Sonic Automotive Inc (SAH) 2013 Q1 法說會逐字稿

Good morning and welcome to the Sonic Automotive first quarter 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 23, 2013. 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 investor relations tab under Our Company and choosing webcasts and presentations on the right side of the page. 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 and Chief Strategic Officer of Sonic Automotive. Mr. Smith you may begin your conference.

Great, thank you. Good morning and welcome to Sonic Automotive's first quarter 2013 earnings conference call. I'm Scott Smith, the Company's co-founder, President, and Chief Strategic Officer. Joining me on the call today is Heath Byrd, the Company's new Chief Financial Officer; and Mr. Jeff Dyke, the Company's Executive Vice President of Retail Operations; Mr. C.G. Saffer, the Company's Chief Accounting Officer; and Mr. David Smith, the Company's Vice Chairman. I'll begin the call with a brief review of the quarter and then I'll turn the call over for Heath for a brief financial recap and then Jeff will give an operational recap. After some summary comments from me we will open the call for your questions. With that please turn to the slide titled Overall Results.

We are pleased with the results of the first quarter. Our revenue was up 8.1%. We out paced the new vehicle industry for the quarter with volume of 7.4% being up. Our pre owned volume was up 3.9%. F&I was up 13.7%. The fixed ops was up 1.4% with two less fixed days. SG&A was 78.5%. Income from continuing ops was $21.7 million, up 2.6%. And our EPS in first quarter was $0.41, up 13.9%. With that I'll now turn the call over to Heath for some financial color. Heath?

Thank you Scott, good morning everyone. As Scott mentioned if you turn to the next slide, the Q1 results, as Scott mentioned we were up 8% of a record level of over $2 billion, driven primarily with improvements in all the business but specifically in variable ops. New retail revenue up 11.7%. Used revenue up 4.8%. We believe the implementation of True Price and SIMS is helping to fuel the growth of our top line and we expect that to continue as all locations are now fully implemented. This growth in revenue resulted in gross profit of $313 million, which is an increase of 3% from last year. And diluted EPS from continued ops of $0.41, up 14% from last year. Next slide please.

SG&A to Gross slide, as you can see here SG&A was up 40 basis points to 78.5% from last year. However we are trending to a target near 77% SG&A for the full year. Expenses this year will include our continued investment in technology and training. And in addition we will have incremental expense related to strengthening our internal controls over financial reporting. As we disclosed in March, management did identify controlled deficiencies related to our dealership level accounting process. It is important to note that these findings did not result in any material misstatements and we did receive a clean opinion on our financial statements for 2012. However it does not minimize the need to correct these issues. Ensuring the effectiveness of our control involvement is a top priority for this year and into 2014. We've added additional resources and invested in technologies to address all deficiencies as well as enhance the overall environment. I'm very pleased with our current progress and I expect full resolution of all issues. Next slide please.

Capital spend, you can see from this slide our total CapEx for Q1 was $59 million. This included an acquisition of four properties. With the mortgage offset, total cash used was $40 million. Estimates for the year are $67 million for real estate, and $105 million for facilities, store level CapEx and IT spend. Next slide. This is our debt covenants. Again this slide shows we are compliant with all of our covenants from our credit facility and we do expect to be so going forward. Next slide please. Share Repurchases. On this slide you can see the activity for Q1 at 392,000 shares and we do have additional authorization of $137 million for share repurchases.

So overall I feel it was a very good quarter with continued organic growth, and as you can see we continue our focus on investment in the core businesses, owning our properties, and improving the capital structure. Based on Q1 results and our forecast we are reaffirming our guidance of the $1.93 to $ 2.03 EPS. And with that I'll turn the call over to Jeff Dyke.

Thanks, Heath. Good morning everyone. I appreciate the opportunity to share the Sonic Automotive 2013 first-quarter operating results. Before I start I want to take a moment to welcome Heath Byrd as our new CFO. He is going to do a terrific job and I look forward to partnering with him for many years to come as we continue to build one of America's greatest companies to work and shop.

Let's take a look at the numbers. New retail revenue as you heard, was up 11.7% while volume was up 7.4% as we recorded our largest new-car volume first quarter in Company history. We completed our True Price rollout and the stores are getting comfortable with our new processes and pricing culture. New car PURs were $2,132, we're very satisfied with this performance given the significant pricing changes with True Price that we've put the stores through, they've done a remarkable job. We believe we have upside to new car PUR as our True Price process becomes more stabilized. A little brand color. BMW and Mini led the way for us up from almost 25%, Honda up almost 2%, Toyota up almost 9%, Mercedes was up 1%, Audi 7%, Lexus pushing 9%, Cadillac almost 8%, Land Rover up 10%, General Motors up a little under 2%, and Ford up just over 12%. New vehicle day supply ended the quarter at 56 days. Next slide please.

Our pre-owned business continues to improve as well. Q1 of 2013 was our largest pre-owned volume first quarter in Company history, up 4% over last year's record quarter. We sold 88 units per store in the first quarter. That was our largest per store volume quarter in Company history. March was the largest pre-owned volume month in Company history, hitting 94 units per store, also a record, as we continue to make progress in achieving our 100 unit volume on a per store, per month which I think we will do in the second half of the year. Pre-owned volume PUR was $1,437, up $68 sequentially, and our best PUR since Q1 of last year. We expect to continue to see pre-owned PURs improve now that all pricing from pre-owned is controlled centrally and we've locked that down through our SIMS system and our trade center management team. Pre-owned Day supply ended the quarter at 27.9 days as we continued to efficiently manage our pre-owned inventory. Next slide please.

As you can see from this slide Fixed Operations revenue was up 1.4% and gross was up 1%. If you just adjust for two less fixed days in the quarter we are up 4.2% in gross. An outstanding fixed quarter and another fixed gross record for Q1. Customer Credit Revenue was up 1.5%, while customer paid gross was up 1.4%. Warranty gross was up 4% led by several recalls, a trend we do not expect to continue. Overall, warranty was 15% of our revenues which is about flat to our prior year.

I'd like to take this opportunity to thank our team for another great, record-breaking first quarter. Their dedication and hard work is something I admire very much. They get all the credit for helping us build one of America's greatest companies to work and shop. Many thanks to you team and now I'll turn the call back over to Scott. Scott?

Thank you, JD. Again we had record revenues in the quarter and record new and used retail volumes. We have had 14 consecutive quarters or 3.5 years of quarter-over-quarter revenue growth without any acquisitions. We've enjoyed double-digit EPS growth of 14% in the quarter. The business environment continues to be favorable for us, therefore we are maintaining our full-year earnings guidance of $1.93 to $2.03 in earnings per share. And before we open the call to take your questions I would like to thank our Sonic associates, our manufacture and vendor partners for making Sonic Automotive one of America's greatest companies to work and shop. It is an honor and a privilege to lead our great Company and with that we will open the call for your questions. Thank you.

(Operator Instructions)

Rick Nelson with Stephens.

Hello. Scott I'm sorry about that. Thanks for taking the question. I'd like to ask about fixed ops growth--the decline that we saw in the internal and sublet in the quarter. Is that something -- what was the driver their--the expectation as we go forward?

Yes Rick. This is Jeff Dyke. We had the inventories coming out of December so a lot of that internal number ended up in the fourth quarter. I expect the internal numbers that you've been seeing year-over-year as the growth sort of narrows and is not huge double digit to narrow as well. But I do not expect it to be negative as we move forward. It should continue to be equal or up as our used car business is.

Thank you for that color. So I would like to ask about the S&I. If you could give us a rough breakdown between what is rate and what would be product? And do you see any risk from the CFPB action?

Yes, first of all I do not see any risk whatsoever. I mean our S&I business has been growing nicely. We'll give you the actual rate to product breakdown in one second, but we have been very pleased with the growth in S&I. Our team has been doing a really nice job and we have been steadily growing our PUR. So we feel real comfortable with where we are, no risk whatsoever.

We are about 40% of the finance side (Indiscernable - low volume).

Yes 40% on the finance side and the rest of it is product.

Thank you for that. SG&A did elaborate or recognize that part of it is that gross profit has declined in both new and used but if you could address that. And how the accounting costs may have played into the quarter and your expectations on a go forward basis.

Yes, part of that SG&A in the first quarter was some of the remediation work that we are doing on the control environment. We are estimating that the total spent for the year will be around $3 million but we think the overall impact will be $0.001 to a $0.01 overall for the year. We will absorb some of that expense by managing other areas of the business. We also had some follow-up expenses from last year's audit that hit in Q1 and so I think from and SG&A perspective about--$800,000 of that in the first quarter was one time nonrecurring as it relates to the accounting for remediation.

And will there be non-recurring expenses in that regard?

Yes the only thing that is going to be recurring going forward in 2014 is we are going to be staffing up to ensure compliance in the field as well as the corporate level. And so that will be recurring but a lot of the stuff that we are doing is one time investment in technology and some professional services that will start dissipating in '13 and be gone altogether in '14.

And Rick, one thing that you mentioned the gross. I'm very happy with our new car PUR, especially just finishing the True Price. And then from a pre owned perspective sequentially we're up nicely and I expect our PUR for the pre owned to continue to grow as we move through the year. We have been between 1400 and1450 for a while now and I think--and we saw a really nice increase in March as we locked down our pricing. And I think we will see that a nice steady increase in PUR, maybe approaching the 1500 mark or even a little better as we move forward throughout the year.

(Indiscernable - multiple speakers) will it improve sequentially?

Yes it improve nicely. I mean the year-over-year number, it was very high last year. A lot of that had to do with a trade that we took off of the issues that was created by the tsunami, but other than that I'm very, very pleased with where we are in the trade center and syms is starting to make a difference for us.

Good luck.

Thank you Rick.

Ravi Shanker with Morgan Stanley.

Good morning everyone, this is actually EJ in for Ravi. My first question is on pricing. So you guys saw a pretty good ASP growth this quarter in both new and used. It sounds like that was driven in part by mix. Could you talk a little bit about what you're seeing in terms of the incentive environment? Maybe in particular the Jade three and your discussions with them. Do you see the weaker yen having an impact at all on their pricing strategies.

Not yet, maybe it will as we move forward. But the incentives certainly for Honda were not as aggressive in the first quarter as they were last year and we have yet to see the big, big Honda press that we had the last couple of years. Especially the Accord program that they had last year so-- incentives year-over-year when you add it all up they were down just a tad bit but not enough to slow us down. But for Japanese brands they were not as aggressive, Toyota being more aggressive than Honda.

How would you characterize then I guess your ASP growth. Is that mostly because of mix or is there some underlying activity going on there?

Well I think mixed certainly has played a role in it.

BMW made up a greater portion of our sales in the first quarter this year than last year and that really drives our sales price. They are a large percentage of overall mix in their growth when you add BMW and [Meed] together was nearly 25%

I got it. Next question on capital allocation. You mentioned last quarter that you are now more open to acquisition opportunities. Can you comment a bit on what you're seeing in the M&A environment now and if that has made you more comfortable with that potential or is it still going to be very much opportunistic and the focus more on share repurchases and lease buy backs?

Well I think it's important to point out--this is Scott by the way. Our strategy really has not changed. We are still continuing to invest in our base business, invest in our infrastructure and tools to help us become more efficient, invest in real estate and strengthen our balance sheet, so we do have considerable amounts of authority on stock repurchase which our aim is to be strategic and opportunistic. And last year we did sell platform dealerships in Oklahoma. We are actively looking to replace those revenues and we have been out in the market looking. We do not have anything to announce, we don't have any definitive agreements or anything like that. But we are looking in the market to be opportunistic there.

Okay great. Thank you very much.

Scott Stember with Sidoti & Company.

Good morning.

Hi Scott.

Can you talk a little bit about the used growth margin decline? How much of that was due to possible disruption from your Associates learning how to use Sims?

No Scott, if you think about it sequentially our used PUR is growing. I think it was up $60 or $68 quarter over quarter pushing toward the 1450 mark. Last year we had a unusual first quarter for us in terms of PUR. A lot of that had to do with the cheaper inventory we were able to buy coming out of the prior year given what happened with the tsunami, so forth and so on. We expect our used car PUR's to sequentially continue to grow. They are better in April right now than they were in March and I think that we will see that continuing to grow throughout the year. But 1500--1450 between 1450 and 1500 has been our target. We may push a little north of that, locking down the pricing here at home office in actually managing our pricing and managing our appraisal numbers. I am seeing a little bit of a bigger uptick in margin. So as we control that better in our environment, and culture gets used to that I think there's probably another $50 and maybe even $100 a car there.

Thank you, can you just give us the timing on when Sims will be finished in retail trade center.

It is all done. It is complete.

Got you.

We completed it in the first quarter so we are all set.

Okay. And on the iPad implementation as well, maybe just give some details of how it is helping the parts and service there.

Service iPads are up. I am not quite ready to share the growth. I can tell you when you look at the BMW, Honda and our bigger brands we are seeing very, very nice growth. But again it is a big change in culture taking a pen and paper out of somebody's hand and putting an iPad in someone's hand and teaching them how to use it. We have got some really neat things happening. That's what I said last quarter. I think towards the second half of the year, and I will be able to give you some definitive numbers and how all of that is working for us.

And all dealerships were completed end of this month.

IPads are all rolled out in sales and service. Our next service will be for technicians.

Okay in the last--obviously the last year there's been a good $2 million to $3 million incremental cost for a lot of these items that you've been putting in place. Can you talk about how that could possibly wind down as the year progresses into 2014 or are these costs that will remain in place?

We have got about $18 million forecasted for capital spend in IT. Of that about $5 million is probably development cost. The rest is equipment iPads, IT telemetry and so our development cost is going down as we have got a lot of that completed. We are still working on finalizing our CRM product but for the iPad apps-- iPhone apps-- that development has started to dwindle so it will become more of a maintenance rather than customer development going forward. So I do anticipate that the expense on the IT side will be going down into '13 and '14.

Got you. And the last question. Could you give us an idea of how April has been shaping up from a sales perspective?

Yes no problem. Pre owned in particular very, very nice. We are having a solid performance. The new car business is not too bad either depending on the brands you're looking at. But it is a solid April in comparison to prior year and to what has been going on the first -- in the first quarter. When you look at the quarter as it broke down January was a good January. February was not the February that we hoped for. And March was gang busters. And April has been a good month so far.

I guess that just leads to the question of the payroll tax and potential impact. You guys really are not seeing all that much?

I think if we saw it, we saw some with the tax increased from a state-level in California. You know California just had a really difficult February which played into a little softer February than we would've liked. That seems to have dissipated now because we are up and running again so I think that played a role in it.

Right. That's all I have thank you.

Thank you Scott.

John Murphy with Bank of America Merrill Lynch.

Good morning. This is Elizabeth Lane on for John. How should we be thinking about incremental flow through to the bottom line as gross profit theoretically improves with volumes. Because if we look at the first quarter this year versus last year, gross profit grew 3% and your operating profit actually declined by about 1%. So there's some negative incremental flow through and you addressed some of the specific issues in the quarter, but what kind of flow through should we expect going forward on our longer-term basis? Is there like a benchmark or target level that you hope to achieve over time?

Yes Elizabeth, this is C.G. What we think that we can push through is around 15%. We did have some cost in the first quarter that held us up a little bit and as our gross was growth through the year we make more in the following quarter so I think you will see that push through down to the operating profit.

Okay great. Thank you very much.

(Operator Instructions)

Aditya Oberoi.

Thanks a lot. I had a question on your margins in the Fixed Operations category. The margins were one of the lowest levels you guys have seen for the last few years now so what was the key driver of that? Was the factor being internal and sublet being down or is there anything else? And how should we think about them going forward?

Internal and sublet certainly played a role in that. Also we are working on -- we are not the [lumpest] in the sector there in terms of margin percentage. And we are studying elasticity of pricing there in our products and what we can do to drive growth. There are a lot of different things going on in Fixed Operations. I'll point out we first had our best first-quarter growth for Fixed Operations that we ever had as a Company. So we are playing around with that and you should expect margins to move around a little bit as we try to find the right sweet spot for margins for Fixed Operations.

Got it. That is helpful. My second question was on the overall sales performance. Were there any specific pockets from a regional standpoint that performed above average or was the sales performance more broad based?

No, from a selling performance pretty good across the country. East coast is performing a little above what we thought. When you look at California it was not the sales performance for us in February as much is was a margin performance. Some of that is our team effort being used to True Price and the way we are doing things now. But also the economy was goofy in February there so sales performance both on new and used pretty steady across our entire enterprise.

Got it and one last one and I think you addressed it a little bit, I'm sorry if I missed it. But in terms of capital allocation. I know you guys want to increase the level of ownership of your dealerships and the real estate there. And at the same time you guys did some buybacks this quarter. So how should we think about the allocation of capital going forward?

Well I think Scott mentioned we will stay focused on the core business, number one. Then the number two priority is owning our own properties and it's all about timing. Those opportunities exist once a lease comes to its term. And then we will either negotiate the purchase or potentially move the dealership so I think in the priorities those two stay at the top. And then you get down to making decisions on stock repurchase, acquisitions and other growth opportunities and we are treating those very opportunistically. We want have the right balance of that in each opportunity we evaluate and make decisions. So the ownership of properties stays in the top two.

Okay great, that is very helpful. Thank you very much guys.

And your next question comes from the line of. Colin Langan with UBS.

Good morning. This is Raul [Jedbare) for Colin. Most of our questions have been answered. Maybe, Heath, if you could talk about how your transition into the new role is progressing and what your priorities are sort of over the next 6 to 12 months.

Sure. Well number one, I have been with the Company for a little over five years now in another capacity so the institutional knowledge really helped out with the transition. And secondly, the Company made the decision in putting me in this position actually back in October so I had the privilege actually-- and obviously I worked with Dave for five years and then I had the privilege to work directly with him in this transition for essentially six months. So I felt like the transition went very smoothly and I feel comfortable that we are ready to move forward. The priorities really have not changed. If you look at our earnings call and our presentations over the last four years it is saying three components and we do not expect any change from that core business, owning our property, and showing with good capital structure. The only variance really is looking at acquisitions as they become available. So the focus is really staying the same as you've noted before.

Great. And then any thoughts on a national brand strategy similar to what one of would your competitors did?

This is Jeff. Auto Nation obviously has blazed a trail in their import and domestic stores. We think that is great for the industry. We have been working on internal branding for a long time in terms of our culture. And if that translates to external at some point and time in the future that's not something we're ruling out but certainly not ready to comment and say this is what we're going to do.

Okay, great. Thank you and congratulations, Heath.

Thank you.

(Operator Instructions) We have a follow-up question from the line of Ravi Shanker with Morgan Stanley.

Hi again, this is EJ in for Ravi again. Just a quick follow-up on S&I, if I could. I know you guys talked about this a little bit before the break between the finance and the product side. In terms of the actual growth this quarter, on my numbers I think you guys grew S&I per vehicle at about 8% year on year. Could you break that part down by what was actually driving back growth, whether was the finance bit or the product side?

It is both. We have growth in finance and products.

And it was primarily in products.

Our service contract administration has skyrocketed we had a big opportunity there and we're doing a but much better job there. Our service contract penetration is up 17% or 18% on new and, oh heck, maybe almost 27% on used.

Right, the finance side was up between 35% and 40%.

Great. Thank you very much.

This concludes today's question and answer session. I would like to turn the call back to Scott Smith for closing remarks.

I would like to thank everyone for taking time to be on our call today and we look forward to talking with you again next quarter. Thank you.

This concludes today's conference. You may now disconnect. [End of transcript]