Sonic Automotive Inc (SAH) 2014 Q4 法說會逐字稿

Good morning and welcome to the Sonic Automotive fourth-quarter and year-end earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions) As a reminder, ladies and gentlemen, this call is being recorded today, Tuesday, February 24, 2015.

Presentation materials, which management will be reviewing on this conference call, can be accessed at the Company's website at www.sonicautomotive.com by selecting investor relations under our Company dropdown box and then choosing webcast and presentations on the right side of the page.

At this time, I would like to refer to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information, or expectations about the Company's products or markets or otherwise make statements that are in 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.

Thank you. I would now like to introduce Mr. Scott Smith, President and Chief Strategic Officer of Sonic Automotive. Mr. Smith, you may begin.

That is easy for you to say, Stephanie. Thank you. Hi and welcome to Sonic Automotive's fourth-quarter 2014 earnings call. I'm Scott Smith, the Company's President and Chief Strategic Officer 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 CG Saffer, our Chief Accounting Officer.

Today I will start the call with an overview of our strategic initiatives and then I will turn the call over to Heath for a review of our fourth-quarter results, followed by Jeff with a look at our operating performance. We will then have some closing comments and open the call to your questions. With that, please turn to slide 4, labeled strategic focus.

Our strategic focus has been consistent for the last several years: grow our base business, own our real estate, and return capital to shareholders. Very simple. This strategic focus will continue for the foreseeable future.

As most people who follow our Company are aware, Sonic Automotive is growing its base business through two very unique and bold avenues that I believe will give us a competitive advantage and differentiate Sonic from others in the retail automotive space. We are customer-centric, One Sonic-One Experience, and through our free-owned specialty stores called EchoPark.

In addition, Sonic Automotive is working very closely with our manufacturer partners on open points and we evaluate acquisition opportunities continuously. Let's take a closer look at these strategic initiatives. Next slide, please.

One Sonic-One Experience, simply put, is an exercise in building a brand. We are building a brand that is centered around the customer experience. The objective is to put the power into customers' hands where they can enjoy the automotive purchase experience with one associate, at one price, in one hour.

We believe that our experience would be unique in the industry and that it will improve transparency and increase trust and ultimately profitability.

The full version of One Sonic-One Experience has been in beta testing since August 1, 2014. Preliminary results are better than anticipated and we will further expand on this later in the call. Let's turn to the next slide, please, number 6.

I am extremely proud of our team, who has worked tirelessly to develop and implement One Sonic-One Experience. It took roughly 7 years of the planning and development to bring all of the pieces of the puzzle together: from culture, compensation claims, pricing, processes and technology. The complexity is enormous and cannot be understated.

One Sonic-One Experience is about building a brand that is predictable, repeatable, and sustainable, where the customer and the experience are the focal points. Our model is designed to reduce transaction time by allowing our customers to deal with just one person through the entire purchase experience.

Our sales associates handle the entire transaction. They appraise vehicles through our retail trade center in Charlotte, utilize our True Price technology, eliminating negotiations. Sales associates help customers through the F&I process, using electronic signatures to reduce transaction time.

None of this would be possible without our proprietary technologies that enable our model. Gone are the days of back and forth with managers. Gone are the mountains of paperwork. Gone are the hassle and pain points of purchasing an automobile.

Some additional benefits to One Sonic-One Experience, besides speeding up the transaction time, are reducing headcount through attrition. We simply don't need as many people that we used to in a traditional model, creating a substantial cost savings -- creating trust and transparency, increased CSI, ASI, and market share, increased margins and a better experience for our customers, much like that of an Apple Store or Starbucks. Let's turn to the next slide, please.

Roughly eight years ago, when we began thinking about EchoPark, we wanted to build something that was totally unique in the industry and that could eventually dovetail with our new car franchise dealerships. I cannot overemphasize enough that this is not your mom-and-pop used car store. We have invested in and built what will become a substantial national brand that is predictable, repeatable, and sustainable.

We did extensive market research to learn exactly what the pain points are in the automotive purchase experience and we set out to eliminate all of them. This is a customer-centric model where the customer is in control, not the dealer. Our highly trained team is there to assist customers in any way possible and they are compensated very differently from the traditional automotive retail model.

Through the use of processes and technology to support and enable, we've built a customer experience that is unique in the industry. I'm very proud of our team of ladies and gentlemen who work so hard to bring this to light. I am pleased to announce that our hub location in Thornton opened November 3 and we have two neighborhood locations, one in Centennial and one in Highlands Ranch, that are open.

We expect at least two additional locations in the greater Denver market to open in 2015 and we are currently searching for real estate to begin planning for opening a second market for EchoPark in 2016.

We have experienced delays in opening our other locations, which is predominantly due to weather. Preliminary sales results are exceeding our internal projections and we have not yet begun our media placement that will begin later this quarter and into next quarter. And now turn to slide eight, please.

As a continuation of our strategic focus, we have been looking at acquisitions and open points through our manufacturer partners. In 2014, we acquired four franchises: Jaguar in Birmingham, Alabama; Nissan in Chattanooga, Tennessee; Land Rover in Glenwood Springs, Colorado; and Chevrolet in Denver, Colorado. We continue to be active in the acquisition market and would welcome the opportunity to have discussions with dealers.

Working very closely, as I mentioned, with a number of manufacturers partners on open points, we are pleased to announce that we were awarded three open points in 2014. We were awarded Nissan in the greater Chattanooga market; Audi in Pensacola, Florida; Mercedes-Benz in McKinney, Texas, which is greater Dallas, and to my understanding, is one of the largest, if not the largest, open point for Mercedes in the country.

We continue to work closely with our manufacturer partners and their market representation plans and we are very excited to be awarded these open points and believe that they demonstrate the strength of our relationships with these fine manufacturer partners. If you'll please turn to slide nine.

Owning our real estate continues to be a strategic focus for us. As you can see on the slide, in 2007, we owed zero real estate. For 2017, we project that we will own approximately 49% to 50% of our nearly $1 billion portfolio.

Putting these terrific assets on our balance sheet is a much more efficient use of our capital then entering into long-term, expensive leases. While the market isn't recognizing the value of these investments, we believe that there is significant value in our real estate. Please turn to slide 10.

Sonic Automotive is committed to returning capital to our shareholders. Through the end of the fourth quarter, we had repurchased 2,256,000 shares at an average price of $23.51, returning nearly $53 million in capital to our shareholders. We currently have an unused share repurchase authorization of approximately $79 million. I am also pleased that we are continuing our quarterly dividend of $0.025 a share.

With that, I will now turn the call over to Heath for a financial review of the quarter. Heath?

Thank you, Scott. Good morning, everyone. Starting with the first 3 columns on slide 12, I would like to walk you through our adjusted Q4 results.

Total revenue was up 1.6%, with a 3% increase in new retail, 2.2% increase in used, 11.3% increase in F&I, and 1.9% increase in fixed. Gross profit up 2.9$%, driven by a 5.7% increase in used retail. 11.3% increase in F&I and 2.4% increase in fixed.

Profit was at $33 million, which resulted in diluted EPS from continued ops of $0.63. SG&A as a percent of gross came in at 75.5%. This, of course, includes expenses related to our investments in One Sonic-One Experience and EchoPark.

In the right 3 columns, you will see the results for the full year. Total revenue up 4%, with a 4.7% increase in new retail, 6.2% increase in used retail, 10% increase in F&I, 5.4% increase in fixed. Gross profit up 4.9% for the year, new retail relatively flat, 4.6% increase in used, 10.1% increase in F&I, and a 4.4% increase in fixed.

Profit was at $100 million, which resulted in diluted EPS from continued ops of $1.90. SG&A as a percent of gross came in at 78.6%. Again, this does include expenses related to the investments of One Sonic-One Experience and EchoPark. Next slide, please.

On this slide, we provide a walk from reported EPS to adjusted EPS and to a comparable EPS for the fourth quarter. As you can see, our comparable EPS is $0.71 for Q4 compared to last year's $0.70 for the $0.05 difference from EchoPark. Next slide, please.

Same exercise here for the full year. 2014 comparable EPS is $2.08 compared to $2.10 last year, with an $0.11 difference year over year related to EchoPark. Next slide, please.

Financial results for EchoPark for Q4 as well as full year 2014. EchoPark had a pre-tax loss of $7.1 million for the quarter and a $15.7 million loss for the year. As Scott mentioned, since opening, EchoPark has performed in line with our expectations. Jeff will provide more color later in the call. Next slide, please.

Adjusted SG&A to gross for the fourth quarter, SG&A as a percent of gross was 75.5% compared to 75.2% a year ago. Areas of improvement include advertising spend and compensation, offset by increases in spend related to the implementation of our shared services, EchoPark and One Sonic-One Experience.

For the full year, SG&A as a percent of gross was 78.6% compared to 77.1% in 2013. Again, primary drivers are related to our investments and our initiatives, which are illustrated in the next slides. Next slide, please.

This slide normalizes our SG&A to gross for our core business. Factoring out our investments, our adjusted SG&A as a percent of gross in Q4 was 72.2%., 210 basis points better than 2013. Next slide.

For the full year, normalized SG&A as a percent of gross, less our investments, was at 76.5%. Next slide.

This slide illustrates our 2014 and our estimated 2015 investments in EchoPark, One Sonic-One Experience, and centralization. As you can see, we expect EchoPark to start improving as we slow our startup expenses and begin to open more locations and generate more gross. As we have stated previously, we do not expect profitability for EchoPark until the fourth year of operation.

For One Sonic-One Experience, we continue to have relatively the same amount of expense until the stores are fully implemented and we get the benefit of market share increases and operational efficiencies. Again, as we have stated in the past, the implementation of One Sonic-One Experience across all stores will take an additional 24 to 36 months.

Regarding centralization, we will experience our first full year of operations in 2015 and we will have overlap in personnel as we transition responsibilities to the corporate office. Next slide, please.

CapEx for 2014 -- total spend of $164 million, offset by $44 million in mortgages. Estimated 2015 total spend of $201 million, offset by $100 million in mortgages. Next slide, please.

Liquidity at the end of Q4. We had total liquidity of $250 million compared to $221 million last year, an increase of $28.6 million. Next slide. Debt covenants. As you can see, we remain compliant with all of our debt covenants and have plenty of cushion going forward.

Thank you for your time today. And with that, I would like to turn the call over to Jeff Dyke for our operations review.

Thanks, Heath, and good morning, everyone. I am proud to present the fourth-quarter 2014 operating results for Sonic Automotive. As you can see from the slide, our new car volume was up 4.9% in the fourth quarter. I will give you a little deeper dive on our new car volume and mix in the coming couple of slides.

Our gross profit per unit was $2,269. As we stated last quarter, we will continue to be more aggressive in our pricing, in particular in our import segment. Both Honda and Toyota represented about 80% of the GPU decrease.

Our pricing will continue to move around while we work on our new car SIMS pricing tool that is getting closer to being ready for use in our mainstream business. We have been using the tool, both in test phase and in our One Sonic-One Experience stores as we work through all the opportunities with the tool. My estimate is that we will have a predictable, repeatable, and sustainable tool to use across our enterprise early this summer.

There is an incredible amount of work going into the development of this tool and all the iterations that arise from each manufacturer when it comes to discounts and incentives. But in the end, we will have a system that can bring consistency to our pricing models and will certainly contribute to maximized market share and margin when complete.

New car day supply was 49 days, which is a little light from where we like to run, and that was primarily driven between luxury and import brands. Next slide, please.

As you can see from this slide, I have outlined for you our revenue mix generated from the majority of the brands that we have in our portfolio. And then laid a key next to it so you can compare our mix to the performance of the brands across the industry.

The information provided show you that BMW and Honda made up about 41% of our revenue mix in the fourth quarter and their industry growth was 6.7% and 3%, respectively. It also shows both Mercedes-Benz and Ford making up about 17% of our mix and the industry performance of both brands being flat year over year for the quarter.

Now let's take a look at the next slide, which will help you better understand how we performed in our local markets with these brands. Next slide, please. This slide highlights the performance of the Sonic brands in our local markets versus the brands' performance in the industry. I have also included for you the percent of units sold, represented by each brand during the fourth quarter.

As you can see, both our BMW and Honda brands well outperformed the market in comparison to the brand performance, which represents about 41% of our overall volume. You also see that we have some opportunities in Lexus and Toyota -- in the Lexus and Toyota brands, which are being addressed with our operations teams in charge of those brands.

I think this information will help you better understand our mix and how we see our performance. It also demonstrates, on a brand-adjusted basis, our stores generally performed consistent with the market performance, with the exception of our exceptional BMW and Honda performance, partially offset by the subindustry's results from Lexus.

I will do my best to update this and share with you as we progress, in particular as we expand our pricing tool and One Sonic-One Experience. You will be able to visualize the performance of each of brand and the effect of the systems and processes going into place. Next slide, please.

We had another solid preowned performance this quarter, but we did leave some volume on the table, as we waited a little too long to start buying supplemental inventory in Q4. We typically buy and really overbuy during the fourth quarter, but the market held on a little longer than normal and we waited until about mid-December to start buying.

This move created a situation where our online inventories were about 1,000 units below where we needed it to be. We have already made the adjustment and increased our buying and with this move, saw about an 8% increase in January, having our best used volume January on record, at just under 93 units per store. We are seeing that momentum continue in February as well.

We finished the quarter at 29.8 day supply, which is a little under where we would like to have been in the fourth quarter. Next slide, please.

As you can see from the slide, our fixed revenue grew 3.9% and gross profit grew 4.4% on a same-store basis. Our customer pay business was up marginally, while internal and sublet was up just over 8% and warranty was up over 12%. Our customer pay ROs dropped during the quarter, which we attribute to the increase in warranty work being completed at this time in our stores.

We have an issue with the incentive levels that our team can achieve with warranty growing and in result, have seen a decline in CPROs. However, our ROs per customer and pay order are in great shape -- our hours per customer pay RO are in great shape.

We're making some adjustments to our incentive structure to help alleviate this issue moving forward and we will keep you posted on our progress in the coming quarters. Next slide, please.

These next few slides will give you a good idea about where we are with our One Sonic-One Experience rollout in the Charlotte market. Next slide, please. I want to share with you some of the observations and opportunities we have seen as we rolled out One Sonic-One Experience in Charlotte. Here are some of the observations.

January was our first full month with all stores using One Sonic-One Experience processes and technology as well as the branded concept. We are able to deliver a vehicle in less than an hour once the guest has selected their vehicle of choice. The feedback we're getting from our guests is fantastic and very supportive.

Interestingly, and something that we had hoped for, we are attracting a new type of employee, which is wonderful for our business model and for the industry. Our training has really helped and made a big difference in our ability to attract and retain new associates from different retail backgrounds and outside of retail. We are also exploring all kinds of new schedules to attract an even broader base of associate.

We began our branded store level marketing campaigns for all stores the week of February 16. We also had some opportunities as we got started. We had significant website issues for Toyota, starting with the launch of our new site in October.

We had SEO -- search engine optimization -- and SEM -- search engine marketing -- performance issues. They were really terrible starting in October and driven primarily by a poor performing website.

We had issues converting from in-store business development centers -- our call centers -- to a centralized guest experience center, where all the Internet leads and calls are now received. This issue is basically behind us and now it is a matter of execution, giving the team a little time, and them gaining experience.

Our pricing and inventory purchasing tool for new cars in SIMS is running behind schedule. It is primarily a resource issue that has caused the timeline shortfall, but I do expect the new car pricing tool to be completed early this summer, as I stated before, and the new car ordering tool to be complete in about six months. Next slide, please.

Let's take a look at the individual store performances with respect to market share. As you can see from the slide, this is our Toyota store. We really got off to a great start when we were testing all the processes in August and September.

As stated earlier, in October, we launched a new website for Toyota. And unfortunately, the website performed so poorly that after a few months, we made the decision to upgrade our old website with our new images and marketing and relaunch the site in the middle of January.

We immediately began to see increased traffic and performance. We've learned a lesson there. We've refurbished all of the Charlotte sites now and will stick with this plan moving forward.

I am very excited to see our share in February as of today back in the 20% range. Actual, this morning, it was at 23.1%. And we plan to continue to be in this range or better moving forward. Next slide, please.

As you can see on this slide, both Ford stores moved in the right direction during their soft launch months in December and January. Both locations have been on a downward trend on share for several months now, so the uptick we have seen in the past few months has been well received. And February is trending up higher again for both locations as the process begins to settle into the stores. Next slide, please.

As you can see from the charts, our Infinity store and Cadillac store both got off to good starts as well. When you have fewer stores in the marketplace, as we do with Infinity there, too, in the Charlotte market, you can have some big swings, depending on inventory levels.

Both Infinity, with two stores, and Cadillac with six, both the brands have struggled so much that one or two cars can cause a big swing as well. The overall market for both brands is selling fewer than 90 units per brand per month. And for example, there were 83 Infinities and 77 Cadillacs sold in the marketplace in January.

Some overall general comments on One Sonic-One Experience. The number one key takeaway is overwhelmingly our guests love One Sonic-One Experience and as we perfect the pricing process that I discussed earlier and with the website issues behind us, we feel very good about the progress we are making.

As I mentioned earlier, we held off on marketing any of our attributes and branding until the week of February 16 due to issues with our centralized guest experience center being able to accept all the Internet and phone leads for these locations and the website issues needing to be resolved.

We have also found that it is taking about eight weeks to get the store in a position that they can handle the process well enough to market the brand and its attributes. So the guest experience is being delivered in -- at an acceptable level.

All of the locations continue to improve in February as well. Our guests in all the brands have been very supportive and love the new way we are handling their time with total transparency.

We are just getting started, but are happy with our launch and look forward to updating you in the coming quarters. As expected, we have learned a bunch with the Charlotte launch. We will more than likely adjust our launch process to launch our CRM and showroom tools ahead of the One Sonic-One Experience launch to help smooth out all that we are throwing at a store at one time.

We are very pleased with our CRM, our iPad processes, and the showroom tool and think we can be more efficient by launching these tools first. As always, we will keep you posted. Next slide, please.

The next few slides will give you a good idea about where we are with our launch and rollout of EchoPark. Next slide. First, we could not be more excited about our EchoPark launch in Denver, Colorado. Other than a few wintry storms in the area, the launch has been a big success and I look forward to answering your questions at the end of the call.

Some early observations for you to think about. As we expected, our hiring and training process has been fantastic. And as a result, we have literally had thousands of applicants apply to join the EchoPark family.

We are very excited that the detailed process we went through to identify and eventually hire our newest family members has worked out so well. We have had very little to no turnover and have applicants reaching out on a daily basis trying to join the EchoPark team.

The testimonials we are getting from our guests on Yahoo, Google, Yelp, and others has been very positive. We cannot thank our guests enough for reaching out to let us know how we are doing.

We are trading for a high percentage of vehicles and guests are bringing their cars to us to buy. Every day, we seem to be getting more and more opportunities. This is something that we had hoped in order to supplement our inventory needs. In January, the trades and what we call straight purchases already represented 25% of our sales, which is fantastic news.

Our entire showroom performance tool is working very well and we are getting guests in and out of the dealership in about an hour and 15 minutes on average, once they select a vehicle. Obviously, our goal is to be under an hour and we will make happen.

Our experienced guys are delivering an industry-leading transparent process in which they handled the appraisal, the F&I process, and the guests love it. Our store technology is strong and getting better each month of operations, as kinks are worked out of the system.

But we have also had some opportunities as well. We have had many of the same website issues that we saw at our Toyota store in the One Sonic-One Experience launch of its website. The performance of the EchoPark site is not acceptable and we will be resolving this issue in the coming weeks.

As a result of the poor performing site, our search engine marketing and optimization have been a challenge and a plan is being implemented to resolve the issue along with the website fix this year.

Unfortunately, Mother Nature has also played a role, as Scott said earlier. It slowed us down. We have had some disastrous weather to deal with, which overall simply slowed down our facilities team to get our stores open. We should have a final pricing tool ready for operation at EchoPark on March 1, which will help our inventory and pricing team be more effective and efficient. Next slide, please.

We thought this slide would give you an idea on the cadence of the store opening and the volume the stores achieved. It is important to note that we do very little advertising or marketing in the first month of a store opening, just to allow the stores the opportunity to use our technology in a live environment, which gives our associates the opportunity to support our attributes to the best of their ability.

We are very excited about the progress with our volume and expect this volume to continue to grow as we began to turn up the advertising effort and the word gets out on EchoPark and the experience you get the minute you arrive online or at a facility.

We are so pleased with our launch of EchoPark that we are already working on real estate for our second market and hope to begin to start identifying properties for purchase in the next month or two. We are targeting stores opening early next year.

I would like to take one minute to thank all of our Sonic and EchoPark associates for all that they do in helping us create a guest experience never seen in our industry. And one of America's greatest companies to work and shop. I know we have asked a lot from you and you are delivering and it is much appreciated.

Now I will turn the call back over to Scott Smith.

Thank you, JD. To summarize the year, it was a huge, huge year for the Sonic Automotive team. What we are attempting to accomplish isn't easy, or everyone would do it, and it takes time.

We had a record year with our core dealership operations. We began consolidation of our shared service center, launched our guest experience call center. We acquired 4 dealerships. We were awarded 3 open points. We opened three EchoPark locations. Vested over $124 million in real estate and dealership properties and returned nearly $83 million to our shareholders.

And all I would say that that is not a bad year. We expect 2015 new car industry volume of 16.5 million to 17 million units. Based on this, we expect 2015 diluted EPS from continued ops to be in the range of $2.01 to $2.11 for our new car franchise operations.

This excludes the effect of EchoPark. We anticipate EchoPark will affect earnings diluted per share approximately $0.16. With the inclusion of EchoPark operations, we expect total diluted EPS from continued ops to be in the $1.85 to $1.95 range.

Before we take your questions, I want to take a minute to thank all of our associates, as JD did, and vendor partners, who join together every day to help us grow one of America's greatest companies to work and shop. It is an honor and a privilege to lead our great Company.

And I really need to thank all of our associates again and our Board, because what we are attempting to do would not be possible without our ownership structure and shared vision to really change the industry. When you look at the valuation of CarMax, a company that we very much admire, we believe that they have a wonderful model and we think that there is a tremendous opportunity for Sonic Automotive to get in and play in a big way, in a national way, in the pre-owned industry.

With that, I will now open the call for your questions.

(Operator Instructions) Rick Nelson, Stephens.

I would like to ask you first about the guidance for 2015. Looks like a flat earnings year, despite some lower costs with EchoPark and One Sonic-One Experience. What would be the drivers, I guess, to that result? Is it conservativeness on your part or are there other factors I might not be considering?

Yes, Rick, this is Heath. I will start off. When we do our modeling, our internal modeling, obviously, we take multiple things into factor. And the EchoPark rollout, as we see it succeed, that could be sped up., which could have an impact on our expense going forward in 2015.

One Sonic-One Experience, as Jeff mentioned, we learn more and more with every launch. And so that number can move around a bit, depending on how fast we roll out.

And so those are big factors into our guidance. Also, obviously, we got to consider -- we start working on our open points (inaudible), as Scott mentioned. Their SG&A structure is pretty much based on the same percentage that we had this year.

And the one big piece that is not in the One Sonic-One Experience and EchoPark is the support costs that are related to opening quicker and as we roll out more, that support cost goes up.

And that rollout plans for Sonic One Experience and EchoPark, if you could talk about the projected economics there. When do you see those two strategies actually being accretive to EPS?

Hey, Rick. It is Jeff Dyke. We said all along, in terms of EchoPark, and as Heath said in his notes earlier, that EchoPark would not be profitable until the fourth year of operation.

So we have got some time now between now and then. Some heavy lifting to do. We get better as we begin to roll out more of our neighborhood stores as part of this concept.

So the business has been very, very robust in Denver. We feel like we are ahead of what we thought we would do in the first few months there. So we are going to I think accelerate the EchoPark schedule by eight or nine months in getting the next market open.

We are not ready to divulge what that market is. We know what it is -- which market it is, but we are not announcing yet. Maybe we will do that on the next call.

And then One Sonic-One Experience, we are learning it is on -- we rolled out the Charlotte market just so we could see how all the pieces of the puzzle work together. But we are going to roll out the CRM and the desking tool and the showroom tool first in the next market. And I am guessing that we are going to get that -- we are going to start doing that at the beginning of the summer as we gear up our support teams to make that happen.

But what we are not going to do is roll out the full-blown process into a store all at one time. It is just too disruptive. It slows everything down and we think we can be a lot more effective and efficient.

In terms of a return for One Sonic-One Experience, I mean, we are already beginning to see -- the darn website threw us off. That really slowed us down, unfortunately. It just didn't work out the way we thought it would, so we made a quick midcourse correction here and we are seeing huge market share gains from our Toyota store back to what we had originally seen.

And the store's profitability plays a lot of role in the elasticity of our pricing models and we are moving all of those around right now. So we have got some stores that are profitable and doing above expectations and then others not quite as good, but the market share is there. And so we are playing around with that.

And I don't want to roll that into the next location until we have those tools really dialed in. So Charlotte is going to be continue to be our Petri dish. But the things that are coming out of it -- the CRM tool, the showroom tool -- those things that are really working well, we are going to move forward to get those in place. And my guess is that is going to start early this summer.

And Rick, this is Scott. Something that I would encourage you to do is go back and look at JD's slide on how the core dealerships are performing by brand. I would say that I feel very good about our core business.

And if you look outside our industry, look at Tesla. They don't make a dime. They lose more money than you can possibly imagine. But they are building something that is very different. Look at Amazon.

I am not as concerned about our earnings per share, if you will, as I am making sure that our core business continues to grow and to grow with the market as the brands that we represent. Because you got to remember our brand mix is very different from the competitive group.

But I don't look at our earnings per share today as the big driver, because we don't have an SG&A line. So if we decide that EchoPark is working really, really well and we want to grow it faster and make those investments, then it may not take us four years for EchoPark to become profitable. It may only take three, but it may be a ding on your earnings between now and then.

And Rick, one more thing. From a modeling perspective, if you look at the initiative expense, the cyclicalization accounting is increasing in 2015 because it will be the first year of full operation. So that basically wipes out the additional $2 million of EchoPark. And so your initiative spend is pretty much the same as it was in 2014.

Thanks for all the color, guys, and good luck going forward.

Paresh Jain, Morgan Stanley.

Staying on the guidance here, on the costs related to EchoPark, it was about a $0.16 hit into 2015 and was $0.18 in 2014. What is the impact from the second EchoPark market in it? And how should we think about the incremental impact from each EchoPark store?

So a great question and we tried to bake that a little bit into our annual guidance here of the $1.85 to $1.95 and being conservative there. What really happens is if we've got a fixed overhead expense and as you open up more stores, that fixed overhead expense gets spread across those stores.

And as Scott was saying earlier, because the stores, we think, are doing so well, we might be able to improve the timeline there to profitability by opening more points. You got to remember, when we open an EchoPark store, the overhead in that store is really small. It is less than 30 people in the entire store. So we've built them to be profitable at a lower performance rate than a traditional store.

So it certainly is not going to be -- we open up another pod and there is another $0.15 worth of expense. It actually might go the other way and improve. But I can't give you an exact EPS effect on it. What I can tell you is that it will be a lot more efficient by opening more points quicker than holding off.

Now obviously, we wouldn't be doing that if we were not having the success we are having in Denver right now. So we are really excited about the progress right off the bat that we've made in Denver.

We told you guys early on that we didn't think we had any barriers to entry. A lot of people out there were questioning our ability to buy inventory and to stock the stores. That, for us, was a cakewalk and continues to be so.

And so it is now just a matter of time in getting the other points open. We had hoped to have another one or two points already opened. But some real estate issues stood in our way and weather has been a big pain in the butt. Denver has had its 15 year -- worst weather in 15 years in terms of the winter. So that has snowed a little bit us in, but not from a performance perspective, just from a facilities perspective. So hopefully that answers -- gives you some color on it.

No. That is actually good color. And the staying on guidance again, what -- can you give us any color on what percentage of stores with OSOE is embedded in that guidance? Any range.

Can you say that again?

What percentage of stores with OSOE is embedded in your guidance?

It is just -- it is just 5%.

5% on -- yes.

5% of the stores.

Got it.

And as Jeff mentioned earlier, you know, our approach going into 2015 is we will start rolling out the technologies of One Sonic-One Experience prior to the full process. And so all of that is already baked in as development costs and is being capitalized.

And the headcount for the rollout is baked into that guidance as well.

That is correct.

While the support dollars that go to rolling that out. It is all baked into the $1.85 to $1.95.

Got it. And lastly, on your SAAR expectations, the midpoint seems a bit lower than what consensus and some of your peers are perhaps expecting. What is driving your rather soft-ish SAAR expectations?

I think if you looked at our guidance on the SAAR every year, we are conservative on it and we just stay true to that. The market has grown awildly for the last four or five years and it could end up at the upper end of our guidance, but we just are being conservative in our estimates.

Thanks, guys. That was helpful.

John Murphy, Bank of America Merrill Lynch.

At the risk of being a little bit duplicative in asking this question, as we think about EchoPark, is there any way that you could isolate your early stores that have been opened and understand when they, unto themselves, might be profitable?

And I know it is hard to decide to disaggregate the numbers, but I'm just trying to understand as we think about the evolution of EchoPark or the development of EchoPark, how we get comfortable with there actually being some real earnings coming through, even though in aggregate, there is going to be losses for four years. And I am just trying to understand, also, how you get comfortable with that as well.

Well, John, if you -- the thing that we have is a lot of depreciation costs and overhead expenses that really have nothing to do with the day-to-day expenses in the store. So if you just isolate what would be pushed to a single neighborhood store, if you isolate that out and just push that piece of depreciation and you just look at the headcount of that one store operating versus having the whole EchoPark infrastructure being charged to three stores that are open, and you look at it in that perspective, because I have sat down and gone through that math, our neighborhood stores are profitable between 75 and 100 cars.

And you saw we are just short of 40 cars in our first month of operation at Centennial. If you just look at it in that way, it won't take long. But unfortunately, there is a lot of overhang, right, that we have to work with.

So maybe what we can do in the future is as Centennial gets profitable or as Highlands Ranch or Dakota Ridge in the future gets profitable, I can sort of give you an outline of just what is going on there. As long as you remember that it won't be -- I am baking out sort of the overall overhead expenses that need to be charged to EchoPark in total.

Okay. Yes. No. I mean, I think detail around that would be helpful over time as there is progress. And then --

No problem. We can do that.

And then secondly on One Sonic. You are not calling it out as a headwind at all in the guidance for 2015. So should we think of it -- that is a sort of a net neutral to 2015?

No.

Or --

No. It is in there. It is just part of our day-to-day operating and we are trying to break out EchoPark, because it really is a separate reporting structure. But One Sonic-One Experience is part of what we are doing in general with Sonic -- in the Sonic stores. So it is built into the $1.85 to $1.95.

If we were not doing One Sonic-One Experience at all, we would not be as aggressive on our market share targets that we put out there and our expenses would be lighter. And the $1.85 to $1.95 might be a little higher for 2015. But that is not the course of action that we have chosen that we are seeing some really, really good signs coming out of these stores in Charlotte.

And another great sign is is our competitors are visiting pretty much around the clock on a daily basis. So we know we have something here. It is just fine-tuning it before we can -- in understanding how the cadence of rollout should be, we know for a fact that we are not going to roll everything out in one store at one time. It is way too disruptive.

So I would tell you that it is built into the number. There is a number in there and Heath might be able to give you more of an accurate dollar.

Yes. As we show on the slide, we expect $10 million to be associated with One Sonic-One Experience which equates to 12 pennies.

Yes. A dime to 12 pennies.

Okay. That's very helpful. And then just lastly, I mean, the core operations look like underneath this look like they are doing pretty well. The only place where there was a little bit of a discrepancy is on the parts and service same-store sales comps, which were a little bit lower than what we have heard from other dealers. And you mentioned warranty kind of crowding out customer pay.

And I was just curious if you can kind of tell us if that is something that you think you could reverse or deal with in 2015? And kind of where your [cap u] is on these stalls and stuff going forward.

Yes, we can deal with it. And we got a couple of different things that we are putting into action right now. I will be honest with you. The warranty is just going crazy, so some of our stores are enjoying really high warranty as a percentage of our overall business. And we are going to make some adjustments to some incentive plans.

And we have got some new -- I mean, you saw on the CapEx, we have got a bunch of money being spent. We are expanding our service facilities, which is really going to help alleviate some of that pain as well.

And we are working on our loaner car programs, which will also help us become more efficient so that we have more throughput from a CP perspective. But there is a lot that we are doing and really, the fourth quarter was just -- it caught us a little bit by surprise. We have been in toe with the rest of the markets and really ahead for the last couple of years.

So we had a little bit of a surprising Q4 and I think it is going to take us a quarter or so to rectify that, but I expect us to hit our target for 2015 in fixed.

Okay, great. Thank you very much.

John, this is Scott as well. As we roll out One Sonic-One Experience, what we are seeing in the market share gains, I think last month just in Charlotte, with all the stores, they were up like 24% year over year. And that is going to continue to help drive the engine of the fixed ops department.

As we continue to grow market share, as Jeff mentioned, we are going to have to add additional capacity in service, whether that is extended hours or physical capacity. So I think there is a lot of upside associated with One Sonic-One Experience and everything that we are seeing so far.

It is very exciting. We just had -- we have had several manufacturer partners in here. We had one of our largest manufacturer partners in here yesterday. And they were absolutely blown away with what we have. And they are like, my gosh, you guys have -- you almost cracked the code here. You are so far ahead. And just giving us all the kudos you can possibly imagine.

It is coming. And it is working. It just takes a little bit of time.

Scott, maybe just one follow-up question to that. If you guys are getting this so right, which it appears that you are on your way, is this the kind of system and set up that could become required by the automakers -- by the dealers of automakers, similar to a sort of facility enhancements to really give the customers a good experience?

I mean, and it is all kind of virtual and online at this point, but it is obviously, as you guys are pointing out, very important to the customer experience, similar to a good facility is. Is this something that could come down the line and be required?

John, that is a great -- now you are thinking, pal. That is a great question. And 100%, the competition is going to have to follow suit. The manufacturers are going to make them.

As a matter of fact, the business partner -- manufacturer partner that was here yesterday was showing us all of their tools that they are building and we are having convergents discussions so that we make sure that our tools can do what their tools can do or their tools can do what ours do.

But there is no question that our experienced guys or sales associates for our competitors are going to be using iPads and all kinds of different devices to build service and sell cars. And there is no question that these dealer groups are going to have to start using data to make decisions. They are going to have to start using CRM tools that are the next generation.

It is coming. There is -- 100% the manufacturers are headed in that direction. Because the name of the game is not going to be about how well you manage your data or how well you do anything, it is about how well your guest experience is in the store. That is going to be the product that we sell.

And that is going to be the difference maker and we feel like we are going through these turbulent waters here these last couple years to get to this point. Everybody else is going to have to go through it, too. And it is going to be very interesting, but that is a fantastic question. You are right on spot.

You are right on spot. The only other caveat or color that I would add to JD's comments are that for most dealers, they will have to go through and get the manufacturers' technology, where we are working with our manufacturers so that we are kind of brand agnostic.

So if a customer buys a Mercedes-Benz at WI Simonsen and shows up at Town and Country Toyota in Charlotte, we have got every single piece of that data aggregated to know who that customer is.

And just like JD said, our product is the experience. There is 20 Mercedes dealers in LA. And why should a customer drive past 18 of them to come to one of ours. And it is the experience that we are building that is very unique, I think.

That is very helpful. Thank you very much.

Bill Armstrong, CL King.

In Charlotte, you lost some share, it looks like, in December and January. And I think you had some website issues, which sounds like were resolved. Did I hear you say that in February so far, you are up to 23% share?

On the -- at the Toyota store this morning, on the Toyota report for the stores that we measure against, which we have always measured against, we are at 23.14% market share, to be exact.

And is that just because your website issues are resolved? Or are there other things going on that -- because that is a huge increase.

It is. We are right back to where we were pre-launch of the website. And if you look at that chart that I gave you, we were up about 20% there. We are right back to where we were. We've dialed in our pricing. We have had a lot of really crappy weather here this month. It is going to hurt our fixed operations business.

But beyond that, our sales business is very strong, very good. We have a -- we are contending for the top Toyota volume store in the city, which we have never done before. So I think we are right there in the top spot or one or two off of it.

And right now, we are at 23.14% share. And we are gaining -- the other stores, remember, are two or three months behind the Toyota store. I see the exact same things happening. The exact same characteristics of the launch for Toyota are happening in the other stores.

We are trying to shorten that bridge, if you will. We are learning a lot. But our shares is going crazy.

Okay. Great. And then on EchoPark, I think earlier, you said that on the neighborhood stores, your breakeven is about 75 to 100 cars per month. What would be breakeven beyond the hub store? Because you are already up to 150 at the hub store.

Yes. That is 230 to 250. But remember, the hub store does all the reconditioning, so it makes a bunch of its gross from the internal and we are behind on getting a couple of stores opened. So we don't have the throughput that we expected to have.

So that sort of has thrown us out of whack a little bit. And that is all purely weather-related. Nothing more than that. So I would say it is in the 230 range and could be better as soon as we get all the other locations opened.

Great. Got it. Okay. And then just lastly, just more broadly, Company-wide, your gross profit per unit on new was down and you kind of mentioned Honda and Toyota. And used was up pretty strong. I was wondering if you could just briefly address both of those trends.

We're being -- we're really -- as I said, we are playing with our pricing tools so -- and we are really doing it within our import brands. And so our margin is moving around. It is not anything that I am concerned about. At $2,200 a copy based on our mix, I am very comfortable there. I think it is one of the leading, if not the highest, PUR out of all the groups.

But -- and then on used, we were short supply at the end of the fourth quarter and that -- short supply, high demand, higher margins is really simple. We have the ability because we manage our pricing and our inventory centrally on used, we can just push buttons. And we ended up in the fourth quarter having about 7,200, 7,300 cars on the line and averaging in the mid-eights in terms of sales.

We need over 8,000, 8,500 cars online. That puts us up to that 9,500 to 10,000 mark or 100 units per store per month. And it was my fault. I was waiting -- we always have this big drop off in October, November, December, where some of the independent dealers start selling off their inventory to make payrolls year end, whatever. And the prices didn't drop and I just held on a little too long.

But lesson learned. We start buying inventory in the middle of December and bought as quickly as we can, but margins are good and probably be that way here for the next six months or so. The business is good.

And are inventories back up to where you would like them to be at this point?

Yes. I mean, we bought a ton of cars coming out of December, then had a record-breaking January. So and the volume is still good in February, don't get me wrong. But I would like to see another 1,000 to 1,500 cars online, pushing us up over 9,000 cars online. Which we have never really done, but we have made that a goal of ours is to average over 9,000 cars online.

And we are turning our inventory -- we are turning our online inventory 14 times a year. We operate at a 30 day supply, which is -- we are very, very efficient at inventory management. Now -- and I feel very comfortable pushing our inventory levels up. So give me another month or two and I would answer 100% yes to that.

Hey, understood. Thank you.

Bret Jordan, BB&T Capital Markets.

Quick question on customer pay service at EchoPark, now that you have got a little bit of data, but not much. I mean, what is the service demand trend you are seeing there?

Yes, it is nothing. I mean, it is very, very light. We haven't even -- as a matter of fact, just this week, we are starting to drop a few mailers. We are doing a $9.99 oil change. We needed to focus 100% on reconditioning of our inventory, which I thought for our team, they have done a fantastic job there. Our cars stand really tall.

But there is very little now. It is not even baked into our forecast at all. But it is certainly with our state neighborhood stores something that we think is a big upside for us. And as we get going, when you buy a car from EchoPark, we have got a RFID chips in the car so you can get a car wash for as long as you own the car and that's -- the car wash is there at the facility and we are going to use that to do some all kinds of different marketing.

And we just haven't started it yet. It wasn't a big part of our plan to start, but certainly is ongoing.

This is Scott, Brad. Just a little more color. Last week on the $9.99 oil change emailer that we sent out, in two days of that, we had 1,200 additional hits on our website for service instead 107 service appointments. Just out of that one mailer.

So we are just starting. I mean, it is too soon, I think, what JD is saying, to even say that we are really into the service business there. But our very first shot out of the box is very impressive.

And as you think about other big profit drivers -- and you were commenting earlier about CarMax -- what is your thought now, sort of an update on how you're thinking about internal finance operations, given the fact that so much of their profit comes from CarMax auto financing? Are you thinking a captive program as well?

Yes. This is Heath. As you know, like 60% of their bottom line comes from that -- from CAF. And we are in the exploratory stages right now, determining if that is going to be a piece of our business.

We have hired some expertise in that area, talked with our bank vendor partners, understanding the license process, the compliance that's required. And so we have started that journey. Based on what we have done so far, it is an 18- to 24-month journey just to go through the hoops and set up your infrastructure. But we believe that is going to be an integral part of EchoPark.

I will tell you that none of our forecast -- our four-year model, none of that has any built-in expectations from an internal finance arm at all.

That's correct.

We did not want to build the success of EchoPark and our neighborhood store concept using that methodology. Our stores -- the overhead at those stores and the way that we've built them, because they are so user-friendly and with the technology, we need very little overhead to run them. And they are going to stand on their own two feet without that. So when we do have something like that, it is just 100% gravy.

Yes. It's Scott again. When you look at adding our entire new car franchise business portfolio to it and you look at the loss ratios, we are predominantly luxury and Asian. So those brands perform extremely well.

And I think there is a big opportunity, not just with EchoPark, but with the franchise business as well to participate in that finance opportunity.

And one final, just as it relates to inventory at EchoPark, could you explain -- I guess you'd partnered up with Mannheim for some of your inventory sourcing. I think you said a quarter of it was coming from trade or direct purchase, but what is it that you got with Mannheim as far as sourcing used units?

We have not partnered -- we have a -- we are working on a plan with Mannheim to develop a strategy to have them help us with inventory, but 100% of our inventory is -- we 722 cars on the ground right now. And 100% of that came through internal buying organization.

A lot of that was bought at Mannheim auctions. But in terms of Mannheim providing us any inventory for the EchoPark stores, not one car.

Okay. But I guess, but you are beginning to describe that you are working on an agreement with Mannheim that would make it easier to get inventory? How does that -- has that set up?

Right. So just a small peek, sort of under the covers, we are working with them on developing a process that really would have them deliver inventory to us that is ready for sale. And you can sort of imagine everything in between that would occur in order to get that done.

And there is a year and a half's worth of work that has gone into this. And I could not tip my hat more to that organization. They are really working hard to work with us to develop some processes. But I think our industry changing, as I think they begin to sort of rebuild themselves in a certain way, to be a great distributor and provider for our industry.

And so more on that on the next couple of calls as we announce our next market and how we are going to roll that market out.

Okay, thank you.

Brett Hoselton, KeyBanc.

First, just a clarification. On the EchoPark, when you talk about being profitable in year four, roughly, is that for the overall enterprise? It kind of sounds like that is, because it sounds like even if you increase the trajectory or increase the number of stores and so forth, it is not going to kind of push that out year after year after year. It sounds like you are saying, look, we think by maybe 2018, this whole entity is going to be turning a profit for us.

Yes, that is exactly right.

Yes.

Okay. And then secondly, and maybe you answered this and I just didn't quite grasp this. You have given us a lot of market share numbers for the Charlotte area stores that are being impacted by the One Sonic-One Experience. Can you address or talk about that store profitability?

Yes, I can. It is all over the board. We have had months where our -- I will just address our Toyota story -- of months where they have made great money and been ahead and other months where they have not made money.

And that is nothing to do with the store as much as it is us landing our One Sonic-One Experience expenses on those stores, the rebuild at the store and the depreciation that goes along with it. And then me playing with their pricing.

So profitability is unstable right now across -- let me take that back. Our Cadillac store is stable. Our Infinity store is fairly stable. The Ford store is a little more competitive and then Toyota is just ridiculously competitive in the marketplace. So stability gets less as you go along that list I just gave you.

And I think over the next few months, that is all going to begin to play out as we work our way into the selling season and I can comment more on it in specifics as we get a little more time under our belt.

It's Scott -- (inaudible) that we did have a record in the fourth quarter at a number of stores that made over $1 million for the month.

Yes. I mean, the overall Sonic business, our fourth quarter was, regardless of any number of stores that we had, was the best profit quarter in December is the best profit month we have ever had. And that includes all the stuff that we have going on in those One Sonic-One Experience stores.

I guess what I am sort of driving at is as you have introduced the One Sonic-One Experience, you have talked about, I think, improving, in my mind, the overall profitability of the store. It is not so much about gaining or losing market share or significantly increasing or decreasing your gross profit per unit, but it is basically, look, we think we can, all things combined, improve the overall profitability of the store.

And I am kind of wondering what gives you the confidence at this point in time that that is going to progress in that direction?

Well, that is an interesting conversation, because it depends on what brand you are talking about. But if we are talking about Toyota, the profitability of Toyota is going to really grow with the more trades that you take and the more you feed your service department. And that hold somewhat true for all the stores, but more so in this brand.

And right now, our number one goal, at least in the first six months of all of this, is to gain share. And to do that, in a way that we think, long term, is going to be wildly profitable for the stores or you don't do the project, right?

And obviously, that we're -- continue to talk about how we are going to roll it out, we are excited about where we are, but I think we got a long way to go. I mean, if you came into our stores and went to a traditional store and saw it. Then you came into this store and went through the process, I mean, it is night and day different.

So the amount of change that we are taking our team through in order to make this happen is creating all kinds of opportunities. And so ultimately, we are hitting all the targets that we thought we would hit and in some cases, doing better.

And now it is just a matter of fine-tuning those things before we roll out to the next stores. Believe me, we are not ruling out anything if our profitability and our share is not growing together.

And then, Heath, I was kind of hoping you could kind of just walk us a little bit from 2014 to 2015 earnings. And by that, I mean in 2014, you made $1.90 and your guidance, ex-EchoPark, is $2.01 to $2.11.

I look at the One Sonic-One Experience as being a negative $0.12 hit in 2014. So if I add that back to the $1.90 and then I add maybe a $0.02 improvement on the EchoPark, that gives me a $0.14 improvement, which takes me to $2.04, which is kind of the midpoint of that $2.01 to $2.11.

And I kind of saying that it seems like you are expecting your core business to be flat of an earnings standpoint. Are there some headwinds built into that or is it merely conservativism?

As you know and noted, our SAAR is conservative. It typically is, our SAAR projection. But there is a couple of items that we could break out into EchoPark and we could break out into One Sonic-One Experience that we keep in our core.

One, I mentioned earlier, the shared services expense this year was $2.1 million. It is going to be $5 million next year. And that has a return, but in this 2015 year, you are going to have overlap as you're transitioning from the field to corporate.

But one of the bigger items as a headwind from an expense perspective is, even though we have only rolled out the technology to One Sonic-One Experience stores, the five stores in Charlotte, we had to depreciate the entire capital development. And so you got an extra $6 million running through the SG&A -- or excuse me. Not the SG&A, but the depreciation line, even though we are only utilizing the technology in five stores. That is just GAAP requirement.

And so that coupled with -- once you build the technology, you got to support it. And so all of that moves out of your development capital costs and becomes SG&A expense.

Excellent. Thank you very much, Heath. Thank you, gentlemen.

At this time, we have no further questions. I would like to turn it back over to Scott Smith for closing remarks.

Great. Well, thank you, ladies and gentlemen. We really appreciate your time today. We are very, very excited about the future of Sonic Automotive and EchoPark and One Sonic-One Experience and we look forward to our next call with you. Take care.

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