Q1 2021 Sonic Automotive Inc Earnings Call

Good morning, and welcome you at all.

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This conference call This conference call at anyway.

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During this conference call management May discuss.

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Such statements are forging and.

Thank you Bryan.

Thanks.

And that could cause actual results to differ materially from the statements.

These risks and you said.

Our G suite and they kept 25.

And of Securities and Exchange Commission.

In addition management day discretionary.

Non-GAAP financial measures as defined by the Securities and Exchange Commission.

Please refer to the Dawn Jaffray.

And the company.

And for them.

And with this decrease cash could be.

Good day.

I would now like to introduce Mr. David.

Chief Executive officer at Sonic automotive.

Smith, you may begin to flow.

Okay.

This is sort of got it and that was very choppy from our perspective I want to be sure that the listeners and here.

And the best of being bad connection.

Yeah.

Yes, everyone kidney.

Okay.

Thank you very much and good morning, everyone and welcome to Sonic Automotive's first quarter, 2020 one earnings call.

I'm, David Smith accounts you see.

Joining me on the call today is our president Mr. Jeff Dyke our.

CFO Mr Heath Byrd.

Our executive Vice President of operations, Mr. Tim T.

Our chief digital reach all sort of Mr. Steve witness and our.

Vice President of Investor Relations and today's wireless.

First I'd like to thank all of our teammates and customers manufacturers and other partners for helping us achieve another record quarter.

During the first quarter of 2021, we continue to build on our strong momentum coming off record adjusted earnings in 2020.

We generated record first quarter total revenues of $2 8 billion.

And up 21% on a year over year basis.

And record first quarter EPS of $1 23 per share.

Our adjusted EPS of 40 cents per share and the first quarter of last year.

These results were driven by strong performance and our franchise dealerships and another all time record quarter for our Echo Park business, reflecting increasing consumer demand and continued execution by our team.

I am pleased to report of deposit trends and the first quarter at <unk>.

Continued into the second quarter.

And we continue to see strength and all facets of our business.

We remain extremely confident and our long term growth targets based on our current results and near term outlook.

And the increasing number of Americans that are receiving vaccinations and beginning of return towards normalcy.

Given these trends and our progress to date.

Confident we can attain our goal of more than doubling total revenues of $25 billion by 2020.

And significantly significantly.

Leasing profitability going forward.

And our core franchise dealership segment.

First one and revenues were $2 $3 billion of <unk>.

15% increase from last year.

Total franchise pre tax income was 70 point.

$5 million and increase of $47 $9 million or 211%.

Compared to last year.

On a two year comparison compared to the first quarter of 2000 and T C.

Same store franchise dealership revenues increased 14% and.

And pretax income increased by 49 $8 million.

Which is at 240% increase reflecting the impact of our lower expense structure.

As a result of strategic actions.

And were taken last year.

Turning now to Echo Park.

We continued to experience rapid growth during the first quarter, achieving all time record quarterly revenues of.

$507 million.

Which was up 53% compared to the same period last year.

We also achieved record quarterly retail sales volume nearly 19700 units.

Which was up 41% year over year and ahead of the 18 to 19000 units, we guided to on our February call.

In addition to top line growth.

The adaptability of our export model at the current used vehicle pricing environment drove total gross profit per unit of 23, $139 and above our target of $2150.

Our first Echo part delivery center in Greenville, South Carolina continues to outperform our model selling 160 vehicles and March.

At nearly $750 and total gross profit per unit.

Generating a $100000 and store level profit for the month.

And your other new heck of box stores and delivery centers also continued to aggressively.

With our Phoenix hub.

Selling 288 vehicles and its first full month and March driving $125000 of store level profit.

The integration of December's used car King acquisition.

Already ramping up nicely some cash.

And five units and the month of March.

At over 2200, $50 and total gross profit per unit.

And we continue to apply our learnings to each new Echo Park store, we opened or acquired.

And results of proving the scalability and momentum of vehicles.

Model.

We believe these results showcase the flexibility and value proposition and consumer demand.

Or I can parse unique pre owned vehicles shopping concept as more gas and choose to visit our stores and shop at the park Dot com.

The incredible inventory selection unbeatable pricing and a unique guest experience that we offer.

As an update on our expansion and that could parks nationwide distribution network and Omnichannel retail and platform, we opened five new locations.

And the first quarter and.

And in April we opened our latest retail and Birmingham, Alabama, and our third delivery center in Charleston, South Carolina.

We remain committed to opening 25, new Echo park locations and 2021 and we.

We're on track for our 100, <unk> 140, plus of point nationwide distribution network by 2025.

We expect to retail over half of million premium vehicles annually.

Yeah.

With our progress to date.

And the continuing development of our omni channel retailing platform.

We are confident that we can reach $14 billion and Echo park revenue by 2025.

In addition to the year over year comparisons for the first quarter. This morning's earnings press release include comparisons to the first quarter of 2019 for certain key metrics.

Important to recall at Sonic actually grew EPS and the first quarter of last year compared to 2019 due to the strength of our January and February results. Despite the initial impact of.

Of the pandemic and March of 2020.

Since that time.

We have substantially improved our expense structure, which is reflected in the current quarter's profitability and operating margin.

And our expectations for the remainder of 2021 and beyond.

And the first quarter of 2021 total SG&A expenses as a percentage of gross profit.

We're 72, 2%.

Representing an 830 basis point of improvement compared to the first quarter of last year.

And 790 basis points Center.

And in the first quarter 2019.

Which in dollar terms, while same store franchise gross profit increased $34 590 from last year.

Same store franchise SG&A expenses decreased $705 million.

Demonstrating the permanent expense reductions we have previously.

Turning now to our balance sheet, we ended the first quarter with $435 million and available liquidity and.

And all time high liquidity March and April at $570 million.

Which included over $300 million and cash on hand.

More recently.

Certainly the company closed a new four year $1 8 billion credit facility.

The credit facility was substantially oversubscribed.

With strong support from both new and incumbent financial partners.

We are very pleased with this transaction, which has extended our debt maturities and improved our borrowing costs.

And raise our total available liquidity and floor plan capacity.

Our growth plan.

Reflecting our current business momentum and substantial liquidity resources I'm very pleased to report that our board of directors recently proofs of 20% decrease.

Companys quarterly cash dividend.

And <unk> per share payable on July 15, 2021.

All shareholders of record.

On June 15 2020.

Additionally, the board increased our share repurchase authorization by $250 million, bringing our total remaining authorization of $277 million.

In summary, our record first quarter performance reflects steadily increasing automotive retail demand as one of them is constantly improving operating conditions.

And good markets rapidly become one of the leading success story and the free.

And automotive retail industry.

And we look forward to continuing its rapid expansion in 2020 one.

We expect to see continued strong demand from both new and preowned vehicles and the near term.

Which should drive further growth for our franchise dealerships and the echo of Heartland.

At the same time, our efficiency improvements have enabled us and has enabled us to operate and a much leaner more profitable manner.

Despite the challenges, we all faced and the last year during this global pandemic Sonic.

Sonic and Echo park of emerge.

And that's much stronger and more efficient organization.

We are encouraged of our successes to date and remain confident and our long term strategic plans.

This concludes our opening remarks, and we look forward to answering the question Jim and thank you very much.

Yes.

As a reminder at midnight.

Cash flow question.

Yes.

And number one telephone fleet.

Yes.

Your first question is very simple.

So some of them.

Okay.

Thanks.

Good morning.

Great quarter.

And you hear me okay.

It's a little choppy, but go ahead of global <unk>.

Yeah Yeah.

And they paid the operator.

And because I heard you all stars.

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Oh yeah.

Yes.

Sorry, just one of those.

Yeah.

And with Tory.

And so hotspot.

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Carrier.

What day.

And why.

Well good morning, Eric.

And one day and.

Inventory will normalize.

Yes, so Greg this is Jeff.

And the firm.

First of all of them with a 43 day supply of new car inventories. So we're sitting pretty good shape I break it down into three buckets bucket.

Luxury and imports and domestic domestic abuse of harvest.

And I think may is going to be the toughest months and.

In terms of that and Thats really only about 12% of our business and we're set up from the next couple of quarters as chip issue.

In terms of more of a problem.

A luxury inventory, which obviously is a big chunk of our business and the biggest driver of that business. We're just not going to be as effective and they're doing a great job, bringing product and from other parts of the world and.

We've got inventory and so at least.

Enjoying good new car volumes and through the second quarter and of course, great margins and those margins are going to continue I think and continue for the rest of the year.

Important domestic revenue get hit harder with domestic from our perspective and just harvest.

The chip start rolling in and this all starts getting a lot better sort of in the middle of June as we move forward, but again, our luxury mix and it's really going to help us as we work through you know more difficult conditions and the second quarter.

Got it and then.

And I fell apart.

At the same 40 days.

Couple of library.

Yeah.

On the largest of run out of.

Okay.

And so you could kind of map.

And then.

Awesome.

And really what Youre seeing with Echo Park and the head of a day supply of just a reflection of the number of stores and we're moving right now and we're carrying a lot of inventory if you get some stores.

Day supply and our and our more mature stores are still quite normal 10 days and the pipeline and 20 days from the frontline.

And we're able to buy cars at auction prices are going up and wholesales lagging retail was a little bit of pressure on front end margin.

But businesses growth.

If you look at the business.

What happened January and February and March.

April and it's just a fantastic month speaking for the overall organization and I think and frankly better than March.

Just really really good and been doing this for a long time. These last couple of months of our some of the best on a retail market I've ever seen.

And at the auction at the auctions.

And we're paying more money per cars right now because theres inventory out there to get.

And in particular, and our one to four year old category.

And our loss of all of our suppliers are good at and we'll look forward to a great even bigger second quarter of and what you saw in the first quarter and continuing our growth pattern.

Over the course of this year.

And I'd call out.

And these are pretty choppy.

Oh Wow.

And then.

Thanks, Greg Thanks Rich.

Your next question Josh.

And Morgan.

Hey, good morning.

Okay.

Hopefully.

A little better from here.

And give us a shot.

Alright.

Okay.

And you talked about Duffy.

EBITDA levels at Justice.

From the nineties.

And one.

I'm, sorry, I need to produce and OEM.

And so given the start to the first.

Quarter end 60, I'm getting at.

Yeah.

Thanks.

All of the majority of ignite.

So just keep that guidance.

Okay.

Is that same thing.

Okay.

Okay.

Yes.

Your question was a little choppy, but I think I got it.

And.

Thank you and in relation to kind of a drag and the performance, we got and the first quarter on Echo Park.

And so we haven't looked at that as we're ramping up of Echostar quickly and we gave you guys guidance and then the.

And at the end of last year at the beginning of this year in February and we were going to haven't gone at $12 million to $14 million drag and we only had $600000 drag and the first quarter.

Still expecting out of that $12 million to $14 million drag for the year.

And still sell north of a 100 barrels and cars.

Our Phoenix store ramp a lot faster than we thought it would of a yearly hit 300 cars I think of the 288 <unk> and our first of all of them up in March and we made $125000 usually thats, taking a couple of months to get that done or six months to get that done we're just.

Moving a lot quicker than we had anticipated and if we can see that happening and Birmingham now of all of sudden ramping up a little faster maybe there is some good news there in terms of drag as we move forward, but our projections still right now are still at.

$12 million to $14 million range, and we can update you and the second quarter.

And sort of what we're seeing on our newly opened stores, but certainly the stores that we're opening right now are improving a lot faster and.

And those stores that we opened last year, we've just learned a lot we're executing better we have people and the pipeline.

And to go in and lead our stores and kind of really good.

Fully mature team and to Phoenix that had been it's been one of our team for a while and it was just like turn on Weizmann and should we just went straight from almost 300 cars and make money and hopefully we'll be able to do that more and more often and as we move forward and I think the one thing and this is David I would add to that.

Five locations, we opened and the first quarter four of those were conversions of the acquisitions, we did in New York and and the Maryland market and one of the benefits of the acquisitions and you think you come online and much more quickly and there's much less preopening most of our strength.

Remaining 20 stores that we have this year will be more greenfield licensing and things like Birmingham and Charleston.

And in the last month of tasks.

So thats worth of and Georgia, and try and comes from it and going to be back weighted.

And Thats one of having to flex.

Exposure of doing acquisitions versus doing traditional greenfield build.

Yes at.

Syracuse platform, and just popcorn and and sold over 300 bars and was profitable.

Immediately there soon.

And we're hoping and expecting that and.

Two of our platform Baltimore and do the same.

Got it but that's kind of ask the question.

All of it.

And infrastructure.

All of this year.

Okay.

Okay.

A lot of.

I was just at the Big New Records.

Yeah.

And.

And just.

Sorry.

How are you.

Exactly.

And maybe just thoughts on cash flow.

Yes.

And we see this as theirs.

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Really choppy, but I think I've heard of capital allocation.

And again, our priorities have not changed.

The main.

The area of capital allocation, but it is interesting because of the success of the franchise and what were seeing as well as how quickly Echo park is becoming profitable and creating net EBITDA, even with the drag and we do see opportunity if we get a lot of opportunities for acquisitions and other franchise side.

And for the first time, we're starting to get a little bit more active on that side and because of the free cash flow, we're producing and we got the opportunity to continue growing Echo park as well as look at some of these opportunities on the acquisitions on franchise.

Of course, we raised the dividend, which was part of the capital allocation and 20% of returning capital to shareholders and we did get the share repurchase authorization. Thank.

Thank you can see we bought almost a million shares back in Q1.

And like $44. We believe is undervalued and we believe it's undervalued now and so Opportunistically. We will we'll continue looking at share repurchase as well.

Got it great retail.

Yeah.

Thank you. Thank you.

Your next question is from Mark Jordan with growth.

At.

And the Echo Park side of your move to increase your Smith of purchases directly from customers.

Hey, Mark this is Jeff Dyke now what's the problem.

And with that is when you're behind cars off the street and we are and the one to four year old model.

Customers are bringing and $1 four year old parts of sell typically there are still upside down and whatever.

You can see some of our competition that's out there buying a lot of cars off the street, because you're buying five to 10 year old cars that at one to four year old cars and the majority of that as far as growing off of wholesale auction sales.

If it's not used.

Source for us and right now that as of <unk>.

Percentage of our overall sales and the 10 per cent range, but it is never going to be of big big source for us because of the nature of the business and.

Customers not showing that one to two year old car.

Straight off the streets, Inc.

And our sourcing is coming from.

At the auctions and when we're buying a lot of vehicles and obviously buying some of them off the street and.

And then we're enjoying.

Being up and buy some from our from our new car dealerships. So the combination of all of that.

Allows us to kind of carry of the inventory levels of organic and.

And this is heath per I'd, just add at this as well as and when we buy from the auctions, we had a very predictable product we buy at very high condition ratings.

And so that allows us to keep the leak on loans and to do it quickly and as you know we turned and vehicles very quickly and so you've got a very predictable source of supply and when.

And you bought the street and <unk> got some debt and see a lot more retail and a lot more time to get through the line. So that's another component of why we focus on the auction and then I'd add one more thing to that our trade ratio of Echo Park is running at almost 70% and so we are getting inventory from trades.

And then the great luxury of that is the trade that don't fit our 140 of our model are being moved over to our franchise side of the business and we're selling the heck out of those stores.

And just a big big home run for Us.

Okay, Great and then can you talk about the differences and and F&I from the at the par side between a customer and that might show up and store and someone who might be buying on margin.

And.

And thank you are saying the F&I, sorry, and so choppy Mark I think you were saying the performance and F&I online versus in store and.

First of all the same that's the one thing that and we've.

Learned a lot of bell.

And we can talk and my products and particularly when our ecommerce platform comes on and makes it even easier for our consumer to use our platform.

<unk>.

And we're going to be at we'll see that Theres room and that can be a big difference between the F&I and that you get.

Online versus non interest income in store and Steve Murphy.

And that just to add to that and Thats exactly right. We've seen at penetration of F&I and products online at about the same or even a little bit better than in store, because we offer that transparency to the consumer and they can really understand what the product does and how it helps them over the short and long term.

Okay great.

And then just anything on the parts and service trend and the franchise side of things.

And that's been a great positive story for us so far this year, we're running up against 19 and the first three months of the year of about 9% and customer paying out of warranty is down about at the same.

But what's even better as we get into April and we are running up 15% and customer pay.

And that's just a big home run so we feel like our fixed operations is back from of CP perspective and <unk>.

And that's just going to be huge for us as we move through the rest of this year and and particularly the back half of last year, where customers just really more of <unk>.

Traveling and it'll be huge and California, obviously, we have a huge footprint of debt.

California reopening will be of a Big addition to know so.

So far so good and that kind of growth and April versus 19 not 20.

It really fantastic for us.

Yes.

Great. Thank you.

Thank you.

And again, if he would like to ask a question. Please press Star then the number one on your telephone keypad.

And then at a stomach.

Yes.

[noise] and your next question please.

Okay.

Good morning, guys.

Got it and why.

Yeah.

Outside of Houston.

And Chicago right.

True.

And.

[noise] Echo part and here.

And the Echo Park inflection point it sounds like it's right on the almost immediate horizon.

Is that sort of a second or third quarter event or is that more like 22 and 23 when enough stores have been opened.

That's opening 25 stores a year matters less on the cost ramp I'm, just trying to understand the inflection point.

And Echo Park.

Yes, So 22, I mean look we are really having some great success with new stores are opening right now and getting unprofitable and then selling by immediate need of three of ours, but we're still opening more stores. This year than we started the year of it and that'll be the last time and if that happens. So 22 is going to be the is really going to be the inflection point here, where you really start.

And the profitability come through and carrying the drag and.

And really not having as big of an impact of bonuses is doing right now.

Put down on the gas pedal.

And we know we have a model that they produce.

And as both volume and profitability, we slowed down in order to speed up we've done all of that and we're going to have a bunch of stores. This year and connect and park has really taken off of its a lot of fun to watch.

100 years of going into this payment and I were talking earlier today, we've put a day.

Okay.

Getting this all right and <unk>.

Learned a lot and.

And now we're going to reap the benefits of that and so.

It would be of great year, even though we're going to have that 12 and $14 million of a drag at the inflection point comes in 'twenty two and.

Jonathan Smith, I think it's really important to emphasize that our team is really.

We have made so much progress and how we open stores both of them.

The scalability of this sort of.

Cost is pulling down and speed to market is just going out of our training and.

And the way, we bring that Jack mentioned earlier, the Phoenix store.

300 cars and his first month and then <unk>.

And of the acquisitions of the.

Like used car King and these others and we've.

Brought online and quickly integrated into.

And they are now.

Echo Park stores and so to speak.

Mark and I think it's a huge part of our growth story and the other thing and then I'll ask one of more of that John and the other thing we're doing is building our management bench and.

And so theres a lot of.

Investments and went into that right now and you didn't see quite as much and the first part of it you're going to see more and the second and third quarter and Thats.

And why the 600000 drag and the first quarter was just sort of understated.

While we still think we'll be in that range at 40.

A year and if you want to look at anything just look at Phoenix, When you put the right management team and to strengthen on day, one and it just blows up and that's exactly what happened and so we're adding more and more people in order to help you at this aggressive rollout schedule.

And the rest of the year.

And you anticipated my next question.

And on on human capital.

What is it.

What is the process.

Developing general manager and either internally or sourcing them externally for all of the stores are being opened.

Yes.

Yes.

We have several layers of management.

Plan to basically have each layer and continuing to move up.

As we open stores, we had to go to the outside of a few times and bringing them in.

Six months early.

To work at that capacity and the stores for future openings and so what.

And of that schedule and feel great about it and that's.

Part of the drag that Jeff was talking about.

And John that was simply.

Okay. Thank you.

And and then just lastly.

On gross margin.

And how sticky do you think this strength.

On the new side.

And here side.

It seems like part of this cash.

Okay.

Okay.

And I understood. Your question, John again, sorry, it's a little choppy, but.

At the new from a margin one of other things its greatest the manufacturers are learning and have learned that they're going to they're going to keep day supply site.

Best fourth made announcements being made announcements and.

Our suppliers are going to stay quite sort of keep margins up.

So I think margin stick.

Who knows if they're going to be quite as good as they are right now and with the jets, but certainly they're not going back to pre pandemic day.

And just don't see that happening.

And the used car margins are good too.

We sort of run at a little lower margin on the front, we had much higher margins on the back end and many of our competitors and you combine that it gives us a total gross package on a per retail basis.

Typically consists of.

And the top one or two of our competitive set and so I think your store margin during the stay strong and remember on the Echo Park model or models that have low margin of our models and <unk>.

<unk> traffic through being 2500 to 3000 of off price and one of the retail market and sort of wholesale pricing at retail and so youre going to see us and that.

Minus 100 to minus 300, and sort of range and that may move around a little bit depending on what's going on and wholesale markets, but certainly we'll continue to try to drive the big volumes and our model and requires from a net perspective.

Great. Thank you very much.

You bet. Thank you.

And there are no further questions.

Yes.

Okay. Thank you very much everyone have a great day.

Okay.

This concludes today's conference call. Thank you for participating you may now disconnect.