Scott Smith - President and CSO Heath Byrd - Chief Financial Officer Jeff Dyke - Executive Vice President, Operations.

Rick Nelson - Stephens Paresh Jain - Morgan Stanley John Murphy - Bank of America Merrill Lynch Bill Armstrong - CL King Bret Jordan - BB&T Capital Markets Brett Hoselton - KeyBanc.

Good morning and welcome to the Sonic Automotive Fourth Quarter and Year End Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions].

As reminder ladies and gentlemen, this call is being recorded today Tuesday, February 24, 2015.

Presentation materials, which management will be reviewing on this conference call, can be accessed at the Company’s website at www.sonicautomotive.com by selecting Investors Relations under our Company dropdown box, and then choosing Webcasts & Presentations on the right side of the page.

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 markets or otherwise make statements that are in 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. Thank you. I would now like to introduce Mr.

Scott Smith, President and Chief Strategic Officer of Sonic Automotive. Mr. Smith, you may begin..

That’s easy for you to say, Stacy. Thank you. Hi, welcome to Sonic Automotive’s fourth quarter 2014 earnings call. I’m Scott Smith, the Company’s President and Chief Strategic Officer and Co-founder. Joining me on the call today are David Smith, our Vice Chairman; Heath Byrd, our CFO; Jeff Dyke, our Executive Vice President of Operations; and C.G.

Saffer, our Chief Accounting Officer. Today, I’ll start the call with an overview of our strategic initiatives. Then I’ll turn the call over to Heath for a review of our fourth quarter results, followed by Jeff with a look at our operating performance. We’ll then have some closing comments and open the call for your questions.

With that please turn to slide four, labeled strategic focus. Our strategic focus has been consistent for the last several years, grow our base business; own our real estate; and return capital to shareholders, very simple. This strategic focus will continue for the foreseeable future.

As most people, who follow our Company are aware, Sonic Automotive is growing its base business with two very unique and bold avenues that really will give us a competitive advantage and differentiate Sonic from others in the retail automotive space who are customer centric, One Sonic-One Experience through our pre-owned specialty stores called EchoPark.

In addition, Sonic Automotive is working very closely with our manufacture partners on open points and we evaluate acquisition opportunities continuously. Let’s take a closer at these strategic initiatives. Next slide please. One Sonic-One Experience, simply put, is an exercise in building a brand.

We’re building a brand and centered around the customer experience. The objective is to put the power into the customers’ hands, where they can enjoy the automotive purchase experience with one associate, at one price, in one hour.

We believe that our experience will be unique in the industry and with that it will improve transparency and increase trust and ultimately profitability. A full version of One Sonic-One Experience has been in beta testing since August 1, 2014. Primarily results are better than anticipated. We’ll further expand on this later in the call.

Let’s turn to next slide, number six. I’m extremely proud of our team, who’s worked tirelessly to develop and implement One Sonic-One Experience.

It took roughly seven years in planning and development to bring all of the pieces of the puzzle together, from culture to compensation plans, to pricing, to processes and technology, the complexity is enormous and cannot be understated.

One Sonic-One Experience is about building a brand that’s predictable, repeatable and sustainable where the customer and experience are the focal points. Our model is designed to reduce transaction time by allowing our customers to deal with just one person through the entire purchase experience. Our sales associates handle the entire transaction.

They appraise vehicles through our retail trade center in Charlotte; utilize our true price technology eliminating negotiations; sales associates help customers through the F&I process using electronic signatures to reduce transaction time. None of this would be possible without our proprietary technologies that enable our model.

Gone are the days, back and forth with managers; gone are the amounts of paper work; gone the hassle and pain points of purchasing an automobile. Some additional benefits of One Sonic-One Experience besides speeding up the transaction time are reducing the headcount through attrition.

We simply don’t need as many people that are used to in the traditional model, creating a substantial cost savings. Creating trust and transparency, increased CSI, ASI, and market share, increased margins, and a better experience for customers much like that of an Apple store or Starbucks. Let’s turn to next slide please.

Roughly eight years ago, when we began thinking about EchoPark, we wanted to build something that was totally unique in the industry. And we could eventually dovetail with our new car franchise dealerships. I cannot overemphasize the knock that this is not your mom and pop used car store.

We have invested in and built what will become a substantial national brand that is predictable, repeatable and sustainable. We did extensive market research to learn exactly what the pain points are in the automotive purchases experience, and we set out to eliminate them, all of them.

This is a customer-centric model where the customer is in control, not the dealer. Our highly trained team is there to assist customers in any way possible and are compensated very differently from the traditional automotive retail model.

Through the use of processes and technology to support and enable, we built a customer experience which is unique in the industry. I’m very proud of our team of ladies and gentlemen, who’ve worked so hard to bring this to life. I’m pleased to announce that our hub location Thornton opened at November 3rd.

And we have two neighborhood locations, one in Centennial and in Highlands Ranch that are open. We expect at least two additional locations in greater Denver market to open in 2015. And we’re currently searching for real estate to begin planning for opening second market to EchoPark in 2016.

We have experienced delays in opening our other locations which is predominantly due to weather. Preliminary sales results are exceeding our internal projections and we have not yet begun our media placement that will begin later this quarter and into next quarter. We now turn to slide eight please.

As a continuation of our strategic focus, we’ve been looking at acquisitions and open points through our manufacturer partners. In 2014 we acquired four franchises, Jaguar in Birmingham, Alabama; Nissan, Chattanooga, Tennessee and Springs, Colorado and Chevrolet in Denver, Colorado.

We continue to be active in the acquisition market and would welcome the opportunity to have discussions with dealers. We’re working very closely, as I mentioned, with a number of manufacturer partners on open points. We’re pleased to announce that we were awarded three open points in 2014.

We were awarded Nissan in the Greater Chattanooga market; Audi in Pensacola, Florida; Mercedes-Benz in McKinney, Texas, which is Greater Dallas and to my understanding is one of the largest if not the largest open point for Mercedes in the country.

We continue to work closely with our manufacture partners and the market representation plans and we’re very excited to be awarded these open points and believe that they demonstrate strength of our relationships with these fine manufacture partners. Please turn to slide nine. Owning our real estate continues to be a strategic focus for us.

As you can see on the slide, in 2007, we owned zero real estate. For 2017, we project that we will own approximately 49% to 50% of our nearly $1 billion portfolio. Putting these terrific assets on our balance sheet is a much more efficient use of our capital than entering into long-term expensive leases.

While the market isn’t recognizing the value of these investments, we believe that there is significant value in our real estate. Please turn to slide 10. Sonic Automotive is committed to returning capital to our shareholders.

Through the end of the fourth quarter, we had repurchased 2,256,000 shares at an average price of $23.51, returning nearly $53 million in capital to our shareholders. We currently have an unused share repurchase authorization of approximately $79 million. I’m also pleased that we are continuing our quarterly dividend of $0.025 per share.

With that, I’ll now turn the call over to Heath for financial review of the quarter.

Heath?.

Thank you, Scott. Good morning, everyone. Starting with the first three columns on slide 12, I’d like to walk you through our adjusted Q4 results. Total revenue was up 1.6%, or the 3% increase in new retail; 2.2% increase in used; 11.3% increase in F&I and 1.9% in fixed.

Gross profit, up 2.9% driven by a 5.7% increase in used retail; 11.3% increase in F&I; and 2.4% increase in fixed. Profit was at $33 million which resulted in diluted EPS from continued ops of $0.63. SG&A as a percent of gross came in at 75.5%. This of course includes expenses related to our investments in One Sonic-One Experience and EchoPark.

In the right three columns, you’ll see the results for the full year. Total revenue up 4% with the 4.7% increase in new retail; 6.2% increase in used retail; 10% increase in F&I, 5.4% in fixed. Gross profit, up 4.9% for the year, new retail relatively flat, 4.6% increase in used; 10.1% increase in F&I; and 4.4% increase in fixed.

Profit was at $100 million which resulted in diluted EPS from continued ops of $1.90. SG&A as a percent of gross came in at 78.6%. Again, this does include expenses related to the investments of One Sonic-One Experience and EchoPark.

Next slide please? On this slide, we provide a walk on reported EPS to adjusted EPS and to a comparable EPS for the fourth quarter. As you can see, our comparable EPS is $0.71 for Q4 compared to last year’s $0.70 or the 5 penny difference from EchoPark. Next slide please? Same exercise here for the full year.

2014 comparable EPS is $2.08 compared $2.10 last year with 11 penny difference year-over-year related to EchoPark. Next slide please? Financial results for EchoPark for Q4 as well as full year 2014. EchoPark had a pretax loss of $7.1 million for the quarter and $15.7 million loss for the year.

As Scott mentioned, since opening, EchoPark has performed in line with our expectations. Jeff will provide more color later in the call. Next slide please? Adjusted SG&A to gross. For the fourth quarter, SG&A, as a percent of gross was 75.5% compared 75.2% a year ago.

The improvement included advertising spend and compensation, also by increases in spend related to the implementation of our shared services, EchoPark and One Sonic-One Experience.

For the full year, SG&A, as a percent of gross was 78.6% compared 77.1% in 2013, again primary drivers are related to our investments and our initiatives which are illustrated in the next slides. Next slide please? This slide normalizes our SG&A to gross to our core business.

Factoring out our investments on adjusted SG&A as a percent of gross in Q4 was 72.2%, 210 basis points better than 2013. Next slide? For the full year, normalized SG&A as a percent of gross less our investments was at 76.5%.

Next slide? This slide illustrates our 2014 and our estimated 2015 investments in EchoPark; One Sonic-One Experience and centralization. As you can see, we expect EchoPark to start improving as we slow our startup expenses and begin to open more locations and generate more gross.

As we have stated previously, we don’t expect profitability for EchoPark until the fourth year of operation. For One Sonic-One Experience, we continue to have relatively the same amount of expenses until the scores are fully implemented and we get the benefit of market share increases and operational efficiencies.

Again, as we stated in the past, the implementation of One Sonic-One Experience across all stores will take an additional 24 months to 36 months. Regarding centralization, we will experience our first full year of operation in 2015 and will have an overlap in personnel as we transition responsibilities to corporate office.

Next slide please? CapEx for 2014, total spend of a $164 million offset by $44 million in mortgages. Estimated 2015 total spend of $211 million offset by $100 million in mortgages. Next slide please? Liquidity, at the end of Q4, we had total liquidity of $250 million compared to $221 million last year, an increase of $28.6 million.

Next slide? Debt covenants, as you can see, we remain compliant with all of our debt covenants and have plenty of cushion going forward. Thank you for your time today. And with that, I’d like to turn the call over to Jeff Dyke for our operations review..

Thanks, Heath, and good morning, everyone. I am proud to present the fourth quarter 2014 operating result for Sonic Automotive. As you can see from the slide, our new car volume was up 4.9% in the fourth quarter. I’ll give you deeper dive on our new car volumes and mix in the couple of slides. Our gross profit was 2,269.

As we stated last quarter, we’ll continue to be more aggressive in our pricing, in particular in our import segment. Both Honda and Toyota represented about 80% of the GPU decrease. Our pricing will continue to move around while we work on our new car SIMS pricing tool that is getting closer to being ready for use in our mainstream business.

We have been using the tool, both in test phase and in our One Sonic-One Experience stores as we work through all the opportunities with the tool. My estimate is that we’ll have a predictable, repeatable and sustainable tool to use across our enterprise early this summer. There is an incredible amount of work going into the development of this tool.

And all the iterations that arise from each manufacturer when it comes to discounts and incentives, but in the end, we’ll have a system that can bring consistency to our pricing models and will certainly contribute to maximize market share and margin when complete.

New car day supply was 49 days, which is a little light from where we like to run, and that was primarily driven between luxury and import brands.

Next slide please? As you can see from this slide, I’ve outlined for you our revenue mix generated from the majority of the brands that we have in our portfolio and then laid a key mix to it so you can compare our mix to the performance of the brands across the industry.

The information provided show you that BMW and Honda made up about 41% of our revenue mix in the fourth quarter and their industry growth was 6.7% and 3% respectively. It also shows both Mercedes-Benz and Ford making up about 17% of our mix and the industry performance of both brands being flat year-over-year for the quarter.

Now let’s take a look at the next slide which will help you better understand how we performed in our local markets with these brands. Next slide please? This slide highlights the performance of the Sonic brands in our local markets versus the brands performance in the industry.

I’ve also included for you the percent of units sold represented by each brand during the fourth quarter. As you can see, both our BMW and Honda well outperformed the market in comparison to the brand performance, which represents about 41% of our overall volume.

You also see that we have some opportunities in the Lexus and Toyota brands which are being addressed with our operations team in charge of those brands. I think this information will help you better understand our mix and how we see our performance.

It also demonstrates on a brand adjusted basis, our stores generally performed consistent with the market performance with the exception of our exceptional BMW and Honda performance partially offset by the industry’s results from Lexus.

I’ll do my best to update this and share with you as we progress in particular as we expand our pricing tool and One Sonic-One Experience. We’ll be able to visualize the performance of each brand and the effect of the systems and processes going into place.

Next slide please? We had another solid pre-owned performance this quarter but we did lose some volume on the table as we waited a little too long start buying supplemental inventory in Q4. We typically buy and really overbuy during the fourth quarter, but the market held on a little longer than normal.

And we waited until about mid-December to start buying. This move created a situation where our online inventories were about 1,000 units below where we needed to be.

We’ve already made an adjustment and increased our buying and with this move saw about an 8% increase in January, having our best used volume January on record at just under 93 units per store. We’re seeing that momentum continue in February as well.

We finished the quarter at 29.8-day supply which is a little under where we’d like to have been in the fourth quarter. Next slide please? As you can see from the slide, our fixed revenue grew 3.9% and gross profit grew 4.4% on a same-store basis.

Our customer pay business was up marginally while internal & sublet was up just over 8% and warranty was up over 12%. Our customer pay ROs dropped during the quarter, which we attribute to the increase in warranty work being completed at this time in our stores.

We have an issue with the incentive levels that our team can achieve with warranty growing and the results have seen a decline in CP ROs. However, our hours for customer pay RO are in great shape. We’re making some adjustments to our incident structure to help alleviate this issue moving forward.

And we’ll keep you posted on our progress in the coming quarters. Next slide please? These next few slides will give you a good idea about where we are with our One Sonic-One Experience roll out in the Charlotte market.

Next slide please? I want to share with you some of the observations and opportunities we have seen as we rolled out One Sonic-One Experience in Charlotte. Here are some of the observations.

January was our first full month with all stores using One Sonic-One Experience processes and technology as well as the branded concept where we are able to deliver a vehicle in less than an hour once the guest has selected their vehicle of choice. The feedback we’re getting from our guests is fantastic and very supportive.

Interestingly and something that we hope for, we’re attracting a new type of employee which is wonderful for our business model and for the industry. Our training has really helped and made a big difference in our ability to attract and retain new associates from different retail backgrounds and outside of retail.

We’re also exploring all kinds of schedules to attract an even broader base of associates. We began our branded store level marketing campaigns for all stores the week of February 16th. We also had some opportunities as we got started. We had significant website issues for Toyota, starting with the launch of our new site in October.

We had SEO search engine optimization and SEM search engine marketing performance issues. They were really terrible starting in October and driven primarily poor performing website.

We had issues converting from in-store business development centers or call centers to a centralized guest experience center where all the internet leads and calls are now received. This issue is basically behind us and now it’s a matter of execution, given the team a little time and then gaining experience.

Our pricing and inventory purchasing tool for new cars and SIMS is running behind schedule. It’s primarily a resource issue that has caused the timeline shortfall. But I do expect the new car pricing tool to be completed early this summer, as I stated before and the new car ordering tool to be complete in about six months.

Next slide please? Let’s take a look at the individual store performances with respect to market share. As you can see from the slide, this is our Toyota store. We really got off to a great start and we are testing all the processes in August and September. As stated earlier, in October, we launched our new website for Toyota.

And unfortunately the website performed so poorly that after a few months we made the decision to upgrade our old website with our new images and marketing and re-launch the site in the middle of January. We immediately began to see increased traffic and performance; we’ve learned a lesson there.

We’ve refurbished all of the Charlotte sites now and will stick with this plan moving forward. I’m very excited to see our share in February, as of today back in the 20%; actually this morning it was at 23.1%. And we plan to continue to be in this range or better moving forward.

Next slide please? As you can see on this slide, both Ford stores moved in the right direction during their soft launch months in December and January; both locations have been on a downward trend on share for several months now.

So, the uptick we have seen in the past few months has been well received in February as trending up higher again for both locations as the process begins to settle into the stores. Next slide please? As you can see from the charts, our Infiniti store and Cadillac store, both got off to good starts as well.

We have fewer stores in the marketplace as we do with Infiniti here too in the Charlotte market. You can have some big swings depending on inventory levels, both Infiniti with two stores and Cadillac with six. Both the brands have struggled so much that one or two cars can cause a big swing as well.

The overall market for both brands is selling fewer than 90 units per brand per month. And for example, there were 83 Infinitis and 77 Cadillacs sold in the marketplace in January. Some overall general comments on One Sonic-One Experience, the number one key take-away is overwhelmingly our guests love One Sonic-One Experience.

And as we perfect the pricing process that I discussed earlier and with the website issues behind us, we feel very good about the progress we’re making.

As I mentioned earlier, we held off our marketing any of our attributes and branding until the week of February 16th due to issues with our centralized guest experience center being able to accept all the internet and phone leads for these issues and the website issues needed to be resolved.

We’ve also found that it’s taking about eight weeks to get the store in a position that they can handle the process, well enough to market the brand and its attributes, so the guest experience is being delivered at an acceptable level. All of the locations continue to improve in February as well.

Our guests in all the brands have been very supportive and love the new way we are handling their time with total transparency, which is getting started but are happy with our launch and look forward to updating you in the coming quarters. As expected, we’ve learned a bunch with the Charlotte launch.

We will more than likely adjust our launch process to launch our CRM and Showroom tools ahead of the One Sonic-One Experience launch to help smooth out all that we are doing at a store at one time. We’re very pleased with our CRM, our iPad processes in the Showroom tool and think we can be more efficient by launching these tools first.

As always, we’ll keep you posted. Next slide please? The next three slides will give you a good idea about where we are with our launch roll out of EchoPark. Next slide? First, we could not be more excited about our EchoPark launch in Denver, Colorado. Other than a few wintery storms in the area, the launch has been a big success.

And I look forward to answering your questions at the end of the call. Some early observations for you to think about. As we expected, our hiring and training process has been fantastic and as a result, we’ve literally had thousands of applicants apply to join the EchoPark family.

We’re very excited that the detail process we went through to identify and eventually hire our newest family members has worked out so well. We’ve had very little to no turnover and have applicants reaching out on a daily basis trying to join the EchoPark team.

The testimonials we are getting from our guests on Yahoo; Google; Yelp; and others has been very positive. We cannot thank our guests enough for reaching to let us know how we are doing. We are trading for a high percentage of vehicles and guests are bringing their cars to us to buy. Every day we seem to be getting more and more opportunities.

This is something that we hope for in order to supplement our inventory needs. In January, the trades and what we call straight purchases already represented 25% of our sales, which is fantastic news. Our entire Showroom performance tool is working very well.

And we’re getting guests in and out of the dealership in about an hour and 15 minutes on average once they select a vehicle. Obviously our goal is to be under an hour and will make that happen. Our experienced guys are delivering an industry leading transparent process in which they handle the appraisal, the F&I process and the guests love it.

Our store technology is strong and getting better each month of operations as kinks are worked out of the system. But we’ve also had some opportunities as well. We’ve had many of the same website issues that we saw at our Toyota store and the One Sonic-One Experience launch of its website.

The performance of the EchoPark side is not acceptable and we’ll be resolving this issue in the coming weeks. As a result of the poor performing site, our search engine marketing and optimization have been a challenge and a plan is being implemented to resolve the issue along with the website fix issue.

Unfortunately, Mother Nature has also played a role. As Scott said earlier, it slowed us down. We’ve had some disastrous weather to deal with, which overall simply slowed down our facilities team to get our stores open.

We should have our final pricing tool ready for operation at EchoPark on March 1st which will help our inventory and pricing team being more effective and efficient. Next slide please? We thought this slide would give you an idea on the cadence of the store opening and the volume the stores achieved.

It’s important to note that we do very little advertising or marketing in the first month of the store opening just to allow the stores the opportunity to use our technology in a live environment which gives our associates the opportunity to support our attributes to the best of their ability.

We’re very excited about the progress with our volume and expect this volume to continue to grow as we begin to turn up the advertising effort and the work it gets out on EchoPark and the experience you get the minute you arrive online or at a facility.

We’re so pleased with our launch of EchoPark and that we’re already working on real estate for our second market and hope to begin start identifying properties for purchase in the next month or two. We’re targeting stores opening early next year.

I’d like to take one minute to thank all of our Sonic and EchoPark associates for all that they do in helping us create a guest experience never seen in our industry and won America’s greatest companies to work and shop. I know we’ve asked a lot from you and you’re delivering. And it’s much appreciated.

Now, I’ll turn the call back over to Scott Smith..

Thank you, J.D. To summarize the year, it was a huge, huge year for the Sonic Automotive team. What we’re attempting to accomplish isn’t easy, if it were, everyone would do it. And it takes time.

We had a record year; we had core dealership operations; we began consolidation of our shared service center; launched our guest experience call center; we acquired four dealerships; we are awarded three open points; we opened three EchoPark locations; invested over $124 million in real estate and dealership properties and returned nearly $83 million to our shareholders.

Now, I would say that that is not a bad year. We expect 2015 new car industry volume of 16.5 to 17 million units. Based on this, we expect 2015 diluted EPS from continued ops to be in the range of $2.01 to $2.11 for our new car franchise operations. This excludes the effect of EchoPark.

We anticipate EchoPark will affect diluted earnings per share approximately $0.16. With the inclusion of the EchoPark operations, we expect total diluted EPS from continued ops to be in the $1.85 to $1.95 range. Before we take your questions, I want to take a minute to thank all of our associates as J.D.

did and vendor partners who join together to help us build one of America’s greatest companies to work and shop. It is an honor and privilege to lead our great Company.

And I really need to thank all of our associates again and our Board because what we are attempting to do would not be possible without our ownership structure and shared vision to really change the industry. When you look at the valuation of CarMax, a Company that we very much admire, we believe that they have a wonderful model.

And we think there is a tremendous opportunity for Sonic Automotive to get in and play in a big way, in a national way in pre-owned industry. With that, I’ll now open the call for your questions..

[Operator Instructions]. Your first question comes from the line of Rick Nelson with Stephens..

Good morning, guys..

Hey, Rick..

I’d like to ask you first about the guidance for 2015. It looks like flat earnings year despite some lower costs with EchoPark and One Sonic-One Experience.

What would be the drivers to that result; is it conservativeness on your part or are there factors I might not be considering?.

Rick, to start off, when we do our modeling, our income modeling, obviously we take multiple things into factor. And the EchoPark roll out, as we see it succeed, that could be sped up; it could have an impact on our expense going forward in 2015. One Sonic-One Experience, as Jeff mentioned, we learn more and more with every launch.

And so, that number can move around a bit, depending on how fast we roll out. And so are big factors into our guidance. Also we’ve got to consider, we start working on our open points and as Scott mentioned, our SG&A structure is pretty much based on the same percentage that we had this year.

And the one big piece that’s not in the One Sonic-One Experience and EchoPark is the support costs that are related to opening quicker and as we roll out more that cost goes up..

And the rollout plans for Sonic-One Experience and EchoPark, if you could talk about the projected economics there; when you see those two strategies actually being accretive to repay us?.

Hey Rick, it’s Jeff Dyke. We said all along in terms of EchoPark. And as Heath said in his notes earlier that EchoPark would not be profitable until the fourth year of operation. So, we’ve got some time now between now and then, some heavy lifting to do. We get better as we begin to roll out more of our neighborhood stores as part of this concept.

So, the business has been very, very robust in Denver. We feel like we’re ahead of what we thought we would do in the first few months there. So, we’re going to accelerate the EchoPark schedule by eight or nine months in getting the next market open.

We’re not ready to divulge what that market is; we know which market it is but we’re not announcing yet, maybe we do that on the next call. And the One Sonic-One Experience, we’re learning it on. We’ve rolled out the Charlotte market just so we could see how all the pieces of the puzzle work together.

But we’re going to roll out the CRM and the Desking tool and the Showroom tool first in the next market. And I’m guessing that we’re going to start doing that at the beginning of the summer as we gear up our support teams to make that happen.

But what we’re not going to do is roll out the full blown process in the store all at one time, it’s just too disruptive, slows everything down. And we think we can be a lot more effective and efficient.

In terms of return for One Sonic-One Experience, I mean we’re already beginning to see, the darn website threw us off and really slowed us down unfortunately, just didn’t work out the way we thought it would. So, we made a quick mid-course correction here.

And we’re seeing huge market share gains from our Toyota store back to what we had originally seen. And the store’s profitability plays a lot of role in the elasticity of our pricing models and what moving those all around right now.

So, we’ve got some stores that are profitable and doing above expectations and then others not quite as good but the market share is there. And so, we’re playing around with that. And I don’t want to roll that into the next location. And so, we have those tool really dialed in.

So, Charlotte is going to continue to be our Petri dish, but the things that are coming out of it, the CRM tool the Showroom tools, those things that are really working well, we’re going to move forward to get those in place and my guess is that’s going to start early this summer..

Rick, this is Scott. Something that I would encourage you to do is go back and look at J.D.’s slide on how the core dealerships are performing by brands. I would say that I feel very good about our core business.

And if you look outside if you look outside our industry, look at Tesla, they don’t make a dime; they lose more money than you can possibly imagine. But they’re building something that’s very different.

Look at Amazon, right? I’m not as concerned about our earnings per share, if you will as I am making sure that our core business continues to grow and to grow with the market as the brands that we represent, because you got to remember, our brand makes us very different from the competitor pool.

So, I don’t look at our earnings per share today as the big driver because we don’t have an SG&A line. So, if we decide that EchoPark is working really, really well and we want to grow it faster and make those investments, then it may not take us four years for EchoPark to become profitable, may only take three.

But it may be a ding on your earnings between now and then..

And Rick, one last thing, from a modeling perspective, if you look at the initiative expense, the centralization of the county is increasing in 2015 because it will be the first year of full operation. So, that basically wipes out the additional $2 million of EchoPark. And so, your initiative spend is pretty much the same as it was in 2014..

Okay. Thanks for all the color, guys. And good luck going forward..

Thank you..

Your next question comes from the line of Paresh Jain with Morgan Stanley..

Good morning, guys. Staying on the guidance here, on the cost related to EchoPark, it was about $0.16 ahead in 2015 and was $0.18 in 2014.

What’s the impact from the second EchoPark market in it and how should we think about incremental impact from EchoPark each EchoPark store?.

So, a great question and we tried to bake that a little bit into our annual guidance here of $1.85 to $1.95 and being conservative there. What really happens is we’ve got a fixed overhead expense. And as you open up more stores, that fixed overhead expense gets spread across those stores.

And as Scott was saying earlier, because the stores we think are doing so well, we might be able to improve the timeline there to profitability by opening more points. You’ve got to remember, when we open an EchoPark store, the overhead in that store is really small; it’s less than 30 people in the entire store.

So, we’ve built them to be profitable at a lower performance rate than a traditional store. So, it’s certainly not going to be we open up another car and there is another $0.15 worth of expense, it actually might go the other way and improve. But I can’t give you an exact EPS effect.

What I can tell you is that it will be a lot more efficient by opening more points quicker than holding off. Now obviously, we wouldn’t be doing that if we weren’t having success that we’re having in Denver right now. So, we’re really excited about the progress right off the bat that we’ve made in Denver.

We’ve told you guys early on that we didn’t think we had any barriers to entry. A lot of people out there are requesting our ability to buy inventory and to stock the stores. That for us was cakewalk and continues to be so. And it’s now just a matter of timing, getting the other points open.

We’d hope to have another one or two points already open but some real estate issues got in our way and weather has been a big pain in the butt. Denver’s had a worst weather in 15 years in terms of the winter. So, that slowed us down a little bit but not from a performance perspective, just from a facilities perspective.

So, hopefully that answers -- gives you some color on it..

No, that’s actually good color.

And staying on guidance again, can you give us any color on what percentage of stores with OSOE is embedded in that guidance, any range?.

Can you say that again?.

What percentage of stores with OSOE is embedded in your guidance?.

It’s just 5% of the stores. And as Jeff mentioned earlier, our approach going into 2015 is we’ll start rolling out the technologies of One Sonic-One Experience prior to the full process. And so all of that is already baked in as development cost and it’s being capitalized..

And the headcount for the roll out is baked into that guidance as well..

That’s correct..

All the support dollars that got rolling that out that’s all baked into the $1.85 to $1.95..

Got it. And lastly on your SAAR expectations, the midpoint seems a bit lower than what consensus and some of your peers are perhaps expecting.

What’s driving rather softish SAAR expectations?.

I think if you looked at our guidance on the SAAR every year, we’re conservative on it. And we just stay true to that. And the market has grown wildly for the last four, five years. And that could end up at the upper end of our guidance. But we just are being conservative in our estimates..

Thanks guys. That was helpful..

Your next question comes from the line of John Murphy with Bank of America Merrill Lynch..

Good morning, guys..

Good morning..

At the risk of being a little bit duplicative in asking this question, if we think about EchoPark, is there any way that you could isolate sort of your early stores that have been opened and understand when they unto themselves might be profitable? And I know it’s hard to disaggregate the numbers, but just trying to understand as we think about the evolution of EchoPark or the development of EchoPark; how we get comfortable with there actually being some real earnings coming through, even though in aggregate there is going to be losses for four years.

And I am just trying to understand also how you get comfortable with that as well..

So, John, if you -- the thing that we have is a lot of depreciation costs and overhead expenses that really have nothing to do with the day-to-day expenses in the store.

So, if you just isolate what would be pushed to a single neighborhood store, if you isolate that out and just push that piece, depreciation and you just look at the headcount of that one store operating versus having the whole EchoPark improve being charged to three stores that are opened, and you look at it in that perspective, because I’ve sat down and gone through that math.

Our neighborhood stores are profitable between 75 and 100 cars. And you saw we’re just short of 40 cars in our first month of operation at Centennial. If you just look at it in that way, it won’t take long. But unfortunately, there is a lot of overhang that we have to work with.

So, maybe what we can do in the future is as Centennial gets profitable or as Highlands Ranch or Dakota region in the future gets profitable, I can sort of give you an outline of just what’s going on there. As long as you remember, it won’t be I am backing out sort of overall overhead expenses that need to be charged to EchoPark in total..

Okay. No, I mean I think detail around that would be helpful over time as there is progress. And then just.

No problem, we can do that..

And then secondly, on One Sonic. You’re not calling it out as a headwind at all in the guidance for ‘15.

So should we think of that as sort of a net neutral to 2015 or…?.

No, it’s in there. It’s just part of our day-to-day operating. And we’re trying to break out EchoPark because it really is a separate reporting structure. But One Sonic-One Experience is part of what we’re doing in general with Sonic in the Sonic store. So, it’s built into the $1.85 to $1.95.

If we were doing One Sonic-One Experience at all, we would not be as aggressive on our market share targets that we put there and our expenses would be lighter. And the $1.85 to $1.95 might be a little higher for 2015. But that’s not the course of action that we’ve chosen.

But we are seeing some really, really good signs coming out of these stores in Charlotte. And another great sign is our competitors are visiting pretty much around the clock on a daily basis. So, we know we have something here, it’s just fine-tuning before we can in understanding how the cadence of rollout should be.

We know for a fact that we’re not going to roll everything out in one store, one time. It’s way too disruptive. So, I would say that it’s built into the number. There is a number in there. And heath might be able to give you a more of an accurate dollar figure..

Yes. As we show on the slide, we expect $2 million to be associated with One Sonic-One Experience which equates to 12 pennies -- 9 to 12 pennies..

Okay. That’s very helpful. And then just lastly, I mean the core operations look like underneath this, look like they are doing pretty well.

The only place where there was a little bit of a discrepancy is on the parts and service same-store sales comps which were a little bit lower than what we’ve heard from other dealers and you mentioned warranty kind of crowding out customer pay.

And I was just curious if you can kind of tell us if that’s something that you think you could reverse or deal with in 2015 and kind of where your cap view is on the stalls and stuff going forward?.

Yes, we can deal with it. And we’ve got a couple of different things that we’re putting into action right now. To be honest with you, the warranty is going crazy. So, some of our stores are enjoying really high warranty as a percentage of our overall business. And we’re going to make some adjustments to some incentive plans.

And we’ve got some -- you saw in the CapEx we’ve got a bunch of being spent; we’re expanding our service facilities, which is really going to help alleviate some of that pain as well. And we’re working on our loaner car program, which will also help us become more efficient so that we have more throughput from a CP perspective.

But there is a lot that we’re doing. And really the fourth quarter, it caught us a little bit by surprise. We’ve been in toe with the rest of the markets and really ahead for the last couple of years. So, we had a little bit of a surprise in Q4.

And I think it’s going to take us a quarter or so to rectify that but expect us to hit our target for 2015 in fixed..

Okay, great. Thank you very much..

John, this is Scott as well. As we roll out One Sonic-One Experience, what we’re seeing in the market share gains, in the last month just in Charlotte with all the stores, it was like 24% year-over-year. And that is going to continue to help drive the engine of the fixed ops performance.

As we continue to grow market share, as Jeff mentioned, we’re going to have to add additional capacity and service whether that’s extended hours or physical capacity. So, I think there is a lot of upside associated with One Sonic-One Experience and everything that we’re seeing so far. It’s very exciting.

We’ve had several manufacture partners and here we had one of our largest manufacture partners in here yesterday. And they were absolutely blown away with what we have. And they’re like my gosh, you guys have -- you almost cracked the code here; you’re so far ahead and just giving us all the kudus you could possibly imagine.

But it’s coming and it’s working. It just takes a little bit of time..

Scott, maybe just one follow-up question to that.

I mean if you guys are getting this so right, which it appears that you’re on your way, is this the kind of system and setup that could become required by the automakers -- by the dealers of automakers similar to a sort of facility enhancements to really give the customers a good experience? And it’s all kind of virtual and online at this point.

But it’s obviously as you guys are pointing out, very important to the customer experience, similar to what a good facility is, I mean is this something that could come down the line and be required?.

John, that’s a great -- now you’re thinking pal; that’s a great question and 100% the competition is going to have to follow suit the manufacture is going to make them.

As a matter of fact, the business partner, manufacture partner that I met yesterday was showing us all of their tools that they are building and we’re having convergence discussions, so that we make sure that our tools can do what their tools can do or they tools can do what ours do.

But there is no question that our experienced guys or sales associates for our competitors are going to be using iPads and all kinds of different devices to both service and sell cars. And there is no question that these dealer groups are going to have to start using data to make decisions.

They’re going to have to start using CRM tools that are the next generation. It’s common. 100% of the manufacturers are headed in that direction because the name of the game is not going to be about how well you manage your data or how well you do anything; it’s about how well your guest experience is in the store.

That’s going to be the product that we sell. And that’s going to be the difference maker. And we feel like we’re going through these turbulent waters here these last couple of years to get to this point. Everybody else is going to have to go through it too. And it’s going to be very interesting. That’s a fantastic question. You’re right on spot..

You are right on spot. The only caveat or color that I would add to J.D.’s comments are that for most dealers, they’ll have to go through and get the manufacturers technology. Where we’re working with our manufacturers so that we kind of brand agnostic. So, if a customer buys a Mercedes-Benz at W.I.

Simonson and shows up at up Town and Country Toyota in Charlotte, we’ve got every single piece of that data aggregated to know who that customer is. And just like J.D. said, our product is the experience. There is 20 Mercedes dealers in LA. And why should a customer drive past 18 of them to come to one of ours.

And it’s the experience that we’re building that’s very unique at that..

That’s very helpful. Thank you very much..

Your next question comes from the line of Bill Armstrong with CL King..

Good morning, guys. In Charlotte, you lost some share; it looks like, in December and January and I think you had some website issues, which sounds like were resolved.

Did I hear you say that in February so far, you are up to 23% share?.

At the Toyota store this morning on Toyota report for the stores that we measure against, which we’ve always measured against were at 23.14% market share to be exact..

And is that just because your website issues are resolved, are there other things going on because that’s a huge increase?.

It is. We’re right back to where we were prelaunch of the website. And if you look at that chart that I gave you, we were up above 20% there. And we’re right back to where we were; we’ve dialed in our pricing. We’ve had a lot of really crappy weather here this month; it’s kind of hurt our fixed operations business.

But beyond that, our sales business is very strong, very good. We are contending for the top Toyota volume store in the city which we’ve never done before. So, I think we’re right there in the top spot or one or two off of it. And right now we’re at 23.14%.

And we’re gaining, the other stores are remember two or three months behind the Toyota; I see the exact thing is happening. The exact same characteristics of the launch for Toyota are happening in the other stores. We’re trying to shorten that bridge if you will, we’re learning a lot but our share is going crazy..

Okay, great. And then on EchoPark, I think earlier you said that on the neighborhood stores, your breakeven is about 75 to 100 cars per month.

What would the breakeven be on the hub store, because you’re already upto 150 as a hub store?.

Yes. It’s 230 to 250. But remember, the hub store does all the reconditioning. So, it makes a bunch of its gross from the internal and we’re behind getting a couple of stores opened. So, we don’t have the throughput that we expected to have. So that’s sort of thrown us out of whack a little bit.

And that’s all purely weather related, nothing more than that. So, I would say it’s in the 230 range and could be better as soon as we get all the other locations open..

Got it, okay. And then just lastly, just more broadly company-wide, your gross profit per unit on new was down and you kind of mentioned Honda and Toyota, and used was up pretty strong. I was wondering if you could just briefly address both of those trends..

Yes. As I said, we’re playing with our pricing tool and we’re really doing it within our import brands. So, our margin is moving around. It’s not anything I’m concerned about $2,200 a copy based on our mix. I am very comfortable there. I think it’s one of the leading if not the highest PUR out of all the groups.

And then on used, we were short supply at the end of the fourth quarter. And that short supply, high demand, higher margins is really simple. We have the ability because we manage our pricing and our inventory centrally on used, we can just push buttons.

And we ended up in the fourth quarter having about 7,200, 7,300 cars online and averaging in the mid-eight in terms of sales. We need over 8,000, 8,500 cars online that puts us up to that 9,500 to 10,000 mark or 100 units per store per month. It was my fault.

I was waiting -- we always have this big drop off in October, November, December where some of the independent dealers start selling off their inventory to make payrolls at year-end whatever. And the prices didn’t drop and just held on a little too long.

But lesson learned, we’d start buying inventory in the middle of December and bought as quickly as we can. But margins were good and probably be that right here for the next six months or and the business is good..

And are inventories back up to where you would like them to be at this point?.

Yes, I mean we bought a ton of cars coming out of December, then had a record breaking January. So, and the volume is still good in February, don’t get me wrong.

But I’d like to see another 1,000 to 1,500 cars online, pushing us up over 9,000 cars online, which we’ve never really done but we’ve made that a goal of ours as to average of 9,000 cars online. And we’re turning our inventory; we’re turning our online inventory 14 times a year.

We operated a 30-day supply which is -- I mean we’re very, very efficient at inventory management. Now, I feel very comfortable pushing our inventory levels up. So, give me another month or two and I would answer 100% yes to that..

Okay. I understood. Thank you..

Yes. Bill, thank you..

Your next question comes from the line of Bret Jordan with BB&T Capital Markets..

Good morning..

Hey, Brett..

Quick question on customer pay service at EchoPark, now that you have got a little bit of data but not much.

I mean what is the service demand trend you’re seeing there?.

Yes, it’s nothing. I mean it’s very, very light. We have an even -- as a matter of fact, just this week, we’re starting to drop a few mailers. We’re doing a $999 oil change. We needed to focus 100% on reconditioning of our inventory, which I thought for our team, they’ve done a fantastic job there. Our car is staying really tall.

But there is very little amount; it’s not even baked into our forecast at all. But it’s certainly with our neighborhood stores; something that we think is a big upside for us. And as we get going, when you buy cars at EchoPark, we’ve got RFID chips in the car, so you can get a car wash for as long as you own the car.

And the car wash is there at the facility. And we’re going to use that to do some all kinds of different marketing. And we just haven’t started it yet. It wasn’t a big part of our plan to start but certainly, it’s ongoing..

This is Scott, Bret. Just a little more color. Last week on the $999 oil change e-mailer that we sent out; in two days of that, we had 1,200 additional hits on our website for service instead of 107 service hits, just out of that one mailer. So, we’re just starting -- I mean it’s too soon I think what J.D.

said that we’re really into the service business there, but our very first shot out of the box is very impressive..

And as you think about other profit drivers and you were commenting earlier about CarMax, what’s your thought now, sort of an update on how you’re thinking about internal finance operations given the fact that so much of their profit comes from CarMax auto financing; are you thinking that captive program as well?.

This is Heath. As you know, 60% of the bottom-line comes from that CAF. And we are in exploratory stages right now determining of that’s going to be a piece for our business. We have hired some expertise in that area; talking with our bank, vendor partners understanding the license process, the compliance that’s required.

And so, we have started that journey. Based on what we’ve done so far, it is an 18 months to 24 months journey, just to go through the hoops instead of the infrastructure. But we believe that is going to be an integral part of that..

I will tell you that none of our forecast, our four year model, none of that has any built in expectations from an internal finance at all.

We did not want to build the success of EchoPark and our neighborhood store concept using that methodology, our stores, the overhead of those stores and the way that we’ve built them because they’re user friendly and with the technology, we need very little overhead to run them. And they’re going to stand on their own two feet without that.

So, when we do something like that, it’s just not 100% breaking..

Okay..

This is Scott again. When you look at adding our entire new car franchise business portfolio to it and you look at the loss ratios, we’re predominantly luxury and Asian. So, those brands perform extremely well.

And I think there is a big opportunity, not just with EchoPark but with the franchise business as well to participate in that finance opportunity..

And one final, just as it relates to inventory at EchoPark. Could you explain -- I guess you’d partnered up with Mannheim for some of your inventory sourcing; I think you said a quarter of it was coming from trade or direct purchase.

But what is it that you got with Mannheim as far as sourcing used units?.

I mean we don’t -- we have not partnered -- we have a -- we’re working on a plan with Mannheim to develop a strategy to have them help us with inventory but 100% of our inventory is 722 cars on the ground right now and 100% of that came through internal, our buying. A lot of that was bought at Mannheim auctions.

But in terms of Mannheim providing us any inventory for the EchoPark stores, not one car..

Okay.

But you’re beginning to describe that you’re working on an agreement with Mannheim that would make it easier to get inventory; how does that set up?.

Right. So, just a small peak sort of under the covers. We’re working with them on developing across this but really would have them deliver inventory to us that’s ready for sale. And you can sort of imagine everything in between that would occur in order to get that done. And there is a year and half worth of work that’s going into this.

And I could not tip my hat more to that organization. They’re really working hard to work with us, develop some processes. But I think our industry changing as I think they begin to sort of rebuild themselves in a certain way to be a great distributor and provider for our industry.

And so, more on that on the next couple of calls as we announce our next market and how we’re going to roll that market out..

Okay. Thank you..

Your next question comes from the line of Brett Hoselton with KeyBanc..

Hello gentlemen..

Hey Brett..

First, just clarification on the EchoPark, when you talk about being profitable in year four roughly, is that for the overall enterprise? It kind of sounds like that is because it sounds like even if you increase the trajectory or increase the number of stores and so forth, it’s not going to kind of push that out year-after-year-after-year.

It sounds like you are saying look, we think by maybe 2018, this whole entity is going to be turning a profit for us..

Yes, that’s exactly right..

Okay. And then secondly and maybe you answered this and I just didn’t quite grasp this. You’ve given us a lot of market share numbers for the Charlotte area stores that are being impacted by the One Sonic-One Experience.

Can you address or talk about that store profitability?.

Yes, I can. I mean it’s all over the board. We’ve had months where -- I’ll just address our Toyota story in months where they made great money and been ahead and other months where they’ve not made money.

And that has nothing to do with store as much as it is us letting our One Sonic-One Experience expenses on those stores, the rebuild of the store and the depreciation that goes along with it and then me planning with pricing. So, profitability is unstable right now across -- let me take that back.

Our Cadillac store is stable and our Infiniti store is fairly stable, the Ford store is a little more competitive and then Toyota is just ridiculously competitive in the marketplace. So, stability gets less as you go along that list I just gave you.

And I think over the next few months, that’s all going to begin to play out as we work our way into the selling season. And I can comment more on it in specifics as we get a little more time under our belt..

We did have a record in the fourth quarter at the number of stores that made over $1 million for the month..

Yes. For the overall Sonic business, our fourth quarter was regardless of any number of stores that we had best profit quarter and December was a best profit month we’ve ever had. And that includes all the stuff that we have going on in those One Sonic-One Experience stores..

I guess what I’m kind of driving at is as you’ve introduced the One Sonic-One Experience, you’ve talked about I think improving, in my mind, the overall profitability of the store.

It’s not so much about gaining or losing market share or significantly increasing or decreasing your gross profit per unit, but it’s basically look, we think we can all things combined, improve the overall profitability of the store.

And I’m kind of wondering what gives you the confidence at this point in time that that’s going to progress in that direction?.

That’s the interesting conversation because it depends on what brands you’re talking about. But if we’re talking about Toyota, the profitability of Toyota is really going to grow with more trade that you take and the more you feed your service department and I hope somewhat true for all the stores but more so in this brand.

And right now our number one goal at least in the first six months of all of this is to gain share. And to do that in a way that we think long-term is going to be wildly profitable for the stores or you don’t do the project. And obviously that we’re continuing to talk about how we’re going to roll it out, we’re excited about where we are.

But I think we’ve got a long way to go. I mean you came into our stores and went for this one store and south and you came into this store and went through the process. I mean it is night day difference. So, the amount of change that we’re taking our team to in order to make this happen is creating all kinds of opportunities.

And so, ultimately, we’re hitting all the targets that we thought we would hit and in some cases, doing better. And now, it’s just a matter of fine-tuning those things before we roll out to the next stores. Believe me we’re not rolling out anything if our profitability and our share is not growing together..

And then Heath, I was kind of hoping you could kind of just walk us a little bit from 2014 to 2015 earnings. And by that I mean in 2014 you made $1.90 and your guidance, ex EchoPark, is $2.01 to $2.11. I look at the One Sonic-One Experience as being a negative $0.12 hit on 2014.

So, if I add that back to the $1.90 and then I add maybe a $0.02 improvement on the EchoPark, it gives me a $0.14 improvement which takes me to $2.04, which is kind of the midpoint of that $2.01 to $2.11. And I kind of saying it seems like you are expecting your core business to be flat on an earnings standpoint.

Are there some headwinds built into that or is it merely conservativism?.

As you know and noted, our SARR is conservative; it typically is, our SAAR projection. But there is a couple of items that we could break out into EchoPark and we could break out into One Sonic-One Experience that we keep in our core.

What I mentioned earlier is the shared services expense this year was 2.1 million; it’s going to be 5 million next year. And that has a return but in this 2015 year you’re going to have overlap as you’re transitioning from the field to corporate.

But one of the bigger items as a headwind from an expenses perspective is even though we have only rolled out the technology to One Sonic-One Experience stores the flat stores in Charlotte; we had to depreciate the entire capital development.

And so, you’ve got an extra $6 million running through the with the depreciation line even though we’re only utilizing the technology in the five stores as just GAAP requirement. And so that coupled with once you build the technology, you’ve got to support it. And so all of that moves out of your development capital cost and becomes SG&A expense..

Excellent thank you very much, Heath. Thank you, gentlemen..

Thank you..

At this time, we have no further questions. I would like to turn it back over to Scott Smith for closings remarks..

Thank you, ladies and gentlemen. We really appreciate your time today. We’re very, very excited about the future of Sonic Automotive and EchoPark and One Sonic-One Experience. And we look forward to our next call with you. Take care..

Thank you. This concludes today’s conference call. You may now disconnect..