Good morning, and welcome to the Sonic Automotive Second Quarter 2018 Earnings Conference Call. This conference is being recorded today, Friday, July 27, 2018. 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 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 like to introduce Mr. Scott Smith, Co-Founder and CEO of Sonic Automotive. Mr. Smith, you begin your conference.

Thank you. Good morning, and welcome to Sonic Automotive's second quarter 2018 earnings call. I'm Scott Smith, the Company's Chief Executive Officer and Co-Founder. Joining me on the call today are David Smith, our Executive Vice Chairman and Chief Strategic Officer; Heath Byrd, our CFO; and Jeff Dyke, our Executive Vice President of Operations. I'll provide some brief comments, and then will turn the call over for your questions. For the second quarter 2018 we reported $0.40 per diluted share from continuing operations on a GAAP basis and $0.35 per diluted share from continuing operations on an adjusted basis. We're pleased with our performance in several areas of the business and unfortunately fell short in others. Some highlights for the quarter; second quarter record revenue and gross profit of $2.5 billion and $362.4 million respectively, are all-time record quarterly pre-owned retail unit sales of 35,779 units, all-time record quarterly F&I gross profit per retail unit of $1,572, all-time record quarterly F&I growth of $104.1 million, and especially happy with EchoPark stores, retail 7,459 units during the quarter, up 35.2% sequentially from the first quarter 2018. I'm most proud of the topline revenue growth experienced in our EchoPark stores as we continue to open new stores and our ramp up period is shortening and volumes are building at a more rapid rate. During the second quarter 2018 our EchoPark operations generated $180.2 million in revenue, retailing as I mentioned 7,459 vehicles; this represents revenue and unit growth of over 260% from the same period the previous year. Sequentially on a quarterly basis, EchoPark revenue grew 37% compared to Q1 2018. We will continue pushing EchoPark topline growth as we buildup this brand in the markets we enter. Same-store pre-owned revenue during Q2 2018 that our franchise stores also grew posting an…

[Operator Instructions] Rick Nelson from Stephens, please go ahead with your question.

If you can provide some color around this long-term compensation add-back with $23 million this quarter and only if you have something similar last quarter but it was about sizeable -- but if this is an ongoing expense, it will be adjusted or…

That was related to the acquisition that we did in the third quarter of 2017 and is not ongoing and that will be paid over the next three years but it's a onetime event that we called out because it was related to that acquisition in Q3 of '17.

And Jeff or Scott, any color around the early learning's, I know you're pushing that driverselect strategy into the EchoPark stores; how that's being integrated?

The integration is complete, we sort of combined the two cultures. We took all of the technology and everything that's going on in EchoPark and combine it with the inventory and the pricing at driverselect and look at the quarter. We actually were profitable in the month of June, we made over $1 million profit in those seven locations and we're tracking better than that this month. And like I said on the last call, we expect to be enterprise profitable in the fourth quarter, we're selling a bunch of cars and it's really quick and so we're having a lot of fun. And if you look at the topline revenue growth that Scott mentioned earlier, I think it was 267% growth on a year-over-year basis and I think the volume was 264 or something like that, it's just has been fantastic. The transition has gone well, that's all complete, now it's maximized the volume and the profit in stores that we have and then we get San Antonio, we get Houston, and we get Charlotte opened all this year and then we'll focus on the additional markets next year. So we're excited with where we are with EchoPark.

Just to be clear, we've got a total of four EchoPark stores that we expect to open by the end of next year. And Steve Haul [ph], who is -- he came to us in the driverselect deal and it's been -- just wonderful member of our team now. He kind of phrased it interestingly, he said the driverselect model saves customers thousands, not hundreds; and the EchoPark model saves the customer hours in the transaction; and so we've been very successful in combining the two cultures to save the customers hours and thousands, and when we look at the slope of what we're enjoying coming out of EchoPark and driverselect and how much we've been able to increase their business as well, it's been a very good marriage and -- we're actually having a lot of fun growing this business.

Can you -- as Scott said [ph], purchase products or the economics around driverselect?

No Rick, that's not something that we're going to share.

The $1.90 to $2 guidance -- what does that now assume for EchoPark losses like $0.15 for the year-to-date?

Yes, that's right. And then we expect the enterprise to be profitable next year. I think early forecast are in the $20 million -- some odd million range of profitability moving forward, something like that, I don't know, it's in the $15 million range.

It's $15 million in 2019 and it was around $15 million for…

So it's a $30 million swing I think, give or take $1 million year-over-year between now and the end of next year.

And you said those stores are now profitable?

Yes.

As a group?

Yes, at the store level, yes, they are profitable as a group. As a matter of fact, five out of those seven stores made money last month in their -- all tracking make money this month, other ones just kind of right on the borderline. The store level profit was $1.4 million -- the store level profit was $1,025,000 for the month of June and tracking better than that in July. So we could finally say the stores at EchoPark are profitable and that's within our timeline and guided range when we first opened EchoPark and we're very excited because the volume is just -- it's going crazy.

So the corporate costs there will produce a lot in Q3 and then…

That's correct.

And that criteria in Q4 for profit?

That's correct.

Bret Jordan from Jefferies. Please go ahead with your question.

To your comments and the prepared remarks maybe we could get some more detail as to what was going out of BMW and Honda in the quarter?

Look, at Honda it's all about the Accord and like of incentives on the Accord there, anywhere from $1,200 to $2,000 -- and we sold 3,000 Honda's a month and margins were off $250 to $300 a car, it costs us about $1 million a month in the Honda store, so that's big deal when you look at EPS. And then BMW's incentives is a mix of incentives on certain products that are coming in. It's not just that BMW has a lot of incentive dollars out there, it's the mix of those dollars and how they are arriving at the store and that cost us in the quarter about $575 to $600 a car, and given the size of BMW and Honda's as a percentage of our portfolio, it's 30% of our store mix and 40% of our profit. Those dollars are largely overcome when it comes to an EPS basis, so it's not that we're selling less cars, we hit all of our projections in terms of BMW volume, we haven't missed the BMW number in two years. So we don't miss those numbers in terms of volume, it's all coming on the margin side and as a result, it made for a difficult quarter. And while the early returns in July are a little better than -- but I still anticipate a difficult margin quarter for Honda and BMW in Q3. I think Honda's incentives will lighten up as we move towards the end of the year and I believe that the new product is being launched for BMW and particularly X7, and our markets are going to -- and our big BMW stores at Texas and so forth will enjoy some heavy margin and volume from this product line, so that's going to help. So we expect Q4 to be better for us in terms of margin, everything else has clicked along in all the other brands, those are the two big brands with the two big hits.

I think it's really important to note when Jeff was talking about the mix and margin; the big miss for us was the factory to dealer incentives. There is terms of customer incentives that are out there but the margin that we're getting squeezed on the most is coming from the lack of the factory to dealer incentives, that's why our topline was there and we're so making decent growth at retail but for similar growth but we don't have the factory incentives to the dealer.

And then a question on EchoPark, I think a year or so ago you were talking about thinking you had critical mass when you were 25 stores up. Now that you've got seven stores and they are turning profitable, is that number lower now just given the fact that you're outperforming your expectations?

We changed the -- as we've learned, right, we've made some adjustments, the adjustments is lower that our stores -- we're not building as many stores, we're just building stores or so and heck of a lot more cars. Our store in Dallas is doing 1,200 to 1,300 cars a month, we're dealing over a 1,000 cars now out of the Denver market on a monthly basis; so in the San Antonio market it's catching on par market [ph] -- that's in the 500 to 600 car month range now, we've just been up in few months there. So we don't need as many stores and as a result we're signing more volume first store and the stores are profitable, and some of them loudly profitable. So it's exciting for us and exciting time and we will systematically grow the business as it gets profitable, we're not going to go out and just throw a bunch of stores out there and eat up a bunch of profitability, we're going to do this wisely, methodically, profitably and we've cracked the code, we know what we are, and we're in full control of it. So it's a lot of fun, we've worked for a long time, some of us careers were to get to this point and we're going to enjoy, these next few years are going to be a lot of fun growing EchoPark.

How big is this version? You said some of them are wildly profitable; of the five of the seven that made money last month, is there a big -- I mean, it sounds like there is a fairly big spread between the top of the five and the bottom of the five?

Yes, there could be $1 million spread but any time you get a store that's making $0.5 million, $750,000 or $1 million a month or more, you start comparing that around the country to some of the new car dealerships and I promise you you're going to have -- you're going to find it hard to find them.

John Murphy [ph] from Bank of America. Please go ahead with your question.

So my first question is on F&I; it was obviously pretty strong this quarter and I was wondering whether you can talk about what was driving that and what do you guys think, that's sustainable?

Absolutely, it's sustainable. Look, the relationship between JM&A and Sonic Automotive is really paying off, our F&I numbers at EchoPark were fantastic, and we're executing our playbook process and we've just done a really, really good job. Our working penetration is gaining speed in the mid-40% range now and at EchoPark closer to 50%. So yes, it's sustainable and we just keep executing, we keep growing, our F&I team is doing a fantastic job.

So in terms of FI PVR, do you think -- I think you pushed at $14.80 this quarter on a same-store basis, so do you think that's kind of the upper limit or could it be potentially higher?

We think it can go higher, for sure.

So another question just on the used business; again, you had pretty strong sales growth this quarter but you gave up some margin on the GPU basis. So can you maybe talk about what was driving that weakness and was it the function of supply-demand imbalance or maybe increased competition or maybe something else?

To be honest with you, we really don't look at GPU, we look at the total gross dollars that we generate between F&I and the front-end of the car, and we find the sweet-spot there; so we've done a good job of getting our inventory straight, our day supply runs 28 to 29 days on the Sonic side. And so when we get right into that 28-29 day supply range, that's when we see we're generating the most gross dollars and that could be a $1,300 or $1,400 a car combined with a great F&I number at $1,400 or $1,500 a car, so we're really looking at the total gross dollars that we generate and that GPU could fluctuate up or down. I kind of like it to be in the $1,300 to $1,400 range because I think that's where we get the most gross dollars and maximize the volume, and our guys just did a super super job this quarter and it's starting out again that way in Q3. So we're very excited where our used car business is on the Sonic side as well, they are both really doing well, EchoPark and Sonic from a used perspective; so I appreciate the question.

And then last question from me on the P&S business, and a number of your peers have previously cited the shortage of technician is the key limiting factor in that segment, and I was wondering whether you guys see a similar kind of constraint? And if so, what kind of actions are you taking to address that?

In terms of parts and service, we had a strong customer pay in the quarter, we're up 7%. Warranty is what's really hurting us and that's coming from Lexus, Toyota and Honda in comparison to prior year. Our focus is on customer pay and not allowing warranty to take up shop hours from our technicians, and so we're doing a better job of controlling that and that's what's driving the customer pay results that we're getting. And of course as we add facilities and do things we're adding base and that's making a difference. And as we grow our used car business, the internal dollars are growing as well; so we're excited about where we are there, we're making some technology changes there that we can discuss in future quarters that we think will help our service drive perform better and make it more convenient for the consumer. And as we get those kind of things rolled out, we'll talk more about that in our future calls.

[Operator Instructions] Colin Langan from UBS. Please go ahead with your question.

Just a follow-up on parts and services; what is your outlook there? Do you think business actually start to pick up again in the second half of the year or this is kind of breakeven year-over-year on the same-store?

I do, in particular on customer pay, that's where we're driving internal is going to grow, anyway just because the pre-owned business is really rolling again. Warranty is going to come down, with huge -- all the air bag, all the stuff that went on unless there something happens more with one of the manufacturers God forbid, hopefully warranty comes down and we just did so much warranty work last year and in particular, in our Honda stores, Toyota stores that we're having a little bit of a tough time comping over that but we've got great growth in customer pay, it's growing 7%, 8% so -- if we can just maintain that and then take the hours that we're dedicating to warranty and plough that back into customer paying internal, you should see nice continued growth in the next couple of quarters plus moving into 2018.

You mentioned this a bit but on Page 16 you showed used car days as supply coming down quite a bit, so what is the logic of the strategy there? Just -- you're at your target number for days of supply on used?

Absolutely. So when you run that used day supply up in the 35 and 40 days range, it just creates complexity, it's just too many cars, you're not moving the cars through the system fast enough and you can't maximize margin dollars. And so we found that as we get below 30 day supply, we maximize our margin dollars, reduce wholesale loss, maximize our profitability in the department; so you should expect us to be in that 28, 29, 30 day supply range moving forward, that's a big push that we made in the first quarter and you saw some wholesale loss and margin erosion in the first quarter to help get us to that 29 day supply but then we had huge growth in Q2 and you're going to see that again in Q3 and Q4 as we move forward. Our used car business is really back on-track and rolling and we're very excited about it.

And just to sort of follow-up on the questions on BMW and Honda, I think what you said there is the lack of factory dealer incentives is the big issue at Honda; if the volumes are still there, I mean -- do you think that actually -- those incentives come back? I mean, what would the motivation of Honda be to kind of -- dealers still selling their cars…

We're not, I mean -- that's not really, that's not really accurate. I mean our volume is still there but overall if you look at the Accord, I think in Q2 it was down 12% or 15% versus the exact opposite for the Camry. So there is no way that they can continue to produce the Accord and then not bring the incentives, and -- they just took the incentives away in February/March timeframe and it's eating away at the volume, the Camry is just a cheaper -- it's a cheaper version and we're selling more of those, so it's up 12% or so. You know, Honda's got some soul searching to do in order to get their margins in line if they want to grow that product line and that sort of hurt us. And you can expect us to move our prices up which may hurt the volume a little bit but we're not going to sit back and lose that kind of margin for very long, we'll watch our share real closely but we need them to make it -- they are asking us to make investments in facilities and to spend a ton of money on this brand, we need them to continue to support the heck out of the product that they're building and not make those kind of moves. And so we're certainly having conversations with them and we'll see how things go but I think in the very very near future, we're still going to experience some margin pressures.

And there are no further questions at this time. Mr. Smith, your closing comments please.

Well, thank you everyone for joining us on the call today, and we'll talk to you next quarter.