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Sonic Automotive Inc  (NYSE:SAH)
Q4 2018 Earnings Conference Call
Feb. 20, 2019, 11:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, and welcome to the Sonic Automotive Fourth Quarter 2018 Earnings Conference Call. This conference call is being recorded today, Wednesday, February 20th, 2019.

Presentation materials, which management will be reviewing on the conference call can be accessed at the Company's website at www.sonicautomotive.com by clicking on Our Company, then Investor Relations, then Webcasts & Presentations.

At this time, I would like to refer to the Safe Harbor statement under the Private Securities and Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectations about the Company's products or market or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the Company's filings with the Securities and Exchange Commission.

I would now like to introduce Mr. David Smith, Sonic Automotive's Chief Executive Officer. Mr. Smith, you may begin your conference.

David Bruton Smith -- Chief Executive Officer, Director

Thank you and good morning and welcome to Sonic Automotive's fourth quarter 2018 earnings call. I'm David Smith, the Company's CEO. And joining me on the call today is our President, Mr. Jeff Dyke and our CFO, Mr. Heath Byrd. I will provide some brief comments and then turn the call over for questions.

In the fourth quarter of 2018, we reported $0.51 per diluted share from continuing operations on a GAAP basis and $0.76 per diluted share from continuing operations on an adjusted basis. For the full year of 2018, we reported $1.22 per diluted share from continuing operations on a GAAP basis and $1.79 per diluted share from continuing operations on an adjusted basis.

Some highlights for the fourth quarter, we're excited that our EchoPark stores retailed 8,762 units during the fourth quarter, that's up 94.9% from the fourth quarter of last year. We increased the quarterly cash dividend 67% to $0.10 per share. We generated fourth quarter revenue and gross profit of $2.6 billion and $370.7 million respectively. We had record fourth quarter pre-owned retail unit sales of 35,135 units, and record fourth quarter F&I gross profit per retail unit of $1,659. This resulted in record fourth quarter F&I gross of $109.6 million.

We were challenged on the franchise side of the business in the fourth quarter, specifically in two of our most important and profitable brands, BMW and Honda. Although, we maintained our market share of the sales available in those local markets in which our BMW and Honda stores operate, the incentives we received on a per unit basis were below our expectations and below our historical levels.

On the EchoPark side though, we were very pleased with the trajectory of our unit sales in our stores. As discussed in the prior quarter, we saw our new Charlotte location perform better than any other new EchoPark store in its first month of operations and we continued to see that performance throughout the fourth quarter. In fact, all of our EchoPark stores sold more units in the fourth quarter of 2018, than in the fourth quarter of 2017. And we see that trend continuing in the first part of the quarter of 2019.

Lastly, we are also pleased that our Board of Directors approved a quarterly cash dividend of $0.10 per share, which is again a 67% increase from our previous quarterly dividend of $0.06 per share. This change to $0.10 per share increases the dividend closer to levels experienced prior to 2008 and demonstrates our commitment to return capital to all shareholders. The dividend will be payable in cash for our stockholders of record on March 15, 2019. The dividend will be payable on April 15, 2019.

At this point, we would like to open up the call to questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Rick Nelson from Stephens. Your line is open.

Rick Nelson -- Stephens -- Analyst

Thanks. Good morning.

David Bruton Smith -- Chief Executive Officer, Director

Hi, Rick.

Jeff Dyke -- President

Good morning.

Rick Nelson -- Stephens -- Analyst

To follow up on EchoPark, a loss in the fourth quarter, $0.08 compared to $0.04 a year ago. What was the driver there, (inaudible) store openings and a loss for the year, $0.34, if you can provide some color around your expectation (multiple speakers)?

Jeff Dyke -- President

Yeah, you bet, Rick. You bet Rick. This is Jeff Dyke. Yeah, we moved our big store in Dallas. And so when we moved that store, it took a couple of months for it to get back up on its feet. But this is a store that traditionally is making about $1 million a month, $800,000 a month and selling 1,200 to 1,300 cars, and it just took a couple of months to get it back on its feet. It's back there, made $1 million again in January. We expect that kind of level of performance again in February. So we've sort of weathered that storm, plus we opened two stores and there's just carrying cost that goes along with that. And I believe, I told you on the last call, we thought it'd take a couple of quarters for EchoPark -- a couple of more quarters for EchoPark to get profitable, including all of our top side expenses. I'm proud to announce that in January, EchoPark was profitable including all top side expenses. So, we're very excited about that. It's just every single day, it seems like we're setting another record. So, EchoPark is just doing everything we anticipated. We told everybody that it would take us four, five years to get profitable. We are there now. And -- so, we're expecting to be profitable for the quarter. February is a little short of a month. We'll see how that goes, but then we're expecting to have a huge March. And once we have a profitable quarter of covering all expenses then we'll start talking about some aggressive expansion plans. But we're very proud of the brand and I hope that answers your question.

Rick Nelson -- Stephens -- Analyst

(inaudible) Jeff. Thank you for that. EchoPark in Charlotte, which sounds like that that store is performing quite well. Are you doing anything different in that market than you are elsewhere?

David Bruton Smith -- Chief Executive Officer, Director

So, EchoPark Charlotte was sort of the first store that we opened after we merged driversselect and EchoPark together and all the processes. So, it's kind of our first baby out of all of that, and really it was unbelievable. Our first month of store made $85,000, selling over 300 cars. In the next month, I think it sold 327 cars, made $150,000 grand (ph) in January. So, yes, it's just a cumulation of that and what's fantastic is our Houston store opened just after that, they're about two months apart, and we're seeing the same kind of lift. Now Houston is a much bigger store with a lot more overhead, but that store is going to do 370 to 400 vehicles this month. We expect it to do in the 400 to 500 range in March and to get profitable. So, when we first opened EchoPark, it was -- it would take a year to get us profitable and now we've cut that down to less than six months. In Charlotte's case it was basically its first full month. And so, we figured out the formula. When you came to visit us, we were talking about the things that we were working on and we believe we've got the formula figured out. It's making money and we're ready to launch this thing and do a lot of good things with it. So, we could not be more excited about EchoPark and where it stands today than we are. I mean it's just -- it's fun to watch.

Rick Nelson -- Stephens -- Analyst

Right. And at the franchise side of the house (inaudible) same-store units were down (inaudible) was the driver for that. BMW, Honda you mentioned (inaudible) call out those brands in that market to look how you're doing elsewhere?

David Bruton Smith -- Chief Executive Officer, Director

Yes. So, Texas did play a role there. We're still battling -- at that point in time, we're still battling some of the Hurricane comparison. I think BMW for the quarter for us was down 13%, Honda around 8%. And I think, Texas was down 7%, 13% (inaudible) 13% when you pull those out. So, when you combine those, a big chunk of our business is in Houston. And honestly when BMW and Honda don't perform at the levels that we need them to perform at, there's such a large part of our overall mix that it just causes us issues. And that's why we are building EchoPark, quite honestly. And it gives us the off-ramp when the manufacturers have these ups and downs. But we're big believers in Honda, we're big believers in BMW, and they're going to come roaring back and do great things, but we don't need that inconsistency. I mean, when that -- when you have those two brands playing such a big role in your overall profit and volume mix, you got to have other options. EchoPark is that option for us. We've worked really hard to get here and now EchoPark can start hearing some of that weight (ph).

Rick Nelson -- Stephens -- Analyst

Okay. Thanks a lot and good luck.

David Bruton Smith -- Chief Executive Officer, Director

Thank you so much, Rick.

Jeff Dyke -- President

Thank you.

Operator

Our next question comes from the line of John Murphy from Bank of America Merrill Lynch. Your line is open.

David Bruton Smith -- Chief Executive Officer, Director

Hi, John.

Yarden Amsalem -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Good morning. This is Yarden here on for John.

Jeff Dyke -- President

Hi. Good morning.

David Bruton Smith -- Chief Executive Officer, Director

Good morning.

Yarden Amsalem -- Bank of America Merrill Lynch -- Analyst

Hi. First question on interest rates. You guys mentioned that in your press release as a potential headwind this year. Can you share with us your strategy around managing rising rates and inventory levels? And I mean, are the automakers doing anything on the floor plan assistance side to help?

David Bruton Smith -- Chief Executive Officer, Director

I wish they were doing more to help quite honestly. We had less floor plan assistance last year in 2018 than we did the prior year, and hopefully we can get them to start thinking that way. We came out of the fourth quarter with a 59-day supply of new cars. So, I feel like we do a really good job, but we are working. We put in even more rules and regulations for our stores to bring the inventory levels down further. You can have a little bit of spike in day supply in January and February, just because the seasonality of those two months. But I feel real good where we are there. We built in three rate increases into our numbers for 2019. We'll see if that happens. And so effectively those were hidden (ph) increases. They've actually eaten up all the tax rate that we got and win (ph) some. And so, it's a very difficult situation. We're working hard to make sure we maintain our inventory levels. We feel like we do a really good job there, but there's no question that we're going to have to do even better in order to offset interest rates climbing over the next few months.

Yarden Amsalem -- Bank of America Merrill Lynch -- Analyst

Okay. So just a follow-up on that. Can you remind us how much interest rate exposure do you have in your floor plan line and other debt in terms of what is variable versus fixed?

David Bruton Smith -- Chief Executive Officer, Director

Say that -- will you ask the question one more time?

Yarden Amsalem -- Bank of America Merrill Lynch -- Analyst

Sure. How much interest rate exposure do you have in your floor plan line and other debt in terms of what is variable versus fixed?

Jeff Dyke -- President

Yes. It's about 50%, we use caps to -- we no longer use swaps, but we use caps, it's about 50% as exposed to variable rates.

Yarden Amsalem -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you. And then lastly on the parts and service side. It seems to be a little bit soft this quarter on a total basis, but the performance was so much mixed by segment. Can you maybe provide some color on the divergence incomes between customer pay, warranty and internal work and so on? Is there anything in your markets that is driving that?

David Bruton Smith -- Chief Executive Officer, Director

Well, I mean, I think we had some bigger comps in Texas from the year-over-year -- from the hurricane piece, that's certainly one. We had some trouble with our Honda stores from a fixed operations perspective and that drove a little bit of that. We rectified those issues. And so, we saw a much better performance in January than we've been having, and I think we were up 3% to 4% in January, which is back to kind of our normal growth rate. And that's what we're expecting for this year, somewhere in a 3% growth rate. And then also we had a big strategy change with fixed operations when it comes to EchoPark. We got totally out of the fixed business. That's just not part of our model and that's why you're seeing the profitability improve at EchoPark. So that took -- from our forecast, that took a big chunk of the planned gross that we were going to get out. So that should suffice to answer your question.

Yarden Amsalem -- Bank of America Merrill Lynch -- Analyst

Okay. So, what's your outlook for -- I'm sorry for 2019? Do you expect (inaudible) start picking up again this year?

David Bruton Smith -- Chief Executive Officer, Director

We do. On a same-store basis we're looking for a 3.3% increase, I think is the exact number. On a consolidated basis we will be down about 1.9%, but that number -- in our forecast that number includes us selling two stores. We sold a big Lexus store and a big Honda store in the DC area. We were being asked to do some massive facility consolidation work on those stores and we just couldn't find the return on investment for putting the money into those stores. So, we sold those stores, got a big return for the investment that we had in the store, and we're putting that capital to use elsewhere. So that's for the cause a little bit of the total fixed operations number to look of those three (ph) this year. But on a same-store basis we're expecting to be up about 3.3%.

Yarden Amsalem -- Bank of America Merrill Lynch -- Analyst

Okay. Great. That answers my question. Thanks so much for the color.

David Bruton Smith -- Chief Executive Officer, Director

Yes, ma'am.

Jeff Dyke -- President

Thank you.

Operator

Our next question comes from the line of Armintas Sinkevicius from Morgan Stanley. Your line is open.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Great. Thank you for taking the questions. Just with BMW, I wanted to understand the dynamic, because you're expecting a good line-up here at new vehicles. Was it the incentives or was it the supply of new vehicles or both that pressured results? And also, do you think WLTP had some impact with -- related to the supply of BMW vehicles and your outlook for BMW going forward particularly given the new line-up?

David Bruton Smith -- Chief Executive Officer, Director

Yeah. Well, look, there's no question that we'd hope that some of the new model launches would have gone faster and better, that's OK. We have great outlook at BMW, they're a fantastic manufacturing partner and I think that they'll bounce back and have a good 2019. But certainly the incentives and the volume levels were not where they need to be in the fourth quarter. Our BMW gross was down about $5.8 million for the quarter and our volume was down about 13%, and we do not expect that. When we got to the end of September, our BMW business was off about 1%. So to have that big -- you could not have trended that out, you wouldn't have, and just really had a tough December. And we usually have a huge December with BMW, and it made it a difficult month for us when they're such a large part of our profitability, so goes BMW, so goes this Company. And so, that's why we're building EchoPark. So we have other means to drive volume and profitability and don't have to count so heavily on those two brands in BMW and Honda, when they make adjustments or they -- because they're going to have issues as the years go on, we all do. And for us to better support ourselves to better support them, even, and to be a good business partner, we need to have other ways to bring profitability into the Company and that's what we're doing with EchoPark.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Okay. And then with relation to only providing GAAP results on a go-forward basis, just wanted to understand the thought process, the reasoning behind that. If I look at this quarter for instance GAAP results would have been worse. So I'm sure there's a rhyme and reason to it, but just wanted to understand your thinking there?

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

Yes. This is Heath. There's really nothing more than trying to be compliant with SEC, and not having to go back and forth from an SEC perspective. And it's also -- you saw the AutoNation has done the same thing. We'll obviously provide some color around any of the adjustments on the earnings call, but we've made a decision as a company to only report on a GAAP basis going forward.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Got it. So, we'll still get some disclosure as far as some of the one-off items that we should be mindful of for our firm (ph) models at least?

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

Yes. Absolutely.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Okay. Much appreciated. Thank you.

Operator

Our next question comes from the line of Colin Langan from UBS. Your line is open.

Colin Langan -- UBS -- Analyst

Great. Thanks for taking my question.

David Bruton Smith -- Chief Executive Officer, Director

Hi, Colin.

Colin Langan -- UBS -- Analyst

Hey. How should we think about BMW and Honda? Do you still think those are going to be headwinds into next year, I mean -- or is Q4 more of an anomaly that we should think about?

David Bruton Smith -- Chief Executive Officer, Director

Well, look we thought the combination of BMW and Honda for all of 2018 we were down $20 million in profit between the two brands, so that was a big headwind the entire year, fourth quarter just happened to be elaborated. When you look at Honda, a lot of that were short supply on Civic and incidents on Accord, the great news is is Honda got better as the quarter went on and in January, we were back up and rolling again with Honda. So, I don't see that being a headwind at all. And we'll see with BMW. It depends on the incentives and how they handle stair-step programs and all the things that BMW is doing. They're a great company with great products. And -- so, I think that one is a little bit of a hit or miss until we get a couple of more months under our belt and we see what they do with incentives and how the product launches go, the X7 is coming which we're all really excited about, in particular in our markets it's a fantastic product, and I think it's going to do very well. That will mean a lot for our bottom line and our volume levels. So, we're a lot -- we feel a lot better about both of those brands than I do. I do not think we'll see a repeat of what we had in 2018.

Colin Langan -- UBS -- Analyst

Got it. And I'm not sure if I missed this earlier, on EchoPark, I think in the past you said you expect it to be profitable next year, breakeven for the full year. I mean, is that still the outlook? I mean, what is the profit profile as we go forward?

David Bruton Smith -- Chief Executive Officer, Director

Yeah. I mean, we -- look, our forecasts are actually to lose a little bit of money with EchoPark for the year. But if you look at how we performed in January and we look at how we're performing in February, it seems to be that we're going to beat those forecasts. So we're very excited that the EchoPark is really starting to pick up a lot of steam, and very excited about our last two openings both in Charlotte and Houston. These stores have just rocketed off. It took us two years to get to the kind of volume levels that Houston is doing, just in a couple of months in the Denver market. So, we think we've cracked the code, we've got profit coming in, and we're really excited about where we are. It's going to be a fun 2019.

Colin Langan -- UBS -- Analyst

And -- but it's fair to say the second half is where you start seeing profit or like you said (multiple speakers) the year is still losing in the first half and then back to profit in the second?

David Bruton Smith -- Chief Executive Officer, Director

We'll see. We made money in January. So we'll see how it goes. My expectations for our EchoPark team is to start making money now. If we can make money in January, why can't you make money, the other 11 months of the year. We're selling cars. February's daily run rate is probably the highest daily run rate that we've had of any months since we opened EchoPark. So, my expectations are for us to be profitable. We didn't forecast that way, we were a little more conservative there. But January sure it was fun to make your first profit and to do it in the fashion that we did selling a lot of cars in that month. So there's nothing but upside for the rest of the year from my perspective.

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

Yeah. And this is Heath. I think one of the variables in the profitability of EchoPark is how aggressive we decide to grow the brand. If we continue to see the profitability, we'll probably get more aggressive throughout the year. And as you open new stores for the training and hiring that could impact the overall profitability. And that is actually one of the drivers of the no longer providing guidance because we want to have the flexibility of EchoPark. And again, if we continue to see the kind of performance that we saw in January and are seeing in February, the growth plan can get a lot more aggressive.

David Bruton Smith -- Chief Executive Officer, Director

The other thing is there is a lot of news going on now about the tax refunds and are they going to be as great, is there a bunch of surprises on that, always plays a big role in the used car business. So we'll see how it goes. We feel very good about where we are with EchoPark. It's going to be a great, great year. Obviously, we lost north of $20 million with EchoPark in 2018. We're not going to be anywhere near that in 2019. So, it's an exciting time for our Company and an exciting time for this brand.

Colin Langan -- UBS -- Analyst

Got it. And just lastly, the press release mentioned some headcount reductions, I guess about 6%. I mean that was not in the Q4 result, but started in Q1. And any quantification -- (inaudible) any quantification of the savings that you should get from those reduction?

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

Yeah. This is Heath. That's correct. There will be -- we'll start seeing the savings start in Q1. That was just one of many initiatives that we have to reduce SG&A. And so far we've identified around $20 million of decrease in SG&A, including that reduction and that coupled with, if you look at our CapEx spend for 2019, we're reducing that by $55 million. And so, we're really focusing on free cash flow. And -- so to answer your question, Q1 is when you're going to see that reduction in SG&A.

David Bruton Smith -- Chief Executive Officer, Director

Yeah. And this is David Smith. And one of the big things that we're wanting to do is, as Heath mentioned, we want to focus our team on what's most important, and we believe that we had a lot of different projects going on. We've eliminated a lot of expense and are really focusing on our core business and growing EchoPark in our strategic goals. And that's going to lead to much more profitability, we all believe. So --

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

And just to add -- one more thing to add, this is Heath. We have made a decision as a company to really focus on improving our leverage ratio. And so, as we generate free cash flow with reduction of CapEx, some of the proceeds that we mentioned on the two stores that we sold, as well as the increased profitability from the franchise and EchoPark, we're going to focus on taking our debt down. And so, I think you'll see that the way that we plan on providing capital back to the shareholders will be in the form of dividends, and the free cash flow remaining will focus on taking down our debt.

Colin Langan -- UBS -- Analyst

Got it. All right. Thanks for taking my question.

David Bruton Smith -- Chief Executive Officer, Director

Thank you.

Operator

Our next question comes from the line of Bret Jordan from Jefferies. Your line is open.

Mark Jordan -- Jefferies -- Analyst

This is Mark Jordan on for Bret. Good morning.

Jeff Dyke -- President

Hi, Mark. Good morning.

Mark Jordan -- Jefferies -- Analyst

Good morning. So looking at the used vehicle segment, we had some strong unit growth in the quarter, but it looks like gross profit kind of -- gross profit per unit had a bit of a decline. Can you talk about the driver there? Was it really maybe the result of chasing volumes during the quarter or perhaps the average profile of the vehicle has changed?

Jeff Dyke -- President

No, no. Are you -- you are talking on a consolidated basis?

Mark Jordan -- Jefferies -- Analyst

Yeah, on a same-store consolidated basis.

Jeff Dyke -- President

Yeah. Okay. So, what that is is the mix of EchoPark coming in. EchoPark's front-end margins are zero (ph), somewhere in there. So when you mix them together, you're bringing the overall margin of the Company down. At the same time EchoPark's back-end margins are really high, north of $2,000. So it's bringing the overall Company F&I margin up. So the combination of those two, we just don't look at front or back, we look at the combination of the two, and just work sort of the elasticity of the pricing off of that. And -- so, we had a -- I think it's a record gross and volume quarter for us on the same-store basis in the fourth quarter for the franchise side, and it was certainly a record on the EchoPark side. So, yeah, we were up on the franchise side, I think in GPU about $18 to $20, somewhere in that ballpark. So, it's just the mix of business that's creating that, but certainly have no concern, we're selling a lot of cars and it's just a blend of the two brands coming together.

Mark Jordan -- Jefferies -- Analyst

Okay. Perfect. Yeah, it makes sense. And I know you discussed performance in Texas, but can you talk about performance in some of your other markets such as California, Tennessee, Florida?

Jeff Dyke -- President

Yeah. Look in the fourth quarter, Northern Cal and Southern Cal were a little softer, but the East Coast has been holding strong. It doesn't matter if it's Carolinas, Florida, Alabama, Tennessee, Georgia, our stores all there performed fairly well. We did have the Honda and BMW struggle. Our California stores and Texas really caused some of the year-over-year comp comparisons forcing, and obviously Texas it's just the hurricane stuff. And California that's where our biggest mix and blend of BMW and Honda stores are and we've been -- as you know we've been struggling with the brands, and hopefully those days are behind us, in particular with Honda now, and I believe we're going to see that with BMW as we move across the next couple of months.

Mark Jordan -- Jefferies -- Analyst

Okay. Great. And then in terms of your other larger brands, such as Toyota, Mercedes, how do they perform during the quarter for you guys?

Jeff Dyke -- President

On both cases, all major brands in the markets that we do business in were down. And I've never seen that before in my 14 years here at Sonic Automotive. I mean, every single market we had,all of our brands were down. We were able to maintain our share, but when you have every brand going down, that makes for a difficult situation. So, Mercedes down, I think it was down double digit. Certainly --

David Bruton Smith -- Chief Executive Officer, Director

11.7%

Jeff Dyke -- President

Huh?

David Bruton Smith -- Chief Executive Officer, Director

11.7%

Jeff Dyke -- President

Yeah, 11.7%. Audi was down, Chevrolet, Ford were down. In particular, Chevrolet was down, but we were -- I think it was the only brand we had that was actually up in volume driven by our big, big Lone Star Chevrolet store in Houston, Texas. So, across the board -- and we saw it again in January. We started looking at the same report that we put out. We looked at in January, it's like, oh crap, here we go again. The new car business is just -- it's a little topsy-turvy right now. And we feel like our pre-owned business, our fixed operations business, F&I is just doing fantastic. We had a record year, and we're going to have another record year this year there with our partners from JM&A. They're doing a great job in terms of training and on the EchoPark side our partners with (inaudible) they're all just doing a fantastic job with us. So, the new car volume is going to be a little bumpy as we move forward, but between EchoPark and the other departments we feel like we're going to have good 2019.

Mark Jordan -- Jefferies -- Analyst

Okay. (multiple speakers)

Jeff Dyke -- President

Also -- I'd also add onto that, Mark, that David mentioned this earlier, we have really been doing a lot of soul searching and we have cut out just a ton of projects that weren't giving us enough clarity with the Company. And so, we really -- and we're watering this down (ph), we really moved a lot of that aside. That's part of the savings that Heath Byrd talked about a minute ago, and there's more there. And as we move through this year, we'll realize more and more of that savings.

Mark Jordan -- Jefferies -- Analyst

All right. Great. Thanks for taking my questions.

Jeff Dyke -- President

Yes, sir.

David Bruton Smith -- Chief Executive Officer, Director

Thank you.

Operator

Our next question comes from the line of Rajat Gupta from JPMorgan. Your line is open.

Rajat Gupta -- JPMorgan -- Analyst

Hi. Good morning. Thanks for taking my question, and thanks for all the details on the call. I just had a question on your SG&A to gross profit progression that you expect in 2019. Now, you talked about savings from some of the restructuring actions that you took. It looks like EchoPark could turn positive this year. You also have a couple of divestitures. So just combining all of that, I mean, what's kind of like the progression we should expect for SG&A to gross heading into '19?

Jeff Dyke -- President

Yeah, in our forecast right now we were at 78.2% to $78.3%.

David Bruton Smith -- Chief Executive Officer, Director

Including rent.

Jeff Dyke -- President

Including rent, correct.

Rajat Gupta -- JPMorgan -- Analyst

Got it. So, that's down pretty materially from 79% you did in '18. And just on the two divestitures that you mentioned. Could you help us size a little bit on the rough earnings impact from that we should see in '19. Is there a rough ballpark number (multiple speakers) ?

David Bruton Smith -- Chief Executive Officer, Director

Earnings impact.

Jeff Dyke -- President

The impact on earnings, I think with the combined -- go ahead.

David Bruton Smith -- Chief Executive Officer, Director

Revenue was $240 million.

Jeff Dyke -- President

And I think the -- I think the combined income impact when you combine what we sold and what we know we're going to sell, I think it's around a $4 million net income impact, and that's what we forecasted.

Rajat Gupta -- JPMorgan -- Analyst

Got it. Understood. It's great color. Just one last one on F&I. I didn't hear much on the call. Just on that -- you had a pretty strong 2018. What's your outlook for '19 there? I mean, should -- do you still expect those healthy trends to continue? I know new vehicle probably declined the mix. So, what's kind of baked in into your internal expectations there, just for F&I gross profit in '19?

Jeff Dyke -- President

Yeah. So, we've baked in about a 5% increase in F&I. We expect the trends that we've had to just keep on continuing, in particular EchoPark just runs really high F&I margin. So that helps overall, but the work that we've done on the franchise side of the business and the relationship that we have with JM&A is making a huge difference in our performance there. We're well over $1,500 now, and we don't see why we can't be in the $1,600 range, we just keep moving that target up for ourselves. And the stores keep performing, so we're really excited about where we are, so about a 5% increase in gross is what we're putting into our model.

Rajat Gupta -- JPMorgan -- Analyst

Got it. Great. That's it. Thanks for taking the questions.

Jeff Dyke -- President

Yes, sir.

David Bruton Smith -- Chief Executive Officer, Director

Thank you.

Operator

Our next question comes from the line of Grant Jordan from Wells Fargo. Your line is open.

Grant Jordan -- Wells Fargo -- Analyst

Hi. Good morning. Just a couple of follow-ups from earlier comments. Appreciate the comments about capital allocation and trying to focus on paying down debt. Do you have a target in terms of where you want your balance sheet either in terms of amount of debt or leverage?

Jeff Dyke -- President

Sure. We actually are really focusing on the public debt side. Obviously, we will look at what is the best opportunity from a financial perspective, giving up our higher interest debt first. Our goal at this point is to focus on reducing our debt by $300 million within the next 12 to 18 months.

Grant Jordan -- Wells Fargo -- Analyst

Okay. And then along with that, can you give us the amount that you sold those two stores for in terms of net asset sale proceeds?

Jeff Dyke -- President

No. We don't disclose that. But, yeah, you will be able to find in the K.

Grant Jordan -- Wells Fargo -- Analyst

Got you. And then on the CapEx, obviously that's going down from last year, thinking forward a couple of years, do you feel like it's just going to be tighter in terms of CapEx spending or should we expect to see that go back up?

Jeff Dyke -- President

We are -- this is Jeff Dyke, to put a stake in it, we're not going to have our CapEx go back up. We are done at this company and with our manufacturer partners building facilities that do not have a return on investment. And we're working hard with our manufacturer partners to get them to recognize that it's not the size of the building and how many square feet you have in the building that allows you to sell cars. And so -- those days are over. So our CapEx dollars are coming down. I think it's in our budget this year about $108 million, down from $140 million something or $150 million something the year before, and down from $200 million (ph) something the year before that.

David Bruton Smith -- Chief Executive Officer, Director

$234 million. (ph)

Jeff Dyke -- President

Yeah, so we expect that number to continue to fall. We've got a few projects that we're finishing up this year with our manufacturer partners, and then we'll focus on the investments that we're going to make in EchoPark. But EchoPark we build a facility, we do it for significantly cheaper than we build a new car store for, and then we sell about three or four times more cars out of it. So, there's a lot we're learning at EchoPark that we're trying to teach the manufacturers on, and it's been a fight, it'll be a fight, but I can assure you that the days of us spending a lot of money in the CapEx area without return on investment, a proven return on investments, are over at this company.

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

Yeah. And it's -- what we have forecast right now is $123 million and what you're going to see is as Jeff just mentioned, you're going to see a lot more in the EchoPark and less in the franchise, and we're also -- you'll see a dramatic decrease in the IT CapEx that you've seen historically.

Grant Jordan -- Wells Fargo -- Analyst

Great. Appreciate all the information.

Operator

(Operator Instructions) Our next question comes from the line of David Whiston from Morningstar. Your line is open.

David Whiston -- Morningstar -- Analyst

Thanks. Good morning. Going back to the BMW headwinds in the quarter, in addition to inventory shortages and incentive issues, do you think the rise of the Tesla Model 3 in California played a role?

Jeff Dyke -- President

There's no question. I mean -- they're calling out to sell well over 300,000 cars this year, they sold a lot of cars last year. I can tell you that I've spent a lot of time in manufacturer meetings and five years ago Tesla was just not even a real big topic and today it's the top of everybody's board and it needs to be. They're selling a lot of cars. And until BMW -- I think Audi is really doing a good job coming out with products, but until the manufacturers come with the line-up to deal with them, you can say all you want about their service problems and all of this, they just keep selling more cars. And I don't know if it's more of a cult than it is anything else, but my hat off to them. They're selling lots of cars and there's no question in California that (inaudible).

David Whiston -- Morningstar -- Analyst

Okay. That's helpful. And over to EchoPark, I'm just curious why you guys had an impairment charge there in the quarter even though it's a young business that's growing. It was the fixed op cycle that you mentioned earlier?

Jeff Dyke -- President

No, we -- just like any business, there were a few facilities that we built that just weren't working, that weren't selling the kind of volume we needed, and we changed strategy a little bit. So we didn't need as many stores in the Denver market as we had, so we closed the store and we are selling the property, and that's what that adjustment was.

David Whiston -- Morningstar -- Analyst

Okay. Thanks, guys.

Operator

We have no further questions in queue. I'll turn the call back to our presenters for closing remarks.

David Bruton Smith -- Chief Executive Officer, Director

Thank you very much and we appreciate you being on the call and everyone have a great day. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 37 minutes

Call participants:

David Bruton Smith -- Chief Executive Officer, Director

Rick Nelson -- Stephens -- Analyst

Jeff Dyke -- President

Yarden Amsalem -- Bank of America Merrill Lynch -- Analyst

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

Colin Langan -- UBS -- Analyst

Mark Jordan -- Jefferies -- Analyst

Rajat Gupta -- JPMorgan -- Analyst

Grant Jordan -- Wells Fargo -- Analyst

David Whiston -- Morningstar -- Analyst

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