Sonic Automotive Inc (SAH) 2008 Q1 法說會逐字稿

Good morning, and welcome to the Sonic Automotive first quarter earnings conference call. All lines have been placed on mute, to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this call is being recorded today, Tuesday, April 29th, 2008. 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 Investor's tab, and choosing Webcasts 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 or markets, or otherwise make statements about the future. Such statements are forward-looking, and subject to 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. Mr. Smith, you may begin your conference.

Thank you very much. Good morning, ladies and gentlemen. I am Scott Smith, President and Chief Strategic Officer. Welcome to Sonic Automotive's first quarter 2008 conference call.

Joining me on the call today are the Company's vice Chairman and Chief Financial Officer, Dave Cosper, our Divisional Chief Operating Officers, Jeff Dyke and Jim Evans, Rachel Richards, our Vice President of Retail Strategy, and Greg Young, our Vice President of Finance. Discussion topics for today's call will include, a 2008 strategy execution and key initiative implementation update, a review of the first quarter performance. We will then open the call for questions, and have some closing comments.

If you will please turn to slide #2, Building for the Long Term. In our last earnings call, I shared this slide, which lays out our strategic focus for 2008. Please allow me to update you on a number of key items we accomplished in the first quarter of this year.

Basically it all starts with our people. As I communicated during our last earnings call, we are investing more than ever in developing and training our associates. In February, we began to roll out our first phase of our new training initiatives under Sonic University. We also launched our online learning content management system, which is a portal for our web-based training classes, career development, and all of the initiatives for our associates.

So far, the feedback from our associates has been very positive, and we are beginning to see an impact on our turnover, as it continues to decline. I am very pleased to report that less than 30 days ago, we also completed a website conversion for all of our dealerships. We view the websites as our virtual stores, and our desire to build brand-centric sites, aligned with what consumers expect from the automotive brand that they are shopping.

This phase of our eCommerce strategy includes, driving more traffic to our sites using target-based marketing analytics, building customer friendly websites that create engagement, delivering the why buy here and why buy now message to drive leads to our dealerships, and lastly, fulfilling the customer shopping experience through a disciplined sales process. I am proud to say that in only 17 days that we have had these sites up, we have already seen a 47% increase in website leads, compared to the same period last year.

We recognize that a consumer can go anywhere to buy an automotive vehicle, or to get their vehicle serviced. As passionate as I am about our associates, I am equally passionate about customer satisfaction, and providing our customers with a differentiated sales and service experience. As a result, we recently filled a newly-created position, the Director of Customer Experience, reporting to Rachel Richards, our Vice President of Retail Strategy. The objective of filling this position, is to develop and implement a customer-focused enterprise-wide strategy for enhancing guest satisfaction and retention. All with the goal of improving our customer experience, market share, and customer loyalty.

Lastly, Sonic realizes the need to continue growing our business. We are thrilled about our newest acquisition, on April 1st, we closed on an Audi Porsche, Jaguar dealership in Nashville, Tennessee. While we continue to look to acquire new dealerships, it is all about buying them at the right price, the right brands, and the right locations.

If you will please turn to the next slide. Also during the quarter, we finalized the first phase of our used vehicle process roll-out, and made meaningful progress in the second phase. Over the last two years, the culture of change in our stores, has provided Sonic with a solid foundation for accelerated used car growth in the coming years, as we have moved forward through the second phase of our used car strategy, we continue to look for ways that we can refine and enhance our processes, as well as grow and develop our associates with the overall strategy.

Our focus during the early part of Phase II has been familiarized by our associates, with enhanced inventory tools, and technologies that support our strategy to optimize inventory. As we progress through this phase, we will increase our ability to effectively optimize both inventory levels, and sales at each of our stores, putting the right cars, in the right locations, at the right price.

Next slide, please. Building for the long-term. Now for the quarter, despite a very challenging market condition, Sonic Automotive was able to improve it's top line growth. Our ability to execute on Best Practices and focus on key initiatives, which is used vehicles, F&I, and fixed operations, helped us to adapt to the most difficult economic environment. We ended the quarter with continuing earnings per share of $0.44, right in-line with our internal expectations.

At this time, I would like to reiterate our full year continuing EPS guidance of 2.35 to $2.50 a share. We will continue to stick with our strategy outlined in our fourth quarter earnings call, and Sonic is committed to investing our most valuable assets, our associates. At the same time, we will continue to devote resources to improving our technological infrastructure throughout the organization. We believe without a doubt that these two investments will reap immense benefits down the road.

Now I would like to turn the call over to our Vice Chairman and Chief Financial Officer, Mr. Dave Cosper, to review our performance in detail. Dave?

Thanks, Scott. Good morning everyone. As you can see on the slide, total revenue for the quarter was $1.9 billion, up 1% from last year. Gross profit was up 2.5% to $306 million, and gross margin was up 30 basis points to 16.1%. New margins were 7.4%, flat with last year, and up 10 basis points from last quarter, which is a great sign for us. Used retail margins were 8.9%, down 70 basis points from last year, but up from 8.3% last quarter, as we improved our inventory position.

Fixed operations margins were 49.7%, down 40 basis points from last year, and 30 basis points from last quarter. Operating profit for the quarter was $55 million, down 6 million from last year, and operating margin was 2.9%, down 30 basis points. Total income from Continuing Operations was $18 million, down just over 4 million. As Scott mentioned a moment ago, EPS from Continuing Operations was $0.44, in-line with our internal projections for the full year.

Please turn to the next slide. This slide shows our same store performance, excluding wholesale, overall same store revenue declined 2.9% for the quarter. Total new revenue was down 8.2% for the quarter. We were impacted most by a decline in light truck sales, which were off 13.4%. In terms of regional performance, sales of new vehicles were soft in California, and accounted for a large part of the retail volume decline. We continue to expand our used vehicle operations.

Same store used revenues were up 11.5% from last year, driven primarily by a 10.2% increase in volume. Same store CPO unit volume was up 20.5%, and CPO volume reached nearly 38% of our total retail used volume. I will have more on this on the next slide. Note that wholesale revenue was down 24%. We are keeping our trades, and selling them at a profit.

Our success in F&I continues as well. Same store F&I revenue was up 5.9% for the quarter, the majority of which was due to the $81 per unit increase. Fixed operations revenue was up 0.7 of a point, included in this was a 2.7% drop in warranty revenue, as well as lower wholesale part sales.

Total customer pay revenue was up 1.3%, and our quick lube revenue and gross were each up 31%. Additionally, our body shop revenue was up 4.7%, this business is not as sensitive to economic conditions, and we are seeing good growth, particularly in our BMW body shops. Overall, we are seeing some customer reluctance to spend on bigger ticket repairs right now. However, our fast-growing quick lube business, provides an opportunity for us to get vehicles into our service lanes, establish relationships, and sell additional products.

Next slide, please. As you can see from this slide, our focus on used vehicles is helping buffer weakness in new vehicle sales. In total, used vehicle sales were up 10.2%. Within that, certified preowned sales were up nearly 21%, with most of the increase coming from our luxury dealerships, where volume was up 33%.

Our BMW CPO sales were up almost 60%. I want to point out that we have improved our used sales in California and Florida as well. In California, for example, total used volume is up 14%, and CPO is up 26%, a nice lift in a tough market.

As you know, the CPO business is win/win, for the customer and for us. The customers get a great vehicle and we make good gross, and establish a nice relationship for future service business under warranty. For the quarter, this is something that I think we are pretty pleased with, our used to new ratio increased to 0.64 from 0.54 a year ago. This ratio improved in every one of our seven regions.

Next slide. Scott mentioned our success in F&I earlier. I wanted to show this slide to highlight further the progress we are making. As you can see, F&I per unit has been trending up for the last three quarters, and has been well above last year's numbers. The electronic menu has been in place for a while now, and our salespeople are becoming more proficient in using it to drive sales. Although new car volume is soft, our sharp increase in used vehicle volume is driving our F&I profit up as well.

Next slide. SG&A expense as a percent of gross was 79.3%, up 170 basis points from last year. On a very positive note, rent as a percentage of gross was down for the quarter. Our move to owning more of our properties, and lower interest rates account for this improvement. Also variable compensation and other fixed costs were flat to slightly down for the quarter. Our stores are modeled well, and we are controlling our costs.

When we provided EPS guidance for 2008 on our last call, I pointed out that we are making a fairly substantial investment of 4 to 5 million this year, in training our people and in our IT infrastructure. As Scott mentioned, our company-wide training initiative really got underway during Q1. We developed and launched it in the quarter, and our cost is up for this. We are now well underway, and already seeing dividends. Additionally, we set in motion a two-year plan to reengineer Sonic's eCommerce capabilities, and we are spending money to improve our supporting IT infrastructure on this front as well.

As Scott mentioned, we just launched all new websites for all of our dealerships, and these websites are really just a first step for us. There is so much more to come, as we grow our ability to target and satisfy our customers. I would like to point out that just earlier this month, there was a storm, a hail storm in Texas. And we have just got preliminary data on that, that shows the loss at close to $2 million, which is about $0.03 a share. And that is going to be hitting us in the second quarter.

Next slide. We ended the quarter with a 63 day supply of new vehicles, about the same as the industry. As can you see, our domestic brands are in pretty good shape, while our import stores are a bit high.

Spring BMW inventory shipped a bit earlier than planned, and sales in March were a bit less than expected. As a result, inventories in this brand ended the quarter with an unusually high days supply for us. However, we feel we can sell out of this inventory pretty quickly, particularly as some of the inventory that came in was with the 1 Series, which we are projecting to do very well. Used vehicles ended the quarter at 36 days, which is right where we want to be.

Next slide. We ended the quarter with total debt-to-cap ratio of 46.3%, or 43.7 excluding mortgages. In first quarter, we purchased our Tom Williams luxury platform of five stores, which previously had been leased. During the second quarter, we plan to secure a mortgage for this platform, as well as for our brand-new BMW store that just opened in Fort Myers, Florida. The bar on the far right shows our debt-to-capital ratio once these mortgages are in place. As you can see, excluding these mortgages, or including these mortgages it drops to 41.4%, and we project this to fall even further throughout the year.

As Scott mentioned, we closed on one acquisition during the first quarter, the Jaguar, Porsche, Audi in Nashville. During the quarter, we also repurchased 20 million of our stock, which left us with 13 million in repurchase authority. However, we recently received Board authorization for an additional 40 million of repurchase authority for a total of 53.

With that, I will turn the call back to Scott.

Thank you, Dave. Just to hit the summary slide, again, we are reaffirming our full year guidance, and we feel that we are right on-track. In a difficult economic environment, Sonic expanded our revenue, and used F&I and fixed ops. We are sticking to our strategies of investing in our people, our digital marketing, our technology.

We have entered our Phase II of our used vehicle process. Q2 outlook, as Dave mentioned, we had a hail of a storm, and our new vehicle environment we expect is going to remain challenging. There is no doubt that the housing conditions, gas prices, and tightened credit has weighed heavily on the consumer psyche and confidence, and while we don't think or expect a sudden turnaround or reversal in terms of the economic headwinds in the second quarter, we believe that we can continue to operate effectively, while also laying down the tracks for our future growth.

We have demonstrated once again that our brand mix and our execution and commitment to our strategic initiatives, have allowed us to adopt to the current conditions, and we remain optimistic that the second half of the year, will bring improved economic conditions as the credit environment stabilizes, and housing prices become more in-line with income levels. As a result, I am once again reaffirming our full year continuing EPS guidance of 2.35 to $2.50 a share. Our dividend will remain unchanged at $0.12 per share, payable on July 15th, 2008 for shareholders of record as of June 15th, 2008.

Before we open the call for questions, as always, I would like to take the opportunity to thank our Sonic associates for all of their hard work and dedication over the quarter, and it is truly appreciated. Additionally, I want to thank our manufacturing partners, their upcoming product lines reflect changing consumer needs for more fuel efficient vehicles, and this will benefit all of us.

At this time, we would like to open the call for your questions.

(OPERATOR INSTRUCTIONS). Our first question comes from the line of Rich Kwas with Wachovia Securities.

Hi, good morning, guys.

Hi, Rich.

Good morning. As you look out over the next couple quarters, what are you expecting on the luxury side, luxury was down first quarter, and how are you seeing, what are you seeing in terms of grosses on the luxury side right now, and your expectation going forward?

Jeff, you want to take that?

Rich, this is Jeff Dyke. The luxury business continues to be decent for Sonic Automotive, but I am expecting margins to be a little more difficult as we move forward. Inventories are higher. Thus it is going to put a little pressure both from a competitive set, and us trying to reduce our base supply.

Is there anything region specific with regards to that, or is that kind of broad based?

I think that is broad based across the country.

And then when you look at your used inventory, what percentage, how are you balanced on truck versus cars? Are you a little more weighted on trucks or do you feel comfortable with where you are right now?

We are comfortable. 60% of our inventory is car, and we are focused very heavily on making sure that we are moving inventory. Obviously, margins are compressing a little bit as we try, as we push the SUVs out of the inventory. But that is about it. We are 60% car.

And then Dave, in terms of the SG&A spend, that was a little bit higher than we expected. I know you mentioned some of the investments here. How is the cadence of the investments going forward? How is the cadence of the investment going forward, as you go through the next couple quarters?

Yes, I think it is a little front-end loaded in the first half of the year and then it will taper off a little bit in the second half of the year. There was also in our SG&A a non-recurrence of a favorable compensation adjustment that happened last year, that didn't happen this year. And that is mucking up the numbers a little bit.

Okay. Thank you.

Our next question comes from the line of Rick Nelson with Stephens.

Thank you, good morning.

Good morning.

Wanted to follow up on your comments about California. The business seemed to be getting worse there in the first quarter, or have things continued sort of like they were in the fourth quarter? And what regions are showing strength and weakness, aside from California?

Why don't I start with that. I was pleased to see that new car margins were actually up 10 basis points in the quarter, which is encouraging. We did very well on used as well, CPO in particular, as I mentioned. New car is soft. Jim, you want to talk about that?

Sure. Rick, this is Jim Evans. Our California business is actually very stable. We think we have seen the bottom on PVR compression at 7.4%. We thing it is going to stay there, to improve in the second quarter. Our used retail volume was up 14%, customer pay was flat, with good improvement in F&I. So our California business is essentially stable. We don't see any reason for concern as we go forward.

How about outside of California, what are the areas of strength and weakness? Texas we understand is a pretty solid market.

Yes, Rick, this is Jeff Dyke. Our Texas business continues to be strong as it has been over the last few quarters, and we forecast that to happen, to continue on for the remainder of the year. We are actually pleased with our Florida business. Our Import business is strengthening there, and things have leveled out. So that business is starting to improve a little bit for us.

You recall that we had that one store in Florida, Clearwater Toyota that was under construction. That is up and running now, and volume is starting to pick up.

Recent returns have been very good.

Wanted to ask about the Beck acquisition. I understand there might be some issues with Mercedes, and if you could shed some light on that?

I will field that one. I have to temper it with saying that we are working with Mercedes to reach a resolution, but we are in litigation with them. So I can't go too deeply into it. But essentially, when we acquired Calabasas, Mercedes we felt exerted a tremendous amount of pressure on us to comply with certain facilities projects, Autohaus, et cetera. Yet never provided us with exactly what those requirements were.

As we proceeded with negotiations with Beck, we were also doing our facility plans, and had spent quite a bit of money on architectural design and such, and we were working with Mercedes and felt that we were making material progress. When we entered into the agreement with Beck, Mercedes refused to accept an application, which we believe was in direct violation of North Carolina franchise law. And we have since had a lot of dialogue with Mercedes, and believe that the issues are pretty much resolved, and that we will put this behind us here pretty soon.

We are supporters of the Autohaus design. I am not so sure that capacity-wise, we are in complete agreement, but as far as the customer touch areas, we are aligned with Mercedes, and plan on moving forward. So from what I understand, it is just a matter of getting it on paper. I look for hopefully second quarter here to get that resolved. Does that answer your question?

Yes. You are anticipating come Q2, you will have the green light with Mercedes?

I am hoping so. As in every transaction, the manufacturer has the right to approve the deal or turn it down, and we believe, we are hopeful that we will get the green light to close on the transaction in the second quarter.

But, you know, no promises. On the outside, the furthest that they could drag it out, going through the whole court system, is about a year. But we don't believe that it will go that far.

CapEx issue is related to Calabasas, or is it other Mercedes dealerships?

Well, when we were acquiring Calabasas, it had just been completely renovated about two months before we acquired it, and felt that it was in full compliance when we bought it, and Mercedes has, I don't want to single out Mercedes because pretty much all the manufacturers do it, in trying to take a huge bite of the apple, they went around to look at every facility issue, and if you will keep in mind that Mercedes was really behind the 8 ball, when it came to their image compliance, versus say, Lexus or BMW, where they wanted to play catch-up.

So they went around to every facility and looked at them, and basically required us to bring every facility up to Autohaus compliance, which again, we are doing where it makes sense to do it, and we are very supportive.

Thank you for that and good luck.

Thank you.

Our next question comes from the line of Scott Stember with Sidoti & Company.

Hey, Scott.

Could you talk about the parts and service. You mentioned that you are starting to see some reluctance for some higher ticket items to be completed. Could you talk about what segment of, whether this is luxury and import or the lower end, and also talk about why the parts and service gross margin was down in the quarter?

Yes, I think we saw some softness in BMW, in particular. I would say that our Mercedes warranty was down quite a bit. We are seeing that, and I think everybody is. I noticed some of the peer group, and virtually everybody is down in margin. I mean, I don't view it as a big problem.

Our quick lube sales are up sharply. And our tire sales are up, and those tend to be lower margin products, and that is weighing it down just a little bit. I don't view it as a problem. I just view it as kind of noise in the numbers.

Okay. And going forward, the customer pay business you would expect to be up modestly for the rest of the year?

Yes, I think so. We were up 1.2%. I would like to see it a little higher than that, and we are working on that.

Okay. And that is all I have for right now. Thank you very much.

Thanks, Scott.

Our next question comes from the line of Matthew Fassler with Goldman Sachs.

Hey, Matt.

Thanks a lot, and good morning, how are you?

Good.

Good. Couple questions. First of all, want to dig a little deeper into cost control, particularly, or the expense side rather, how big was the year ago compensation adjustment David that you discussed?

It was closing in on $2 million.

Got you.

1.6, something like that.

And was the incremental training expense in the first quarter essentially of that size as well?

It was.

And was it bigger than you had originally thought, did that number creep on you a little bit, or was that sort of in line with initial expectations?

I think it was in line with our initial expectations and our full year estimate on that is unchanged. A lot of it is development kind of things that are done up front.

Okay. I guess the second question, just to get some more color on the comments that you all made earlier on the gross margin side, particularly with regard to the new car business, did I essentially hear from you that you think that, I think you said margins will be tough. Would you expect them to deteriorate from here, given the inventory situation for both you and for the sector?

Frankly, I would like to see them hold flat, about where they are right now. They were up 10 basis points from the fourth quarter. I think we are doing a good job of holding gross. Pretty much nationwide.

And with inventories up, is that still feasible?

Yes, There are a couple of product lines that we may have to give back some gross to move them.

Got you.

We are on that.

And then just to get clarity on April, you intimated that the environment remains tough, certainly in the short run. Should we interpret that here, 29 days for the month, that April looks something like March?

It is looking a lot like March. Last weekend was good.

It is tough on new vehicles, but our used vehicle business continues to be strong.

Understood. Thanks so much, guys.

(OPERATOR INSTRUCTIONS). Our next question comes from the line of Edward Yruma with JPMorgan.

Good morning, thanks for taking my question.

Hey, Edward.

Can you talk a little bit about the improvements you are making to CPO, and if you expect that to have the same degree of lift, as you had when you implemented Champion, gosh, maybe two years ago?

This is Jeff Dyke. There is really no change in our process on CPO. Our used vehicle process included CPO, and right now what we are seeing is the new car customer moving over a little bit to the CPO business, so that is where you are seeing that increase. We try to target about 30 to 35% of our overall used car business in the CPO category, so as a percent of the total mix.

It has jumped up to 38%. We are really doing a bang-up job there.

BMW is driving a large portion of that, BMW CPO business is up 60% for the quarter.

Got you. I know you touched upon it a little bit in your prepared remarks. Could you talk about customer credit availability, has it tightened significantly, and have you had to make any significant changes to the way that you approach the F&I business?

I have been looking for that, and I don't see it. We have a preferred lending group, and interestingly, I looked at our penetration of our preferred lending group, and it was actually up in every category of our lending. Including subprime. So my hat is off to those guys that are supporting us very, very well. When somebody backs off, and there are a few guys that have dialed back on the subprime, there has been somebody else to step in. I think the captives have done a very good job as well. So I don't see it.

Got you. One final question. I know that in the past you have had some slight bias towards repurchasing shares. You know, when you think about your capital allocation for the next 12 months, do you have a bias to that, or are you looking more aggressively at lowering your debt levels? Thank you.

We always reveal all of the potential possibilities for use of our capital. We were a pretty heavy buyer of our stock last year, and we bought 20 million back in the first quarter, and got some more authority.

At the moment, given the liquidity issues in the market, I think we are going to sit back a little bit. Also, as I look at premiums in the market are still pretty sticky on acquisition targets. So given the environment, and everything going on, a little bit of prudence here I think is warranted, and that is kind of how I see things.

Great. Thank you very much.

Our next question is a follow-up question from the line of Rich Kwas with Wachovia Securities.

Just a follow-up on the guidance for the year. $0.03 is coming out of Q2 because of the damage to the Texas store.

Yes.

Sounds like just given your commentary, Q2 is going to be a little muted here. What should we look for in terms of the second half of the year, in terms of either getting towards the upper end of your guidance, which is where Consensus is right now?

Well, of course the $0.03 hurts our overall profitability for the year. I mean, we are still comfortable with the guidance range that we gave. I noticed the optimism and Consensus for the first quarter, and then I looked at our actual results versus year ago results for everybody else, and I think we performed reasonably well. Especially given some of the investments in some of our key initiatives that we have got going forward. So I still hold to the guidance, just like we did last year. And delivered on it, and I expect more of the same this year.

And just Dave or Scott, in terms of the second half of the year, any major changes in the environment assumed, or are you kind of assuming steady state here on out for '08?

Well, we had assumed a pick-up in the second half. Remember, we had interest rates going up to I think 4.5% LIBOR. I mean, that obviously doesn't look like that is going to happen.

There are a lot of moving pieces. I think new is softer than we envisioned. I think our F&I is a little stronger than we envisioned. I think our used is significantly higher than we envisioned. And obviously interest rates are lower. All of those things when I look at them, even including the hail storm, and what have you, I think they are kind of balanced, and our view remains unchanged. We are looking for some pick-up in the second half of the year.

But the $0.03 from the Texas store is included in the guidance, right?

It is.

Okay. Great. All right, thank you.

Thanks.

There are no further questions at this time. Mr. Smith, are there any closing remarks?

Well, I would just like to again thank all of our associates, our manufacturing partners, and certainly our investors. I can tell you that despite what is going on out there in the macro economy, it is an awful lot of fun to come to work every day, and we have the best team, we have just an extraordinary group of individuals and professionals here, and I just want to thank you for all of your support. Have a great day. Bye-bye.

This concludes today's conference call. Thank you for your participation in Sonic Automotive's first quarter earnings conference call. You may now disconnect.