Q1 2024 Sonic Automotive Inc Earnings Call

[music].

Operator: Good morning, and welcome to the Sonic Automotive first quarter 2024 earnings conference call. This conference call is being recorded today, Thursday, April 25th, 2024. Presentation materials which accompany management's discussion on the conference call can be accessed on the company's website at pir.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 markets or otherwise make statements about the future.

Good morning, and welcome to the Sonic automotive first quarter 2024 earnings conference call. This.

Operator: This conference call is being recorded today Thursday April 25, 2024 presentation materials, which are accompanying managements discussion on the conference call can be accessed at the company's website at <unk>.

Operator: Our Sonic automotive dotcom.

Operator: At this time I would like to refer to the Safe Harbor statement under the private Securities Litigation Reform Act.

Operator: During this conference call management may discuss financial projections information or expectations about the company's products or markets or otherwise make statements about the future such statements are forward looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made.

Operator: Such statements are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed. These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission. In addition, management may discuss certain non-GAAP financial measures as defined by the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables in the company's current report on Form 8K filed with the SEC 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 speech.

David Bruton Smith: These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission.

David Bruton Smith: 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 SEC.

David Bruton Smith: In the Securities and Exchange Commission earlier today.

Operator: I would now like to introduce Mr. David Smith, Chairman and Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

Operator: Thank you very much and good morning, everyone and as you say welcome to the Sonic automotive first quarter 2024 earnings call I'm, David Smith, the company's chairman and CEO.

David Bruton Smith: Thank you very much and good morning everyone. And, as he said, welcome to the Sonic Automotive first quarter 2024 earnings call. I'm David Smith, the company's chairman and CEO. Joining me on today's call is our president Jeff Dyke, our CFO Heath Byrd, our Echo Park chief operating officer Tim Keen, and our VP of investor relations Danny Wieland. Earlier this morning, Sonic Automotive reported first quarter financial results, including first quarter total revenues of $3.4 billion, which was down 3% from the previous year. First quarter gap EPS was $1.20 per share, which includes the effect of certain charges as detailed in our press release this morning. Excluding these items, adjusted EPS was $1.36 per share.

David Bruton Smith: Joining me on today's call is our president Jeff Dyke, our CFO Heath Byrd.

David Bruton Smith: Our Echo Park, Chief operating Officer, Tim King and our V P of Investor Relations Daniel Island.

David Bruton Smith: Earlier this morning, Sonic automotive reported first quarter financial results, including first quarter total revenues of $3 $4 billion.

David Bruton Smith: Which was down 3% from the previous year first quarter GAAP EPS was $1 20 per share which includes the effect of certain charges as detailed in our press release. This morning.

David Bruton Smith: Excluding these items adjusted EPS was $1 36 per share a 2% increase year over year due primarily to our commitment to returning capital to stockholders via share repurchases along with significant operating improvement at our Echo Park segment.

David Bruton Smith: 2% increase year-over-year, due primarily to our commitment to returning capital to stockholders via share repurchases, along with significant operating improvement at our Echo Park segment, which offsets lower profit in our franchise dealership segment, demonstrating the value of our diversified business model. We are very proud of our team's performance in the first quarter, and we remain focused on adapting to changing market dynamics in the near term while positioning Sonic to achieve our long-term strategic goals. We believe our strong relationships with our teammates, our manufacturer and lending partners, and our guests are keys to our success. I would like to thank them all for their continued support.

David Bruton Smith: Which offset lower profit in our franchise dealership segment, demonstrating the value of our diversified business model.

David Bruton Smith: We're very proud of our team's performance in the first quarter and we remain focused on adapting to the changing market dynamics in the near term while positioning sonic to achieve our long term strategic goals, we believe our strong relationships with our teammates our manufacturer and lending partners and our guests are keys to our success.

David Bruton Smith: I would like to thank them all for their continued support.

David Bruton Smith: Turning now to First Quarter Franchise Dealership Trends. We continue to see an expansion of new vehicle inventory levels across our brand portfolio, ending the quarter with a 50-day supply of inventory, which was up 37 days at the end of the fourth quarter. As a result, same store new vehicle gross profit per unit continued its sequential decline to $3,716 per unit in the first quarter. We expect this decline in new vehicle GPUs to continue throughout 2024, exiting the fourth quarter in the low $3,000 range. But we continue to believe that the new normal level of new vehicle GPUs will remain structurally higher than it was pre-pandemic.

David Bruton Smith: Turning now to the first quarter franchise dealership trends.

David Bruton Smith: We continue to see expansion of new vehicle inventory levels across our brand portfolio.

David Bruton Smith: Ending the quarter with a 50 day supply of inventory, which was up 37 days at the end of the fourth quarter.

David Bruton Smith: As a result same store new vehicle gross profit per unit continued its sequential decline to 3700 $16 per unit in the first quarter.

David Bruton Smith: We expect this decline in new vehicle Gpus to continue through 2020 throughout 2024.

David Bruton Smith: Exiting the fourth quarter in the low $3000 range, but we continue to believe that the new normal level of new vehicle Gpus will remain structurally higher than it was pre pandemic.

David Bruton Smith: Additionally, our team continues to work closely with our manufacturer partners to align inventory levels and powertrain options with evolving consumer demand. In recent months, we've seen increasing consumer demand for hybrid electric vehicles as a more cost-effective and convenient alternative to fully electric vehicles, and we are turning our hybrid inventory faster and at more traditional gross profit levels than fully electric vehicles. In the first quarter of 2024, fully electric vehicle sales will reduce our reported new vehicle GPU by approximately $400.

David Bruton Smith: Additionally, our team continues to work closely with our manufacturer partners to align inventory levels and powertrain options with evolving consumer demand.

David Bruton Smith: In recent months, we've seen increasing consumer demand for hybrid electric vehicles.

David Bruton Smith: More cost effective and convenient alternative to fully electric vehicles, and we are turning our hybrid inventory faster and at more traditional gross profit levels, then fully electric vehicles.

David Bruton Smith: In the first quarter of 'twenty 'twenty four fully electric vehicle sales reduced our reported new vehicle GPU by approximately $400 consistent with the fourth quarter headwind due primarily to price discounts to push sales volume and manage easy inventory day supply.

David Bruton Smith: Consistent with the fourth quarter headwind, due primarily to price discounts to push sales volume and manage EV inventory day supply. At the end of the first quarter, EV day supply averaged 70 days, increasing our overall reported day supply by two days, while hybrid vehicles averaged just 26 days. In the used vehicle market, wholesale auction prices for three-year-old vehicles increased 2% during the first quarter, which is consistent with historical seasonal trends.

David Bruton Smith: At the end of the first quarter EV day supply averaged 70 days.

David Bruton Smith: Increasing our overall reported day supply by two day.

David Bruton Smith: While hybrid vehicles.

David Bruton Smith: Just 26 days supply.

David Bruton Smith: In the used vehicle market wholesale auction prices for three year old vehicles increased 2% during the first quarter.

David Bruton Smith: Which is consistent with historical seasonal trends, while our franchise dealerships average retail used pricing declined 5% sequentially from the fourth quarter.

David Bruton Smith: Well, at our franchise dealerships, average retail used pricing declined 5% sequentially from the fourth quarter. Elevated used retail prices remain a challenge for consumers, contributing to affordability concerns amid the current interest rate environment. However, the return to normal seasonal trends in used vehicle wholesale pricing is positive for our business outlook and should benefit affordability and used vehicle sales volume in the remainder of 2024. However, fewer lease turn-ins at our franchise dealerships continued to restrict supply and limit our used vehicle volume in the first quarter.

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

David Bruton Smith: However.

David Bruton Smith: They returned to normal seasonal trends in used vehicle wholesale pricing are positive for our business outlook and should benefit affordability and used vehicle sales volume and the remainder of 2024.

David Bruton Smith: Fewer lease turn ins at our franchise dealerships continued to restrict supply and limit our used vehicle volume in the first quarter.

David Bruton Smith: And lower used retail selling prices drove a 3% year-over-year decline in same-store used retail GPU to $1,585 per unit. Our team remains focused on driving incremental used inventory acquisition and retail sales opportunities in 2024, driving upside in this line of the business alongside the expected normalization of used car pricing and volumes over time. Our F&I performance continues to be a strength, despite elevated consumer interest rates, with same-store franchised F&I GPU of $2,350 in the first quarter, down 1% year-over-year but up 1% sequentially from the fourth quarter.

David Bruton Smith: And lower used retail selling prices drove a 3% year over year decline in same store used retail GPU to 1500 $85 per unit.

David Bruton Smith: Our team remains focused on driving incremental used inventory acquisition and retail sales opportunities in 'twenty 'twenty four driving upside in this line of the business alongside the expected normalization of used car pricing and volumes over time.

David Bruton Smith: Our F&I performance continues to be a strength despite elevated consumer interest rates with same store franchised F&I GPU of 'twenty $350 in the first quarter down 1% year over year, but up 1% sequentially from the fourth quarter.

David Bruton Smith: Furthermore, our franchise dealerships' F&I penetration rates increased sequentially from the fourth quarter, demonstrating our teammates' ability to navigate the high-interest rate market with our best-in-class F&I playbook processes. The continued strength in F&I performance supports our view that F&I per unit will remain structurally higher than pre-pandemic levels, even in a challenging consumer affordability environment.

David Bruton Smith: Furthermore, our franchise dealerships F&I penetration rates increased sequentially from the fourth quarter, demonstrating our teammates ability to navigate the high interest rate market with our best in class F&I playbook processes.

David Bruton Smith: The continued strength in F&I performance supports our view that F&I per unit will remain structurally higher than pre pandemic levels, even in a challenging consumer affordability environment.

David Bruton Smith: Our parts and service or fixed operations business remained strong with all time record quarterly fixed operations gross profit at our franchise dealerships up 6% year over year on a same store basis, driven by 6% growth in our customer pay business and 30.

David Bruton Smith: Our parts and service, or fixed operations, business remains strong with all-time record quarterly fixed operations gross profit at our franchise dealerships, up 6% year-over-year on a same-store basis, driven by 6% growth in our customer-paid business and 13% growth in our warranty business. We are proud of the success our team has had in this area, and we believe there are remaining opportunities to optimize our fixed-offs business as we progress through 2024. As we mentioned on our fourth quarter earnings call, we launched a net 300 initiative with the goal of adding 300 additional technicians in 2024, which we expect to contribute an additional $100 million in annualized fixed ops gross profit. Turning now to the Echo Park segment.

David Bruton Smith: Percent growth in our warranty business.

David Bruton Smith: 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: As we mentioned on our fourth quarter earnings call. We launched a net 300 initiative with the goal of adding 300 incremental technicians in 'twenty 'twenty, four which we expect to contribute an additional $100 million in annualized fixed ops gross profit.

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

David Bruton Smith: We are very excited to report that Echo Park returned to positive segment adjusted EBITDA in the first quarter. We reported an all-time record Echo Park segment quarterly adjusted EBITDA of $7.3 million, exceeding our previously stated target of break-even adjusted EBITDA. Excluding closed stores, Ecopark segment adjusted EBITDA was $9.4 million in the first quarter, significantly improved from a loss of $22.2 million last year on the same market base. For the first quarter, we reported Echo Park revenues of $559 million, down 14% from the prior year, and first quarter Echo Park gross profit of $52.6 million, which was up 34% from the prior year, despite a significant reduction in our store count year over year.

David Bruton Smith: We are very excited to report that Echo Park returned to positive segment adjusted EBITDA in the first quarter.

David Bruton Smith: We reported all time record Echo Park segment quarterly adjusted EBITDA of $7 $3 million exceeding our previously stated target of breakeven adjusted EBITDA.

David Bruton Smith: Excluding closed stores Echo Park segment, adjusted EBITDA was $9 $4 million in the first quarter significantly improved from a loss of $22 $2 million last year on a same market basis.

David Bruton Smith: For the first quarter, we reported Echo park revenues of $559 million down 14% from the prior year and first quarter Echo Park gross profit of $52 $6 million, which was up 34% from the prior year. Despite a significant.

David Bruton Smith: Reduction in our store count year over year.

David Bruton Smith: Echo Park segment retail unit sales volume for the quarter was nearly 18,000 units, down 10% year over year. However, on a same market basis, which excludes closed stores, Echo Park retail unit sales volume was up 13% in the first quarter. Revenue was up 11%, and gross profit was up 79%.

David Bruton Smith: Echo Park segment retail unit sales volume for the quarter was nearly 18000 units.

David Bruton Smith: Down 10% year over year.

David Bruton Smith: However, on a same market basis, which excludes closed stores.

David Bruton Smith: Echo Park retail unit sales volume was up 13% in the first quarter revenue was up 11% and gross profit was up 79%.

David Bruton Smith: Echo Park same market total gross profit per unit.

David Bruton Smith: Echo Park, same market, total gross profit per unit was $3,018 per unit, which is up 65% year over year, driven by marginal improvements in used vehicle market pricing, improving inventory sales velocity, and a 10% increase in F&I gross profit per unit. As discussed on our previous earnings calls, the reductions to our store footprint since the first quarter of 2023 allowed us to better allocate inventory across the platform, driving higher unit sales volume per rooftop, better variable GPU, and a return to positive adjusted EBITDA.

David Bruton Smith: It was 3000 $3018 per unit, which is up 65% year over year, driven by marginal improvements improvements in used vehicle market pricing improving inventory sales velocity and a 10% increase in F&I gross profit per unit.

David Bruton Smith: As discussed on our previous earnings calls the reductions to our store footprint since the first quarter of 2023 allowed us to better allocate inventory across the platform driving higher unit sales volume per rooftop better variable G. P U and a return to positive adjusted EBITDA.

David Bruton Smith: Our unwavering confidence in Echo park's future potential has positioned us as one of the few remaining nationwide used vehicle retailers Cree.

David Bruton Smith: 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 long-term opportunity for this brand. A return to positive segment adjusted EBITDA for Echo Park validates the strategic adjustments we made over the past few quarters, and we look forward to resuming disciplined, long-term growth for Echo Park as used vehicle market conditions continue to improve in the coming years. Turning now to our Power Sports segment.

David Bruton Smith: Creating a tremendous long term opportunity for this brand.

David Bruton Smith: It returned to positive segment adjusted EBITDA for Echo Park validates the strategic adjustments, we made over the past few quarters and we look forward to resuming disciplined long term growth for Echo Park as used vehicle market conditions continue to improve in the coming years.

David Bruton Smith: Turning now to our power sports segment.

David Bruton Smith: For the first quarter, we generated revenues of $27.7 million, gross profit of $7.8 million, and a segment-adjusted loss of about $800,000. Given the seasonal variability in the power sports industry and our geographic presence with the Black Hills platform in the Sturgis, South Dakota area, our first quarter results were in line with our projections. As we begin the PowerSports selling season in April, we continue to focus on identifying operational synergies within our current PowerSports network and remain optimistic about future growth opportunities in this adjacent retail sector when the time is right.

David Bruton Smith: For the first quarter, we generated revenues of $27 7 million gross profit of $7.8 million and the segment adjusted loss of about $800000.

David Bruton Smith: Given the seasonal variability in the power sports industry, and our geographic presence with the Black Hills platform and the Sturgis South Dakota area.

David Bruton Smith: Our first quarter results were in line with our projections actually began in the power sports selling season in April 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 now to our balance sheet, we ended the first quarter with $847 million in available liquidity.

David Bruton Smith: Finally, turning to our balance sheet, we ended the first quarter with $847 million in available liquidity, which included $335 million in combined cash and floor plan deposits on hand. Additionally, during the first quarter, we repurchased approximately half a million shares of our common stock for $27 million.

David Bruton Smith: Which includes $335 million in combined cash and floorplan deposits on hand during.

David Bruton Smith: During the first quarter, we repurchased approximately half a million shares of our common stock for $27 million.

David Bruton Smith: And I'm pleased to report today that our Board of Directors approved a quarterly cash dividend of $0.30 per share, payable on July 15, 2024, to all stockholders of record on June 14, 2024. As you can see in the investor presentation we released this morning, we are reaffirming our limited financial guidance for 2024 following our first quarter results. We continue to believe that lower franchise dealership segment earnings can be partially offset by a significant improvement in our Echo Park segment results, returning to positive Echo Park segment adjusted EBITDA for the year, as well as a moderate increase in power sports segment income year over year.

David Bruton Smith: And I'm pleased to report today that our board of directors approved a quarterly cash dividend of <unk> 30 per share payable on July 15th 2024 to all stockholders of record on June 14th 2024.

David Bruton Smith: As you can see in the Investor presentation. We released this morning, we are reaffirming our limited financial guidance for 2024, following first quarter results.

David Bruton Smith: We continue to believe that lower franchise dealership segment earnings can be partially offset by significant improvement in our Echo Park segment results returning to positive Echo Park segment adjusted EBITDA for the year as well as a moderate increase in power sports segment income year over year.

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.

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 a diversified business model provides significant earnings growth opportunities in our ecopark and power sports segments that may help to offset industry-driven margin headwinds we may face in the franchise business, minimizing the earnings downside to our consolidated sonic results over time.

David Bruton Smith: While making strategic decisions to maximize long term returns.

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

David Bruton Smith: Sonic results overtime.

David Bruton Smith: We remain confident that we have the right strategy and the right people and the right culture to continue to grow our business and create long-term value for our stock market. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you very much.

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

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

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. You may press star 2 if you'd like to remove your question from the queue. The participant's even speaker equipment may make it necessary to pick up your handset before pressing the star keys. One moment, please, while we pull up the question. Thank you. Our first question is from John Murphy with Bank of America. Please proceed with your question.

Speaker Change: Thank you we will now be conducting a question and answer session.

Speaker Change: We would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to turn it over your question from the queue.

Operator: Participants using speaker equipment may be necessary to pick up your handset before pressing the star Kids My mom inquiries, while we poll for questions.

Operator: Thank you. Our first question that's come John Murphy with Bank of America. Please proceed with your question.

John Joseph Murphy: Hi, Good morning, everybody just a quick question on the the statement you said about optimizing our fixed ops I understand the.

John Joseph Murphy: Good morning, everybody. Just a quick question on the statement you said about optimizing fixed ops. I understand the focus on hiring these 300 techs this year. I was wondering if you could give us an idea of the cadence and where you are on those, but if there's any other opportunities to optimize fixed operations, and ultimately, what do you think that drives besides those 300 techs and that incremental profit you talked about? Are there other opportunities even above and beyond that?

John Joseph Murphy: The the focus on hiring 300, Texas year I was wondering if you can give us an idea of the cadence and where you are on those but if there's any other opportunities.

John Joseph Murphy: Do you optimize fixed ops and ultimately what do you think that drives besides the 300 taxing that incremental profit.

John Joseph Murphy: Profit you talked about are there other opportunities even above and beyond that.

Frank Jeff Dyke: Hey, John, it's Jeff. Yeah, I mean, look, we're 35 to 40 incremental techs so far for the year. We expect to hit our 300 number. Each of those techs is generating $21,000 or so in gross a month per stall, per bay. So that's a huge opportunity for us. We have approximately 1,000 open bays across the organization.

John Joseph Murphy: Hey, John its Jeff Yeah, I mean look we're 35 to 40 incremental tax so far for the year, we expect to hit our 300 number each of those taxes generating 21000 or so in gross a month per store per day.

Frank Jeff Dyke: So that's a huge opportunity for us we have approximately a thousand open base across the organization and you really you really run into them you know our culture effect because technicians like to operate two base and were breaking that culture down that's something that the industry deals with.

Frank Jeff Dyke: And you really run into, you know, a culture effect because technicians like to operate two bays. And we're breaking that culture down. That's something that the industry deals with. We're breaking that culture down, and we've got stores out there that are, you know, every bay has a technician in them. And it's something that we've really been focused on and will continue to focus on throughout the rest of this year. So, great opportunities to continue to grow in the mid to, you know, upper mid-growth rate for the rest of this year and, I think, into 25 and 26. The business is there. The customers are there.

Frank Jeff Dyke: Were breaking that culture down and we've got stores out there that are you know every day has a technician in them I mean, it's something that we've really been focused on them and we will continue to focus throughout the rest of this year. So great opportunities to continue to grow in the mid to.

Frank Jeff Dyke: Upper mid growth rate for the rest of this year and I think into 25 and 26 of businesses. There. The customers are there with the advent of E V and the opportunities that we have there we see electric vehicles coming back more often than we do is so I think there's plenty of opportunity are the thing is is that we've got it.

Frank Jeff Dyke: With the advent of EV and the opportunities that we have there, we see electric vehicles coming back more often than we do ICE. So I think there's plenty of opportunity. The thing is, though, is that we've got to break some culture.

Frank Jeff Dyke: Break some culture down we've got to work on that within the stores and our leadership team.

Frank Jeff Dyke: We've got to work on that within the stores and our leadership team and add those 300 techs, and then we'll focus next year on adding even more techs on top of that. So it's a big push for us. I think you're beginning to see some of those returns. Our fixed operations business is strong, and we expect that to continue.

Frank Jeff Dyke: And add those 300 techs and then we'll focus next year on adding even more tax on top of that so it's a big push for US I think youre beginning to see some of those returns in our fixed operations business is strong and we expect that to continue.

John Joseph Murphy: Super helpful. Then just on Echo Park and the used business in general, I mean we're girding to, you know, continue shrinking of your sort of zero to six or zero to seven or even zero to four year old vehicles as we kind of grind through the depressed years from COVID new vehicle sales. I'm just curious, you know, how you are managing that, how much that constrains your ability to get Echo Park turned even more than you already have, and how you're gonna, yeah, how you're gonna deal with that, what does that, what does that mean for Echo Park?

Speaker Change: Super Helpful. And then just on Echo Park in the used business and in general I mean, where were getting into you'll continued shrinkage of the sort of zero to 607 or even zero to four year old vehicles, as we kind of grind through the the depressed years from from Covid, New vehicle sales I'm. Just curious you know how you are managing that how much that can strain.

John Joseph Murphy: Your ability to get Echo park turned even more than you already have.

John Joseph Murphy: And how you're gonna Yeah, how are you going to deal with that what does that what does that mean for Echo Park yeah.

Speaker Change: Look we think that Ah 24 is gonna be a great year I'm sure. There are less lease returns with their calls and puts theres cars coming in from a rental car type of cars coming in from rental car companies.

Frank Jeff Dyke: Yeah, I mean, look, we think that 24 is going to be a great year. I'm sure there will be fewer lease returns with their calls and puts.

Frank Jeff Dyke: There are cars coming in from rental car companies, there are delinquencies out there, and we're getting vehicles back that way. So there's plenty of inventory out there for us to buy. And remember, we're only buying for 18 stores right now. So we can very easily handle the amount of inventory we need for those 18 stores. We're going to be very smart about how we grow Echo Park. We will not open any more stores this year. And we'll look to that as we move into 25. We are not at all concerned at all about inventory in the one to five-year-old category throughout this year to support our Echo Park stores.

Frank Jeff Dyke: There's delinquencies out there and where we're getting vehicles back that way. So there's plenty of inventory out there for us to buy and remember we're only buying for 18 stores right. Now. So we can very easily handle the amount of inventory we need for those 18 stores. You know we're gonna be very smart about how we grow Echo Park, we will not open any more stores this year and will.

Frank Jeff Dyke: Look to that as we move into 'twenty five we are not concerned at all about about inventory in the one to five year old category throughout this year to support our Echo Park stores, that's something that we're gonna be able to easily do and we'll continue to see the kind of returns that we got in the first quarter.

Frank Jeff Dyke: That's something that we're going to be able to easily do, and we'll continue to see the kind of returns that we got in the first quarter. I think, in terms of cadence, the second quarter will be down a little bit. The third quarter should be a gangbuster, and the fourth quarter might look a little bit like the second quarter.

Frank Jeff Dyke: You know I think in terms of cadence the second quarter, the margins will be down a little bit third quarter should be a bank, a gangbuster and fourth quarter might look a little bit like the second quarter. So it's gonna be a great 24 in Echo Park is off to the races. We said that last year. We said look this is what's gonna take Theres new car inventory is growing like Crazy and you saw we went from a mid <unk>.

Frank Jeff Dyke: So it's going to be a great 24, and Echo Park is off to the races. We said that last year. We said, look, this is what it's going to take. There are new car inventories growing like crazy. You saw we went from a mid-30s day supply to a 50-day supply. I expect that to continue to grow. Manufacturers are building new cars left and right. That's just common sense.

Frank Jeff Dyke: These days supply to a 50 day supply I expect that to continue to grow manufactured or building new cars left and right. That's just common sense, it's going to put pressure downward pressure on used vehicle pricing.

John Joseph Murphy: It's going to put downward pressure on used vehicle prices. It's going to allow us to buy more cars on the street. It's going to allow us to buy more cars from rental car companies. And so this is tailor-made for us.

John Joseph Murphy: Pricing, it's going to allow us to buy more cars in the lanes, it's going to allow us to buy more cars from rental car companies and so we're this is tailor made for US. This is what we've been talking about what we've been waiting for them. It's what we've been saying is going to happen and sure if that had happened in the first order and it's going to happen again throughout the rest of this year, it's gonna be bumpy waters.

Frank Jeff Dyke: This is what we've been talking about. It's what we've been waiting for. It's what we've been saying is going to happen. And sure as heck, it happened in the first quarter, and it's going to happen again throughout the rest of this year.

Frank Jeff Dyke: It's going to be, you know, bumpy waters between now and probably the end of next year, but it's going to marginally get better as we go forward. Then 26 is off to the races as lease maturities begin to come back, and we were able to take advantage of those. The bad times for used vehicle inventory behind us; that was end of 22, beginning of 23. It's just not going to go back to that, not with the way manufacturers are building new cars.

Frank Jeff Dyke: Now in probably the end of next year, but it's been marginally get better as we go forward. Then 26 is off to the races as at least maturities began to come back and we were able to take advantage of this the bad times for used vehicle inventory behind us that was the end of 'twenty two beginning in 'twenty three it's just not going to go back to that not with the way manufacturer to building new.

Frank Jeff Dyke: And if I could sneak one more in you you you just mentioned that consumers are coming in asking for a hybrid is that across all brands or is that essentially code for two of those inventories coming back. The camry is all hybrid this year, there's more they're putting more hybrids back in the market. So really this is more Toyota specific or are you actually getting this in all.

John Joseph Murphy: And if I could sneak one more in, you mentioned that consumers are coming in asking for hybrids. Is that across all brands, or is that essentially code for Toyota's inventory is coming back, the Camry is all hybrid this year, they're putting more hybrids back in the market, so really this is more Toyota specific? Or are you actually getting this in all the brands that you guys recommend?

John Joseph Murphy: The brands you guys wrap it.

Frank Jeff Dyke: It's industry-wide; if you see some of our other peer groups, they're saying the same thing. Consumer demand for hybrids is greater at the moment than for EVs. Yeah, and it's a stair step to EV, right? And I think that's how you have to look at it. And some of the hybrid vehicles that are coming now are just absolutely amazing. Just back from the Mercedes meeting in Germany last week, some amazing hybrid inventory coming in 26. But it's a stair step as consumers get used to that, but it's across all brands, as David said, 100%.

John Joseph Murphy: It's an industry wide. If you if you see some of the other peer group. They are saying the same thing I'd say is the consumer demand for hybrids is greater.

Frank Jeff Dyke: Moment, then E V. Yeah, and it's a stairstep to EV right and I think that's how you got to look at it in some of the hybrid vehicles that are coming now are just absolutely amazing just back from the Mercedes meeting in Germany last week, some amazing hybrid inventory coming in 'twenty, six, but it's a stair step as consumers get used to that.

Frank Jeff Dyke: And but it's across all brands as David said, 100%.

Speaker Change: Okay. Thank you very much appreciate it thank.

Speaker Change: Thank you got it.

Frank Jeff Dyke: Our next question is from Rajat Gupta with Jpmorgan. Please proceed with your question.

Rajat Gupta: Our next question is from Rajat Gupta with J.P. Morgan. Please proceed with your question.

Rajat Gupta: Hi, great. Thanks for the question and congrats on a strong quarter. Thank.

Rajat Gupta: Great, thanks for the questions and congrats on a strong quarter. Thank you. First, on Echo Park. You know, the 7 million EBITDA in the first quarter. You mentioned that 2Q might see some, you know, some reduction in the GPUs, but we're curious, like, how should we think about the total EBITDA dollar gated? [inaudible]

Speaker Change: Thank you.

Rajat Gupta: I have a question on Echo Park first 7 million EBITDA in the first quarter.

Rajat Gupta: You mentioned that took you might see some are you know some reduction in the Gpus, but was curious like how should we think about the total EBITDA dollar cadence.

Rajat Gupta: Through the course of the or you know any more granularity you can give there.

Frank Jeff Dyke: Yeah, I mean, it's going to move around, Rajit. You know, the first quarter is always your strongest front-end margin quarter, seasonally adjusted, right? So if you just kind of get rid of the last couple of years and go back to normalized sales, we always have the best margins in Q1. Q2 sinks a little bit as prices flatten out, and so I would certainly expect positive EBITDA for the quarter, maybe not as strong as Q1.

Rajat Gupta: The positive EBITDA commentary in the slide deck and I have a follow up.

Frank Jeff Dyke: Yeah, I mean, it's going to move around or you know it's the first quarter is always your strongest front end margin quarter seasonally adjusted right. So if you just kind of get rid of the last couple of years and go back to normalized sales. We always have the best margins in Q1, Q2 things a little bit as prices flatten out.

Frank Jeff Dyke: And so I would expect a certainly positive EBITDA for the quarter and maybe not as strong as Q1.

Frank Jeff Dyke: Then I expect Q3 to be real strong, again, maybe like Q1, and then the fourth quarter to look a little bit like Q2. So that's kind of how I would look at it, a little up and down as we go through the year, but gradually, marginally getting better as we go into 25, and then, of course, I think 26 is just going to be a huge breakout year for Echo Park.

Frank Jeff Dyke: And then I expect Q3 to be real strong again, maybe like Q1, and then a fourth quarter to be look a little bit like Q2, and so that's kind of how I would look at it a little up and down as we go through the year.

Frank Jeff Dyke: But progressively marginally getting better as we as we go into 'twenty five and then of course I think 26 is just going to be a huge breakout year for Franklin Park, So where back you know it's fun, it's fun to be back and it's fun to you know put our inventory skill sets to work and that that's happening right now and again with 18 stores, it's not a problem.

Frank Jeff Dyke: So we're back. You know, it's really fun. It's fun to be back, and it's fun to, you know, put our inventory skill sets to work, and that's happening right now. And again, with 18 stores, it's not a problem. You know, with 50 stores, maybe a little bit more of an issue because of the lack of total inventory out there, but there are fewer people that we're bidding against in the auction lanes, and that's where 80% of our inventory comes from because some didn't, you know, unfortunately, didn't make it through all of this, and that goes along with David's comment. We feel like we're some of the last ones standing on a national basis, and it's going to make it fun for us throughout the rest of this year and going forward.

Frank Jeff Dyke: I met with 50 stores, maybe a little bit more of an issue because because of the lack of total inventory out there, but there are less people that we're bidding against in the auction lanes, and that's where 80% of our inventory comes from them because didn't you know unfortunately didn't make it through all of this and that goes along with David's comment we feel like we're seeing in the last one standing on a national basis.

Frank Jeff Dyke: And it's going to make it fun for us throughout the rest of this year and going forward. It's also this is David. This is all something to emphasize is that what we're seeing from a demand standpoint, where we've got.

David Bruton Smith: It's also, this is David, this is also something to emphasize is that what we're seeing from the demand standpoint, we've got, you know, some stores where we're needing to hire additional sales people because the demand is extremely strong. We have some stores that are selling over 30 cars per salesperson, which is fascinating. And if you look at our reputation.com scores, we're getting, you know, virtually every review is a five

David Bruton Smith: Some stores, where we're needing to hire additional sales people because the demand is extremely strong.

David Bruton Smith: Some stores that are selling over 30 cars per salesperson.

David Bruton Smith: This is fascinating and if you look at our our reputation by Comscore as we were getting you know virtually every reviews are five star reviews.

Speaker Change: And I think this is tiny but that's key David's point on having the right head count and the right productivity per sales associate that's part of the variability in EBITDA for the remainder of the year is how do we invest this positive EBITDA that we that we.

Danny Wieland: And I think, this is Danny, that's key, David's point on having the right headcount and the right productivity per sales associate, that's part of the variability in EBITDA for the remainder of the year, is how do we invest this positive EBITDA that we've flipped to in supporting ourselves for further growth as we go through the year, as we go into 25, even just at this existing store base, as, you know, pricing and affordability begin to improve, that should drive more volume, more potential there. And so we'll think about having the right headcount to support that growth, and there may be some investment ahead of the growth coming, or on the brand marketing side of things, having that optionality with positive EBITDA may let us begin to invest in and develop the Echo Park brand, as we'd intended to do a couple of years back, and obviously had to make some adjustments on the fly, but continue to build that as we build out that nationwide network over time.

Danny Wieland: Flip to in supporting ourselves for further growth as we go through the year as we go into 'twenty five even just at this existing store base as you know pricing and affordability begin to improve that should drive more volume more potential there and so we'll think about having the right head count to support that growth and there may be some investment ahead of the growth coming or on the brand marketing.

Danny Wieland: Side of things, having that optionality with positive EBITDA, maybe let us begin to invest in and develop the Echo Park brand as we had intended to do a couple of years back and obviously you had to make some adjustments on the fly but continue to build that as we build out that nation wide network over time.

Speaker Change: Got it got it that's helpful color and just you know just a broader question on the used car market.

Rajat Gupta: Got it got to get that helpful color and just you know just broader questions on the used car market. You had positive feedback on the franchise business, you know, in the retail business, you know, obviously, Echo Park is starting to see some traction on the volume. Um, you know, but when you look at some results from, you know, some of your peers, like independent to me, it seems like there's still some pressure that they might be facing in their same store numbers.

Rajat Gupta: You had positive comments you know in the franchise business you know.

Rajat Gupta: Echo Park is starting to see some traction on the wall you.

Rajat Gupta: Yeah, but it didn't look like something some results from you know some of your peers like independent to me. It seems like there's still some pressure there they might be same thing in that same store number I'm curious like what would you argue is driving that diversion is it because.

Rajat Gupta: I'm curious, like, what in your view is driving that diversion? Is it because, you know, having the advantage of the franchise stores? Or, you know, how would you explain that kind of disconnect? Because you seem to be not having or not, you seem to not be complaining about, you know, the one to five-year-old vehicles at all. So they're curious, like, what's driving that.

Rajat Gupta: You know how having to get an idea of the franchise stores or you know how would you explain that kind of disconnect because you seem to be not having or.

Rajat Gupta: You seem to not be complaining about you know the one to five year old vehicles at all I'm sort of curious like what's what's driving.

Rajat Gupta: Thanks.

Frank Jeff Dyke: You know, I can't speak for them, but at the end of the day, I think we boast some of the best inventory management skill sets in the industry. We know where to get the cars, and how to get the cars. And with inventory coming back on the new car side, it just opens the doors for us. And we just don't see it. I've read a lot of the comments that are out there for the rest of this year. I know lease returns are going to drop off a cliff.

Speaker Change: Yeah, you know I can't speak for them at the end of the day I think you know we bought some of the best inventory management skill sets in the industry, we know where to get the cars how to get the cars and with inventory coming back on the new car side. It just opens the doors for us and we just don't see a read a lot of that.

Frank Jeff Dyke: Comments that are out there for the rest of this year I know lease returns are going to drop off a cliff.

Frank Jeff Dyke: But there are other ways to procure inventory, and we just don't see it as having some massive effect on the used car business. We expect to grow our used car business from the low to mid single-digit range for the year. And I expect that to continue into the second, third, and fourth quarters and to grow from there. And so I can't explain, you know, some of the commentary I was sitting with Tim Keen earlier this morning asking this exact question: I just don't understand the commentary on the pre-owned inventory. The bad days are behind us.

Frank Jeff Dyke: But there's other ways to two to procure inventory and we just don't see it as having some massive effect on the used car business, we expect to grow our used car business from the low to mid single digit range for the year and I expect that to continue into the second third and fourth quarters.

Frank Jeff Dyke: And to grow from there.

Frank Jeff Dyke: And so I can't explain you know some of the commentary I was sitting with Tim keen earlier. This morning, asking this exact question is I just don't get the commentary.

Frank Jeff Dyke: On the pre owned on the pre owned inventory the bad days are behind us, they're they're not in front of us and Theres inventory out there to procure them where were seeing that and I expect us to continue to grow with good margin throughout the rest of this year, it's not gonna be gangbusters.

Frank Jeff Dyke: They're not in front of us, and there's inventory out there to procure. We're seeing that, and I expect us to continue to grow with good margin throughout the rest of this year. It's not going to be, you know, gangbusters are significantly marginally better, but marginally better throughout this year.

Frank Jeff Dyke: Significantly marginally better, but marginally better throughout throughout this year.

Rajat Gupta: Got it. Got it. Got it. I'll get back in queue. You know, for more follow-ups, but thanks for your time. You got it. Thank you.

Speaker Change: Got it got it.

Speaker Change: I'll get back in queue.

Speaker Change: For my follow ups. Thanks, Robert Thanks for the classification.

Speaker Change: Got it thank you.

Speaker Change: As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.

Operator: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question is from Bret Jordan with Jeffries. Please proceed with your question.

Operator: Our next question from Bret Jordan with Jefferies. Please proceed with your question.

Patrick Neil Buckley: Hey, good morning guys. This is Patrick Buckley on for Bret. Thanks for taking our questions. Hey Patrick. Morning. On the new GPU side, with the estimated 24X at a range of about 3000, should we expect a pretty steady progression throughout the year? And I guess into 25, you know, how does that compare to what you guys expect the new normal to be?

Operator: Hey, Good morning, guys. This is Patrick Buckley on for Brett. Thanks for taking my questions Hey, Patrick Good morning.

Patrick Neil Buckley: I'm, a new GPU side with the estimated 24 exit range of about 3000 should we expect a pretty steady progression throughout the year and I guess into 25, how does that compare to what you guys expect that the new normal to me.

Frank Jeff Dyke: Yeah, so it's Jeff, I think between 200 and 250 bucks a quarter reduction as we move forward, getting us into that exiting 24 in the 3000 range. And I think it's going to kind of hang there. There is a new normal for front end margin.

Patrick Neil Buckley: Yeah. So it's Jeff I think between 200, and 250 Bucks a quarter a reduction as we move forward getting us into that exiting 'twenty four and the 3000 range and I think it's going to kind of hang their and there is a new normal for front end margin I.

Frank Jeff Dyke: I don't expect the manufacturers, just I mean, while they are going a little bit nuts right now, they're going to pull back. I don't expect them to just continue to go crazy on new car production, although EVs are going to play a role in all this. But I'm quite confident that in and around that 3000 range when we leave this year, we'll be there. And then I expect it to be in and around that range for 25 as well.

Jeff: I don't expect the manufacturers just I mean, while they are going a little bit nuts, right now, they're going to they're going to pull back I don't expect them to just continue to go crazy on on new car production, although evs are going to play a role in all of this but I'm quite confident that in and around that 3000 range exiting this year and we'll be we'll be there.

Frank Jeff Dyke: And then I expect it to be in and around that range for 'twenty five as well.

Patrick Neil Buckley: Got it. That's helpful. Thank you. And on that note, were there any notable callouts from a brand or region mix within new GPUs this quarter?

Patrick Neil Buckley: Got it that's helpful. Thank you and I guess on that note were there any notable call outs from a brand or a region mix within new Gpus this quarter.

Frank Jeff Dyke: Now you know EVs continue to be a little bit of a drag, as we announced in David's opening comments, that they're about a $400 drag on the overall PUR, and that's, you know, being driven by a handful of brands. Our day supply of EVs is, you know, fine. You really can't look at the overall numbers; you got to look at the actual units. I mean, we have a 60-day supply of BMW EVs on the ground, but it's 600 units, and they're cutting back significantly on EV production and coming more with hybrids, so I think the manufacturers recognize that they're doing the right things, and I think that stabilizes Great, that's all for my today.

Patrick Neil Buckley: No you know evs continue to be a little bit of a drag as we as we announced in David's opening comments, that's about a 400 dollar drag on the overall B U R.

Frank Jeff Dyke: And that's being driven by a handful of brands our day supply on EV. It's it's you know fine.

Frank Jeff Dyke: Fine you really can't look at the day supply overall numbers, you've got to look at the actual units I mean, we have a 60 day supply of B M. W. E. These on the ground, but it's it's 600 units and Theyre cutting back significantly on EV production and coming more with hybrid and so I think the manufacturers recognize that they're doing the right things and I think that stabilizes everything as we move forward.

Speaker Change: Great that's all from US thanks, guys.

Patrick Neil Buckley: Great, that's all from us. Thanks guys.

Speaker Change: You bet.

Patrick Neil Buckley: Thank you no further questions at this time I'd like to hand, the floor back over to David Smith for any closing comments.

David Bruton Smith: Thank you. There are no further questions at this time. I'd like to hand the floor back over to David Smith for any closing comments.

Operator: Thank you very much and thank you everyone for joining us, and we'll talk to you next quarter. Thanks a lot.

David Bruton Smith: Thank you very much and thank you everyone for joining us and we'll talk to you next quarter. Thanks, a lot. Thank you.

Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Operator: Yeah.

Speaker Change: This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.