H2 2023 Sonic Automotive Inc Earnings Call

Operator: Greetings and welcome to the Sonic Automotive 4th Quarter 2023 Earnings Conference Call. This conference call is being recorded today, Wednesday, February 14, 2024. Presentation materials with the company management's discussion of the conference call can be accessed on 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 Validation 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 them. 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.

Greetings and welcome to the Sonic automotive fourth quarter 2023 earnings Conference call. This conference call is being recorded today Wednesday February 14th 2024.

Presentation materials, which accompany managements discussion on the conference call can be accessed accessed at the company's website at IR Dot Sonic automotive Dot com at this time I would like to refer to the Safe Harbor statement under the private Securities 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.

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.

Operator: 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, Chairman and Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your presentation. Thank you and good morning, everyone.

Now I'd like to introduce Mr. David Smith, Chairman and Chief Executive Officer of Sonic Automotive Mr. Smith, you may begin your conference.

David Bruton Smith: Thank you and good morning, everyone and welcome to the Sonic automotive fourth quarter 2023 earnings call. Joining me today are.

David Bruton Smith: And welcome to the Sonic Automotive fourth quarter 2023 earnings call. Joining me today are President Jeff Dyke, our CFO Heath Byrd, our Echo Park Chief Operating Officer Tim Keene, and our VP of Investor Relations, Danny Weiland. Earlier this morning, Sonic Automotive reported fourth quarter and full year financial results, including fourth quarter total revenues of $3.6 billion and all-time record annual revenues of $14.4 billion, up 3% from the previous year. Fourth quarter GAAP EPS was $1.11 per share, which includes the effect of non-cash impairment charges and tax items.

David Bruton Smith: Our president Jeff Dyke, our CFO Heath Byrd, Our Echo Park, Chief operating Officer, Tim King and our VP of Investor Relations Daniel Island.

David Bruton Smith: Earlier this morning, Sonic automotive reported fourth quarter and full year financial results, including fourth quarter total revenues of $3 $6 billion, an all time record annual revenues of $14 $4 billion up 3% from the previous year.

David Bruton Smith: Fourth quarter, GAAP, EPS was adult or $1 11 per share, which includes the effects of noncash impairment charges and tax items.

David Bruton Smith: Excluding these items, adjusted EPS was $1.63 per share, a decrease from $2.61 in the prior year due primarily to continued normalization of new vehicle GPUs and higher interest rates. We are very proud of our team's performance in the fourth quarter, and we remain focused on leveraging our diversified business model to adapt to changing market dynamics in the near term while positioning Sonic to achieve our long-term strategic goal. We believe our strong relationships with our teammates, manufacturer and lending partners, and guests are key to our future success, and I'd like to thank them all for their continued support. Turning now to fourth-quarter franchise dealership trends. We continue to see an expansion of new vehicle inventory levels across our brand portfolio, ending the year with a 37-day supply of inventory, up from 33 days at the end of the third quarter and 24 days at the end of 2022.

David Bruton Smith: Excluding these items adjusted EPS was $1 63 per share a decrease from $2.61 in the prior year due primarily to continued normalization of new vehicle Gpus and higher interest rates.

David Bruton Smith: We are very proud of our team's performance in the fourth quarter and we remain focused on leveraging our diversified business model to adapt to changing market dynamics in the near term.

David Bruton Smith: While positioning side to achieve our long term strategic goals.

David Bruton Smith: We believe our strong relationships with our teammates manufacturer and lending partners and guests are key to our future success now I'd like to thank them all for their continued support.

Turning now to fourth quarter franchise dealership trends.

David Bruton Smith: We continue to see expansion of new vehicle inventory levels across our brand portfolio ending the year with a 37 day supply of inventory up from 33 days at the end of the third quarter and 24 days at the end of 2022.

David Bruton Smith: As a result, new vehicle gross profit per unit continued its sequential decline to $4,289 per unit in the fourth quarter, in line with our previous guidance to exit 2023 in the low to mid $4,000 range. This steady decline in new vehicle GPUs should continue throughout 2024, but we continue to believe that the new normal level of new vehicle GPUs will remain structurally higher than it was pre-pandemic, historically in the $2,000 per unit range. Furthermore, our luxury-weighted portfolio generally runs a lower inventory-day supply, and our luxury manufacturer partners have more effectively balanced supply to date, potentially minimizing new GPU compression relative to overall industry trends, which would continue to benefit the earnings power of our franchise business. In the used vehicle market, wholesale auction prices for three-year-old vehicles decreased nearly 9% in the fourth quarter, while average retail used prices declined just 2%.

As a result, new vehicle gross profit per unit continued its sequential decline to 4200 $89 per unit in the fourth quarter in line with our previous guidance as you exit 2023 in the low to mid $4000 range.

The steady decline in new vehicle Gpus should continue throughout 2024, but we continue to believe that the new normal level of new vehicle GPU will remain structurally higher than it was pre pandemic historically in the 2000 dollar per unit range.

David Bruton Smith: Furthermore, our luxury weighted portfolio generally runs a lower inventory days supply and our luxury manufacturer partners have more effectively balance supply to date potentially minimizing new GPU compression relative to overall industry trends, which would continue to benefit the earnings power of our franchise business.

In the used vehicle market wholesale auction prices for three year old vehicles decreased nearly 9% in the fourth quarter.

David Bruton Smith: While average retail used pricing declined just 2%.

David Bruton Smith: Elevated used retail prices remain a challenge for consumers, contributing to affordability concerns amid the current interest rate environment. However, the downward trends we are seeing in used vehicle wholesale pricing are positive for our business outlook and should benefit affordability and used vehicle sales volume in 2024. Nevertheless, fewer lease turn-ins at our franchise dealerships continued to limit our used vehicle volume in the fourth quarter, and used market seasonality drove a decline in used retail GPU to $1,443 per unit on a staying-store basis. Our team remains focused on driving incremental used inventory acquisition and retail sales opportunities in 2024, driving upside in this line of business alongside the expected normalization of used car pricing and volumes over time. Despite an elevated consumer interest rate environment, our F&I performance continues to be a strength, with same-store franchised F&I per unit of $2,334 in the fourth quarter.

David Bruton Smith: Elevated use retail prices remain a challenge for consumers contributing to affordability concerns amid the current interest rate environment.

However, the downward trends, we're seeing in used vehicle wholesale pricing are positive for our business outlook and should benefit affordability and used vehicle sales volume in 2024.

David Bruton Smith: Fewer lease turn ins at our franchise dealerships continue to limit our used vehicle volume in the fourth quarter and used market seasonality drove a decline in used retail GPU to 1400 and $43 per unit on a same store basis.

David Bruton Smith: Our team remains focused on driving incremental used inventory acquisition and retail sales opportunities in 2024.

David Bruton Smith: Driving upside in this line of business alongside the expected normalization of used car pricing and volumes over time.

David Bruton Smith: Despite an elevated consumer interest rate environment. Our F&I performance continues to be a strength with same store franchise F&I per unit of 2300 $34 in the fourth quarter.

David Bruton Smith: Our franchise dealership F&I penetration rates were stable quarter to quarter, and we achieved our previously issued guidance for full year 2023 franchised F&I GPU at or above $2,400 per unit, with same-store franchised F&I GPU of $2,411 for the full year. For comparison, for full year 2019, our franchised F&I GPU was $1,620, which was nearly $800 lower than the current run rate.

David Bruton Smith: Our franchise dealership F&I penetration rates were stable quarter to quarter.

David Bruton Smith: And we achieved our previously issued guidance for full year 2023, franchised F&I GPU at or above $2400 per unit with same store franchise F&I GPU of 'twenty $411 for the full year.

David Bruton Smith: For comparison for for full year 2019, our franchised F&I GPU was $620, which was nearly $800 lower than the current run rate and we expect to see continued stability in F&I GPU in 2024.

David Bruton Smith: And we expect to see continued stability in F&I GPUs in 2024. Our parts and service, or fixed operations business, remains strong with record fourth-quarter fixed operations gross profit at our franchise dealerships of 7% year-over-year on a same-store basis, driven by 9% growth in our customer pay. We are proud of the success our team has had in this area, and we believe there are remaining opportunities to optimize our fixed ops business as we progress through 2024. Turning now to the Echo Park segment. For the fourth quarter, we reported Echo Park revenues of $557 million, down 6% from the prior year and a record fourth quarter Echo Park gross profit of $43 million, up 5% from the prior year despite a significant reduction in our store count year over year. The Echo Park segment retail unit sales volume for the quarter was nearly 17,600 units, up 1% year over year.

David Bruton Smith: Our parts and service or fixed operations business remained strong with record fourth quarter fixed operations gross profit at a franchise dealerships up 7% year over year on a same store basis, driven by a 9% growth in our customer pay business.

David Bruton Smith: We were we are proud of the success. Our team has had in this area and we believe there are remaining opportunities to optimize our fixed ops business as we progress through 2024.

David Bruton Smith: Turning now to the Echo Park segment for.

David Bruton Smith: For the fourth quarter, we reported Echo park revenues of $557 million.

David Bruton Smith: Down 6% from the prior year and record fourth quarter Echo Park gross profit of $43 million.

David Bruton Smith: Up 5% from the prior year, despite a significant reduction in our store count year over year.

David Bruton Smith: Echo Park segment retail unit sales volume for the quarter was nearly 17600 units up 1% year over year. However, on a same store basis Echo Park retail unit sales volume was up 42% in the fourth quarter.

David Bruton Smith: However, on a same store basis, Echo Park retail unit sales volume was up 42% in the fourth quarter. As discussed on our previous earnings calls, reducing our store footprint in the second quarter of 2023 allowed us to better allocate inventory across the platform, driving higher unit sales volume, better GPUs, and significantly lower operating losses in the second half of 2023. Fourth quarter Echo Park segment adjusted EBITDA was a loss of $9.1 million compared to an adjusted EBITDA loss of $25.4 million in the fourth quarter of last year.

David Bruton Smith: As discussed on our previous earnings calls, reducing our store footprint in the second quarter of 2023 allowed us to better allocate inventory across the platform driving higher unit sales volume better G. P U and significantly lower operating losses in the second half of 2023.

David Bruton Smith: Fourth quarter Echo Park segment, adjusted EBITDA was a loss of $9 1 million compared to an adjusted EBITDA loss of $25 4 million in the fourth quarter last year.

David Bruton Smith: In January 2024, we've made the difficult decision to close the seven remaining northwest Motorsport pre owned stores and the Echo Park segment due to unique ongoing challenges to the northwest Motorsport business model.

David Bruton Smith: In January 2024, we made the difficult decision to close the seven remaining Northwest Motorsport pre-owned stores in the Echo Park segment due to unique ongoing challenges to the Northwest Motorsport business model. This decision, while not taken lightly, was made in order to benefit Echo Park's near-term profitability path and better align with our overall used vehicle strategy. Fourth quarter adjusted EBITDA losses associated with the Northwest Motorsport Group totaled $1.3 million.

David Bruton Smith: This decision was not taken lightly was.

David Bruton Smith: It was made in order to benefit Echo parks near term profitability path and better aligned with our overall used vehicle strategy.

David Bruton Smith: Fourth quarter adjusted EBITDA loss associated with the northwest Motorsport group totaled one 1.3 million, that's 1.3 million, while full year adjusted EBITDA losses associated with the group totaled $5 1 million.

David Bruton Smith: That's $1.3 million, while full-year adjusted EBITDA losses associated with the group totaled $5.1 million. Moving forward, we remain confident in our path to achieve rake-even Echo Park segment adjusted EBITDA in the first quarter of 2024 and positive Echo Park segment adjusted EBITDA for the full year. Sonic's diversified cash flows and strong balance sheet allowed us to withstand the challenges in the used vehicle market over the last three years and maintain our long-term Echo Park plan. Our unwavering confidence in Echo Park's future potential has positioned us as one of the few remaining nationwide used vehicle retailers, creating a tremendous opportunity for this brand down the road. We look forward to resuming disciplined long-term growth for Echo Park as used vehicle market conditions improve Turning now to our PowerSports segment, for the fourth quarter, we generated revenues of $27 million, gross profit of $7 million, and an adjusted EBITDA loss of $2.4 million.

David Bruton Smith: Moving forward, we remain confident in our path to achieve rake, even Echo Park segment adjusted EBITDA in the first quarter of 'twenty 'twenty, four and positive Echo Park segment adjusted EBITDA for the full year.

David Bruton Smith: Sonics diversified cash flows and strong balance sheet allowed us to withstand the challenges in the used vehicle market over the last three years and maintain our long term Echo park plants.

David Bruton Smith: Our unwavering confidence and echo park's future potential.

David Bruton Smith: Has positioned us as one of the few remaining nationwide used vehicle retailers, creating a tremendous opportunity for this brand down the road.

David Bruton Smith: We look forward to resuming disciplined long term growth, where I could park as used vehicle market conditions improve.

David Bruton Smith: Turning now to our power sports segment for the fourth quarter, we generated revenues of $27 million.

David Bruton Smith: Gross profit of $7 million and an adjusted EBITDA loss of $2 $4 million.

David Bruton Smith: Given the seasonal variability in the power sports industry and our geographic presence with the Black Hills platform, our fourth quarter results were in line with our projections. Looking into 2024, we continue to focus on identifying operational synergies within our current power sports network and remain optimistic about future growth opportunities in this adjacent retail sector when the time is right. Finally, turning to our balance sheet, we ended the third quarter with $846 million in available liquidity, including $374 million in combined cash and floor plan deposits on hand.

David Bruton Smith: Given the seasonal variability the variability in the power sports industry and our geographic presence with the Black Hills platform, our fourth quarter results were in line with our projections.

David Bruton Smith: Looking into 'twenty 'twenty four we continue to focus on identifying operational synergies within our current power sports network and remain optimistic about the future growth opportunities in this adjacent retail sector. When the time is right.

David Bruton Smith: Finally, turning to our balance sheet.

David Bruton Smith: We ended the third quarter with $846 million in available liquidity, including $374 million in combined cash and floorplan deposits on hand.

David Bruton Smith: The strength of our balance sheet allowed us to repurchase 3.3 million shares of our common stock in 2023, or 9% of shares outstanding at the beginning of the year. At the end of the fourth quarter, our remaining share repurchase authorization was $287 million, which represents approximately 15% of today's equity market cap. Share repurchases are an important part of our capital allocation strategy, and we remain focused on returning capital to shareholders via share repurchases as our liquidity and other capital needs allow. Additionally, I'm pleased to report that our Board of Directors approved a quarterly cash dividend of 30 cents per share, payable on April 15, 2024, to all stockholders, a record on March 15, 2024.

David Bruton Smith: The strength of our balance sheet allowed us to repurchase three 3 million shares of our common stock in 2023 or 9% of shares outstanding at the beginning of the year.

David Bruton Smith: At the end of the fourth quarter, our remaining share repurchase authorization was $287 million, which represents approximately 15% of today's equity market cap.

David Bruton Smith: Share repurchases are an important part of our capital allocation strategy.

David Bruton Smith: We remain focused on returning capital to shareholders via share repurchases as our liquidity and other capital needs are low.

David Bruton Smith: Additionally, I'm pleased to report that our board of directors approved quarterly cash dividend of <unk> 30 cents per share paid.

David Bruton Smith: Payable on April 15th 2024 to all stockholders of record on March 15th 2024.

David Bruton Smith: As we move ahead to 'twenty 'twenty four I'd like to call your attention to pages 12, and 13 in the Investor presentation. We released this morning.

David Bruton Smith: As we move ahead to 2024, I'd like to call your attention to pages 12 and 13 in the investor presentation we released this morning, where we discuss our outlook for the industry in 2024 and provide limited financial guidance for certain. From a consolidated company earnings perspective, we expect lower franchise dealership segment earnings to be partially offset by a significant improvement in Echo Park segment results, returning to positive adjusted EBITDA for the year, as well as a moderate increase in power While the financial outlook in the investor presentation is subject to inherent forecast risks and uncertainties, some of which are beyond our control, we believe the metrics provided may be useful in developing a financial model for Sonic's 2024 results.

David Bruton Smith: Where we discuss our outlook for the industry in 2024 and provide limited financial guidance for certain metrics.

David Bruton Smith: From a consolidated company earnings perspective, we expect lower franchise dealership segment earnings to be partially offset by a significant improvement in Echo Park segment results returning to positive adjusted EBITDA for the year as.

David Bruton Smith: As well as a moderate increase in power sports segment income year over year.

David Bruton Smith: While the financial outlook and the Investor presentation is subject to inherent forecast risks and uncertainties.

David Bruton Smith: Some of which are beyond our control. We believe the metrics provided may be useful in developing that financial model for Sonics 'twenty 'twenty four results.

David Bruton Smith: In closing, our team remains focused on near-term execution and adapting to ongoing changes in the automotive retail environment and macroeconomic backdrop while making strategic decisions to maximize long-term returns. Furthermore, we continue to believe that our diversified business model provides significant earnings growth opportunities in our eco-park and power sports segments that may help to offset any industry-driven margin headwinds we may face in the franchise business, minimizing the earnings downside to consolidated sonic results over time. We remain confident that we have the right strategy, the right people, and the right culture to continue to grow our business and create long-term value for our stakeholders. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you very much.

David Bruton Smith: In closing our team remains focused on near term execution and it and adapting to ongoing changes in the automotive retail environment and macroeconomic backdrop, while making strategic decisions to maximize long term returns.

David Bruton Smith: Furthermore, we continue to believe that our diversified business model provides significant earnings growth opportunities in our Echo Park and power sports segments that may help to offset any industry driven margin headwinds, we may face in the franchise business.

David Bruton Smith: <unk> the earnings downside to consolidated Sonic results over time.

David Bruton Smith: We remain confident that we have the right strategy the right people and the right culture to continue to grow our business and create long term value for our stakeholders.

Speaker Change: This concludes our opening remarks, and we look forward to answering any questions. You may have thank you very much.

David Bruton Smith: Okay.

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

Speaker Change: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Speaker Change: Confirmation tone will indicate your line is in the question queue.

Operator: You may press star 2 if you would like to remove your question. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start button. One moment, please, while we pull for you. Our first questions come from the line of Daniel Imbra with Stevens. Please proceed with your question. Hey guys, this is Joe Enderlin. I'm on behalf of Daniel.

Speaker Change: Press Star two if he would like to remove your question from the queue for.

Speaker Change: Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.

Speaker Change: Our first questions come from the line of Daniel Embrown with Stephens. Please proceed with your questions.

Speaker Change: Hey, guys. This is Joe enderlin on for Daniel Thanks for taking the questions.

Operator: Thanks for taking the question. All in all, good morning.

Speaker Change: Okay.

Speaker Change: Morning.

Heath Byrd: On the franchise side, your SG&A assumption of low 70s margin was a little higher than we expected. Could you maybe bucket out what drives these costs higher? And maybe is this where you expect long-term margin to shake out, or do you expect leverage? after 2024 and we return to a more normal GPU gate. Yes, hey, this is Heath Byrd.

Joe Enderlin: On the franchise side your SG&A assumption of low Seventy's margin was a little higher than we expected could you maybe bucket out what drives disease cause higher and maybe is this where you expect long term margin to shake out or do you expect leverage after 'twenty 'twenty four and we returned to a more normal GPU guidance. Thanks.

Speaker Change: Yes, Hey, this is Heath Byrd, a couple of things, obviously yesterday and as a percent of gross is heavily dependent on growth right and in our guidance of a low 70% range.

Heath Byrd: A couple of things. Obviously, the SG&A's percent of gross is heavily dependent on gross, and in our guidance of a low 70% range. We also have about a $1,200 degradation in the front end GPU. You just take that degradation on a flat unit basis.

Heath Byrd: We also have about a 1200 dollar degradation in the front end Gpus.

Heath Byrd: You just take that degradation on a flat unit basis is $130 million of gross that's leaving the numerator in that calculation.

Heath Byrd: That's $130 million of gross that's leaving the numerator in that calculation. We do have about a 1% increase in units in there that does offset some of that loss and growth. And so the biggest component is that $130 million, give or take, decrease in growth. If you look at the expenses, you know, the variable expenses are leveraging as they should as gross is going down. Fixed expenses; there's some that are higher than normal.

Heath Byrd: We do have about a 1% increase in units in there that does offset some of that walston gross.

Heath Byrd: So the biggest component is that 103 hundred 30 million give or take decreasing grows. If you look at the expenses. The variable expenses are leveraging as they should as grocers going down VIX expenses. There are some that are higher than our normal insurance coverage is trying to get coverage with property and casualty.

Heath Byrd: Insurance coverage, trying to get coverage with property and casualty insurance, is going up across the country. Also, the loaner expense is higher because our fixed ops business is growing at such a good pace, and we have manufacturer requirements to use EVs as loaners, and the depreciation of those is higher than ICE vehicles, and so that impacts our loaner expense and some IT expenses and investments for future optimization. There's definitely upside potential in that SG&A is in growth. The GPU degradation may be slower than we expected, but I think it's pretty standard across the peer group that in that range of about 1,200 losses for the year. Aileen Smith, Rick Nelson, and David Smith, Sonic Automotive Inc. We also have plans to have some structural changes in our expense structure, which could also impact that number. So we definitely see opportunities to beat that number, but looking at the math and the things that we see out there, we think a low 70% range is appropriate. Got it, that's helpful.

Speaker Change: He is going up across the country are also longer expense is is higher because our fixed ops business is growing at such a good pace and Ah we haven't manufactured requirements. He means E DS as loners and the depreciation of those are higher than ice vehicles, and so that impacts our loan works.

Speaker Change: That's.

Speaker Change: And some I T X, our expenses and investments for future optimization.

Speaker Change: There's definitely upside potential in that S James and Nicholas.

Speaker Change: The GPU degradation, maybe slower than we expected, but I think it's pretty standard across the peer group, but in that range of about 1200 loss for the year.

Speaker Change: Our portfolio get out performed the Saar.

Speaker Change: Expectations out there from 1% to 4%.

Speaker Change: We have a low single digit expectation and the units that we sell and obviously, we've got between join me F&I and fixed growth offset that loss and new growth.

Speaker Change: We also have plans to have some structural changes in our expense structure, which could also impact that number. So we definitely see opportunities to beat that number but looking at the math and the things that we see out there we think a low 70% range is appropriate.

Speaker Change: Got it that's helpful. As a follow up just given the weakness the weakness in the used market as a whole do you have any updated thoughts on what gives you confidence in the long term operating model of Echo Park do you may be increasingly think that consolidation of assets is going to play a considerable role in returning to that peak profitability.

Jeff Dyke: As a follow-up, given the weakness in the used market as a whole, do you have any updated thoughts on what gives you confidence in the long-term operating model of Echo Park? Do you maybe increasingly think that consolidation of assets is going to play a considerable role in returning to that peak profitability? Yeah, this is Jeff.

Speaker Change: Yeah. This is Jeff certainly the reduction in store count has helped us in our buying team buy cars for fewer stores and that's proving out in the numbers as we called out in the second and the third quarter.

Jeff Dyke: Certainly, the reduction in store count has helped us in our buying team buy cars for fewer stores, and that's proving out in the numbers, as we called out in the second and the third quarter. We're seeing excellent growth across the remaining 18 stores that we have. And with the manufacturers putting more and more inventory out on the street, it's going to just naturally make sense; it's going to drop prices. We're seeing that. Average wholesale prices are dropping.

Jeff Dyke: We're seeing excellent growth across.

Jeff Dyke: Across the remaining 18 stores that we have.

Jeff Dyke: And with the manufacturers for putting more and more inventory out on the street. It's gonna just naturally common sense, it's going to drop pricing, we're seeing that average wholesale prices are dropping or buying cars now in the mid 23 range.

Jeff Dyke: We're buying cars now in the mid-23 range, and I expect that to continue to drop, in particular after we get out of the March, kind of April selling timeframe. And that'll continue to improve as we move throughout the year. With that, we're going to sell more cars. We're gaining confidence with where we were with Echo Park back in 2019, and then we can start looking at strategic growth for Echo Park, being very conservative but getting back on the bicycle and growing the brand again. And so we've just been waiting.

Jeff Dyke: I expect that to continue to drop in particular after we get out of the March April are selling timeframe and that'll continue to improve as we move throughout the year with that we're going to sell more cars, we're gaining confidence with where we were with Echo Park back in 2019, and then we can start looking at strategic growth for Echo Park.

Jeff Dyke: Being very conservative, but getting back on the bicycle and in growing the brand again and so we've just been waiting.

Operator: Certainly, as we called out in the third quarter, turbulent waters for the used car business. We think there's another 16, 18 months of that, but progressively getting better as we move throughout the year.

Jeff Dyke: Certainly as we called out in the third quarter with turbulent waters for the used car business. We think there's another 16 18 months of that but but progressively getting better as we move throughout the year.

Speaker Change: Got it. Thank you guys that's all for us.

Operator: Thank you, guys. That's all for us. Thank you. Thank you. Our next questions come from the line of John Murphy with Bank of America. Please proceed with your question. Good morning, guys.

Speaker Change: Thank you. Thank you.

Speaker Change: Thank you our next questions come from the line of John Murphy with Bank of America. Please proceed with your questions.

John Murphy: Good morning, guys I just wanted to follow up on that that that use question I mean, Jeff I mean, it seems like what we're seeing is.

Jeff Dyke: I just wanted to follow up on that question you used. I mean, Jeff, it seems like what we're seeing is that demand for vehicles is continuing to slowly improve. And I'm just curious, you know, as you think of what's going on on the used side, right, versus the new, is there this substitution where folks are just tripping into buying new vehicles as opposed to used vehicles? But we also have this dynamic of sort of a still shrinking of the one to six year old used fleet. So there's a lot of moving parts that are going on here. And we're kind of hearing, you know, cross currents, you know, in different ways about used vehicle demand being weak, but it doesn't seem like it jives necessarily with the idea that vehicle demand is improving. I just, I don't know if you could expand on that or tell us kind of what you're seeing generally, maybe in the new stores, but then also in Echo Park. Yeah, sure.

John Murphy: Demand for vehicles is continuing to slowly improve.

John Murphy: And I'm just curious you know as you think of what's going on on the used side rate versus the new is there's this substitution where folks are just tripping into buying new vehicles as opposed to used vehicles, but we also have this dynamic of sort of a still shrinkage of the the one to six year old used fleet.

John Murphy: So there's a lot of moving parts that are going on here and we're kind of hearing you know crosscurrents in different ways about us being weak, but it doesn't seem like it jives necessarily with the idea that the vehicle demand is improving I just I don't know if you could expand on that or tell us kind of what you're seeing generally maybe in the new stores, but then also.

Jeff Dyke: I mean, I don't agree with the statement that the used vehicle market is getting weaker. I mean, if anything, it's flattening out and starting to get better. And so, you know, in the coming months, with the amount of new cars that the manufacturers are putting on the road, we're gonna trade for more cars. We're gonna trade for more one to five-year-old cars. And that's certainly helping both the franchise used vehicle departments and Echo Park. And you can see it in Echo Park.

Echo Park: And Echo Park, Yeah, sure I mean, I don't agree with the statement that they used vehicles getting weak I mean, if anything it's flattening out and starting to get better and so you know in the coming months with the amount of new cars with the manufacturers are putting on the road, we're going to trade for more cars are going to trade for more one to five year old cars and that's <unk>.

Echo Park: Certainly, helping both the franchise I've used vehicle apartments, and Echo Park and you can see it in Echo Park I mean, you see the numbers are our Echo Park volume is expanding greatly we're selling more cars now out of 18 stores and they were selling out of 45 stores before so and we expect that to continue I think the used vehicle business gets.

Jeff Dyke: I mean, you see the numbers. Our Echo Park volume is expanding greatly. We're selling, you know, more cars now out of 18 stores than we were selling out of 45 stores before. And we expect that to continue. I think the used vehicle business is going to get stronger as the year goes on. And that's because wholesale prices are gonna drop, and wholesale prices are gonna drop because the manufacturers can't help themselves. They're just putting more and more cars on the road. Some are doing a better job than others. But, and then we've got the electric vehicle piece that's coming in. We don't have any, to say, used electric vehicles.

Echo Park: Or as the year goes on.

Echo Park: And that's because wholesale prices are going to drop in wholesale prices are going to drop because the manufacturers can't help themselves.

They're just putting more and more cars on the road some are doing a better job than others.

Echo Park: But they're in and then we've got the electric vehicle piece, that's coming in we don't have any to say used vehicle electric vehicles, that's gonna start becoming a part of the picture as we move into the mid summer months as some of the off lease cars start coming back so.

Jeff Dyke: That's gonna start becoming a part of the picture as we move into the mid-summer months as some of the off-lease cars start coming back. So, I just see nothing but upside from a used vehicle perspective. And that's why we're very confident in our first quarter break-even EBITDA call-out for Echo Park, and we ought to be in great shape for the year. The business, the used car business, is strong. It's always been strong. We've just been short on the one to five-year-old model for Echo Park, and that, you know, caused some turbulent times over the last couple of years. But that's dissipating.

I, just see nothing but upside from a from a used vehicle perspective, and that's why we're very confident in our first quarter, a breakeven EBITDA call out for Echo Park and.

Echo Park: And we ought to be in great shape for the year of the business. The used car business is strong it's always been strong we've just been short on the one to five year old model Franco parking lots that you know call. Some turbulent times over the last couple of years, that's dissipating and as we move throughout 'twenty four it's just going to get stronger and stronger and that bodes well for the Echo Park model that's an offer.

Jeff Dyke: And as we move throughout 24, it's just gonna get stronger and stronger. And that bodes well for the Echo Park model. It's an offset to what goes on from a franchise perspective for us. And so, we're expecting just a tremendous year from an Echo Park. That's very helpful.

Echo Park: Is that to what goes on from a franchise perspective for us and so we're expecting just a tremendous year from an Echo Park perspective.

That's very helpful. Just one follow up on the F&I P. V. R. 2400, roughly you guys are looking at and it seems like we're through the worst of times you know knock on wood on on rates rising and in sort of the negative headwinds that you might have there.

Jeff Dyke: Just one follow-up on the FNI PVR, 2400 roughly, you guys are looking at. You know, it seems like we're through the worst of times, knock on wood on rates rising and sort of the negative headwinds that you might have there. You know, there might be some offset of revenue per unit, right? ATP is going down a bit in 24, but, you know, is there potential that there could be some real upside there, you know, in 24, maybe structurally over time as you get better penetration of some of the good products that you guys have developed there and the industry has developed? Yeah, absolutely.

Echo Park: Yeah, there might be some offset of our revenue per unit or a T. P is going down a bit.

Echo Park: In 'twenty four but is there potential that there could be some real upside there you know in 24, maybe structurally over time as you get good better penetration of some of the good product that you guys would have out there in the industry has developed.

Echo Park: Yeah, absolutely and especially as we get to the back half of the year, our rates come down a little bit certainly with retail pricing dropping there's less margin on the part of F&I, but yeah, there's nothing but upside look.

Jeff Dyke: And especially as we get to the back half of the year, rates come down a little bit. And certainly, with retail pricing dropping, there's less margin on the F part of F&I. But, you know, there's nothing but upside. Look, we are typically one or two in the category, or, excuse me, two or three in the category. And I think AutoNation's out there with a much higher F&I PUR.

Echo Park: We are typically one or two in the category.

Echo Park: Or excuse me two or three in the category and I think auto nations out there with a with a much higher F&I. If you are we believe we can perform at that level or higher or Echo park stores perform at that level or higher and I think you'll see that along with improving front end margin at Echo Park as we move throughout the first quarter and into the into the Red.

Jeff Dyke: We believe we can perform at that level or higher. Our Echo Park stores will perform at that level or higher. And I think you'll see that, along with improving front end margin at Echo Park, as we move throughout the first quarter and into the rest of the year. So that's a good call out.

Speaker Change: A year or so that's a good call out.

Operator: I think there is opportunity for F&I improvement as we move forward. Thank you very much, guys. Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate you are in the question queue.

Speaker Change: There is opportunity for F&I improvement as we move forward.

Speaker Change: As you very much guys.

Speaker Change: Thank you.

Speaker Change: Thank you as a reminder, if he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate you are in the question queue. Our next question.

Jeff Dyke: Our next question comes from the line of Rajat Gupta with J.P. Morton. Please proceed with your question. Great. Thanks for taking the time to answer the question. I just wanted to, you know, first reconcile some of the comments on the used car market. I think, Jeff, I think earlier in the call, you mentioned that the backdrop is likely to remain tough for 16 to 18 months. But then, to John's question earlier, I think you mentioned that you're seeing improvement. I'm just curious, like, you know, how should we reconcile those comments?

Speaker Change: I have a job goop that with J P. Morgan. Please proceed with your question.

Great. Thanks for taking the question just wanted to first start reconcile some of the comments on the used car market.

Job Goop: I think Jeff I think I heard you on the call you had mentioned that the.

Speaker Change: Crop is likely to remain tough for 16 to 18 months.

Speaker Change: But then to John's question earlier, I think you mentioned that you're seeing improvement.

Speaker Change: I'm just curious like you know how should we reconcile those comments and then.

Jeff Dyke: And then would you be able to put a finer point on expectations for used car volumes, both at Ecopark and the franchise business for 2024? And I have a quick follow-up on SG&A. I think over the next 16 to 18 months, it's not going to return to 2019 levels, but it's progressively going to get better. And the way that I would look at volume for Ecopark is in and around the same amount of volume that we did last year with a lot fewer stores for six months of the year. And then we are projecting low single-digit growth for used car volume increases from a used car perspective on the franchise side. So, look, you know, we're not out of the troubled waters, but it's not anywhere near as choppy as it was. And with wholesale market prices dropping, it's just progressively going to get better as we move throughout 24 and into the first quarter of 25. And that's why we're just so confident about Ecopark and where we are. We told you guys this in the second quarter. We made our moves. We saw what happened in the third quarter.

Speaker Change: Would you be able to put a finer point on.

Speaker Change: Expectations for used car volumes, both at Echo Park, and the franchise business for 'twenty 'twenty, four and I have a quick follow up on SG&A.

Speaker Change: I think over the next six to eight to 16 to 18 months you know, it's not going to return to 2019 levels, but its progressive way going to get better.

Speaker Change: And the way that I would look at volume for Echo Park is in and around the same amount of volume that we did that we did last year with a lot fewer stores. Our first six months of the year and then we are projecting low single digit growth for used car volume increases from a used car perspective on the franchise side. So.

Speaker Change: You know, we're not out of the troubled waters, but it's not anywhere near as choppy as it was and with the wholesale market prices dropping it's just progressively going to get better as we move throughout 'twenty four and ended the first quarter of 'twenty five and that's why we're just so confident about echo parking where we are we told you guys at this in the second quarter, we made our move.

Speaker Change: Moves we saw what happened in the third quarter, we saw what happened in the fourth quarter with our volumes. That's continuing in January we're seeing it in fact it continued in January we'll see it we're saying it again in February and.

Operator: We saw what happened in the fourth quarter with our volumes. That's continuing in January. We're seeing it continue in February. And we expect the rest of the year to progressively get better as we move forward. Did we lose you? You might be muted.

Speaker Change: And we expect that the rest of the year to progressively getting better as we as we move forward.

Did we lose you you might be muted.

Operator: Can you hear me? Sorry. Yeah, we can hear you now. Yeah, so just on SG&A to gross, you know, the low 70% number for the full year. I mean, if we compare that to 2019, it's obviously, you know, below, you know, your 77% in 2019, you know, gotten just 72%. But that that 72 73% for this year is still on. Yeah, this is Heath.

Speaker Change: Oh can you hear me sorry that we couldn't hear you now yes.

Speaker Change: Oh, just on SG&A to gross you know the low 70% number.

Speaker Change: For the full year I mean, if.

Speaker Change: I mean, if you compare that to 2019, it's obviously you know below 77% in 2019, and Youre guiding to a 72% but.

Speaker Change: But that's that's 72 sandwiches per cent for this year, it's still up on.

Speaker Change: Our higher than 2019, and new car GPU number on a blended basis. So.

Speaker Change: Is there any change in thought process around you know where the normalized SG&A to gross would go to because.

Heath Byrd: Yeah, we absolutely think that in the out periods there's the opportunity to decrease that level of SG&A's percent of gross. We're doing some structural changes from an expense perspective, as well as some changes in our F&I products that we're offering, and those things will help replace that degradation in the new gross and will actually help the SG&A percent of gross. So we do not think that this is going to be staying in the 70s going forward.

Speaker Change: Presumably 2025 is going to see another step down in the new car GPU. So.

Speaker Change: Should we expect that franchise as you need to grow societal even higher than low seventies eventually or.

Speaker Change: Yeah, how should we think about that.

And hopefully that question makes sense.

Speaker Change: Yeah. This is heath, yeah, we absolutely think that in the out periods that there's the opportunity to do.

Heath Byrd: Decrease that level of SG&A as a percent of gross.

Heath Byrd: We can give them some structural changes from an expense perspective as well as some changes in our F&I products that we're offering and those things will help replace that degradation and the new gross and Oh actually wasn't a healthy SG&A as a percent of gross so we do not think that this is gonna be staying in the seventies going forward.

Heath Byrd: We think there's opportunities to get back in the high 60s, but at this point, based on the data that we're seeing, we believe that that low 70 range is appropriate for 2040. The other thing, too, is that we added a 100 net gain of 108 technicians last year. Our target is to add an additional 300 net gain of technicians this year.

Heath Byrd: We think there's opportunities to go back into the high Sixty's.

Heath Byrd: But at this point based on the data that we're seeing we believe with that low 70 range is appropriate for twinkling for just the other thing too is we added 100 net gain of 108 technicians last year. Our target is to add an additional 300 net gain of technicians. This year, we still have to do that but at the end of the day, that's going to create.

Jeff Dyke: We still have to do that, but at the end of the day, that's going to create incremental growth to help offset what we see from a front-end gross degradation on new cars. And that, too, will help push the margin SG&A percentage gross down below the 72% number that we're calling out. And look, at the end of the day, we'll see the street.

Incremental growth to help offset what we see from our front end gross integration on the degradation on a new car and that too will help push the margin up.

Heath Byrd: SG&A percentage grows down below.

Heath Byrd: The 72% number that we're calling out and look at the end of the day you will see the street you know some of our competitors are calling out 150 200 basis point increase in expenses.

Jeff Dyke: Some of our competitors are calling out 150, 200 basis points of increase in expenses. We're in that 400 to 500 range. It's still early in the year, but we're all calling out basically $300 a quarter in front-end margin degradation, and that's a lot of gross reduction. And we'll see kind of who's right when this is all said and done.

Heath Byrd: We're in that four to 500 range, it's still early in the year, but we're all calling out basically $300 a quarter and front end margin degradation and that's a lot of gross reduction and we'll see you know kind of who's right. When this is all said and done where there's a long way to go in the year. We certainly believe that we can improve upon that.

Jeff Dyke: There's a long way to go in the year. We certainly believe that we can improve upon the number that we're giving you, but, like he said, based on where we are right now, that low 70s range we feel is a good number to begin the year with, and we'll work our tails off to improve from there. But there's a long way to go, and what the manufacturers do with new cars and new car day supply is going to play a big role in all of this, along with what percentage of your overall sales is going to be electric vehicles. That's running around 10% right now. That had almost a $400 degradation to our front-end margin in the fourth quarter. Highline drove a lot of that.

Heath Byrd: Remember that we're giving you but like he said based on where we are right now that that low seventy's range. We feel is a good number to begin the year with and well work our tails off to improve from there, but there's a long way to go and and and what the manufacturers do with new cars and new car day.

Supply is going to play a big role in all of this along with what percentage of your overall sales is gonna be electric vehicle, that's running around 10% right now that had almost a 400 dollar degradation to our front end margin in the fourth quarter Highline drove a lot of that a Mercedes Benz was 235.

Jeff Dyke: Mercedes-Benz was $235 of that degradation alone, primarily driven from California. We've got to get control of that. That's a big focus point for us with our manufacturer partners as we move forward. I know we're not the only ones experiencing that. There are a lot of moving pieces at play here, but it's safe to say in that low 70% range for now, and hopefully, as we move through the quarters, that becomes a

Heath Byrd: Dollars of that degradation alone, primarily driven from California.

Heath Byrd: We've got to get control of that that's a big focus point for us with our manufacturer partners as we move forward and I know that we're not the only ones experiencing that so there's a lot of a lot of moving pieces at play here, but it's safe to say in that low 70% range for now and and hopefully as we move through the quarters.

Heath Byrd: That becomes a better number.

Heath Byrd: One technical point, too, on the degradation: it's not going to be linear. We're going to have, for that GPU front-end degradation, you're going to have a larger portion going from Q4 into Q1, and then it levels out to about 300 a quarter going forward. And to your point, Rajab, this is Danny. To your point on the sustainability of structurally higher new GPUs, we still believe that that's a possibility as we go forward, move past 2024. We're already seeing where some of the domestic manufacturers have got an 80-plus day supply today, but yet we're making $1,200 up to $2,000 more in GPUs than we did in 2019, despite day supply being roughly back at that level

Heath Byrd: One technical point too long the degradation, it's not gonna be linear we're gonna have without gpus running degradation, you're going to have a larger portion going from Q4 into Q1, and then it levels out to about 300, a quarter going forward.

Heath Byrd: And to your point resolved this advantage to your point on the sustainability of structurally higher new Gpus, we still believe that that's a possibility as we go forward moved past 'twenty 'twenty four we're already seeing where with some of the domestic manufacturers they've got an 80 plus days supply today, but yet, we're making 1200 up to $2000 more in GPU then.

Heath Byrd: We did in 2019, despite days' supply being roughly back at that level a lot of that has to do with the segment mix shift towards full size trucks Suvs that are higher margin business for us and then across the other brands you know where we've got more measured inventory days' supply expansion, we're still seeing dramatically elevated new gpus.

Danny Weiland: A lot of that has to do with the segment making a shift towards full-size trucks and SUVs that are higher-margin business for us. And then across the other brands, where we've got more measured inventory day supply expansion, we're still seeing dramatically elevated new GPUs that while we expect them to come down as we go through this year, we still see a path to where, as part of that longer-term SG&E growth structure, we're not going back to a $2,000 blended new GPU, and it's somewhere elevated above that. And then you factor in the fact that we're running roughly $800 higher in F&I per unit; the variable GPU associated with those retail unit sales down the road should help us leverage the expense structure more efficiently than we did in 2019. I got it. I got it.

Heath Byrd: While we expect to come down as we go through this year, we still see a path to where it is part of that longer term SG&A to growth structure, we're not going back to the 2000 dollar blended new GPU and it's somewhere elevated above that and then you factor in the fact that we're running roughly $800 higher in F&I per unit variable GPU associated with those.

Heath Byrd: Retail unit sales down the road should help us leverage the expense structure more efficiently than we did in 2019.

Speaker Change: Got it got it that's a very clear thanks for taking the questions.

Operator: That's very clear. Thanks for taking the question. Thank you. Thank you. Our next questions come from the line of Glenn Ching with Seaboard Research Partners. Please proceed with your question. Good morning.

Speaker Change: Thank you.

Speaker Change: Thank you our next questions come from the line of Glenn Chin with Seaport Research Partners. Please proceed with your questions.

Glenn Chin: Hi, Good morning, Thanks, gentlemen, I just to circle back just circling back to your comment about high G. P headwinds from either us or is that a.

Operator: Thanks, gentlemen. Just to circle back, just circling back to your comment about TPU Edwin from EVU is that a..., www.sonicautomotiveinc.com. We lost you. Sorry, can you guys still hear me?

Glenn Chin: Okay.

Speaker Change: We lost you.

Speaker Change: <unk>.

Operator: We can now. Can you ask that again? Sorry about that. Just circling back to your comment, Jeff, about... DTU headwind from EVs at $400. That's a comment relative to year-over-year, correct? Not sequential?

Speaker Change: We can tell right now.

Speaker Change: Ask that again.

Speaker Change: Sorry about that hi, just circling back to your constant chest about.

Speaker Change: GPU headwind from E D that $400, that's a comment relative to a year over year correct not sequential.

Danny Weiland: That's the headwind in the fourth quarter. So if you look at our blended GPU that we reported for Q4, it reflects a $400 headwind from EV GPUs running at a lower rate than the remainder of the business. And in some brands, a negative margin and a significant negative margin, which added to that. Okay, very good. And then, You know, historically, the fourth quarter is seasonally strongest for earnings for Sonic. Can you just highlight the factor or factors that primarily drove that disruption to that trend this year?

Speaker Change: That's the headwind in the fourth quarter. So if you look at our at our blended GPU that we reported for Q4.

Speaker Change: Flex a 400 dollar headwind from E V Gpus at running at a lower rate than the remainder of the business and in some brands negative margin and significant negative margin, which added which added to that.

Speaker Change: Okay very good thank you and then.

Speaker Change: You know historically fourth quarter is seasonally strongest.

Speaker Change: Core earnings for Sonic can you just highlight the factor or factors that primarily drove that disruption to that trend this year.

David Bruton Smith: I mean, a lot of us, this is David, we've talked a lot about it. There was sort of a window of uncertainty that we saw that really impacted our traffic, and I think that the overall macroeconomic landscape, people hesitated a little bit there to do business, and then it came back in some areas at the close of the year, but I think that was, again, sort of a macro point of saying, you know, So, the other thing that I would add to that is BMW plays, you know, an enormous role in our overall performance, and our growth on BMW in the quarter was about 1.1%.

Speaker Change: Shortly.

Speaker Change: Lot of US. This is David we've talked a lot about it right, but there was a there was a.

Speaker Change: A window of uncertainty that we saw that really impacted our traffic and.

Speaker Change: Think that the overall macroeconomic.

David Bruton Smith: Landscape that people were hesitated, a little bit there to to do business and then it came back in and in some areas at the close of the year.

David Bruton Smith: I think that that was again, there's sort of a macro point.

David Bruton Smith: Point of saying, Hey, we'll just wait and back let's see let's see if this storm clears a little bit before we would go and buy a car. That's some of the feedback we've gotten.

David Bruton Smith: So I think the other thing that I would add to that is B M. W. Plays you know an enormous role in our overall performance and our growth on B M. W. In the quarter was about 1.1% when you compare that to some of our other highline manufacturers lexis were up 76% in the quarter.

David Bruton Smith: If you compare that to some of our other high-line manufacturers, Lexus was up 76% in the quarter, Audi up almost 23%, Luxury was up 11.4%, but when BMW doesn't have the kind of volume in the quarter that it normally would have and the gross erosion associated with that, that certainly did not help during the quarter, and that was really driven by inventory levels. BMW has done an amazing job overall keeping their day supply down and did that during the fourth quarter. We missed out on some opportunities there, and because we have so many BMW stores and they're such a big part of our overall revenue mix, that certainly played a role in the overall performance in the quarter. Okay, I apologize. I hopped on late.

David Bruton Smith: Audi up almost 23% a luxury was up 11, 4%, but when BMW doesn't.

David Bruton Smith: It doesn't have the kind of volume in the quarter than it normally would have that AR and the grocery erosion associated with that that that certainly did not help during the quarter and that was really driven by inventory levels BMW has done an amazing job.

David Bruton Smith: Overall, keeping their day supply down and did that during the fourth quarter, we missed out on some opportunities there and because they we have so many BMW stores and they are such a big part of our overall revenue mix that that certainly played a role in the overall performance in the quarter.

Speaker Change: Okay, I apologize I hopped on late so thank you for clarifying.

Jeff Dyke: So thank you for clarifying. And then, then just on your outlook, thank you for the comprehensive look. That's very helpful.

Speaker Change: And then then just on your outlook. Thank you for the comprehensive look that's a very helpful.

David Bruton Smith: I don't suppose you guys would care to venture a range for potential adjusted EBITDA profitability for Echo Park for 2024? No, we, you know, we do have that we forecast being positive even now for the year, but I go to the park, and that's the score. Okay.

Speaker Change:

Speaker Change: I don't suppose you guys, we character venture arrange for potential adjusted EBITDA profitability Crackle part for 'twenty 'twenty four.

Speaker Change: Yeah. We you know we do have that we forecast being positive EBITDA for the year when I go Park and that's as far as we go.

Speaker Change: Okay.

Jeff Dyke: Um, and can I ask just what that, uh, What that may be predicated upon, does it require any more store closures, or is the footprint you guys have now set? That's not something we built into it, is it, any additional store closures. Yeah, I mean, look, the used vehicle business is getting better, the inventory supply is getting better, the average wholesale price is dropping significantly, and when you combine all of those things, that's why we just have such confidence in our Echo Park model and why we stuck it out through those last three very difficult years. It makes for a pretty picture at 24 and even better as the years go on.

Speaker Change: And can I ask just what that.

Speaker Change: What that may be predicated upon doesn't require any more store closures or is the footprint. You guys are have now are set.

Speaker Change: That's not something we built into it or is it an additional store closures.

Speaker Change: I mean look the use the used vehicle business is getting better the inventory supply is getting better the average wholesale prices dropping significantly.

Speaker Change: And when you combine all of those things that's why we just have such confidence in our Echo Park model and why are we stuck it out through those last three very difficult years. It makes for a pretty picture for 'twenty, four and even better as the years go on were coming out of those turbulent waters as I said earlier and it's gonna make for a fun year.

Jeff Dyke: We're coming out of those turbulent waters, as I said earlier, and it's going to make for a fun year. Echo Park is going to have a great year, and we're very excited about being back on our bicycles, so to speak, and getting those stores back to selling the kind of volume that we built them for and driving the kind of growth that we built them for, and that's upon us now. We've waited a long time and worked really, really hard.

Speaker Change: Echo Park is going to have a great year, and we're very excited about being back on our bicycles, so to speak and getting getting those stores back to selling the kind of volume that we built them for and driving the kind of grocery we bought them for them and that's upon US now we've waited a long time worked really really hard our team is busted their butts and them to get through all.

David Bruton Smith: Our team has busted their butts to get through all of this, and we're getting ready to enjoy the rewards from the hard work that went into it. David, as I mentioned in our opening comments, talking about our diversified business model and being able to weather the storm, we view it, and jokingly hear in the office talk about it, it's like in the movie Forrest Gump when they survive the storm. You see these other competitors closing. It's not as if the used vehicle market has just been disintegrated forever. We think it's going to be stronger than ever.

Speaker Change: This and we're getting ready to you know enjoy the rewards from from the hard work that went into that.

Speaker Change: This is David as I mentioned in her opening comments you were talking about our diversified business model and being able to weather the storm.

Speaker Change: You know, we view it and jokingly here in the office to talk about it.

And the movie Forrest Gump, when when they survived the storm you know you've seen these other stores.

Speaker Change: The competitors closing you know, it's not as if they used vehicle market has just.

Speaker Change: Integrated forever, it's just not like Hey, we think it's going to be.

Speaker Change: Strong and there was a much larger market than the new vehicle market historically and we just as we said we see tremendous opportunity for Echo park in the future.

Danny Weiland: It's a much larger market than the new vehicle market historically, and as we said, we see a tremendous opportunity for Echo Park in the future. Yeah, and one more point to add, this is Danny. You know, Glenn, I think you mentioned in your note this morning that even just going from the $83 million adjusted EBITDA loss at Echo Park in 2023 to zero is north of $1.50 of EPS benefit. And we've called out that we expect to be positive for the full year next year. So there's a big opportunity to offset, at least somewhat offset, the normalization, and continued normalization of franchised earnings just by getting back to zero, let alone positive EBITDA on the Echo Park segment. Yep, I understand.

Speaker Change: Yeah, and one more point to add this is Danny you know Glenn I think you mentioned it in your note. This morning that even just going from the 83 million adjusted EBITDA loss at Echo Park. In 2020, 320 is north of a $1 50 of EPS benefit and we've called out that we expect to be positive for the full year next year. So there's a big opportunity to offset all of it.

Speaker Change: Somewhat offset the normalization of the continued normalization of franchised earnings just by getting back to zero, let alone positive EBITDA on the Echo Park segment.

Speaker Change: Yep Yep understood. Okay. Thanks, and then just last for me.

Operator: Okay, thanks. And then, just last for me, if you can just comment on the spread between wholesale and retail use pricing, has it normalized, and what you guys might see it doing for the rest of this year? No, it hasn't. It hasn't normalized.

Speaker Change: If you can just comment on the spread between wholesale and retail.

Speaker Change: Used pricing has it normalize and what you guys might see it doing for the rest of this year.

Speaker Change: No. It's not it's not normalized I think wholesale prices in the fourth quarter dropped like 9% retail dropped 2%.

Jeff Dyke: I think wholesale prices in the fourth quarter dropped like 9%, and retail dropped 2%. And, you know, as you know, there's a seven, eight week lag there. There's still a lot of high percentage of no sales in the auction lanes. I think that's running north of 40%, but down from 50. And so, you know, everybody's still trying to find their way through this on the back edges of this storm.

Speaker Change: And you know as you know, there's a seven to eight week lag there.

There theres still a lot of high percentage of net sales in the auction lanes I think that's running north of 40%, but down from 50 and so as you know everybody is still trying to find their way through this in the back edge isn't the storm, but.

Jeff Dyke: But we expect those two things to catch up with each other. And, you know, I think we're going to have to keep an eye on each other as we move into March, April, and May. And, again, you know, put some wind in the sails of Echo Park and the industry. The used vehicle business should be getting better as we move forward. So, in other words, yes, so that spread should be widening, correct? Yes, that's exactly right. Yeah, okay, very good. Thanks for all the comments.

Speaker Change: But we expect those two things to catch up with each other as we move into March and April and May.

Speaker Change: And again, you know put some wind in our sales of of Echo Park and the industry used vehicle business should be getting better as we move forward.

Speaker Change: So.

Speaker Change: In other words, yes, so so that spread should be widening correct.

Speaker Change: Yes, that's exactly right.

Speaker Change: Okay very good thanks for all the comments thank.

Operator: Thank you. I appreciate the question. Thank you. Our next questions come from the line of Michael Ward with Freedom Capital. Please proceed with your questions. Thanks very much. Good morning, everyone.

Speaker Change: Thank you I appreciate the questions.

Speaker Change: Thank you our next questions come from the line of Michael Ward with Freedom Capital. Please proceed with your question.

Michael Patrick Ward: Thanks, very much good morning, everyone.

Just to.

Operator: Just to zero in a little bit on Echo Park on the SG&A side. So we've seen a big improvement in SG&A costs, second half versus first of 2023. As we go into 2024, I assume the run rate's even lower as we go into Q1 with getting rid of some of the Northwest stores. Is that correct? Yes, hundred percent.

Michael Patrick Ward: Dessert and a little bit on Echo park on the SG&A side. So we've seen a big improvement in SG&A costs second half versus first half 2023.

Michael Patrick Ward: As we go into 2024.

Michael Patrick Ward: E I assume the run rates, even lower as we go into Q1 with getting rid of some of the northwest store is that correct.

Michael Ward: Yes.

Michael Ward: 100%.

Jeff Dyke: Okay, and I think we called out on the pages that David referenced somewhere an echo park SG&A percentage in the 80% range, with a mature store being south of 70%. And we expect that as we mature week, that's where we expect to be. And honestly, that's where we were, if not better, prior to COVID hitting.

Okay, and I think we called out on the pages that David referenced somewhere.

Michael Ward: Our SG&A percentage in the 80% range with a mature store being south of 70% and we expect that as we mature weeks, that's where we expect to be in and honestly, that's where we were if not better prior to COVID-19 hitting so all these things are coming back into light for us which is just fine.

Jeff Dyke: So all these things are coming back into light for us, which is just fantastic. Yeah, that's the total segment level. At the store level, we've seen our more mature stores, both in 2019, getting back toward a sub-60. I mean, they're among the best of our entire portfolio in terms of SG&A to gross and SG&A leverage because of the cop structure in that market. What did you end up doing, how many locations do you have at Echo Park at your end? Eighteen.

Michael Ward: Tastic Yeah, that's a total segment level at the store level, we've seen in our more mature stores, both in 2019 or getting back toward a sub 60 I mean, there are among the best of our entire portfolio in terms of SG&A to gross and SG&A leverage because of the cost structure in that market.

Michael Ward: What did you and how many locations do you have an echo park at yearend 2014.

Operator: We had 25 at year end, but with the seven closures in January, today we sit at 18. Sorry, I've already forgotten about Northwest Motorsports. Thanks very much. Thank you. Our next question has come from the line of Brett Jordan with Jeffries.

Speaker Change: We had 25 at year end, but with the seven closures in January today, we sit at eight games.

Speaker Change: Alright, I've already forgotten about northwest Motorsports [laughter], thanks very much.

Speaker Change: Thank you. Our next question is coming from the line of Bret Jordan with Jefferies. Please proceed with your questions.

Operator: Please proceed with your question. Hey, good morning, guys. Good morning.

Bret Jordan: Good morning, guys.

Jeff Dyke: Could you talk about the impact of lease recovery on F&I? Obviously, it's been at a pretty low rate on lease penetration, but it would seem that there is less F&I packaged in that transaction. Is that factored into your flat F&I going forward? Meaning, at least if leases improve and penetration improves, it's not going to make a difference.

Bret Jordan: Could you talk about the impact of lease recovery on F&I and obviously, it's been at a pretty low rate on lease penetration, but it would seem that has less F&I packaged in that transaction.

Bret Jordan: That factored into your flat F&I going forward.

Speaker Change: Meaning if lease if leases improve and penetration improves it's not it's not going to make a difference I don't think our.

Jeff Dyke: I don't think our It is factored in, and you know, we're going to be in that 2400 range or north of that, I think, when the back half of the year gets here as we continue to improve, especially on a total company basis because we're seeing great improvement at Echo Park even in the current interest rate environment as we zero in and focus on execution there. There's a lot of opportunity from our perspective and from an F&I perspective, and we should be able to hit that 2400 number or higher as we move forward. No, there's F&I in it. It's just not at the level that you would with when someone's financing a car traditionally.

Speaker Change: It is factored in and and you know we're gonna be in that.

Speaker Change: 2400 range or north of that I think is the back half of the year gets here as we continue to improve especially on a total company basis.

Speaker Change: Because where we're seeing great improvement at Echo Park.

Speaker Change: Even in the current margin right at current interest rate environment.

Speaker Change: As we zero in and focus on execution there. There's a lot of top side, there's a lot of ops opportunity from our perspective and from an F&I perspective and.

Speaker Change: We should be able to hit that 24 number 2400 number or higher as we move forward is there any F&I attach the leasing or is it pretty much not a cat and not the other thing there.

Speaker Change: No Theres F&I are in it it's just not at the level that you would with with when someone's been answering a car traditionally.

Danny Weiland: And then on the customer pay, parts, and service side, up nine percent, what was the number between price and traffic in that nine percent? About a third of that, this is Danny. About a third of that comes from higher repair order volume, and two-thirds comes from passing along higher labor costs, higher parts costs, the effects of inflation as we've seen over the last several quarters. Okay, great. Thank you. Thank you. There are no further questions at this time. I'd now like to hand the call back over to David Smith for any closing remarks. Thank you very much, and thank you everyone for participating in the call, and we look forward to speaking with you during our next quarter. Thank you. Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day. Aileen Smith, Rick Nelson, and David Smith, Sonic Automotive Inc.

Speaker Change: And then on the customer pay parts and service side up nine do you what was the number between price and traffic in that 9%.

Speaker Change: About a third of that is Danny about a third of that comes from higher repair order volume and two thirds is coming from passing along higher labor costs higher parts cost the effects of inflation as we've seen.

Speaker Change: Over the last several quarters, okay, great. Thank you.

Speaker Change: Thank you there are no further questions at this time I'd now like to hand, the call back over to David Smith for any closing remarks.

David Bruton Smith: Thank you very much and thank you everyone for participating in the call and we look forward to speaking with you next quarter. Thank you.

David Bruton Smith: Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.

David Bruton Smith:

David Bruton Smith: [music].

Okay.

David Bruton Smith: [music].

David Bruton Smith: Yes.

David Bruton Smith: Uh huh.