Q1 2023 Sonic Automotive Earnings Call
Good morning, and welcome to the Sonic automotive first quarter 2023 earnings conference call.
This conference call is being recorded today Thursday April 27 2023.
Presentation materials, which accompany managements discussion on the conference call can be accessed at the company's website.
At IR Dot Sonic automotive dot com.
At this time I would like to refer to the Safe Harbor statement under the private Securities and Litigation Reform Act of 995.
During this conference call management may discuss financial projections information or expectations about the company's products or market or otherwise make statements about the future.
Such statements are forward looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made.
These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission.
In addition management may discuss certain non-GAAP financial measures as defined by the Securities and Exchange Commission.
Please refer to the non-GAAP reconciliation tables in the company's current report on form 8-K filed with the Securities and Exchange Commission earlier today.
I would now like to introduce Mr. David Smith, Chief Executive Officer of Sonic Automotive Mr. Smith, you may begin your conference.
Thanks, very much and good morning, everyone and welcome to Sonic Automotive's first quarter 2023 earnings call.
He said I'm, David <unk>, the company's chairman and CEO joining me on the call today is our president Jeff Dyke, Our CFO Heath Byrd Echo Park, Chief operating Officer, Tim <unk>, Our Chief Digital retail officer, Steve Whitman, and our VP of Investor Relations Andy Weiland.
Earlier. This morning, sorry reported first quarter financial results, including record first quarter total revenues of $3 5 billion.
And record first quarter Echo pork segment revenues of $651 million.
First quarter GAAP EPS was $1 29 per share and adjusted EPS was $1 33 per share.
I am very proud of our team's performance in the first quarter and we're excited to build on last year's success as we move forward in 2023.
Despite ongoing challenges in the automotive retail industry <unk>.
Including rising interest rates in vehicle affordability concerns we remain focused on delivering an exceptional guest experience in executing our long term strategic plan.
Our strong relationships with our teammates our manufacturer and lending partners and our guests are key to our long term success and now I'd like to sincerely thank them for their continued support.
Turning now to the first quarter.
The industry continued to see improvement in new vehicle production and inventory levels, which resulted in lower new vehicle Gpus sequentially and year over year as we expected.
This decline in new vehicle Gpus should continue as we progress through 2023, but we believe that the new normal level of new vehicle GPU will remain structurally higher than it was pre pandemic.
In the used vehicle business wholesale auction prices for three year old vehicles unexpectedly rose over 6% since the beginning of the year as nearly new inventory continued to face elevated demand from rental car companies and dealers at auction.
Conversely used vehicle retail average selling prices declined approximately 1% year to date, reflecting continued affordability challenges for consumers affecting retail demand.
This combined with a lower level of lease turn ins at our franchise dealerships limited our used vehicle volume potential during the first quarter, but we were able to maintain higher gpus than expected to somewhat offset the lower volume.
Used vehicle retail price levels continued to drive monthly payment affordability concerns for the average buyer at current interest rates and despite the uptick in wholesale prices in the first quarter, we expect used vehicle prices to resume their decline.
As we progress through 2023.
Despite an elevated interest rate environment that has reduced our finance contract penetration rate F&I performance continues to be a strength and we want to reiterate our guidance for full year 2023, F&I per unit at or above $2400 per unit.
Our parts and service or fixed operations business remained strong with an all time record quarterly fixed operations gross profit at our franchise dealerships up 12% year over year.
We are very proud of the success. Our team has had in this area and believe there are remaining opportunities for growth in our fixed ops business as we progressed through 2023.
As we said on our fourth quarter call back in February we believe ongoing macroeconomic uncertainty and concerns around the effects of rising interest rates on the average consumer could drive voluntary volatility in consumer demand and vehicle margins through at least the first half of 2023.
This coupled with our luxury weighted franchise business contributed to our decline in earnings from the fourth quarter to the first quarter, which is consistent with the historical seasonality of our business.
However, we continue to believe that our diversified automotive retail model positions us favorably to adapt our business to changes in market conditions as we progress through 2023.
As new vehicle inventory supply grows we expect it to take pressure off of used vehicle pricing and rental car company demand at auction, which should benefit both consumer affordability and cost of inventory.
Turning now to Echo Park segment results, we reported record first quarter revenues of $651 million up 5% from the prior year.
Gross profit of $39 million.
Down 9% due in part to the increase in wholesale vehicle pricing I mentioned earlier.
Echo Park segment retail unit sales volume for the quarter.
With a first quarter record of 19980 units up 15% from the fourth quarter and up 34% year over year.
Echo Park segment average used vehicle selling price decreased 3% from the fourth quarter, but at $28650 per unit still remains 10% to 15% above targeted affordability levels.
We continue to focus on optimizing our inventory sourcing mix and expanding our inventory of affordability by including five plus year old vehicles.
Echo Park inventory amid the ongoing auction demand for nearly new inventory.
For the first quarter five plus year old vehicles represented 16% of Echo Park segment retail unit sales volume.
And our non auction sourcing mix was 20% of sales in the first quarter.
First quarter Echo Park segment, adjusted EBITDA was a loss of $36 $9 million compared to an adjusted EBITDA loss of 25.
One 4 million in the fourth quarter and $29 5 million in the year ago period.
First quarter 2023 segment results include a $12 $5 million adjusted EBITDA loss related to other used vehicle businesses within the Echo Park segment.
Including the northwest Motorsport business acquired as part of the RFK acquisition.
We are in the process of implementing our standard playbooks and processes at these locations, including inventory management and pricing strategies and expect the losses associated with this transition to improve sequentially in the second quarter.
Excluding these losses, our core Echo park branded locations generated an adjusted EBITDA loss of 20, $24 4 million.
An improvement of $11 8 million from the first quarter of 2022.
Our Echo Park first quarter results were in line with our internal projections and we maintain our guidance for breakeven adjusted EBITDA for the <unk> segment.
The first quarter of 2024.
Furthermore, we believe in any industry driven margin headwinds, we may face in the franchise business should be a tailwind jackup segment revenue growth and profitability minimizing the earnings downside to consolidated Sonic results overtime.
As we announced in February we are very excited about our newly created power sports operating segment, which further diversify sox retail retail portfolio.
The integration of Black Hills, Harley Davidson into the Sonic family is off to a great start and the team is currently gearing up to make this year's Sturgis motorcycle rally better than ever.
We believe their operational synergies with our growing power sports network, leveraging the team Mancuso and wanted to Harley Davidson teams to maximize the financial benefits of this event.
As we continue to develop our relationships with the power sports Oems, we are increasingly optimistic about the future growth opportunities in this adjacent retail sector.
Finally, turning now to our balance sheet and capital allocation. We ended the fourth quarter was $893 million in available liquidity, including $432 million in combined cash and Fortunately deposits on hand.
As an update on our share repurchase activity during the first quarter, we repurchased approximately one 6 million shares of the company's stock.
For $91 million, representing approximately 5% of shares outstanding at the end of 2022.
As of today, we have a total of $374 million in remaining share repurchase authorization.
Presenting approximately 20% of Sonics current market cap.
Additionally, I'm pleased to report today that our board of directors approved a three 6% increase to our quarterly cash dividend to <unk> 29 per share payable on July 14th 2023 to all stockholders of record on June 15th 2023.
In closing our team is prepared to continue to execute at a high level, while remaining adaptable to changes in the automotive retail environment and macroeconomic backdrop.
Further we continue to operate our business with a long term view and remain committed to a disciplined return based balanced capital allocation strategy to maximize long term stockholder returns.
This concludes our opening remarks, and we look forward to answering any questions. You may have thank you very much.
Thank you ladies and gentlemen at this time, we'll be conducting a question and answer session.
If you'd like to ask a question you May press star one on your telephone keypad.
A confirmation tone will indicate your line is any question Kim.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star King.
Our first question comes from the line of Daniel <unk> with Stephens. Please proceed with your question.
Yes, thanks, good morning, everybody and thanks for taking my questions.
The only thing I wanted to start on the Echo Park side, you provided some color there on what drove up the.
The losses here, but maybe just hoping on SG&A.
G&A sequentially stepped up maybe more than we anticipated and can you just talk to what drove that given the in store labor is largely fixed that's where the leverage comes from medical park. So what's driving the continued to increase as units picked up here because with unit selling almost 20000 this quarter did that should've been towards your old break even.
Kind of quantity needed. So can you maybe help us talk through what's changed on the cost side Thats whats keeping us from getting closer to that breakeven number.
Yeah. Danielle this is Jeff Dyke, it's really not cost generated other than we are investing in building the brand in Houston. So there is some incremental AD spend going on there.
More along the lines and I would sort of direct you to page 23 of the investor deck, it's more along the lines of $12 $5 million in gross coming out in the other non Echo Park operating stores in particular northwest Motorsport, where that's in the northwest part of the country and there are none there is truck truck truck, we sell lots and lots of trucks.
We're selling lots and lots of trucks here that product has become excruciatingly hard to buy.
And it's and it's put a big weight.
<unk> on that brand.
For the quarter I expect that to be about 50% better in other words will cut our losses in half there, but more importantly here is is the is the gain in EBITDA that we saw year over year, we hit our numbers.
So far for the first time here in a while.
Very excited about that if you look at the Echo Park stores only our volume was up about 47% year over year for that for that for that brand.
And our EBITDA pickup was about $11 $8 million. So we're in line and still maintain as David said in his opening remarks.
Being profitable or EBITDA profitable in the first quarter of 2024, so really look at it as a gross reduction in our profit reduction is driving the SG&A up and we expect that to really improve a lot.
I said by 50% or better as we move into the second quarter as we get in the back half of the year, we'll have northwest motorsport on playbook.
Of course availability for trucks, and Suvs, which is what 90% of our business there that we sell and we were selling.
As we as we did the <unk> acquisition.
That's going to improve as we move to the back half of the year. So that's how you got to look at that it's really a profit gross generating the incremental expense that we're spending at Echo Park can you talk about what you you've mentioned it a few things there and thank you for that but you expect that supply to get better.
North west around trucks, and Suvs I guess why would the supply of used trucks are starting to get better if.
If we're still in a pretty tight environment and we're going to start lapping over the decline in new car sales a few years ago. So I would think youre young the number of young leases coming off lease should go down in the next few months.
So can you talk to walk through kind of what the expectation is for why that supply gets better.
Yes, sure new car inventories build and if you take a look at not just us, but if you look across the board. If you look at new car inventory is gone from call. It a 20 day supply to a 30 day supply on average across the board, we expect that to continue to grow.
We're seeing a lot more no sales in the auction lanes, that's gone from call. It 30% January February up to over 40% now, which means deal or just start to hold onto their inventory that's exactly what happened sort of the middle of the fourth quarter ended December and January and February we were buying cars in the auction lanes in January February the $24000 price Mark.
In two weeks in March that went from 24000 back up to 27, and a half of 28000, where we're having to buy cars at 96% of market instead of 90% of market. We're now flattened that flattening that back out we're buying cars in the 90, 192% of market that means supply is growing supply is going to continue to grow.
It's going to be slow, but we expect.
Pricing to start dropping as we move towards the end of the second quarter.
And it will continue to drop which means supply is going to grow that will give us access to more inventory.
And we think the back half of the year. So it's going to be stronger that's what all the indicators are showing to us now.
Got it got it maybe one more on used prices go Park and then a follow up but if used prices were to fall 10, 15%, maybe it's not a fair question, but how much do you guys baking in cause externally. We look at the data on used car pricing is I think a proxy for what's going on with the worst thing. So how much would you guys need to see some of the indices.
Or you're sourcing pricing fall in supply get better to hit the projections, you've given at Echo Park, if prices were only down 10% can you hit that.
The goals, you've given of getting to breakeven in early 'twenty four yes.
Yes, the best way to look at it is we need the monthly payment for a consumer to get under $500 a car.
That's going to be in the $24000 price range. If you saw our volumes in January and February to Echo Park was just really spiking up and it spiked up the first 10 days of March we were.
We're on pace to do about 7000 cars in March and then we had just a huge increase in wholesale pricing I believe that we're going to we're going to get sub 25000, as we move towards the end of the second quarter and into the 'twenty four and possibly 23000 range as we move towards the end of the year that does it for Echo Park, we get to that kind of pricing at wholesale then.
We're gonna see 21% to 25000 per quarters.
And we're off to the races and so that's why we put this page 23 together for you. So you can begin to really look at the within Echo Park, what the Echo Park stores are doing from a from an EBITDA and a volume perspective, and youll be able to see the improvement that we're making it more price motorsports over the next couple of quarters here.
This is I would just add as David mentioned in his opening comments, you know that 10% to 15% as we see this is still about 50% higher from whom we can get to that $500.
Got.
Got it got it and maybe one on cap allocation given your confidence in this in anyway. The dislocation in the stock you guys had been expanding into power sport M&A looking at other uses I guess, where does buyback fall in terms of your.
Priorities here or when you look at returns on the investment given what's happening in the stock.
Yes.
Bought back.
161, 7 million shares in Q1.
That's obviously returning capital to shareholder is a big priority, we mentioned before that we're going to slow walk the power sports segment. So we don't plan on looking for big acquisitions. There. We wanted to learn the business and do it right. We think is a huge opportunity, but we don't have any large.
Acquisitions on the radar so share repurchase as we indicated in Q1 as a valuable part of our capital allocation.
We increased the dividend three 5%.
That is another way to return capital to shareholders. We're also allocating a significant amount of capital to our I D.
Enhancements as well as some facility enhancements and we're balancing all of that with ensuring we have enough dry powder for any kind of economic conditions that may be come down the road.
Great well I appreciate all the color and thanks for answering all the questions and good luck guys.
Thank you.
Our next question comes from the line of John Murphy with Bank of America. Please proceed with your question.
Hi, good morning, guys.
Good morning.
Just a first question.
As you have consumers walking into showrooms affordability is an issue whether you have a lot of money or not right pricing in.
Payments are fairly high at the moment.
Who is actually walking out of your dealership seeing affordability is just too big an issue for me I'm I'm going to hold off are you able to close the folks of the opposite you get either online or in store that are that are real.
Yes. This is Tim Kaine, we're doing just fine with the people that are coming into the store.
But we our survey you can customers that have gone online shown interest in cars.
60% of those people are still in the market waiting for prices to come down. So that's what we're seeing and as you know.
Cost of sale goes down those people come back into the market.
And then just a follow up I mean is there any success.
In transforming those folks into new.
Nearly new used car buyers.
I mean have you had any success there or are they actually really just on hold.
No I mean, it's kind of both we do transform them Jonathan one of the problem on the franchise side. We have as we just don't have any off lease cars and with BMW being as big a percentage of mix as we have those off lease cars are just not there and they are not going to be there for a couple of years. So if we had the inventory no problem. The demand is there.
We saw it in Echo Park in particular in the first quarter. The first eight weeks of the quarter.
We were just going gangbusters until the average retail wholesale price went up in a lot of that is just being driven by the rental car companies in particular Hertz.
And cars in the lane and they're paying $3 $4000 more carbon we can afford to pay.
And or the industry can afford to pay and that's really that's really a problem that we need our manufacturer partners to work with them to allow them to buy some more inventory because right now typically they are selling cars in the lanes not buying cars in the line. So that's creating a problem for all of us.
And then the off lease cars are certainly an issue because that's that one to three year old nearly new car that really represents about a third of our volume the franchise stores were buying no cars in the auction lanes zero, where either trading Florida buying the cars off the street, which is becoming which is replacing what we were what we were buying in the lanes are getting.
Cars coming off lease for CPO and Thats why youre seeing the drops in those areas and that's going to be an ongoing problem until leasing starts where the lease returns start coming back.
Great.
This is David.
You mentioned about demand as we are.
Recently with the RSP acquisition.
And we have some still anthos stores right also known as Chrysler Dodge Jeep Ram stores, right and we were off by $17 million and profit due to due.
Due to the truck situation that the supply of trucks.
Stop hold and there's what 20 some thousand trucks in Mexico for example that are.
We are stuck there and so the demand is there we have hundreds of deposits for those trucks as soon as they come in we believe we're going to pick that that profit back up later in the year.
Okay.
Incredibly helpful and interesting you, but one layer down if youre not able to sell them a new car you are not transforming them into a used car.
How much is your parts and service benefiting from those folks holding onto that car longer I mean, and I don't know if you have a gauge or understanding.
How much parts and services benefiting from folks just waiting until they can get another new vehicle.
Yeah.
Our strongest parts and service tailwind is going to be.
And if there's still even a backlog on the parts and service tailwind.
Our parts and service business, just fantastic and about a third of our growth is just coming from incremental new oros.
And so and we expect that to continue to grow.
We've really focused on bringing in more tax.
We've got the space, we've got the capacity.
And our team is just doing a fabulous job from a parts and service perspective, and you can see that in the numbers.
And yet there is no expectation that if new vehicle inventory becomes much more available you sound a lot more new vehicles used becomes.
Supply comes back that you're going to have any sort of air pocket on parts and services. It seems like this is more structural and youre getting more of your fair share in your markets is that a is that a fair statement, yes. That's a real fair statement, we are executing internally at a much higher level than we ever have before from a parts and service perspective, we have really focused on taking market share.
By Op code.
And that's been a big big push for us in the last 12 months and it's a huge vote number one focus item for us this year in parts and service is just to understand which op codes. We don't have share in and to go out and get that share and we're doing that and it's making a big difference in our overall performance.
And anecdotally, we just opened our second Audi dealership in Nashville for example in the fixed Ops Department has already won about two weeks out of service. So the demand is very high.
Thank you very much guys.
Thank you.
Yeah.
Our next question comes from the line of argument Gupta with J P. Morgan. Please proceed with your question.
Hi, good morning, Thanks for taking the question.
I had a follow up on the SG&A question earlier.
But more on the franchise side.
A pretty big pick up in the SG&A to growth for the fourth quarter I know.
There is always an element of seasonality from.
<unk>.
But curious like what was the pickup all attributed to that or are there any one offs or any.
Any time, you up investments in advertising, that's coming through that impacted that number.
I have a follow up and if you could also comment like how the trajectory has changed across whether it would.
Yes.
Sure. This is heath.
As you know our SG&A as a percent of gross.
Literally increased.
Five to 750 basis points from Q1, so you're accurate there.
And that has to do with the seasonality in the business in Q1.
We still if you look at that SG&A.
There is 11.
$11 million of the $23 million in total increase are really investments in it and facility.
That and a couple in the Atlantis impact that David mentioned.
We're back down into the high 60% and so we believe those are one time events that actually drove it up a little bit higher.
We still are reiterating that we're going to believe that the franchise will be in the mid sixties.
For the full year and <unk> will be in the high <unk>.
For the full year.
Got it.
To clarify and add one more point to that this is Danny distillate. This impact was about 300 basis points of deleverage.
On the franchise side. So again that's of the of the 650 increase we saw from the fourth quarter, a big piece of that is related to the lack of heavy.
Heavy duty Ram trucks that we can sell through and the lost gross related to those and we just we can't get the product are on stop sale.
We get little trickles, but hopefully when that loosens up than our big stores like Dave Smith in the northwest just it has a huge impact.
From an SG&A perspective gross profit perspective, so that will all come back to us at some point in time this year.
You exclude the non eco branded locations within that Echo Park segment.
Jeff was talking about before and still anticipates, a 500 basis points impact.
That's great color.
And then just on Gpus, you mentioned that you.
You would expect like a continued decline.
Through through the course, we are paddling about pre pandemic any way to any visibility you have on the magnitude.
All of that base of decline going forward.
And then relatedly.
Combining that with your Echo Park comment.
In the past.
Sometimes given us some indication on just first quarter EPS seasonality.
Whereas it's typically landed like around.
Around 15% to 20% of full year EPS I mean is that is that still the case this year as well.
Given whatever visibility you have on like new car GPU trajectory and then the Echo Park wrap up thanks.
Yes.
Got it.
Yes. This is danny on the on the EPS cadence typically we see that kind of 40% to 50% falloff on fourth quarter first quarter, which was right. In line you know we had some unexpected headwinds the scientists that we just talked about for the first quarter of this year, but yes, we still expect despite the the.
The normalization of new Gpus as we go through the year and the impact of that on the franchise business the upside and opportunity as we go through and improve the losses at Echo Park.
Going to lead you back half weighted Etfs as we traditionally see.
The improvement Jeff maybe you can add color here and we expect them to luxury lease penetration as you go through the year. That's another piece that should help benefit our luxury waiting in the seasonal nature of that into the fourth quarter, certainly it's going to improve new car margins right in line with what we thought would happen in the first quarter.
I would expect a little further degradation as we move into the second quarter, we're seeing that in April .
But we think full year, it's going to land in the mid force somewhere in that ballpark.
And I think ongoing its going to be in that range. It's certainly not going to go back to pre pandemic levels. The manufacturers are going to do a good job of not growing over growing supply, but they're certainly not going to stick with supply in the 25% to 30 day range, it's going to move up hopefully closer to 40.
That level of used car prices really began to drop and that fixes the background for Echo Park and our franchise used car business. So.
Certainly we had beat our objectives for the first quarter.
We're on target to beat our objectives again in the second quarter and for whatever reason, we're always seem to be a little light weighted in terms of what happens with what the street comes out with in the first quarter, that's been predictable over the last 5678 years and the <unk>.
<unk> always short of where we think we're going to be in the fourth quarter.
But but we reiterate.
We're hitting our targets.
Coming out of the first quarter and intend to hit or beat our targets for the year.
And the cadence that we talked about before is the relatively the same kind of thing where the first quarter is typically the lightest and the two middle or relatively the same in this bigger windows in the fourth quarter.
That's.
That's really helpful color.
That's all I had and good luck.
Thank you.
As a reminder, its star one to ask a question. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.
Hey, guys. This is Patrick Buckley on for Bret Jordan, Thanks for taking my questions.
Good morning, good morning.
You guys seen any signs of increasing new vehicle incentives as we added in the second quarter. It sounds like some pretty brand specific to start the year, but still fairly below historical levels.
This is Jeff it's way below historical levels, a little bit in certain pockets pockets of the country for leasing.
Probably more so weighted towards electric vehicles than combustion.
But just a little bit, but well below historical levels.
Got it that's helpful. Thank you.
And then taking a look at the power sports segment, where are we in the cycle. There in terms of profitability should we expect a similar cadence there.
We are expecting in new and used vehicles or is it a bit of a different part of the cycle.
There is a big seasonality in that business as you can imagine in the in the Snowy weather for example, we mentioned that the upcoming Sturgis rally.
The biggest part by far of the year for us during that Sturgis rally in August for example that the lion's share of the profit comes out of that and its a extremely strong it's amazing what they do in Nevada, a two week period during that time, yes, I would look at the first and second quarters of being about the same.
And then a big big Spike in the third quarter.
Given the rally and what's going on at Black Hills with the surface of that.
And then a little bit returned to normal first second quarter for both for the fourth quarter.
But we're still learning that that's why we're slow walking this theres a ton of work to be done.
Spending a lot of time with our new partners.
This arena, but we see tons of upside, there's just a ton of upside from a technology perspective and providing.
Those businesses with our technology and processes and Playbooks.
They are very excited to be a part of all of that so we don't have any more major acquisitions on the horizon here you will spend the next 12 months or so really focus on executing our playbooks and honing our experience within this segment.
And we'll see how it goes but I would tell you first quarter and second quarter sort of look the same huge spike in the third quarter due to the rally and then kind of a return to levels first second quarter.
In the fourth quarter.
Great that's helpful. Thanks.
Thanks, guys. Thanks.
Thank you very much.
There are no further questions in the queue I'd like to hand, the call back to you David Smith for closing remarks.
Alright. Thank you everyone I appreciate you being on the call and have a great day. Thank you.
Yeah.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.