Sonic Automotive, Inc. (SAH) Q3 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Sonic Automotive Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. As a reminder, ladies and gentlemen, this conference call is being recorded today, Wednesday, October 28, 2015. Presentation materials, which management will be reviewing on the conference call can be accessed at the company's website at www.sonicautomotive.com by clicking on the For Investors tab and choosing Webcasts & Presentations on the left side of the monitor. At this time, I would like to refer to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectations about the company's products or markets or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the company's filings with Securities and Exchange Commission. Thank you. I would now like to introduce Mr. Scott Smith, Co-Founder and CEO of Sonic Automotive. Mr. Smith, you may begin your conference. Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: Thank you. Good morning, everyone. Thank you for joining us on Sonic Automotive's third quarter 2015 earnings call. I'm Scott Smith, Sonic's CEO and Co-Founder. Joining me today are David Smith, our Vice Chairman; Heath Byrd, our Chief Financial Officer; Jeff Dyke, our Executive Vice President of Operations; and C.G. Saffer, our Chief Accounting Officer. Supporting slides that add color related to our quarter in this call will be located on our website. We're extremely pleased with the record-setting quarter and the announcement of an increase in dividend rate. We had an outstanding quarter, very pleased with our operations. One Sonic-One Experience is kicking ass. EchoPark is really doing a great job. We're very excited about ramping up the expansion of EchoPark. Just a little color, we hit $0.53 this quarter. I was hoping for $0.54, but Jeff just couldn't quite get us there and it was really outstanding. EchoPark, we've retailed 920 units in the quarter, an increase of 4.4% which was outstanding. On a capital perspective, we returned approximately 800,000 shares to our shareholders during the quarter or $17.3 million. And our board increased the dividend rate of about 50% to $0.375 (sic) [$0.0375] (3:34) per share for shareholders of record December 15, 2015. We are maintaining our guidance for the full year of adjusted EPS from continuing ops from $1.85 to $1.95. We believe that we'll be at the upper end of the range. So far things are looking pretty good for the quarter and we're internally very excited about the direction that we're headed in. That concludes our prepared remarks. With that, we now open the call for your comments.

Our first question comes from the line of Bill Armstrong with C.L. King & Associates. William R. Armstrong - C.L. King & Associates, Inc.: Good morning, gentlemen. I had a question on used gross profit per unit which was down about $128 year-over-year. Could you discuss the competitive environment, are you seeing any intensified competitive activity, and you've mentioned that you're working to increase your used inventories. I wonder if you could maybe talk about that and maybe how that impacted your strong sales, and you put lower gross margin?

Hi, Bill. It's Jeff Dyke. If you look at it sequentially, we were in line from the previous quarter. Our margin was right where we thought it'd be. And that's just us being more aggressive. We're carrying more inventory. We were carrying about 7,500 to 8,000 cars online. We've moved that up to over 9,000 cars online. So we're learning how to manage a bigger inventory and doing a better job with it, but the margin is right where we wanted to be. We don't have a bunch of aging vehicles. Our inventories are in great shape, probably the best that's been ever. We had a very, very good quarter, which is our biggest volume quarter ever with any store count. And the fourth quarter is starting off the same. So we're very excited about where our pre-owned business is and the margin is not a surprise. It was down over last year, but sequentially, like I said earlier, it's in fine shape. William R. Armstrong - C.L. King & Associates, Inc.: Great. Got it. Understood. And on EchoPark, your 920 units, just kind of looking at the sequential growth, which was extremely strong in the first and second quarters. It looks like a bit of a slowdown. Are you guys on track in terms of your unit sales growth there? Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: Oh, yeah. We're right in line if not better and that's just September; it's just like June, July and August. It's just a stronger period of time in the Denver market for used car sales, but that's nothing more than seasonality built in. And we are right in line; as a matter of fact we've announced last quarter that we were going after our first market and looking at our second pod. But the board has challenged us to go ahead and open up two pods. Our team is prepared for that. And we've picked out both of those markets and are actively purchasing real estate now to get those next-generation stores up and running.

Yeah. At the store level, they are outperforming our own internal projections. They're really doing a great job and the customer demand, if you go online and read some of the yelps and things that our customers are saying about us, they absolutely love it and our associates love it. Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: Very, very similar to the same kind of feedback we're getting at One Sonic-One Experience. I mean, it's just – so far, the technology, the training, everything we thought would happen is really beginning to come together for us and we do see upside – nothing but upside as we move forward. William R. Armstrong - C.L. King & Associates, Inc.: Got it. And if I could just squeeze one more question in regarding the new vehicles. Midline imports, we know the industries have seen margin pressure for a while now. We're hearing that now, there's margin pressure on luxury brands as well. And you guys are heavily weighted on the luxury side. I was just wondering if you could maybe address what you're seeing there. Heath R. Byrd - Chief Financial Officer & Executive Vice President: Yeah. And in particular, from a luxury perspective with BMW, we've got a very high day supply of BMWs on the ground more so than we've had in a long while. And it doesn't look like there's any relief in sight. So, BMW has really caused some margin erosion for us. And when you look at BMW and Honda and Toyota, they make up about 56% of our total sales, and all three of those brands were flat to up 2% or 3% for the quarter. So, when you combine the volume increase with a little bit of margin erosion – although Honda is really kind of flat year-over-year in margin; it's more Toyota and BMW and a little bit of Audi that's creating that erosion. And I think that we're in a battle. As long as the day supply is high, in particular for BMW, the margins are going to continue to be where they are. And the way out of that is just to sell our way through it and continue to focus on increasing our F&I PURs which we've done a pretty good job of. And there's still – given a couple of the other performances in the sector, there's still plenty of room for upside. Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: I think what we're seeing is we're seeing an oversupply, generally because of China. All right. Those cars – as China slow down, those BMWs aren't going to China, they're coming here. And the difference between not having enough and having too many is one car. I think it's going to be a great opportunity for consumers in the fourth quarter. I think you're going to see an artificially strong SAAR for the fourth quarter and maybe even into the first quarter with these inventories. I can tell you Mercedes Benz is in great shape; can't get enough of those cars. Trucks, we can't get enough of. We have too many...

Yeah. At the end of the day, you look at Toyota and they've got a 12-day supply of trucks on the ground ending the third quarter. And that makes it really difficult because with Toyota, you make all your margin on trucks and aged vehicles. So, if you don't have that and your mix is more generated towards cars, then it puts pressure on your margin. So overall, look it was a great quarter; it was our biggest new car quarter that we've had from a Q3 perspective. Great used car quarter. And we're going to see the ups and downs of inventory as the years come on. This is nothing new for us. And we'll deal with it accordingly. Great position at the end. The fourth quarter for Sonic Automotive is always our biggest quarter. December is going to be fantastic. We've got lots of cars on the ground. So, if we're going to have a high day supply of BMW, this is the time to have it. William R. Armstrong - C.L. King & Associates, Inc.: Okay. Got it. Thank you very much.

Your next question comes from Rick Nelson with Stephens.

Good morning, guys.

Good morning, Rick.

I'd like to ask you about the EchoPark guidance there. It was a $0.16 headwind for the year. Do you still feel comfortable with that? And how should we think about next year with the new stores and new markets?

So, yeah, we're right in line with our guidance. We're meeting or beating all of our targets for EchoPark. And next year, because we're ramping up the rollout, I would characterize that as the same as this year. We'll get more specific with that as we roll into the first quarter and give a little better guidance. But right now, where we thought it would be $0.12, maybe $0.10 for next year that number is probably going to be more along the lines of where we are this year just because we're ramping up the rollout of the new stores. But we also have to develop a next-generation store which is significantly cheaper. We can put it up a lot faster. Once we buy property, our team can have a store up and running, turnkey in six months. Our goal is to be able to do it in four months. And we changed a little bit the amount of inventory that we're going to carry at each location from 125 to 150 to 200. So that seems to be the sweet spot for us. So, we're playing with the formula a little bit, but it helped ramp up the profitability in each of the neighborhood location. So, I would characterize it as it's probably going to look a lot like this year. Heath R. Byrd - Chief Financial Officer & Executive Vice President: And Rick, this is Heath. As we finalize those models, as we understand how many stores will go online next year, we will share that model with all of you. Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: Our goal is to have 25 to 30 stores operating between now and the end of 2017.

Okay. Thanks for that color. Also, I would like to ask you where you stand with the pricing tool as it relates to OSOE and the rollout plans there. Heath R. Byrd - Chief Financial Officer & Executive Vice President: Yeah. Great question. Every quarter, every month, we get a little better. Our market share for September, we have leadership in market share in every category and across all the brands, did just a really, really good job, and we've got the highest share that we've had so far. As a matter of fact, Toyota in October is tracking 25% share, which is just fantastic. And a lot of that has to do with our pricing tool, but we're not there yet. It's certainly not complete. Our team and our vendor partner from Revenue Analytics were working hard to finalize our new car pricing tool for the brands that we have, along with the next launch brands. And I can tell you, we're still a quarter or two away from where I'm going to feel real comfortable that the pricing tool is doing what we expect it to do. There's just so many nuances. And I can tell you that we were – where I thought we were close six months ago, we've learned a lot even since then. And we're a hell of a lot further along, but we're not quite there yet. And I've got a lot of confidence that our team will have a tool that will be ready to use for our team probably over the next six months.

Can I get little color on what we're doing with the window?

Yeah. So, one of the things that we've developed is an electronic hang tag, so that when we do change prices as often as we like to change prices, we don't have to have someone going out and change the stickers all day long. So we've developed an electronic hang tag that hangs on the window of the car, just like a lock box lid on the outside of the car, and when we change a price in the system, that price then changes on the car automatically. So, we cut down on, obviously, by killing a lot of trees with the amount of paper that we're using, but we also cut down on head count and the mistakes that can be made from having to go out and do that. So, we're becoming a lot more sophisticated in the pricing arena. We're just not quite there yet, but I'm real confident that we're going to have six months – you'll be able to see a tool that will be very, very unique for our industry and really kind of unique to retail. We're really excited about what we're building. Heath R. Byrd - Chief Financial Officer & Executive Vice President: And Rick, this is Heath. Just to add on to that. Because of the additional work needed on the pricing tool, that's not going to slow our One Sonic-One Experience rollout. We talked about it in the past that we will phase out – I mean, phase in the One Sonic-One Experience starting next quarter, first quarter. We'll start rolling out the technologies to the next market. And then the price will come after that. So, it's not going to slow down the rollout of One Sonic-One Experience.

Okay. Got you. And any comments on October sales would be helpful. And geographically, whether the oil price decline perhaps having impact, do you think, in Texas, obviously, the rains are a challenge recently, but... Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: Yeah. We can all give a report and look, last weekend was tough because of all the hurricane stuff. But in the end, we'll overcome that. We are seeing in the energy corridor, I-10 in the kind of the Katy area, we've a BMW store and an Audi store. And probably for the first time, we're starting to feel a little pinch there as we deal with energy companies. There's been a lot of layoffs and those two stores have slowed a little bit in comparison to our other Audi and BMW stores in the same marketplace. So, October has gotten off to a decent start. And new car volume has kind of been where it's been or is where it's been – actually, from a year-over-year basis, it's probably a little higher. Margins continue to be compressed in particular with BMW and Toyota although we're really putting a lot of pressure on the stores to work on that. Our used car business is just fantastic. The move that we've made with increasing our inventories, our systems, our playbook, our processes, it really worked and it's fun to stress the team a little bit, put a little more inventory up and see what they can do in it, and they're really doing a good job. So that business, we expect to see – to continue to see the type of increases and the type of performance that we've seen. And in our fixed operations business, if you look at the charts, man on man we've added – net of a reduction of technicians, we've added probably 300-plus technicians for the year. And our customer pay business is on fire. We really understand how to handle the warranty now, in particular with Honda. I mean, we've got dedicated teams handling all the airbag recalls. And so, our customer pay business is going up. We're taking advantage of the warranty opportunities. Our internal business is good, so our fixed business is just record after record after record. So, we see that continuing on for the next several quarters. Nothing is slowing down. Everyday there's another announcement. Jane (18:18) had one yesterday. So, business should be good for the fourth quarter. It's our best quarter, it's always our biggest profit quarter and a big chunk of that happens in December, so we're looking forward to a big quarter. Heath R. Byrd - Chief Financial Officer & Executive Vice President: I think it's very important to realize that when the analysts are building their models and they compare us with the rest of the group, you really have to look at Honda, Toyota, Mercedes and BMW, because as they go, we go. It doesn't matter what Ford or GM or Chrysler or anybody else does. Those four brands really control our destiny, if you will. And when you look at fixed ops and you look at margin percentages and such, there's a lot of accounting noise that goes into those margins and who's putting what into fixed ops versus sales, et cetera. So, I would just caution everybody when you're digging in to do your homework (19:26). Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: And we go through this every year with the Street in particular where everybody always thinks our first quarter and second quarter should be higher and our third quarter and fourth quarter should be lower. And I think we've got about an eight-year track record here of outperforming in the third and the fourth and underperforming in the first and second. And these days, we all get on the same page, but the fourth quarter should be a great quarter for us.

Well, if you think about it, a lot of these luxury vehicles are leased, and those leases come off every year at Christmas, right, and they're renewing these leases. So, fourth quarter, Decembers are just like two months to us. It's just huge.

Good luck. Have a nice quarter and thanks a lot. Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: Thanks, Rick.

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

Good morning, guys. Maybe if I could just follow up on that fourth quarter comment you just made. When you're looking at the high end of your guidance range of $1.95 and what you've done year-to-date, it basically would imply $0.60 on the high end for the fourth quarter, and it looks like you did just about $0.63 last year in the fourth quarter. So is there something going on that you see as far as cost for EchoPark or anything else that might depress your numbers sort of on a one-time basis, or is this really just kind of holding the line on the outlook for the year and being somewhat conservative on the fourth quarter? Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: John, we're always conservative in what we do.

That's a good thing. Heath R. Byrd - Chief Financial Officer & Executive Vice President: We're being conservative. Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: That's what we said, we're going to be to the upper end of our guidance and we should be. If we have a normalized quarter, maybe we're ahead of that, but you know. Heath R. Byrd - Chief Financial Officer & Executive Vice President: There's a lot of noise going on in the world and in the economy. Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: Who knows what's happening, but we feel pretty good about where we stand. The things that we've been working on for a long time are starting to materialize a bit, and it ought to be a fun quarter.

Good. Then a second question, as we look at the used car business, obviously, that's going very well here. You're I think at 0.8-to-1 on used to new. I think the target is ultimately to get to 1:1. I mean, you're moving there quickly. I mean, when do you think you can get there? And what do you think you need to do differently to get there? Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: A lot of the difference is coming out of Toyota because we are selling the shit out of new Toyotas right now. And the used-to-new ratio in those stores just hurts the overall number. And so, we're very interested. Not that we want Toyota to slow down at all. We certainly want their truck mix to get better. We're very interested in what happens to margins as their new pricing methodologies kick in where you can't advertise below invoice. We're interested to see what happens as they start penalizing companies for doing that. But, hopefully, things don't slow down. We've got a lot of work to do to get to 1-to-1 in those locations as they make up a big difference in that 0.8-to-1 ratio.

That's very helpful color. And then a second question just staying on used cars and looking at EchoPark. You mentioned that on a store basis you're running ahead of your internal plans. I'm just curious what that means if we were to look at not tasking the individual stores with sort of the launch cost and the overhead that's going on with the total effort. How profitable are these stores on a standalone basis? And based on your experience so far, do you think you could be looking at a model that is more profitable with better return on invested capital than what you're looking at in your new vehicle buildings or franchises? Heath R. Byrd - Chief Financial Officer & Executive Vice President: Yes. It's pretty simple here. We're building these stores with about a $7 million to $7.5 million cost structure, including real estate. And we should be able to sell, when each neighborhood store is rolling, 125 to 150 cars. That's going to yield a $1.2 million to $1.5 million a year in net income. And so the goal here is how many can you build?

And EBIT. Heath R. Byrd - Chief Financial Officer & Executive Vice President: And EBIT, yes. And so the goal – that's income per store, not after corporate overhead and that's pre-tax. So, then we goal is how many of these can you build? We have a breakeven analysis in these stores between 60 and 65 cars. We have our first store – it's got a little heavier overhead because we've overbuilt the thing. It's already doing – our first neighborhood store is already in the 70 cars to 80 cars range. The next one is kind of following closely behind in the 50 cars range. The big store's doing 200 cras to 250 cars. And I expect as we roll out the neighborhood stores under the next generation model that these things are printing money six months to eight months from the day of opening down the road. So, in our original models we were cash flow positive at the beginning of the fourth year. And these models – our new model ramping everything up has us cash flow positive really towards the third year. So, we're very, very excited about where we are with the stores and hence the request of the board of Sonic to us to increase the level of stores that we had projected for the next couple of years.

Sounds really interesting. Last question, as you look at the SG&A, you guys had a great quarter on performance, especially ex the EchoPark cost. It looks like the sales comp or comp was a big part of that. Is that something that's sustainable going forward in taking the SG&A down to this level? And can you keep sales comp down that low without impacting sales in any way? Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: Yes. That's the devil in the percentage sign, John. Our compensation is more fixed than most other auto retailers. And it's an increasing gross. As our gross goes up, our comp's going to continue to drop like that. We just don't have the big variability in our comp plans. As you know, at the One Sonic stores and EchoPark everybody is on a salary. In most of our import stores, we pay a flat per car, so we don't have a lot of variability in our sales compensation. So if you look at the raw dollars, dollar to dollar, and what we're paying out, that really didn't drop. What happened is, as our gross went up and it drops that percentage number. So if you look, we're very proud of what we're paying. That's something that we put a stake in the ground a few years ago just to make sure that we had the highest paid associates in the industry. And our comp as a percent of gross is not dropping because we've cut pay plans. It's dropping because we're driving more gross.

That sure doesn't sound like a devil. That sounds like a good thing. Thank you very much, guys. Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: It's a damn good thing. Thank you.

Your next question is from Michael Montani with Evercore ISI. Michael Montani - International Strategy & Investment Group LLC: Hey, guys. Good morning. Thanks for taking the questions. Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: Thank you. Heath R. Byrd - Chief Financial Officer & Executive Vice President: Good morning, Mike. Michael Montani - International Strategy & Investment Group LLC: Just wanted to ask, the market share gains for One Sonic-One Experience are obviously very impressive here at Charlotte. Can you just compare what you're seeing on gross profit per unit trends there? Obviously, same-store, I believe, was down 7%. So would those units also be coming with a higher GPU rate? Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: I mean, look, it depends on the brand. With Cadillac and Infiniti, the gross profit per unit is fine. There's no elasticity in pricing there. Whether you drop the price or not, there's so few cars being sold, even though we have market leadership, it doesn't matter. It doesn't increase or decrease your volume. Ford, we really have figured that out. So margin is down a little bit, but our total gross dollars are up. And that's really driving the business. Last quarter we hadn't quite figured out the Ford pricing model, but we have that down now. And we have taken market leadership with the two Ford stores. Yes, we're one and two in the marketplace comfortably. And then with Toyota, the margins are obviously down and a lot of that has to do with just our mix. We started the month of September, we had seven total sport utility and trucks on the ground; seven, that's it. And so when you don't have truck and sport utility on the ground, your margins are going to be compressed and it is, but you've got to have a little bit more foresight than to sort of making adjustments in your pricing there. You can fast forward to October, we had a lot more sport utilities and trucks on the ground. Our margin is moving up. So there's definitely margin compression in Toyota. We will try to start moving and inching that margin up as time goes on and we start advertising a little bit more. But right now, we're enjoying market leadership. We're enjoying huge growth in market share. Our fixed operations gross is up $250,000 a month in gross in the store. So we're just starting to get our wheels underneath us in that brand. And so it's a little bit of a hodgepodge, to answer your question, for each of the brands in the marketplace. Michael Montani - International Strategy & Investment Group LLC: And it sounds like net-net because of the market share gains you're seeing on a profitability basis, you're more than pleased with that. Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: Well, I'm not pleased with it yet, but it's getting better every month. No question, our profitability is increasing. September is our best month. And hopefully, October is going to top that. Michael Montani - International Strategy & Investment Group LLC: Great. Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: And I would just going to – we look at total gross dollars versus margin percentages, we really don't manage based on percentages. We're trying to drive the actual dollars to the bottom line. Michael Montani - International Strategy & Investment Group LLC: Sure. I just wanted to follow up in EchoPark. Could you discuss a little bit how the service business is seasoning there? And when you think about those units at maturity and some of the profit levels that you've shared, are you thinking about service as a percentage of revenues that's kind of 5% to 10% or could it get to like a 10% to 15% that you'd see at a franchise dealer like how should we think about that? Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: So, the way we're looking at it is we've built enough capacity to-date to handle our reconditioning. Right now, we're reconning so many cars so fast in trying to keep up with that that if we go out and start really heavily advertising and marketing for service, it's going to put a damper on the amount of cars that we can get through. You may have read in Automotive News, we're working with our partners from Manheim to have them begin to take over that load and to begin, based on our buying criteria and our buying tools, buying the cars, reconning the cars, doing the detail of the cars, taking the photos, uploading them, and then delivering and putting them on our shelf, kind of like Coca-Cola would do for Walmart. So we've worked very hard with them over the last year and year and a half to design the processes in order to make that happen, which will keep us from having to build huge recon facilities and added expense along with hiring all the people and the personnel that go along with that. So we're working very hard to mitigate that expense so that we can move forward and grow profitability with a lower cost basis. Michael Montani - International Strategy & Investment Group LLC: That's helpful. Just last one I had was for Heath, in terms of the cash flow outlook, increasing the dividend as you did shows some conviction in the model and sustainability of the cash flow. So, I guess, I'm wondering, can you provide any update for your outlook this year on CapEx, cash from ops, how much could we see as discretionary cash flow? Heath R. Byrd - Chief Financial Officer & Executive Vice President: Yes. As you can see in the slides, I think we have a slide that, number one, shows our liquidity dramatically over where we were at the end of the year as well as our CapEx spend. Our capital allocation model hasn't changed. And that dividend increase the figure is like $1.9 million. So it's not a large amount of money for that dividend increase. The capital allocation plan has stayed the same. We're going to always look at opportunities for acquisitions. We have deals that we look at daily, but there is a priority on EchoPark. And currently, at our discount, share repurchase is attractive to us based on where we're trading right now. So the strategy has not changed, and the dividend is such a small number, it's not really going to impact our cash flow. Michael Montani - International Strategy & Investment Group LLC: Okay, great. Thank you.

Your next question comes from Paresh Jain with Morgan Stanley. Paresh B. Jain - Morgan Stanley & Co. LLC: Good morning, everyone. We have to start with the cost execution here. The SG&A/gross performance was a lot different and for the better than what we saw in first half. So what really changed in 3Q and can we see this as an inflection point going forward? Heath R. Byrd - Chief Financial Officer & Executive Vice President: Well, I think it's what Jeff said before, we just generated more gross, and we have a lot of fixed costs, probably more fixed costs than our peer group, especially in the comp area. So all of that was incremental throughput. So that was the big driver. Now we did get some pickups on the top side throughout the year. You're going to have up and downs on medical, legal. We had a clean quarter in those areas on the corporate side. So it's sustainable from a standpoint of once you start generating that growth, it flows through easier because we're more fixed than variables.

Yes. Our pre-owned business is really rolling, which is generating more growth obviously from an F&I perspective. And so front-end gross and related gross is from F&I and fixed operations from an internal perspective are just make a big difference. And the moves that we've made in order to generate that gross from that area has really made a big difference in the other areas, too, which when your expenses tend to be more fixed than variable, it makes a big difference. Heath R. Byrd - Chief Financial Officer & Executive Vice President: Yes. And some things to look at, if you do your homework and look at our liquidity, we've basically tucked away $100 million in liquidity to pay off our 2022 debt.

Yes. 2022. Heath R. Byrd - Chief Financial Officer & Executive Vice President: And that's not showing up on anyone's radar anywhere but it's there. It's real. And then if you look at real estate, in 2007 we didn't own any real estate. And today, we own almost 40% of our real estate. If you take just an 80/20 mortgage rate on that, you've got 20% equity minimum in all that real estate that nobody is giving us any credit for. But what we're building here is a foundation for the future to have them bulletproof balance sheet. And we're creating a tremendous amount of value. Well, yes, it's sexy to be able to go out and buy deals all the time, that's not our strategy. If that's what investors are looking for, they need to go invest somewhere else in the peer group. If they're looking for a long-term investment and they're interested in our EchoPark which I think is really going to be our future for Sonic Automotive, I think there's a tremendous opportunity in the pre-owned market. CarMax is out there, which we really hold them in very high esteem. They're the big 400-pound gorilla and they have how much of the market?

I think 1.5%. Heath R. Byrd - Chief Financial Officer & Executive Vice President: Yeah. 4% of the markets that we're in. Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: Yeah. Heath R. Byrd - Chief Financial Officer & Executive Vice President: 2% national. Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: 1.5% national. And their market share is bigger than ours, Penske and AutoNation combined. Think about that. So, that's a direction that we're going in. Why should we go out and buy Mercedes stores and BMW stores with 10 times EBIT when we're trading at 10 times net. It's dilutive, it's doesn't work. So, we're investing in pre-owned market. We're buying our shares back and we're returning capital to our shareholders. Paresh B. Jain - Morgan Stanley & Co. LLC: Got it. So, a follow-up on the used market and the EchoPark strategy. I agree there's definitely a lot of share to be gained for all players, existing and new and that's very clear. And that's one of the reasons why we see a lot of peer-to-peer online dealer models coming up as well. So, our gain in share itself is not a concern, what these new dealer business models do is bring in a lot of transparency not only on the pricing front, but also on gross profits or markups. So, how do you view these emerging business models? And is the gross profit transparency a concern at all? Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: No, not right now. The market is just too big and there's just – I mean, you get 10 players – I don't even know if you can name 10 new ones on your hand, but another certainly four or five of them and they're not going to add pressure. A lot of us are in different markets, so I don't see that as a big deal. But what I do see as a big deal is their ability to acquire inventory. And that's the thing that we've perfected over a 10-year – over a decade here, is building the systems that allow us – when we first started all this, everybody said how the hell are you going to get all the inventory to pull all this off, blah, blah, blah, blah. And that's been for us the easiest thing because there's not any problem getting inventory. And I hear a lot of chatter up and down the proverbial grapevine about different companies that are getting started really having problems with inventory, which is moving their volume up and down all over the place with wild swings. And I see that because you get all the reports. And so I do think that they're going to have a – that's where the companies that really invested the time to understand how to manage the inventory, how to buy it, how to get it through the system, how to price it and how to get it out of the system into our customers' hands, or even wholesale, those are the companies that are really going to have the upper hand and there's just not a lot of them. And so, those are the ones that we pay a lot of attention to. CarMax obviously does a fantastic job there, but I think we do too. And so we'll see how things go. So far no margin pressure; our margins are at or actually above, in particular in F&I, where our margins are $200 to $250 better than what our models had to begin with. So, we're very excited about where we are and seeing no margin pressure right now from any of the business-to-business or online-type used car companies that are being developed. Paresh B. Jain - Morgan Stanley & Co. LLC: Got it. Thanks a lot.

Our next question comes from Brett Hoselton with KeyBanc. Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: Hi, Brett.

Good morning, gentlemen. Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: Good morning.

Good morning.

I want to start with the One Sonic-One Experience. And can you, first of all, talk through – and I'm looking at slide 28. In Charlotte, phase 1, phase 2, phase 3, where are you at in that? It sounds like the pricing tool is still being fine tuned at this point in time, but how do we think about the Charlotte market in particular? And how many of these items here in these different phases you feel as though you've really got under your belt? Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: Well, we've rolled out all of this in the Charlotte market. So we did it all at the exact same time, but had no intention of rolling it all out at the exact same time and start drinking from a fire hydrant, right? There's too much for the stores to consume at one time. The CRM tool, the appraisal tool, the desking tool, the F&I tool, the inventory and management tools, the compensation, the branding, I would tell you that all of them with the exception of really heavy-focused brand advertising and the pricing tool are all installed and we're very happy with. But even all the tools that we're happy with, we're not going to roll them all out at one time because it's still too much for the stores to absorb. So, beginning in the first quarter, we'll start with the CRM, the appraisal and the desking tool for our management team to begin to use. And we'll roll that out over a period of two years. Within that same timeframe, we'll come back 9 months to 12 months later and begin rolling out our F&I tool, which is really making a big difference in these stores in helping our experienced guides, our sales associates, perform from an F&I perspective. Until the pricing tool is ready, we're not rolling it out. We've got to get that and get comfortable with it. And again, like I said earlier, we're six months away from bringing that to a position where I think we're going to be comfortable with it.

So, as we think about this technology – I apologize. As we think about this technology roll-out then, we want to think about this as going across all your stores simultaneously kind of over this timeframe.

Not simultaneously. No. We have a training team. We're going to start in the West. We have kind of two divisions. We're going to start on the West Coast and East Coast and meet in the middle. And it's going to take us a couple of years to get the CRM, the appraisal and the desking tool in place. That's not something you can do overnight. It is a huge undertaking, a big, big change in culture from a technology perspective. And so we will very slowly, very methodically install these processes to make sure that we dot our I's and cross our T's and execute and we're executing at a level that's totally acceptable. Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: This is Scott. We've had numerous manufacturer partners in going through the system and the technology, and in fact, yesterday, we had Mr. Reznik (42:13) in town from California, and he was absolutely blown away as have been our manufacturer partners by the system and the ease of use in how integrated everything is. So, yeah, I would say that we're trying to err on the side of caution in being conservative in our rollout. It is a big change in culture, and it's just that it's like drinking out of a fire hose when you go into a dealership and you plug this new technology and processes and pay plans and everything into a dealership, so it just takes time. And then it has to mature once you get it in.

Okay. And then on the new car GPU, I know it was asked a little earlier here. As you think about the outlook, obviously, seasonally, you see a pickup in the fourth quarter due to the luxury mix and that sort of thing. But as you think about the outlook for new car GPU, how would you characterize this at this point in time? Would you kind of say it's stable at the current level or do you think there's some potential for some additional downside or maybe some recovery? How do you think about that? Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: Yeah. I mean, look, a lot of it depends on your brand mix, for us I think we're not going to get any lower. But as long as BMW and Toyota – as long as the Toyota mix doesn't include a big day supply of trucks, you're going to have margin compression. That's all there is to it. And I don't see their truck inventory getting better overnight. And BMW, look they're introducing new products. Like I said earlier, we've got an 85-day to 90-day supply of BMWs on the ground. We're not going to have any more day supply on the ground. I'm not going to promise you that but as long as your day supply is up, I think that the margins are going to be where they are now, but as that begins to come down, law of supply and demand, your margins are going to go up. I don't think for Sonic Automotive and our brand mix, you'll see our new car PURs get any lower. In fact, you made the comment, given the quarter, our PURs will go up. But as we get into the first and second quarter, there may be some softening from where we were in the first quarter but certainly not to where we are at the end of Q3.

Okay. And then on the used car GPU, kind of a similar question, stable turning up or down, but I'm also interested in knowing, how do we think about EchoPark impacting your used vehicle gross profit per unit?

It should help it. I mean, EchoPark is running new, used and recon combined at $3,300, something like that. So that's – excuse me. I meant to use F&I and recon, and we didn't start selling new at EchoPark. And so, it should help it. The used car margins are better, so it should help it especially versus the import and domestic stores. But what's really going to be fun is just the extra gross dollars it's going to bring to the table just because we're selling so many cars, but that's going to make a big difference.

And then you talked about the quarter getting a little bit of benefit from, I think, some medical and legal stuff in the SG&A line. Can you, at all, quantify that? Give us a kind of a sense of the impact of that or the benefit of that in the third quarter? Because it sounds like at least that portion is not necessarily sustainable. Heath R. Byrd - Chief Financial Officer & Executive Vice President: Yeah. It's actually – we just incurred higher than expected expenses in Q1, Q2. It isn't that it was lower. What you see now is expected. We just had higher exposure in Q1 and Q2.

Okay, excellent. Thank you very much, gentlemen.

At this time, I would like to turn it back over to management for closing remarks. Bryan Scott Smith - Co-Founder & Chief Executive Officer, President, Director: Great. Well, I just want to thank everybody for taking time out today to join us on our Q3 call. Hope you have a wonderful day. Thank you.