Q2 2022 Sonic Automotive Inc Earnings Call
And net income of $94 8 million or $2 33 per diluted share.
Excluding a $4 4 million one time charge, we reported adjusted net income of $99 $2 million.
Our $2 45 per diluted share.
Despite ongoing supply chain disruptions rising inflation and higher interest rates in the second quarter. Our team continued to execute at historically high levels and deliver another quarter of new vehicle GPU expansion steady customer lead volume and continued growth in our parts and service business.
These results are also indicative of persistent consumer demand both in store and throughout our digital network. Despite a growing concern that macroeconomic about macroeconomic headwinds. This is not the first time Sonic has experienced such business conditions, and we recognize the importance of being prudent and adaptable in our approach.
To achieving our growth and profitability targets during such times.
To bolster our short term position and prepare for a range of potential economic conditions. We are very focused on maintaining our strong liquidity and balance sheet position identifying additional cost management measures and balancing our growth plans.
Beginning with our franchise dealership segment results second quarter 2022 revenues were $3 billion.
Up 8% from the prior year.
Segment income was $162 1 million.
Down just 2% and segment adjusted EBITDA was $216 3 million.
Up 9%.
On a same store basis franchise dealership revenues were down 12% year over year.
Gross profit was lower by 2% due primarily to a 20% decrease in industry new vehicle volume as a result of ongoing vehicle production constraints.
Parts and service gross profit was up 4%.
On a same store basis, improving as vehicle miles driven recover towards normal levels.
With an ink within 11% increase in customer pay gross profit offset partially by a 10% decrease in warranty gross profit.
Same store F&I gross profit was down 14% due to lower retail unit volumes. Despite all time record F&I per unit of $2472 and our franchise dealership segment.
Which was up 17% year over year.
Franchise dealership segment adjusted SG&A as a percentage of gross profit was 59, 9%.
Up 180 basis points year over year, but remain structurally lower than pre pandemic levels due to the strategic actions, we've taken over the past two years to better optimize our cost structure.
Similar to the last few quarters, we continue to see limited new vehicle production and inventory levels due to supply chain disruptions and strong consumer demand for new vehicles.
This contributed to a 33% decrease in same store retail new vehicle unit sales volume higher than the industry retail Saar decline of 20% due to our luxury and import weighted brand mix, which continue to have lower day supply of inventory than domestic brands.
Offsetting the lower sales volume those same store retail new vehicle profit gross profit per unit was 6900, $905, a 77% increase year over year and 2% sequential increase from the first quarter.
As of June 30, our new vehicle days supply at our franchise dealership was just 18 days up from 15 day supply at the end of the first quarter, while production is improving somewhat dimmer.
Demand for new vehicles remained strong as evidenced by stable new car pricing and continued expansion of new vehicle GPU.
Our franchise dealership segment used vehicle inventory had approximately 31 day supply down from 33 days at the end of the first quarter.
We continue to be disciplined in managing our used inventory volume and pricing in the face of recent declines in wholesale market pricing and the current macroeconomic outlook.
Turning now to Echo part.
We reported all time record quarterly revenues of $665 6 million up 12% from the prior year.
Echo Park retail sales volume for the quarter was 16608 units down 22% year over year, but up 11% from the first quarter.
As we guided on our April earnings call second quarter Echo Park segment loss of $34 9 million was flat compared to the first quarter.
But showed monthly improvement exiting the quarter as the effect of strategic shifts in inventory mix and sourcing began to benefit the bottom line.
These operating results we continued the nationwide expansion of Echo Park.
Opening three new Echo park locations during the second quarter, including two retail hub locations in Raleigh in St. Louis.
And remain on pace to reach 50% of U S population by the end of this year and 90% coverage by 2025.
Beyond our physical footprint in June we completed the rollout of our proprietary new e-commerce platform to 100% of our nationwide traffic.
At Echo Park Dot com.
The new platform continues to produce positive results in consumer and customer feedback accounting for 19% of our retail volume during the second quarter with a 30% increase in our website conversion rate and out of market buyers represented 69% of our E Commerce sales.
Going forward, we intend to continue to echo parts expansion in a targeted strategic manner.
With our current rate of expansion and the success of our new E Commerce platform.
We remain very confident in <unk> long term prospects once the used vehicle market eventually reverts to historical norms.
In the interim we have taken deliberate action to expand our inventory offering to include five plus year old vehicles, which enables us to reach additional customer segments.
Improved consumer affordability and allows us to source more vehicles from non auction sources benefiting profitability.
In the second quarter, we increased our non auction sourcing mix to 25% of Echo Park sales volume and.
And in July to date, 57% of our acquired inventory has come from non auction sources.
With this improvement in sourcing we are seeing better front end and combined GPU volume in the third quarter, which we expect to drive an improvement in Echo Park losses in the second half of the year in.
In addition, we have taken steps to adjust our head count and expense structure at Echo Park to better align with current volume levels and our near term growth plan.
We remain confident in <unk> long term prospects. However, the current market as.
Has caused us to adjust our projected revenue growth and pushed back our previously stated financial targets beyond 2025.
Once we have gained more clarity on future used vehicle market conditions and the effects of the strategic adjustments. We have made at Echo Park. We will then provide an updated echo park model and guidance.
Lastly on Echo Park at this time, we are concluding the previously announced formal review process for Aqua Park together with our advisers, we carefully evaluated a range of alternatives and our board has determined that timing and current market conditions do not align with our value creation objectives for the business.
We will continue to execute on our expansion plans for Echo Park, and we will continue to monitor market conditions and periodically consider potential opportunities to maximize long term shareholder value as they arise.
Now turning to our balance sheet.
We ended the second quarter was $755 million in available liquidity, including $453 million in cash and floorplan deposits on hand.
Our consistently strong sales performance cash flow generation and balanced capital allocation strategy with all contributed to our solid financial position, enabling sonic to return capital to shareholders through its quarterly dividend and share repurchases.
During the second quarter, we bought back approximately one 4 million shares of the company's stock for an aggregate purchase price of $59 $4 million.
Year to date, we have repurchased approximately 5% of shares outstanding at December 31, 2021.
To that end today, we announced that <unk> board of directors increased the company's share repurchase authorization by $500 million.
To a total of $633 million in remaining authorization.
Further I'm pleased to report that our board of directors approved a quarterly cash dividend of 25 per share payable on October 14th 2022 to all stockholders of record on September 15th 2022.
In closing our second quarter results demonstrated another period of solid and consistent financial performance despite macro headwinds.
Moving ahead, we will continue to execute on our strategic growth plans for Sonic <unk> capitalizing on the strength of our business model and flexibility to adapt in the short term. So we continue towards our longer term goals.
By following this course, we are confident in our long term ability to deliver revenue growth increased profitability and build greater value for our guests teammates and stockholders.
This concludes our opening remarks, and we look forward to answering any questions. You may have thank you.
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Thank.
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Right.
Our first question comes from the line of Daniel and Brown with Stephens. Please go ahead.
Yes, Hey, good morning, guys. Thanks for taking my question.
Good morning, I wanted to start on the Echo Park side and really what's going on the units I think it makes sense.
Affordability is a challenge, but trying to parse out how much of the unit weakness.
It is due to softening demand in this backdrop and how much of it is maybe due to a lack of supply are you able to see that within your business or do you think demand still exceeds supply there just trying to figure out kind of the drivers.
Of that unit softness there.
Yes. This is Jeff Dyke, 100% the demand is there I mean, we pulled the business back just because we couldnt buy one to four year old vehicles.
Very hard to get.
And so as we announced in the first quarter, we retooled.
Said that it would take us four or five months to bring a five plus year old vehicles into inventory and we're doing that now and starting to see some great results from that.
I can refer you to slide 18, if you look at our Houston market.
32% of the vehicles that we sold five plus year old cars in June 22, that's just continuing to improve as we move into into the third quarter.
And if you look we did Denver and we did Dallas.
July in those markets that were losing money in previous quarters are now going to be at least breakeven Denver market should make in the $300000 range in July all of this is from the moves.
We have made with the inventory so the demand is there.
But the demand is not there for a $640 monthly payment for pre owned and Thats, what youre, that's what you're getting and you're selling a one to four year old car right now at 30% $31000 and so retooling to the five year old plus cars were able to get that monthly payment back down into the $400 range, which is historically, where it needs to be so consumers are borrowing a little higher.
<unk>.
At a lower payment and we've been able to continue to keep our warranty penetration up there. So.
Not concerned at all about pre owned demand.
The bigger concerns or just the availability of inventory.
And we're procuring much more as a percentage of our inventory off the street now.
And through trades than we were before and it was a really low number.
In the previous years now that number's over 50%, which is great.
We will continue to see that growth as we move into the third and fourth quarter and in <unk>.
We bolster our bottomline, our bottomline is going to get better.
In Q3.
Then it was in Q1 and Q2 and then we'd expect Q4 to be better than Q3, as we move into the first second and third quarters of next year.
We expect EBITDA to be back to a breakeven or to profitability as we move forward.
This is Steve I would just like that if you look at slide 18 I think.
It is important to note that.
<unk>.
Pretty dramatic impact that that change is made on profitability that Jeff mentioned that Houston market was the first market, we transitioned five plus vehicles and you can see they went from losing.
$1 1 million box too.
June 2022, they are losing 300000 that we're seeing the same thing at the other locations as we transition so.
I agree with Jeff is going to have a big impact on.
On the profitability of acre park going forward.
David Smith is one of the thing to remember too is our guest experience or our team our Echo Park team is delivering just that.
The World class guest experience so the demand from those guests from people out there.
Running a five plus year old car.
To be able to buy one from Echo Park, we've seen that increase drastically as well and I think that it's important to note remember with this transition to retooling the inventories of four to five month process that we started that in the middle of May.
We told you we would do in the first one coming out of the first quarters call.
And so.
A few more months, we've got Houston down we've got <unk>.
We've got Denver done we'll start adding.
Hi clusters to the other markets you are retooling technicians, and reconditioning processes in all kinds of things advertising and pricing.
To get to a more traditional type of model.
And we will ride this wave until the one to four year old market comes back and we have.
Inventory that we can buy either auctioning off the street in that category.
Yeah.
Really really helpful color and a follow up on that the profitability is higher and it sounds like a big portion of it is non auction towards volume.
How much of that do you think is sustainable and I guess, the thought being it's easier to buy a car off the street from a consumer when they have positive equity and the car right now but.
Values normalize and the consumers back to negative equity is probably a lot harder to buy them out of that car without attaching a tail to it. So curious how you guys think about that trend feeding into next year and in future years, but also obviously impacting the profitability of this older cohort when it is harder to buy that from a consumer.
Yes, well when that happens you're back to traditional used car model and we will see one to four year old cars.
Begin to drop in valuation and price and we're already seeing it but to begin to drop in the auction lanes and then we're back to buying those vehicles sourcing those vehicles both from off the street in the auction and that will bring the volume back from an Echo Park perspective, and then one for category, yes, youre going to be down into the <unk>.
Right now if youre looking at what we're paying at auction three or four weeks ago as at $31000 price point.
Today, you are in the 2000 728000 of our price range. So it is dropping.
And I expect that to get back down below 25000, and that makes a big deal. Because then you're back down into the four hundreds for a monthly payment for the consumer and that is what we're looking for it that's the big issue.
Now for everybody in pre owned is the monthly payments are too high and the wonderful category.
And Daniel to add one more point this is Danny.
The other piece of that is if when you see that happening in used pricing start to come down and you could have as potential for negative negative equity youre going to be in a position to where lessees are are not buying out their leases at the end of the term as they are to date, which historically has been less than 10% of leases that are somewhere in the neighborhood of 50% today, so that would benefit both the one to four year coming back through auction as well as on the franchise.
<unk> side kind of the organic inventory sourcing that we're missing out of a lot, particularly in our BMW and Honda brands today, Yes, if you look at our BMW and Honda brands, they compromise, 30% to 35% of our total revenue.
Yes.
In the second quarter combined those two brands were off about 6000 used cars year over year.
We were off 4000 cars. So they were more than the company was off and Thats, a 100% coming from off lease cars not coming back to consumer.
Typically by 95% of those off lease cars back.
Today, it's less than 50% and that's where you see the difference in terms of our used car performance on the franchise side being different than everybody else's. It's just those two brands are causing a some have it right now in terms of used car supply coming back off of lease.
Got it and last one for me just talking about youth pricing normalizing.
Are you seeing any lenders tightened in this environment just given prices are so high and maybe are coming down are you seeing any change I know you guys will take balance sheet risk, but any change in your financing partners our ability for customers to get financing at this point in cycle.
Daniel This is heath.
Haven't seen that and we get asked that a lot you see a little bit of credit for the subprime.
Above that we haven't seen any tightening from our lenders.
And we keep hearing some macro data that actually.
Correlates with Venezuela.
There is obviously the chance if we hit a recession.
These difficult that we may see something but so far nothing new there.
Thanks for all the color this morning and good luck.
Thank you. Thank you.
Thank you Ms Sandra.
Sure Ashwin.
Question. Please press star followed by one on your telephone keypad.
Our next question comes from the line of <unk> Gupta with J P. Morgan. Please go ahead.
Great. Thanks for taking the question David.
Just wanted to background my condolences to you and your families well.
Thank you so much.
Yes.
First question on Echo Park following up on Donald's question.
You mentioned that the exit rate.
On the other losses were getting better.
I've gotten better our interview just curious.
If you could provide us with any visibility.
On the trajectory of Echo Park.
EBITDA in the near term when can we expect that business to return to profitability.
Based on the actions, we're taking around mix the hydrogen views and ultimately cost.
And I have a follow up thanks.
Yes, you bet, Jeff Dyke here so as.
As we told you in the first quarter of the second quarter was kind of going to mirror. The first quarter in terms of EBITDA and that's exactly what happened was almost identical.
As we retooled it started that in May.
The third quarter is going to be we're going to lose less money.
In the third quarter from an EBIT perspective than we did in the first two.
Will improve again in the fourth quarter from that and it would be my guess that in the first or second quarter of.
23.
Nothing changes and.
Inventory continues to kind of stay in this 27 28 $29000 price range for one to four year old cars.
And we don't improve.
And overall used car availability perspective, but I would tell you will be fully retooled in the next two to three months.
And profitability at least from a breakeven basis on EBITDA in the first couple of quarters I would say the second quarter of next year somewhere in that ballpark.
If not sooner and then if we if inventory start to become more plentiful.
Off lease cars kind of return consumer started selling those cars instead of buying them out that's going to change evaluation process on pre owned we'll get that price point down.
The 400 to 450 price point range for the consumer as a monthly payment the profitability come back a lot faster. So its kind of a wait and see to see what's going to happen with with pricing on pre owned inventory, but if nothing changes.
First couple of quarters of next year.
At least back to breakeven.
This is heath I would just add that we are still fully committed to hitting our goal of 90% coverage of about 23. So.
So we're going to have the infrastructure in place as the market turns.
And so the speed of the market returning unless we tooling is really going to define that trajectory.
Going forward, but I think it's important to note that we will be the infrastructure will be there as the market terms, we have not backed down on that 90% coverage by 2035.
And if you do look at just.
Sequential month to month.
Our Echo Park from June to July .
We don't even have to three of the markets transition to this new model and we're seeing $2 million to $3 million differences in pre tax.
Yes, I would add that adding the <unk>.
<unk> inventory is temporary it's not a banding build one of the four year program long term, that's still a major part of our plan and we think as inventory comes back.
Doesn't mean that we won't sell the five plus your vehicles, but it just won't be as big a percentage of the mix is going to be right now while we work our way through this inventory time I don't think it's also important to remember as we said earlier, our Denver market, which we just retooled this month.
It was losing in the 3% to 400000, a month range, it's going to make $300000.
In the month of July in our Dallas market, but we also retooled. This month it was losing six 700000.
There's going to be zero to 100000 law. So massive improvements and then Heath talked about page 18 earlier, where we've gone in Houston from a million million, one maybe even a little over 1 million three all the way up to a $300000 loss in continuing to improve there.
It doesn't take long to retool it a few more months and then EBITDA is just going to continue to get much better than what you've seen in the first two quarters.
This is heath I think it's important.
The beauty of having the diversification we have been doing this on the franchise side for decades, and so we had the capability and knowledge that we could easily go overnight.
Indeed, the five plus with the recon and the processes in place.
Got it.
Very helpful color.
Maybe shifting gears through parts and services.
The same store growth was strong, but slightly even slightly below what your peers have reported.
Anything to flag there on the driver is.
More regional or Brad dynamic, perhaps just lower reconditioning because.
The weaker new and used units.
Maybe if you could help us unpack that a bit.
Our expectations are for the remainder of the year.
Yes, actually we are really excited about what we're doing fixed operations were up 11% in customer pay.
Which is for the other peers that are.
Give that data we're in line. We're in line with that and I think brand mix plays a role there and if you look at <unk>.
Penske and what they're doing I think our numbers were about the same.
Tunnels are hurting a little bit because of the used car volume being off.
That typically runs about 15% over our overall fixed growth and then that's off.
14, or 15%, so because of the volume being down and so that's playing a role in that somewhat.
Warranty is offsetting it a little bit but.
We're very focused on growing our market share by op code.
In our in our service business and we are gaining market share, particularly in the BMW brand.
I expect that to continue to pay dividends for us as we move through the next few quarters.
And into next year. So we're very excited about where we are on fixed.
And I think just when you compare to the competitors the brand mix plays a little bit of a role there.
<unk> versus versus our brand mix and you can this is David as you can imagine.
With the discussion of <unk>.
Used cars being more expensive it will cause customers to keep their existing vehicle and.
And help our fixed operations as Heath mentioned, having the diversification of our business really helps.
Got it.
It's helpful color. Thanks.
Thanks, Laura.
Okay.
Mr Cooper.
There are no additional questions.
This time I would like to pass the conference back to David Smith for any closing remarks.
Thank you very much. Thank you everyone. We appreciate your time and have a great day.
Okay.
The Sonic automotive second quarter 2022 earnings Conference call I Hope you all enjoy the rest of the day you may now disconnect your line.
Sure.