Sonic Automotive Inc (SAH) 2015 Q3 法說會逐字稿

Good morning and welcome to the Sonic Automotive Third Quarter Earnings Conference Call. (Operator Instructions).

This conference call is being recorded today, Wednesday, October 28, 2015. Presentation materials which management will be reviewing on the conference call can be accessed at the Company's website at www.sonicautomotive.com by clicking on the "For Investors" tab and choosing "Webcast and Presentations" on the left side of the monitor.

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

Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the Company's filings with the Securities and Exchange Commission.

Thank you, I would now like to introduce Mr. Scott Smith, Co-Founder and CEO of Sonic Automotive. Mr. Smith, you may begin your conference.

Thank you. Good morning, everyone. Thank you for joining us on Sonic Automotive's Third Quarter 2015 Earnings Call. I'm Scott Smith, the Company's CEO and Co-Founder. Joining me today are David Smith, our Vice Chairman; Heath Byrd, our Chief Financial Officer; Jeff Dyke, our Executive Vice President of Operations; and C.G. [Golum] Saffer, our Chief Accounting Officer.

Supporting slides that add color related to our quarter in this call will be indicated on our website. We're extremely pleased with the record-setting quarter and the announcement of an increase in our dividend rate. We had an outstanding quarter; very pleased with our operations. One Sonic-One Experience is kicking (expletive).

EchoPark is really doing a great job. We're very excited about ramping up the expansion of EchoPark. Just for a little color, you know, we hit $0.53 this quarter. I was hoping for $0.54, but Jeff just couldn't quite get us there. It was really outstanding.

EchoPark, you know, we retailed 920 units in the quarter, an increase of 4.4%, which was outstanding. You know, on a capital perspective we returned approximately 800,000 shares to our shareholders during the quarter for $17.3 million and our Board increased the dividend rate of -- by 50% to $0.375 per share for shareholders of record December 15, 2015. We are maintaining our guidance for the full year of adjusted EPS from continuing ops from $1.85 to $1.95.

We believe that we will be at the upper end of the range. So far, you know, things are looking pretty good for the quarter. We're internally very excited about the direction that we're headed in. That concludes our prepared remarks. With that we will now open the call for your comments.

(Operator Instructions). Our first question comes from the line of Bill Armstrong with CL King and Associates.

Good morning, gentlemen. I had a question on the used gross profit per unit which was down about $128 year-over-year. Could you discuss the competitive environment? Are you seeing any intensified competitive activity and, you know, you have mentioned that you're working to increase your use inventory.

I wonder if you could maybe talk about that and maybe how that impacted your -- your strong sales but in use but lower gross margin.

Hey Bill. It's Jeff Dyke. You know, if you look at it sequentially we were in line from the previous quarter. Our margin was right where we thought it would be and that's just us being more aggressive. We're carrying more inventory, we were carrying about 7,500 to 8,000 cars online.

We have moved that up to over 9,000 car lines online, so we're learning how to manage a bigger inventory and doing a better job with it. But the margins is right where we want it to be. We don't have a bunch of aging vehicles; our inventory is in great shape, probably the best it's been ever.

We had a very, very good quarter, it was our biggest volume quarter ever with any store count and the fourth quarter is starting off the same. So we're very excited about where our pre-owned business is and the margin is not a surprise. It was down over last year, but sequentially like I said earlier it's in fine shape.

Got it. Understood. And on EchoPark, you know, 920 units. You look -- just kind of looking at the sequential growth which was extremely strong in the first and second quarters looks like a bit of a slowdown. Are you guys on track in terms of your unit sales growth there?

Oh, yeah. We're right in line if not better in -- it's just September. It's just a -- you know, I like you know, June and -- or July, August and -- or June, July and August. It's just a stronger period of time in the Denver market for used car sales, but that's nothing more than seasonality built-in and we're right in line.

As a matter of fact we've announced that last quarter that we were going after our first market and looking at our second, Bob, but the Board has challenged us to go ahead and open up two PODs. Our team is prepared for that and we've pecked out both of those markets and are actively purchasing real estate now to get those next-generation stores up and running.

At the store level they're out-performing our own internal projections. They're really doing a great job and the customer and demand -- if you go online and you read some of the Yelps and things that our customers are saying about us, they absolutely love it. And our associates love it.

Very, very similar to the same kind of feedback we're get at One Sonic-One Experience. I mean it's just -- so far the technology, the training, everything we thought would happen is really beginning to come together for us and we just see upside -- nothing but upside as we move forward.

Got it. Now if I could just squeeze one more question in regarding new vehicles, you know, mid-line imports that we know the industry has seen margin pressure for a while now.

You know, we're hearing that now there's margin pressure on luxury brands as well, and you guys are heavily weighted on the luxury side. I was wondering if you could maybe address what you are seeing there.

Yes. And in particular from a luxury perspective with BMW, we've got a very high day supply on the grounds, more so than we've had in a long while, and it doesn't look like there's any relief in sight so BMW is really caused some margin erosion for us. And you look -- when you look at BMW and Honda and Toyota they make up about 56% of our total sales and all three of those brands were flat to up 2% or 3% for the quarter.

So when you combine the volume increase with a little bit of margin erosion, although Honda is really kind of flat year-over-year in margin. It's more Toyota and BMW and a little bit of Audi that's creating that erosion and I think that we're in a battle.

As long as the day supply is high in particular for BMW the margins are going to continue to be where they are and the way out of that is just to out-sell, to sell our way through it and continue to focus on increasing our F&I PORs, which we have we have done a pretty good job of and there's still -- given a couple of other performances in the sector, there's still plenty of room for upside.

I think that what we're seeing is, we're seeing an oversupply generally because of China, right? Those cars -- as China slowed down, those BMWs aren't going to China, they're coming here. And the difference between not having enough and having too many is one car. I think it's going to be a great opportunity for consumers in the fourth quarter.

I think -- I think you're going to see an artificially strong SAAR for the fourth quarter and maybe even into the first quarter with these inventories. I can tell you Mercedes-Benz is in great shape. Can't get enough of those cars.

Trucks we can't get enough of. We have what, too many --

At the end of the day you look at -- you look at Toyota and they have got a 12 day supply of trucks on the ground ending the third quarter and that makes it really difficult because with Toyota you make all your margin on trucks and, you know, h-vehicles so you know, if you don't have that and your mix is more generated towards cars then it puts pressure on your margin.

So overall it was a great quarter. It's our biggest new quarter that we have had from a Q3 perspective. Great used car quarter and we're going to see the ups and downs of inventory, you know, as the years come on. This is nothing new for us and we'll deal with it accordingly. Great position to be in.

The fourth quarter for Sonic Automotive is always our biggest quarter. December is going to be fantastic. We got lots of cars on the ground so if we're going to have a high day supply of BMW this is the time to have it.

Okay. Got it thank you very much.

Your next question is from Rick Nelson with Stevens.

Good morning. Nice.

Good morning, Rick.

I would like to ask you about EchoPark guidance there that was $0.16 headwind for the year. Do you still feel comfortable with that and how should we think about next year with the new stores and new markets?

So yes. We're right in line with our guidance. We're meeting or beating all of our targets for EchoPark and next year because we're ramping up the roll out, I would -- I would characterize that as the same as this year, you know, we'll get more specific with that as we roll into the first quarter and give a little better guidance but right now where we thought it would be $0.12, maybe $0.10 for next year.

That number is probably going to be more along the lines of where we are this year just because we're ramping up the roll out of the new stores. But we also have developed, you know, a next-generation store which is significantly cheaper. We can put it up a lot faster. Once we buy property, our team can have a store up and running, turn-key in six months.

Our goal is to be able to do it in four months, and we changed a little bit the amount of inventory that we're going to carry at each location from 125 to 150 to 200. So that seems to be the sweet spot for us.

So we're playing with the formula a little bit, but to help ramp-up to profitability in each of the neighborhood locations. So I would -- I would characterize it as it's probably going to look a lot like this year.

And Rick this is Heath. As we finalize those models as we understand how many stores will go online next year, we will share that model with all of you.

Our goal is to have 25 to 30 stores operating between now and the end of 2017.

Okay. Thanks for that color. Also, would like to ask you where you stand with the pricing tool as it relates to OSOE and the rollout plans there.

Yes. Great question. We are -- every quarter, every month we get a little better. Our market share for September -- we had leadership in market share in every category and across all the brands. Just a really, really good job. We have got the highest share that we've had so far. As a matter of fact, Toyota in October is tracking 25% share, which is just fantastic.

And lot of that has to do with our pricing tool, but we're not there yet. It's certainly not complete. Our team and our vendor program from revenue analytics we're working hard to finalize our new car pricing tool for the brands that we have along with the next launch brands, and I can tell you we're still a quarter or two away from where I'm going to feel real comfortable but the pricing tooling is doing what we expect it to do.

There's just so many nuances and I can tell you we were -- I thought we were close six months ago and we have learned a lot even since then and we're a hell of a lot further along but we're in the quite there a yet and I have got a lot of confidence in our team. We'll have a tool that we'll be ready to use for our team you know probably over the next six months.

You might give a little color on -- on what we're doing with the -- with the window.

Yes. So one of the things that we've -- we've developed is an electronic hang tag so that when we do change prices as often as we like to change prices we don't have to have someone going out and changing stickers all day long.

So we have developed an electronic hang tag that hangs on the window of the car just like a lock box would on the outside of the car and when we change a price in the system that price then changes on -- on the car automatically.

So we cut down on obviously killing a lot of trees with the amount of paper that we're using but we also cut down on headcount and the mistakes that can be made from having to go out and do that. So we're becoming a lot more sophisticated in the pricing arena, we're just not quite there yet, but I'm real confident over the next six months you will be able to see a tool that will be very, very unique for our industry and really kind of unique to retail. We're real excited about what we're building.

And Rick this is Heath. Just to add on to that because of the additional work needed on the pricing tool that's not going to slow our One Sonic-One Experience rollout and we talked about it in the past but we will phase out -- or phase in the One Sonic-One Experience starting next quarter, first quarter.

We will start rolling out the technologies to the next market and then the price will come after that. So it's not going to slow down the rollout of One Sonic-One Experience.

Okay. Got you. And any comments on October sales would be helpful, and geographically whether the oil price decline if that's having impact do you think in Texas. Obviously the rains are a challenge recently but --

Yes, you know, we can all give a weather report and last weekend was tough because of all the hurricane stuff but -- and in the end we will overcome that. We are seeing in the energy corridor, you know, I 10 and kind of the Cady area we have a BMW store and Audi store, and probably for the first time we're starting to feel a little pinch there as we deal with energy companies.

You know, there's been a lot of layoffs and those two stores have slowed a little bit in comparison to our other Audi and BMW stores in the same marketplace. So, you know, October has gotten off to a decent start. New car volume has kind of been where it's been. Or is where it's been.

Actually, from a year-over-year basis probably a little higher. Margins continue to be compressed in particular with BMW and Toyota although we're really putting a lot of pressure on the stores to -- to work on that. Our used car business is just fantastic.

You know, the move that we made with increasing our inventories, our systems, our play books, our processes, it really worked and it's fun to stress the team a little bit, put a little more inventory out there and see what they can do and they are really doing a good job.

So that business we expect to see -- to continue to see the type of increases and the type of performance that we have seen. And then our fixed operations business, if you look at the charts, man oh, man we've added net of a reduction of technicians we have added probably 300 plus technicians for the year and our customer pay business is on fire.

We really understand how to handle the warranty now in particular with Honda. We have got dedicated teams handling all of the air bag recalls and so our customer pay business is going up we're taking advantage of the warranty opportunities, our internal business is good so our fixed business is just record after record after record.

So we see that continuing on for the next several quarters. Nothing slowing down. Every day there is another announcement. GM had one yesterday.

So business should be good for the fourth quarter. It's our best quarter it's always our biggest profit quarter and a big chunk of that happens in December so we're looking forward to a big quarter.

I think its really important to realize that when analysts are building their models to -- and they compare us to the rest of the group, you really have to look at Honda, Toyota, Mercedes, and BMW because as they go, we go.

It doesn't matter what Ford or GM or Chrysler or anybody else does. Those four brands really control our destiny, if you will, and when you look at fixed ops, and you look at margin percentages and such there's a lot of accounting noise that goes into those margins and who's putting what into fixed ops versus sales, et cetera. So I would just caution everybody when you're digging in to do your homework.

We go through this every year with -- with the Street in particular where everybody always this is our first quarter and second quarter should be higher and our third quarter and fourth quarter should be lower and I think we've got about an eight year track record here of outperforming in the third and the fourth and under performing in the first and second. One of these days we'll all get on same page, but the fourth quarter should be a great quarter for us.

Well, and if you think about it a lot of these luxury vehicles are leased and those leases come off every year at Christmas, right? And they're renewing these leases. So fourth quarter December is -- is like two months to us. It -- it's just huge.

Good luck. Have a nice holiday quarter and thanks a lot.

Thanks, Rick.

Your next question comes from the line of John Murphy with Bank of America.

Good morning, guys. Maybe if I could just follow up on that fourth quarter comment you just made. I mean when you are looking at the high-end of your guidance range of $1.95 and what you have done year-to-date, it basically would imply $0.60 on the high end for the fourth quarter and it looks like you did just about $0.63 last year in the fourth quarter.

So is there something going on that you see as far as cost for EchoPark or anything else that might depress your numbers sort of on a one-time basis or is this really just kind of holding the line on the outlook for the year and being somewhat conservative on the fourth quarter?

Well, John, we're always conservative in what we do.

Well, that's a good thing.

We're being conservative.

Look, that's what we said. We're going to be to the upper end of our guidance and we should be. You know, we were a normalized quarter maybe we're ahead of that but, you know.

There's a lot of noise going on in the world. Yeah, the economy.

Who knows what's happening but we felt pretty good about where we stand. Our business, the things that we have been looking on for a long time are starting to materialize a bit and it ought to be a fun quarter.

Good. Then a second question. I mean as we look at the used car business obviously that's going very well here. You're I think at 80.8 to 1 on used to new. I think the target is ultimately you get to one-to-one. I mean you're moving there quickly -- I mean, when do you think you can get there and what do you think you need to do differently to get there?

You know, the differences -- a lot of the difference is coming out of Toyota. Because we are, you know, selling the (expletive) out of new Toyotas right now and the used to new ratios in those stores just hurts the overall -- overall number and so we're very interested -- not that we want Toyota to slow down at all.

We certainly want their trucks mix to get better. We're very interested in what happens to margins as their new pricing methodologies kick in where you can't advertise below invoice. We're interested to see what happens as they start penalizing companies for doing that.

But hopefully things don't slow down. We've got a lot of work to do to get to one-to-one in those locations that they make up a big difference in that .81 to 1 ratio.

That's very helpful color. Then a second question staying on used cars and looking at EchoPark. I mean you mentioned that the -- on a store basis you're running ahead of your internal plans.

I'm just curious you know, what that means if we were to look at not tasking the individual stores with sort of the launch costs and the overhead that's going on with the total effort, you know, how profitable are these stores on a stand-alone basis and based on your experience so far, do you think you could be looking at a model that is more profitable with better return on invested capital than what you're looking at in your new vehicle buildings or franchises?

You know, It's pretty simple here. We're building these stores with about a $7 to $7.5 million cost structure including -- including real estate and we should be able to sell -- when each neighborhood store is rolling 125 to 150 cars.

That's going to yield $1.2 million to $1.5 million a year in net income and so the -- the goal here is how many can you build. And -- yes and so the goal -- that's income per store, not after corporate overhead and -- that's pre-tax.

So then the goal is how many of these can you build. We are -- have a breakeven analysis in these stores between 60 and 65 cars. We have our first store that's got a little heavier overhead because we over built the thing. It's already doing -- our first neighborhood store is already in the 70 to 80 range.

The next one is following closely behind in the 50 range. The big store is doing 200 to 250 and, you know, I expect as we roll out the neighborhood stores under the next generation model that these things are, you know, printing money, you know, six, eight months from day of -- from day of opening down the road.

So we have in our original models we had -- we were cash flow positive at the beginning of the fourth year and these model -- our new model ramping everything up has us cash flow positive really towards the third year.

So we're very, very excited about where we are with the stores and -- and hence the request of the Board of Sonic to -- to us to increase the level of -- of stores that we had -- had projected for the next couple of years.

Sounds really interesting. Last question, as you look at the SG&A, you guys had a great quarter on performance, especially ex the EchoPark cost. I mean it looks like sales camp or comp was a big part of that. I mean is that something that's sustainable going forward and taking the SG&A down to this level and can you keep sales count down that low without impacting sales in any way?

Yes. That's the devil in the percentage sign. You know, John, our compensation is more fixed than most other auto retailers and it's an increase in gross. As our gross goes up our comp is going to continue to drop like that.

We just don't have the big variability in our company. Because you know the Sonic stores and EchoPark everybody is on a salary. In most of our import stores, we pay a flat per car, so we don't have a lot of variability in our, in our sales compensation. So if you look at the raw dollars, dollar to dollar in what we're paying out, that really didn't drop.

What happened is our gross went up and it drops that percentage number, so if you look, we're very proud of what we're paying. That's something that we would put a stake in the ground a few years ago to make sure that we had the highest paid associates in the industry, and you know our comp is as a percent of gross is not dropping because we cut pay plans. It's dropping because we're driving more gross.

That sure doesn't sounds like a devil. That's sounds like a good thing. Thank you very much, guys.

A damn good thing. Thank you.

Your next question is from Michael Montani with Evercore ISI.

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

Thank you.

Good Morning, Mike.

I just wanted to ask you know, the market share gains for One Sonic-One Experience are obviously very impressive here in Charlotte. You know, can you just compare what you're seeing on gross profit per unit trends there, obviously same store I believe was down seven, so would those units also be coming with a higher GPU rate.

Well I mean look, it depends on the -- it depends on the -- on the brand. With Cadillac and Infiniti, you know the gross profit per unit is fine. We -- there's no elasticity in pricing there. Whether you drop the price or not, there's so many -- so few cars being sold even though we have market leadership it doesn't matter. It doesn't increase or decrease your volume. Ford we really have figured that out.

So margin is down a little bit, but our total gross dollars are up and that-- that's really driving the business. The last quarter we hadn't quite figured out the Ford pricing model, but we have that down now and we have taken market leadership with the two Ford stores -- yes we're one and two in the marketplace comfortably. And then with Toyota the margins are obviously down and a lot of that has to do with just our mix.

We started the month of September we had seven total sport utility and trucks on the ground. Seven. That's it. And so when you don't have truck and sport utility on the ground your margin is going to be compressed and it is, but you got to have a little more foresight than to start making adjustments in your pricing there.

You can fast forward to October. We have a lot of, a lot more sport utilities and trucks on the ground our margin is moving up. So, you know, there's definitely margin compression in Toyota. We will try to start moving and inching that margin up as time goes on and we start advertising a little bit more, but right now we're enjoying market leadership, we're enjoying huge growth in market share.

Our fixed operations gross is up 200,000 -- 250,000 a month in gross in the stores, so we're just starting to get our wheels underneath us in that brand and so it's a little bit of a hodgepodge to answer your question for each of the brands in the marketplace.

And it sounds like net-net because of the market share gains you're seeing on a profitability basis you're more than pleased with that.

It -- well, I'm not pleased with it yet, but it's getting better every month. No question our profitability is increasing. September was our best month, and hopefully October is going to top that.

Great.

I'll just throw in that we look at total gross dollars versus margin percentages. We really don't manage based on percentages. You know, we're trying to drive the actual dollars to the bottom line.

Sure. I just wanted to follow-up in EchoPark could you discuss a little bit how the service business is seasoning there and when you think about those units at maturity and some of the profit levels that you shared, are you thinking about, you know, service as a percentage of revenues that's kind of 5% to 10% or could it get to like a 10% to 15% that you would see at a franchise dealer?

Like how should we think about that.

So the way we're looking at it is we have built enough capacity to-date to handle our reconditioning. Right now we're reconning so many cars so fast and trying to keep up with that if we go out and start really heavily advertising and marketing for service, it's going to puts a damper on the amount of cars that we can get through.

You may have read in Automotive News we're working with our partners from Manheim to have them begin to take over that load and to begin based on our buying criteria and our buying tools, buying the cars, recounting the cars, doing the detail on the cars, taking the photos, uploading them and then delivering and putting them on our shelf. Kind of like Coca-Cola would do for Wal-Mart.

So we have worked very hard with them over the last year, year and a half to design the processes in order to make that happen. Which will keep us from having to build huge recon facilities and added expense along with hiring all the people and the personnel that go along with that.

So we're working very hard to -- to mitigate that expense so that we can, we can move forward and grow profitability with a lower cost basis.

Got it. That's helpful. Just one last one I had was for Heath, you know, in terms of the cash flow outlook, you know, increasing the dividend as you did it showed some conviction in the model and sustainability of the cash flow.

So I guess I'm wondering, you know, can you provide any update for your outlook this year on CapEx, cash from ops, you know -- how much could we see at discretionary cash flow?

Yes. As you can see in the slides, I think we have a slide that number one shows our liquidity dramatically what we're worth at the end of the year as well as our CapEx spend. You know, our capital allocation model hasn't changed, and that dividend increase I think is like $1.9 million, so it's not a large amount of money for that dividend increase.

The cap allocation plan has stayed the same. We're going to always look at opportunities for acquisitions. We had deals and then we look at daily but there is a -- a priority on EchoPark and currently at our -- at our discount share repurchase is attractive to us, you know based on what we are trading right now.

So the strategy has not changed. And the dividend is a small number. It's not really going to impact our cash flow.

Okay. Great. Thank you.

Your next question comes from Paresh Jain with Morgan Stanley.

Good morning, everyone. I have to start with cost execution here. The SG&A gross performance was a lot different and for the better than what we saw in first half. So what really changed in 3Q and can we see this as an inflection point going forward?

Well, I think it's what Jeff said before. We just generated more gross and we have a lot of fixed cost, probably more fixed cost than our peer group, and especially in the comp area. So all of that was, you know, incremental throughput so that was a big driver.

Now, we did get some pickups on the top side throughout the year. You're going to have up and downs on medical, legal. We had a clean quarter in those areas on the corporate side.

So it's sustainable from a standpoint of once you start generating that gross it flows through easier because we're more fixed than variable.

Yes, and our pre-owned business is really rolling which is generating more gross obviously from an F&I perspective and so front-end gross and related gross is from F&I and fixed operations from an internal perspective. It just makes a big difference and the moves that we have made in order to generate that gross from that -- from that area has really made a big difference in the other areas, too, which -- which when you're expenses tend to be more fixed than variable that makes a big difference.

Yes. And some things to look at if you do your homework and look at our liquidity, you know, we have basically tucked away $100 million in liquidity to pay off our $22 million debt.

Yes, $22 million.

And, you know, that's not showing up on anyone's radar anywhere, but it's there. It's real. And then if you look at real estate, you know in 2000-- in 2007, we didn't own any real estate. You know, today we own almost 40% of our real estate.

If you take just an 80/20 mortgage rate on that, you have got 20% equity minimum in all of that real estate that nobody is giving us any credit for, but what we're building here is -- is a foundation for the future to have them bulletproof balance sheet and, you know, we're creating a tremendous amount of value. While yes, it's sexy to be able to go out and buy deals, you know, all the time, that's not our strategy. If that's what investors are looking for, they need to go invest somewhere else in the peer group.

If they are looking for a long-term investment and they're interested in -- in our EchoPark, which I think is really going to be our future for Sonic Automotive, I think there's a tremendous opportunity in the pre-owned market. You know, CarMax is out there which we really hold them in very high esteem. They're the big 400-pound gorilla and they have how much of a market?

They have 1.5% --

About 4% of the market they're in, 2% nationally.

1.5% percent nationally, and their market share is bigger than ours, Penske, and AutoNation combined. You know, think about that. So that's the direction that we're going in. Why should we go out and buy Mercedes stores and BMW stores at ten times EBIT when we're trading at ten times net.

You know, it's diluted. It doesn't work. So we're investing in pre-owned market. We're buying our shares back and we're returning capital to our shareholders.

Got it. So a follow-up on the used market and the EchoPark strategy, I agree there's definitely a lot of share to be gained for all players, existing and new, and that's very clear and it's one of the reasons why we see a lot of peer-to-peer online dealer models coming up as well. So while gaining share itself is not a concern, what these new dealer business models do is bring in a lot of transparency not only on the pricing front but also on gross profits or markups. So how do you -- how do you view these emerging business models and is the gross profit transparency a concern at all?

Well, not right now. The market is just too big and there's just -- I mean you get ten players -- I don't even know if you can name ten new ones but there are certainly four or five of them, and they're not going to add pressure. A lot of us are in different markets, so I don't see that as a big deal, but what I do see as a big deal is their ability to acquire inventory.

And that's the thing that we've perfected over a ten year -- over a decade here is -- is building the system to allow us -- and when we first started this everybody said, "How in the hell are you going to get all the inventory to pull all this off, blah, blah, blah, blah, blah -- and that's been for us the easiest thing.

And so I do think that they're going to have -- that's where, you know, the companies that -- that really invested the time to understand how to manage the inventory; how to buy it, how to get it through the system, how to price it, and how to get it out of the system into our customers' hands or even wholesale -- those are the conditions that are going to have the upper hand.

Not any problem getting inventory in, you know, I hear a lot of chatter up and down the -- the proverbial grapevine about, you know, different companies that are getting started really having problems with inventory which is moving their volume up and down all over the place with wild swings and I -- I see that because you get all the reports.

And there are just not a lot of them, and so that -- those are the ones that we pay a lot of attention to. CarMax obviously does a fantastic job there, but I think we do, too. And so we'll see how things go. So far, no margin pressure.

Our margins are at or actually above, in particular in F&I, where our margins are $200 to $250 better than -- than what our models had to begin with so we're very excited about where we are and see no margin pressure right now from any of the business-to-business or online-type used car companies that are being developed.

Got it. Thanks a lot.

(Operator Instructions). Our next question comes from Brett Hoselton with KeyBanc.

Hey, Brett.

Morning, gentlemen.

Morning.

Morning.

I want to start, start with the One Sonic-One Experience and can you first of all talk through -- and I'm looking at Slide 28 -- in Charlotte Phase I, Phase II, Phase III, it -- where are you at in that? It sounds like pricing -- the pricing tool is still being fine-tuned at this point in time, but how do we think about the Charlotte market in particular and how many of these items here in these different phases you feel as though you have really got under your belt?

Well, we have rolled out all of this in the Charlotte market so we did it all at the exact same time, but have no intention of rolling it all out at the exact same time. It's like drinking from a fire hydrant, right? Just too much for the stores to consume at one time.

The CRM tool, the appraisal tool, the desking tool, the F&I tool, the inventory and management tools, the compensation, the branding -- I would say that all of them with the exception of really heavy focus brand advertising and the pricing tool are all installed and we're very happy with.

But even all the tools that we're happy with we're not going to roll them out at one time because it's still too much for the stores to absorb, so beginning in the first quarter, we will start you know with the CRM, the appraisal, and the desking tool for our Management Team to begin to use and we'll roll that out over a period of two years.

Within that same time frame we'll come back, you know, nine to twelve months later and begin rolling out our F&I tool which is really making a big difference in these stores in helping you know, our -- our experience guys or sales associates perform from an F&I perspective. Until the pricing tool is ready, we're not rolling it out.

You know what, we've got to get that and get comfortable with it and again, like I said earlier, we're six months away from bringing that to a position where I think we're going to be comfortable with it.

And I would --

So as we think about this technology -- I apologize.

As we think about this technology rollout then, we want to think about this as going across all your stores simultaneously kind of over this time frame?

Not simultaneously, no. We have a -- a training team. We're going to start on the west -- we have kind of two divisions. We're going to start on the West Coast and East Coast and meet in the middle, and it's going to take us a couple years to get the CRM, the appraisal, and the desking tool in place. That's not something you can do overnight.

It is a huge undertaking -- a big, big change in culture from a technology perspective. And so we will very slowly, very methodically install these processes to make sure that we dot our I's and cross our T's and execute -- and we're executing at a level that's totally acceptable.

I can say that this -- this is Scott. We've had numerous manufacture partners in going through the system and the technology and, in fact, yesterday we had Mr. [Resonit] in town from California and he was absolutely blown away as have been our manufacturer partners by the system and the ease of use and how integrated everything is. So yes, I would say that we're trying to err on the side of caution in being conservative in our rollout.

You know, it is a big change in culture. And as Jeff said, it's like, you know, drinking out of a fire hose when you go into a dealership and you plug this new technology and processes and pay plans and everything into a dealership so it just take time and then it has to mature. You know, once you get it in.

Okay. And then on the -- on the new car GPU, I know it was a asked a little earlier here. As you think about the outlook, you know, obviously seasonally you see a pickup in the fourth quarter due to a luxury mix and that sort of thing, but as you think about the outlook for new car GPU, how would you characterize this at this point in time? Would you kind of say it's stable at the current level, or do you think there's some potential for some additional downside or maybe some recovery? How do you think about that?

Yes. I mean look, a lot of it depends on -- on your brands mix. For us, I think we're not going to get any lower, but as long as BMW and Toyota -- as long as the Toyota mix doesn't include a big day supply of trucks, you're going to have margin compression. That's all there is to it and -- I don't see their truck inventory getting better overnight.

And BMW, look they're introducing new products. Like I said earlier, we got an 85-day to 90-day display of BMWs on the ground. We're not going to have anymore day supply on the ground, I can promise you that.

But you know, as long as their day supply is up, I think that their margins are going to be where they are now but as that begins to come down, law of supply and demand -- you know, your margins are going to go up.

I don't think for Sonic Automotive and our brands mix you will see our new car PRs get any lower. In fact, you made the comment given the quarter our PRs will go up, but as we get into the first and second quarter, you know, there may be some softening from where we were in the first quarter but certainly not to where we are at the end of the Q3.

Okay. And then on the used car GPU kind of a similar question, you know, stable trending up or down and -- but I'm also interested in knowing how do we think about EchoPark impacting your used vehicle gross profit per unit.

Yes. It should -- it should help it. I mean EchoPark's running, you know, new, used and recon combined at $3,300, something like that. So that's -- that's -- excuse me. I meant used F&I and recon. We didn't start selling new at EchoPark.

And so it should help it, you know, the used car margins are better so it should help it, especially versus the import and domestic stores. But what's really going to be fun is just the extra gross dollars it's going to bring to the table just because we're selling so many cars. That's going to make a big difference.

And then, Heath, you talked about in the quarter getting a little bit of benefit from I think some medical and legal stuff in the SG&A line. Can you at all quantify that? Give us a kind of sense of the impact of that or the benefit of that in the third quarter? Because it sounds like at least that portion is not necessarily sustainable.

Yes. It's actually -- we just incurred higher-than-expected expenses in Q1, too. It isn't that it was lower. What you are seeing now is expected. We just had higher exposure in Q1 and Q2.

Okay. Excellent. Thank you very much, gentlemen.

Thank you.

At this time I would like to turn it back over to management for closing remarks.

Great. Well, I just want to thank everybody for take time out today to join us on our Q3 call. Hope you have a wonderful day. Thank you.

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