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spk02: Good morning and welcome to the Sonic Automotive fourth quarter 2020 earnings conference call. This conference call is being recorded today, Wednesday, February 17th, 2021. Presentation materials, which are company management's discussion 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 the actual results to differ materially from the statements made. Those risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission. In addition, management may discuss non-GAAP financial measures as defined by the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation report on Form 8K filed with the Securities and Exchange Commission earlier today. I would now like to introduce Mr. Jeff Dyke, president of Sonic Automotive. Mr. Dyke, you may begin your conference.
spk01: Thank you. And special note, everybody, I was caught in Texas in this unprecedented snow and ice storm and temperature storm. We're low on electricity. So if for some reason I cut out, Heath Bird will take over my speaking notes. With that, good morning, everyone, and welcome to Sonic Automotive's fourth quarter and full year 2020 earnings call. i'm jeff dyke the company's president joining me on the call today is our cfo mr heath bird our executive vice president of operations mr tim keen our vice president of investor relations mr danny wyland and our chief digital retail officer mr steve whitman who recently joined our team to drive the expansion of our omni channel digital retail platform earlier today we reported the highest quarterly revenues and earnings in our company's history with record fourth quarter revenues of $2.8 billion and an adjusted EPS of $1.50, up 54.6% from the fourth quarter of 2019. In addition, the full year 2020 was our second consecutive year of all-time record adjusted earnings, with adjusted EPS of $3.85, up 45.3% from $2.65 in 2019. These record results reflect the strength of our diversified business model, the dedication of our teammates, and the support of our manufacturer and vendor partners in the face of unprecedented challenges we face together this year. During 2020, we took targeted measures to improve operating efficiencies and manage expense throughout our entire organization, fundamentally improving our cost structure. As a result, we achieved all-time record adjusted SG&A expenses as a percentage of gross profit, of 68.1% for the fourth quarter of 2020, down 560 basis points from 73.7% in the fourth quarter of 2019. Four-year 2020 adjusted SG&A expenses as a percentage of gross profit were 72.9%, 400 basis points better than 2019. For 2021, we expect to continue to see a benefit of our permanent SG&A reductions. However, the rapid rate of expansion at Echo Park may drive an increase in SG&A as a percentage of gross profit while still being accretive to the bottom line overall. Turning to our core franchise dealership segment, fourth quarter revenues were $2.4 billion, down 1.2% from the prior year and up 11.5% sequentially from the third quarter of 2020. Franchise dealership segment income increased 37.1 million, or 68.2%, compared to the fourth quarter of last year, driven by strong new vehicle and F&I gross profit per unit and a $30.3 million reduction in adjusted SG&A expenses. Franchise dealership segment adjusted SG&A as a percentage gross profit was 65.2%, down 810 basis points from the fourth quarter of 2019. Looking at Echo Park for the fourth quarter, revenues were an all-time record of $386.9 million, up 25.4% from the prior year quarter. This growth was driven by a 17.1% increase in used vehicle unit sales volume to 14,841 units. For the full year 2020, Echo Park revenues were $1.4 billion, a 22.1% increase compared to 2019, with retail sales volume of 57,161 units, up 15.4% from 2019. For the first quarter of 2021, we expect to retail between 18 and 19,000 units at Echo Park, earn a way to delivering between 100 and 105,000 units for the full year of 2021. As part of our Echo Park expansion strategy, we recently completed the acquisition of two pre-owned businesses in Maryland and New York, expanding our geographic footprint into the Mid-Atlantic and Northeast. These include Car Biz, serving the greater Baltimore-Washington metro area, and News Car King, a Syracuse-based pre-owned group serving car buyers throughout New York State. Each of these businesses already embraces the same culture and values that define Echo Park, with a highly qualified team focused on providing an exceptional experience and incredible value to their guests. We're in the process of transitioning these acquisitions into our Echo Park model and expect them to generate total annual revenues in excess of $350 million at maturity before any revenues from future delivery and buy centers that these markets will support. By way of update, our delivery and buy center concept, our first market in Greenville, South Carolina, retailed 166 units and was profitable in January in its sixth full month of operation. Our second delivery and buy center in Knoxville, Tennessee, opened in late December and retailed 55 units in its first full month, nearly mirroring what we saw in Greenville in month one. For comparison, before entering these markets with the delivery and buy center model, we sold an average of 10 to 12 units per month in Greenville and two to three units per month in Knoxville from our nearest hubs, demonstrating that these truly are incremental sales into the adjacent markets. The opening of four new Echo Park locations in the fourth quarter and seven for the full year of 2020 brings our total at year end to 16. These plus the two acquisitions completed to date, the opening of our Phoenix, Arizona store next week, and the additional openings in 2021 will give us over 40 points in place by the end of 2021. As you can see, we're well underway in establishing our 140-plus point Echo Park Nationwide Distribution Network, which is expected to retail over a half a million pre-owned vehicles annually and drive $14 billion in annual Echo Park revenues by 2025. In the meantime, we're focused on addressing the tremendous growth opportunity and untapped value in Echo Park's unique pre-owned vehicle sales concept. Car buyers nationwide continue to discover the exceptional pricing, inventory selection, purchase experience that Echo Park offers. The guest-centric in-store experience combined with our omni-channel tools and delivery center model offers Echo Park shoppers a full range of buying options to meet their needs. Our consumer studies, including a Harris Insights poll commissioned in September of 2020, continue to reaffirm our belief in an omnichannel approach matches the ideal purchase experience for the vast majority of car buyers. When we launch our new digital retail platform in the fourth quarter of this year, we expect to provide our guests with an online experience that sets a new standard of excellence in this industry. Before we turn the call over for your questions, I'd like to talk about the market conditions and trends we're seeing throughout the first month and a half of 2021. The new vehicle sales momentum and elevated margins from the fourth quarter had carried into 2021, and the industry slowdown in used vehicle demand in November and December has steadily improved in January and February to date. While the pressure on used vehicle margins at Echo Park persisted longer than we expected in the fourth quarter, january total gross per unit was back in line with our model and our expectations for 2021. our franchise dealerships parts and service business continues to recover more slowly than we'd like but is showing signs of improvement adjusted for calendar differences year over year our fixed operations gross was down roughly four percent in january compared to nearly six percent for the fourth quarter We believe as the vaccine rollout continues to gain momentum and Americans feel more comfortable resuming daily activities as the year progresses, our parts and service business will bounce back. F&I continues to be a highlight of our business as we eclipsed 2,000 per unit for the first time in the fourth quarter and continue to expect growth in this area in 2021. In closing, 2020 was a challenging year in many ways. However, our fourth quarter and full year results show the strength and resiliency of our franchise and Echo Park models. We are much leaner, we're more efficient, and we're a stronger company than we were prior to 2020, and we believe each of our business segments is well positioned for both near-term and long-term success. The stage is set for an exciting 2021 for Sonic Automotive, with 25 new Echo Park locations to open and roll out, and the rollout of our new omni-channel digital retail platform by the end of the year. As always, we look forward to keeping you updated on our progress throughout the year. And this concludes my opening remarks. And now I'm going to turn the call over to Heath Bird for a few opening remarks of his. Thank you.
spk06: Thank you, Jeff. Before you open up for questions, I just wanted to provide a little bit more color on what we're seeing in our 2021 outlook. As Jeff mentioned, these numbers and this outlook is in line with what we're seeing in January and February. Also keep in mind, as Jeff mentioned, he's in the middle of the storm. Some of these numbers, the first quarter, we're going to have some impact from the storms. This impacts Texas, which you guys know is one of our largest franchise markets. It is our largest eco-park market. It's also going to affect Birmingham, Nashville. And so hopefully it cleans up quickly, but obviously there'll be some impact. Those stores right now are closed. It's also important to note that the outlook I'm going to go over real quickly is The majority of the growth is weighted to the second half of the year. Obviously, we believe that things will pick up dramatically as vaccines are rolling out and we get back to normal. So on the franchise side, on new, we expect the growth rate to be up double digits on volume. GPU, we think it will continue to be elevated. We're all aware of the shortage of inventory through the first half and start to normalize in the second half of the year. Franchise used, we're expecting and looking to a low double-digit growth in volume. The GPUs, as Jeff mentioned, are normalizing, and we expect those to normalize at approximately $1,300 for the full year. Fixed, we are forecasting full year to be up high single digits. This is definitely way into the second half of the year. We still have, as you all know, large portfolio is related to California, and we still see some closing there. So we think that will ramp up more in the second half of the year. F&I growths, low double digit growth. We continue to see opportunity to increase our GPU and continue to surpass the $2,000 per unit. On the Echo Park segments, as Jeff mentioned, we had 16 stores at the end of the year. We actually opened up four in the fourth quarter. That will grow to 40 locations by the end of 2021. That's two and a half times our current footprint. So very busy with new stores. Units, we expect growth of 75% to 85% in units year over year. As a percent of the total revenue, Echo Park was about 15% of total revenue in 2020. We expect that to grow to 20% to 25% in 2021 as it continues to be a higher percentage of the business here at Sonic. Echo Park EBITDA was approximately $11 million in 2020. That includes the drag of $6.6 million from the new stores. We expect that to be approximately double that in 2021. And that includes a drag of about $12 to $14 million of EBITDA related to the new stores that are opening in 2021. And that even-out growth is definitely weighted to the second half of the year as we open up new stores and they start maturing. From a CapEx perspective on Echo Park, we have budgeted $75 million in CapEx for that growth. You can see putting all those or developing all those locations at such a low capex spend. This is a capital light strategy. And this allows us to take that free cash flow that is being generated on the franchise side and increase our liquidity and also increase our opportunities for growth on the franchise side. So you can see very low capex to get to that 40 new stores at Echo Park. So from a consolidated standpoint, a couple of things to keep in mind. I think it's very important we talk about this each year. The profit cadence at Sonic, because of our portfolio mix, about 15% to 20% of our profitability will come in the first quarter, 25% in the second, 25% in the third, and about 30% to 35% in the fourth quarter. Again, that's that luxury brand mix that has such a big fourth quarter impact. SG&A perspective on a consolidated basis, 2020 was 72.9%. We expect that to be flat to slightly up in 2021. The franchise SG&A will continue to lever. We've mentioned the $84 million that we continue to see in reduced expenses, but that will be offset. That lowering of SG&A on the franchise side will be offset due to the new stores that were opening at Echo Park. Another thing to keep in mind if you're looking at Q1, typically because of seasonality cadence, our SG&A as a percent of growth is typically 700 to 900 basis points worse when you relate it to Q4. EBITDA, we expect that to be low double-digit growth in EBITDA. Tax rate in shares, we are modeling an expected tax rate of approximately 26 to 28%. Share count will maintain approximately $44 million. We will do share repurchase to ensure there's no dilution from the investments that will happen in 2021. And with that, I will turn the call over for questions.
spk02: At this time, if you would like to ask a question, simply press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A rosters. Your first question comes from the line of Nelson from Stevens. Your line is open.
spk00: Good morning, and thanks for all the color around 2021. I'd like to dig in a bit to Echo Park, I guess on the franchise side. The used business was a little tough from a GPU standpoint. If you could talk about what you think happened in November, December, and things seem to be back on track here in January outside of the weather issues.
spk01: Hey, Rick. This is Jeff Dyke. On the franchise side of the business, a couple of things happened. One, as you know, we've got a lot of stores in our portfolio on the West Coast, and we've got a lot of BMW stores there. And with the unprecedented amount of lease returns that are coming back, and the margin that we're losing on those lease returns because BMW and a lot of the highline dealers held lease returns for a while going through COVID, we're getting all those returns back. And our margins are a lot less on those cars today than they were four or five months ago. So that's playing a big role. We don't expect that to continue. BMW is working with us and so are the other Highline manufacturers. So we don't expect that to continue, but certainly played a role in our margin on the franchise side throughout the fourth quarter and a little bit in January. But it's certainly normalizing. On the Echo Park side, you really have to break the segment down, the used car segment down into the one to four-year-old category and then older. Anything five years and older, we're all making great margin on. And that exists on the franchise side of the business and Echo, but not at Echo Park because at Echo Park, we're one to four years only. And the margin on the one to four-year-old, And our 30-day supply inventory targets that we keep and turning that inventory really fast, which helps us get to the high volumes that we need for our model, created an overhang in terms of margin erosion longer in the fourth quarter than we thought it would. The good news is that inventories are back in line. Our margins are relative again to where we were pre-COVID, and so we're off to the races again. You couple that with a great first quarter, 18,000 to 19,000 cars, and our focus on selling 100,000 to 105,000 cars for the year, and Echo Park is just going to have a smashingly good year. So, you know, unprecedented times when you have these massive swings in inventory valuations. It definitely affected what was a shrinking one- to four-year-old category in terms of volume in the fourth quarter across the country. It certainly affected the margin, and, again, But we're back on track and expect no issues as we move forward.
spk00: Okay, great. Thanks for that. So looking at 2021, I guess from a different perspective, if we go back to pre-COVID times, Earnings Power 2019 add in the benefits of that $84 million in cost takeout. We've got benefits from lower floor plan interest expense, lower rates there. I'm calculating a number around $4.71. And then, you know, F&I should be higher in 2021 compared to 2019. We've got Groves and Echo Park in 2021 compared to, you know, 2020 and 2019. He had excess, you know, free cash. Well, it looks like that would support buybacks or acquisitions. I'd like to get your comments there. Anything I'm missing, I guess the GPU, you know, probably not sustainable, but should be bigger in 2021 compared to 2019. Okay.
spk01: So this is Jeff. A lot to unravel there. I expect the new car GPUs in the first half of 2021 to be great, just like they have been. I expect all that to carry over. I expect F&I. We're close to the $2,000 mark. I expect F&I to continue to do very, very well. You know, I think from an EPS perspective and an EBITDA perspective, the only thing, Rick, that you really need to think about a little bit there is the drag that we'll get. We're going to open 25 stores. There's a lot of complexity moving from, you know, we grew Echo Park, we stopped growing it, we made it profitable, we proved our model, and now we're going back into growth mode. And there's a lot of complexity in growing that many stores that fast. But we're very confident that we can get that done. But it is going to, as Heath stated in his opening statements, it is going to create, you know, it's going to create drag from the SG&A perspective. So I think you need to make sure that as you're modeling 21, you sort of, you make sure that you include those thoughts, you know, in your model. Because there is a, I would say somewhere between $12 and $15 million drag from opening those up on an SG&A, from an SG&A perspective.
spk06: Yeah, Rick, I'll just add, I think you're spot on. I think that if you look at the total business model and all the metrics that drive profitability, you've got tailwinds in almost every category. We do think that fixed will pick up in the second half of the year. New, as Jeff mentioned, GPUs are going to still be elevated in the first half. usually have a lot of opportunity based on what we discussed in the opening comments on both the Echo Park and franchise side. And so really the drag is the opening of Echo Park. But all the other segments we expect to have tailwinds and to have a very good year in every one of those segments with the drag being the expansion, the accelerated expansion of Echo Park and the expenses related to that.
spk01: So it should be another record-setting year for all intents and purposes. As Heath discussed, the tailwind should really drive us to another record-setting year.
spk00: And then finally, on the balance sheet, you know, that to, you know, below two times, actually closer to one times, you should be able to fully fund CapEx. uh you know with the free cash on the franchise side of the house what are the thoughts i guess about uh you know capital allocation your targeted you know leverage ratio and what you do with the excess cash yeah a couple of things you're exactly right and the fact that we have you know we think of park is a capital-like kind of strategy
spk06: We can actually grow that without continuing. We're at the point now that we don't have to utilize all the free cash flow from the franchise side of the business. So, number one, we believe that we can start accumulating additional liquidity, which can be used for opportunities on the franchise side, number one. And number two, nothing has been contemplated, but we absolutely have capacity. If we see a good opportunity, we obviously have capacity from a debt perspective.
spk00: And would you contemplate accelerating Echo Park routes or would the infrastructure not support that?
spk06: Obviously, from a CapEx perspective, we've got plenty of cash to do it. It's a resource perspective. We're actually putting up a store every two weeks, actually every week almost. And so it's a resource perspective more than it is capital.
spk01: Hey, Rick, this is Jeff. So the other thing is that it's one thing that you saw us do in the fourth quarter is we acquired two groups from a pre-owned perspective that fit our model. And so that's another piece of the evolution that's happening at Echo Park that will allow us to grow faster because you have already personnel in place, you have facilities in place, no really capital constraints to build. And so all we have to do is train people fill the inventory pipeline and price, and away we go. And so it makes us be able to expand quicker. So as those opportunities come along, you'll see us take advantage of that because it will allow us to move even faster towards that $14 billion number that we've been talking about for 2025. I think the one thing that –
spk06: On the pre-owned side, relative to franchise acquisitions, we can accomplish those in a much shorter timeframe, in as little as 30 days, much lower, even multiple. You don't have manufacturer considerations in terms of approvals and things that can slow and drag out that process. So it allows us to, as you said, accelerate that growth, do so much more cost-effectively, and solve the human capital resource constraints. Yeah, I think that's a very good point. You know, what you have to do, the the expense to entry into like an acquisition on the pre-owned is dramatically less than on the new site.
spk00: Makes sense. Thanks for the color and good luck. Thank you, Rick.
spk02: Your next question comes from the line of Rajat Gupta from J.P. Morgan. Your line is open.
spk03: Hey, good morning. Thanks for taking the questions. I appreciate all the color, you know, the 2021 moving parts. Just one point of clarification and then a couple questions. You know, for the first quarter, you know, the comment around 15% to 20% of earnings, was that an EPS number or was that either Dow or pre-tax? I just wanted to clarify that seasonality that you had provided for this year.
spk06: Yes, that is a profit. It's related to profit. 15% to 20% of our total profit for the year we realize in Q1.
spk03: The net income, is that it?
spk06: Yes, from a net income or ETF perspective, the post-20 was an outlier. But if you look back to a few years prior to that, that's typically our seasonal cadence for the quarterly contributions.
spk03: OK. And just take into account the strength you're seeing on the new vehicle grosses as well. Is that right? Or is that just more of a normalized trajectory excluding the benefits?
spk06: It's purely a percentage of the total year. It definitely takes into account what we're seeing in January and February, but we expect to see that throughout the year. So as a percentage, we still think it's 15% to 20%. We'll see it in the first quarter. And if you look at what new grosses, come in, even relative to the rest of the industry. And we get the downside of that coming out of Q4 into Q1.
spk03: Got it. Okay, that's helpful. And then, you know, just on the Echo Park side of things, you know, you got it to roughly 20 to 22 million for this year. I mean, this is still like, you know, you're still 90% away from your five-year target here. So when is the period or the quarter or the year really where you can see earnings there inflecting? I mean, you have obviously ramping up these new stores and the added cost coming with that. I mean, you're essentially guiding to 2021 EBITDA flat with 2019 levels for Echo Park. So, you know, despite twice the number of units. And you're going to continue to have a lot more stores going forward. So is 2022 the real year of inflection or is it 2023? Just curious if you could just... Give us some sense of, you know, that trajectory towards your five-year plan on EBITDA. And I have one last follow-up.
spk01: So, Rajat, this is Jeff Sykes. Rajat, this is Jeff Sykes. One of the things that you need to think about is in 2019, we really slowed opening stores, right? to prove the profitability concepts of Echo Park, right, that we could actually sell a bunch of cars and make money, which is a novel idea in this day and time. And so now that we're moving into – we've never opened 25 stores in one year. In 20, you know, we opened seven. And so there's a lot of drag that comes along with that. We could tomorrow stop opening stores and return to really high profitability. But you're going to see us grow. another 25 stores in 22, another 25 stores in 23 on our way to having this 140-plus distribution network across the country. You'll continue to see profitability improve as we move into 22 and 23, where you have more stores that are maturing. It's taking six, eight, nine months to get the stores really off the ground and profitable. um the great news about of our you know recent announcement today is the delivery center you know was profitable in six months we sold that 166 units and made money in the first six months so that's really really good news for us and our second delivery center is taking off the same way as our first so i would expect profitability to be what we're calling out uh this year um and i would expect to see that continue to improve as the stores continue to mature
spk06: And if you look at, you know, based on our projections, 2022 is when you start seeing you've now got 40 locations, 45 locations that have gone through their maturity or a portion of their maturity. So to answer your question specifically, 2022 is when we see that tipping point that you've started having enough stores that have matured that more is hitting that bottom line profit. And just to add to that, you know, for each of those 25-store cohorts that we opened, that's 12 to 14 million of people's odds are out from a pre-opening and pre-break-even loss perspective. And so that's steady from 2021 through 2025. But the initial base stores, you know, the 16 we got today, going into 22, it'll be 40-plus stores. Those are what continue to mature. So if you're comparing our outlook for 2021 back to the 2019 levels, It's really, you know, the $20 million we did in 2019 is comparable to the $33 to $35 million that we forecast for 2021, excluding that drag from these stores. Correct.
spk03: Got it. That's helpful, Keller. I did this last one on the digital rollout. Could you give us a sense of, you know, how many cars were sold through those channels, you know, where... where it was a contactless transaction, you know, either the customer getting it home delivered or just picking up the car. And also, if you could give us an update on, you know, the rollout of the Darwin Cox platform, you know, how that's going, any updates on that, or, you know, when you expect that to be fully live with all the inventory, that would be helpful. That's it for me. Thanks.
spk06: Sure. Hey, Raghav, this is Steve Whitman, Chief Digital Retail Officer here at Sonic. Two questions there. So the first one on the percentage of cars that have gone through our digital channel. So we actually think about it a little bit differently. We think about it from a consumer perspective because we want to make sure we serve the consumer throughout their customer journey. And that journey is a mix of physical and digital interactions with us, both on our websites, in our call centers, and, of course, in our physical locations. And we've tried to really be consumer-centered here, right? So we've done, like Jeff mentioned, we've done some good research with the Harris Poll in September of 2020, which told us that only really 9% of consumers want to execute their process 100% digitally. About 75% of consumers, conversely, want to have a hybrid model. So we actually think about Omnichannel as a hybrid model where the consumer can dip in and out of both physical and digital processes and have a seamless handoff between the two so that we can be adaptable to their needs. So that's our strategy. Our strategy is to have an omnichannel infrastructure in place. Our strategy is also to make sure that that handoff is seamless so the consumer doesn't notice anything when they talk to a person versus when they interact online. Now, specific data for Sonic in the last year, about 90% of our consumers actually started coming to our stores. About 40% of our consumers take action online. And when I say take action online, that means that they fill out the contact form, fill out the financing form, talk to some person in the GEC via chat, that kind of thing. And then lastly, we do see about 10% of consumers go end-to-end online with the Darwin tool. And that, on average, saves our consumer about two hours at the dealership. That time saving is a key piece in and out of physical and digital. So that's the answer to the first question. The second question is how we're thinking about our digital strategy this year. And really it's a parallel path. So the two paths are one, we're optimizing what we have with the Darwin and Cox relationship. And you've seen some of those changes already happen online. You can go to our Echo Park website and look at our vehicle listing page, and you can see that we've dramatically simplified it. We've made consumer interaction with our photos better. We've given consumers more options and seen more cars above the fold. So we've tried to improve what the consumer is seeing right now on our websites. Same thing with Darwin. We've made the process clear where the consumer is in the process. We've simplified the language to really turn it into consumer language, not dealer language. In parallel, we've kicked off a massive project here at Sonic to create the best e-commerce platform in the automotive industry. And what we're doing there is we're partnering with an outside firm, and we're looking at what are the best e-commerce experiences that consumers have in automotive but also outside automotive. So consumers have great experiences on Amazon, on Wayfair, on Walmart.com. And we want to apply those learnings to the car buying industry and give consumers something really, really special that really leapfrogs the competition. We don't want to just be a copycat of what's already out there. So I'm super excited about that. We're tapping into talent outside the industry. Of course, we're leveraging our industry expertise. And not only just thinking about e-commerce from a today standpoint, we're also creating a modern tech stack that'll be adaptable to our future needs so that it'll last not just one year or two years, but five years and 10 years.
spk03: Got it. Thanks for all the color. And good luck.
spk01: Thank you.
spk02: Your next question comes from the line of John Murphy from Bank of America. Your line is open.
spk05: Good morning, guys. Good morning. First question around sourcing these vehicles, and there's a lot that seems to be shifting. with these returns and sourcing more and more online and away from these physical auctions. And it just seems like there's a lot shifting here. So maybe getting beyond just the next quarter or two, just thinking later this year or over the next five years, where do you envision the bulk of your sourcing coming? How do you think it's shifting? Obviously, you're trying to make it more efficient over time and lower cost transaction and pricing both. I'm just curious how you think about this and what kind of opportunity there might be for Echo Park and your franchise dealers.
spk01: Hey, John, it's Jeff Dyke. So, look, we're buying, you know, a lot of our inventory now through the auctions. And... That is going to transition to us buying more and more cars off the street, and we're working on some different applications as a part of Steve Whitman's comments that he made a second ago to make it much easier for the consumer to trade a vehicle into us off the street. And so while that's a smaller percentage of our overall inventory today, less than 15%, we expect that to grow to north of 25% to 30% as we move forward and take more opportunities for consumers off the street. We don't have a hard time buying inventory. in particular in the 1 to 4 category, which is where the bulk of the inventory is. So there's no concern for us as we move forward on can you get enough cars to support your 140 network, to support all of the franchise stores and everything that you do. We certainly will take a number of our cars in on trade, but most of those cars that we take in on trade at Echo Park are moving over to our Sonic stores, to our franchise stores where they are turning those cars really fast at higher margins. which has been a big, a great thing for us in synergies between the two companies. But there's no concern in terms of sourcing. The sourcing supply will shift over time to more cars off the street from our perspective than versus buying in the auction lanes or for the franchise stores at the closed sales.
spk05: Do you envision a period of time where you're sourcing more than 50% of your new vehicle inventory through trades and off-street purchases? And you said 20% to 30%, I think, is just your current comments. But, I mean, could this be the majority of your vehicles at some point in the future?
spk01: I think that it can be the majority in the future as long as that one- to four-year-old supply is there. What tends to happen is the vehicles that you buy off the street are or five, six, seven, eight year old cars. They're not the one to four year old cars. And that's Echo Park's model. And so from a franchise perspective, sure. But on the Echo Park side, we'll continue to source a higher percentage through the auctions, through the manufacturers, through the rental car companies. um as we see opportunities um because that that low cost um product that we're looking for in that one to four category that's our that's that's what um you know drives our volume at echo park and there are less opportunities to buy off the street in the one to four year old category than there are in the older cars got it okay that's helpful um second question just on on the the car business car you know acquisition um sounds like it's a way to you know really um
spk05: you know, drive hyper, you know, hyper growth in a new market. But, you know, how does the integration of those work? I mean, given that you have sort of a standard model you're running, you know, it's your greenfield and stuff, you know exactly what you're dealing with, what you're getting, how you're doing it. When you're acquiring these stores, there's a whole lot of legacy, you know, assets, people, you know, processes. How does that integration work?
spk01: Yeah, it's a lot easier than you might think because you don't have all the franchise baloney that we have to deal with on the new car side. Very, very quickly, our buying system takes over their buying, and we're supplying inventory into both locations already. So we're filling that up. Our training team is then putting in our playbooks and our processes. The great thing is we've got four really good facilities now. in very, very good locations, one being in Laurel, Maryland, which is just a really good used car market. Then we've got all the great people and the assets already on the ground. So now all we have to do is go, and they were already one price. They were already trying to do some things that Echo Park does, but just hadn't figured out the formula. And what we're doing is just coming in and finishing the pieces of the formula, which is allowing us to really move a lot faster. And that's what's great in this evolution of Echo Park, is we're looking at these stores, and there's plenty of them out there, and we're thinking, well, gosh, we could go buy a facility. Instead of having to go build and find and search for real estate and all that stuff, we could go buy a facility that's already in operation if it meets our standards. And they share in some of the same cultures and characteristics. and then convert those fairly easily. And both leadership groups of both organizations, as a matter of fact, they introduced us to each other, just snapped in real quickly. And as a matter of fact, one of the guys that we purchased is now running our distribution, part of our distribution network in the delivery and buy center. So it's a very exciting time for us because it's going to allow us to be even more efficient and more effective with less capital than what we were doing prior.
spk05: Yeah, that's very, very interesting. And then just lastly, I mean, you kind of highlighted that the new vehicle market might be a little bit inventory, you know, tight, you know, GPUs were off of the strongfield first half of the year. It seems like that makes a lot of sense. Just curious, on the chip shortage side, if you're seeing any kind of shocks to, you know, production schedules and, you know, vehicles and transit that are just not showing up just yet, or is that something you expect to be dealing with in the coming weeks and months as this thing really kind of hits? And then that ends up being a positive as the automakers focus on very rich mix, and it's not such a bad thing.
spk01: Look, at the end of the day, the manufacturers are learning, and we're all learning, shorter day supply means higher margins and better turn rate. And the manufacturers then have to spend less on incentives. And so I suspect that you're going to see a permanent change in our industry. I do not think that we'll ever get back to the high, high levels of inventory and slower turn rates. We're all pushing for that, including the manufacturers. The chip piece has not had an immediate impact. It's going to have an impact as we move forward, you know, over the next month or two. But again, remember, short supply has created all-time best running margins. Very easy inventory management. And that fits right into, you know, our bread basket because we've already, you know, that's how we're built is to really tight day supply everything. And it makes it nice when the whole rest of the world has to do that. We all get to have better margins. And I think the industry has learned a big lesson here over the last 12 months with that.
spk05: Thank you very much.
spk01: You bet it.
spk02: Once again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Mark Jordan from Jefferies. Your line is open.
spk04: This is Mark Jordan on for Brett. Good morning. Hey, Mark. Hey. Thinking about the franchise side, specifically the parts and services segment, are you able to provide a breakout for maybe each channel and where do you see the largest headwinds to recovery there?
spk01: You mean service and parts and body shop?
spk04: Yeah.
spk01: So, sure, I mean, we can get that to you after the call. At the end of the day, the body shop business is really defunct, a lot less driving, a lot less accidents. And so that's been a big struggle for everybody in the industry in total. And the parts business follows the service business, and the service ROs are down because people are not driving as much. And so we saw about a 4% decline in January, a 6% decline in the fourth quarter. We expect that, and Heath was saying this earlier on, we expect that to really change as we move into the back half of the year. The vaccines are out and people are getting more comfortable driving around and traveling. That's going to make a big difference for us, and we expect the back half of the year to be much better from a fixed perspective than the first half.
spk06: Yeah, this is David and Mark adding to that. If you look at it from the segments, our customer pay overall for the fourth quarter was roughly flat. It was down about half a point based on the same store. But if you look at it from part service, collision repair, collision repair was down almost 20% in the fourth quarter. I think that's in line with what we've heard from some of the competitors in the space. So still part is also down. If you've got lower activity in the service length in our dealerships, independent shops are certainly having the same or similar impact.
spk01: And, Mark, one other thing to add to that is that the parts that the body shops are buying from our parts departments, certainly parts is off by that percentage as well.
spk04: Great. Great. Thank you. And I guess switching over to Echo Park, just – You know, thinking about we've seen quite a few online only used vehicle platforms emerge recently. Can you maybe talk about, you know, how Echo Park differentiates from those platforms and what advantages you have by providing that physical footprint that the customers might want to visit?
spk01: Yeah, sure. I'll start and Steve Whitman can chime in here in a second. But, you know, our data shows 75% of the customers out there want to come touch and feel a car. And we think we have a physical footprint plan that will allow us to grow across the country very efficiently, capital light, as Heath was saying earlier. And so in many cases, those online platforms are spending more capital than we are on physical plants, you know, getting their inventory up and running. But at the end of the day, we feel like we have a very, very good plan an effective and efficient plan to roll out our plant, our facilities across the country, and then provide our really cheap pricing from a used car perspective. And we're $2,500 to $3,000 cheaper than our average competitor in the one to four-year-old market. And it's going to be very difficult to compete with that as we open up across the country and make that happen.
spk06: And this is, Doug just said, and Jeff said it, but there's really, to me, there's really three components that differentiate Echo Park from all the competitors. And number one, as Jeff mentioned, is price. We have the call structure that we can provide the lowest price and high quality vehicles. And when you ask a consumer what they're looking for, the very first thing from a used vehicle, price is the number one driver. So to me, the pricing strategy in our expense structure is the number one differentiator. Number two, as Steve Whitman discussed, The data says that people want to buy cars differently. If you're going to be a used only, you're going to miss out on a large percent of the population. If you're going to be a physical onsite only, you're going to miss out on a growing percent of the population. You have to have the ability to do both, and that is the strategy that Whitman walked through, and that is our strategy to address the journey that the consumer wants. And then the third component is operational expertise. I mean, we have demonstrated for years that we lead the industry in inventory management. We've got years and years of experience running automotive dealerships. So when you add all of those three together, the best price, the ability to buy the way you want, and the expertise to operate, those are the things that differentiate Echo Park from the competitors from our perspective. And this is Steve Whitman, just to add on to that. We're designing our digital ecosystem in a way, number one, that's flexible, right? digital and physical world. The consumer doesn't view those as two separate things anymore, right? We've all been on Amazon when we've been in physical stores. And that's the way consumers think about digital retailing in the automotive industry. We're going to give them the ability to shop and to do whatever they want online from wherever they want. If they're sitting on the beach, we can let them shop for a car there. If they're at their desktop at an office, we're going to let them shop for their car there. So flexibility and being grounded in consumer needs and consumer understanding is key. Number two, that seamless handoff is very important. The consumer shouldn't notice when they dip in and out of digital or physical. We're going to have the infrastructure so that if a consumer fills out five steps online, they're able to pick up at step six when they talk to somebody at our customer call center or chat with somebody or go into our dealership. So that seamless integration between digital and physical without the consumer noticing is critical to an outstanding consumer experience. And then lastly, it's transparency, right? And this is all about, you know, keeping in line with the Echo Park equity, being transparent with our products and services online, also where our products exist, giving the consumer the opportunity to come in and touch, feel, smell the product that they want to, or else do everything they want to online and looking at our cars and our products and services. So that flexibility, that seamless handoff and transparency are going to be hallmarks of our digital products. And this is Steve again. We believe that you heard Steve talk about, Steve Whitman talk about, you know, we are listening to the consumer, right, what they really want. And we believe that the leading indicator for long-term success is customer satisfaction. And I think if you look at our ratings, if you look at the customer satisfactions chart, you can see that we lead the industry. And Echo Park has phenomenal reputation from the consumer satisfaction perspective, and that's the leading indicator for long-term growth. If you meet the needs of the consumer, you're going to have long-term success.
spk01: And, Mark, this is Jeff. If you add to that, if you look at our Greenville performance, Greenville's got our highest NPS, highest customer satisfaction scores already. So we're real excited about that because you're doing the entire transaction basically online other than state regulated pen to paper. And then delivering that car from one of our centers down to Greenville where we have an office. And yet we have our highest satisfaction scores in that marketplace. So the customer is telling, we're listening as he said, the customer is telling us, yes, this is the right formula. This is exactly what we want. We love the experience. Most importantly, they love the price. And that's the big difference. If you can create the cost structure that supports your ability to run the price, $2,500 to $3,000 a car below retail, then it allows us to really expand and grow and to do that effectively and efficiently. So really good news early on for us coming out of our delivery and buy centers, and we look forward to updating you guys more as we roll out more.
spk04: Okay, great. Thank you very much, and best of luck. You bet.
spk02: There are no further questions at this time. I turn the call back to Jeff for closing remarks.
spk01: I appreciate everybody joining us on the call. Sorry for the opening here in Texas being with all the weather, but we worked our way through that and certainly appreciate everybody. We'll talk to you on the next call.
spk02: Thank you. That concludes today's conference call. Thank you, everybody, for joining today. You may now disconnect.
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