Q4 2020 Sonic Automotive Inc Earnings Call
Good morning, and welcome to the refund at automotive fourth quarter 2020 earnings Conference call. This conference call is being recorded today Wednesday February 17th 2000, and once you won.
Presentation materials, which accompany management's discussion of on the conference call can be accessed at the company's website at IR Dot Sonic automotive.
At this time I would like to refer to the Safe Harbor statement under the private Securities Litigation Reform Act of $19 95.
During this conference call management may discuss financial projections information or expectations of the companies.
Or market.
Otherwise make statements about the future such statements are forward looking and subject to a number of risks and uncertainties that could cause the actual results to differ materially from the statements made.
Those risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission.
In addition management may discuss non-GAAP financial measures as defined by the Securities and Exchange Commission.
Please refer to the non-GAAP reconciliation tables.
And our report on form 8-K filed with the Securities and Exchange Commission earlier today I.
I would now like to introduce Mr. Jeff Dyke President of Sonic automotive Mr. Day, you may begin your conference.
<unk> and special note everybody I was caught in Texas, and that's unprecedented snow and ice storm and temperature storm.
We're low on and electricity so at.
For some reason I cut out Heath Byrd will take over my speaking notes.
With that and good morning, everyone and welcome to Sonic Automotive's fourth quarter and full year 2020 earnings call and Jeff Dyke, The company's President joining me on the call today is our CFO Mr. Heath Byrd, our executive Vice President of operations, Mr. Tim <unk>, Our vice President of Investor Relations, Mr. Danny Weiland, and our Chief Digital retail officer, Mr. Steve Whitman, who.
Recently joined our team to drive the expansion of our omni channel digital retail platform.
Earlier today, we reported the highest quarterly revenues and earnings and our company's history with record fourth quarter revenues of $2 8 billion and and adjusted EPS of $1 50 up 54, 6% from the fourth quarter of 2019 and addition, the full year 2020 was our second consecutive year of full of all time record adjusted.
Earnings with adjusted EPS of $3 85 up 45, 3% from $2 65, and 2019. These record results reflect the strength of our diversified business model the dedication of our teammates and the support of our manufacturer and vendor partners and the face of unprecedented challenges we face together this.
Year.
During 2020, we took targeted measures to improve operating efficiencies.
And manage expense throughout our entire organization and fundamentally improving our cost structure. As a result, we achieved all time record adjusted SG&A expenses as a percentage of gross profit of 68, 1% for the fourth quarter of 2020 down 560 basis points from 73, 7% and the fourth quarter of 2019.
Full year of 2020, adjusted SG&A expenses as a percentage of gross profit were 72, 9% 400 basis points better than 2019.
2021, we expect to continue to see a benefit of our permanent SG&A reductions. However, the rapid rate of expansion at Echo Park May drive an increase in SG&A as a percentage of gross profit, while still being accretive to the bottom line overall.
Turning to our core franchise dealership segment fourth quarter revenues were $2 4 billion down one 2% from the prior year and up 11, 5% sequentially from the third quarter of 2020.
Franchise dealership segment income increased $37 1 million or 68, 2% compared to the fourth quarter of last year.
Driven by strong new vehicle and F&I gross profit per unit, and a $33 million reduction and adjusted SG&A expenses free.
Size dealership segment adjusted SG&A as a percentage of gross profit was 65, 2% down 810 basis points from the fourth quarter of 2019.
Looking at Echo Park for the fourth quarter revenues were an all time record of $386 9 million up 25, 4% from the prior year quarter. This growth was driven by of 17, 1% increase and used vehicle unit sales volume to 14841 units for the full year of 2020 Echo Park revenues were one.
One 4 billion at 22, 1% increase compared to 2019 with retail sales volume of 57161 units up 15, 4% from 2019 for.
For the first quarter of 2021, we expect of retail between 18, and 19000 units at Echo Park, and a way to delivering between 100 and 105000 units for the full year of 2021.
And as part of our Echo Park expansion strategy. We recently completed the acquisition of two pre owned businesses, and Maryland, and New York, expanding our geographic footprint and to the mid Atlantic and northeast lease.
These include carbon serving the greater Baltimore, Washington Metro area and used car King of Syracuse based pre owned group service car buyers throughout New York State.
Each of these businesses already embraced at the same culture and values that define Echo park with a highly qualified team focused on providing an exceptional experience and incredible value to their guests.
We're in the process of transitioning these acquisitions into our Echo Park model and expect them to generate total annual revenues in excess of $350 million at maturity before any revenues from future delivery and by centers that these markets will support.
By way of update our delivery and by some of our concept our first market and Greenville, South Carolina Retailed 166 units and was profitable in January and at six full months of operation.
Our second delivering by center and Knoxville, Tennessee opened in late December and retail at 55 units and its first full month nearly nearing what we saw in Greenville and month one.
For comparison before entering these markets with the delivery and by Center model, we sold and average of 10 to 12 units per month, and Greenville, and two to three units per month and Knoxville from our nearest hubs demonstrating at these truly are incremental sales into the adjacent markets.
The opening of four new Eco park locations and the fourth quarter and 7% for the full year of 2020 brings our total at year end to <unk> 16 lease plus the two acquisitions completed to date, the opening of our Phoenix, Arizona store next week and the additional openings in 2021 will give us over 40 points and place by the end of 2021.
As you can see we are well underway and establishing our 140 plus point Echo Park nationwide distribution network, which is expected to retail over a half of million pre owned vehicles annually and drive 14 billion and annual revenue annual Echo Park revenues by 2025.
And the meantime, we're focused on addressing the tremendous growth opportunity and untapped value and echo parts of unique pre owned vehicles sales concept car buyers nationwide continue to discover the exceptional pricing inventory selection purchase experience at Echo Parks Echo Park offers the guest centric in store experience combined with our omni channel too.
<unk> and delivery set of model offers Echo park shoppers, a full range of buying options to meet their needs.
Our consumer studies, including at Harris insights poll commissioned in September of 2020 continue to reaffirm our belief in an omni channel approach matches the ideal purchase experience for the vast majority of car buyers when.
And when we launch our new digital retail platform and the fourth quarter of this year, we expect to provide our guests with an online experience and sets a new standard of excellence and this industry.
Before I turn the call over for your questions I'd like to talk about the market conditions and trends, we're seeing throughout the first month and a half of 2021.
The new vehicles sales momentum and elevated margins from the fourth quarter has carried into 2021 and the industry slowdown and used vehicle demand in November and December has steadily improved in January and February to date.
While the pressure on used vehicle margins at Echo park persisted longer than we expected and the fourth quarter January total gross per unit was back in line with our model and our expectations for 2021 of our franchise dealerships parts and service business continues to recover more slowly than wed like but it is showing signs of improvement adjusted for calendar differences year over year, our fixed operate.
<unk> gross was down roughly 4% and January compared to nearly 6% for the fourth quarter.
We believe at the vaccine rollout continues to gain momentum and Americans feel more comfortable resuming daily activities as of year progresses, our parts and service business will bounce back.
The F&I continues to be a highlight of our business as we eclipse 2000 per unit for the first time and the fourth quarter and continue to expect growth in this area and 2021.
And closing 2020 was a challenging year in many ways. However, our fourth quarter and full year results show the strength and resiliency of our franchise and Echo Park models.
We are much leaner more efficient and we're a stronger company than we were prior to 2020, and we believe each of our business segments is well positioned for both near term and long term success. This.
The stage of set for an exciting 2021 for Sonic automotive with 25, New Echo park locations to open and rollout.
And the rollout of our new Omni channel digital retail platform by the end of the year.
As always we look forward to keeping you updated on our progress throughout the year.
And this concludes my opening remarks, and now I'm going to turn the call over to Heath Byrd for a few opening remarks of his thank you.
Ladies and gents.
And he opened up of equation and I just wanted to provide a little bit more color on what we're seeing and our 'twenty 'twenty one outlook.
And as Jeff mentioned each of these numbers and this outlook is to align with what we're seeing.
February.
Also keep in mind.
And should ease and the middle of the storm and <unk>.
Some of these numbers at first quarter, and we're going to have some impact from the storms and this impact.
Texas, which you guys know is one of our largest franchise markets and our.
The largest single part of the market.
<unk>.
Birmingham Nashville and.
So hopefully.
And just quietly and obviously there'll be some type of stores right now are closed.
It's also important to note at the outlook.
The outlook on that and go over real quickly.
Surety of the growth is weighted to the second half of the year, obviously, we believe and things will pick up dramatically as vaccines and rolling out and we get back to normal.
So all of them and franchise side.
And do we expect the.
Growth rate to be up double digits on volume GPU, we think it will continue to be elevated well aware of the shortage of inventory.
First cash and start to normalize and the second half of the year.
Franchise used.
Banking and linking to.
And low double digit growth.
And volume.
The GPU this as Jeff mentioned are normalizing and we expect them to normalize at approximately 13 and robust full year.
Thanks, Lee of forecasting full year to be of single high single digits. This is definitely weighted to the second half of the year. We still have as you all know large portfolio is related and California, and we still see some closing there. So we think that will ramp up more end of second half of the year.
F&I gross of low double digit growth.
And changing to see opportunity to increase of GPU and <unk> and continued dispatch and 2000.
Per unit.
On the ankle product segments as Jeff mentioned at 60 stores at the end of the year, we actually opened up for it and the fourth quarter.
And we will grow to 40.
Locations by the end of 'twenty, and 'twenty, one and Thats, two and half times, our current footprint, so very digital and new stores IGN and should we expect growth of 75% to 85% units year over year.
As a percentage of the total revenue and go park was about 15% of total revenue of 2020, and we expect <unk> growth to 20, and 25% and 2021 as it continues to be a higher percentage of the business you're at site.
And good luck to EBITDA was approximately $11 million in 'twenty and 'twenty that includes deep drag of $6 16 of the new stores, we state that should be approximately double.
And that in 2021 and that includes a drag of about 12 of 14 million of he.
EBITDA.
Each of the new stores at our opening in 2021 and <unk>.
EBITDA growth is definitely weighted to the second half of the year as the opening of new stores and a short maturity.
From a capex perspective on Echo Park, we had budgeted at $75 million in Capex for that growth you can see and all of those.
We are developing all of these locations at such a low capex.
Capex spend this is a capital light.
Strategy and this allows us to tell.
Take that free cash flow and is being generated on the franchise side and.
Our liquidity and also increase our opportunities for growth on the franchise side. So you can see at very low capex to get to that 40, new stores and income part.
So from a consolidator standpoint, and a couple of things to keep in mind I think it's very important and we talk about this each year.
The profit cadence at Sonic because of our portfolio of next.
15% to 20% of our.
Profitability will kind of the first quarter.
<unk> 25 in the second 25, and the third and about 30% 35%.
And the fourth quarter and again Thats at luxury brand mix of at such a big fourth quarter.
SG&A perspective.
Consolidated basis, 2020 was 72, 9%, we expect that to be flat to slightly up and 2021. The franchise SG&A will continue to lever we've mentioned the $84 million and we continue to see.
And reduced expenses.
But that will be offset that at that lowering of SG&A on the franchise side will be offset.
Due to the new stores and we're opening at Echostar.
The other thing to keep in mind as Youre looking at Q1, typically because of seasonality cadence of our SG&A as a percentage of gross is typically.
700 to 900 basis points worsening from when you related to Q4.
EBITDA, we expect to be low double digit growth and EBITDA.
Tax rate and shares.
And modeling and expect a tax rate of approximately 26 of 28%.
Share count will maintain approximately $44 million, we will do share repurchase should instead of dilution from the best seats and it will happen in 'twenty and 'twenty one.
And with that I will turn the call over for questions.
At this time I would like to ask simply press Star then the number one on your telephone keypad and.
We will pause a moment to compile the Q&A roster.
Your first question comes from the line of Nelson from Stephens, Inc. Your line is open.
Yes.
And Ken market and.
Good morning, Robert or color around 'twenty and 'twenty one.
One two.
And a bit.
Other kalydeco parts of some of the franchise side they.
And they used a bigger kind of this.
And for a little kind of humming.
He used standpoint.
Kurt.
Talk about what should happen.
That happened in November.
And it.
Could be back on prior carrier and January outside of <unk>.
The weather issues.
Hey, Rick This is Jeff Dyke so on.
On the franchise side of the business couple of things happened. One is you know we've got a lot of stores and our portfolio and the west coast and.
And we've got a lot of BMW stores, there and with the unprecedented amount of lease returns that are coming back.
And.
And the margin that we're losing at most lease returns because of that because of BMW and a lot of the highway and dealers held lease returns for a while going through Covid, we're getting all of those returns back.
And where our margins are a lot less on those cars.
Today then.
And then they were four or five months ago. So that's.
And that's playing a big role we don't expect that to continue at BMW is working with us and some of the other manufacturers. So we don't expect that to continue but certainly played a role and.
Our margin on the franchise side.
Throughout the fourth quarter and a little bit in January but it's certainly normalizing of.
On the Echo Park side, you really have to break that segment down the used car segment down into the one to four year old category and then older and.
Anything five years and older we're all making great margin on.
And that exist on the franchise side of the business and at but not at Echo Park because of the Echo Park of one to four years only and the margin on the one to four year old, but and our 30 day supply of inventory targets that we keep and turning that inventory really fast which helps us get to the high volumes that we need for our model created.
And overhang in terms of margin erosion longer and the fourth quarter than we thought it would the good news is is that inventories.
Inventories are back in line, our margins or our relative again to where we were at pre COVID-19 and so we're off to the races again and.
Couple that with a great first quarter, 18, and 19000 cars and our focus on selling of 100 of 105000 cars for the year and Echo parts. She is going to have a smattering of Goodyear so.
Unprecedented times when you have this massive swings in inventory valuations.
And it definitely affected.
Was a shrinking one to four year old category in terms of volume and the fourth quarter across the country.
And it certainly affected the margin and.
But we're back on track and expect net issues as we move forward.
Credit repair.
And to that.
Look at them.
'twenty and 'twenty, one and I guess.
From a different purchase price of a prebuilt back.
<unk> covered.
Earnings power at 2019, and then the.
Of that $84 million and cost takeout rigged up out of <unk>.
From lower.
Floor plan and.
Or just kind of slower rates there.
And im.
Calculating a number of around $4 and how are they won tons and.
And then.
And this should be higher in 2021 compared to 2019.
We've got program at co parts and.
And 2021 compared to 2020 and 2009 and.
And <unk>.
Free cash flow of it looks like that would support buybacks or for acquisitions.
Acquisition.
And what credential comments or anything I'm missing I guess that J P. You, probably not sustainable but.
Should be bigger and 'twenty and 'twenty, one compared to 2019.
So this is Jeff a lot to unravel there when you when you I expect the new car Gpus and the first half of 'twenty 'twenty one to be Greg just like they have done and I expect all of that to carryover I expect F&I.
And $2000 Mark.
And I expect F&I to continued to do very very well.
I think from an EPS perspective, and an EBITDA perspective, the only thing Rick that you really need to think about a little bit. There is the drag that we will get what kind of opened 25 stores, there's a lot of complexity and moving from.
We grew Echo park, we stopped growing and he made it profitable we proved our model and now we're going back into growth mode, and there's a lot of complexity and and growing that many stores that fast.
But we're very confident that we can get that done but it is going to as he stated in his opening statements at is going to create.
And it's going to create drag from the SG&A perspective, So I think you need to make sure of that as you're modeling 'twenty. One we sort of if you make sure that you include those stops and your model.
Because there is a.
I would say somewhere between 12 and $15 million drag from opening those up on and SG&A from an SG&A perspective.
Great.
Just to add and I think you're spot on I think that if you look at.
The total business model and all of its all of the metrics that drive profitability and.
And you've got channel wins in almost every category.
We do think and things will pick up and the second at the end of the year new.
New.
Jeff mentioned Gpus of instill.
The elevated and the first half usually has a lot of opportunity based on what we discussed at the opening comments.
And both vehicle parts and franchise side and so really of the.
And drag is the opening of tobacco.
But all of the other segments, we expect at ads.
Tailwind and to have a very good year.
And one of those segments with the drag being.
And the expansion the accelerated expansion of bank of park and the expenses related to that.
It should be another record setting year.
Relative to purposes.
<unk> discussed the tailwind should really drive us to another record setting year.
And then.
Finally on the balance sheet.
Yeah.
And that too.
Net to EBITDA.
And below two times.
We're at closer to one times.
Should be able to fully fund.
And Capex.
And with the free cash on the franchise.
How does the house.
Yep.
Thought I'd ask about.
Capital allocation, you're tired of it.
Our leverage ratio and.
What should be at with the excess cash.
Yeah, a couple of things that you are exactly right and the fact that we at Winter Park and a capital line kind of strategy, we can actually grow and at without continuing ramp of point now that we don't have to utilize all of the free cash flow from the franchise side of the business of number one we believe that we can start.
Accumulating additional liquidity, which can be used for opportunities on the.
The franchise side number one and number two.
Nothing has been contemplated.
Absolutely at capacity, if we see at good opportunity and the option of capacity from a debt perspective.
Kind of term would you contemplate at accelerating at.
Our growth for.
Would be the infrastructure and not support.
Support that.
Hey, John.
From a capex perspective, we got plenty of cash to do it. It's a resource perspective, we're actually putting up of store every two weeks actually every week almost and so it's a resource perspective.
More than it is capital.
Hey, Rick this is Jeff so the other thing.
Is that and it's one thing that you saw during the fourth quarter as we acquired.
And to deal with two groups from a premium perspective that fit our model.
And so that's another piece of the evolution that's happening at Echo Park that will allow us to grow faster because you have already personnel in place you of facilities in place no really capital constraints to build.
And so all we have to do is trained and build the inventory pipeline and price and away. We go and so it makes us be able to expand quicker.
So as those deal as those opportunities come along.
Youll see us take advantage of that because it will allow us to move even faster towards that $14 billion number.
And that we've been talking about for 2025.
And yes.
The one thing that at.
On the free upside relative to your franchise acquisitions.
So instead of a much sort of timeframe and as little of 30 days of much lower EBIT multiple.
Manufacturer of considerations in terms of approvals and flow and driving that process.
And you said accelerating that growth and do so much more cost effectively all of it.
Human capital and resource constraints.
Thank you guys at very good point and then what she has of Janney.
And then the entry into like an acquisition of a pre owned is dramatically less and a new site.
It's one of the color and good luck.
Thank you rich.
Your next question comes from the line numbers from.
From JP Morgan Your line is open.
Hey, good morning, Thanks for taking the questions and yet.
I appreciate all the color one of them.
21 of them moving parts.
And just one point of clarification, and then a couple of questions sort.
For the fourth quarter, and the comment around 15% to 20%.
Of earnings.
Was that like was that at an EPS number or was that EBITDA or pre tax I just wanted to clarify that that seasonality that you have provided for this year.
Yes that is a profit.
It's related to profit of 15% to 20% of our total profit for the year free.
Realized in Q1.
Right.
Chip.
The net income is that at or.
Yes from a net income or <unk>.
Yes for sensors.
And now you went back a few years prior to that and typically our seasonal cadence for the quarter contributions.
Okay and the change.
And.
And this takes into account and the strength youre seeing and under new Winkle grosses as well.
And that is that right or is that just more of a.
Normalized trajectory.
Excluding the benefit yearly and percentage of total year. It definitely takes into account what we're seeing in January and February. So we expect to see that throughout the year. So as a percentage, we still think at 15% to 20% will share in the first quarter.
And you wouldn't be aggressive.
And Q3 Q4, that's why you see our luxury weighted income in June relative to the rest of the industry.
And outside of that coming out of cash.
And Keith.
Got it Okay. That's helpful and then.
And does this based on the Echo Park.
Out of things.
You guided to I think of training to $22 million of EBITDA.
For this I mean this is still like.
And you said, 90% of right away from your five year target there.
So when and when is the when is the period or the quarter.
The other really where you can see earnings get inflicting I mean, you've had obviously ramping up these new stores and they've added cost.
And with that but.
I mean, you're essentially guiding to 2021, EBITDA flat with 2019 levels of our Echo Park. So.
Despite several despite twice the number of units.
And youre going to continue to add a lot more stores going forward. So it's 2022.
<unk> year of inflection or at the drink and 23.
Just curious if you could just.
Give us some sense of that.
And that trajectory towards verify their plan and EBITDA and I have one last fall.
Josh at site.
Just Jeff one.
The one of the things that you need to think about us and 2019, we really slowed opening stores right.
To prove the <unk>.
Profitability at concept of tobacco Park right, there that we could actually sell a bunch of cars and make money, which is a novel idea and this will stay and time and.
So.
Now that we're moving into we've never we've never opened 25 stores and one year of Ben in 'twenty, and we opened seven and so theres a lot of drag that comes along with that we could tomorrow stopped opening stores and returns of really high profitability, but youre going to see us growth. Another 25 stores and 20 to another 25 stores and 23 on our.
And are having a 140 plus distribution network across the country. We youll continue to see profitability improve as we move into 'twenty, two and 23, where you have more stores that are maturing and it's taking 689 months to get the stores really off the ground and and profitable.
Great News about of our recently announcement today is the delivery center was profitable and six months sold at 166 units and make money and the first six months. So that's really really good news for us and our second delivery centers, taking off the same way as our first so I would expect profitability of the beat what were calling out this year.
And I would expect and see that continue to improve as the stores continue to mature.
And if you look at and based on our projections 2022 is when you start seeing you down.
40 locations 40 locations that have gone through the at maturity or a portion of their maturity. So to answer. Your question. Specifically 2022 is when we see that tipping point that you've started having enough stores at have mature.
At more of hitting net bottom line profit.
And just to add to that.
For each of the 25 store cohorts to be open at $12 million to $14 million of EBITDA drag.
From a pre opening and free.
Breakeven loss perspective, and so that's.
And 2021, and 2000 and supply.
And so based sources and excuse me and got today going into 2000 and soon to be 40 plus stores.
Sure. So if you are comparing our outlook for 2021 back to 2019 levels. It's really you know the $20 million and into 2019 is comparable to the $33 million to $35 million.
And forecast for 2021, excluding net drag from.
And new stores.
Exactly.
Correct.
That's helpful color.
And just last one on the digital rollout could you give us a sense of.
Cars were sold.
Through those channels.
We have gone back to this transaction out of the customer getting at home delivery at or just thinking of the car.
And.
And if you could give us an update on the rollout of the Darwin Cox.
Platform, how that's going any updates on that or when do you expect that to be fully aligned with all of the inventory that would be helpful. That's it for me. Thanks.
Sure sure.
And and changes of the retail officer here at Sonic.
Two questions there so the first one.
And the percentage of cars that have gone through additional channel. So we actually think about it.
Any differently from a consumer perspective.
And because we want to make sure we serve the consumer throughout their customer journey and in Germany, and a mix of physical and digital.
And with us.
And on our website and our call centers and of course, and our physical locations.
And you kind of really consumer center share right. So we've done at like Jeff mentioned and again some good research of the aerosol and September of 2020, which told us and only really at 90% of consumers, one and execute their digital their process of 100% digitally.
At 75% of consumers Conversely.
Hybrid model. So we actually think about omni channel is a hybrid model, where the consumer day in and out of both physical and digital and having a seamless handoff between the two.
So that he can be adaptable and to their needs.
So and Thats our strategy our strategy is to have an omni channel.
Sales infrastructure in place.
Alright, and our strategy.
And also to make sure that day.
And of the seamless so of the consumer and doesn't notice of any day.
And they talk to a person versus when they interact online.
No specific data for Sonic and last year of.
90% of our consumers actually start on our websites before they come into our stores.
40% of of our consumers and online and when at Saint Kate.
Cash and line.
And today, John with the content of form.
Global financing on top of so first of all of the GEC and chat and kind of.
Great.
And then lastly, EQT at 10% of consumers go end to end online with the Darwin tool.
And that's been going on now.
Average changed our consumer of about two hours at the dealership timeshare and was a key piece and delays of our consumers and day.
And any other physical and digital.
And so that's the first phase of the first question.
And second question and how we're thinking about our digital strategy this year.
At the parallel path. So that she has a one of them of optimizing what we have at the door when and Cox of relationship.
And you've seen some of those changes already happen online you can go to our ankle for our website and look at our vehicles listing page and you can see.
And we've dramatically simplified we've made consumer interaction with our photos better.
Consumers have more options and see more cars above defaults and heightened improve.
And the consumer of shape right now on their websites and same thing of Darwin.
And the process clear, where the consumer and the prop.
And we simplified the language to really turning into consumer language, not and dealer language.
In parallel we have kicked off a massive projects here at Sonic decrease of best ecommerce platform and the automotive industry.
And what we're doing new areas of partnering with and I'll say firm and we're looking at what's the best E Commerce experiences that consumers have in automotive, but also outside of automotive. So can she was a great experiences on Amazon.
On day here on Walmart Dot com.
And we'll apply those learnings to the car buying industry.
And there's something really really special.
New products the competition, we don't wanted to see and copycat of what's already out there.
And so I'm Super excited about that we're tapping of accounts outside of the industry of course were leveraging our industry expertise.
Not only just the E commerce from day to day standpoint, we're also creating a modern tech stack.
And that'll be adaptable to our future needs. So at the last one just one of your two years five years and 10 years.
Okay.
Got it thanks for all of the color.
And good luck.
Thank you.
Your next question comes from the line of John Murphy from Bank of America of your line is open.
Good morning, guys.
Good morning, and.
First question.
Around sourcing used vehicles and.
All of that seem to be shifting.
With lease returns and.
And so we're seeing more and more online and and away from the physical auction and engine.
Seems like there's a lot of shifting here so maybe.
Getting beyond just like the next quarter or two and just thinking.
Later this year of over the next five years.
We envision.
And the bulk of your sourcing coming how do you. How do you think it's at shifting obviously, you're trying to make it more efficient over time and lower cost.
Transaction and at pricing at both.
I think of that business, and what kind of opportunity and there might be for HEICO parts and your franchise dealers.
Hey, John its Jeff Dyke, so what we're buying.
A lot of our inventory now through the auctions.
And.
And that that is going to transition to us buying more and more cars off the street and we're working on some different applications as a part of Steve Whitman's comments and he made a second ago to make it much easier because of the consumer to trade of vehicle and to us off the street.
And so while that's a smaller percentage of our overall inventory today.
Less than 15%.
We expect that to grow to north of 25% to 30% as we move forward.
And take more and more opportunities for consumers off the strength there is not.
We don't have a hard time buying inventory.
And particularly in the 1% to four category, which is where the bulk of the inventory is so.
And so theres no concern for us as we move forward on can you get enough cars to support your 140 network.
To support all of the franchise stores and everything that you do we certainly will take a number of our cars and on trade, but most of those cars that were taken on trade at Echo Park are moving over to our Sonic stores to our franchise stores, where they are turning those cars really fast at higher margins, which has been a big.
A great thing for us and synergies between the two companies.
But there's no concern in terms of sourcing.
The sourcing and supply.
And we'll shift over time to more cars off the street.
And from our perspective than versus buying and the auction lanes are at the at the.
The franchise stores at the closed sales.
But do you envision a period of time, where you are sourcing more than 50% of your new people and inventory through trades and and off of repurchases.
And you said, you said, 20%, 30% I think interest you at current comments, but I mean it.
Could this be the majority of your vehicles at some point and the future.
I think that it can be the majority.
And the future as long as at one to four year old supply is there.
And perhaps and as the vehicles that you buy off the street price.
670.
Your old cars Theyre not the one to four year old cars and Thats Echo parts model.
And so from a franchise perspective sure.
But.
On the Echo Park side will continue to source of a higher percentage through the auctions through the manufacturers through the rental car companies.
As we see opportunities because of that that low cost products that we're looking for and that one to four category. That's our that's what.
Drives our volume at Echo Park, and there are less opportunities to buy off the street and the one to four year old category and there are and the older cars.
Got it Okay. That's helpful. Second question just on the card based and used car acquisition. It sounds like it's a weighted really.
And so on and hybrid.
Ciber hypoglossal and new market.
And as the integration of those does work and then given that you have sort of of standard model Youre running.
And so of Green 70 stuff heat and know exactly what youre getting at with what Youre getting at how you're doing it.
When you acquire and new stores and.
Whole lot legacy assets.
Assets people and processes.
How does that integration work.
Yeah, it's a lot of eats a lot easier and you might think because you don't have all of the franchise baloney that we have to deal with on the new car side.
Very very quickly are buying system takes over their buying and we're supplying inventory ended both locations already so we're filling that up our training team has been putting in our playbooks.
And our processes the great thing is as we've got.
For really good facilities now.
And very very good locations, one being and Laurel, Maryland, which is just a really good used car market.
And we've got all of the great people and the assets already on the ground. So now all we have to do it and they were already one price. They were already so I was trying to do some things at Echo Park to us, but just haven't figured out the formula and what we're doing is just coming in and finishing the pieces of the formula which is allowing.
After really.
Move a lot faster and that's what's that's what's great and this evolution of of Echo Park is where we're looking at new stores and there's plenty of them out there and were thinking well gosh. We could go buy we could go buy at facility instead of having to go build and find and searched for real estate and all of that stuff. We could go buy and facilities. It's already in operation if it meets our.
And our standards and they have they share in some of the same cultures and characteristics and then convert those fairly easily and.
And both leadership groups of both organizations.
They introduced us to each other.
Our snapper and real quickly.
And as a matter of fact of one of the guys that we purchase is now running our our distribution part of our distribution network and the delivery and by centers. So it's a very exciting time for us because it's going to allow us to be even more efficient and more effective with less capital than what we were doing prior.
Yes.
And interesting and then just lastly, I know you've kind of highlighted at the new vehicle market might be a little bit inventory tight and GPU 12th of the strong first half of the year. It seems like that makes a lot of sense. Just curious on the chips were at side, if youre seeing any.
Kind of shocks.
Production schedules and vehicles and transit are just not not showing up just yet or is that something you expect to be dealing with.
And in the coming weeks and months of this thing really kind of hits.
And then at that end up being of how positive is joining us focus on very rich mix and it's not such a bad zone.
Look at the end of the day.
And the manufacturers and we're learning and we're all learning shorter day supply and the entire margin and better turn rate.
And the manufacturers and have to spend less on incentives.
And so I suspect that you're going to see a permanent change and our industry I do not think that we will ever get back to the.
And the high high levels of inventory and slow return, we're all pushing for that including the manufacturers. The chip piece has not had an immediate impact it's going to have an impact as we move forward over the next month or two but again remember short supply has created all time best front end margins.
Very easy inventory management, and and that fits right into our breadbasket because we've already.
How we're built is to really type of day supply of everything in.
It makes it nice and when the whole rest of the world has to do that.
I'll get to have better margins and I think the industry's learned of big lesson here over the last 12 months with that.
Thank you very much.
You bet at.
Once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Your next question comes from the line of Mark Jordan from Jefferies. Your line is open.
This is mark Jordan on for Bryan Good morning.
Hey, Mark.
Alright.
Thinking about the franchise side significantly of the parts and service segment are you able to.
Provide a breakout maybe each channel and where do you think of largest headwinds to recovery there.
You mean service and parts and body shops.
Yeah Yeah.
So sure I mean, we think we can get that to you. After the call at the end of the day of the body shop businesses is really different.
Lot less driving a lot less accidents and so that's been a big a big struggle for everybody at the industry and total.
And the parts business follows the service business and the service of our Roes are down because people are not driving as much.
And so we saw about a 4% decline and January six.
And 6% decline and the fourth quarter, we expect that and Heath was saying earlier on we expect that to really change as we move into the back half of the year of the vaccines are out and people are getting more comfortable driving around.
That's kind of and traveling that's going to make a big difference for us and we expect the back half of the year to be much better from a fixed perspective and the first half.
And this is mark.
At the Inc.
The segment of Changzhou survey overall sort of fourth quarter was roughly flat and.
And our same stores.
And our service collision repair collision repair was down.
And almost 20% and the fourth quarter and I think that's in line with what we heard from some of the competitors and say wholesale parts all of the account.
So you've got lower more activity and the start of planes that are josephs independent shops, or some kind of thing.
A similar impact.
And Mark one other thing to add to that is that the parts at the body shops are borrowing from our parts departments certainly parts of off by that percentage as well.
Great Great. Thank you and I.
I guess switching over to Echo Park at just.
And thinking about we've seen quite of few online only used vehicle platform and the merge recently can you maybe talk about how Echo park differentiates from those platforms and what advantages you have by providing that physical footprint at the customers might want to visit.
Yes, sure I'll start and see Wilmington.
Chime in here and a second but.
Our data shows 75% of the customers out there want to touch and feel of the car.
And we think we have of physical footprint plan that will allow us to.
Grow across the country very efficiently capital light and heat was saying earlier and.
So in many cases.
Those online platforms are spending more capital than we are on physical plants.
And getting getting.
Getting their inventory up and running but at the end of the day, we feel like we have a very very good plan and.
Effective and efficient plan to rollout our plant and our facilities across the country and then provide a really cheap pricing.
A used car perspective, and we're at 2500 of $3000 cheaper than our average competitor and the one to four year old market and it's going to be very difficult to compete with that as we open up across the country.
And make that happen.
And this is not you said Inc.
And there is really to me, there's really three components of differentiates Echo park from all of the competitors and number one as Jeff mentioned this price we have and cost structure that we can provide the lowest price and high quality vehicles, and when you ask and consumer and what they're looking for the very first thing.
And from the used vehicle price as the number one driver so to me and pricing strategy and our expense structure is of number one differentiator and number two as Steve Whitman discussed and the data says that people want to buy cars differently.
We're gonna be of used only is at a miss out on a large percent of the population and you're gonna be a physical onside on lease you kind of Miss out on a growing percentage of the population you have and the ability to both and that is the strategy that women and walk through and that is our strategy to address the journey that the consumer want.
And then the third component is is his operational expertise and we are Jim.
Illustrated for years that we lead the industry and inventory management, we've got yet.
Huge and use of experience running automotive dealerships. So when you add all of those three together the best price and the ability to buy the way you watch NBA expertise to operate.
Those of the things and differentiate differentiate and Echo park from the competitors from our perspective.
And this is Steve and just to add onto that we're designing our digital ecosystem and away and we want.
And Thats flexible right and that's the consumer and continue and out of the digital and physical world and consumer doesn't view those as two separate things anymore, Rainbow and on Amazon and when you've been in physical stores and at the way consumers think about digital retailing and the automotive industry, and we're getting to and the ability to shop.
They want online from wherever they want it they're sitting on the left and.
Shopper card of Eric and.
Desktop and office being lifted and chocolate our economy of some flexibility and being a consumer needs and consumer and understanding it.
Key.
Number two at seamless handoff is very important consumer should notice when they get in and out of digital or physical or should have the infrastructure so that of consumer fills out.
And I steps online and they are able to take other steps six when they talk to somebody at our <unk> and our customer call center or channel or go into a dealership.
Seamless integration between digital and physical without the consumer noticing is critical to us.
And the consumer experience and then lastly at transparency price and this is all about.
And in line with vehicles for equity income.
Transparent with our products and services online and also where our products exist.
And some of the opportunity to come in and.
Touch and feel smell of the product that they wanted a relative do everything they want to and mine and looking at our cars and our products and services.
Flexibility of seamless handoff and transparency of the hallmarks of our digital products and.
And this is Steve again.
We believe that you've heard Steve talk about Steve Lindeman talk about we are listening to the consumers what they really want and we believe at the leading indicator for long term success.
Percentage sanctioned.
And I think and you look at our ratings at you'd look at the customer satisfactions.
And can see and we lead the industry and Echo podcast phenomenal reputation from the consumer satisfaction perspective, and then.
And it's the leading indicator for long term growth of give meet the needs of the consumer you're going to have long term success.
And success.
And market. This is Jeff if you add to that if you look at our Greenville performance Greenville has got our highest NPS highest customer satisfaction scores.
Already.
And so we're real excited about that because youre doing the entire transaction basically online other than state regulated.
Pen to paper and then delivering that car from one of our centers down to Greenville, and or we have and office and yet we have our highest satisfaction scores in that marketplace. So the customer is talent. We're listening as he said the customers telling US. Yes. This is the right formula of this is exactly what we want we lumpy expenses.
<unk> and most importantly, they love the price and.
And that's the big difference if you can create the cost structure that supports your ability to run the price 2500 to $3000 of car below retail and it allows us to really expand and grow and and to do that effectively and efficiently.
Really good news early on for us coming out of our delivery and by centers and.
And we look forward to updating you guys more as we as we roll out more.
Okay, great. Thank you very much and best of luck.
You bet.
There are no further questions at this time I turn the call back to Jeff for closing remarks.
And at everybody joining us on the call sorry.
The opening here in Texas being thing with all of the weather, but we worked our way through that and certainly appreciate everybody. We'll talk to you on the next call.
Thank you that concludes.
That concludes today's conference call. Thank you everybody for joining today you may now disconnect.
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