Sonic Automotive, Inc. (SAH) Q2 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the Sonic Automotive Second Quarter 2016 Earnings Conference Call. This conference call is being recorded today, Tuesday, July 26, 2016. Presentation materials which management will be reviewing on the conference call can be accessed at the company's website at www.sonicautomotive.com by clicking on Our Company, then Investor Relations, then Webcasts and Presentations. At this time, I would like to refer to the Safe Harbor statement under the Private Securities and Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information, or expectations about the company's products or market or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission. I would now like to introduce Mr. Scott Smith, Co-Founder and CEO of Sonic Automotive. Mr. Smith, you may begin your conference. B. Scott Smith - Chief Executive Officer, President & Director: Good morning and welcome, everyone, to Sonic Automotive's second quarter 2016 earnings call. I'm Scott Smith, the company's CEO and Co-Founder. Joining me on the call today are David Smith, our Vice Chairman; Heath Byrd, our CFO; Jeff Dyke, our Executive Vice President of Operations; and C.G. Saffer, our Chief Accounting Officer. I trust everyone has read the documents released earlier this morning. I'll provide some brief comments before opening the call for questions. For the quarter we generated $0.50 per share from continuing operations versus $0.20 better than the prior year quarter on a GAAP basis and $0.04 better on an adjusted basis. Please see our earnings release for a discussion of the non-GAAP adjustments made to the prior year quarter. There were no adjustments in the current year quarter. We continued to perform in line with internal estimates, a lot of the industry themes from the first quarter came into the second quarter. The new vehicle market continues to remain highly competitive. We believe many of the new vehicle oversupply issues have worked their way through the retail pipelines during the quarter. Although this cannot be easily seen in our new vehicle retail volume numbers, which were down 3.3% on a same-store basis, gross profit per unit improved to $89 to 4.7%. This resulted in improvement of same-store gross margin dollars from new retail units of approximately $1 million or up 1.3%. Our pre-owned business with the exception of EchoPark struggled a bit as the effective stop sales prevented us from retailing many of our vehicles in inventory. Same-store used vehicle retail unit sales declined 1.8% and related gross profit per unit declined $65 or 4.8%. We can discuss this and provide a little more color in our Q&A. The EchoPark segment on the other hand continues to grow. Retail unit sales from EchoPark improved 28.9%, which enabled gross profit to grow approximately $1 million. SG&A expenses declined about $100,000 despite the increase in retail activity. EchoPark was able to narrow its pre-tax loss compared to the prior year a little more than $700,000 with one of the stores achieving same-store profit during this quarter. We are also excited about the June openings of our new stores in the Stapleton and Dakota Ridge neighborhoods in Denver. We expect one additional store to open in Denver market around the end of the current year and continue to assemble parcels to use in Texas and Carolina markets as we expand the geographic footprint of the EchoPark brand. Fixed ops results in the quarter were mixed as we were able to grow same-store revenues by 3%, but related gross profit was relatively flat. This was primarily driven by a decline in warranty gross profit. The mix of warranty work during the quarter was less labor-intensive than the prior year and this yielded pure gross profit dollars. F&I growth continues to remain strong, up 2.9% on a same-store basis despite a decline seen in overall retail unit sales. We were able to offset the effects of lower retail unit volume by increases in product penetration, particularly in the finance and service contract areas. SG&A, the gross for the quarter came in at 78.5%, an improvement of 160 basis points over the prior year GAAP amount and 70 basis points better than the adjusted prior year quarter of 79.2%. We continue to analyze cost and eliminate those activities that did not contribute to the bottom line. The rollout of OSOE technology continues to occur in our Birmingham, Chattanooga, and LA markets and is being well received by both our associates and customers. During the quarter we invested approximately $13.1 million in share repurchases to repurchase 759,000 shares bringing the total year-to-date investment to $57.5 million for 4.9 million shares. We plan on continually evaluating our repurchase programs as we identify windows of opportunity to reduce our share count and enhance shareholder value. I'd also like to provide little color on our earnings guidance for the second half of the year. Based on our current estimates, we believe diluted earnings per share from continuing operations for the third quarter to be between $0.52 and $0.54, for the fourth quarter to be between $0.66 and $0.69. At this point, we'd like to open the call for your questions.

. Our first question comes from the line of John Murphy with Bank of America.

Good morning guys. Just a first question on EchoPark, it's kind of two parts actually, I mean, is there a reason that gross profit per unit there would be lower than your other franchised stores, it just seems like it's running a lot lower? And then sort of secondly on EchoPark, what are the original stores profit and loss statements looks sort of on a standalone basis, I mean are we turning the corner on those; as you're adding these new stores you can kind of see the way to the higher profitability for the entire entity?

Hi John, Jeff Dyke. If you look we're playing with our mix and pricing with EchoPark, if you look, whatever we drop in front-end margin we made up in F&I, we just got a little more aggressive in pricing during the quarter and we see that kind of going on in the marketplace. And in Denver that tends to happen. June is kind of a funny month in the market. So, the overall margin is the same. It's just coming from different buckets, so nothing of concern to us from what our original forecast was for margin per unit. And then, yeah we're very excited, Thornton which is our big hub turned a profit for the quarter. And so that was our original store that opened up. And the other two stores that opened up originally certainly improving, Centennial is on its way there, cash flow I think it's close to being positive or positive, I can get you the exact on that. Highlands Ranch, as we look at it, we probably under built that store. It holds a 100 cars and we really needed it to hold 150 plus cars. So that one is not improving as fast as we like it, then the other two stores that we just opened came out of the shoots significantly faster than the stores that we originally opened. So we're very excited about where we are. Cash flow looks good. Profitability is certainly moving along for what we forecast if not better. And then our other two markets Texas and the Carolinas from a property perspective are coming on quickly. So nothing but positive things. And in the feedback that we're getting from our guests on EchoPark is nothing short of, "it's just fantastic." If you read the feedback that we get it's unbelievable.

And, Jeff, hopefully this is a fleeting issue, but how are you dealing with the stop-sale issue at EchoPark versus your franchised dealers? Are you sidestepping those vehicles that have stop sale and not dealing with them or I mean how do you work with them there?

So the stop-sale cars, it just depends on the brand John. For BMW, we can move those cars to our BMW stores, but the other brands are not as flexible. So stop sale, we don't have that many at EchoPark. It's not that big of an issue on the ground. I think we might have 120 or something like in their total inventory of maybe 1,800 cars. So that's not a huge number and we'll easily deal with that and we'll sell some of them off at wholesale. It's a much different story on the Sonic side because that certainly affected our used car business. I've been here almost 11 years now and I can hardly remember a quarter when we were that down year-over-year. And so we broke the inventory down into unaffected and affected buckets. In our unaffected inventory on the Sonic side, we're up about 8% year-over-year. But our affected inventory, we're down like 48% just because we can't get the airbags in fast enough to get them out on the lot and ready for sale. So it's certainly playing an issue here. We are starting to see the light at the end of the tunnel. Hopefully in particular with BMW and Honda, we'll get that cleaned up here in the coming months and put this behind us. But it certainly has been a bit of a challenge for the stores.

Thanks. That's helpful. And then if you could talk about just the valuation of the stock versus the potential for acquisitions. It just seems like where the stock is right now versus the multiples we're hearing out in the private market, it just seems like there is odd arbitrage going on right now. And would you be more aggressive in buying back stock as we go forward during the course of the year as you build up greater cash from earnings? Heath R. Byrd - Chief Financial Officer & Executive Vice President: This is Heath. We're always looking at the market to see if it's an opportunistic time to buy back shares. We think that our share price is affected by our performance in EchoPark and the roll out of One Sonic-One Experience. Obviously we have a different strategy, a more long-term strategy, and once those things start turning, we believe the share price will reflect that. We're looking at our capital allocation. Again, share price is always a part of that equation, but we definitely need to keep dry powder for our expansion in EchoPark as well as updating some of our facilities. And we continue to look at acquisitions as they come across our table. If we find something that fits in nicely with our portfolio and our geographical coverage, we consider those as much as any other capital allocation.

Okay. And then just lastly on the three add points that you guys were awarded. That's great news. How did you pull that off? How did you win those? What's the capital requirement versus making acquisitions? And do you see a lot more of those on the horizon?

Hi, John. Thanks for that question. Look, at the end of the day, Sonic Automotive, five years, six years, seven years, eight years ago was just not in a position to receive add points and for a number of reasons. Customer satisfaction scores, being the big one, just wasn't there. Now we're atop the leader board in a lot of those measurable categories. And so given that, the manufacturers and pretty much across the board, because it's not just one manufacturer versus another and we'll have more to announce in the coming quarter or two, are looking at Sonic and saying, look, they're doing exactly what they said they were going to do. Their customer satisfaction scores are good. They're market leaders when it comes to share and volume and we're going to allow them and partner with them to invest in our brand. So, to us, it's just a big feather in our cap and we're very excited. We're also working with our manufacturer partners better than ever. And so it just makes a big difference when you can come together as two companies and work to accomplish your goals. It's made a big difference for us and we're very excited to add the revenue and the profitability along with the head count that's going to help us really generate a lot more growth for our shareholders. So a great, great opportunity. And appreciate the question. B. Scott Smith - Chief Executive Officer, President & Director: And, John, I'm going to get back to you just real quick on the question you'd asked on cash flow and pre-tax. In the original store in detail had a positive cash flow of about $310,000 for the quarter, or about $100,000 a month. It made a pre-tax of about $115,000. And then the two stores that opened up a few months behind them, one is cash flowing negative $60,000 a month, somewhere in there. And the other one is cash flowing negative $80,000, somewhere in that ballpark, so. When you combine all of them we're damn close to cash flow positive, not including the two new stores. And that's just getting better and better as we move through. We're having a really nice July in the stores and we expect that to continue.

Great. I'm sorry – and just the CapEx or cost of opening the add points versus making an acquisition. I'm just curious if you could give us some color around that. Heath, maybe if you have... Heath R. Byrd - Chief Financial Officer & Executive Vice President: It just depends, John, on the brand. Like we are opening a Mercedes-Benz store in the north part of Dallas in McKinney. The property and the building there is going to be more expensive than the Nissan store that we're opening in Cleveland, Tennessee that's outside of Chattanooga. It just depends. So one might have a $8 million allocation, the other one might have a $22 million allocation. It just depends. But then you get a bigger return out of one than the other. So it's all over the board. And for the ones that we know that we are going to be getting here in the future that we'll announce in the quarter, it's the same thing. You're just making, whether it's high line or import or domestic, it just depends on what the brand is, depends on the investment.

But a material discount to making an acquisition of existing franchise and building in land? Heath R. Byrd - Chief Financial Officer & Executive Vice President: Yeah. It's a hell of a lot – there's no blue sky.

Yeah. Heath R. Byrd - Chief Financial Officer & Executive Vice President: So, if we're looking at an acquisition that's a $40 million investment blue sky or $100 million investment and blue sky, those dollars aren't there. We'd just have to go buy the property and build the building and work with your manufacturer partner to make sure that building meets all the specifications. And we're working a lot with them to make sure that it meets their future specifications for retail along with our One Sonic-One Experience specification. So I think that's also played a big role in our ability to get the additional points is how we look at future retail and the investment that Sonic Automotive is making there.

Great. Thank you very much.

You bet.

Your next question comes from the line of Paresh Jain with Morgan Stanley. Paresh B. Jain - Morgan Stanley & Co. LLC: Good morning, everyone. Couple of questions. First, can you provide us with an update on the timing of OSOE deployment? Where are you versus your expectations earlier in the year in terms of rollout and some performance metrics there?

Yeah. Sure, Paresh. Hi. This is Jeff Dyke. So, One Sonic has rolled out. We rolled out, as Scott said in his notes, into our Chattanooga market, Birmingham and Southern California. That now goes along with our Charlotte stores. We are training and working on those stores and we always sort of said we are going to roll out kind of the next phase and make sure that I's are dotted, T's are crossed and see sort of how that goes. We're also working on some data transfer issues from our current CRM system into our new CRM system, and so we're looking for ways to do that more effectively and efficiently and to speed up the rollout process. So I would tell you that in the Phase 1 we're a little bit behind schedule in terms of the original schedule that we put down to rollout, but hopefully given the moves that we're making right now in partnership with Microsoft and a few other companies, that's going to speed the overall schedule up. So we're working very hard to make all of this happen, but it's got to be done the right way, and we've said since the very beginning this is a marathon, not a sprint, and so we're going to run into road-bumps and we've hit a few, but nothing that's detracting us from the overall goal. Paresh B. Jain - Morgan Stanley & Co. LLC: Understood. And then a question on EchoPark strategy, I think it's worth asking this to any used-only business that wants to scale quickly. It seems like the online-only or the other peer-to-peer model is gaining some acceptance now, and they can scale fairly quickly, reduce capital requirements, and improve cost savings. So my question is instead of having multiple stores in one market, would you consider doing a hybrid of brick-and-mortar with an online-only model where the customer doesn't even have to step into the store at all?

Yeah, so obviously, there's no question that that's where the industry is going, the big question is how fast does it get there. if you still look at the volume leaders in all the markets, they are still brick-and-mortar stores, and so we are working on what we call Sonic One Stop and that is the ability for our guests to shop and purchase a vehicle online without ever having to come to our stores. Obviously, as the industry moves that way, you need much less brick-and-mortar on both the new car side and the pre-owned side, but at the same time we're trying also to build our brand, and so that's why we've taken the opportunity to not build these big tens of millions of dollar palaces for pre-owned, where for EchoPark we're building significantly cheaper stores just with the inventory. So right now we're going to market at about $7.5 million property and building included, and so it makes it feasible for us to have a few points in the marketplace, and also put our guests in a position where they can purchase online, so you can both build the brand along with the guest buy the vehicle online and us deliver it to their home or their place of business. So Sonic One Stop hopefully between now and the end of the year makes its debut. We are working diligently with some of our vendor partners that we built One Sonic One Experience with and we look forward to introducing that to our customer base. B. Scott Smith - Chief Executive Officer, President & Director: I think, it's important for us – it's Scott. It's important to note that nobody in the industry has a 100% paperless transaction, that's going on right now. Every state has different franchise laws and different requirements on paper that has to be signed. To my knowledge we are as far ahead as anyone in the industry as far as delivering vehicles where the customer never ever has to step foot at a dealership. We can do the entire transaction from the comfort of you sitting in your underwear, on your couch or out by the pool, you can buy car. We'll deliver it to your house, paperwork show up and you can sign it. Never have to see or speak to a single individual, we have that today. That's real, it's not vaporware that happens, I don't want to say all the time, so I don't want to mislead you, it's a very, very small percentage of our business, but if you think of these online retailers that you think that are out there just sucking up the industry, they're not. People still need a place to take their car and get it serviced. We've done absolutely zero with EchoPark in the way of advertising for fixed ops. And our fixed ops departments are full right now with our UIO service work and doing all of our recon for sales. So, we're going to be able to pick up that gross that we get in the fixed ops department. Over time, I think that'll also continue to be a differentiator and we happen to agree with you that you don't have to have a whole lot of bricks and mortar to sell cars, and that's why we've gone to the neighborhood model where we feel like being closer to customers, and being able to service the cars is what's really going to differentiate because at some point in time down the road everybody is going to able to sell cars paperlessly and without having to have these great big huge facilities. Paresh B. Jain - Morgan Stanley & Co. LLC: That's very helpful. Thank you.

Your next question comes from the line of Rick Nelson with Stephens.

Thanks. I'd like to... B. Scott Smith - Chief Executive Officer, President & Director: Hey, Rick.

...follow-up on the third quarter guidance flat year-over-year, you are coming off a quarter where you did 9% EPS growth, and it looks like the fourth quarter you're guiding to 10% EPS growth, but a little slower in 3Q, I am curious about that?

Yeah. Hey, Rick. This is Jeff. Couple of things. One, we started the quarter were short a day in fixed operations. We started the quarter off in July with the – with how we measure fixed operations a day, we do about $2,480,000 a day in fixed gross. And we're going to be short year-over-year three days, that's some $7 million worth of gross. So we've got a big uphill battle to climb there. And then so goes Sonic Automotive, so goes BMW. And BMW get backwards and forwards, and so BMW's been struggling a little bit. They are a 30%-plus piece of our profitability. And they are working on as you know and we've been fighting this all year, they're working on reducing their overall inventory levels in particular in the 5 Series and the 7 Series, which have not been doing as well, margins are shrinking there. And so we just see that being a little bit of a challenge for us this quarter as we clean up and get ready for new model year products. So we'll see how things go maybe we can do better, but we'd rather guide you guys. And it seems like every year, there's a little bit of miss – we're just kind of miss cadence. We always do a whole lot better in the fourth quarter than we do the third quarter. And so instead of just saying, hey, here's kind of where we think we're going to be for the year, we thought we'd give you guys some quarterly guidance that would help get everybody thinking on the same page as what we see coming with the business. So that's, that's really what's happening, Rick.

That's very helpful, Jeff. To volume sales, any commentary there what you're saying?

Yeah. You know, there we got an extra Saturday. So, new car volume is just okay; used car volume is much better. Margins are a little tight or still tight. Fixed operation is a little better, so it's a lot of the same. I don't see a whole lot of difference there, just less days in fixed operations than we had last year. But the daily run rate – matter of fact, the daily run rate in July might be higher than it was prior year, we're just looking to run out of days. And then when I look down the road here August and September should be a little better, right, just because of the way the days all lineup and I think the volumes will come in a little better because I think the incentives are to continue to be strong or stronger as we come to the end of the third quarter and people are trying to balance out inventories.

And any comments on, Jeff, geographies, especially Texas, I guess I am interested in?

Yeah. You know, in Texas, you really got to breakdown, Dallas is fine, Houston on the other hand is struggling and really it's the energy corridor in Houston, and really it's high line in the industry corridor in Houston and we just are right dead smack in the middle of all that, that's a big hub for us as you know, we've 19 stores there, and so – and a lot of high line stores there. And so, we are fighting the fight, when oil is high, and things are rolling, you got wind in your sales, and when it's not, you got a little wind in your face. But it's nothing that we can't overcome and haven't seen before and are adept at handling. It's just – that's the struggling piece. And then the Southwest region for us is a bit of a struggle. That's a little bit of what's going on in the marketplace and a little bit of us. We've had four major facility projects, we would have chosen not to do them at the same time but we had manufacturer reasons and dollars on the line to do them all at the same time. So we've got two big high line stores in the Denver market and two big old BMW stores in the L.A. market that were all under construction at the exact same time. And it just creates a lot of chaos and havoc, and so that bothers a little bit. But, by the end of the year we'll have all that behind us and push forward, and then reap the benefits of all that. So, those are the two markets; the rest of the markets are doing great. Northern California is doing really well. The Florida market, the Carolinas, all of them they're all doing just fine; they're equal to or better than last year. And so, we're certainly pleased with those performances. It's really Houston that's the big deal.

Okay. Got it. Thanks for that. If I could ask you, EchoPark, I know you're pursuing some new sourcing refurbishment strategies with Manheim. Are you starting to test those? And what sort of traction are you seeing there?

Rick, this is David Smith. Something to mention with that construction is that it's not like we don't have a plan there. We're under timelines that we have to meet. So it's not likely we'd just do all these projects. B. Scott Smith - Chief Executive Officer, President & Director: Yeah, the manufacturer puts us under pretty strict timelines and so we fought those timelines as hard as we could, but that's what ended up driving that in the Southwest.

Right. B. Scott Smith - Chief Executive Officer, President & Director: And what was your question about EchoPark?

Yeah, your new strategies in terms of sourcing and not doing the refurbishments on site, you're going to use Manheim to do those. Are you starting to test those within the Denver stores? B. Scott Smith - Chief Executive Officer, President & Director: Oh yeah. So, Manheim, great business partner for us. We love them. They're working their tails off. They're doing about half the inventory right now in the Denver market from a reconditioning perspective for us, which obviously lightens our load, overhead, that kind of thing. So slowly but surely they're going to grow with us in the Carolinas and they're going to grow with us in Texas. We've got plans, they've already made investments in – I don't want to put words in their mouth. But I think they've made investments in San Antonio, Dallas and South Carolina. So they're following right along with us. And we're going to continue to recondition cars as well. Right now what we're seeing is is we've got such a demand, our business is growing cyclically, it's taking both companies to really keep up for the number of stores that we have. And so hopefully as we move forward over the years here, Manheim will assume 100% of that and we'll be out of the reconditioning and refurbishment business moving forward. But a little hybrid model between now and then as they get ramped up and we teach them some things and they teach us some things and we work together to accomplish that goal.

And are the economics better with the Manheim relationship? B. Scott Smith - Chief Executive Officer, President & Director: Certainly they will be because we don't have to build the facility to recondition cars, we don't have to have the buying team, we don't have to have all the technicians, all the staff, everything you have, so the economics will be significantly better when we get to the end of that role.

Great. Thanks. And good luck. B. Scott Smith - Chief Executive Officer, President & Director: Thanks a lot.

Your next question comes from the line of Patrick Archambault with Goldman Sachs. B. Scott Smith - Chief Executive Officer, President & Director: Hey, Patrick. Patrick Archambault - Goldman Sachs & Co.: Hey. Good morning. Thanks for taking my questions. So I just wanted clarification on the stop sale. You have some good information in slide 34, where you say I think it's like 11 days of your 46 days of used inventory have some kind of a stop sale on it, so about 24%. Can you just update us, have you guys gotten all the VIN numbers from NHTSA and identified all the inventory that is likely to be identified under this last wave of Takata recalls or is that a number that could creep up? B. Scott Smith - Chief Executive Officer, President & Director: Well, I mean, certainly it's a number that could creep up as you take in trades and everything. But we've got all the information that we have on the inventory that we currently have on the ground today. Now it's a waiting game to get the airbags and the replacement parts, get the cars in the shop and get them out without destroying your customer pay, availability of hours and your warranty availability of hours and your recon availability of hours. So you've really got to be careful in how you balance that and get those cars through the shop as quickly as you can. That's why we're doing extended hours and things like that so that we can get those vehicles in as the airbags come into us or the available parts come into us. Patrick Archambault - Goldman Sachs & Co.: Yeah. And that actually dovetails into my next question, I guess there's two parts to it. What you said about P&S being impacted by margin, was that kind of a Takata recall issue? Because I think you guys had said previously that maybe it was like $100 of gross profit on a $300 job which is obviously lower than what you're used to. So I guess that would be question number one. And question number two, I guess that would imply that parts of inflators are starting to become available. And maybe we can talk about what's the impact of that is positive. So maybe just help us kind of frame that. B. Scott Smith - Chief Executive Officer, President & Director: Yeah. I mean, so, look, the manufacturer is not paying you a ton of money to switch those things out. And we totally understand there's so many cars, you could break them, too. So this is a total investment on both the retailer side and the manufacturer side. So we're getting the parts in. There is a flow of parts coming in. There's no question. We're trying to take care of our customers that need parts plus the inventory that we have on the ground. We probably have 4,200 or 4,300 pre-owned cars sitting out there, and predominately those are BMW and Honda for us. And so it's a mixed bag. I mean, we're working very hard to get the cars out on to the front line so we can reduce that extra 11-day supply that's sitting there. And it's affecting our volume. I mean, if you think about it, BMW 3 Series, we sell more 3 Series than just about anybody and it's certainly by far the number one volume vehicle for us followed by Honda Accord. And both of those cars have been decimated by the airbag recall. So that certainly hurt our business. And we're working hard to overcome that. So, mix plays a role in all this as well because if you don't have a bunch of Hondas versus a bunch of BMWs, your used car business would be just fine.

Another point of that that we would talk about is so you also got additional floor plan expense as we continue to floor these stop sales. So that's another impact that can be a positive once we get these things flowing through again. Patrick Archambault - Goldman Sachs & Co.: And has there been an impact on – one of things one has to wonder is, is there an impact on unused prices because obviously there's all these models that can't be sold, right, like tens of millions of them quite frankly, right. So unless somebody wants to sit and wait, right, they kind of have to buy another car, right. So is that putting upward pressure on used prices for other vehicles that aren't effective? B. Scott Smith - Chief Executive Officer, President & Director: You would – logically that's what you would think would happen. We've not really seen that yet, and then the cars that we've wholesaled, you know, that we've either fixed and wholesaled, because we've got too many, they've been bringing good money. So I think this is just a matter of – you know, the cars are not being depreciated at a huge vast amount, it's the same cars, it's just switch out of a part, right. Once that happens and we get past kind of the flood of inventory that we have I think everything really returns to normal. The pricing has not been overly impacted by this. Now we've gotten a little more aggressive because our days supplies were higher when you include the air bags, and we – when we – or we normally used too, you know, Sonic runs at a 32 days supply on a typical basis; I think, we are running at 34 days supply now. We're trying to carry some of the unaffected inventory. We're trying to ramp that up a little bit, so we have inventories at retail, but it's just a – it's a hell of a balancing act and for the companies that are larger companies, the AutoNation and the Group 1s and those of the world, and they – especially if they have this brand mix, they got to be battling that and carrying that inventory. It's going to plague us here, until we get all the parts done and hopefully by the end of the year, we'll be – we'll push through all this and put it behind us. Patrick Archambault - Goldman Sachs & Co.: Okay. Yeah. I mean that's a timeframe that's much more – I mean, you know, and you guys, so that's why I'm interested, because you guys see this stuff actually coming in. I know that's the timeframe for fixing all this is sort of stretches well into kind of the end of next year, right? B. Scott Smith - Chief Executive Officer, President & Director: Yeah. It's going to take a while but what you – what we saw happening is I mean really from about the beginning of year where we had on pre-owned on the ground maybe 500 cars, it got up to 5,000 cars in five months, right. And we were like, oh my god, you know, if this flood keeps happening we're going to have 25,000 cars here faster than we can snap. And so it has begun to slow down a little bit, I mean, we're not seeing – we're not seeing – in another words, we're not seeing that we're going to go 6,000, 7,000, 8,000, 9,000, 10,000 cars unless there is – there's all kinds of talk about all these millions of more cars that have recalls coming, that's unforeseen, right. So we'll see kind of what happens as we move forward, but you know right now there's a little bit of lull on the action in terms of incoming, and we're working very hard to get their cars that we have on the ground out in retail. Patrick Archambault - Goldman Sachs & Co.: Got it. All right, cool. Thanks for talking us through that. Thank you. B. Scott Smith - Chief Executive Officer, President & Director: You bet.

Your next question comes the line of Tony Cristello with BB&T Capital Markets. Anthony F. Cristello - BB&T Capital Markets: Thank you. Good morning. B. Scott Smith - Chief Executive Officer, President & Director: Good morning.

Good morning. Anthony F. Cristello - BB&T Capital Markets: First question I want to talk a little bit more about is on the parts and service side of the business. It was certainly impacted a little bit this quarter, you talked about warranty, and it seems like last year you also had a third quarter perhaps that had some strong warranty business in it as well. So, the trends that we saw this quarter should we expect that for sort of the second half of the year, would you get a stronger perhaps customer pay and a little bit less on the warranty side? B. Scott Smith - Chief Executive Officer, President & Director: Well, here's the deal. Last year in Q2 and in Q3, we had this huge BMW – we did a fantastic job of it too. We had a huge BMW engine recall, right. And we did a lot of heavy warranty work there and with BMW and the percent of business that it is of Sonic, it made warranty a lot higher. Warranties now sort of – it's still high, but it's just sort of leveled back in at its normal run rate from what that was. So, I would tell you that I would look sequentially versus year-over-year here for a couple of quarter because you are going to – because we're outrunning that BMW deal. And I expect customer pay continue to stay strong for us and solid. We're going to be faced with shorter days in the third quarter, but I expect fourth quarter to come right back and be at the same type of performance that we've been having. There's nothing. Our head count is still really strong. All the basic principles that we put in place sort of first quarter last year, fourth quarter the year before that have been driving our fixed business are there, and just fighting a little warranty battle there on a year-over-year comparative. Anthony F. Cristello - BB&T Capital Markets: And if you think about the customer pay dynamic, if let's say you get more of it, the recall parts available for those type of repairs, is it just simply then less available bay space, if you will, to take a customer pay order? So will there be some fluctuation once you have this recall parts back in stock that you may see some swings? B. Scott Smith - Chief Executive Officer, President & Director: Well, we were a little overzealous last kind of 2014 Q4 as we started digging into all this and started using up our hours on that. We are a hell of a lot more mature today than we were back then, and to be quite honest with you. So, we won't let customer pay hours be affected by that, we'll move hours into the evening hours, we'll add rotations where we need to in order to make that happen, so that we don't affect our customer pay business. That – it's something that happened in the very beginning, and to be quite honest with you, we've been working with a lot of our manufacturer partners, educating them on some of the things that we think we did wrong to begin with, so that they don't ask us to do things like 650 customer cars a day on average or something like that, where the shop hours just can't handle it and you really destroy your CP business. So, I think, we're much more educated and ready to handle that, and we won't have the kind of issues that we had way back then when this all started. Anthony F. Cristello - BB&T Capital Markets: Okay. And then maybe one last question, if you think about maybe used being impacted a little bit by the various topics you thoroughly discussed, if we think about used and CPO, and the strength that those should have down the road as things normalize, what is ultimately the impact on the F&I side with respect to growth, and then margin and should we realize any meaningful difference than what we're seeing today? B. Scott Smith - Chief Executive Officer, President & Director: I think that the overall impact is we're going to sell more cars once these cars get handled, and we're going to ultimately drive a lot more growth, right. So we're going to have an – and if you think about it, we're – we've got a bunch of BMW 3 Series and Honda Ford sitting on the ground today. Those are our bread and butter cars. Those are the ones that Sonic Automotive knows how to – and I can't answer for everybody else, but that's what we know how to sell extremely well. So as those cars become available, it's like a candy store, we'll have them and away we go and that's going to positively impact F&I. And then our F&I performance just continue to just kind of get better and better and better over the last six quarters or seven quarters, as you can see from a PR perspective, so when we combine those two things there should be a little pot of gold at the end of the rainbow so to speak. Anthony F. Cristello - BB&T Capital Markets: Okay. Very good. Thank you for your time. B. Scott Smith - Chief Executive Officer, President & Director: You bet.

Your next question comes from the line of Mike Montani with Evercore ISI. B. Scott Smith - Chief Executive Officer, President & Director: Hi, Mike.

Mike, you may proceed with your question. We'll proceed to the next...

Hey, guys, could you hear me?

Mike, you're there?

I am. Can you hear me?

Go ahead, sir. B. Scott Smith - Chief Executive Officer, President & Director: Yes.

Great. Sorry about that. I just wanted to ask on the used car comp trend, guys, have been running steady mid-single digits, and then obviously turned to down low-singles, would you attribute that basically to Takata? And then how should we think about the cadence moving forward? B. Scott Smith - Chief Executive Officer, President & Director: Yeah, 100%, for us like I said earlier our unaffected volume – unaffected unit volume was up about 8%, so cars that we worked that were not affected by the airbag, you know, that's mid-to-upper single-digit growth and that's, kind of, what we're used to. And I think you're used to from us at Sonic, for us to have a down trend for a quarter is a little bit unusual. And – but the affected units were down about 48%. So I think we're going to be dealing with this, although we are getting a little more aggressive in our pricing to help try to blow some of the inventory out. We're going to be dealing with a little bit of this as we move forward. I think, we'll take the brunt of that in the third quarter, and then hopefully as the fourth quarter moves on it'll be cleaned up and we'll be in the good shape as we move into 2017.

Got it. And if I could on credit availability, can you just talk about on the new and used side how available is credit from your lending partners and also as it relates to subprime? B. Scott Smith - Chief Executive Officer, President & Director: Yeah, it's fine. It's great. There's not – there is no issue there whatsoever. Our lending partners have been fantastic, in particular on the EchoPark side and – yeah, we have no issues. We don't do a ton of subprime business at the company, it's not a part of the industry that we really chase after a lot. But at the end of the day the credit availability is there and we don't have any issues.

And then last one if I could, just on One Sonic initiative can you just talk about maybe latest thinking there as it relates to also single price point selling and just some incremental granularity; I know, you've rolled out to incremental markets, but just in the process itself where do you stand right now with that? B. Scott Smith - Chief Executive Officer, President & Director: Yeah so, just to be clear, we've not rolled out One – the only place that we have one price is in the Carolinas in Charlotte. The other markets we just rolled the CRM tool, our appraisal and desking tool in our guest management system. So the one price wouldn't come along until we finalize our new car pricing tool. We're hoping that's sometime year end or Q1, we'll see kind of how that goes, but we're not – we're pricing centrally and doing all of that in the Charlotte market only. The rest of that is being handled by the stores and they traditionally price in all our other markets other than EchoPark, which is one price. And then we price centrally on pre-owned across the entire country and have been doing that for a while. We set the initial price at the home office. So we'll see. Our markets here is solid. Our Charlotte stores have improved greatly. We had a really nice year-over-year profit, pick up increase and we should, we're comping against lighter results just from the rollout last year. But we're making nice progress and if you lead the guests as your sort of guiding light and you listen to what they're telling you about the experience that you're delivering, you do this every day and twice on Sundays, right, they are just – they are glowing about the experience that they're getting and so we're working our way through the technical road bumps that we have, and we're getting One Sonic rolled out as quickly as we can, but it's got to be effective and efficient.

Okay. Thank you.

Your next question comes from the line of Bret Jordan with Jefferies.

Hey, good morning, guys. B. Scott Smith - Chief Executive Officer, President & Director: Hey, Bret. Good morning.

On the EchoPark service side, I think you were saying earlier you are kind of splitting that volume or the refurbish with Manheim and that your service bays are pretty full. Are you not offering customer pay service in EchoPark yet?

We definitely are. We're just not marketing it. I mean, we're not out there running huge promotions and things like that to drive a bunch of business in because that quite honestly don't have the available shop hours to handle it if they do come in. So, as we keep ramping up our volume, we're seeing nice volume growth. It's taking up more and more shop hours and that's why – but we've reduced the number of – just so you know, we've reduced the number of head count on the EchoPark side in that marketplace and Manheim's increased their head count. So we're really trying to – we're in the middle of kind of shifting as they take on more responsibility and they learn. They've got to produce a lot more cars than they're producing today and they're working on that. We've got a team that meets every week, we have a call. And we're working diligently to get that through. But we're just kind of moving through a transition as they learn and grow. And so now we're not out there pushing CP yet. That would be a mistake on our part. We'd upset customers and our whole EchoPark is about guest experience. So we've got to make sure that we're prepared for that when we do start advertising and marketing.

But when do you think that might be? I mean, I guess as you look at the transition to Manheim for the refurb, is that something that could be first half of 2017? When can we see what the CP traction is?

Yeah, that's a great question and it's a question I ask every day. I don't think so. We'll see. We're taking a wait-and-see on how the EchoPark stores are doing from a profit perspective and now we're starting to turn profit. So we want to speed up, speed the market, and we're going to roll out more stores. And so Manheim's got to keep up with that. I'm hoping that they'll be able transition both the Texas market and the Carolina market faster than they did Denver. Maybe by the middle of next year Denver market will be handling all of it. But that's yet to be seen. We've still got work to do there.

Okay. And then one question. I think maybe Heath mentioned that you were talking about floor plan being a little bit of a headwind as you accumulate the stop sale inventory. It's my understanding that a lot of the OEs are subsidizing the floor plan and the depreciation. Is that something they're not paying you until after you clear the inventory?

Yeah, we're not realizing those dollars until we clear the inventory. Heath R. Byrd - Chief Financial Officer & Executive Vice President: Until you sell the car.

Yeah. So, we have not been taking in dollars until we sell the cars. So there's some dollars out there and available to us as soon as we – and some incentive, as soon as we got those cars cleared.

Okay. Great. Thank you.

Your next question comes from the line of Irina Hodakovsky with KeyBanc.

Good morning, everyone. Thank you for taking my question. I wanted to ask you two things. So the first one is just your guidance. You basically trimmed the guidance at the upper end by about $0.05. Wondering where are you more bearish in terms of your outlook? Heath R. Byrd - Chief Financial Officer & Executive Vice President: Well, one of the issues that Jeff mentioned is we've got less days in Q3 in service. And right there each day is $3.48 million (49:45). So obviously that's going to affect our EPS. And as we work through these stop sales and especially in the used car area, it's going to affect our third quarter.

Great. Thank you. And then on that subject, BMW specifically, we've been hearing that there's a large inflow of off-lease vehicles. We were expecting these to come in. And just wondering are you seeing this? Is it a good or a bad thing from your perspective? Is it helping? These are off-lease vehicles, so theoretically these people are replacing them with new leases, this should be driving new vehicle volume. But then is it creating too much inventory? What are you seeing and how is it impacting you?

Yeah, so our friends at BMW are working their butts off to align their inventories and prepare for a new model year and with the slowdown for BMW in particular in Texas, it's created a wave of cars. So you have off-lease cars coming in, we have the airbag issue and the overall inventory issue. So we're in a bit of a perfect storm with the brand right now and particularly in some markets. And so that's a short-term issue. It's something that we'll overcome, but certainly something we've been battling here for a good part of the year and we're going to battle into the third quarter. No question.

So you expect this will persist through the third quarter at least?

Oh, yeah. Yeah, definitely. It's probably going to persist through the end of the year, but should be getting better as we move through the end of the year. And that's why we're giving this guidance because the fourth quarter for us is always just so darn strong and it's driven a lot by BMW. And our big BMW stores really hit on all cylinders in December and we blow out a lot of inventory. So that's held true for 10 straight years and we're hoping it's going to hold true for another year this year.

Great. Thank you very much. Appreciate that.

You bet.

Your next question comes from the line of Bill Armstrong with C.L. King & Associates. B. Scott Smith - Chief Executive Officer, President & Director: Hey, Bill.

Hey, Bill. William R. Armstrong - C.L. King & Associates, Inc.: Good morning, everyone. So on the new car side, your gross profit per unit had a nice increase. I was wondering if you could discuss the drivers there. And also in terms of, especially in the luxury side, availability of SUVs versus sedans where, obviously, consumer demand is skewing towards the SUVs. I was wondering if you could discuss any recent trends there.

Yeah, sure. Our Honda margin remains pretty darn strong and our high-line margin in particular really for Mercedes-Benz, BMW, and Lexus is strong for us, so that's what's driving it. It's such a large portion of our business. And if BMW and Mercedes are good, our margins are going to be up. And that's exactly what's happened. And then I'll take all the high-line luxury SUVs I can get my hands on. We'd sell them all. They're short there. and with gas prices are being low, it's going to drive that. Manufacturers are retooling as fast as they can to get us inventory. Certainly it's improving a bit, but it could improve a whole lot more. William R. Armstrong - C.L. King & Associates, Inc.: So you are beginning to see a little bit of improvement from the OEMs on that?

Yeah, we are. They're certain model lines, the Macan and things like that, that you just can't get your hands on that we're all waiting for. But there's been some improvement and I expect that to continue to get better. The manufacturer began shipping a few quarters ago, and as gas prices dropped off and with oil looking like it's settling in the $40 to $50 range, we're going to continue to see that opportunity and sell trucks and SUVs across the board. William R. Armstrong - C.L. King & Associates, Inc.: Got it. Okay. And sorry for not quite getting this, but why is it that you have three fewer days in Q3 versus last year for service?

So the way that – and I'm just speaking for us, right. I don't know how everybody measures their service days, but for us we had 23 fixed days last year versus 20 this year and it has to do with the way that June ends. The July 4 fell on a Sunday versus a Monday, because we don't count that holiday and the way August starts. So we have three less fixed days the way we measure the business and that's going to certainly play a role in our overall gross from a fixed perspective and we'll bust our butts. We pick up a day in August and were flat year-over-year in September, I think. So we'll bust our tails for the remainder of the quarter to catch up, but this is just going to be very difficult to catch that up. William R. Armstrong - C.L. King & Associates, Inc.: So, the service departments are closed on Sundays and so are they also closed on Labor Day and on July 4?

We've got a handful that open, but yes, the majority of the stores aren't. William R. Armstrong - C.L. King & Associates, Inc.: Got it. Okay. Thank you.

Your next question comes from the line of Mike Montani with Evercore ISI.

Hey, guys. Thanks for the follow up. Just wanted to ask on the days sales outstanding on new was a material improvement there. How are you able to work that out with the cancellations, et cetera, there? And then secondly GPUs have stabilized nicely here. So are we looking for kind of 1,900 full-year type levels or can you just expand on those two points?

Yes, sure. We've been telling you since late fourth quarter, October, November in fourth quarter last year that we expected seeing an uptick in new car inventory just because all the inventories are out there and we want to work with our manufacturer partners to help relieve those inventories. But we began February and March really tightening down new car inventory levels in particular brands, and as a result our inventories dropping and we expect it to continue to drop. And as your inventory gets in better shape, your margins go up. And so, I don't see any major shifts in where our margin is today versus what it should be in Q3. A lot of it depends on our BMW/Honda mix and how that plays out overall and what kind of volume we do with those brands. So we'll see as we move forward, but certainly it has stabilized.

Okay. Thank you.

At this time, there are no additional questions. B. Scott Smith - Chief Executive Officer, President & Director: All right. Well, ladies and gentlemen, thank you so much for joining us today. We look forward to speaking with you on our next earnings call. Have a great day.

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