Sonic Automotive, Inc.

Good morning and welcome to the Sonic Automotive first quarter 2020 earnings conference call. This conference call is being recorded today, Thursday, April 30, 2020. Presentation materials which management will be reviewing on the conference call can be accessed at the company's website at ir.sonicautomotive.com. At this time, I would like to refer to the Safe Harbor Statement under the Private Securities and Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information, or expectations about the company's products or market or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the company's filing with the Security and Exchange Commission. In addition, management may discuss certain non-GAAP financial measures as defined by the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables in the company's current report on Form 8-K filed with the Securities and Exchange Commission yesterday. I would now like to introduce Mr. David Smith, Sonic and Echo Park's Chief Executive Officer. Mr. Smith, you may begin your conference.

Thank you very much, and good morning, everyone, and welcome to Sonic Automotive's first quarter 2020 earnings call. Again, I'm David Smith, company CEO. Joining me on the call today is our president, Jeff Dyke, our CFO, Heath Byrd, and our executive VP of operations, Tim Keeney. Today, in addition to discussing highlights from the first quarter of 2020, I'll also provide a business update with respect to the COVID pandemic. We continue to see our record 2019 performance carry over well into the first quarter of 2020. Our earnings press release and investor presentation discuss our first quarter results in great detail. While it's not our normal practice, I'd like to offer a More information on our operating performance in the first two months of the quarter before we began to see the impact of the COVID-19 pandemic on our business. Then I'll talk about how that has changed in recent weeks. During the first two months of 2020, same store total revenues increased 17% versus the comparable two-month period in 2019. driven by an 11% increase in new vehicle unit sales volume, a 27% increase in used vehicle unit sales volume, and an 8% increase in fixed operations revenues. Additionally, Echo Park revenues grew by 61% in the first two months of the year and was on pace to retail over 16,000 vehicles for the first quarter. While we all know the world has changed dramatically since that time, I think this information is very important as it speaks to the strength of our business and the momentum we carried over from 2019. Sonic Automotive and Echo Park have been built for the long term. We have a seasoned team that has already overcome prior historic challenges, like the financial crisis of more than a decade ago. While the effect of the COVID-19 pandemic has had a sudden and severe impact on the global economy. Our team and our business are in a position to recover quickly and continue on our path to achieving our long-term goal of $20 billion in total annual revenues this decade. Of course, we cannot ignore the reality we are facing in the near term. The pandemic is having a widespread effect on the automotive industry as a whole, from the parts suppliers to the OEMs to the dealers and to the consumers. Our team has been working day and night monitoring all aspects of our business and making operational changes as necessary, and we will continue to do so as the situation evolves. As you know, from the day the COVID-19 pandemic was declared, many areas across the country enacted stay-at-home orders. which significantly reduced consumer traffic at our stores. During this period, our overall vehicle sales volumes fell roughly 40% compared to the prior year. Customer facing parts and service gross profit decreased 15% during the same period and experienced nearly 40% year over year declines in early April as more states declared stay at home orders. In the past week, though, the year-over-year vehicle sales declines have improved to roughly 30%, with used vehicle sales being slightly more resilient than new vehicle sales. Parts and service growth has also improved over the past week as states begin to relax their stay-at-home orders and customers begin to return for delayed repair and maintenance work. The investor presentation we posted yesterday includes several slides on our outlook for the rest of 2020 which we believe will recover to our original expectations sometime during the third quarter. Now returning to the first quarter, I'd like to briefly mention some operating highlights and other notable items, which include an all-time record quarterly Echo Park revenues of $332 million, which was up 33% from the first quarter of 2019. We also had record Echo Park retail volume of nearly 14,000 units, which is up 27% from the first quarter of 2019. We had Echo Park segment income of $2.1 million, which was in line with the first quarter of 2019. Our franchise segment income of $22.8 million was up 9% from the first quarter of 2019. We had a 0.8% increase in franchise same-store gross profit despite lower vehicle sales volume and a 2.0% decrease in same-store revenue. We had an all-time record quarterly F&I gross profit per unit of $1,885 on a total sonic consolidated basis. Our adjusted SG&A to gross profit was 80.5% for the first quarter of 2020, up just 40 basis points from the first quarter of 2019. Our adjusted EPS from continuing operations was 40 cents for the first quarter of 2020, compared to 39 cents for the first quarter of 2019. Our current available liquidity is $418 million. This is an increase from $311 million as of March 31st and up from $280 million as of December 31st, 2019. As described in our press release, during the first quarter of 2020, we were required to recognize a non-cash, that's non-cash goodwill impairment charge of $268 million as a result of a decrease in the company's stock price to $13.28 on March 31st due to the COVID-19 pandemic's effect on the overall stock market. We note that this non-cash impairment charge is not indicative of Sonic's current financial position, financial outlook, or long-term prospects for our franchise dealerships or Echo Park. For more information on our first quarter results, see our press release and investor presentation that were posted yesterday and we will be happy to expand on that in the Q&A portion of this call. What's most important at Sonic & Echo Park is that we continue to ensure the health and safety of our guests and teammates. Since this pandemic began, we've implemented processes to ensure that first responders and others responsible for providing essential services continue to have access to safe, reliable transportation. In addition to the enhanced Thank you. Thank you. We recognize the importance of continuity and stability during these challenging times, and we have put great thought into how we can best provide this for our guests, our teammates, and our business partners. We continue to monitor new developments related to COVID-19 and the eventual reopening of our nation's economy on a daily basis. While we have taken the actions necessary to manage these short-term challenges, It's very important to recognize that we have always focused on a long-term plan for our business. When this pandemic first began, Sonic already had many of the systems in place to operate in the current environment. We have executed our crisis preparedness plan, allowing us to migrate to a working structure that facilitates enhanced safety and productivity with all systems and operations functioning seamlessly. In addition, we have taken prudent, although some very difficult and unfortunate measures to fortify our business while reducing our expenses to match the current environment. This includes a 33% reduction in current headcount, freezing of new hires, reducing advertising and other operating expenses, ensuring we have continued access to additional resources of liquidity, and postponing certain capital expenditures. Despite significantly reducing our planned capital expenditures, we expect to be able to move ahead with some key strategic projects, such as our new Echo Park store in Tampa, Florida, which successfully opened last week. We also plan to open two more Echo Park stores later this year, bringing our total to 12 locations nationwide by the end of the year. While we are focused on our capital expenditure levels in the near term, We continue to execute on our growth plans for Echo Park and believe the low initial capital outlays and flexibility of the model will allow us to continue to grow as planned. We have also taken several proactive steps to bolster our liquidity position, provide additional financial flexibility, and strengthen our balance sheet, including drawing down $210 million of additional funds on a revolving credit facility in March of this year in maximizing availability under other borrowing facilities in order to prepare our business for the worst if needed. Our liquidity currently stands as I mentioned at $418 million which is up nearly 50% from the end of 2019. In closing, we are prepared to safely and efficiently operate in the current and we have taken practical actions to position the business for the future. We believe that we have the financial resources in place to manage these near-term challenges and to quickly recover when normal commerce resumes as early as the third quarter of this year. Lastly, before we go to questions, I'd like to thank each of our teammates for their extraordinary efforts, continued dedication and commitment to Sonic and Echo Park, and to their fellow teammates and to our guests. We believe that our team will be able to manage through this challenge and emerge from the pandemic as an even stronger company and team than we were before. Special thanks to our manufacturer partners, finance partners and vendors for your unwavering support and teamwork. This concludes our opening remarks now and we'll be happy to take your questions.

To ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question is from Rick Nelson with Stephen.

Thanks. Good morning. I'd like to cover the forecast. You guys are Suggesting the business returns to pre-COVID levels, you know, July, August timeframe. You know, it seems like we're likely to have high unemployment, you know, potential for fewer miles driven if you could, you know, discuss the factors that drive your forecast.

So, Rick, this is Jeff Dyke. We put together, and we do this on a daily basis. It's a pretty fluid situation, as you understand, but we put together and update our forecast every day. And the good news is that we have not yet missed one of our forecast numbers that we put together, whether it's for new car volume used on the franchise side, the Echo Park volume, or fixed operations. That's all tracking today. along the guidelines of the slides that we put together for you guys that take us out through the end of the year. We believe that we're well positioned in particular with Echo Park. Our base supply both on the franchise side and Echo Park is still sitting in the 30-day range like it was pre-COVID. And so as prices are dropping, inventories are growing, and our pricing model, we think that we're well positioned to take advantage of that opportunity as it comes along. and so while there are unemployment numbers out there that are skyrocketing that we've seen, we believe that our forecasts are accurate but they are going to be updated daily and so what we plan on doing for the month of April, for the month of May and for the month of June is we'll issue an 8K and we'll provide those charts updated monthly for you so you can see how we're tracking against are forecasts that we put out there. But we have a high level of confidence on where we are. And like I said, we're tracking this daily. Yesterday was a great day for us. We were actually up in new car volume over prior year. We were actually up at Echo Park over prior year. Our used car volume was down about 4.9%. And so each day it just continues to get better. The U has started at Sonic across all of our business lines. and it's just going to be a slow you up between now and the end of June and we're hopeful that by the time we get to July that we'll be performing at or above the guidelines that we put out there for you.

Those updates I think will be helpful. Jeff or David or the group, curious how you see consumer behavior are changing here on the other side of COVID. You put together some action plans that are interesting, but how do you see the consumer on the other side of this?

You know, Jeff, again, this is real interesting. Right now, about 15% of our business we're delivering at home in the no-contact process from a sales perspective, both on the Echo Park and the Sonic side. And it's about 7% of our overall warranty and CPRO count pickup and delivery for service. And so we believe that it's going to be in that range for the foreseeable future, maybe grow a little bit. But it's hard to tell. The consumer is still coming to the store to pick up a car. And we've got a no-contact delivery process at the dealership. and all the dealerships, both for sales and service. But interestingly enough, even during COVID, even during this time, the consumer is still telling us, look, we want to come to the store to pick your car up. It doesn't mean that we're not offering the service to bring it to your home. We're offering that service free of charge across the board, and it's still less than 20% on our sales side and less than 10% on the service side. So it seems like the consumer still wants to come to the store to shop the vehicle, look at the vehicle. and probably get out of the house, to be quite honest with you, with all the stay-at-home orders that have been in place. So I expect that. You know, it was less than 2% prior going into COVID, and so it's up significantly. But I'm not so sure that that's going to grow more than that as we come out of this pandemic.

And, David, you know, we've been looking at it. We think that the airline industry is going to take a little longer to to recover, and people are going to be a little more hesitant to fly. And I saw a report yesterday, I think it may be three years before the airline industry gets back to, you know, pre-COVID levels. And so, and for a number of other reasons, we think that a lot of people are going to want their own transportation rather than, and they're going to want to drive rather than fly. And also using, you know, car sharing services and all that, they're going to rather have their own vehicle. We think that that's going to be an interesting thing to watch and that a lot of people will just prefer to have their own car than a lot of the discussion about that the whole world is going to car sharing.

We just don't believe that. And Rick, just to add, you know, as Jeff mentioned about the home delivery and the pickup and delivery on service, you know, it's interesting that we haven't let a good crisis get a waste here and we've evolved and we do believe that There is, albeit it's 15, less than 20% of our current customer base, but we are formalizing that service. And so the future Sonic Automotive, we will be providing that service of home delivery if that is what the consumer wants. So we've evolved and put that product out there just to add to our offerings.

And Rick, this is Jeff again. One of the things that happened out of all this is we went ahead and launched our Car Cash app across the entire country. And our Car Cash app is now representing almost 30% of our overall appraisals, which is fantastic, right? The consumer is at their home appraising their vehicle. And that's surprising. It's working out way better than we even anticipated so fast. And it's been launched since a week ago Monday. and already representing that much of our overall appraisal base. So we're very excited about that being part of the services that we offer to do home delivery if it's needed.

Great. That's helpful. Just to clarify, is Echo Park also offering home delivery?

Yes.

Okay.

Just to clarify, Rick, prior to the crisis, Echo Park did not deliver.

Exactly, yeah. So, yeah, if I could, you know, final question on the headcount reduction, 33%. If you could put that in top dollar terms or headcount, I think that would be helpful. And then how much of that reduction do you consider to be permanent?

That's a great question. Of the 33%, 1,208 I think is the recent number. Those were terminated. The rest are furloughed, a little over 3,000, right around 3,000 in total. And when you look at what we think is going to be permanent, we save anywhere between $14 and $15 million a month overall when you include advertising, other loaner cars, you name it, the headcounts. And I think that number is going to be somewhere permanent in the 7 million range. We're going to bring back all the furloughed, the 1,700 furloughed associates or teammates. And that's going to be a slow drift. It's going to be between now, we're starting some now, and we think we'll bring back all of our furloughed associates by the end of June.

Great. Thanks, and good luck. Thank you so much. Thank you.

Your next question is from Rajar Gupta with J.P. Morgan.

Hey, good morning, and thanks for taking the question. I really, really appreciate all the detailed charts in the slide deck. You know, just based on your forecast, you know, for new use and fixed up, you know, for 2Q and for the rest of the year, and also, you know, given you've taken some permanent expense reductions, What kind of SG&E, the gross profit level, are you now anticipating for the year? Could you give us a range or some sense of where that could land? Sure.

I think it would be helpful if I walk through where we are and how we relate now with the graphs that we have provided and give you sort of a walk of how we see Q2 coming out. So if you start on slide 45 on the franchise new vehicle units, now keep in mind we have not closed out April, but we wanted to give you an idea of where we are. Right now, you know, our April new units are down 40% at approximately 4,700 units. Now you'll notice that the graph is at 4,166, give or take. And so we actually are ahead of that forecast. This forecast was done approximately a week to 10 days ago. and that's precisely why we want to provide you updates as we close out the month through an 8K so that you have that. So there we're already ahead of that forecast and on the GPU we're down approximately 300 per unit on the franchise new. On slide 46 on the franchise used, actual down 30% year-over-year in April. The graph is basically indicating that, so we're in line with that forecast, and our front GPU is down about $1,000. If you look at our F&I, the blended for new and used is up about $100.

Yeah, so this is Jeff. One comment on the pre-owned GPU. We, as you know, and we talk about this a lot in our inventory management skill sets, we strategically dropped our pricing about two weeks ago to blow out sitting inventory. So we didn't have a bunch of water in the inventory coming out of the second quarter. And so if you'll see, we went into COVID with a 30-day supply. on the franchise side approximately, and we're still sitting at a 30-day supply, which positions us to be able to buy inventory at a much lower price and replace inventory at a lower price so that as we come out of COVID, our GPUs will go up and we'll make up that difference. But to keep inventory, stale inventory, just sitting with high prices to us made no sense, so we strategically dropped our GPU in order to do that and clean the inventories up. So, we are sitting in great shape from an inventory perspective, which is key critical coming out of COVID because of the supply and demand that's going to be on the street over the next few weeks and over the next month. Heath, you want to go back to the slides?

If you look at slide 47, this is our Echo Park used units. For April, we're down about 30% year over year. The graph illustrates that we're down further, so we're actually ahead of that forecast. Actually, it was about 2,800. The graph indicates about 2,300, so we actually are doing better than the graph in April. Again, haven't closed it yet. GPU is down about – the front end is down about 700, and the F&I component is down about 100. On Echo Park, we expect approximately a $3 million loss at the store level for April. But keep in mind, there's $3 to $4 million in corporate expenses that are associated with Echo Park as well.

And on the franchise level, from a store level loss, we're expecting somewhere in the $12 million range. So when you look at April, May, and June, loss of about $20 million. for April. May is going to be about half of that loss. It'll be better than April. And then June, back to profitability, maybe even a little better than that. So that's how you guys just sort of look at the quarter and how we're building the quarter against these slides. And then as we put the 8Ks out each month, you can see if we're trading ahead or below are our original projections that we have on the slides today, and we'll make that very clear so that you can easily gauge how we're producing against those forecasts.

Exactly. Just to finalize that, you know, we are down about 40% in April, and as Jeff just indicated, approximately $15 million store-level loss. And keep in mind, you know, you guys have seen our liquidity number. We're very strong from a liquidity standpoint. If you try to factor in our burn rate, it's basically that store-level loss plus a million bucks. And so we're very strong from a liquidity standpoint. And as Jeff just mentioned as well, you know, approximately 20 million overall pre-tax loss in April, about half that in May, and then break even or better in June is our forecast for Q2.

That's an amazing color. Really appreciate that. And then just to, you know, follow up on Rick's question earlier, you know, just given where unemployment levels are and, you know, what some forecasts are out there for the rest of the year and the fact that, you know, you are reducing prices here on the U side to pure inventory. I mean, is there any risk that there could have been some pull forward here in demand or – Is there some risk on that front that you see or you feel pretty comfortable with the forecast right now?

Well, we feel very comfortable with the forecast, in particular with Echo Park. Echo Park could not be better positioned. This is the exact kind of position that Echo Park is going to thrive in. Low prices on used inventory, huge supplies of used car inventory, especially in the one- to four-year-old model, and then our pricing structure. Remember, we discount those prices for what we're buying and for all the way down. We're selling them basically at cost and then making our money in the F&I side. Our F&I performance has been exceptional through this. We just had our highest F&I quarter ever. And so when you add all that together, the way that we manage inventory, the way that we price, having fresh inventory on the lot versus having stale inventory since we got rid of all the inventory, when you put all that together, it's Nirvana for Echo Park and our used car business on the franchise side. This is, well, a very difficult situation for our industry. It's a silver lining because our business model thrives in this kind of environment as we come out of it. And so it's going to be a great ride once we get through, you know, what, quite honestly, which is a bit of a shit show in April and May.

Got it. And this is David Smith. And you've got to keep in mind, too, that our projections do not – we don't – Thank you so much. Thank you.

Your next question is from Armentis Sienkiewicz with Morgan Stanley.

Great. Thank you for taking the question. Parts and services, you know, was underperforming, new and used in January, February, then outperforming in March, and you have it coming back to the original forecast a month later than new and used in July. Can you walk me through the dynamics of parts and services, why it underperformed in the first couple of months, how it's performing now, and why it'll take longer to get back to the original forecast?

Yeah, good question. So one of the things that we have done, if you really think about it, all throughout 2019, we sort of lagged the industry in terms of our overall parts and service business. And if you'll see in the first quarter, our CP, and especially January and February, Our customer pay business and our overall growth for the business was really improving above what we've traditionally been running up 8%, I think, in total, maybe double digit up 12% in customer pay for the first quarter. We believe that there's going to be a bit of a lag from manufacturer production of parts throughout this COVID environment for the next 90 days or so. And so with that being said, we think that there's another 30 days or so of lag with parts and service. Now, there could be a buildup there. We're ahead of our pace here the last few days. And so we'll see. But we're trying to be conservative in terms of this model. So we don't put ourselves in a position where we're giving you something and we're coming back, you know, 60, 90 days from now and adjusting if there hasn't been any major move with COVID with negative news. and so it could come back, or maybe it's a little sooner than that, but all of our projections show that it's going to be about a 30-day lag in terms of the volume. Remember, our overall volume numbers, we really are aggressive in terms of how we price, especially on the freon side, and it just gives us a little faster V-up. We're not as aggressive on the part side, in the service side, as we are on the volume side. It could be a little faster, but those are our projections for now.

Okay. And then the other question is, you know, with coronavirus being sort of an equal opportunity virus with people staying home, that's, you know, getting new use. And presumably, you know, our thought process here was parts and services as well, just because if people aren't leaving their home, they're not leaving their home. What have you seen that, you know, helped drive that better than, you know, vehicle sales?

Like I said, it certainly could be. And there's pinup demand there as well. So you might get a little spike as we move forward. There's also our pickup and delivery service, how much of that ends up being a role in this as we move forward and the consumer gets a little bit more comfortable that COVID is not a death sentence and they can actually come to the store. You know, it's a very fluid situation. So we are offering disinfecting services and doing a lot of things for, you know, the first responders. We're giving free disinfecting services to drive traffic into our stores, let them know our brand, let them know who we are, both on the Echo Park side and the franchise side. But, again, it's such a fluid situation. and that's why I keep leaning back on our forecast. We're just taking data, looking at where we are, what we think is going to happen. There's an opportunity there, but right now, and we'll update, like I said, with the 8Ks, we'll update you. If it ends up being better than what we're forecasting, that's fantastic.

Okay. Much appreciated.

Your next question is from John Murphy with Bank of America.

Good morning, guys, and thanks for all the details. It's incredibly helpful. I just wanted to follow up on the used GPUs and pricing, you know, what it means for Echo Park. I get the idea that you kind of have a much faster sort of flywheel here of more and more volume on the used side because there's going to be a ton coming at you, which is great if you're reasonably agnostic and use equal pricing like you will be because you'll turn the inventory quickly. But that pressure on used pricing – does have some really big implications for the new vehicle side, meaning the trading values are lower, so more consumers are upside down on their loans, and residual assumptions are that much lower on leases, so it's tough to get people into new leases. So, I mean, how do you think about that pressure on used pricing, which undoubtedly will come, we'll see how long it lasts, for the new vehicle side of the business? And, you know, you're being pretty optimistic, and I hope you're right, about sort of the recovery, you know, in the third and fourth quarter. But it just seems like the confluence of events, particularly this pressure on musical pricing, might limit that recovery.

Let's break it down into two buckets, and let's look at Echo Park first. Remember, at Echo Park, 90% to 95% of our purchases are made at auction. So that's just a built-in discount coming forward to us, and away we go, right? So put Echo Park on the side. Move over to the OEMs. Yeah, there's going to be pressure. I mean, the OEMs have – you know, consumers sitting in and lease return vehicles that they're driving for free or half price for an incremental 90 days. So there's going to be a glutton of inventory coming off lease. And that's a situation that we're going to have to deal with. It is going to put pressure on used vehicle prices, on trade valuations. But remember, the manufacturers at some point, they've got model year 19, model year 20, and model year 21 coming. They're going to put real heavy on model year 20. They're going to put a ton of incentives out there to blow that inventory out. And they're not producing any cars right now. And I will give them a lot of credit. In years past, they'd still be producing cars, yada, yada, yada. They're shut down. And I think more than ever now they understand not to flood the market with new car inventory coming out. So I think it's going to not be as bad as a lot of predicting from a new car perspective, which will not make the used car pricing so bad. and so there's going to be support from the manufacturers coming out of this. I do agree with you 100%. There's going to be pressure on used car valuations and I think that our model puts us in a position to take advantage of that both on the franchise side and on the Echo Park side. And really on the franchise side, one of the things that we're learning is we lowered our prices on our pre-owned cars franchise and our volume spiked up I mean, when I tell you we lowered our prices on one day, the very next day our volume started spiking up over prior year, and it's staying there. And a lot better than it was. It's not above prior year. It's a lot better than what we were trending because we were down 40% to 50%. Now we're running down, you know, yesterday was 4.9%. And so we're learning about pricing those cars maybe a little more aggressively on the franchise side as well. to continue to drive volume and take advantage of the really improving F&I numbers that we're seeing on the franchise side. And so I agree with you. There's going to be pressure there. We're going to have to deal with it. We're going to need manufacturer support. BMW is out there with 0.9% interest on certified units now. It's helping out a lot. And so we're going to have to deal with a glutton of inventory in particular for the next 120, 180 days. And there's going to be pressure there on margins. We can't avoid it.

Okay. And then maybe kind of the other side of that is it's going to take some time for these guys to get up and running, even if they were to start today. And sort of your assumptions are that it seems like you're going to have a one- to two-month running start of clearing inventory on the new vehicle side before you start getting a lot of deliveries back in. So, I mean, is there any point as you're thinking about this, because you do have a reasonably optimistic outlook for new vehicle sales, where you think, You know, you're trying to figure out at what point in time you might end up being short of inventory. I know that sounds like an odd question at the moment, but if they're not turned on all the way on production and all of a sudden your sales are, you know, rocking and rolling reasonably well, you know, you can clear out some of this inventory reasonably quickly and be caught short. I know that's a bizarre way to think about things, but that would be the other side of the equation. How do you think about that?

Well, it's not bizarre. And as a matter of fact, one of the things I'm worried about is that China is moving up. in terms of their volume. And there's several manufacturers that produce a lot of cars in the U.S. that go to China that are going to go there first. And so it's a very, very good, smart question. At the end of the day, we're sitting on an 86-day supply of new car inventory at the end of March. That day supply number, just by virtue of lower sales in April, is going to be even higher. I'm not so certain that we don't have enough new car inventory now from a sonic perspective to get us through. And, you know, we'll have to kind of play that one by ear. Right now, based on how we're tracking every day, what we're selling versus prior year, our models indicate what's on that graph. And it's a very fluid situation with what you're talking about. And that's why we thought it was a really good idea to provide you guys with an 8K, those charts. each month so that you can kind of see, yeah, these items came into play and the new car volume is actually lower because of a short supply, which would be just, as you said, an unusual situation, or no, we actually had enough supply to get us through and we're at or above our projections now.

Okay, that's very helpful. And then just lastly on parts and service, You know, it sounds like at some point that deferred maintenance will come through. You have a lot of dead batteries, a lot of tires replaced, a little changes to do. There's going to be a pretty big bounce at some point, whether it comes third or fourth quarter, you know, wholly debatable. But if you think about your manned capacity at the moment and as you get into those moments when you're seeing this real bounce, you know, where do you think the governor or the limit on that capacity may be? Like, if we think about the third and fourth quarter and everything's working well, You know, can you handle up 10% same store on a year-over-year basis or 15% or 20%? And then if we think about this over time, we have a ton of people out of work now in the United States, some of whom won't be hired back. Can you retrain and have a better sort of pipeline of techs now that can help you ultimately really kind of make this an even stronger secular story of growing this parking service, you know, beyond this COVID crisis we're in?

Yeah, so, you know, we were running up in that kind of range in the first quarter of January and February. We were already up 12% and handling that easily. We can handle the 20% increase. And we can run multi-shifts. There's a lot of things that we can do and be flexible in our environment to handle that kind of increase. So I'm not too concerned about that. You know, there was a tech shortage going into the COVID, right? We could have hired another hundred technicians at Sonic and filled our bays more. And we're always out hiring tech as the number one position in the warehouse. trying to hire on a continuous basis. So it certainly would be a welcome. I'm looking forward to the day that there's that many customers that are out there, and we are certainly prepared to handle that kind of an increase if it comes our way.

And this is David Smith, and something you've got to keep in mind, obviously, is as customers come in, as we were talking about earlier, if they're not happy with the trade appraisals they get, They're going to fix their car. We've seen this in the crisis 10 years ago where people were – if they didn't trade their car in, they're going to get them serviced. We have that, and obviously there's a higher margin in that. But I also think that people do understand because it's such a global crisis and well-known that people are understanding that their cars are worth less, which I think is reflecting in our appraisals and the number of trades we're actually doing.

Yeah, Hugh, that's a great point, David, just made. If you look and you guys know we have our retail trade center and we're looking at appraisals every day, our trade appraisal percentage right now for the month of April so far, month to date from this morning's report, was 52.8%. But of every 10 cars we trade for 5.2 cars, that's really not that far below that we normally run, which is, you know, from 55% to 60%. And so, you know, the consumer is adjusting. And they're going to have to adjust because there's going to be so many cars out on the marketplace that if they're not going to trade their car, they're going to fix it. And we're sitting in a great position. And then there's Echo Park, who buys all their cars at the auction at the lower prices. And like I've been saying all call, that's going to really let us take advantage of the marketplace. That's why we believe Echo Park is really in position, maybe better than anybody else, any other company out there, to take advantage of this opportunity that's in front of us.

One quick last one as a follow-up to what you just said. I mean, is the physical up still much more valuable to the online lead because you have that ability to shift them from a new to a used to maybe just servicing their vehicle? I mean, as you think about them, you don't necessarily want everybody to go online because that physical up just gives you a lot more opportunity to work the customer.

Yeah, sure. At the end of the day, we'd like to have the customer at the store. It's been many times when a customer comes to the store and they look at one car and end up buying another. and there's a lot of programs out there with the manufacturers from the BMW, 0.9% financing to the financing that they get on a loaner car that we sell, you know, kind of on the new car side. There's all kinds of different things. So having them, you know, at the store is much preferable. But our system is flexible enough and we've really built a great no-contact delivery process and we have the technology already to make that happen, like with our Car Cash app. that we can handle it if they want to be at home. We can handle it either way, but unquestionably, we'd rather have them come to the store.

Great. Thank you very much, guys.

Thank you.

Our next question is from Michael Ward with Benchmark.

Thank you. Good morning. What percentage of your used vehicle sales at the franchise – segment, or CPO?

It's low. It's less than 30%, somewhere in there, 25% to 30%.

25% to 30%.

Okay.

Now, has there historically been aggressive incentives on CPO vehicles?

No. That's probably the first time I've seen, and we really lobbied with BMW. I've got to give them all the credit in the world. They have done a fantastic job supporting their dealer body. That's the first time I've seen a .9 in a decade, maybe, that kind of level. And it just launched last Friday afternoon. I think across our, I don't know, 15 BMW stores, we've done 50 to 100 somewhere in their sales. That's going to grow rapidly as we move through the next couple of weeks. And so we're very excited about that. Remember, there's a lot of off-lease cars coming back. There are a lot of BMW customers, Mercedes customers still sitting in those off-lease cars that were supposed to be returned 30 days ago. There's going to be a glutton of inventory coming our way, and those incentives are going to help us retail those cars. Your worst retail deal can be better than your best wholesale deal any day of the week. That holds true for the retailer and the manufacturer. So the manufacturer, they know they need to get us to take those off-lease car courses, us sending them back to them to go to and the more programs we can have like that, the better off we're going to be.

And are you able to transfer, if somebody brings into a BMW store, whatever, a Chevrolet, are you able to take that Chevrolet as a trade-in and send it to a Chevy store to be certified as a CPO vehicle?

100%. And our systems actually, and we've had this for well over a decade, our sonic inventory management system literally will look at a car coming in, a Chevrolet coming in at a BMW store in California. It'll add in transportation price, all the costs, the CPO costs, and the system will automatically move it to a Chevy store if we have the opportunity to make more gross and turn the car faster. So that's all built into our system, has been for a long time, and we do that all the time.

Okay, so you should see that CPO share of your used vehicle on the franchise side grow. over the next whatever.

It should if there are programs out there to support it, yes. Right.

And this is David Smith. In that same vein, if those vehicles that are getting traded in, if they fit the Echo Park model, we send those to Echo Park.

You can.

Okay. We take all those cars that are above four years old at Echo Park and push them into our Sonic franchise stores, and that's where you've seen a lot of our lift last year on the franchise stores really growing significantly. from that 100 number per unit per month per rooftop to 109. We're in that ballpark. A lot of that is because we take those trades that we don't sell at Echo Park and push them to our franchise stores.

And on the Echo Park side of it, based on your charts, it looks like your inventory is in very good shape relative to the industry. And so you're going to have an opportunity at least April, May, June probably to buy vehicles at auction at a much lower price. Are you willing to trade margin to gain market share for those Echo Park stores? 100%.

Yeah, based on our F&I performance, 100%. That's the whole model. You got it right. And so if we can buy a car $1,000 cheaper, it's going to be priced $1,000 cheaper, and we're going to gain that share. And remember, every one of those that goes out, we're getting $2,100, $2,200 a copy in F&I. off of that in total. And so that makes a big difference. That's why Echo Park, I mean, it's the model what you just described. That's why Echo Park is sitting beautifully to come out of this. And we think it's not just two or three months. We're going to ride this wave for a long period of time because once you gain that share and they get to experience our guest experience, that's going to make a huge difference for us.

And this is David. And one of the things that we were seeing even before the pandemic was our ability to to expand Echo Park at a much cheaper number and investment than we were doing before. We think there's going to be even greater opportunities in the future. You're looking at saving millions of dollars over our early Echo Park stores versus what we can open an Echo Park store today. Then the timing, it takes much, much less time today to Thank you so much for joining us.

that we've got a $2 million to $3 million cap-ex expense that we're going to put in there, and the store is going to just rock it right out of the chute. We've got another store that we own that we'll also open, but it's a $3 million to $4 million investment. And then there's a possibility of even getting a third one in late in the year, so we'll see kind of how all that goes. And then we're primed to open three to four stores for next year, and hopefully maybe more. We'll see kind of how things progress.

And as a reminder, ladies and gentlemen, if you would like to ask a question at this time, simply press star, then the number one on your telephone keypad.

We have an additional question in queue from Raja Gupta with JP Morgan.

Hey, thanks for getting me back on the queue here. Just had a follow-up question. On the unit economics of the online sale, you know, versus the in-store sales, I mean, how different for what you've seen so far in April? And also on the service side, like how different are your margin profiles?

Thanks. The great thing is one of the things that we were kind of concerned about is when you get on online sales, what happens to your F&I product sales and all that? The great thing is there's been no difference. We've been rolling right along. Our margins are the same. So, you know, you add a little expense in for delivering the car, but we're figuring that in, too. It's becoming part of this sales associate or what we call an experience guide process. You know, if they have to deliver a car, they deliver the car, take an Uber back, and we follow all the social distancing guidelines. We disinfect the car on site. We have a whole process that we go through in order to make that happen so it's a true no-contact delivery, including the paperwork being done electronically. So the margins are there, and that's a big learn out of this crisis that we were concerned about as we were contemplating moving more and more to doing some of those kind of things and doing online sales. It just hasn't been a – it has not been a detriment. It's actually been the same as them buying the car in-store.

And I think it's a good point that we're not building a large, expensive infrastructure for delivery. We're not buying trucks. We're actually utilizing, as Jeff mentioned, the relationship with the sales associate. They drive the vehicle over. They do a no-contact delivery, and then they Uber back. So it's an incremental $20 to get them back to the store.

Got it, got it. And for the service side of things, how are the economics on the service and bots work? It's the same. For home service, okay. Yep, it's the same.

Got it. One last thing for the online sale. We're getting about 90% of that transaction done in advance of even taking the car to the customer, so There's a lot of this stuff that's done online way ahead of time. And there's some states that require still ink to paper, right? There's some things that just have to be done via FedEx until we get those laws changed. But a lot of the transactions are already completed, so it's very seamless in how we go to market.

Got it. That's super helpful. There's just one last one for me. I mean, on floor plan, I mean, just given – where the LIBOR is right now and, you know, what the future curves are looking like. Like, what kind of tailwind are you making in this year, you know, based on your sales forecast and, you know, the kind of inventory levels you're going to have through the rest of the year? That'll be all. Thanks.

Yeah, well, obviously, we've heard you. Treasury's going to keep the Fed rates near zero. LIBOR is obviously correlated to that number. and so, you know, we anticipate having continued to have a very low interest expense as it relates to floor plan.

And also, because of our inventory capabilities, we run at such a low day supply anyway that, you know, we buy the car, transport it, recon it and sell it so fast. that we're turning that inventory at Echo Park 12 to almost 13 times a year. It's just flipping through, and it's the same way at Sonic. We literally are running sort of 20-day online supply and 10-day in-recon and pipeline, if you will, transportation supply, and we stick to those guidelines very strictly. That's why we're in such good position from an inventory perspective during the middle of all this. While you see a lot of our competitors out there have 60-, 70-, 80-day supply of inventory, I just think that that's a total train wreck, and we just weren't going to allow that to happen. Our systems wouldn't allow that to happen inside of Sonic and Echo Park.

Got it. That's super helpful. Thanks for all the color, and good luck. You bet. Thank you.

Your next question is from Brett Jordan with Jefferies.

Hey, morning, guys. Hey, Brett. Morning. The question I guess I was having, if inventory is depreciating and the volumes are down pretty dramatically, so maybe some of these independents or folks with a lot of inventory are going to have it pretty rough here. Do you think we come out of this with fewer total independent doors in the used vehicle space?

Meaning they're closing their doors? Yeah. Yeah.

This will put some people out of business, or is this shock not big enough, or is their business model flexible enough they survive it?

You know, look, at the end of the day, if they got – you never know if they ended up getting any SBA money or not, and that's a big deal. The public, you know, weren't allowed to take any of the SBA money. And so, you know, if they got the dollars and they spend the dollars the right way, maybe they can offset payroll that will eventually take dollars that they can use to depreciate inventory. But there's so much inventory out there, and there's so many companies, both public and non-public, that are just sitting on their inventory that it's going to be a great opportunity for us having the low-day supply, and it's going to be a big problem for a lot of dealers. The mom and pops are going to have issues, and if they don't get any help, you're right, there are going to be a lot of doors to close. Give us more share opportunities.

I totally agree with Jeff. There's just no way that, especially over the next couple of months, what we described is coming, what we're dealing with here in the second quarter, that there's going to be many dealers who just won't be able to survive that.

It's interesting. If you study the data, and we've got a ton of VINs out there, and we really study this data, early on, retail prices were going up. to try and offset margin loss, to try and offset volume loss. And, you know, you just can't take your prices up in a pandemic like this. That's just lunacy. In the same way, you can't just sit on inventory, right? Your car is depreciating. It's like a banana, right? That banana is rotting every day, $50, $100, $175 a day, whatever the number is. It's rotting every day. If you're sitting on it, you're creating a big bubble, and you're going to have to pay for it at some point in time. We cleared the decks immediately. This is something we did several weeks ago. We cleared the decks immediately to put us in the position that we're in today. Again, this is David.

Keep in mind that there were a lot of areas in the country that had the stay-at-home orders where there were dealers who had to shut their doors. While our business has been impacted greatly, we continue to do some business. There's been a lot of stores that were just absolutely 100% shut down who have been forced to hold on to that inventory that Jeff was talking about. And so, I mean, there's just no way they're going to be able to survive.

And as we come out of this, our liquidity position for us is about as strong as it's ever been. And as we come out of this, we do believe there's going to be some M&A opportunities for us to look at and further bolster, you know, our goal of getting to the $20 billion in revenue prior to this decade ending.

Would your M&A focus be on franchised or trying to buy more used capacity?

Well, it depends on the opportunity. This is David. So it's without saying too much, but there are certainly going to be some fantastic opportunities for franchise stores. But you do have to look at, as I mentioned before, We're getting better and better. Our team is getting better and better at opening these Echo Park stores very efficiently. It's going to have to be an extremely great deal on a franchise store to outweigh the ROI that we're getting on the Echo Park expansion.

The other thing, too, is real estate could be a lot cheaper. and that just further bolsters the margin in the return on Echo Park. And Echo Park's returns are a lot higher, as David was saying, than on the franchise side. So it really makes a great opportunity for us. There's going to be a lot of closed franchise dealers out there that we can go and buy. One of the stores that we're looking at to open this year possibly is a franchise that went out of business and we're buying it at a great price. Those opportunities are going to be out there and we'll be in a position from our liquidity perspective to take advantage of that.

And while we want to also make sure that we are clear that, as we were saying, that we're not going to be distracted either. You know, we're going to have, you know, if we come across some fantastic deals, that's great. But to make sure that everybody understands, it's not going to disrupt our growth of Echo Park and our rollout of that. And it would be an addition. to that.

Okay. And then one last housekeeping question. You guys had mentioned last week that your parts and service business had improved. What was it last week? I assume it was not up year over year, but maybe it was less down, but could you tell us sort of how much it improved?

Yeah, so in April, we're off about 40%. In those numbers now, I think yesterday, I'm getting some numbers now, we're down 30% to 35% somewhere in that ballpark. So it's improving every week. And what's great is we're managing it by every morning we come in and do our liquidity model and we update the volume from the previous day and the growth from the previous day out of fixed. And so we're looking at Wednesday versus Wednesday, Thursday versus Thursday. How are we comparing sequentially week over week? And that number just keeps getting better. It's gone from being down 55% to being down 50% to being down 40%. Now in the lower 30s. And we expect that to continue right along those trend lines, if not better than what we put out there for you.

And total gross, total fixed gross, same store through February was up 8.1% before the last 20 days of March impacted.

Okay, great. Thank you.

And they're under further questions now. If there are no further questions at this time, I'll turn the call back over to Mr. David Smith for closing remarks.

Wonderful. Thank you so much. Thank you everyone for participating on the call. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.