Sonic Automotive Inc (SAH) 2007 Q3 法說會逐字稿

Good morning and welcome to the Sonic Automotive third quarter earnings conference call. (OPERATORS INSTRUCTIONS) As a reminder, ladies and gentlemen, this call is being recorded today, Tuesday, October 30, 2007. Presentation materials which management will be reviewing on the conference call can be accessed on the company's website at www.sonicautomotive.com by clicking on the for investors tab and choosing web casts and presentations on the left side of the monitor.

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, markets 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. Thank you.

I would now like to introduce Mr. Scott Smith, President and Chief Strategic Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

Thank you. Welcome. Good morning ladies and gentlemen and fellow shareholders. Welcome to Sonic Automotive's third quarter 2007 conference call. I'm Scott Smith, President and Chief Strategic Officer. Joining me today on the call are the company's Vice Chairman and Chief Financial Officer, Mr. Dave Cosper, and our Chief Operating Officers Mr. Jeff Dyke and Jim Evans. The presentation materials for this call is posted to our website, www.sonicautomotive.com and can be accessed by clicking on the for investors tab and choosing web casts and presentation on your left side of the screen.

Our comments today will be linked to the slides on this site. If you'll please turn to slide No. 1. Once again, I'm happy to report that Sonic Automotive has delivered great performance. Implementation of best practices and consistent execution in our key strategic initiatives have resulted in solid results. Let me go over some highlights. Profits from continuing operations up 9.4%. Same-store used vehicle revenue up double digits. F&I continues to improve. Service customer pay revenue up and SG&A down. All of this was achieved in a challenging marketplace. Our results showcased not only our talented associates, but also our committment to executing our strategic initiatives. This combination will result in improved profits and cash flow. Now I'll turn the call over to our Vice Chairman and Chief Financial Officer, Dave Cosper, to go over our performance in detail. Dave?

Thank you, Scott, and good morning, everyone. I feel we had a very strong quarter and would like to take you through the highlights of our performance. As you can see, on this slide, total revenue increased 5.7% to nearly 2.2 billion. Gross profit increased in similar fashion and is up 6%. As a result, gross margin was 15.3%, flat with last year. New retail margins were 7.4, down 20 basis points from last year, but up 10 basis points from the second quarter.

Used retail gross margin was 8.8%, down 60 basis points from last year. I'll talk more about this in a moment. Fixed operations margins 50.7%, up 70 basis points from last year. This part of our business continues to be exceptionally strong. Our operating profit increased 8.5% to 80 million and our operating margin increased to 3.7%, up from 3.6% a year ago. Total income from continuing operations was 31.8 million, an increase of 9.4%. Our EPS from continuing operations was $0.70, up 6% from last year. Bottom line profit was off 2.5 million from last year and was impacted primarily by non-cash impairment charges on stores sold in the third quarter or expected to close this quarter. The sale of these stores is expected to generate approximately $13 million in cash. We're more aggressively moving to dispose of stores we judge as non-core to free up capital for more productive use. With the exception of one rooftop, all remaining franchises within our discontinued operations pose a low risk of significant deterioration in operations or a drag on overall earnings. So we've made good progress on this front.

Next slide please. This slide shows the key changes in earnings per share from last year. As you can see, interest expense is up $0.03 a share. The increase primarily reflects higher floor plan and revolver debt levels from our acquisitions. Higher share count reduced EPS by $0.02. This is primarily the dilution impact of our 2005 convertible debt. All other improvements total $0.09 and reflect both our strong sales performance and our strong focus on managing costs. We believe with interest rates leveling off or falling, our strong operating performance will flow more fully to the bottom line.

This slide shows our same store sales performance for the quarter which, overall, is very strong in a tough environment. In total, same-store revenue increased 0.7% for the quarter. Excluding wholesale, revenue was up 1.8%. Total new vehicle revenue was down 0.8%, but more than offsetting this was higher used vehicle revenue was up 11.1%. This increase was driven by higher volume of 5.4% and higher per unit pricing which, in part, reflects sharply higher sales in our luxury stores. In total, same store used volume at our luxury stores was up 18%. At BMW, used sales were up 38% same-store and we actually had margin improvement from a year ago. Because margins are lower on used luxury vehicles, our sales success with luxury actually pulled down our overall margin percentage terms but, of course, higher sales improved our profits.

I'd like to note that our used-to-new ratio was 0.51, up from 0.46 last year. Same store F&I revenue was up 3.4%. The increase was driven by a $51 per unit improvement. The standard menu continues to produce solid results. Fixed operations also continue to perform strongly. Total same-store revenue increased 2.3% while same-store gross profit increased 2.9%. Customer pay revenue gross were up 5.4 and 5.3% respectively and drove the overall increase. At our luxury stores, customer pay revenue was up 10%. In total, our fixed absorption was over 90%, which is even more important in a challenging sales environment. Of course, we remain focused on customer service and satisfaction and will invest in stall capacity where it makes sense.

Please turn to the next slide. We've been talking for a while about our used car performance and this slide lays out our vision for where we can go. We already have made good progress and feel there's substantial profit opportunity ahead of us. By this year end, we will have finalized the first phase of our used vehicle strategy rollout. As you can see on the slide, the initial phase is focused on changing the culture in our stores to become more retail focused and less wholesale focused. As part of this, we introduce simple and easy to execute inventory processes and Sonic's proprietary inventory management system, Sims. This is powered by Auto Exchange.

Over the last two years, the introduction of phase one and the culture change in our stores has provided Sonic with a solid foundation for accelerated used car growth in the coming years. In 2008, we'll enter the second phase of our used car strategy. This phase will include enhanced inventory technology to our Sims system powered by both Auto Exchange and Lane Logic. These enhancements will support our strategy to optimize inventory as it is traded or purchased in our Sonic network of stores. We will be able to effectively move retail inventory throughout our network of stores to optimize both inventory and sales at each of our stores, in effect putting the right car at the right location for the right price. That's the whole promise. This second phase will take 18 to 24 months to complete. During that time, Sonic will continue to grow used car volume, margin, and profitability. Currently, we're in the process of developing our online used vehicle strategy and approach. We envision a used vehicle virtual store having its own unique branding and customer controlled shopping and transactional elements. Obviously, these phases build on one another, so our plan is to move forward with implementation of phase three once we're comfortable with progress on phase two.

Turning to the next slide, please. SG&A was another strong performance area for us in the quarter. As a percent of gross, it was 74.4%, down 40 basis points from last year. Our SG&A as a percentage of gross continues to benefit from our disciplined approach to cost control and, in particular, our attention to department modeling and common element pay plans. They really paid off for us in the quarter. On same-store basis, variable compensation, fixed compensation and other fixed costs were all down, in terms of raw dollars. This is really important. We're reducing cost and increasing gross and, of course, that combination has a dramatic impact on profits.

Turning to the next slide, this is our geographic review. Our strongest regions for the quarter were Texas, Alabama, Tennessee, and Georgia. These markets account for roughly 40% of our total revenue and produce gains in most revenue categories. Michigan is tough right now and we don't see that changing in the near term. Michigan is less than 3% of our sales. In Florida, we experienced softness in our non-luxury import brands. Additionally, our large Toyota store there has been severely hampered by construction. Used volume and fixed operations in Florida were stable.

New car market in California has been challenging; however, same-store used volume, F&I, and customer pay revenue were all up. Additionally, while new car volume was down in California, we were able to pick up market share in some key areas and hold our overall new car margins flat with last year. As I mentioned, used car volume was up in California and we were actually able to increase used margins in the state. Finally, the integration of our three stores in California has gone very well and they contributed to our performance for the quarter.

Next slide, please. This is inventory status for us and we ended the quarter with just under 44 day supply of new vehicles, much lower than the industry average. I'm particularly proud of the way we managed our domestic levels at 52 days. Used car inventory for the quarter ended at 37 days, which is equal to our target, and overall we're in pretty good shape, in terms of our inventory.

Next slide. This is our debt to capital. As a reminder, our debt-to-capital was 39% in the fourth quarter of last year and the first quarter of this year, so we were in our target range of 35 to 40%. During the third quarter, we acquired Long Beach BMW, a beautiful store with nearly 140 million in revenue, and we financed this with debt. So, we ended the quarter with a debt-to-cap of 41.9%. As I've said in the past, we'll be in the target debt range over time, but its going to be lumpy depending on acquisitions.

As you may know, during the quarter we sold Cornerstone Acceptance and we received $33 million for it. We used every cent of the proceeds to repurchase our stock. I recently read an article that management teams often worry about the signal they send to investors when they repurchase their stock. In other words, are there growth opportunities in the business or does the management feel the stock is undervalued? I assure you, we have substantial growth opportunity. As a reminder, we're continuing with our plans to own more of our real estate financed with mortgages instead of leases. I firmly believe this is the right strategy for Sonic, and this will create substantial value over time. Of course, this puts pressure on our debt-to-cap ratio. For example, our debt-to-cap ratio at September 30 would have been 41.3% without the mortgage financing; 0.6 of a point below the level we're reporting.

Next slide. Talk just a minute about the Q4 outlook. While there continues to be some regional pockets of economic stress, we feel the operating environment in total will be stable. We're going to control what we can control. Used, fixed operations, F&I, and expenses. There are also some new models out there that will help stimulate traffic; Mercedes C Class, Honda Accord, Cadillac CTS, and the Chevy Malibu. Also, we see luxury imports continuing to gain share which plays to our strength. We're comfortable with our previous guidance and reaffirming EPS and $2.50 to $2.60 a share. As a final comment, I mentioned earlier we repurchased 33 million of stock in the third quarter for a year-to-date of $43 million. At our October board meeting, we obtained approval for an addition 40 million of repurchased authority. We have a very strong capital allocation process at Sonic and we'll be watching all investment opportunities. With that, I'd like to turn the call back to Scott.

Thank you, Dave. Once again, we have proven that Sonic can deliver on promises and expectations. We believe in our team, our strategies, and our ability to execute. Life is great at Sonic Automotive, and I believe that our company is one of the best large companies to work for, and I am very honored and proud to serve as our company's president. We are reaffirming our full year EPS target of $2.50 to $2.60 a share. As cofounder and a significant shareholder of Sonic, I do agree with Dave that our company is a very good value. Our dividend will remain unchanged at $0.12 per share payable on January 15, 2008, for shareholders as of record December 15, 2007.

Before closing, in response to the Southern California wildfires, Sonic Automotive has joined our friends and partners, NASCAR Nextel Cup champion Jimmy Johnson, Hendrick Motorsports, Lowe's and NASCAR by donating $350,000 to the American Red Cross California Wildfire Relief Fund to benefit people affected by the fires. I'd like to share my sincere appreciation for the leadership demonstrated by Mr. Johnson, Mr. Hendrick, Mr. [Neblock], Mr. France and our Chairman and CEO, Bruton Smith. As always, I want to thank our dedicated Sonic associates. They are the heart of this company. Also, we want to express our sincere gratitude to our manufacturing partners for their support. The pipeline of new products for the coming year are fresh and will generate excitement. At this time, we will now take your questions.

(OPERATORS INSTRUCTIONS) Your first question comes from the line of David LIM of Wachovia.

Hi, guys. It's Rich Kwas, actually.

Hi, Rich.

Dave, where are you on discontinued operations or discontinued stores? I think you had a dozen or 15 franchises that were still (inaudible) and did you make any progress in the quarter?

Yes. We did make some progress and as I was mentioning in the slide, there's some of the tougher stores and I would expect the operating piece of the loss to be trimmed by 45% by the stores that we've sold in the third quarter and then fourth quarter. So, a lot of progress there. We're taking a more aggressive stance on that.

Okay. So, is the 45% meaning that you reduced that count by 45%?

No, not the count, just the magnitude of the loss.

Okay.

The loss that is there, I think it's roughly 8 million pretax, roughly half of that is impairment charges.

Okay. And then the intent is to divest yourself, divest of these stores?

It is. We want to get out of the stores that are the most challenged for us and have been the biggest problem and free up the capital.

And how many franchises were there at the end of Q3?

174.

I mean in discontinued ops, excuse me.

10 to 15, something like that, franchises. A lot of them are linked stores.

Okay. And in terms of geographic trends here, California, Florida, are things getting any worse from your perspective?

Rich, this is Jim Evans. Our California business remains very stable. Our margins for the quarter are flat. Our new car business is up. Our F&I is up. We're controlling what we can control. Good, fixed operations for us. We think we've stabilized the new car gross compression. We feel good about California currently. We think it's a very stable environment for us with our operating model, and we're looking forward to a solid quarter out there.

Yes. I'm not sure you commented on my comments, but actually new car gross margin was flat year to year and actually improved on used and volume was up on used. We were pretty pleased with that overall.

I caught the tail end of that. I was scribbling that down, but just wanted to get your qualitative comments on that. On Florida, when does that Toyota dealership get finished, the construction?

Rich, this is Jeff. I also was going to comment. Our Florida business is fairly stable across the board with the exception of that store, and it has just caused us some problems from a remodel. We will finish that construction or start moving into the fixed operations of that facility at the beginning of the first quarter, which will be a big relief to us.

Okay. Great. Dave, did you say that customer pay was up 5% year-over-year on parts and service?

5.4 overall, 10% for luxury.

Great, thank you.

Your next question comes from the line of Edward Yruma JPMorgan.

Sorry about that. Congrats on a very special performance in a very tough environment. Can you talk a little about some of your commentary on used -- it was interesting that you would contemplate an online super store? Does this preclude you from doing something physically or launching kind of a standalone used car concept?

It doesn't preclude us from that. One of the things Dave talked about, when he was talking about the used vehicle performance slide, was that we're working on this in stages. We've been very disciplined in handling the first phase of this project, which has taken the last 18 to 24 months. We'll focus heavily on phase two which will introduce our trade (inaudible) and really putting the right inventory at the right location for the right price. And then along those lines, as we get that beginning to roll out we're going to start focusing on opportunities that we have in web tailing and branding a virtual lot for Sonic. We'll take it in that order.

It doesn't preclude us having standalone used vehicle lot.

Not at all.

Got you. In your commentary about the stabilization of California I found very interesting in light of some of the comments from your competitors. Do you feel like you're taking share or is it just a byproduct of where you are in the market in your brand?

Ed, Jim Evans. We have a favorable brand mix in California. We also feel like through our enhanced traffic management eCommerce focus out there as well as a very effective management of the inventories, we feel like we have a competitive advantage and we're -- we feel it's a very stable market for us now as we look quarter over quarter and the beginning of the fourth quarter it feels very, very stable to us and a solid business model supports that very effectively.

Got you. And one final question. It seems as if you've been very focused on share purchases over the past quarter. As you think about applying your growth capital going forward, do you, at this stage, view share purchases as more attractive than acquisitions?

Ed, it is something we judge over time and I have to tell you, freeing up the capital from Cornerstone I was never fully comfortable having our capital invested in that. As fortuitous, whatever you want to call it, the share price fell dramatically, in my opinion, based on the future outlook that I see for the business and we took advantage of that, and I feel really good about that. We have a policy of whittling away at dilution so we don't have dilution over time from stock compensation. We took a big whack at it there. We're back to the levels, basic share count of the level before I joined the company and that had been a goal of mine and the timing was right.

And I might throw in there as well, the growth is what we're about. And I think this depressed stock prices shown our discipline in choosing where we're deploying the capital. And I'd say that as far as infrastructure goes, we can still grow 30 to 40% without meaningfully adding any SG&A to our current structure. So we're poised for growth and that's the direction that our chairman wants us to go in.

Of course, buying back shares is not a long-term growth plan obviously.

Got you. Thank you very much.

Your next question comes from the line of Darren Kennedy Goldman Sachs.

Hi. Most of my questions have been answered. I did wonder whether your involvement in the California fire, Red Cross charity initiative, you always have exposure in that market that is pretty significant in that area? Is it impacting your sales currently?

Darren, we only had two stores that were evacuated in Poway. Our Honda and Toyota store down there, that's a suburb of San Diego. Those two stores were evacuated for an entire week from Monday through Friday. They were back open on Saturday and actually both of them had a very solid weekend. Our business throughout Southern California, we have 20 plus dealerships in the remainder of the state.

Sales were a little bit slow during the week, but we had a very solid weekend. It appears the worst of that is behind us. Most importantly, all our associates are safe. We did have two that lost homes in the Poway area. No other stores were evacuated. There was no property or physical damage to inventory. So, we're back in business and looking to support our associates and local communities.

Great. That's good to hear. And then I guess on the used performance, in general, you've got a lot going on, a lot of plans to build that and strengthen that business. But it seems like some of your competitors really showed -- appear to be operating in a different environment. Can you talk about what challenges you're facing and outpacing your competitors by so much?

This is Jeff Dyke and I'll try that question. We spent the last 18 to 24 months working on building the basics and supporting the basic processes in our stores and not counting on auto exchange product or some technology to help us grow our business, and I think that is what is showing up right now, just supporting those basics that we are willing to invest the time and the energy in to and the training in to from our support teams regionally. I think that's what's showing our level of growth in the foundation we put in place.

Widespread growth across the entire nation, and that's pleasing to see for me.

Great. And then, finally, a question of Toyota specifically since you do have one of your larger brands. Are you seeing -- I don't know if I missed it -- did you talk about specifically inventory levels where they are today versus a year ago for that brand and also what your margin experience has been there specifically?

Our margin experience continues to be a bit of a challenge. We are with the local markets, we're relatively competitive, but we've seen over the last quarter, in particular, some compression in gross with Toyota across the board. We're currently at a 35 day supply with that product and that's stabilizing for us.

Is that 35 -- what is that? Versus year ago?

It was 23 a year ago, 35 day supply currently.

That sounds like quite a jump, probably more than the industry is up or maybe about parallel. Would you say that suggests margin pressure will continue into this quarter for that brand?

We anticipate that, particularly with Camry. There has been considerable margin compression with the Camry product and that could account for a large portion of the overall compression we're seeing.

Thank you very much.

(OPERATORS INSTRUCTIONS) Your next question comes from the line of Rick Nelson of Stephens.

Thank you. Good morning and my congratulations as well.

Thanks.

Follow up on the capital allocation stock buy backs. Obviously, you're taking higher priority of late. Can you comment on the acquisition environment? Are there more sellers up there today, given the overall environment and what's happened to pricing?

Rick, this is Scott. We're seeing a fairly stable environment to even down. Some of the requirements that the manufacturers are coming with now -- it's kind of the same old story but we're seeing it in some brands that we like. Mercedes has just come out with a new margin structure that is tied into image and significant investment into these dealerships that frankly we believe a significant number of Mercedes dealers will become available in the next one to three years. That's how long their program lasts.

The other franchises continue to put pressure on dealers to invest in facilities. And we've been doing it over the years and we like to put our money where we make money, which is primarily in the fixed operations areas. So, I'd say it's a fairly stable environment. There are lots of opportunities out there. This year we've grown our revenues by roughly 585 million through acquisitions and still have a good pipeline into the coming year.

Okay. Thank you for that, Scott. Any comments on October sales changes versus what we've seen?

This is stable and continues to look like the last couple of months. It's not bad.

Thank you.

We have a follow-up question from the line of David Lim of Wachovia.

Hi, guys. It's Rich again. Dave, impressive same-store unit growth on the used side overall at the luxury store level and then you talked about BMW being up 38%. As we think forward, where is BMW -- that's one of your biggest brands? Where do you think you have an opportunity otherwise, in terms of the other brands? Would you say BMW you made the most progress with BMW in that among the other luxury brands and import brands you operate that you have good opportunity there. How should we think about that as we get into '08?

Well, I'll give you an opinion and let those guys chime in. I think we're going see improvement across the board. I think some of the culture change that Jeff Dyke talked about maybe was the biggest in our BMW arena where those guys, "gee, can I seel a Camry off this lot or not." We're finding that, yes, we can sell products like that off of BMW lots, so I think there is probably an area of more improvement in some of those stores, particularly in the luxury side. We're seeing good growth in California. Frankly, its across the board. Jeff, you have anything to add to that.

I agree with everything. It's just at our BMW stores the culture has changed a little quicker, but you should expect to see those kinds of things continue to happen as we continue to change the culture in our other locations.

Great. Nice job. Thank you.

Thank you.

Your next question comes from the line of Mike Geoghegan from Bear Stearns.

Hi guys. How are you?

Hi, Mike.

Let me try rephrasing that and you tell me if I'm on the right track. Is this a little bit of a departure from your bar bell strategy with used cars. Are you going into more of that middle market range?

I don't think so. We're still committed to our, I guess, premium brands and certified pre owned as well as the low cost of sales, but I think it is really the discipline and the process of the still committed to our I guess people are brands and it's really the discipline and the process of the Vince Lombardi blocking and tackling each and every play and we do our trade walks at every dealership every day. All the salesmen are out there. The sales managers are out there walking and looking at these trade-ins, and it's basic blocking and tackling. We see our entire opportunity if you'll go back not so long ago in our history, we had the most opportunity in the sector for pre owned growth and the last couple of years we've been focusing on this and these processes are just now bearing fruit. I wouldn't even say we've gotten to our low-hanging fruit yet.

Yes. CPO sales, just as a point of fact, were 33.7% for the quarter. Just up slightly from a year ago.

About 5.3% from a year ago. But as a percent of total used sales, basically flat.

Okay.

And that's what we said all along is that our CPO business would be ranging somewhere between 30 and 35% of overall business and that we would grow the rest of the opportunity that's out there across the board. Like Scott said, it's just taken time to get all the basic principles put in place, but now that they're in place, we're starting to bear some of the fruits of our labor.

Okay. I guess I'm trying to reconcile what it sounds like I'm hearing which is that your're going to stick with the higher end and lower vehicles in used, but you do want to sort of beef up your entire used car operation, so how do you -- how or why do you stay out of that sort of bread and butter middle market kind of Camry?

Well, you don't. Absolutely we're growing the business across the board, traditional units as well. And it's just putting the disciplines in place that is supporting the different stores across the country. It's taken us a little bit of time to get all the processes put in place.

We've been saying all along it would take 18 to 24 months for some of these results to begin to show up and they're really starting to bear out for us. Our strategy has not changed one bit in the last 24 months. It's very, very consistent. Our approach to the business is consistent every single day and will be so for the next three to five years. It's just putting the basic building blocks in place.

Okay. Great. Thank you, guys.

At this time, there are no further questions. I will now tax return call to Scott Smith for any final remarks.

Thank you ladies and gentlemen and fellow shareholders. It's a privilege. Business is great at Sonic Automotive. If you're not a shareholder, you might want to consider us. We'll see you. Have a great day.

Thank you. That does conclude today's Sonic Automotive third quarter earnings conference call. You may now disconnect.