David Smith - Vice Chairman Jeff Dyke - EVP of Operations Heath Byrd - CFO.

Rick Nelson - Stevens Mike Montani - Evercore ISI John Murphy - Bank of America Merrill Lynch Bill Armstrong - CL King and Associates Bret Jordan - Jefferies.

Good morning and welcome to the Sonic Automotive First Quarter 2017 Earnings Conference Call. This conference call is being recorded today, Wednesday, April 26, 2017.

Presentation materials which management will be reviewing on the conference call can be accessed at the company's website at www.sonicautomotive.com by clicking on Our Company then Investor Relations then Webcasts & Presentations.

At this time, I would like to refer to the Safe Harbor statement under the Private Securities and Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectations about the Company's products or markets or otherwise make statements about the future.

Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the Company's filings with the Securities and Exchange Commission. I would now like to introduce Mr.

David Smith, Vice Chairman of Sonic Automotive. Mr. Smith, you may begin your conference sir..

Thank you and good morning and welcome to Sonic Automotive first quarter 2017 earnings call. I'm David Smith, Company's Vice Chairman. Joining me on the call today are Jeff Dyke, our Executive VP of Operations; Heath Byrd, our CFO and C.G. Saffer, our Chief Accounting Officer.

I trust everyone has read the documents released earlier this morning, I'll provide some brief comments and then turn the call over for questions. For the quarter, we generated $0.23 per share from continuing operations on an adjusted basis and $0.00 per share on a GAAP basis.

Our GAAP results were depressed primarily due to two items, $0.21 loss per share on the refinancing of our 7% notes during the quarter and $0.02 loss per share related to storm damage cost at our group of stores in Texas.

As we discussed in a previous release during the quarter, our internal Q1 projections anticipated continuing operation results of between $0.22 and $0.26 per share.

Our internal projections took into consideration the effects of opening new stores and open points in late Q4 of 2016 and Q1 of 2017 in addition to cost incurred related to additional openings and conversions of stores which will be completed during the remainder of the first half of 2017.

We are very pleased with the refinancing of our 7% notes with a 6.125% ten-year issuance. This locks in a very favorable rate and improves our calendar of debt maturities. The first quarter started off very slowly, but recovered somewhat in the month of March.

In fact, we sold more new vehicles in the month of March than any other March month in the history of Sonic. As Jeff will most likely get into during the Q&A, the new vehicle business continues to be challenging due to higher level of competition for deals.

We were pleased with our performance in used vehicles and those at franchise locations and at our EchoPark stores. Fixed operations also continued to grow as did F&I.

We remain committed to returning capital to shareholders and again announced a dividend of $0.05 per share for the shareholders of record as of June 15 to the payment occurring on July 14. Our stock repurchases were modest during the quarter with the level of $4 million, as we continue to remain opportunistic in our repurchase strategy.

Our Board of Directors increased our outstanding share repurchase authorization by $100 million during the quarter that resulted in an authorization remaining of approximately $141 million at the end of the first quarter. The rollout of One Sonic-One Experience technology continued in our Birmingham, Chattanooga and Los Angeles markets.

And rollout of our first BMW store in the first quarter has progressed as expected. EchoPark results were in line with expectation and EchoPark contributed a loss per share of $0.07 during the first quarter of 2017 compared to a loss of $0.05 per share in the first quarter of 2016.

Year-over-year improvements in operations of EchoPark Denver platform were offset by costs associated with the operation of our AutoMatch [indiscernible] stores in Florida and the conversion of those stores to EchoPark locations. At this point we'd like to open up the call to questions..

[Operator Instructions] The first question will come from Rick Nelson with Stevens. Please go ahead..

To follow-up on the guidance, I think last quarter you talked about a $2 to $2.10 estimate for Sonic, any updates on that?.

Hi Rick, this is Heath, we're maintaining that guidance of $2 to $2.10 for the full year..

And EchoPark, the projected loss of $0.23 to $0.27 unchanged as well?.

Yes sir, that's correct..

Sounds like hailstorms were pretty disruptive and if could discuss that and how that could potentially impact supply and 2Q results?.

Hi Rick, Jeff Dyke here. It's amazing; as a matter of fact we are getting ready to start an unprecedented push to put up hail nets across our hail prone areas. We just had enough of it, we've been getting killed every year. Our big Mercedes store in McKinney, it's a new ad point for us got just absolutely destroyed on a Sunday.

Nobody was at the store because we're closed there on Sunday and every car that we had including any customer cars that are outside got just totally pounded.

And then here are a couple of weeks ago that same store after we fixed a bunch of the cars got hit again, luckily we got about 60% of our inventory inside because we built a big inside showroom that we can push all the cars into.

Our Birmingham stores in Alabama all got hit a few weeks later and then also last week Dallas got hit, just about every single store that we had I think we had over 1,300 cars get hit with hail again there.

So it's certainly disruptive for those stores and we're busily fixing the vehicles having hail to sale events and doing everything that we can to mitigate that. But like I said, we're going to have an unprecedented push to get hail nets up in these stores that is going to create some CapEx spend that we just did not predict.

But it's something that's necessary. And any EchoPark store that we build in Texas, we'll do the same, we'll add hail nets to that. So it's a few hundred thousand dollars a store, it's not the end of the world, but it's still an expense that we had not anticipated in our models.

But long-term we think it will save us a bunch of money as our risk team is evaluated this, it's just, it's not worth dealing with it any longer, so we're going to do our best to get it taken care of now rather than later..

This is Heath, and just for clarity, the subsequent event of Alabama and the second Texas event were all second quarter events..

Also, I would like to ask about Texas and the Houston market in particular, is there any signs of recovery going there?.

Yes, so Rick, interestingly enough if you looked at the fourth quarter of last year, October and November were still very difficult in Texas and December came along and it was just record-breaking. January and February were very difficult months there. And March was a pretty darn good month, we had a record-breaking March, it was a great month.

But it's really kind of up-and-down there, it's certainly not as bad as it was a year ago early on in the last year. There is leveling off, there is leveling off in margins, volumes are not bad. But if you look at sort of our profit decline at the store level about 50% to 60% of that came from the Houston market.

So there is no question that it is still very competitive and we've got big BMW stores there that are battling with couple of the other bigger groups. And as I listened to their calls and their notes, they're saying the same things.

I mean Houston just, while improving it's not improving, it's fast enough for my liking, but it is certainly not as bad as it was..

And Jeff, with stabilization in GPUs on the new cars, you could speak to that and hit the inventory levels where you're light, where you're heavy at this point?.

Obviously we want more sport utility vehicles and trucks, and the manufacturers are busily retooling to make that happen. Our base supply is in good shape. Coming out of March I think we are 73 days something in that ballpark 74 days.

So I'm not just dissatisfied there, I'm very satisfied that the margins are leveling up because as you know for a long time we are on a big drop and actually our new-car margin was up a little bit for the quarter. So on a year-over-year basis and so it's certainly leveled out.

I had a meeting with Toyota yesterday, I told them if our Toyota margins are not where we want them to be, our core margins are not where we want them to be, but a Honda and BMW and Mercedes, those margins are holding tight and doing better. And that's predominant of our overall mix, so that's making a difference for us.

And then our F&I margins are vastly improved, JM&A became a new partner for us this year and they are training program and the support they were getting from them is fantastic. And our F&I margins with an all-time record month in March, we are pacing an all-time record month in April, so from a PR perspective.

So I'm very pleased that margins have stabilized and we'll see how the rest of the year goes. If you look at manufacturer's incentives there, inching on past 10% of our MSRP mark and that's going to continue to grow I think in order for them to hang into that 17 million SAR range for the rest of this year.

So we'll see what happens in '18, I'm concerned that it's going to have to get more and more competitive from the manufacturers' incentive perspective to keep our margins sort of stabilized. I want the rest of the year to play out before I'll make any further comments on that..

It looks like you're rolling some of the technology into new markets and the pricing tool, is that something that you're still developing or are you not likely to push forward with that path?.

Well yeah, let's break it down into two categories. First is our used car pricing tool and I could not be more pleased with where we are there. I think we've got the superior used car premium pricing tool in the industry today.

Our EchoPark stores are all priced automatically, we had electronic ink tags on our cars, and our cars are being, pricing is being adjusted by our algorithms on a daily basis. And so I couldn't be more pleased with where we are, we're still working on our new car pricing tool, it's a much more complicated venture than that.

But under no circumstances are we backing off of that. If you're going to be one price or non-negotiating environment, you've got to put yourself in a position where you can price cars and do that on a timely basis. So, we are rolling out our technology, we brought that out into 14 stores, we added a BMW, training started in the middle of January.

We're having a - sequentially the store keeps getting better and better and better. And so I want to go through April, May, June, see how that store does before we start putting a full core press on rolling more of a technology out.

We're very pleased with our CRM tool, our desking tool, we've got an appraisal app that we'll introduce to the public here in the coming months where they can appraise their own vehicle. And by the time this year is over with, our team is going to be able to provide online for our customers to do an entire transaction from stem to stern.

So they'll be able to buy a car online and we'll deliver [indiscernible] their place of business, their home, wherever they would like. So that's something we've been working on for a long time, we talked about it last quarter. And by the end of this year we should be able to deliver that opportunity for our customer base.

And then I know it's not a large part of the customer base today, but we projected over time that's going to grow and that opportunity will be there for consumers to use at their convenience..

The next question will come from Mike Montani with Evercore ISI. Please go ahead..

I just wanted to ask if I could from a profitability standpoint and also from a used unit throughput standpoint.

Can you just give us some incremental updates on what you're seeing out of the Denver market in particular? And then just how to think about profitability moving forward as those stores mature?.

Yeah I mean, look if you look at our stores on a same-store basis year-over-year, cash flow was just about breakeven for the quarter. Our original stores are making money. So that's why we're pushing forward so hard with EchoPark, very, very excited about that. Our throughput is great, our volume growth is excellent.

So if you sort of separated out the AutoMatch stores and we try to do that for you on a slide, you can sort of see where EchoPark is and what our growth is. But we could not be more excited about EchoPark and the opportunity that we have there. It is just going gangbusters in Denver.

And we've already broken ground in San Antonio, Dallas and the Carolinas will be just behind that. We'll probably get the AutoMatch stores all converted this year and three or four stores opened by the end of the fourth quarter. And then we could have the opportunity to open 15 to 20 stores next year.

So we really made a lot of progress with real estate, a lot of progress with facility and how quickly we can open them. Our technology is like I said earlier, it's just I think the best in the industry, if you ever visit the store you'll see why.

And so, we could not be more excited about EchoPark and we are in Denver Colorado, it's just been a fantastic move for this company. And if you look at the first quarter and you look holistically, it's the first time in a quarter that Sonic Automotive has sold more pre-owned cars than new cars and we expect that to continue to grow.

The more stores we open up, you're going to be see our used car business continue to take a commanding lead in the overall volume and mix of this company. And long-term profitability wise it's going to take the lion's share of that too. So we just couldn't be more excited about where we are with EchoPark..

Can you talk a little bit about the service side in particular and how are you seeing that mature in the EchoPark stores. And just as a separate but related note, one of your competitors has decided to private label a majority of the parts that they're selling in the parts and service space, obviously non-warranty.

I was just wondering if you guys could comment at all, how you might think about that as a strategic option or maybe not?.

Sure, service at EchoPark, we're being very cautious about pressing hard there. I've got a certain number of man hours or operational hours if you will and they're all dedicated to reconditioning cars. We're just keeping up with the throughput that we have is the most important thing for me right now.

So a driving customer pay, while important down the road is not the most important thing for us right now. And then, I know Jackson and the team are out there working on their private little parts program, more power to them building their brand I think that's just the smart thing to do.

That's exactly what we've been working on for years now and we're going to sit back and watch how that works. There's sort of a mixed belief there, but if the numbers that he's touting are accurate then there will certainly be an opportunity for both sides Automotive and EchoPark to play in that ballpark and others to expand our brand.

And I think expanding the brand is the more important thing here with what's going on, on the manufacturer side, the amount of money that the manufacturers are wanting to spend on facilities is getting to the ridiculous point.

And I've spent a ton of time in this arena and so at Sonic, we're going to do everything we can to support that, but at the same time do the best to expand our brand and EchoPark is our way of doing that and growing there. And if Parts becomes a part of that picture down the road, great.

We've got a lot of irons in the fire with one Sonic one experience, a lot of irons in the fire with EchoPark and in our technology and what we're doing. I feel like adding more projects to our team at this point is not an efficient and effective way to use our time.

So we'll sit back and we'd see how am I going to do, I'm sure they're going to be successful at it and we'll let them blaze that trail and maybe learn from it and if there's an opportunity down the road, then we'll certainly take a look at it..

Okay. Great.

And just the last one I had and I'll jump come back here in the queue, but just on that fixed op side, it looks like the gross profit comps, 1.1%, can you guys give a little bit incremental color there, if you were to do customer pay versus warranty and recon, kind of what's going on there, just because I had been looking for something maybe a little bit above that level?.

Yeah. We sure can. Last quarter Keith, I believe we announced that we had an accounting change. We took some of the BMW and Toyota maintenance items and put them in to warranty where we think they belong and we're splitting that out on our ROs and measuring customer pay differently.

So when you break down the categories and look at the detailed customer pay revenue because of the year-over-year comparison [indiscernible], but if you normalize it and standardize it on a year-over-year basis, our customer pay growth was down about 1.5% year-over-year, while warranty was up 6.6%.

And [indiscernible] customer pay up about 5% and warranty of about 14.7%. Our internal revenue and our internal growth is growing at a higher level, because of our used car business. Our used car business, we just saw outstanding March was an all-time volume record for us. And our used car volume just continues to grow.

We've had a record used car volume I think every year since maybe 8 or 9 or 10 and '17 won't be any different. So it's going to drive that internal growth volume, which is certainly helping bolster our fixed operations line.

I think we have some opportunities in customer pay this year and to do a better job there and we have some opportunities in Body Shop and so those are two major focus areas for us between now and the remainder of the year, so hopefully that answers your question..

The next question will come from John Murphy with Bank of America Merrill Lynch. Please go ahead..

Good morning, guys. Just a first question on sort of the pricing environment and we just got off the Fiat Chrysler call and they were talking about how they thought the incentive environment was actually getting less competitive or better in April.

I'm just curious what you guys are seeing in general as far as incentives and pricing and the action you're seeing from the automakers and also if we think about it beyond just sort of the standard incentives and thinking about residual support on leasing, if you can kind of include that in your comments or how you're seeing that shape up out there?.

Yes. So here's what's happening. In January and February, incentives were kind of lighter and then march, it went berserk. And so there's this trend that's building, you're going to see a little bit of a lighter month in April and May. But in June, it'll go berserk again as the manufacturers try to hold on to that 17 million SAR.

And so the incentives are all over the board and it changes on the hour. I mean it is just crazy what's going on, very difficult to manage and I wouldn't be surprised if you heard that from everybody, at least from a public perspective, a lot of people or the company has a lot of stores.

So from a - the manufacturers are going to do everything they can this year I think to hang into that 17 million SAR range and I expect this real topsy-turvy incentive environment to continue into the foreseeable future. They've just got too much inventory. The days supplies up on their lots and so that's going to be forced down on to us.

They're going to have to keep incentives going to push those cars out. There are new launches coming from a several different brands. I mean it's just - it could be the perfect storm if it's not managed right..

Okay. That's incredibly helpful.

And then if you think sort of to the back-end just on residuals and what's going on with leasing, I mean what do you see sort of now, is there a lot of residual support, then also as we think about this big push in leasing, have this sort of tsunami of vehicles coming back off of lease over the next three years, what is the opportunity for you both in your core stores, in your EchoPark stores and how do you divide that up?.

Actually, we're seeing some of our manufacturers pull away from leasing and going the other way. I mean BMW for example is pressing us to sell more cars, lease less cars and although that's a very difficult thing to do in this environment. And I think it's because of all the cars that are coming off lease and the residual values that they're seeing.

So their finance companies are making the operating companies do things that maybe they want to do right now, but if anything, I'm not seeing a huge push to lease.

I'm seeing the opposite of that and I enjoy the ability of sitting on a few dealer boards and it's a lot of the talk of the conversation that we're having is how do you reduce the lease output, increase the traditional sale output and still maintain the levels of volume and margin in the competitiveness that you have to for any particular brand.

And so I think it's a conundrum right now and it's something that we're going to have to work on as we move forward this year..

I'm sorry. Just to follow-up on that, I mean there seems to be like a 20% to 25% gap between the monthly payment on a lease and a monthly payment on a purchase, assuming like 72 month loan term.

Is that what you're seeing and how do you convince the consumer, I mean obviously, long term things should equal out there, so puts and takes and all this stuff, but when the consumer looks at a monthly payment that's 400 bucks versus on a lease versus a monthly payment that's $500 plus on a loan, I mean how do you get them, I mean aren't people fighting on these leases in a huge way and that's part of the problem?.

Yeah. I'm going to bring you to my dealer board meetings with me. It's the same question I'm asking and so, yeah, there's a huge gap and you cannot - you're not going to be competitive with vehicles that have $100, $150, $75 more monthly payment in a straight buy versus a lease. And so it's an issue that we're going to have to deal with.

They're going to have to meet more in the middle. The cost is going to have to come down and the lease residual value is going to have to go up, let's say, take it in the shorts at the end of the term, but that something is going to have to change or we're going to sell a lot less cars..

And you sell a lot more used cars though?.

Yes. We will and we've been predicting that John for quite some time now..

Okay. Then just my last question, I appreciate all the color.

Last question is, as you think about the used car opportunity, you've kind of taken two paths right now, because you made an acquisition of AutoMatch, so how do you decide on buy versus build when you're entering a market or looking at stores or an area, because that was kind of - you just kind of exhibited a willingness to buy, not just build Greenfield stores..

Yeah. Well with those AutoMatch stores, markets may just have a deal. I mean we bought those stores very cheap and so it was an opportunity for us to very quickly add four more locations to our mix and that will be done here in the coming months.

We're looking at, not every Starbucks is the same, right and so we're looking at Greenfield, we're looking at stores that we can go in and buy and convert the facility to have our brand and look and feel to it and it's just a financial decision, some math equation, that's it. We have certain rent streams that we want to pay.

And we have to - we're very focused on having about 400 cars in sellable inventory available for sale in each location. And so we have to meet those standards.

And as we meet those standards, we can pop them out like popcorn and it's great because our breakeven is at a level where we don't have to sell that many cars and as we continue to grow the brand in these markets like we're doing in Denver, we start to see nice profitability out of the stores and then the question is just how fast can we grown them.

We have 100% confidence in our ability to make money out of them, 100% confident in our ability to sell a lot of the cars.

The big trick is getting your footprint, where you want to get the price that you want and then getting it approved by the local governments, which aren't sometimes as keen as you might believe on having a used car facility opened up, but once we make our presentations, we're 100 for 100, 100% success rate.

And so that's why next year, we could very easily open 15 to 20 stores as we've done a lot of homework and a lot of work being prepared for that and so the Dallas market, the Austin, the Carolinas, Florida, Georgia, they're all going to come alive next year..

The next question will come from Bill Armstrong with CL King and Associates. Please go ahead..

Good morning, everyone. Just a follow-up on that last discussion on the AutoMatch conversions, can you sort of walk us through what needs to be done there, how are they different than the EchoPark stores.

So what do you need to do with the time line to get in the --?.

It's a brick and a gold bar. I mean totally different, operations were totally different. So we're converting the culture now.

The facilities, we're actually going to do some really cool, we're going to wrap the facilities to make them look like the EchoPark stores versus doing a bunch of expense and construction, we found a new way to do that, which will help us in the future if we find buildings that are already done that we can convert.

So we've already gone through and done the hiring seminars. We've hired the people that we want.

We've got them in place and I would tell you that over the next three to four months, we'll have three of the four stores converted and then the one store in Savannah, Georgia which we're very excited about [indiscernible] kind of the jewel of their real estate, it will be probably fourth quarter before we get that one open.

We're doing some conversion work on that store. So not a ton of expense to convert in comparison to other projects, but converting the culture, the EchoPark culture is very, very different. Our associates go through sixty days of training before they're even allowed to talk to customers.

So we're going through that entire process right now and we've got some people exiting, some people coming in and we've got the infrastructure, we really don't have to add anything to that, it's just getting the stores converted and that's going to take a few more months..

Okay. Got it. Thanks for that color. And on SG&A, obviously somewhat elevated for the reasons that you've outlined with the new stores and the EchoPark.

What sort of - is that going to ramp down at some point as these stores start moving past the construction or conversion stage and whether the franchise or the EchoPark and then start actually doing business? What should we look for as we move through the year in terms of SG&A either dollars or ratios, however you might want to express it?.

Yeah. From an EchoPark perspective as long as we're growing at the pace that we're growing at SG&A, it's going to be a little higher. Simply because it takes us about a year to ramp up a store where we want to be from a breakeven perspective. And we'll probably make a mistake here or there in a location as we go out.

So there are going to be those kind of - there are going to be those kind of hiccups, but in the end, I would expect as we need to cover our corporate overhead and to get the entire thing cash flow positive versus just the market cash flow positive. My guess is about 25, 26, 27 stores open and operating. So we're hustling towards that environment.

But there are SG&A opportunities on the Sonic side that we're taking just because of the environment that we're in and we're aggressively taking - making those moves now and so hopefully over the next three to four months, some of those SG&A percentages will begin to drop off as we make some significant adjustments in our expense model for Sonic..

And Bill, we had one, two, three, four, five - seven new stores in Q1, when you include the EchoPark and AutoMatch that were not included in Q1 of 2016.

So obviously that had an impact on year-over-year SG&A and those were ramping up, those were new stores, but we modeled the year, total year would be about 78.5% to 78.8% SG&A as a percentage for us..

And Bill, that's why when we say our internal forecasts for the first quarter were in range with where we were, we took those stores in the mine as they're going through their ramp up and obviously, if you guys just look at our history and you get towards the end of the year, that fourth quarter for us plays a huge role in our profitability.

So you guys need to take that in mind if you're forecasting at your year and building your plan based on what the information that we're giving you today..

The next question will come from Bret Jordan with Jefferies. Please go ahead..

One quick follow-up on that comment you just made.

You're looking at a full year 78.5 SG&A to gross, so including the first quarter, is just average or is that the run rate you expect to be added at the end of the year?.

That will be the annual rate. That's the 80 plus for the first quarter..

Okay. Great. Thanks. And then I guess just following up on one of the comments yesterday, obviously you don't have as much southeastern or Florida market share, but are you seeing any regional differences other than Texas getting somewhat better off a low base, do you just see any softness in the southeast as Autonation mentioned..

Yeah. I read that a little bit as we've got a very similar footprint, so a little bit and we wholeheartedly agree on Texas, in particular Houston and California. I think Bill Berman said that the California business was robust, so is ours. So the southeast is nowhere near and we've got a pretty good footprint in the southeast.

It's nowhere near what Houston is.

That Houston market, like I said earlier, represented about 50% to 60% of our store level P&L miss and on a year-over-year basis and that's - we've got a great team there, fantastic leadership, great assets and they're fighting a good fight every day and hopefully as oil prices, because that's what this is all about, as oil prices will bounce back, the market will and we'll be able to have that robust market back through our P&L again..

Okay. And then just sort of the granular - the details on the EchoPark, you're talking about 400 cars in inventory. I think you mentioned a relatively low breakeven unit number. What would be sort of a ballpark for units to breakeven on the used only lots..

For neighborhood stores, somewhere in the 125 car range, something like that, 115 cars, somewhere in that ballpark..

Okay. And then one last question is kind of fuzzy, but obviously we're talking a lot about the OEs pushing incentives to keep 17 million SAR.

What do you think SAR rate would be if you pulled off the incentives and just sort of a natural state, if we ran an average over the last ten years of incentives as opposed to heightened incentives, what do you think the natural retail demand for units are?.

That's a hell of a question. I mean, it's going to be a hell of a lot lower than it is today. I mean there's no question that incentives, we've got a lot of full head coming and its natural state, it's probably 15 million SAR, 14 million SAR, who knows. It's the same way.

If you sat down and you listen to what all the manufacturers put together and you add all those numbers together, we'd be selling 22 million cars or 23 million cars. So all of their forecasts are all baloney. At the end of the day, we're bolstering up that the incentives in order to get us to that 17 million SAR.

Certainly, a lesser number, my guess would be in the 15 million range..

At this time, I would like to turn the conference back over to David Smith for any closing remarks..

Thank you all. Have a great week..

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect..