Good morning and welcome to the Sonic Automotive Fourth Quarter 2016 Earnings Conference Call. This conference call is being recorded today, Tuesday, February 21, 2017. Presentation materials which management will be reviewing on the conference call can be accessed at the company's website at www.sonicautomotive.com by clicking on Our Company then Investor Relations then Webcasts & Presentations. At this time, I would like to refer to the Safe Harbor statement under the Private Securities and Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectations about the company's products or markets or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission. I would now like to introduce Mr. Scott Smith, Co-Founder and CEO of Sonic Automotive. Mr. Smith, you may begin your conference.

Thank you. Well, good morning, everyone. 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 earlier this morning and I'll provide some brief comments and then we'll turn the call over for your questions. For the quarter, we generated $0.84 from continuing operations on a GAAP basis and $0.66 per share on an adjusted basis. These results contribute to annual results from continuing operations of $2.06 per share on a GAAP basis and $2.01 per share on an adjusted basis. Please see our earnings release for a discussion on the non-GAAP adjustments in the quarter. In 2016, we also continued to return capital to our shareholders. In addition to our dividend declaration during the quarter of $0.05 per share, we invested approximately $2.5 million in share repurchase to repurchase 147,000 shares at an average price of $16.90 per share, bringing the total year-to-date investment to $100 million for 5.6 million shares at an average price of $17.89 per share. This represents significant level of capital return to our shareholders. Combined with dividends, we returned approximately $109 million to our shareholders in 2016. In addition, subsequent to year-end, our board of directors increased our outstanding share repurchase authorization by $100 million, giving us a total of $145 million of authorization going forward in 2017. We will continue to evaluate our repurchase program as we identify windows of opportunity to reduce our share count and enhance shareholder value. The rollout of OSOE, One Sonic-One Experience, technology continued in our Birmingham, Chattanooga and Los Angeles markets during the quarter and we plan to roll the program out to our first BMW store in the…

Our first question will come from the line of Rick Nelson with Stephens. Please go ahead.

All right. Thanks a lot. Good morning, guys.

Hey, Rick.

Morning.

The press release referenced a strong December performance and I'm curious you talked on the Houston market if that's starting to turn the corner.

Hey, Rick. It's Jeff Dyke. Houston certainly isn't – throughout the entire year last year, it sort of dropped. And I would tell you that it's flattened out towards the end of the year. And I want to see – I want to go to the end of March this year before I can really tell you for certain that it's really flat. We don't see it dropping like it was dropping, but certainly Houston played a big role in the month of December for us just because of our brand mix there and the number of stores we have there. We sold a lot of cars, made a lot of money in that market during December.

Okay. The inventory situation, 60 days down from 77 days, I guess, from the first quarter. If you could comment there, where you think you are from an inventory – from the quality of the inventory as we head into the next year.

Yes, I mean, our inventory's in good shape. We're getting all the Takata cars out, which is really good. Obviously, we've got actually less cars on the ground in January than we did in December just because of the big sales rate, but our days supply is a little higher just because the sales rate in January is slower than what it was in December. But overall, our inventories on both new and used is in good shape. We could always use more sport utility vehicles, they're retooling as quickly as they can from a manufacturer's perspective, but I have no problem where we are on inventory. We're in good shape and Takata's becoming a thing of the past or it won't be at the level that it was in 2016, so we feel good about that and I feel good about where our inventory is.

Okay. Great. Thanks for that color. Also on EchoPark, I know you set up a separate buying organization for EchoPark. Does that preclude you from sourcing off-lease cars through the dealer network?

No, no. We can source inventory through the dealer network, no problem. There's so much inventory out there right now, Rick, that it's just not a problem to source inventory. And at EchoPark now we're selling off a lot, and this is a January number, February number, but we're 34%, 35%, 36% of our cars now are cars that we either traded for or purchased off the street. That's been gradually growing every quarter for us, and our goal is to get that up over 50%. So plenty of inventory out there for us. We don't do a lot of piggy-backing off of the Sonic dealerships to get inventories. As a matter of fact, we really haven't done any, but it doesn't mean that we couldn't. We can certainly do that if we need to open up and buy cars from that resource.

Because the GPU at EchoPark, $1,162, I noticed the consolidated same-store used GPU $1,341. That disparity – is that because of sourcing out of auction versus retail and you expect that gap to narrow? Or any color, that would be helpful.

Yeah, a few things there. One, we buy a lot of inventory outside of Colorado and ship it in, so that adds cost to it. We expect our margins to improve when we move to Texas, maybe by $150 a car or so. But the rule is – I mean you go and you buy cars at auction and you're buying 50%, 60% of your cars at auction, your margins are going to be tighter than it would be if you're trading for the number of cars. And we trade for about six out of every 10 cars that we look at, at the Sonic store. So our margins are just a little better. But really our pricing system is dictating the PUR. And what we're really looking for is the balance between the volume and the PUR, so we generate the most gross that we can, because that's what you take to the bank. Doesn't matter if you PUR is $1,300 or $1,100 or $1,700. As long as you mix it with the right volume so you generate the most gross dollars and that's what our system is doing. Just remember at EchoPark, we price 100% electronically. So you don't have an individual sitting down there. You have algorithms that are pricing that inventory for us. And I would expect those margins to move around all year long. Our margins in February are actually better than they were in December and January. So that's just the system doing that. And as inventory goes up based on what we trade for and what we purchase off the street, I would expect our margins to go up.

Great. Thanks a lot for that color and good luck.

Thank you very much.

Thank you

Your next question will come from the line of Mike Montani with Evercore ISI. Please go ahead.

Hey, guys. Good morning. Thanks for taking the question.

Good morning.

Hey, Mike.

I just wanted to ask if I could, there was a reference to the Houston economy improving and I guess I'm just wondering if you could comment a little bit about the improvement you saw in December. Has that sustained here early this year in terms of sell-through? And kind of what are you referencing there in particular, just kind of commodity price or is there other things, anecdotally, you can share?

No, I mean look – this is Jeff Dyke again – what I said was that it's not dropping like it was. It certainly seemed to flatten out. It was not flat in October and November. I mean it was a tale of two cities for us in the quarter, because October and November were really soft and December was the strongest month we've ever had as a company. And in order for us to have a strong month like that, Houston had to play a role in it, because of the number of stores and the brand mix that we have there. But 2017's kind of starting off like fourth quarter started off. It's soft in January and February and Houston's playing a role in that, no question, picking up a little bit in volume here for us in February. March, we're expecting to have a big March, it's one of our best – probably the second best month of the year for us overall on a historical basis and so we'll see how it goes. But I would not say or coin the phrase at all that Houston's economy is improving. I would just tell you that it's flattened out and is not on the steady decline like it was.

Okay. Thanks for that clarification. Sorry for any confusion to it.

Yeah. Yeah.

What I wanted to ask though, in terms of the outlook a little bit for this year. The new GPU side showed some really nice stability. And I guess I'm just wondering if you can get into some of the drivers of that, either at the OEM brand level or regionally and what are you guys doing to improve that and is it sustainable.

Yeah. I mean – this is Jeff Dyke again. We're going to obviously brand – the mix of inventory that we're selling is going to help. So more sport utility vehicles bring higher margin. And then the Takata thing is becoming a little bit of the thing of the past. Both on the new and the used car side it is going to help us. So, both of those things will play a role in improving the margin. And we've been able to sort of flatten our new car margin here lately anyway, because those scenarios have been improving. Those are two things that I've talked about before there. So I think that plays a role in 2017 as we move forward. And I don't expect to see just massive gains in new car margin. I think that the margin and where it's at today is kind of be where it is. I don't think we're going to see big gains. I also don't think we're going to see a bunch of reductions. You might if you had a big, big import mix in your total group, but the Highlands store should improve and in particular for us, BMW, as we move through this year, new 5 Series out, some different things like that should help us improve incentives. We're going to continue to be aggressive from our perspective. And as long as you can balance yourself and hit those incentives, then I think you can take advantage of that. But I don't see them getting any worse. I just don't see them getting a whole bunch better.

Okay. That's helpful. And then just on the used side, I think you guys outlined a 5% increase for this year was the plan. I don't know if that was on a same-store basis for units or dollars but could you just clarify that? And then also how do you think about used vehicle gross profit dollar per unit progression?

Yeah. I mean I think used is going to be – it's the same as new, I mean, I think it's going to be in and around that $1,350 range. It's sort of where we've been for the last few years. I think our internals are higher than that in terms of our budget for 2017, at least our volume.

We're actually – guys, this is Heath Byrd – we're actually budgeting between the high single digits growth in used car in volume and a modest increase in GPU.

And so remember that includes EchoPark in that number. And we expect EchoPark just to continue to roll as it did in 2016. And as we begin to open some new stores, with the store opening in Colorado Springs and then stores in the fourth quarter in Texas this year.

Okay. And then is there anything you can share on CPO? Like is that growing just proportionately quickly and does that actually raise GPU as well on the used side or can you help context it there?

Look, I mean, certified pre-owned runs about a third of our business overall and I don't expect that to change. It's going to be somewhere in that 30% range. I think we grew it 10% for the year last year and maybe 9% for the quarter. So I expect that to be in the same ballpark and have the same effect on GPU that it did last year.

And I guess if I can sneak in one last one, but just in terms of the cost side, throughout most of the retailers that we cover, we've been hearing a lot about wage pressure that doesn't seem to subside too much this year. Can you guys just talk a little bit about what are you seeing, basically, in terms of hourly wage rates at the dealership? And do you feel there's initiatives you have underway, centralization, et cetera, to be able to manage that?

Well, for my own edification, if we could get the government out of our wage management, that would be a fantastic deal. But look, I think there's a couple of segments here that you have to look at. Millennials, you've got to hire and pay differently; more salary-oriented. But I don't see wages – I mean, it's a competitive market. It was a competitive market last year; it was a competitive market the year before. In the states that are pushing minimum wage up and putting a lot of pressure on us to change pay plans and the way that we pay, yeah, there could be some wage increase there. But I think we're fairly resilient in how we manage that. A lot of our stores have moved to flats per car or salaries anyway. EchoPark's totally a salaried dealership group. All of our One Sonic stores are salaried. So our compensation's very predictable when it's like that. And I think there's some competition out there to hire the right people, in particular around technicians, and so that becomes expensive. And I expect us to hire somewhere in the 200 to 250-technician head count this year to keep up with the demand that we have, but – and turnover when you add that all together. But I don't see it being any different than last year. I think that wages are competitive and they always have been.

Thanks for that context. I'll just jump back in the queue if there's other questions. Thank you.

Thank you, Mike.

Your next question comes from the line of Bill Armstrong with C.L. King & Associates. Please go ahead. William R. Armstrong - C.L. King & Associates, Inc.: Good morning, everyone. So in your press release, you referenced BMW and a couple of other brands where you outpaced industry units. In your last conference call, you had talked about the BMW stair-step targets that you thought you were very confident that you could hit those. I was wondering if you could just tell us how you did in the quarter against BMW's stair-step targets and if you were able to maybe capture a little margin there.

Oh, yeah. We hit every number that we could possibly hit with them. As you know, they're a third of our profitability, and we would have never had the quarter that we had without hitting those numbers with BMW. So we maxed out all the stair-step programs across the board for BMW. So from a BMW perspective and margin perspective, a very, very good month in December, which – they sort of wrapped in October and November if you kind of got paid back on cars, if you hit certain levels all the way through the quarter. So very, very positive into the year with that brand. William R. Armstrong - C.L. King & Associates, Inc.: Okay. That's great. And then on the parts and service you had a 4.2% same-store decline in customer pay. Is that getting squeezed out a little bit by warranty, which was up pretty big or is there some other dynamic going on there?

No. That's a good question. I'm glad you caught it. There's a reclass going on there for us where we had – for example, BMW has a three-year/36,000 miles on 2017 model cars and I think a five-year/50,000 miles on 2016 and back. We had some of those – we had that – customer that was coming in really wasn't customer pay. It was warranty pointed towards customer pay. And so we started in 2016 moving all that to warranty. So that we properly classified customer pay and warranty through the different manufacturers that have those type of programs, Toyota being another one, Porsche being another one. So we made some adjustments there. As a result, I could tell you throughout 2017 and 2016, the CP and the warranty numbers on a revenue basis and a gross basis for parts and service are going to look funky. We can give you the actual numbers. And so I think Heath's got them right in front of him.

Yes. Bill, this is Heath. If you actually back out that reclass, customer pay is down about 1% and warranty is up 1.4%.

In gross.

In gross. That's correct.

And then in revenue...

Customer pay is up 1.3% and warranty is up 1%. William R. Armstrong - C.L. King & Associates, Inc.: Okay. And then you'll – and we'll continue to see that reclass cause impact in the comparisons throughout 2017?

Yes. Throughout - William R. Armstrong - C.L. King & Associates, Inc.: And then you'll anniversary it?

Correct. And then as 2018 gets here, it'll be clean. So we'll try to call that out each quarter, so we can show you kind of exactly where we are. William R. Armstrong - C.L. King & Associates, Inc.: Okay. Yeah. That would be great. All right. Thanks, guys.

And your next question will come from the line of Brett Hoselton with KeyBanc. Please go ahead.

Good morning.

Hey, Brett.

Good morning.

Just continuing around the parts and service, the overall parts and service same-store I think was up 1.5%. A lot of your peers are thinking in the range kind of in the mid-single-digit range. I'm wondering can you kind of talk a little bit about what you're seeing currently and what your outlook is. Is there anything unusual currently? And what do you think you're going to be able to grow at kind of going forward?

No. I mean, I think if you look at our fixed operations targets for 2017, we're in that same – we're in about the 5% growth range. There's a lot of noise in our numbers because of all the reclass that's being done. And so we'll have to call that out for you as we go throughout the year. I can tell you that, I said this earlier, on technician – in hiring technicians, it's really gotten competitive. I mean that's something that we're fighting with our competition set on tooth and nail to make sure that we keep our tenure and that we're hiring people into these positions. And we're also building more capacity. So we've opened several new BMW stores, a couple new Mercedes stores, and we're adding shop capacity there to help us with the number of guests that we have coming through. A little bit of a downtick that we're seeing, and we're hearing it from our competition as well, in customer pay ROs the first few weeks this year. We'll see how that goes. I don't expect that to continue. I don't know if that's – what's causing that, but we'll see. I do expect us to grow in the 5% range, though, for the year.

Okay. Thank you. And EchoPark, can you talk about some of the successes and challenges that you've seen recently. And then regarding the outlook, you're looking at a loss of $0.23 to $0.27 here this year. At what stage do you anticipate that you might see that break even?

So we've got to have – included in that $0.23 to $0.27 is our EchoPark corporate overhead, and we need about 25 stores, is our estimate right now, up and running to make that happen, and I don't see that happening until the end of 2018. We'll hopefully get seven stores open this year to add to our six stores – or, excuse me, we'll get eight stores open this year to add to our five stores that we have, so we have 13. So maybe it happens the next year, for certain, the next. We're very delighted with – the great news is, is that our original stores are – our store is profitable in Thornton. It made money for the year. We have stores that are now cash-flow positive. We're selling the volume. We think we've also sort of dialed in the right inventory mix and the number of cars that we carry on each lot. We've really been playing hard with that. Our pricing tool is working and working very well. How we have become a part of the community through a bunch of different organizations. In particular, a lot of the public school systems and things that we're doing have all been a plus. I'd tell you, if I laid it all on the table here and said, what's the biggest challenge, probably the number of cars we have to bring into the Denver market and get them reconditioned and out on the front line. The amount of time it's taking us is longer than what we're used to so we're working very hard on correcting that. But other than that, very pleased with where we are with EchoPark so far. And this is the first call that we've been able to sit back and say we've actually got a store that's profitable and we believe we've got that formula dialed in and look forward to opening up more as quickly as we can to cover the overhead that we have.

Okay. And then finally, SG&A performed better than expected at least as far as our expectations. Can you kind of talk about the primary drivers, was there anything exceptional in the quarter? And then just briefly, talk about your expectations going forward.

Yeah. This is Heath.

Heath.

We were 20 basis points better year-over-year. The improvement was in fixed comp and the majority of that was driven by our medical expense quarter-over-quarter or year-over-year. We had improvement or leverage on our variable ops as a percent of gross. And the things that were worse were we were a little bit higher on loaner, IT and real estate expense. Legal was a lot better. Do keep in mind the GAAP number does have the Volkswagen settlement of approximately $14.8 million.

Okay. Excellent. Thank you very much, gentlemen.

Thank you.

At this time there are no further questions. Ladies and gentlemen, this does conclude today's meeting. Thank you all for joining and you may now disconnect.