Q2 2023 Sonic Automotive Inc Earnings Call
Yeah.
[music].
Good morning, and welcome to the Sonic automotive second quarter 2023 earnings Conference call.
Call is being recorded today Thursday July 27 2023.
Materials, which accompany managements discussion on the conference call can be accessed at the company's website at IR.
Sure.
Nick automotive Dot com at this time I would like to refer to the Safe Harbor statement under the private Securities Litigation Reform Act of 1995. During this conference call management may discuss financial projections information or expectations about the company's products or market.
Or otherwise make statements about the future.
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 Smee.
<unk> Chief Executive Officer of Sonic automotive Mr. Smith, you May begin your conference.
Thank you very much and good morning, everyone.
Welcome as you said to the Sonic automotive second quarter 2023 earnings call again, I'm, David Smith, the company's chairman and CEO joining me on the call today is Jeff Dyke, our president our.
Our CFO Mr Heath Byrd, Our Echo Park, Chief operating Officer, Mr. Tim King, our Chief Digital retail officer, Mr. Steve Whitman.
And our vice President of Investor Relations, Mr. Daniel Island.
Earlier this morning, Sonic automotive reported second quarter financial results, including record quarter quarterly total revenues of $3 7 billion.
A 4% increase from last year.
Quarter EPS was <unk> 65 per share, which includes the effect of $75 million in charges related to our previously announced plan to indefinitely suspend operations.
Eight Echo park retail hubs, and 14 delivery and by centers as well as three northwest Motorsports stores in the Echo Park segment.
Offset partially by a $21 million gain on the disposal of three franchise dealerships.
Excluding these items adjusted EPS was $1 83 per share a decrease from $2 45 in the prior year due primarily to normalizing new vehicle margins and higher interest rates.
We are proud of our team's performance in the second quarter and we remain focused on maximizing profitability in the near term, while positioning sonic to achieve our long term strategic goals we'd.
We'd like to thank our amazing teammates manufacturer and lending partners and of course, our customers for their continued support.
Turning to our second quarter results the industry continued to see improvement in new vehicle production and inventory levels, which resulted in incremental new vehicle sales volume and lower new vehicle gross profit per unit sequentially as expected.
This decline in new vehicle Gpus should continue as we progress through the second half of 2023 and into 2024.
But we continue to believe that the new normal level of new vehicle GPU.
Remain structurally higher than it was pre pandemic.
And the used vehicle business wholesale auction prices for three year old vehicles decreased 6% in the second quarter.
Wanting the surprise increase we saw in the first quarter.
And this is important July month to date three year old wholesale prices are down nearly 4% consistent with our expectations for continued price normalization in the third and fourth quarters, which will ultimately benefit consumer affordability and demand for used vehicles once retail pricing follows the.
They'll trend in the same direction.
Lower lease turn ins at our franchise dealerships continue to limit our used vehicle volume in the second quarter, but we were able to maintain higher used gpus to somewhat offset the lower volume.
We expect to use meal used vehicle prices to decline further in the remainder of the year.
Yeah.
Now to our franchise dealerships are franchise dealerships F&I gross profit per unit improved $156 sequentially from the first quarter to an all time record 2500 $16 per unit and.
And we reiterate our previously issued guidance for full year 2023, franchised F&I per unit at or above $2400 per unit.
Our parts and service or fixed operations business remains very strong with another quarter of all time record fixed ops gross profit at our franchise dealerships up 9% year over year, driven by 11% growth in our customer pay business.
We are proud of the success. Our team has had in this area and we believe there are remaining opportunities to optimize our fixed ops business as we progress through 2023.
Turning to the Echo Park segment in this mornings press release as I mentioned, we provided additional details around the previously announced suspension of operations at certain Echo park locations and the closure of three.
Three northwest Motorsports locations.
In total we suspended operations at eight Echo Park retail hubs and 14 really.
<unk> Echo park, delivering by centers as well as three northwest Motorsports doors.
In the second quarter, we suspended operations.
I'm sorry, the suspended operations represented 14% of our Echo Park segment unit sales volume approximately $74 million in revenues and incurred a segment loss of $13 2 million.
Going forward, we expect two and a half to $3 million in ongoing quarterly expenses associated with these non operating locations.
Suspending operations at these stores was a very difficult, but necessary decision given the current used vehicle market conditions and our near term outlook.
As we've continued to develop deck apart model our team has learned how to adapt the business to the unique challenges we have faced over the past three years.
While we believe the delivery and by centers remain a key opportunity for echo part growth down the road.
The success of the delivery center model is dependent upon broader broker Echo Park brand awareness to drive organic.
E Commerce traffic to Echo Park Dot com and generate sufficient delivery center sales volume to meet our required returns.
In light of the inventory constraints, we are facing in the current environment.
We do not feel it is prudent to invest in this level of brand marketing at this time, however, as market conditions improve we will begin to rollout our active part national branding strategy, which will enable us to selectively invest and delivery center growth to facilitate our goal of reaching 90%.
Of the U S population and maturity.
We believe that the decision to suspend operations at these stores will substantially improve our near term financial performance and allow us to reach our goal of breakeven Echo Park segment adjusted EBITDA.
By the first quarter of 2024, while.
While maintaining the viability of our long term strategic plan for Echo Park once used market conditions normalize.
Turning back to our second quarter <unk> financial results, we reported record revenues of $601 million and gross profit of $27 million down 44% due in part to the volatility in wholesale auction pricing I mentioned earlier.
Echo Park segment retail unit sales volume for the quarter was approximately 17100 units up 4% year over year.
Second quarter Echo Park segment, adjusted EBITDA was a loss of $31 8 million compared to an adjusted EBITDA loss of $36 9 million in the first quarter and $27 3 million in the year ago period.
We expect to see continued improvement in adjusted EBITDA losses through the second half of 2023, both due to the reduced store footprint and through improved profitability at our remaining operating stores as we're better able to allocate inventory and management resources across the entire.
Platform.
That's why our power sports segment segment, the second quarter kicked off this summer power sports selling season, and we expect peak seasonal profitability in the third quarter highlighted by the Sturgis motorcycle rally next month.
We are continuing to identify operational synergies with our growing power sports network and we remain optimistic about the future growth opportunities in this adjacent retail sector.
Finally, turning now to our balance sheet, we ended the fourth quarter with $864 million in available liquidity.
Including $407 million in combined cash and floor plan deposits on hand.
Additionally, I'm pleased to report today that our board of directors approved a quarterly cash dividend of 29 cents per share payable on October 13, 2023 to all stockholders of record on September 15th 2023.
In closing our team remains focused on near term execution and adapting to changes in the automotive retail environment and macroeconomic backdrop, while making strategic decisions to maximize long term returns.
Furthermore, we believe any industry driven margin headwinds we.
We may face in the franchise business should be a tailwind to Echo Park segment revenue growth and profitability minimizing the earnings downside to our consolidated Sonic results overtime.
This concludes our opening remarks, and we look forward to answering any questions. You may have thank you.
Thank you ladies and gentlemen, the floor is now open for questions. Thank you have a question. Please press star one on your telephone keypad at this time again Thats Star one if you do have a question or comment please hold as we poll for questions.
And we'll take our first question from Daniel Enbrel from Stephens. Please go ahead Daniel.
Hey, good morning, everybody. Thanks for taking the question.
Good morning, Good morning, I wanted to start maybe on the Echo park kind of restructuring.
As Jeff our Heath, if we look at the portfolio today, how did you arrive.
<unk> are there more and maybe a second tier of challenging market that could close.
Market's day tougher for longer and then just a clarifier on the numbers is the right implication of your cost commentary that its like $48 million of annual savings of $40 million of accretion towards EBITDA.
Yes, the 40 million is correct ensure there we did we took up we looked at the stores across the board and this is Jeff by the way we looked at the stores across the board.
And we took the stores that we might have had more difficulty getting inventory to buying inventory in the market areas around those stores and really pared it down from the 50 level down to 25 that we feel given the market conditions today that we can buy enough inventory to support the volume that the stores are capable of doing it.
To all remember that you go pre Covid these stores.
<unk>. This group of stores I think it was 12 or 13 pre COVID-19.
Was averaging about 500 to 550 units per rooftop per month and today you are just not able to buy enough inventory in the 1% to five segment to support as many stores as we have so we've pared down to the number of stores that we knew we could buy inventory for if the market conditions change, we certainly have the ability.
The levers to pull to adjust store counts in either direction, because we've got the stores hibernate. The market comes back faster than we think it's going to we can open stores back up.
If we see a jog and the inventory valuations that we saw in March where prices went from basically what we were buying at 24000 up to 29000, if that happens again, then we can certainly make other adjustments.
Pull other levers to get us to our target of being EBITDA positive in the first quarter of 'twenty four.
This is heath I think just a couple of things that Youre 40 million is correct from an annual basis that is the savings that we have.
But the bigger benefit is two two.
<unk> point is that debt.
We can sell more units out of the 25 remaining locations than the 50 units because you can stock the shelves properly.
So because of these moves and the limitations of getting inventory.
We can now do a better job of inventory mix at those 25 resulted in more units at a higher gross our GPU that we had with the 50, but that makes sense, yes. So on a go forward basis.
You guys are looking at modeling this as we get to the first quarter and breakeven EBITDA, we're going to sell more cars out of the remaining 25 locations. Then we did out of the 50 locations in the first and second quarter.
And our margin improvement should be in and around $500 better in the third quarter versus in the fourth quarter versus what you saw in the second quarter and it's simply because we can buy enough cars sell enough volume.
We're seeing that happened in July and we're going to turn our inventory almost two times in the month of July which is fantastic and getting back to that big volume pre COVID-19 level that is what these stores were built on and what the models built about so we can definitely buy enough inventory right now to support the remaining stores as long as the market stays where it's at.
Now the market. We think is going to get is going to continue to get better right, meaning prices are going to continue to drop in inventories, but kind of become more available as we move from now to the end of the year.
That's helpful to understand kind of your assumptions is the pricing just to make sure understand if pricing were to move higher in the wholesale side that would get more challenging and then that would necessitate potentially further actions.
So from.
That's correct, Yeah, we don't anticipate that though that's just not in the cards and manufacturer producing more cars new car inventory across the board from everybody's announcements is going up from a day supply perspective, no sales in the auction lanes of real high north of 50% right now which is a good sign.
That inventory is building and prices are going to come down so theres going to be more and more volume to buy the rental car companies pretty much now are out of the lanes from buying cars and Thats, what really caused a big issue in March for us and for the industry.
So all indicators are that we're headed certainly in the right direction.
Great. That's helpful. And then maybe one last one for me here. If we look at the franchise F&I per unit. It was much stronger I think you've made some changes over the last year I think you brought up the new financing partners can you parse out what the drivers were of the sequentially stronger F&I per unit on the franchise dealer side and maybe the sustainability of that level going forward.
Yes.
Look we're not the number one in the peer group I think automation is out there $2800. We're a little over 2500, and our warranty penetration is just getting better and better every month.
So we reiterated in David's announcement north of $2400.
Copying and we're going to hit those numbers, we're doing it now and had an all time record quarter.
This is heath is if you look at our penetration to Jeff's point.
New.
Finance penetration was up 250 basis points warranty penetrations up 200 basis points on new and used warranty penetration was up 50 basis points.
Alright, I appreciate it so much best of luck.
Thank you. Thank you.
Thank you and we will take our next question from Rajat Gupta from Jpmorgan. Please go ahead Roger.
Great. Good morning, Thanks for taking the question.
Doug.
Further clarification on Echo Park.
You mentioned that youre going to be you're going to get better throughput from the the remaining stores.
The assumption that.
If we adjust by the $32 million loss in the second quarter or like our $20 million loss adjusting for.
Adjusting for the store count reduction going from the $20 million loss to the breakeven.
Is that.
You mentioned the $500 of gross profit per unit that would be better as the remaining coming from volume.
Our growth going forward.
Adoption of sequentially volumes keep going up from here or.
Im just trying to understand like.
A little more granularity, how do we get to that breakeven.
Over the past.
Yes. This is David.
It's interesting Jeff touched on a second ago, and I will let him touch.
But it's interesting to note that our capacity to grow our volume in the past week as he mentioned, we did 550 cars per store.
Where we're sitting now is less than 300 correct units per store. So we easily have the the capacity on our in our team.
<unk> team and our structure.
So far more cars with this.
<unk> group of stores and also deliver the world class guest experience that Echo Park.
Has been delivering.
For the last 10 years the breakeven I think we gave you all last quarter was or the quarter before was around 9000 cars given the changes that we've made that breakeven number now for the year.
The segment is 7200 cars.
And we feel that between now and the end of the year, we're going to be in a position to make that happen to remember a lot more throughput means we've got to hire more people hire more technicians are average.
Experienced sales associated Echo Park. This month it is going to be in the 27, 5% to 28 range.
Pre COVID-19, we were doing well over 30% so that's coming back.
So the volume the inventory there is plenty of inventory to support the stores that we have left open.
And we think we can continue to grow that we will continue to grow that through the third and fourth quarter and hit our breakeven target for Q1 of.
2024 and.
To sum it up.
Basically those three components, it's the reduction in expenses of the $10 million a quarter plus the increase in volume and the increase in GPU.
And we're seeing that occur in July yes.
Got it got it that's helpful.
On the inventory revaluation charge.
In the second quarter and the $10 million.
Would that just mean.
They are.
The front end gross profit in Echo Park.
This has a much more favorable base here.
Into the third and fourth quarter and does that kind of like driver of confidence in that $500.
<unk> increased sequentially as well just wanted to make sure like when thinking about that correctly.
Yes, that's certainly a part of that but more importantly, it's the 1% to 35 day old cars that we're selling we're turning our inventory so much faster buying cars cheaper. So our margin is significantly better on our fresh inventory the $10 million really went against our aged inventory.
A lot of the inventory that we bought in March the depreciated a lot faster than probably we've ever seen before in history.
And so that's where those dollars took care of some of that of that inventory, but the bigger news is the margin that we're making on our fresh inventory now that's back to normal for us.
Actually better than normal for us, which is just fantastic. We are in the 550 to $600 range on fresh inventory, which is well above where we've been even pre COVID-19. So that's the exciting news is we know margins improving on our fresh inventory, we're turning our inventory really fast probably turning our inventory faster than we've ever turn to.
Because we're going to be nearly two times turn in in July .
The faster you turn your inventory the higher your margins are going to be.
Right right.
That makes sense.
One on the franchise SG&A to growth.
The prior guidance was I believe mid sixties.
Just curious if you read or anything that happened.
And maybe like any updated thoughts on how you expect.
New and used car GPU to trend.
Okay.
Yes, we reiterate that we believe that the franchise will be in that mid <unk> from an SG&A as a percent of gross and told that likely to a total of around 65 to 70 for the year.
The margin should be consistent.
Margin should be consistent from a used vehicle perspective from what you saw in the second quarter.
And new car margins.
Mid 4000 range somewhere in that ballpark between now and the end of the year.
Understood great. Thanks for all the color.
Once again Thats Star one if you do have a question or comment.
Next we'll take a question from Bret Jordan from Jefferies. Please go ahead Brian .
Hey, Good morning, guys. This is Patrick Buckley on for Brent Thanks for taking our questions.
Hey, Patrick Hey, good morning, Good morning, just dig in a bit more into the used gpus how.
Should we think about what the new normal is theyre moving forward.
Given the rebound in the past couple of quarters should we think about <unk> hundred is a new low or more volatility in the longer term there.
I think if the market keeps dropping like it's dropping then.
We're going to be real comfortable in that 1400 range.
If the market keeps moving around a lot margins.
Margins are going to move around.
And that's just keeping up with the depreciation, but I don't think the markets are going to maybe another four or five weeks of drops, but it's got to flatten out here at some point because you know what.
We've gone from $29000, a card or $27000 a car in the first part of Jim now we're buying cars below 25000 that trends just not going to continue at that steep level.
So.
If that happens and things begin to flatten out margin should sustain itself between now and the end of the year in and around where we are today from a franchise perspective and this is David I think it's important.
To touch on that that our team has been very.
Disciplined and selling through.
Our inventory as that market evolves.
So it has put a little pressure on margin, but as it as it levels out as Jeff was saying that margins should improve.
Got it that's helpful. Thank you.
And then just moving over to the parts and service side could you talk a little bit more about where your capacity levels are at.
Imagine labor continues to be a constraint there, but curious to hear that compares to your overall physical capacity and how much from.
Lastly, there is to grow.
Yes, we're full.
Every every stall.
We need more technicians were actively building stalls in many of our locations today.
Or we'd have further upside in terms of our year over year growth.
This is a long runway.
We've been really working on our market share as we said last quarter.
From an Alco perspective, and growing our share across all of our brands and we've really got BMW done now we've got Honda done now that will continue throughout the rest of the brands and growing share by specific op code and that's given us a great return we've had just an amazing performance from fixed ops perspective, another record breaking quarter.
And we expect that to continue to grow but we need more stalls, we need more tax there is no question about that.
Great that's all from us thank guys.
Yes.
As a reminder, that star one if you do have a question or comment.
Good morning, guys.
Wanted to follow up on the Echo Park restructuring from an operating standpoint, and maybe from an accounting standpoint.
So if we think about the 25 locations or maybe 'twenty, two and X out the Motorsports stuff should we really think about this as a light kind of being turned off and then if market conditions in 12 plus months.
Prove that.
You might be able to turn these lights back on pretty quick pretty quickly.
Yes.
The exact idea.
I would like to brag on our team here at a little bit.
Our team does an amazing job of hiring and training and getting these stores open.
I think that it's actually going to be an easier job as the market improves and because of the experience of our existing leaders at Echo Park to ramp up these stores and get them going again.
Again as the market improves the lights are definitely out in the stores that we closed but doesn't mean, they can't be turned right back on.
And that would be the intention if the.
The market improves.
Like we think it is going to do it's just not going to happen in this calendar year right. We've got a long way to go to get back down to the 21 $22000 price level, if we do.
But certainly rapidly improving prices and rapidly improving availability is occurring right now and we're seeing that in this month, we're seeing a lot more cars per rooftop because we can buy and fill the shelves.
The remaining stores that we have but if that more inventory becomes available.
At the right prices, then absolutely we have the ability to pull those triggers and levers and open more stores and opening quickly obviously because they already exist.
Key takeaways that the stores that were closed only represented 14% of the volume.
Yes.
Yes.
That's pretty resounding right given it's the same number of stores that you got to keep open right I mean, it clearly shows the chosen the right stores or at least appears to chose the right stores.
Just a follow up on the accounting side on this.
Why would you keep an ongoing expense for something that's put in disc ops wouldn't that have been put into the charge and then sort of follow on on the accounting side. When you talk about the inventory write down is that write down for vehicles that are then dispersed to other locations and then sold at a higher gross so they help you out in the short run I'm not trying to be a wise guy just trying to understand that.
The accounting and how this is all flowing.
Yes, John this is Danny.
Two pieces to that the ongoing expenses are the pieces that we couldnt accrue and recognizing that onetime charge you've got ongoing maintenance.
Security utilities at those leased and owned properties going forward.
Other things like the rent and depreciation were contemplated in the 75 million of charges in the second quarter.
When you think about the 10 million inventory adjustment as we noted in the release.
About $7 7 million of that is related to that remain the operating stores again as Jeff noted just cleaning up some aging with the rate of depreciation that we saw in the second quarter.
The remaining $2 three youre exactly right with the aged inventory as well as then just valuing that to what the retail market value is as we reassigned that either to other echo park locations or at wholesale.
Okay.
Given that inventory write down in operating stores in that $2 3 million in the disc op stores like that that will help I mean that will will flatter the margins in the short run is.
As youre going through the next quarter is that correct I just want to make sure I understand that yes. This is Jeff it's certainly going to help the aged inventory, let's call aged inventory anything north of 45 days because your backyard 45 days ago Theyre down a couple of thousand dollars a car already.
So, yes, it'll shorten there, but the more important thing is what's the margin on the cars that are that are 1% to 35 days old now that we're seeing in July and of course, those dollars are going to that inventory.
What's happening in that inventories are margins are significantly higher than the pre COVID-19 run rates that we had in margins where the stores are making all the money that they were making so that's the great news. The great news is the margins on the fresh inventory is back in.
Back better than it was pre COVID-19. So that's what we hope to see continue to happen between now and the end of the year and why we're so confident in it.
Positive EBITDA in the first quarter of 'twenty, four I'm, sorry, and just one last one on this.
<unk> mean that you will not open any new stores until the stores come back on or could you stay in disc ops and you say, hey, listen we just found a new market or newer markets that are just really attractive and we can add a couple of stores here and there. So we could see Echo park growth gross store count even with these kind of stores in disc ops for now.
Yes, I mean, some of those stores and discounts could be there forever right in there and we might end up selling but and find new markets that are bigger better we've got inventory resources there.
Name it it'll be a combination of of what you said.
Okay, Alright, great. Thank you very much guys.
Thank you.
And our next question comes from David Whiston from Morningstar. Please go ahead David.
Okay.
Hi, good morning.
I had a question on your franchise business.
Looking at the reported versus same store on the used side Youre used gpus.
We're actually up 14%.
But on a same store basis, they are announced 3% and so.
You seem to be backing at a pretty strong industry headwind here, which is great to see but it looks like maybe you're favoring profit over volume on the used side on the franchise side, but also do you have some newly acquired stores not yet in the same store base that we're just outperforming the industry on yield to cause that difference.
There is some of that going on but we are bucking the trend we're being very conservative I mean, we sold 75 to 80 units per rooftop and we typically run over 100, but you just can't buy the inventory there is no off lease cars coming so we're really trading for cars and buying cars off the street and we did take a much more conservative approach than we normally have.
In terms of holding onto our GPU and selling a little less volume we could sell more cars Theres no question, but the margins would really drop if we had to go buy more cars in the auction and we see that at Echo Park with our lower margins.
Yes that was a strategic.
And we will continue to balance that through the rest of this year before we start opening any of our buyers to go back into the auction lanes to buy cars for the franchise stores, we're going to we're going to live off of vehicles that we bought off the street and our trade ins keep our trade ratios really high which is running in the 55% to 60% range right now.
We'll live off that until we really get a handle on what's going to happen in this used car market.
One of the Big differences is really just the brand mix of what we acquired last year and while we just close this year. So that's also kind of noise in those numbers.
This is David we've mentioned it earlier I mean it was it was.
All accounts a historic drop.
Valuations are used cars in the market. So we.
We think strategically it's really smart to.
Keep that inventory tight and as Jeff said, maybe Miss a few retail deals until that market starts to flatten out more consistently and then we can crank up the volume.
Yes, we're seeing prices drop in the wholesale market for the mix that we buy two weeks ago, we were buying cars over $26000 last week, we bought cars under under 25000.
And you have to adjust your retail pricing on your lot to account for that so we're just being very very careful turning our inventory a lot faster getting our cars through reconditioning quicker and in executing our playbooks at a really high level. It's given us more gross theres no question were seeing that little bit echo parking on the franchise side.
Thanks for that.
I'm just curiosity do you have any store gms.
Planing to you guys, though that we're.
I'd like to get more volume on the used side.
No not at all.
<unk> been buying inventory, yes, we buy our inventory had been trade for our inventory centrally.
They're executing their playbooks and we don't have any of that.
Okay, and just curious on the Tesla model Y aggressive discounting how badly that's not hurting not only your premium brands if at all but also to your volume brand stores.
It certainly played a role if you had a bunch of Tesla is in stock.
You know in any other franchise stores.
<unk> right.
That hurt.
But overall I mean, it's certainly playing a role against electric vehicles.
From a new car perspective.
They are having to get more aggressive in terms of their pricing, but the quality the quality of the product that the manufacturers are producing now.
Is simply amazing I don't care, if its Mercedes BMW Audi you name it.
Lexus Toyota, they're just producing an amazing product and it's a better product and Tesla.
And is the pricing gets right the inventory levels come up youre going to see a higher mix of electric vehicle sales.
Throughout the category.
Do you think consumers are catching on though that is a better product one topic.
Perhaps he was complaining they have too many <unk>.
Yes, I think it's a little early yet.
It's a little early yet to make that comment right.
Let's see what happens as we move through the next six months shelves begin to get filled and we put some loaner electric motor vehicles in and let the customer get used to driving electric vehicle dealing with the range issues that kind of go with the consumers' concerns.
And so let's see what happens I think we've got another six months to a year of sort of crossing some new boundaries.
The electric vehicle and if the manufacturer can you get the pricing right and they keep their day supply in line, which are two big questions.
They really need to focus on then I think they can do very very well, but if theyre going to launch vehicles that are $112000.
When the counterpart combustion engine vehicles, 2000, and $30000 cheaper theyre going to have a problem and they are very well aware that some manufacturers are doing a better job than others.
Everybody is learning the electric vehicle business right now and that includes the manufacture how to launch it what product to put out there how to compete against Tesla.
We're nowhere near that limit I think Mercedes BMW and the 17% to 20000 vehicles versus desk with 600000, maybe this year from a U S perspective, so there's a whole lot to learn in a long way to go before we can claim any victories from a from an electric vehicle perspective.
I think it's worth, noting you mentioned that EQM and <unk>.
We've got the number one.
Savings.
Ship in the country out in California, and the <unk> model. It is.
Regional where it's like that.
That part of the country has been faster to adopt that car and so that store has actually been buying EQM is from other parts of the country.
Shipping them out there.
Okay.
Okay I appreciate all the detail. Thank you.
You bet.
Once again star one if you do have a question or comment and we will take another question from Rajat Gupta from Jpmorgan. Please go ahead Roger.
Great. Thanks for taking my question just wanted to get your updated thoughts on capital allocation buyback M&A obviously.
A big focus on converting cash at Echo Park here in the near term, but as you as you get more comfortable with line of sight towards.
Profitability ignored cash when in Echo Park how.
How should we think about the use of excess cash in line.
Capital allocation.
Yes.
David and I know Heath has.
Comment about this but.
We think that.
Our focus on our balance sheet, and making sure that we have the strongest balance sheet possible.
Deliberately.
It was a strategic decision to not buy back shares.
Second quarter, and we'll see where we go opportunistically from here as you see we've got it.
Fantastic balance sheet, a lot of cash and we will look at strategically at various opportunities for acquisitions and share buybacks.
But we just thought that it is important to focus on it we've had quite a few acquisitions and a lot going on with Echo Park is to focus on those operationally and we've got our power sports business and the RFG dealerships and putting into our playbooks and making sure that we execute.
Properly and Adobe.
There'll be plenty of opportunities in the future for our capital allocation, but heath as you have anything again I'll just reiterate.
We believe that cash is king when you have uncertainty with economic conditions that we want to have dry powder for that number one.
Number two we also have a strategic initiatives.
Our debt down and so we've reduced our debt about $60 million for the year. So that's a big important part of our capital allocation plan.
We're reinvesting in our it infrastructure and innovation as well as our facilities. So that's a priority.
We don't have anything that is pricing in a material from an M&A perspective in the near term.
Wanted to be prepared and have capital available to start growing Echo Park again, as we start seeing that market normalize.
And then again as always we will return capital to shareholders, primarily through our dividends and opportunistically through share repurchase.
Great. Thanks for the color.
Thank you Sir.
Once again star one if you do have a question.
Okay. There appear to be no further questions at this time I'd like to turn the floor back over to management for closing remarks.
Thank you all so much for attending the call.
We will talk to you next quarter. Thank you. Thank you.
Thank you ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time and have a great day.
Thank you.
[music].