Sonic Automotive Inc (SAH) 2009 Q4 法說會逐字稿

Good morning and welcome to the Sonic Automotive fourth quarter and year-end earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer period. (Operator Instructions). As a reminder, ladies and gentlemen, this call is being recorded, today, Tuesday, February 23, 2010. 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 webcast 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 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 of Sonic Automotive. Mr. Smith you may begin your conference.

Thank you. Good morning, ladies and gentlemen. I am Scott Smith, Co-Founder and President and Chief Strategic Officer of Sonic Automotive. Welcome to Sonic Automotive's fourth quarter 2009 earnings conference call. Joining me on the call today are the Company's Vice President, David Smith, the Vice Chairman and Chief Financial Officer, Dave Cosper, our Executive Vice President of Operations, Jeff Dyke and Greg Young our Vice President of Finance. If you will please turn to the first slide.

Today I will be discussing an overview of the quarter and I will then the turn the call over to Dave for a detailed financial review. Jeff will will follow Dave and give an update on our operational trends, I will then summarize and we will open the call for your questions and then closing comments.

If you will turn to the next slide overall results, Q4, fourth quarter of 2009 continued a series of operating successes that we have seen over the course of the year. A majority of our stores continued to take new vehicle share in their local markets, which helped our new vehicle volume increase 6.3% over the same quarter last year. In addition to the strong volume performance our new vehicle retail margins were up 60 basis points at the end of the quarter at 7.3%. Our used vehicle business continues to grow as our stores implement and refine our play book strategy. Jeff will have more to say about our used vehicle business but it is important to note that our retail used vehicle volume was up 18%, compared to last year. At the same time, our gross profit dollars generated by our used vehicle business were up 21%, compared to the fourth quarter last year. The successes that we are seeing in our core operating segments of our business are the results of a lot of hard work and patient roll out of a consistent operating strategy at all of our dealerships.

Our balance sheet is in the best shape in a long time, the successful refinancing of our syndicated credit facility in January, is the latest in a series of steps we have taken to get our balance sheet where we want it. We now have a grand total of $17 million of long-term debt maturing over the next three years. in addition to dealing with our debt maturities we have also delevered to the tune of $146.3 million over the last year. And all of this was done in a less than ideal economic environment. We were required to record some charges related primary to noncash lease accruals and impairments on the dealerships General Motors terminated in connection with their bankruptcy and from the repayment of our 4.25% notes that we completed in October. Overall our team performed very well this quarter and our operating metrics continue to demonstrate the effectiveness of our play books that we are rolling out across our stores.

With that, I will turn the call over to Dave, our Chief Financial Officer. Dave.

Thanks, Scott. Good morning, everyone. It is nice to be in a position now to look back at 2009, and it certainly was a challenging year. It is also nice to see we had strong revenue growth in the fourth quarter of just over 10%, with gross profit up nearly 8%. Our cost performance was strong with SG&A as a percent of gross at 80.3% and operating profit came in at 2.7% of revenue. As Scott mentioned there is a number of adjustments included in our results such as the impacts from the termination of the GM stores, debt restructuring and tax valuation allowance changes, these adjustments are detailed in the appendix to this presentation, and taken together these adjustments actually improved earnings so the adjusted earnings shown here are actually lower than our GAAP results. On an adjusted basis we earned $9.3 million after tax from continuing operations with EPS at $0.18 a share.

Next slide, please. This slide show our results for the full year 2009, revenue was just over $6 billion for the year, down 12.5% from 2008. SG&A as a percent of gross for the year was 80.4%, and operating profit as a percent of revenue was 2.8%. On an adjusted basis we earned $35 million after taxes from continuing operations which is $0.68 a share from the full year.

Next slide, please. This slide shows our trend of EBITDA, for 2009 we generated $170 million(Sic-see presentation slides) of EBITDA, up from $151 million, in 2008. So we were actually able to improve cash generation in 2009, even though industry volume fell by over 20%. Given our improved cost structure and operating efficiencies, we believe we can reach our 2007 EBITDA level on an industry volume significantly below 16 million units.

Next slide, SG&A costs totaled $208 million in the fourth quarter down nearly $6 million from 2008. Controllable costs within that were down over $13 million. SG&A as a percent of gross was 80.3% down from 88.9% in 2008. We worked really hard during the year to reduce costs in a prudent and thoughtful manner improving both our efficiency and optimizing our ability to generate revenue in a weak sales environment. As industry volume increases we plan to hold the line on costs to leverage our cost base and generate improved profitability.

Next slide. Scott talked about our balance sheet, and this slide shows our capitalization. We focused in 2009, on reducing debt level and improving our liquidity. At year-end our long-term debt balance was $605 million down $146 million from year-end '08, nearly a 20% reduction. And as part of this we reduced our short-term borrowing to 0 and built a cash balance of $30 million. With the sharp decline in industry volume we reduced our new vehicle inventories and associated floor plan borrowing declined by over $350 million, or 32%. I wanted to mention there's a page posted on our website now that provides a look at our interest forecast for 2010, and we thought this might be helpful.

Next slide, please. I really like this slide. This one shows how our debt maturity profile has changed during 2009, and we worked really hard with our key debt holders and our banks during a very difficult time in the financial markets, and not only did we reduce debt in 2009, but we substantially improved our maturity profile and now have essentially no material maturities for over three years. The $17 million of debt maturing later this year is the remaining balance of our 4.25 convertible notes. We plan to address these notes later this year with available cash.

Next slide, as shown above we are compliant with all our debt covenants by a fairly wide margin and the covenants shown here are the new ones effective with our new credit facilities that were put in place on January 15, and we expect to be in compliance with all of our debt covenants going forward.

Next slide. As part of our focus on improving liquidity, we held capital spending, net of mortgage funding to $35 million, for 2009. As you may recall, we put several large projects on hold during 2009 to conserve cash. Given our improved financial situation, we have resumed construction. We already have secured mortgage funding for one of the projects and are working on another one right now and hope to have it in place shortly. Spending for 2010 is projected at $60 million, and mortgage funding of 20 million is expected for a net cash spending level of $40 million.

With that I will turn the call over to Jeff Dyke for a revenue of our operations. Jeff.

Thanks, Dave, and good morning, everyone. Our new vehicle market share continues to improve, as mentioned in our previous calls, our attention to associate satisfaction, retention and our ability to execute our E-sales and preowned play books continue to contribute to the success of our new car market share gains and record setting performances. Fourth quarter marked our fourth straight quarter of share growth, also setting a share record for the quarter, and the year. Additionally, our share continued to grow, in January of 2010.

Total retail volume for the quarter was just over 23,000 units a year-over-year increase of 6.3%. We continued to manage all new vehicle inventory ordering on a centralized basis, and are proud to report our new car base supply continues to be in excellent condition at 49.3 days, below the industry average of 54.7 days and significantly better than the same time last year of 85 days.

On a quarter-to-date basis, new vehicle margin was 7.3%, up from 6.7% last year. In our previous call we discussed our customer satisfaction scores were on record pace and we are happy to announce that 82% of our stores or at or above target in sales and services measures by our manufacture partners, an all-time record for Sonic Automotive.

Next slide, please. As you can see on this slide, our preowned strategy continues to show progress quarter after quarter, our used volume was up 18% and revenue was up 23% for the fourth quarter. As our California markets came on line in late March last year the entire Company began to make progress with our play book strategy as it matured. This success is a result of three plus years of hard work by our team. You have asked about our margin erosion, each of the last few quarters and I would like to make certain that we address this head on this quarter. We do not see our margin as an issue in preowned. We have been adjusting our core mix for over a year now to perfect inventory levels and we have also been playing with the elasticity of our pricing models to provide our customers with the right vehicle, at the right price, at the right location.

This effort as you can see is paying off for the Company, as our gross dollars continue to grow, setting an all-time gross record for the fourth quarter some $4.7 million more than prior year up 21.1%. It is important to note that this is only used car front end profit per unit and does not include the incremental gross that is generated in F&I and fixed operations as a result of reconditioning. We fully expect our used car margins to be in line sequentially to Q4 but you should not expect margins at Q1 levels of 2009 as those levels are not in line with our strategy. However you should expect to continue to see unit volume, revenue and gross growth. I would also like to add at this point, that wholesale markets are not causing margin erosion at Sonic, nor are with we simply reducing margin to sell units. That is not our strategy. We are growing our revenue, our unit volume and gross at record levels quarter after quarter after quarter. Another important element of our strategy is our trade ratio which has grown from 38% some 18 months ago to now over 50%. This allows Sonic access to valuable trade inventory and has substantially helped our new car market share.

Our play book execution continues to help Sonic work its way toward achieving our long-term goal of averaging 100 units per store per month. We are gradually introducing further play book elements as our stores mature in the process that include new technologies, procurement plans and much more which we look forward to sharing with you as they come online. Our certified preowned business continues to be about a third of our total used car mix which is right on target and in line with our plan. Inventory ended the quarter at 30 days which was a few days lower than I would have liked. We targeted to be at about 35 days at the end of December, but simply outsold our projected volume models in December. Our retail volume was up 11%, in January of 2010, and is tracking to be up some 30% in February, both all-time volume records for these months for Sonic. We are aggressively trading for as more cars as we can at this point and are buying prudently now as our preowned business continues to grow as a result of our play book execution.

Next slide, please. Overall, we continue to make progress with our fixed operations play book roll out now one year into its introduction. We fully expect to continue to improve on the gains we have seen in 2009. We are particularly excited about the three tiered menu selling process now being trained in our stores and our newly developed service lane merchandising program that will be anchored by a competitive, good, better best tire program that will attract additional customer pay customers to Sonic Automotive. We are also excited about the introduction of our collision repair play book that will be launched in the second quarter of this year, which will dramatically help our collision repair business, a major opportunity that we have in our 30 collision centers at Sonic. Overall, our continuing fixed operations revenue was up 0.6%, while gross margin grew to 50.3%, up 20 basis points on a year-over-year basis. Our customer pay revenue was up 0.7%, and customer pay gross dollars were up 0.5%, while customer pay gross margin was down a ticket 10 basis points. Same-store warranty revenue was down 11.4% and has now dropped to 16.4% of our overall fixed revenue mix.

Next slide, please. As we look to 2010 we expect the SAR to be around 11 million as begin to see some improvement in the new car business but either way our model has become less dependent on the swings in the new car SAR and any up tick to these levels would be added benefit to Sonic. We expect to see used vehicle GPU lower than the first quarter of 2009, but stable sequentially to Q3 and Q4 of 2009, somewhere in the $1,500 range, however we do expect to see both used car volume and gross dollars continue to perform well in terms of year-over-year comparisons due to our play book process and our ability to execute. We expect fixed operations to continue to improve, in 2010, as our fixed play book matures into its second year of execution.

Before I hand the call back to Scott I would like to thank all of our Sonic Automotive associates for their hard work and dedication to the execution of our objectives in increasing associate satisfaction, reducing turnover, improving customer satisfaction and the execution of our play book which all leads to creating one of America's greatest places to work and shop. Thank you. Scott?

Thank you, Jeff. Speaking as both the President and a significant shareholder, our Company today, is stronger and more prepared to meet the challenges and opportunities of the future than ever before. This Company has been significantly transformed in the last two years. Our operational strength and financial strength has been stress tested and proven. Our future growth is going to be driven by all of those things that by now you are very familiar with. Our focus on cash and our balance sheet. Our corporate investment principles are driving every investment and facility decision we make. We have a plan to continue to strengthen our balance sheet, by controlling capital expenditures, and further delevering over time. Our operational play books, we have completed these now for every area of our business, and the future of our business model, profitability is not built on a rebound of the new vehicle SAR environment.

Our investment in training. We will continue to roll out industry leading training to all of our associates and it continues to pay dividends in retention and performance. And our people. I have said from the very beginning that this is a people business and that truth is even more evident today as we invest in our people through training, standardized processes, and technology we are seeing positive trends in our associate satisfaction, customer satisfaction and reduction in turnover. I look forward to updating you further on these initiatives on future calls. At this time we would now like to open the call to your questions.

(Operator Instructions). Your first question comes from Rick Nelson of Stephens.

Thank you. Good morning.

Morning, Rick.

I was interested in what you are seeing in the early 2010 in both used cars and new cars, and how the Toyota recall is affecting business?

Hey, Rick. It is Jeff Dyke, business continues to be solid, moving into January and February, as I stated earlier. Our used car business was up 11% in January, it is pushing up nearly 30% in February. New car business is good as well. So we are pleased with the trends that we have seen so far, Toyota is 14% of overall revenue business. So early on it had a little bit of a tick but in recent few days here especially this week and had a very nice Toyota weekend both on new and used car side. So we expect to see some slow down because of the recall but on going they're going to bounce back solid and we're not too concerned about it annualized basis.

Thank you for that. Can you just also comment, Jeff on used car margins, I know year-over-year, you're expecting lower margins but maybe on a sequential basis.

On a sequential basis, they're up just a little bit, and just like I said, sequential, the Q3 and Q4, you should expect to see us somewhere in the $1,500 range, but not up in the $1,700 range where we were last year at this time. We have just found with the pricing elasticity and product mix, this is -- pricing and product mix, it is generating off of the growth.

Thank you. And the 11 million unit SAR assumptions, you have for the full year, what does that say about fleet and more importantly the retail expectation?

I mean I'm not sure from a fleet perspective. Net was our larger role in January than I think everybody anticipated, and -- but it is all built into our model. Our model is built somewhere in the, the upper 10's to 11 million. So we will be in good shape.

And I know the third quarter call, you had talked about an SG&A to gross, in the mid-70s at a 10.5 to 11 million units SAR. Is that still the expectation?

This is Greg. I think that the SAR would have to be a little more than the 10.5 to 11 to get down into that range. Because if I recall going back into the 15 and 16 million environment, we were in the mid-70s. So I think you are going have to see something north of that 11 million range. We were getting close in December but that was a 12 million SAR environment for the month of December. I think north of that 12 million we start to see the mid-70s, I think in 10.5 to 11 you are still going to be in the high 70s there.

I agree.

But narrowing the expense ratio.

Yes.

Great. Thank you.

Thank you.

Your next question comes from Matthew Fassler of Goldman Sachs.

This is actually Mark Andrea filling in for Matt. How are you?

Good, Mark.

Good, Mark.

Just one quick question on the used ASP were very strong this quarter compared to last, despite the very strong unit comps I am just wondering what the drivers are and where this was not felt as much last quarter, even though it used, used the equal market was strong.

Mark, I am sorry, I didn't understand your question. ASVs.

The ASP, average selling price, is it a mix, is it basically the mix shift or what drove the trend in the used pricing?

Some of it has to do with mix shift and some with the market. I felt like the market in Q4 was really strong especially as we entered the December period. I mean December was just a fantastic. October and November a little weaker, but that was off a little bit due to September, with a light inventory, than we wanted but the quarter ended strong and mix played a little roll in the pricing.

This is Dave. And one thing I noticed California was very strong in used, up 40%, in the fourth quarter and we have a large luxury exposure there and that's helpful a little bit, some of the mix item that Jeff mentioned.

And as a follow up on the SG&A, the ratio was good on a year-over-year basis was a little above what we expected, I was just wondering what's left there in term of cost and what we should expect from here.

Yes, I think we did a pretty good job balancing cost and our focus on growing revenue. You saw in the line with the fourth quarter with new and used growth up over 20%. I think there's more opportunity there, we will continue to look but we will maintain that prudent approach that we have done, and not just gone in and cut everybody's pay plan and let people go where it just doesn't make sense. We have our business structure to sale, it is a revenue business and we are going after it.

Okay. And lastly, if I may, just one question on parts and service, what to you think trajectory there will be, given lower units and operation what are the different initiates if you could give a little detail on what you are doing there?

Mark , it is Jeff Dyke. We are continuing like I said in the presentation to implement our fixed operations play book primarily focused around customer pay, menu selling and our service drives and service lane merchandising program. We are expecting a small uptick from 2009 and our revenue, as we continue to hold the margin I think there's a little margin opportunity there, and as we continue to play with our pricing. So, our expectations for 2010 is to improve upon our performance in

Your next question comes from Colin Lincoln of UBS.

Good morning.

Hi, Colin.

I am looking at the forecast for 2010, and lower than the annualized rate, this quarter, I mean what is the factor that's actually helping it come down next year on an annualized basis?

Well, there's probably some one-time items in there.

There's some of that, and may be some of the delevering. We may have had a little bit at the beginning of the, of the fourth quarter.

Okay. What about the swap, the swap interest, is that down as a LIBOR rates go up? Is that an offset.

Yes, there were some other debt fees and things like that we had to write off that ran through interest in the fourth quarter, coming of those are, are outlined on the, on the tables we had in the Press Release, too.

Okay. And when I look at the share count it was a little lower than I was anticipating. Is there anymore dilute to come? I mean I know you took out a couple about 4.25 convert mid quarter. Did that negatively impact or is that complete I diluted?

No, there shouldn't be with anymore dilute to come going far.

So the Q4 diluted shares is a good proxy for the full year next year, or will it be even lower since you took out convert?

No, no. It should be pretty much that run rate.

Okay. And how many dealerships are left in discontinued ops?

That's a great question. There's two. One has half a foot out the door. So we will be left with one shortly.

Okay.

And you recall what happened there, Colin we had a number of stores for sale in hopes of getting liquidity but that didn't work out. We have pulled them all back.

Okay. One last one, what was the performance (inaudible) within services?

Just a moment, Colin.

I gave warranty. Warranty was down 11.4%, and. It is 16%. It is down 16% of our total fixed revenue. It would be customer pay was up, up 0.5%.

Okay.

Which is, I gave customer pay revenue was up 0.7, while gross dollars up 0.5 point.

Warranty has been trending down for several years now.

Okay.

It is continuing.

So going into next year, customer pay is going to have to be up a bit to keep, to get that flight increase because warranty should continue to be.

It is. That's how it has been. It was like that in 2009 and started heavily many 2008, and we are managing it. Our play book is helping drive customer pay. That's what it is centered on and focused on. We will continue to see increase in 2010.

Thank you very much.

Your next question is from Ryan Brinkman of JPMorgan.

Ryan Brinkman for (inaudible). Your outlook for 2010 SAR is just 6% higher year-over-year than 2009, do you think it is fair to say that in such a scenario Sonic new vehicle revenues and or luxury sales more generally, if you are more comfortable with that could increase at a faster clip year-over-year?

Slightly, Brian. It all depends on how those manufacturer perform this year as a part of the total SAR and maybe slightly, but you are looking into a crystal ball there.

Okay. And then can you just remind us, again, of when your interest rate swaps expire, and can you perhaps comment on, what the proper quarterly impact should be going forward. I think in the reconciliations you mentioned a net income impact of $3.3 million, sort of, in 4Q. I imagine that interest rates rose during the quarter but I don't really know. Can you, can you say what that ought to be sort of on a run rate basis going forward?

I can handle the maturity, mid 2010.

Then with we will file the 10-K and there will be a table in footnotes like in the past that will give I don't you more detail ton individual swaps, and running $4 million to $5 million a quarter at where the interest rates are, are right now. Is the impact of those swipes.

Thanks. I appreciate it.

Roughly where the swap is at 5 to 6% interest rate. So, --

Okay. Good.

(Operator Instructions). Your next question is from Derrick Wenger of Jefferies and Company.

Just two follow ons here, what was your capital expenditure outlook for 2010, and your variability availability on the bank facility and letter of credits against it?

Yes. The number was 60 million gross, and with 20 million of mortgage funding. And it is important to know we have zero on the revolver today, drawn, and anticipate to have a zero balance, throughout the year. So it would be from cash that we generate.

The -- what is the availability on that facility in the letter of credit, out against it and then the capital expenditure outlook.

The facility right now, we have got, as of today, something like $73, or $73 million, of availability on the revolver that we can use given the borrowing base and where letters of credit are today. But again we are not planning to use the revolver for any purpose this year.

Okay. So do you have that letter of credit balance at year end and then capital expenditure outlook.

The capital expenditure was $60 million growth, $20 million of mortgage for $40 million of cash.

The outlook for this year.

That is the outlook for 2010. It is up $5 million from 2009. And principally because we have got, with we three large project.

There's about $96 million of LCs out there.

Okay.

But that's at year-end. It is down to just over $60 million today.

Okay. Thank you very much.

Your next question comes from Peter Siris Guerrilla Company.

Hi. This is -- I lost my voice. Apologize. First, before I ask my question, I want to thank everybody since, I am not only a shareholder but a happy customer having brought a car from you guy, got great service, thank you very much for all the help.

Thank you very much.

The -- it was actually a very interesting experience, to buy a preowned BMW. Thanks. So the, the question I am curious about is right now we are clearly in an economic slow down with low new car sales. First what is the scrappage rate, do you guys have any idea?

It is about 13 million new cars a year.

So, how long is this level of low car sales sustainable? In other words, is there a point, if you look out three or four year, what is the lowest level that you can see sustainable?

I mean I think we are at it. I don't think it gets any lower than where we are today, and you are going the see a nice gradual increase, some are project the SAR to be up over 12 and we are not seeing that but a nice gradual increase in new car volume, that's --

Yes, I mean I agree with Jeff. If you go out three or four years it will be 14 to 15 million.

Yes.

You may not get 17, again, but we don't need 17 million to generate the cash we did before.

It will be fun when we get into to a 12 or 13 million SAR for Sonic Automotive. We are just going to have a ball.

I am curious, with people having closed dealership, if the SAR gets back, so there's a total less competition, if the SAR gets back to 14 or 15 million do you make as much profit as you would have at 17 million in the past?

Oh yes. We sure do. And it doesn't need to go back to 14 or 15 million. It needs to get to 12 or 13 million. And that is the beauty of the model that we have been working so diligently on, with used cars and fixed operations. Our used car business is really driving our business. So, it really doesn't have to, have to go up that high. We are anxiously looking forward to that.

That was the point I was trying to get ton EBITDA slide, that we showed. We generated more EBITDA in 2009 than 2008. At an industry of 12 to 13 million we can be back to where we were in 2007. That was the 16 million SAR back then.

So the last question I have is as I look at the world and see less dealers and see more efficiency ones, and at some point my view was the SAR has to increase. What can go wrong with that picture? Aside from we can have another great, great depression. But I mean in a normal, in a normal world at some point doesn't the SAR have to at least equal the scrappage rate?

Yes or get better. That's what we keep saying. Exactly your comment. Things are going to continue to get better, and that's why we have been working so hard to be other facets of the business so when it does get better we can take full advantage of it.

If it doesn't we are still profitable.

Right. I understand that I am just -- what I am saying is there a scenario you can imagine four years out from now, where it doesn't get substantially better?

Unless there's another depression on top of the great recession, no. Oil prices go crazy but we convene that and made our way through that, too.

Even if oil price, I guess the question I am asking is this, even if oil prices, if the scrappage rate is 13 or 13.5 you can't keep selling 10 million cars a year.

It is still a big country and people need to move from point A to point B. We are optimistic.

Okay. I appreciate it.

Thank you.

That was our final question. I will now turn it back to management for closing remarks.

Well, thank you everyone. Just before I end the call I want to thank everyone of our outstanding associated who continue to work so diligently to make all of our success possible. Thank you, team very much. And it is an honor and a privilege to lead this great Company and we look forward to talking to you next quarter and sharing some more results with you.

Thank you.

Thanks.

Thank you for participating in today's conference. You may now disconnect.