Good morning, welcome to the Sonic Automotive First Quarter 2023 Earnings Conference Call. This conference call is being recorded today, Thursday, April 27, 2023. Presentation materials which accompany management's discussion on the conference call can be accessed at the company's website at ir.sonicautomotive.com. At this time, I would like to refer to the Safe Harbor statement under the Private Securities and Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information, or expectations about the company's products or market, or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission. In addition, management may discuss certain non-GAAP financial measures as defined by the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables in the company's current report on Form 8-K filed with the Securities and Exchange Commission earlier today. I would now like to introduce Mr. David Smith, Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference. Thanks very much, and good morning, everyone. Welcome to Sonic Automotive's first quarter 2023 earnings call. As he said, I'm David Smith, the company's Chairman and CEO. Joining me on the call today is our President, Jeff Dyke, our CFO, Heath Byrd, our EchoPark Chief Operating Officer, Tim Keen, our Chief Digital Retail Officer, Steve Wittman, and our VP of Investor Relations, Danny Wieland. Earlier this morning, Sonic reported first quarter financial results, including record first quarter total revenues of $3.5 billion and record first quarter EchoPark segment revenues of $651 million. First quarter GAAP EPS was $1.29 per share, and adjusted EPS was $1.33 per share. I am very proud of our team's performance in the first quarter, and we're excited to build on last year's success as we move forward in 2023. Despite ongoing challenges in the automotive retail industry, including rising interest rates and vehicle affordability concerns, we remain focused on delivering an exceptional guest experience and executing our long-term strategic plan. Our strong relationships with our teammates, our manufacturer and lending partners, and our guests are key to our long-term success. I'd like to sincerely thank them for their continued support. Turning now to the first quarter. The industry continued to see improvement in new vehicle production and inventory levels, which resulted in lower new vehicle GPU sequentially and year-over-year, as we expected. This decline in new vehicle GPUs should continue as we progress through 2023. We believe that the new normal level of new vehicle GPU will remain structurally higher than it was pre-pandemic. In the used vehicle business, wholesale auction prices for three-year-old vehicles unexpectedly rose over 6% since the beginning of the year, as nearly new inventory continued to face elevated demand from rental car companies and dealers at auction. Conversely, used vehicle retail average selling prices declined approximately 1% year to date, reflecting continued affordability challenges for consumers affecting retail demand. This, combined with a lower level of lease turn-ins at our franchise dealerships, limited our used vehicle volume potential during the first quarter, but we were able to maintain higher GPUs than expected to somewhat offset the lower volume. Used vehicle retail price levels continue to drive monthly payment affordability concerns for the average buyer at current interest rates and despite the uptick in wholesale prices in the first quarter. We expect used vehicle prices to resume their decline as we progress through 2023. Despite an elevated interest rate environment that has reduced our finance contract penetration rate, F&I performance continues to be a strength. We want to reiterate our guidance for full year 2023 F&I per unit at or above $2,400 per unit. Our parts and service or fixed operations business remained strong with an all-time record quarterly fixed operations gross profit at our franchise dealerships, up 12% year-over-year. We are very proud of the success our team has had in this area and believe there are remaining opportunities for growth in our fixed ops business as we progress through 2023. As we said on our fourth quarter call back in February, we believe ongoing macroeconomic uncertainty and concerns around the effects of rising interest rates on the average consumer could drive volatility in consumer demand and vehicle margins through at least the first half of 2023. This, coupled with our luxury-weighted franchise business, contributed to our decline in earnings from the fourth quarter to the first quarter, which is consistent with the historical seasonality of our business. However, we continue to believe that our diversified automotive retail model positions us favorably to adapt our business to changes in market conditions as we progress through 2023. As new vehicle inventory supply grows, we expect it to take pressure off of used vehicle pricing and rental car company demand at auction, which should benefit both consumer affordability and cost of inventory. Turning now to EchoPark segment results. We reported record first quarter revenues of $651 million, up 5% from the prior year, and gross profit of $39 million, down 9%, due in part to the increase in wholesale vehicle pricing I mentioned earlier. EchoPark segment retail unit sales volume for the quarter was a first quarter record of 19,980 units, up 15% from the fourth quarter and up 34% year-over-year. EchoPark segment average used vehicle selling price decreased 3% from the fourth quarter, but at $28,650 per unit still remains 10%-15% above targeted affordability levels. We continue to focus on optimizing our inventory sourcing mix and expanding our inventory affordability by including 5+ year-old vehicles in EchoPark inventory amidst the ongoing auction demand for nearly new inventory. For the first quarter, 5+ year-old vehicles represented 16% of EchoPark segment retail unit sales volume, and our non-auction sourcing mix was 20% of sales in the first quarter. First quarter EchoPark segment adjusted EBITDA was a loss of $36.9 million compared to an adjusted EBITDA loss of $25.4 million in the fourth quarter and $29.5 million in the year-ago period. First quarter 2023 segment results include a $12.5 million adjusted EBITDA loss related to other used vehicle businesses within the EchoPark segment, including the Northwest Motorsport business acquired as part of the RFJ acquisition. We are in the process of implementing our standard playbooks and processes at these locations, including inventory management and pricing strategies, and expect the losses associated with this transition to improve sequentially in the second quarter. Excluding these losses, our core EchoPark branded locations generated an adjusted EBITDA loss of $24.4 million, an improvement of $11.8 million from the first quarter of 2022. Our EchoPark first quarter results were in line with our internal projections, and we maintain our guidance for breakeven adjusted EBITDA for the EchoPark segment by the first quarter of 2024. Furthermore, we believe in any industry driven margin headwinds we may face in the franchise business should be a tailwind to EchoPark segment revenue growth and profitability, minimizing the earnings downside to consolidated Sonic results over time. As we announced in February, we are very excited about our newly created Powersports operating segment, which further diversifies Sonic's retail portfolio. The integration of Black Hills Harley-Davidson into the Sonic family is off to a great start, and the team is currently gearing up to make this year's Sturgis Motorcycle Rally better than ever. We believe there are operational synergies with our growing Powersports network, leveraging the Team Mancuso and Horny Toad Harley-Davidson teams to maximize the financial benefits of this event. As we continue to develop our relationships with the Powersports OEMs, we are increasingly optimistic about the future growth opportunities in this adjacent retail sector. Turning now to our balance sheet and capital allocation. We ended the fourth quarter with $893 million in available liquidity, including $432 million in combined cash and floor plan deposits on hand. As an update on our share repurchase activity, during the first quarter, we repurchased approximately 1.6 million shares of the company stock for $91 million, representing approximately 5% of shares outstanding at the end of 2022. As of today, we have a total of $374 million in remaining share repurchase authorization, representing approximately 20% of Sonic's current market cap. I'm pleased to report today that our board of directors approved a 3.6% increase to our quarterly cash dividend to $0.29 per share, payable on July 14, 2023, to all stockholders of record on June 15, 2023. In closing, our team is prepared to continue to execute at a high level while remaining adaptable to changes in the automotive retail environment and macroeconomic backdrop. Further, we continue to operate our business with a long-term view and remain committed to a disciplined, return-based balanced capital allocation strategy to maximize long-term stockholder returns. This concludes our opening remarks, and we look forward to answering any questions you may have. Thanks very much. Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Daniel Imbro with Stephens. Please proceed with your question. Yep. Thanks. Good morning, everybody, and thanks for taking our questions. Good morning. I wanted to start on the EchoPark side. You know, you provided some color there around what drove up the losses here, but maybe just focusing on SG&A. You know, SG&A sequentially stepped up maybe more than we anticipated. Can you just talk through what drove that, given the in-store labor is largely fixed, that's where the leverage comes from at EchoPark. What's driving the continued increase as units picked up here? Because with units selling almost 20,000 this quarter, that should have been towards your old breakeven kind of quantity needed. Can you maybe help us talk through what's changed on the cost side that's keeping us from getting closer to that breakeven number? Yeah, Daniel, this is Jeff Dyke. It's really not cost generated other than we are investing in building the brand in Houston, so there's some incremental ad spend going on there. It's more along the lines, I would sort of direct you to page 23 of the investor deck. It's more along the lines of $12.5 million in gross coming out in the other non-EchoPark operating stores, in particular Northwest Motorsport, where that's in the Northwest part of the country, and they're known there as truck, truck. We sell lots and lots of trucks, or we're selling lots and lots of trucks there. That product has become excruciatingly hard to buy, and it's put a big weight on that brand for the quarter. I expect that to be about 50% better. In other words, we'll cut our losses in half there. More importantly here is the gain in EBITDA that we saw year-over-year. We hit our numbers for EchoPark for the first time here in a while, and we're very excited about that. If you look at the EchoPark stores only, our volume was up about 47% year-over-year for that brand. And our EBITDA pickup was about $11.8 million. We're in line and still maintain, as David said in his opening remarks, being profitable or EBITDA profitable in the first quarter of 2024. Really look at it as a gross reduction and a profit reduction is driving the SG&A up, and we expect that to really improve, like I said, by 50% or better as we move into the second quarter. As we get in the back half of the year, we'll have Northwest Motorsport on playbook and, of course, availability for trucks and SUVs, which is, it's 90% of our business there that we sell and we were selling as we did the RFJ acquisition. That's gonna improve as we move to the back half of the year. That's how you got to look at that. It's really a profit and gross generating, not incremental expense that we're spending at EchoPark. Can you talk about what. You mentioned a few things there, and thank you for that, but you expect the supply to get better in Northwest around trucks and SUVs. I guess, why would the supply of used trucks start to get better if we're still in a pretty tight environment, and we're going to start lapping over the decline in new car sales a few years ago? I would think your young, the number of young leases coming off lease should go down in the next few months. Can you walk through kind of what the expectation is for why that supply gets better? Yeah, sure. New car inventory is building. If you take a look at not just us, but you look across the board, if you look at new car inventory, it's gone from call it 20-day supply to a 30-day supply on average across the board. We expect that to continue to grow. We're seeing a lot more no sales in the auction lanes. That's gone from call it 30% January, February up to over 40% now, which means dealers are starting to hold on to the inventory. This is exactly what happened, sort of the middle of the fourth quarter into December and January and February. We were buying cars in the auction lanes in January and February, the $24,000 price mark. In two weeks in March, that went from $24,000 back up to $27,500 or $28,000, where we were having to buy cars at 96% of market instead of 90% of market. We're now flattening that back out. We're buying cars in the 91%, 92% of market. That means supply is growing. Supply is gonna continue to grow. It's gonna be slow, but we expect, you know, pricing to start dropping as we move towards the end of the second quarter. And it'll continue to drop, which means supply is gonna grow. That'll give us access to more inventory. And we think the back half of the year is just gonna be stronger. That's what all the indicators are showing to us now. Got it. Got it. Maybe one more on used prices in EchoPark, and then I'll have a follow-up. If used prices were to fall, I mean, 10%-15%, maybe it's not a fair question, but how much are you guys baking in? Because externally, we look at the data on used car pricing as, I think, a proxy for what's going on with sourcing. How much would you guys need to see some of those indices fall or your sourcing pricing fall and supply get better to hit the projections you've given at EchoPark? If prices are only down 10%, can you hit the goals you've given of getting to break even in early 2024? The best way to look at it is we need the monthly payment for a consumer to get under $500 a car. That's gonna be in the $24,000 price range. If you saw our volume in January and February at EchoPark was just really spiking up, it spiked up the first 10 days of March. We were on pace to do about 7,000 cars in March. We had just a huge increase in wholesale pricing. I believe that we're gonna get sub $25,000 as we move towards the end of the second quarter and into the $24,000 and possibly $23,000 range as we move towards the end of the year. That does it for EchoPark. We get to that kind of pricing at wholesale, then, you know, we're gonna see 21,000-25,000 car quarters, and we're off to the races. That, that's why we put this page 23 together for you, so you can begin to really look at the, within EchoPark, what the EchoPark stores are doing from a, from an EBITDA and a volume perspective. You'll be able to, see the improvement that we're making at Northwest Motorsport over the next couple of quarters here. Got it. This is Heath. I'll just add, as David mentioned, in his opening comments, you know, that 10%-15% is we see this is still about 10%-15% higher from when we can get to that $500 price per month. Got it. Got it. Heath said maybe one on cap allocation. Given your confidence in this and any of the dislocation in the stock, you guys have been expanding into Powersports M&A, looking at other uses. I guess, where does buyback fall in terms of your priorities here, or when you look at returns on the investment given what's happening in the stock? We bought back, I think $1.6 million-$1.7 million shares in Q1, that's obviously returning capital to shareholder is a big priority. We mentioned before that, we're going to slow walk the Powersports segment, we don't plan on looking for big acquisitions there. We wanna learn the business and do it right. We think it's a huge opportunity, we don't have any large acquisitions on the radar. Share repurchase, as we indicated in Q1, is a valuable part of our capital allocation. We increased the dividend 3.5%, that is another way to return capital to shareholders. We're also allocating a significant amount of capital to our IT enhancements as well as some facility enhancements. we're balancing all that with, ensuring we have enough dry powder for any kind of economic conditions that may be coming down the road. Great. Well, I appreciate all the color, and thanks for answering all the questions. Good luck, guys. Thank you. Our next question comes from the line of John Murphy with Bank of America. Please proceed with your question. Good morning, guys. Morning. Just a first question. you know, as you have consumers walking into showrooms, affordability is an issue, whether you have a lot of money or not, right? Pricing, and the month payments are fairly high at the moment. Who is actually walking out of your dealership saying, "Affordability is just too big an issue for me, I'm gonna hold off"? Are you able to close the folks or the opps that you get, either online or in store that are real? Yeah, this is Tim Keen. We're doing just fine with the people that are coming into the store. We are surveying customers that have gone online, shown interest in cars, and 60% of those people are still in the market waiting for prices to come down. That's what we're seeing. As, you know, the cost of sale goes down, those people come back into the market. Then just a follow-up. I mean, is there any success in transforming those folks into nearly new used car buyers? I mean, have you had any success there or are they actually really just on hold? No, I mean, kind of both. We do transform them, John, but one of the problem on the franchise side we have is we just don't have any off-lease cars. With BMW. Mm-hmm. as big a potential mix as we have, those off-lease cars are just not there, and they're not gonna be there for a couple of years. If we had the inventory, no problem. The demand is there. The, we saw it in EchoPark, in particular, in the first quarter of the first eight weeks of the quarter. We were just going gangbusters until the average retail wholesale price went up, and a lot of that's just being driven by the rental car companies, in particular, Hertz, you know, buying cars in the lane, and they're paying $3,000-$4,000 more a car than we can afford to pay, and/or the industry can afford to pay. That's really a problem. We need our manufacturer partners to work with them, to allow them to buy some more inventory, because right now, typically, they're selling cars in the lanes, not buying cars in the lanes. That's creating a problem for all of us. Then the off-lease cars are certainly an issue because that's that 1- 3-year-old nearly new car that really represents about a third of our volume. The franchise stores, we're buying no cars in the auction lanes, zero. We're either trading for or buying the cars off the street, which is replacing what we were buying in the lanes and getting cars coming off lease for CPO. That's why you're seeing the drops in those areas. That's gonna be an ongoing problem until leasing starts where it's the lease returns start coming back. Then. This is David Smith. Something to mention about demand is, we're recently with the RFJ acquisition, we have some Stellantis stores, right? Also known as Chrysler Dodge Jeep Ram stores, right? We were off by $17 million in profit due to the truck situation. The supply of trucks are on stop hold and there's what? 20-some thousand trucks in Mexico, for example, that are stuck there. The demand is there. We have hundreds of deposits for those trucks. As soon as they come in, we believe we're gonna pick that profit back up later in the year. That's incredibly helpful. Then just thinking about one layer down, if you're not able to sell them a new car, you're not transforming them to a used car, you know, how much is your parts and service benefiting from those folks holding onto that car longer? I mean, you know, I don't know if you have a gauge or understanding, you know, of how much parts and service is benefiting from folks just waiting until they can get another new vehicle. Yeah, you know. Just try to gauge how strong this parts and service tailwind is going to be, and if there's still even a backlog on the parts and service tailwind. Yeah. Our parts and service business is just fantastic. About a third of our growth is just coming from incremental new ROs. We expect that to continue to grow. We've really focused on bringing in more techs. We've got the space, we've got the capacity. Our team is just doing a fabulous job from a parts and service perspective, and you can see that in the numbers. Jeff, there's no expectation that if new vehicle inventory becomes much more available, you're selling a lot more new vehicles, used becomes, you know, supply, you know, comes back, that you're gonna have any sort of air pocket on parts and service. This seems like this is more structural, and you're getting more of your fair share in your markets. Is that a fair statement? Yeah, that's a real fair statement. We are executing internally at a much higher level than we ever have before from a parts and service perspective. We have really focused on taking market share by op code. That's been a big push for us the last 12 months. It's a huge number 1 focus item for us this year in parts and service, is just to understand which op codes we don't have share in and to go out and get that share, and we're doing that, and it's making a big difference in our overall performance. Anecdotally, you know, we just opened our second Audi dealership in Nashville, for example, and the fixed ops department is already, what, about two weeks out on service. The demand is very high. Thank you very much, guys. Thank you. Our next question comes from the line of Rajat Gupta with JP Morgan. Please proceed with your question. Hi. Good morning. Thanks for taking the question. I had a follow-up on the SG&A question earlier, but more on the franchise side. A pretty big pickup in the SG&A to gross from the Q4. I know there's always an element of seasonality from Q4 to Q1. Curious, like, was the pickup all attributed to that or, you know, are there any one-offs or, you know, any timing of investments and advertising that's coming through that impacted the number? I had a follow-up. If you could also comment, you know, like, on the trajectory on SG&A to gross for the rest of the year, would be helpful. Yes, sure. Yeah, sure. This is Heath. As you know, our SG&A as a percent of gross, you know, can literally increase 5-750 basis points from fourth to Q1, so you're accurate there. That has to do with the seasonality and the kind of business we have in Q1. We still. If you look at that SG&A, there is $11 million of the $23 million in total increase or really investments in IT and facility. That and you couple in the Stellantis impact that David mentioned, we're back down into the high 60%. We believe those are one-time events that actually drove it up a little bit higher. We still are reiterating that we're gonna believe that the franchise will be in the mid-60s for the full year and Total Enterprise will be in the high 60% for the full year. Got it. To clarify and to add one more point to that, this is Danny. The Stellantis impact is about 300 basis points of deleverage on the franchise side. Again, that's of the 650 increase we saw from the fourth quarter. A big piece of that is related to the lack of heavy duty Ram trucks that we can sell through and the lost gross related to those. We can't get the product. They're all on stop sale. We get little trickles, but hopefully when that loosens up, then our big stores like Dave Smith in the Northwest, just it has a huge impact from an SG&A perspective, gross and a profit perspective. That'll all come back to us at some point in time this year. Yeah. If you exclude the non-EchoPark branded locations within that EchoPark segment that Jeff was talking about before and Stellantis, it's a 500 basis points impact. That's great color. Then, you know, just on GPUs, you mentioned that, you know, you would expect like a continued decline through the course of the year, you know, still settling above pre-pandemic. Any visibility you have on the magnitude of that pace of decline going forward? Then relatedly, you know, combining that with your EchoPark comments, you know, in the past you've, you know, sometimes given us, you know, some indication on, you know, just first quarter EPS seasonality, you know, you know, where it's typically landed like around 15%-20% of full year EPS. I mean, is that, is that still the case this year as well, given whatever visibility you have on, like, new car GPU trajectory and then the EchoPark ramp-up? Thanks. Yeah. Go ahead. This is Danny. On the, on the EPS cadence, typically we see that kind of 40%-50% fall off from fourth quarter to first quarter, which is right in line. You know, we had some unexpected headwinds with Stellantis that we just talked about, for the 1st quarter of this year. Yes, we still expect despite the normalization of new GPUs as we go through the year and the impact of that on the franchise business, the upside and opportunity as we go through and improve the losses at EchoPark are gonna lead to back half weighted EPS as we traditionally see. With the improvement, and Jeff, maybe you can add color here, that we expect in the luxury lease penetration as we go through the year, that's another piece that should help benefit our luxury weighting and the seasonal nature of that into the fourth quarter. Certainly, it's gonna improve new car margins, right in line with what we thought would happen in the first quarter. I would expect a little further degradation as we move into the second quarter. We're seeing that in April. We think full year it's gonna land in the mid-4s, somewhere in that ballpark. I think ongoing, it's gonna be in that range. It's certainly not gonna go back to pre-pandemic levels. The manufacturers are gonna do a good job of not growing overgrowing supply, but they're certainly not gonna stick with supply in the, you know, 25-30 day range. It's gonna move up, hopefully closer to 40. At that level, used car prices really begin to drop, and that fixes the backroom for EchoPark and our franchise used car business. You know, internally, we beat our objectives for the first quarter. We're on target to beat our objectives again in the second quarter. You know, for whatever reason, we always seem to be a little light weighted in terms of what happens with what the Street comes out with in the first quarter. That's been predictable over the last five, six, seven, eight years. The Street's always short of where we think we're going to be in the fourth quarter. But we reiterate, you know, we're hitting our targets coming out of the first quarter and intend to hit or beat our targets for the year. The cadence that we talked about before is gonna be relatively the same kind of thing, where the first quarter is typically the lightest and the two middle are relatively the same, and then there's the bigger one is in the fourth quarter. Understood. That's really helpful, Tyler. That's all I had, and good luck. Thank you. Thank you. As a reminder, it's star one to ask a question. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question. Hey, guys. This is Patrick Buckley in for Bret Jordan. Thanks for taking our questions. Good morning. Morning. Have you guys seen any signs of increasing new vehicle incentives as we head into the second quarter? It sounds like it's been pretty, brand specific to start the year, but still, fairly below historical levels. This is Jeff. It's way below historical levels. A little bit in certain pockets of the country for leasing, probably more so weighted towards electric vehicles than combustion. Just a little bit, but well below historical levels. Got it. That's helpful. Thank you. Then taking a look at the Powersports segment, where are we in the cycle there in terms of profitability? Should we expect a similar cadence there, as we're expecting in new and used vehicles? Is it a bit of a different part of the cycle? Yeah. There is a big seasonality in that business, as you can imagine in the snowy weather. For example, we've mentioned the upcoming Sturgis Rally. The biggest part by far of the year, if that is during that Sturgis Rally in August, for example, the lion's share of the profit comes out of that, and it's extremely strong. It's amazing what they do in about a two-week period during that time. I would look at the first and second quarters of being about the same, then a big, big spike in the third quarter, given the rally and what's going on at Black Hills with the Sturgis event. Then a little bit return to normal for second quarter for the fourth quarter. We're still learning that. That's why we're slow walking this. There's a ton of work to be done. We're spending a lot of time, you know, with our new partners, in this arena, but we see tons of upside. There's just a ton of upside from a technology perspective and providing those businesses with our technology and processes and playbooks. They're very excited to be a part of all that. You know, we don't have any more major acquisitions on the horizon here. We will spend the next 12 months or so really focused on executing our playbooks and honing our experience within this segment, and we'll see how it goes. I would tell you, first quarter and second quarter sort of look the same. Huge spike in the third quarter due to the rally, and then kind of return to levels for second quarter in the fourth quarter. Great. That's helpful. That's all for us. Thanks, guys. Thank you very much. You bet. There are no further questions in the queue. I'd like to hand the call back to you, David Smith, for closing remarks. Great. Thank you, everyone. Appreciate you, being on the call, and have a great day. Thank you. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.