Sonic Automotive Inc (SAH) 2011 Q3 法說會逐字稿

Good morning and welcome to Sonic Automotive's third-quarter 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, October 25, 2011. 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. 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 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. Dave Cosper, CFO of Sonic Automotive. This or cost per, you may begin your conference.

It's actually Scott Smith. Good morning everybody. Welcome to Sonic Automotive's third quarter 2011 earnings call. I am Scott Smith, the Company's President and Co-founder. Joining me on the call today are Dave Cosper, our CFO; Mr. Jeff Dyke, our Executive Vice President of Operations; Greg Young our Vice President of Finance; and the Company's Vice President, David Smith. I'll start the call today with an overview of the quarter, after which I will turn it over to Dave for his review of our financial results followed by Jeff with an outlook of our operating results. We will then open the call for your questions.

With that, please turn to the first slide. Overall results. Our third-quarter results reflect of the continuing recovery in the retail-automotive sector combined with our focus on being predictable, repeatable, and sustainable. Our EPS from continuing operations was $0.33 per share compared to $0.25 in the prior-year quarter. We saw strong growth across all of our business lines.

Our new vehicle volume was up 8% over Q3 last year, which again out-paced the industry growth. Our used volume grew 16% over the prior quarter. With 10 consecutive quarters of double-digit growth, we have proven our ability to consistently grow this core piece of our business through difficult economic and pricing cycles. Our parts and service business continues to grow steadily with revenues up 5% over the third quarter of last year despite having one less service day in the current period.

SG&A as a percentage of gross profit at 78.8% was 150 basis-point improvement over the third quarter last year, as we continue to leverage our costs with the strong growth profit growth. Our results this quarter continue to reflect the hard work of that our team has put into executing our predictable, repeatable, and sustainable strategic plans and operating playbooks. As a result our earnings this quarter and our expectations were a fairly stable fourth-quarter operating environment, we are increasing our full year continuing operations earnings-per-share expectation to range of the $1.33 to a $1.37 per share. With that, I will turn the call over to Dave to provide more color on the finances.

Scott mentioned we grew revenue 13% in the quarter. Operating profit improved 15%, and with our continued improvement in our interest cost, we grew after-tax profits by 39%. EPS is $0.33 for the quarter, up 32% from last year. We remain focused on our 3 priorities of growing a base business, owning our property, and reducing our debt. We are making good progress on all fronts.

During the quarter we retired the remaining $43 million of our 8.625% debt, and that had been a key one of ours. Also as Jeff will discuss our operating performance continues to improve on all fronts in view of this performance and the improved Japanese product availability. We are increasing our earnings guidance for the year to $1.33 to $1.37 a share.

Next slide. SG&A's percent of gross was 78.8% for the quarter down from 80.3% last year. We continue to see leverage from our ability to grow revenue and gross while controlling expenses. This is frankly particularly pleasing as we are investing much more in technology and training to support our team for even greater growth in the future. Next to slide it.

This slide shows our capital spending for 2011, which is projected at $84 million net of mortgage proceeds. As you can see the majority of spending was in the first 9 months of the year. This was driven heavily by the purchase of 5 stores in the first quarter that had been leased. And spending to complete a luxury store in California. With that I will turn the call over to Jeff.

I appreciate the opportunity to share the Sonic Automotive third quarter 2011 operating results. We continue to see success in our new car playbook real well. As you can see on the slide, we once again outperformed the industry. And when you look at out mix of brands versus the same industry mix, the gap widens even more. Our market-share levels are at an all-time high for the quarter. Our plans to have our new car playbook installed complete by the end of 2012.

Our gross profit for the unit was $2,391, up at $124 per unit, as gross profit rose 14.3%. We expect the SAAR to be in the range of 12.5 million units to 12.7 million units, right in line with our projections for the year. Japanese inventories continue to improve, and as they do, we expect to take advantage of the increased inventory levels. New vehicle-base supply was 39 days, domestic was at 61 days, import was at 23 days, and luxury at 41 days.

Next slide please. This marks our tenth consecutive quarter of double-digit growth in premium volume, as our team continues this march towards advertising 100 use per store, per month. We averaged 81 units for the quarter. As you can see on this chart, we were up 16% volume for the quarter, while revenue was up 17%. If you look at the third quarter compounded since 2008, we have grown our used car volume by 64%. We have also grown our gross by 44%, when you include recon and pre-owned F & I.

Our used PUR was down for the quarter, but in line with our quarterly expectations as import-purchase inventory was more expensive than normal due to the new car inventory shortages. To retail markets stayed competitive during the quarter, so we saw some margin erosion on the front end, but overall still had great gross growth that when including F & I internal. The good news is as new car inventory levels are improving and prices on premium are coming down, and we will see more margins returned to normalize levels.

Our used car -- new ratio -- used new ratio was 0.95 to 1 as we continued to demonstrate excellent performance in this important measurement. Our day supply at the end of the quarter was 29 days, Certified pre-owned was 28% of our mix, that's right in line with our strategy.

Next slide please. As you can see on the chart fixed-operations revenue was up 5%, while gross profit grew 3% for the quarter. This marked our second best quarter in Company history, as we stayed on record phase on 2011 in both revenue and gross. Customer pay revenue was up 4%, while customer pay gross was up 2.6% for the quarter. As our customer-pay-business continues to build on the back of strong new and pre-owned volume growth and aggressive parts and service specials, driving customers to our business from local mom-and-pop services, tire and quick-lube centers.

Warranty revenue was down 5.1% and warranty gross was down 4.8% for the quarter, and represented about 15% of our fixed-operations revenue. It is my pleasure to lead the Sonic Automotive operations team. I would like to thank this moment day thank each and every technician for the hard work and dedication in helping build one of America's greatest Companies to work and shop. And with that, I will turn the call back over to our President, Mr. Scott Smith.

In summary, Q3 was in line with our original performance expectations despite, low available -- availability of new inventory from our Japanese manufacturer partners. Our new car volume and market share continued to outperform the industry. Our used car volume and associated gross continues to grow at double-digit rates for the tenth consecutive quarter. Fixed operations continues its record pace for 2011. Our operating strategy is simple and successful.

Our focus on creating predictable, repeatable, and sustainable processes in our dealerships are producing results in every area of our business. As we continue to focus our attention on developing our culture and developing our leaders at all levels of our team, our new and used the volumes are exceeding industry growth, driving growth, and related fixed ops in F&I businesses. We are forecasting a full year 2011 SAAR in the range of 12.5 million to 12.7 million in line with our original estimates.

They're raising our EPS estimates for full-year 2011 to $1.33 to a $1.37 based on continued strong execution of our playbooks by our team. It is my honor and privilege to lead our great team. Before we take questions, I want to take a minute to thank all of our Associates and vendor partners to join together every day to help us build one of America's greatest companies to work and shop. With that, we will now open the call for your questions.

(Operator Instructions). Your first question comes from Himanshu Patel with JPMorgan.

This is actually Mike (inaudible) in for (inaudible) today. Just a quick one here. I notice you have typically outperformed the industry by mid- or high-single digits in the first half of the year, but looking at this quarter, it seems that the out-performance was closer to 2%. What's the information behind the weaker performance? Are there certain brands, or certain regions that are experiencing any kind of weakness in the quarter?

No. I mean, all of the brands are strong enough at the end of the day. Mike, it's Jeff Dyke. It's just a lack of inventory. Our base supply on the import brands was -- got really low during the quarter, and that created some volume issues there. But other than that, if those inventory levels pick back up, we expect to see our new car volumes gain attraction.

If you look at the industry, on mix adjusted, the performance is really quite strong. It's really which brands are performing well within the industry versus what we are selling.

I think if you go back to the slide that I did on new retail vehicles, it shows that the mix adjusted for the industry, he took our brands with the industry. Industry was down 2.9%. Sonic was up 8.4%. That gap is pretty much in line with where we have been all year long.

And that's driven by a lack of inventory.

And just a quick follow-up. Looking at your parts and services growth, it seems that there is no signs of any material slowdown just looking at first quarter, third quarter. It has been up 5% to 6% year-over-year each quarter. What is your outlook for 2012 and beyond, and any sign of any slowdown at all?

No, we don't see any slowdown. We feel like the fourth quarter of '11 will be in line with where we have been. We will see how 2012 goes. But as long as our volume keeps driving the way it is, especially from a premium perspective, that business is going to be there for us and continue to grow. We said that at the end of last year, that it was going to grow this year. And we feel comfortable with the level that we are growing at right now.

Great. Thank you very much.

Your next question comes from Rick Nelson with Stephens.

I'm asking about the new car playbook. How many stores have incorporated that playbook and what is the performance there and the rollout plan for that?

Rick, I said that we would be finished rolling out by the end of 2012. We have about 35 to 40 stores are rolled out currently. You have seen it all year long. Our performance is well ahead of the industry, and we continue to see that kind of growth in the stores that we have rolled out. There's been no change since we reported last quarter. It has just been excellent, and we hope to keep that going as we move into 2012.

Certainly, (inaudible). Can you talk about your margin expectations on both the new car side and used car side, you're driving volume, but seem to be giving up some margin to do so.

Yes, everybody is always focused on that margin percentage number, and we look at our business a little differently. We are driving fixed operations, F&I, with the volume, so the total gross dollars are way up and that is what we are focused on. We think we are creating a lot more customers for long-term success there, building our book of business. Our margin percentages, they fluctuated on pre-owned just because inventory was more expensive during the summer. We didn't move our prices up. We stayed very competitive. We did a little bit of that on new, but our margins were -- our PURs were up about $125 and margin percentages were flat. I expect on new, for it to stay about that way, and on used, as long as we start getting some import inventory in the fourth quarter, and it gives us a little relief there. Then we will be in good shape and used margins will return to a more normalized level. If it takes a little longer, then there will still be a little pressure on used car margins. Again, we are driving a lot more gross dollars. That's what you take to the bank. We are creating a lot more customers for the long-term. Our F&I was up 20% during that time frame, so we feel real comfortable where we are.

How about inventory days supply, where does that stand today and when do you think inventories will normalize?

I am hoping that the inventories begin to normalize a little bit here in the fourth quarter. Our days supply on new is at 39 days. And when you break that down and look at import, our day supply is at 23 days. That is driven heavily by the large number of Honda stores that we have. But we have a range from a 4.5-day supply all the way up to a 38-day supply. We average 21-day supply for Honda, so -- right now. We would like to see that obviously grow this quarter. But probably realistically returning to more normalized levels in the first quarter of 2012. Used car day supply is in great shape at 29 days. It will probably come down a little bit in October. But as we start moving towards the end of November like we typically do, we will start buying inventory when everybody else is selling off and use that inventory to help bolster margins in the first quarter.

Okay. Thanks a lot and good luck.

Thank you very much.

Your next question comes from Scott Stember with Sidoti.

Can you guys break out a little bit more parts and service, prep work in the quarter, warranty, and what the wholesale number was as far as same-store sales?

Yes. In terms of revenue, customer-pay growth on revenue was 4.1%, warranty was down 5.1%. Wholesale parts was up nearly 15%, and then sublet -- sublet internal has really grown there, up 17%, up double digit for both of those categories. The volume is really driving -- the volume and now customer pay are really driving our business from a fixed perspective.

And on the warranty side as strictly a function of last year's -- or a tough comparison, for last year's Toyota recalls?

It is. It's all over the board. Next quarter we may have a recall and it goes right back up. It is 15% of our revenue. Traditionally, it ranges between 17% and 18% of our revenue. It has been as low as 14.5%. It is not something we can control, and so it is not something we count on. We are driving our business from an internal perspective and from a customer-pay perspective and those numbers are growing nicely.

Last quarter you gave some details about used vehicle sales per location, where you were. Can you update us as to the third quarter where you were?

Sure. Obviously, our ultimate goal as we've been saying is to get to $100 per store, per month. We finished the quarter at $81. About where we were in the second quarter, which is fine. A lack of used car inventory in the marketplace slowed us down a little bit, but we were still able to grow our volume by 16% and our revenue by 17%. So right in line, 10 straight consecutive quarters of double-digit growth. It's right in line with our plan and what we're try to do is -- import inventory starts picking back up, and it is going to make it -- becomes more available, make it a little easier to continue our growth there.

What was that number last year? The sales per store, per location?

Great question. It was less. I think it was $74, $75, $76, somewhere in there. Like I said, it was less. This is going to be an all-time record year in volume for used-cars for us. And we've been bigger each quarter.

And just a last question on the capital deployment. Are we still in the same mindset of working on our internal operations over looking at outside growth?

Guess we are, Scott. And we will stay focused on those 3 priorities, as I mentioned, the base business, owning our property, and reducing our debt at least for a couple of years. Unless there's some open point that falls in our lap at a low cost. We are going to stay focused. Got you. That's all I had. Thank you.

Your next question comes from Colin Langan with UBS.

Good morning. Could you -- you mentioned parts and services, 15% is warranty. What is the mix for the other businesses?

Yes, no problem. Customer pay is about 46% of business warranty, 15% of the business, wholesale parts is about 13%, sublet and internal combined for the balance -- sublet internal and other combined for the balance, about 27%, something like that.

Has that changed? It seems like the margins there were weak and, I guess, contributing to the wholesale, is that a larger percent this quarter?

No. You are calling them weak, Colin, but we're not. We are being more aggressive on our service drives to drive customer pay and bring customers in from mom-and-pop dealers, tire houses that have traditionally got that business. We are trying to drive them to our service drive. We are driving a lot more gross and taking a lot more dollars to the bank. We don't take percentages to the bank. We just don't look at it like that. One of these days we will get that message across.

Okay. I mean, if we were looking -- tough to comment on the margin, but if you're going to look at a margin going forward, you might see stronger growth, but the margins might not be as strong -- as you're (inaudible)

I think if you landed somewhere between where we are today and 50%, that's probably a pretty good margin outlook and the kind of growth that we are at today. It's going to fluctuate based on the promotions that we run with the different products that we have in our service drives, but it's not a reflection of warranty. Warranty is moving around a little bit, from like I said, 15% to 18% of our business. That's not something that we can control. That is out of our control, so we are focused on what we think is going to drive our business, which is customer pay and driving more volume through new and used.

And on the used margin, I didn't quite get it. Why was margin (technical difficulty) inventory shortages? How would that affect the margin?

Yes, let me explain that to you. Throughout the summer, the import brands, because of shortages on new cars, the import vehicles were just a lot more expensive. So we were paying, heck, near retail prices for used-car inventory, and we chose to by that inventory and sell it at a lower margin. One, so that we had inventory on our lots for our used-car machine to keep growing. And two, to keep our sales associates engaged. One of the last things that we want to do is end up with not a lot of inventory on our lot. We were very aggressive in buying used-car inventory during the summer months. As a result they were more expensive. The retail prices didn't move up enough to cover the increasing expenses. They pushed the margin dollars and percentage down. But that's a one-time -- we had a tsunami, vehicle inventory got short, it got more expensive phenomenon. Margins will return to the normal $1450 to $1500 a copy, where we like to run our business in the coming months.

Okay. So for Q4, the question would be whether the pricing of those import vehicles continues to come down?

Yes. What's going to happen is, it's going to build over the quarter. And it's going start out, probably in October, similar to where it's been. And then it will get stronger in November, and it should be really strong in December as we move forward.

And then, last question, your guidance implies a quarter-over-quarter earnings increase, which is abnormal given, usually seasonally Q4 is a bit weaker. What is giving that confidence? Is it really the view you're going to outperform on the import side as Japan recovers, or is it really cost cutting that's going to help the fourth quarter?

You know that the normal seasonality's becoming blurred over time, Collin, is what we've seen. That's point number 1. Point number 2 is, clearly, we were held back because of the Japanese situation in Q3. If you recall we held our guidance flat at the end of last quarter because of the uncertainty around what was going on with the supply situation on the Japanese brands. We worked our way through that. Even at that time, we indicated that we would take our guidance up, and we are. There's a couple things. One, the performance on the operations side is there. We are driving volume and we are getting gross. And so we are very comfortable raising the guidance.

Yes. It's costs are in line and should stay in line through Q4, but the other thing, Colin, brand mix plays a big role here. Our December's are just unbelievably fantastic with the BMW, Mercedes, Highline mix that we have in this Company, and Lexis. It is just amazing what happens around here in the 4 weeks of that month. We traditionally have some real great performances then and have over the last couple of years. And we expect it to be the same moving forward. It's going to be a good quarter.

Okay, thank you very much.

(Operator Instructions). Your next question comes from John Murphy with Bank of America, Merrill Lynch.

Good morning guys. The first question, on the new guidance. If we look at the midpoint [as] you've raised the range about 10% versus where you were at the end of July. Obviously, the first half was in the bag at that point where you're only looking at the second half as a delta here. So, really, implies that you think your earnings power is almost 20% higher than you did back then. I'm just trying to understand, you haven't changed the industry forecast and you've raised the guidance pretty substantially, just based on new information in the second half of the year. You guys really think your earning power is 20% improved from where it was at the midpoint of this year? Just trying to [see], is that a macro -- it's not macro driven, because you're not changing your macro forecasts. It just seems like your earnings power is really [sitting] at a pretty low level of SAR.

Yes. You heard my answer to the prior question to Collin. We kept it low, and we knew it was low, and indicated that if we worked through the Japanese issue, we would be looking much better and would be raising our guidance. But I -- versus where we thought we would be at the beginning of the year, our performance is much better than our internal estimates on new and used. And it is really driving F&I, and that is helping our business. So shame on us, we are doing a good job. So I don't feel bad at all about taking our guidance up, and as Jeff mentioned, Q4 is very strong. It happens in the last week of the month, and we're comfortable with it.

John, our business continues to get stronger and whether the SAR is at 12.5 or 12.7, we are outperforming the SAR. And we are still projecting to be at the 12.5 to 12.7 level, and obviously we're projecting that we are going to continue to outperform that level. We haven't been outperforming it by just a little bit, now. When you look at our mix and you look at the chart that we put out there, we are outperforming it by double-digit. And that's a lot because it drives a lot of used car trades for us, and if that drives used car trades, our used car volume goes up. And heck, we are selling almost 1-to-1 used to new. It just makes a big difference. As that volume goes up, our business gets a lot better. We leverage our costs, and this machine really starts to crank. It should be a really good fourth quarter and all indications in October are that that's exactly what's going to happen.

(multiple speakers) Sorry. We've got $0.97 through 9 months and if we just repeat Q3 with no adjustment for Christmas or any other performance items, we would be at a $1.30. I don't think -- it makes sense given the way we have been performing and what we saw in Q3.

We were pleasantly surprised. I wasn't trying to suggest anything other than that. Second question. When we look at your current cost structure, you've kept a lot of sales folks around in tough times to really invest in your human capital, which it seems like it would be a good thing in the long-term. I'm just trying to understand, as the SAR does recover, how much can it recover before you need to do hiring? Is it at 13 million or $14 million of SAR that you can run up to with your current cost structure?

John, we don't have to hire any more people. Our structure and the way we are today, the traditional volumes that you get out of each sales associate in this Company you [throw out] the window, our technology and the things we have been doing with our culture, the SAR can go on up to $14.5 million or $15 million. We are not going to need to hire any more salespeople or any more people to get the job done. We made that investment 2 years ago, when we were going through all of this stuff. And we are set. We can just keep on riding the wave. That's why we are so excited about '12 and '13. It should be a lot of fun.

Okay, and then just lastly, Dave, on the cap structure you took out 8.625 in the quarter, is there anything else in the near term that you think you are going to take out, or was this a methodical, long-term refinancing some of your operating leases into mortgages and slowly working down debt? Just trying to understand if there's any big chunks in the near term.

The beautiful thing is we don't have any near-term maturities, which I'm very thrilled about. I personally don't think there's going to be a double dip, but you never know. It is nice not to have any near-term maturities. The closest thing we have is the convert and that has a potential quit-call date in 2014. Yes, we are focused on our property. We've got a plan there. It is nothing big bang. We will just work our way into it over time as leases mature. And then we will poke at the convert and other bits of our debt over time. We are not in any rush. We feel we are heading in the right direction, and we're just going to stay focused on it.

Thanks a lot guys. Keep it up.

Thank you. I will now turn the conference back to Scott Smith for closing remarks.

Thank you. I'd like to thank everyone for taking time to be on our call today. You have a wonderful day.

Thank you. This concludes the conference. You may now disconnect.