Sonic Automotive Inc (SAH) 2015 Q2 法說會逐字稿

Good morning and welcome to the Sonic Automotive second-quarter earnings conference call.

(Operator Instructions)

As a reminder, ladies and gentlemen, this call is being recorded today, Monday, July 20, 2015. Presentation materials which management will be reviewing on this conference call can be accessed on the Company's website at www.sonicautomotive.com by selecting investor relations under Our Company drop-down 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 the conference call management may discuss financial projections, information or expectation about the Company's products or market or otherwise make statements about the future.

Such statements are forward-looking statements 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 like to introduce Mr. Scott Smith, President and Chief Strategic Officer, Sonic Automotive. Mr. Smith, you may begin the conference.

Thank you. Good morning ladies and gentlemen.

I'm Scott Smith, the Company's President and Chief Strategic Officer. 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'll start today's call with an overview of the strategic initiatives, then turn the call over to Heath for a review of our Q2 financials followed by Jeff with a look at our operating performance. We will then open the call for your questions.

If you will turn to the next slide please. Our strategic focus has been consistent for the last several years growing our own base business, owning our real estate, returning capital to shareholders. This strategic focus will continue for the foreseeable future. As most people who follow the Company are aware Sonic Automotive is growing its base business through very unique, bold avenues that I believe will give us a competitive advantage and differentiate Sonic from others in the retail automotive space through our customer-centric One Sonic-One Experience and through our preowned specialty stores called EchoPark.

One Sonic-One Experience, for those that have been following us it's doing very well. It's essentially an exercise in brand building. It's building a brand that's centered around the customer.

The objective is to put the power in the customer's hands where they can enjoy the automotive purchasing experience with one associate at one price in one hour. We believe that our experience will be unique in the industry and improve transparency and increase trust and ultimately profitability.

One Sonic-One Experience has been fully implemented in Charlotte since Q4 of 2014. J.D. is going to talk about it a little bit later but it's going very well. And we are soon to roll out the technology across the rest of the platform.

EchoPark continues to exceed our internal budget. We're opening two additional locations in the greater Denver market in the next 12 months. We've identified our next market and have been working to secure real estate which may include up to 10 locations.

We're pleased to announce that we'll complete construction for our Mercedes-Benz open point in the Dallas market in 2016. Our Audi open point in Pensacola will also open in 2016 and our Nissan point in the greater Chattanooga market we expect will open late in 2016 or early in 2017.

We continue to work closely with our manufacturer partners and our market representation plans and are excited about these open points and believe that they demonstrate the strength of our relationships with our partners. We continue to be active in the acquisition market and we welcome the opportunity to have discussions with dealers.

Owning our real estate continues to be a strategic focus for us. As you can see from this slide in 2007 we owned zero real estate. Through 2017 we project that we'll own approximately 49% to 50% of our $1 billion-plus portfolio.

Putting these terrific assets on our balance sheet is a much more efficient use for our capital than entering into long-term expensive leases. While the market's not recognizing the value of these investments we believe that there is significant value there.

Sonic Automotive is also committed to returning capital to our shareholders. Through the end of Q2 we had repurchased almost 600,000 shares at an average price of $24.66, returning approximately $14.8 million in capital to our shareholders.

We currently have an unused share repurchase authorization of $65 million. I'm also pleased that we're 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. I'll be providing the second-quarter financial results from our franchise business and EchoPark separately as well as consolidated.

So let's start on slide 12 for the franchise operations. For the quarter revenue was up 2.1%. Gross profit was up 1.7%.

This growth was achieved with five less stores compared to last year. If you look on the same-store basis revenue was up 4.7%. Gross was up 4.1%.

SG&A as a percent of gross was improved by 10 basis points in total. 60 basis points improvement on a same-store level. Adjusted diluted EPS was $0.51, an increase of 6.3%.

If you move to slide 14 EchoPark results, revenue was $21 million, gross profit was $2.6 million. This resulted in a pretax loss of $4.1 million.

This compares to an adjusted pretax loss of $4.9 million in Q1 2015. That's a 16.6% improvement.

Total units sold was 881 compared to 660 in Q1 2015. That's an improvement of 33%. Impact on diluted EPS is negative $0.05 from EchoPark.

If you move to slide 16 this is our consolidated results. Revenue was $2.4 billion, an increase of 3%. Gross profit $356 million, an increase of 2.5%.

With the inclusion of EchoPark SG&A as a percent of gross was flat at 79.2%. This resulted in adjusted diluted EPS of $0.46, an increase of 4.5%.

Next slide. Breaking down revenue and gross, all the revenue lines were up led primarily by used, fixed and F&I.

Gross, new retail gross was down. This was driven by rate per unit. Used gross up 8.6%, fixed up 6.5% and F&I up 7.3%.

Next slide please. SG&A, adjusted SG&A to gross was flat. Improvements in variable comp, other variable and rent were offset by increases in advertising, fixed comp and other fixed expenses related to One Sonic-One Experience, centralization and medical insurance.

EchoPark impact on SG&A as a percent of growth is 100 basis points.

Next slide please. Summarizing Q2 adjusted and GAAP EPS, core franchise had an adjusted EPS of $0.51 compared to $0.48 a year ago. EchoPark offset EPS by $0.05 for a total adjusted EPS of $0.46 compared to $0.44 a year ago. Applying one-time adjustments of $13.6 million related to dealership disposal and physical damage results in a GAAP EPS of $0.30.

As of the end of the second quarter we are reaffirming our annual guidance of adjusted diluted EPS of $1.85 to $1.95.

Next slide please. Capital spend for Q2, total spend of $83 million for facilities, IT and general maintenance, offset by $46 million in mortgages related to the EchoPark and franchise dealership properties. Estimated 2015 is a total spend of $214 million offset by $110 million in mortgages.

Next slide please. Liquidity, at the end of Q2 we had total liquidity of $277 million compared to $250 million at the end of last year.

Next slide please, debt covenants. As you can see we continue to be compliant with all of our covenants.

And with that I will turn it over to Jeff Dyke for a more detailed review of our operations for the second quarter. Jeff?

Thanks Heath. Good morning everyone. It's my pleasure to update you on the second-quarter 2015 operational performance for Sonic Automotive.

As you can see on the new vehicle slide on a same-store basis we had a year-over-year increase of 2.1%. Our total store increase was 3.1%.

We continue to see front-end GPU pressure, in particular in our Toyota and Honda import brands which are driving a high percentage of the GPU decrease. As we stated last quarter we'll continue to be aggressive in our pricing which is driving higher volumes, share and ancillary gross throughout the [night].

This strategy while lowering our front-end GPU contributed to our highest gross order in Company history regardless of store count. Our new car day supply was 55 days in line with our expectations.

Next slide please. We had another record-breaking preowned quarter as our preowned business continues to perform well. I'm proud to announce that we achieved 100 units per store for the quarter, a goal that we had been working on for a while now.

This is the largest preowned volume quarter in Company history for any store count and I want to congratulate our team on a job well done. In last quarter's call I mentioned that we are increasing preowned inventory levels in our stores and the team has done a great job adjusting to the increased inventory and volume levels.

Margins were flat year-over-year and in line with our expectations for Q2. Preowned days supply was 34 days at the end of the quarter and in line with our expectations.

Next slide please. We had another record-breaking fixed gross quarter up 8.5% in total gross. This is the largest gross quarter in Company history for any store count.

As you can see from the slide warranty continues to grow and our efforts on customer pay are paying off. The focus on increasing shop hours through time management and adding additional techs is helping our fixed customer pay dollars growth and the increased volume in preowned has also helped our internal gross grow by nearly 7% all contributing to this record-breaking performance.

I want to congratulate our fixed, training and HR teams for a job well done here.

Next slide please. I added this slide to give you a cadence of the customer pay growth for the year. As you can see our efforts are beginning to pay off and our performance in the second-quarter adjusting for the number of fixed days shows the effort being delivered by our fixed team as they work through the warranty hours opportunity in particular with Honda and BMW.

Next slide please, let's take a look at the market share and volume performance of our One Sonic-One Experience stores in Charlotte.

Next slide please. As you can see on this slide we have our Toyota volume running on all cylinders and it moved our market share to around 21% on a consistent basis, up from about 13% a year earlier.

If you will remember we launched One Sonic-One Experience in Toyota in the July, August timeframe, so it took about eight months or so for the store to ramp up and begin taking share. We launched the remainder of the Charlotte stores in the beginning of the year and are just beginning to see some volume and share increases as the processes and teams settle into their new environments.

Profitability at the stores are beginning to improve and we are cautiously optimistic that we'll begin to show profit and share gains by the year-end allowing us to begin a serious discussion about a full One Sonic-One Experience implementation across the Company.

Next slide please. Our preowned business is also performing well. As you can see from the chart we have a nice growth trend in each of the One Sonic-One Experience stores in the Charlotte market.

Next slide please. We've made the decision to begin a partial technology rollout of One Sonic-One Experience next month. We will be rolling out our CRM, desking and appraisal tools for our guests and associates to use.

These tools have proven to be very effective in the Charlotte test market and will greatly improve the experience for our guests and associates. This is the first of a two-phase rollout of One Sonic-One Experience.

The first phase will begin in August and will be complete at the end of 2016. The second phase which will include our F&I, pricing and marketing tools will not be rolled out until we have further results from the Charlotte test market indicating increased share and profitability. We're hopeful that by the end of the year we will be able to bring more clarity to the timing of Phase 2 of the rollout.

Next slide please. Let's take a look at the performance of EchoPark. Next slide. EchoPark is meeting our expectations and is a big hit in the Denver market.

The guest feedback that we're getting via Google, Twitter, Yelp and other social media outlets is simply fantastic. As you can see on the slide we continue to grow our business and are planning to open at least five more locations in our Denver platform between now and the end of 2016.

We've also selected our second market or POD as we call it and have already begun the process of purchasing properties. We expect to break ground in our second POD by the end of Q4 this year or the first quarter of 2016 and we'll keep you posted on our progress as things develop.

With this said I'd like to take the opportunity to thank all of our associates at Sonic Automotive and EchoPark for all the hard work and dedication of building one of America's greatest places to work and shop. And now I'll turn the call back over to Scott. Scott?

Great, thank you, J.D. To summarize the quarter I would say that it is very sound for the Sonic Automotive team. Very proud of our team for our accomplishments here.

We experienced growth in each revenue category. For the first time in the Company's history we achieved an average of 100 preowned units per dealership for the month, actually the quarter, which was fantastic. Fixed ops growth showed strength in customer pay and warranty and we're rolling out our One Sonic-One Experience technology to other markets that as Jeff said begin later in Q3.

Our growth plans with EchoPark will accelerate in the second half of the year which I'm very excited about. We'll continue to repurchase shares. We'll be monitoring our capital requirements for 2017 as a lease maturities approach but I would expect us to continue to acquire stock opportunistically.

It's an honor and a privilege to lead our great Company. And I'd like to thank all of our associates and partners for making us one of America's greatest companies to work and shop.

With that we'll now open the call for your questions.

(Operator Instructions) Rick Nelson, Stephens.

Good morning. I'd like to ask you about the guidance, $1.85 to $1.95 you talked about last quarter. Is there any change to that guidance?

Rick, this is Heath. At this time we are not ready to narrow that down. We're sticking with $1.85 to $1.95 for our guidance for the year.

Okay, thanks. And the expectation for EchoPark that it would weigh $0.16, is that still a working number?

That is still the same number, that's correct. And we're tracking to be right at that.

Thanks. To the impairments and the storm damage, if you could provide some color on each of those.

Yes, this is Heath. The impairment was a Chevy store in Denver. We purchased the store that's right beside our BMW and Mercedes acquisitions, the Murray acquisitions.

There was a Chevy store adjacent to that property. We purchased it in December. We started running the business.

We had some struggles with the operations. We also started evaluating some of the obligations that we had with Mercedes-Benz on the facility for the Murray facility and it actually ended up being more advantageous economically to dispose of that franchise and use the property to expand and make a larger Mercedes-Benz store, excuse me, BMW store yes. So in the end we're actually going to be utilizing that real estate to have a larger BMW store and again we think that's more advantageous economically.

And direct this is Jeff Dyke. In the same Denver market we got nailed by hail. We had a hail storm blow through, hit our Toyota store and damaged 700, 800 vehicles, cut through the center of the city, skipped all the EchoPark stores thank God and then hit the BMW and Mercedes store and the Chevrolet store that we're closing and wiped out a bunch of their vehicles.

We got them all fixed and about 10 days later got another hailstorm and damage to cars all over again. So it was just a comedy of weather errors there. So hopefully that's behind us and we don't have to do that anymore.

Okay, thanks for that color. Also I'd like to ask about the growth in warranty that was quite significant, if you could provide some numbers maybe around what recalls contributed to that?

Yes, sure. It's primarily being driven by BMW and Honda. I think of the $7 million increase they make up about $4 million to $4.5 million of that.

And in particular at the Honda store with the airbag recalls we just finally developed warranty teams. So I've got a warranty writer and technicians that are just basically handling all of that.

The amount of dollars that we're getting back for the recall is really low from my perspective and eating up a lot of our shop hours. So we've created a different way and a different flow-through for that warranty business and we're doing a much better job with it as you can see this quarter than we have in the past.

And then BMW has got a lot of really, really big warranty jobs. In particular we've got some of the 5 and 7 series, we're pulling engines and doing a bunch of stuff that's eating up a lot of shop hours as well.

So they make up the majority of it and we've got our hands full. We've added 206 technicians, that's net of technicians that have left us this year for one reason or another from January. So those 206 technicians are really making a big difference in our push here.

And finally if I could ask to the same-store growth in new cars 1.3%, how you think that compares to the industry and maybe some commentary on market share.

Yes, I can comment on that. A chunk of that is coming from our Cadillac stores and to be quite honest with you we've played with our pricing the last few quarters with Cadillac and our business while we sold a couple more cars, not that many, but we gave up a hell of a lot of gross. So we reversed that trend, made a hell of a lot more money out of our Cadillac stores but gave up some volume on a year-over-year basis.

And it's a big, we've got a lot of Cadillac stores. Even though they are not doing a lot of volume we've got a bunch of stores, so that certainly played a role in our decrease year-over-year from a Cadillac perspective.

And then with Toyota I think we had a 10% increase in share versus maybe Toyota being up across the country 1%. We'd outperformed Honda by double. BMW we were backwards a little bit.

That primarily came from our West Coast stores, in particular Beverly Hills BMW where we were just not as aggressive in pricing, although we're up nicely in profitability and so that's what's driving that. It's a handful of stores and really us making some conscious decisions on some brands that we need to -- we felt like if we raised margins and gave up a little bit of volume we'd bolster our bottom line and it really didn't affect us overall.

And this is Heath, we are actually up 2.1% on the retail side on the new units. And we said that's just a small fleet business that takes it down to 1.3%.

Yes, we've got one store that does a bunch of fleet that we're backing out of slowly but surely because it's just not that profitable for us. And so we were up 2.1% as I stated on my comments from my slides that I reviewed.

Okay. Thanks a lot and good luck.

Bill Armstrong, CL King & Associates.

Good morning, gentlemen. Just on the gross profit per unit, you indicated that Toyota and Honda once again were the main drivers of the lower GPU. If we strip out Toyota and Honda, how would you say -- how would you think the GPU trended versus a year ago?

Down about $140 or $150 a car. The rest of it BMW was a little bit of it as well but those are the three brands that drove the majority of it.

And is there any indication that that may be stabilizing anytime soon?

You know I don't know. We're going to continue to be really aggressive with Honda and Toyota because we're are gaining share and our profitability is going. So I don't know that we'll back off too much right now.

One Sonic-One Experience is a part of that in the big growth that we're getting out of the Toyota store here in Charlotte and BMW is a little bit all over the board. It just depends on the mix of cars that you have and who's punching what and there's a lot of punch games going on with them. So we'll see how it works out.

I don't expect it to be any greater than it was last quarter. I think the quarter before maybe we're $50 worse or something but it's going to be in and around where we have been trending, sort of the $1,900-ish to $2,000 a car level until we get to the fourth quarter. And then you'll see it go up a couple hundred dollars a car just because it's that time of the year.

Got it. And then just shifting gears to the One Sonic-One Experience rollout, so you indicated three waves and the first wave I guess you're just beginning now. Is that a change in approach from what you were looking to do before or is this the game plan you were originally anticipating?

Yes, when we first rolled out in Charlotte we rolled everything out at one time and we learned that you don't want to roll everything out at one time. It's like drinking from a fire hydrant.

So we're now just doing the same thing but just doing it in pieces and giving our stores the opportunity to use the technology. We've developed the technology, it's just fantastic and so we've got a lot of requests for it. Heck, we've even got requests outside of our Company for it.

So we're going to slowly over the next between now and the end of next year roll those three pieces out. Our CRM, our desking and our appraisal tool and then let the Charlotte market catch up and see how it's doing. I think we're going to be in pretty good shape here by the end of the year, our market share is really starting to grow and so is profitability.

So we'll see how those things work. And as we get better and better at executing in Charlotte then we'll pick some markets to roll the balance of the One Sonic-One Experience process out in.

And can you just remind us what is the desking tool? What does that do?

Yes, so either on the iPad or from your desk it allows the manager and in the Charlotte market the sales associate or what we call an experience guide to do the entire transaction, sign paperwork on the iPad, significantly reduce the amount of time it takes to do a deal.

Got it. Okay, thank you very much.

And that same tool by the way is in use at EchoPark as well. So it's in both sides of the business.

Okay.

Paresh Jain, Morgan Stanley.

Good morning everyone. A couple of questions.

The preowned performance in the Charlotte market improved through the months. How much of that would you say was driven by OSOE? Was this just your overall preowned performance improving this quarter?

Yes, the Charlotte market's outperforming the rest of the Company. A lot of that's just because the new car volume is increasing. We're taking more trades and when you take more trades you sell more cars.

So that's part of it. And the other part is we're executing our playbooks and doing the things that we need to do in those stores. As you can imagine there's a lot of training and a lot of attention going on, so we expect to see the same kind of lift as we roll out One Sonic-One Experience to the rest of the Company.

Got it. On EchoPark you are obviously now ramping up on EchoPark expansion.

Are the initial stores pretty much on autopilot in terms of strategy execution and not needing much of management bandwidth going forward? Just trying to understand what gives you more confidence in scaling EchoPark right now?

Yes, they're doing great. They've done a really good job. We've got very little turnover.

We're executing, the feedback that we're getting from our guests is fantastic. We had no intention of we had intended to be profitable as quickly as possible but we certainly didn't have that in our plans for this year.

And it looks like we'll be cash flow positive in our neighborhood stores anyway, hopefully this year. And so it just give us a lot of confidence.

We've also already developed a next-gen facility which keeps the cost even lower, it makes us much more efficient. We learned a lot in building the first two neighborhood stores and so that's going to help with profitability. So we're really, really confident, it's been a big, big success for us so far and hopefully we'll continue to see that happen.

Great. Just to follow up on EchoPark again, you're adding a few more stores in Denver in the next 12 months. What has been the competitive response so far within the existing markets?

You're talking about within the Denver market --

Yes, with the existing stores.

Yes, it's competitive. We've watched our competition move their pricing all over. We track everybody's pricing on a daily basis, so we're watching what everybody's doing.

But we're still able to hold -- we're running about 105%, 106% of the market in our pricing. We're able to hold a little higher gross because of the experience that we provide and the uniqueness of the brand. And we had projected to be able to do that when we started EchoPark.

So there's not a lot the competition can do. It's such a different experience that's so different than what's being offered in the market. And from the reconditioning levels that we have to the speed that we can get a deal out to no pressure to the salary management team and experience guide that's such a different level of execution and level of experience and that's what the consumer is telling us.

And that's probably the overall driving factor right there is the consumer is just -- it's fantastic. If you go out on Google or Twitter or Yelp and just read the verbatims they are just over-the-top good.

Excellent. Thank you, guys.

John Murphy, Bank of America Merrill Lynch.

Hey guys, I just wanted to follow-up on slide 23. I know there have been some questions and some explanation here but when we look at a gross profit in total on a same store for new vehicle down 9.3% yet volume is up 2.1%, just trying to understand what you guys are doing here.

Because in some cases you're saying the gross profit is going up in certain places because of certain activities but I mean the total is pretty tough to stomach, down 9.3% if you're doing up 2.1% on volume. Just trying to understand in general how you're thinking about this and what efforts you can take to potentially maybe mitigate some of those losses.

I mean you call it a loss but we're driving more total Company gross and it's really being driven by the import stores. If you look at it, I mean we are selling a hell of a lot more Toyotas and a hell of a lot more Hondas than the brand Toyota or the brand Honda are selling and it's driving a lot of that reduction.

Adding a lot to our F&I total gross dollars, adding a lot to our fixed business and so we've got more throughput coming. We could get less aggressive there but we don't think that's the right move. And obviously we wouldn't be doing it if we weren't driving more profitability.

So BMW did come down in gross for the quarter and a lot of that has to do with the mix of cars that we have and all the punches that are going on. We've got in one day on a side call we can talk about how all that works but that certainly played a part of it. Those three brands are driving 90% of the gross reduction for us.

And our BMW business I would tell you from a volume perspective was really good across the country with the exception of California in the quarter. California, the volume was back but our profitability was up nicely and so a little bit of a trade-off there.

But you might say that if you look at our business, Toyota and Honda out of the 100 stores that we have Toyota and Honda they represent a large chunk of the volume that we do and so any time you increase the volume there you have a shift in your margin mix and we've done that. We've increased our volume in those two brands and we've shifted our margin and it's caused an effect there on the PUR.

But you're comfortable that you're picking up on F&I PVR on the backend on those vehicles and parts and service ultimately that that's a good trade-off? I mean that's the way you're thinking about it?

It is. I mean you just looked at it, think about this, it was 2007 this Company had 157 stores and we have 100. We just had the largest gross quarter in our Company's history any count of stores and we're getting good throughput. Our fixed operations business is rebounding nicely from the move that we made and we've been talking about the last couple of quarters and so yes we're picking it up and if we weren't we wouldn't be doing it.

And then a second question to follow up on slide 28 on the One Sonic-One Experience, obviously you're getting some really good volume growth here in the Toyota stores, but I'm just curious is there any profit metrics that you're looking at there in addition to just volume? And if you sort of held all else equal, which I know is tough to do, do you think that your volume increases there are not impacting profitability at all?

You know, I think that it's a tale of two stories here because it's in the beginning certainly the going one price and being as aggressive as we have been was putting pressure on profitability but that's turning now as the market begins to follow us in pricing versus us following the market. So as we inch our prices up our margin is improving in the stores and our profitability is coming back to levels that are acceptable and that's why I'm cautiously optimistic.

I think by the end of the year we'll be able to sit down and give you a really good picture on profitability and show you okay, here's what One Sonic-One Experience did, here's what we learned, here are the moves that we made and here's what profitability looks like now. And we're not quite ready to do that.

Some of the numbers are really nice and good and some of them aren't. But I think what we look at is the trend that we see is good and it's also a big adjustment. We've made huge, huge changes in the environment in these stores and so it's taking some time.

Just look how long it took Toyota to begin to ramp up in volume. And in May we led the market here. That's never been done since I've been around Sonic and I don't think it's ever been done, I think the Scott Clark stores always had the number one volume store here.

And we were able to push our volume up high enough and our profitability is coming along with it. Plus the one other thing is that our fixed team was not ready for the amount of service that came into our service department nor did we have enough techs on hand.

So we've basically doubled the number of writers. We've added 10 technicians and now our profitability in service is really starting to grow. That was maybe the big positive surprise out of all this is the amount of fixed that's being driven into the stores with the increased volume.

It a lot heavier than we anticipated and so we're rapidly trying to catch up with that. In some cases like Toyota we actually went backwards before we started going forwards because CSI got hurt just because it was so much traffic coming into the store. We resolved those issues and now we'll see how all that plays out here over the next few months.

That's very helpful. And then just a last question if we think about the second market for EchoPark do you think that's going to be a lot less disruptive?

And I think you alluded to the first tranche of EchoPark in Denver being cash flow neutral to slightly positive towards the end of this year. Do you think this is an effort that's going to start carrying itself or is this second market going to still be a little bit disruptive to cash flow and earnings as we go through next year?

No, I'll tell you, first of all we said that the neighborhood stores, the hub won't be cash flow positive this year in Denver and I don't think it's going to be any more disruptive. We've really figured out the formula there. We know what we can spend on a piece of property.

We know how much exactly we can spend on a building. We're not crossing those thresholds. We're being very, very patient about the properties that we're buying and how we're executing that and nothing outside of the financial plan that we put together for the next five years, EchoPark is either going to outperform that or equal to it as we move forward.

Great, thank you very much.

Brett Hoselton, KeyBanc.

Good morning, gentlemen. I want to follow on on John's question about the new gross profit per unit and just it sounds like based on the discussion thus far, it sounds like you're intentionally choosing to be more price competitive, taking a lower gross profit per unit on the new car side on the front end in order to gain some market share and get some more throughput and you think that you might also be making it up in F&I and service. Is that the overall thought process here?

Yes, but it's also it's not 100% of the reduction, just margin mix is contributing to that. And you understand if you sell 500 more Hondas versus 500 more than you were selling previously because you've lowered your price and your mix changes overall and that drops your mix of PUR. Overall our total gross dollars though are growing.

Now if I look at slide 28 where you've got retail, new retail units for example, is there any way that you can give us some sense of how this these different stores are performing as far as an overall store profitability is concerned? Because obviously this chart here talks about new and the next chart talks about used, retail units, but you're obviously suggesting that there's an overall profitability of each of these stores that's also seeing some overall improvement. Is there any way that you can share with us what that looks like?

Yes, you know I will in the coming quarter. We've got sequential improvement certainly from where we began and in each of the stores less one. We had one store that struggled a little bit more than the others.

And we're finally starting to get back to the levels of profitability where we were before we started all of this but now we've got all the throughput that's coming. So that piece we think we'll start to begin to see towards the end of the year and if what I think is going to happen happens then I'll be able to towards the end of the fourth, for the fourth-quarter call give you guys a real good view of exactly what happened. I'd like it to play out before we start sharing all the data with you.

Okay, fair enough. And then in terms of the rollout of the One Sonic-One Experience, the Phase 1, the CRM desking tool and appraisal tool and so forth, when you say rollout August 1, 2015, what does that mean? In other words does that mean you're going to just begin rolling out across the entire network of Sonic Automotive stores, basically going to 100% of the stores and if so what kind of a timeframe would that take place over?

Yes, that's exactly what it means and as I stated earlier it's going to hopefully be done by the end of 2016. We'll install the CRM, our desking tool and our appraisal tool which will do nothing but enhance the experience for our guests and our associates in our business.

What we're not going to do is rollout pricing and all the other things that go with it, the F&I tool until we're comfortable with what's going on in Charlotte. That's why we're doing the test in Charlotte, that's why we've done it like we've done it.

And the plan right now I believe has us completing 40 stores by the end of this year.

Something of that nature.

Okay. And finally how do we think EchoPark, you talked about the impact in the quarter, you've talked about the impact for 2015 but how do you think about EchoPark's impact on your earnings as you move into 2016 and into 2017? Does it become an incremental headwind or is it actually become a tailwind as you move into 2016 and start driving increased profitability? How do we think about that $0.16 loss for example?

Yes, just the same thing I answered for Murphy a little while ago is there's nothing from our perspective that changes our financial forecast that we've already put out there. So when we modeled for you in our five-year internal plan we are either at or beating our plan. So we don't see any of the openings of the future stores or future PODs adjusting any of that, if anything it gets a little better and we'll include that in our guidance for 2016.

Yes, we believe that every time you put a unit out it's going to be contributing to that corporate overhead. So we think it's all contribution margin for every store we open in 2016. But it definitely depends on how quickly we get those built and opened.

Okay, thank you very much, gentlemen.

David Tamberrino, Goldman Sachs.

Hey, great. Thank you for taking our questions here. There's been a little bit of news coming out of the CFPB more recently.

I think last week was when they announced a deal with Honda where the discretionary loan markup was cut essentially in half from about 200 basis points to 100 basis points. So I was wondering if you could discuss how that impacts your F&I going forward from here and then the potential for consent orders with Toyota and Nissan?

Yes, this is Heath. A couple of things. We're obviously working with not only our lending bank partners, also the captive partners to help them with their remediation as their settlements with the CFPB.

From a standpoint of the impact we believed from the very beginning that the CFPB could achieve their objective of eliminating or reducing discrimination but at the same time not hurting the economics of the deal for the dealers and the banks and the captives. If you look at the Honda settlement basically what they're saying is they're going to reduce the cap down to I think it's 1.25% for 60-month terms and 1% for anything longer than that.

But there's another fee that they're allowed to provide on top of that, a flat fee that they can put on top of that. And I think as long as the captives are allowed to continue to reimburse the dealerships at the same level it doesn't matter if it's a percent of the deal, a flat fee, I think we can get to the same number and not have an impact on F&I at the dealership level. Now if you look at our average ballpark average we're probably 1 percentage point over our buy rates and so right now if it's capped at 1.25% in theory that wouldn't have an impact on us anyway.

Okay. That's hopeful. The PNS out-performance, it wasn't just on the revenue line but also in the margin.

What was really driving that year over year? I think it was about 150 basis points of expansion.

Mix, it's just mix of business, that's the answer. Maybe a little bit of a softer year last year as well because if you look at it just from an ongoing basis it's not that different.

Okay. And then it sounds as if you're constrained more from the tech side or from the service bay side.

It sounded as if there is a little bit of both in some of your prepared remarks and the responses to questions earlier. Is it just a matter of staying open later and pushing some of the warranty work into the later hours of the evening or how do you continue to grow there?

Actually what we're doing is we're pushing all the reconditioning hours into the evening and running double shifts. Especially with Honda and BMW we are constrained in some cases from a facility perspective. We have worked really hard this year to hire a net gain of 206 technicians for the Company.

So there's been constraints on both sides. The warranty business in particular at Honda with the airbag recalls is just crazy. We've got guests coming from every which direction.

And whether we try to get them to set an appointment or they're just driving up our shops are really, really full. And we're doing our best to also take the opportunity to review our guests' needs and upsell when there's an opportunity there.

But it eats up the shop hours and so we've really had to adjust those shop hours to deal with that. And we have big Honda stores across the country and it's taking a lot of work to put ourselves in a position to be able to deal with it.

Okay, that's a very helpful. And then just lastly on the tax rate for the quarter it was about the least the way we're calculating it about 29% effective tax rate versus last year in the 40% range.

Is there any special or one-time things that's not going to be repeated as a result? Should we be expecting a lower full tax rate for the year?

Yes, it's 39% I think it's actually --

Great. Thank you very much, gentlemen.

(Operator Instructions) Bret Jordan, Jefferies.

Hey, good morning. A quick question on slide 32.

I guess as we look at EchoPark and maybe some of the other fixed operations could you give us some feeling and I know there is not a year-over-year comparison but maybe sequential trends in service at EchoPark? And then as you look at the F&I side of the business and you rollout a second POD, where are you in thinking about creating a captive finance option where you can attract, retain a little bit more of the F&I process?

We just -- thanks for the questions. We just started growing in advertising for fixed at EchoPark. We purposely did not start out trying to drive business through our service drive because we wanted to make sure that we had all of our reconditioning pieces in place.

So that business is beginning to grow sequentially. The first four or five months was really from a customer facing perspective there was really nothing there.

So the growth percentages look fantastic but because it's comping against nothing. So next quarter I'll give you an update and just show I'll add a slide that shows how the performance there is quarter over quarter so you can begin to track from a fixed perspective.

It's not big but it's certainly growing and we're getting the same kind of feedback by the way in fixed that we do on the sales side. We're really the process extends through our fixed business. And so Google and Twitter and Yelp the feedback has just been fantastic and Heath do you want to comment on the captive?

Yes, sure. Couple of things. We've been evaluating captive finance for probably the last year.

We're cautiously looking at different alternatives, different partners, how we put that together. From just doing a private label kind of financing all the way to securitization and we're being very cautious about it and slowing that down just a little bit.

One of the things we want to see play out is the CFPB. I think we all know we can make money doing it. I think we're confident that we could execute with the right models but that one bogey that's out there that as someone mentioned is a gaining strength is the CFPB.

So we want to see where that's going to play out because we don't want to open ourselves up to compliance that would make it where it looks like it makes money now but may not in the future.

All right, great. Thank you.

At this time we have no further questions. I will hand the program back over to Scott Smith for any closing remarks.

Great, well thank you ladies and gentlemen for joining us today. It was a great quarter for us and we're very excited about the rest of the year and I look forward to speaking with you again shortly. Have a great day.

Ladies and gentlemen, we thank you for joining us for Sonic Automotive's second-quarter earnings conference call. You may now disconnect your lines and have a great day.