get it in the backend margin, it's the combined number that's the most important number to us and we focus heavily on that at EchoPark. That number is somewhere between $2,200 and $2,300 a car. And oddly enough, it's in about the same ballpark on the franchise side.

--------------------------------------------------------------------------------

Heath R. Byrd, Sonic Automotive, Inc. - EVP, CAO & CFO [62]

--------------------------------------------------------------------------------

This is Heath. The Q will give you the actual breakdown too, so you'll have that.

--------------------------------------------------------------------------------

Mark David Jordan, Jefferies LLC, Research Division - Equity Associate [63]

--------------------------------------------------------------------------------

Then just one final question on reporting here. Are you guys going to report adjusted going forward or is this going to be -- because I thought last quarter it was going to be a switch to just GAAP reporting.

--------------------------------------------------------------------------------

Heath R. Byrd, Sonic Automotive, Inc. - EVP, CAO & CFO [64]

--------------------------------------------------------------------------------

GAAP will be the prominent reporting format. But when we have items of interest that we believe will help the analysts and investors understand what our continuing ops are going to be, we just think there's more transparency, but it will typically be GAAP will be the first reported, but we want to give you color so you understand what continuing ops looks like.

--------------------------------------------------------------------------------

Operator [65]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of John Murphy of Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [66]

--------------------------------------------------------------------------------

Good morning, guys. Not surprisingly, I have a few questions on EchoPark. So you kind of danced around this topic a little bit, but when you look at Echo Park, it sounds like almost all vehicles right now are sourced from auction. Is that correct in EchoPark?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [67]

--------------------------------------------------------------------------------

It's 90%.

--------------------------------------------------------------------------------

John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [68]

--------------------------------------------------------------------------------

Okay. Then when we think about car -- the remainder would be Car Cash or street purchase?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [69]

--------------------------------------------------------------------------------

That is correct.

--------------------------------------------------------------------------------

John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [70]

--------------------------------------------------------------------------------

So if we think about the profitability for the vehicles you buy from auction versus the vehicles that you get from your street or Car Cash, is there a significant delta in the upfront GPU or the total GPU per unit?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [71]

--------------------------------------------------------------------------------

It's why we want to buy more cars off the street. We certainly will make more money if you miss out on the transportation fees and a lot of other fees that we get when you buy at auction. So the more we can shift that mix, the higher the frontend margin will be from an EchoPark perspective.

--------------------------------------------------------------------------------

John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [72]

--------------------------------------------------------------------------------

So would it be fair to say that you would save as much as $300 to $500 if you do a Car Cash or street purchase versus the auctions?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [73]

--------------------------------------------------------------------------------

100%. You're thinking right.

--------------------------------------------------------------------------------

David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [74]

--------------------------------------------------------------------------------

This is David. It's by the way, just a traditional car, I mean it's been that way in the car industry forever, which is why other dealers have advertised that. So we'd love to have our customers just come in and sell us their car. And they don't have to buy anything from us to do that. That's not something that's very important.

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [75]

--------------------------------------------------------------------------------

Yeah, it's just upside. There's nothing but upside the more that mix changes. But we're -- want to keep that days' supply really low and stay very, very flexible and the more we can buy through our Car Cash app, the more fuel we're going to have in terms of frontend margin.

--------------------------------------------------------------------------------

John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [76]

--------------------------------------------------------------------------------

Okay. Then also on EchoPark, if we think about this, you're at 8 stores now, another one opening up this year, it sounds like another 2 roughly planned for next year. I mean I guess the more success you have, the more you're willing to kind of go out and spend money and develop these stores, which makes sense. At CarMax, we have a simple algo where we think about stuff of if you take same-store sales and they're up mid to high single digits, you can open your store count at 10% and not deleverage your SG&A. Are there any kind of rules of thumb that you can think of that we could use as you're ramping up these EchoPark stores so we can understand if you have 8 stores, then you open 3 more in the next 24 months, that they can absorb the cost so we don't see a deterioration of the total profitability and you're still a little bit profitable in the stores you're supporting. Just trying to understand how we should really kind of think about the layering of new stores and sort of maybe the bumpiness or lack thereof of the profitability or losses.

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [77]

--------------------------------------------------------------------------------

Yeah, so here was the first rule of thumb. The first rule of thumb was we weren't going to open up any more stores until we got profitable. And it wasn't just getting profitable because you had 1 or 2 stores. We needed to have every market getting profitable and heading in the right direction. So now if you look at kind of what we did in the first quarter, if we didn't open up any more stores. The question was asked of us earlier, could we just knock off the $0.34 you lost last year, call it zero and call it a day, the answer is yes. You could actually take that number way north. Because if we didn't open up any more stores or make any more investments, EchoPark would make a really nice profit this year just based on what we did in the first quarter. And as you know January and February are a little slower months, we're just going to gain momentum as we move through the year. So the profitability was exceptionally important to us to get to that number, to learn how to do that, to make sure that we evolved in the right direction. Now our goal is we're not going to lose the profitability. We're going to certainly beat our internal estimates from a profit perspective for EchoPark. And we're going to open, we'll open one more store this year, continue to profitability. The ramp up for EchoPark, remember, is no longer a year, it's 3 or 4 months to get us in the breakeven range. And so if we opened a store for example and we got to the fourth month and it was losing a lot of money and causing us all kinds of issues, we could back off to opening another store until we figured out what the heck was going on there. Degradation of profitability just for the nicety of having great revenue and selling lots of cars is not our business model. We're going to grow profitability, but we're going to do it -- we could grow more, John, between now and the end of the year if we didn't open stores, but we've got to add some carrying costs, we'll probably add about $2 million in carrying costs between now and the end of the year hiring people to get ready for the end of this year's opening and next year's openings. So you can sort of take that off the trend and get pretty close to where we think we'll be by the end of the year.

--------------------------------------------------------------------------------

David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [78]

--------------------------------------------------------------------------------

This is David. Another thing to remember is, early on in EchoPark, we were building greenfield stores. Whereas now, as you are aware, there are a lot of big box stores, there are a lot of locations that are available. So we can go in and find a location and be open in much shorter period of time for much less cost. Which is huge. For example, the Dallas store, what we acquired that for was less than half of what that store was originally built for. It was sitting there vacant and we got it. So there's a number of examples like that. So we've proven that you don't have to build a whole huge network of brand new stores to draw customers.

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [79]

--------------------------------------------------------------------------------

Our Houston store, John, went into an old Ford store buyer that was losing money and not doing well. And now we're doing 4 times the amount of volume out of that store today. Then the L.A. market, we got a facility that we're going to go into and it will be cheap in order to do that in terms of what we've done in the past. So we're evolving. It's a lot less expensive to open a store for us today. We can do it a whole lot faster. And that's why you see our profitability really coming up. The amount of time it takes to make a profit and the experience we've gained over the last couple of years, along with our inventory management and pricing, I cannot stress that enough, we've spent a lot of time working on, as you know, and we've made a lot of investment in terms of SG&A, into our pricing algorithms and our inventory management systems, that are really beginning to pay off for us now. So I don't know that I would describe the tactical detail that you just did from CarMax's perspective, but the profitability and the growth that we think -- we're not going to give up profitability below what our estimates are just in order to open up a market. We'll be very mature about that and if we continue to open up markets like we've done the last 2, this is going to be a big home run.

--------------------------------------------------------------------------------

Heath R. Byrd, Sonic Automotive, Inc. - EVP, CAO & CFO [80]

--------------------------------------------------------------------------------

And John, this is Heath. Just to add, as David mentioned, we are moving this into a growth stage. And as we solidify that growth plan over the next 5 years, we can start providing more transparency and color on how you can model that plan. But it's crystal clear, I want it to be crystal clear that this is now a whole different phase of the growth of this business. And it is going to be a growth business. And as we get that plan in place, we'll provide you some color for modeling.

--------------------------------------------------------------------------------

John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [81]

--------------------------------------------------------------------------------

Then just one last EchoPark question, then I have one other after that, is when you think about sort of the success of these dealerships as standalone entities, what kind of impact does it have on your local new vehicles dealers that are also running what has historically been a very good used vehicle business? I mean are these kind of coming to sort of loggerheads, or are there actually some synergies from this?

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [82]

--------------------------------------------------------------------------------

That's what's so great about the used car business, it's so fragmented, there's so much business out there, that for example in our Denver market, we just continue to sell more and more and more cars and yet our new car stores in Denver, they're having record years too. And so it has had zero impact. Whether it's the Houston market, whether it's Charlotte, none of our stores have gone backwards in volume. As a matter of fact, it was a record volume first quarter for us this year on the franchise side. And in the markets where we have EchoPark stores and there's been no degradation whatsoever.

--------------------------------------------------------------------------------

David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [83]

--------------------------------------------------------------------------------

This is David. It's important to remember, as we've said, we're selling across the nation, 121 different markets. So what really happens, even though we have 8 locations currently, a lot of our customers are going on to EchoPark.com. I think most of the transactions, they find their car, go through most of the transaction and they just come to the dealership to like as I said earlier, put their hands on it, look at it, make sure it's what they want, and take delivery. They fly in from -- they drive in.

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [84]

--------------------------------------------------------------------------------

Here's a great example of that, we sold 35 cars into the Santa Fe, New Mexico market this year from all over. We don't have a store anywhere close to that. So just lots and lots of opportunities. It could be a little bit of a different buyer. You look at Houston and it might be a little more degradation on the new car side than it is the preowned side just because we're selling 0 to 5-year old cars. And it's a great niche for us. We don't have the carrying costs, the reconditioning costs of all the aging inventories like we do on the franchise side, so it's just a totally different model.

--------------------------------------------------------------------------------

John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [85]

--------------------------------------------------------------------------------

Okay, and one last quick question for me on leasing. We're kind of 3 years, a little bit more than 3 years into this massive push that's coming from the automakers as far as the penetration of new vehicle sales sold via leasing. You guys are doing a lot of them. I'm just curious sort of what your opinion is on that, if you're seeing the mix stay at sort of 25%, 30% of your new vehicles sold via lease and if that's got any sort of knock-on or follow-on impact on your business, either positively or negatively as we're kind of getting through a lot of these big lease years starting to come back in a big way.

--------------------------------------------------------------------------------

Frank J. Dyke, Sonic Automotive, Inc. - President [86]

--------------------------------------------------------------------------------

Great source of product for EchoPark. I mean look, in the traditional lease markets, the numbers are all relative, they're about the same. There are certainly big off lease inventories that are out there, in particular on the high line side as you know. We take advantage of that. We buy a lot of those cars on the franchise side. We buy a lot of other dealers' cars that just don't do the level of volume that we do on the franchise side. But then again, we've got big markets like Texas that leasing is an afterthought, we don't do a lot of leasing there. But nothing out of the ordinary that I would tell you from years past in terms of percentages in the markets that have heavy lease, i.e., the California market, some of the Florida markets.

--------------------------------------------------------------------------------

Operator [87]

--------------------------------------------------------------------------------

At this time, there appears to be no further questions. I would like to turn the floor back over to Mr. Smith for any additional or closing remarks.

--------------------------------------------------------------------------------

David Bruton Smith, Sonic Automotive, Inc. - CEO & Director [88]

--------------------------------------------------------------------------------

Thank you, everyone. We appreciate it and have a great day.

--------------------------------------------------------------------------------

Operator [89]

--------------------------------------------------------------------------------

Thank you, ladies and gentlemen. This does conclude today's first quarter 2019 earnings conference call. You may now disconnect and have a wonderful day.