Sonic Automotive Inc (SAH) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Sonic Automotive Third Quarter 2017 Earnings Conference Call. This conference call is being recorded today, Tuesday, October 24, 2017.

Presentation materials, which management will be reviewing on the conference call, can be accessed at the company's website at www.sonicautomotive.com by clicking on Our Company, then Investor Relations, then Webcasts & Presentations.

At this time, I would like to refer to the safe harbor statement under the Private Securities and Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectations about the company's products or market 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.

I would now like introduce Mr. Scott Smith, co-founder and CEO of Sonic Automotive. Mr. Smith, you may begin your conference.

Good morning, and welcome to Sonic Automotive's Third Quarter 2017 Earnings Call. I'm Scott Smith. Joining me on the call today are David Smith, our Vice Chairman; Heath Byrd, our CFO; Jeff Dyke, our Executive Vice President of Operations; and C.G. Saffer, our Chief Accounting Officer.

I trust everyone has read the documents released earlier this morning. I'll provide some brief comments and then turn the call over for questions.

For the quarter, we generated $0.45 per share from continuing operations on a GAAP basis and $0.40 per share on an adjusted basis. Our GAAP results were higher as a result of gains from the disposal of a franchise, offset by impairment charges, weather-related physical damage costs, impairment charges and legal matters.

The third quarter was challenging from an operational standpoint, and I'm very proud of how our team responded to the challenges. The hurricanes that affected the Southern states impacted so many people. I can't tell you how many hours our local and corporate teams spent preparing our stores for the storms and then dedicating time and resources to get our associates and our stores back on their feet. We're also grateful to local leaders and first responders who worked tirelessly assisting people in need.

All of our stores in the hurricane-impacted areas were able to continue operations by September 15. From the reopening dates to the end of the month, store activity in these areas was very strong, more so in the Harvey-affected areas in southern states and in the Irma-affected areas, as people began to repair and replace vehicles.

The largest impact we experienced was a loss of fixed operation days during that time we were closed. And that is quite noticeable in our results. We continue to see strength and opportunity in the used vehicle fixed ops and F&I areas of our business, but new vehicles remained under pressure as dealers compete for volume while trying not to erode GPU.

We remain committed to returning capital to shareholders and again announced a dividend of $0.05 per share for shareholders of record as of December 15, with the payment occurring on January 12, 2018.

Our stock repurchases were fairly robust during the quarter at a level of $11.4 million, as we continue to remain opportunistic in our repurchase strategy. We ended the quarter with a remaining repurchase authorization of approximately $107.7 million.

EchoPark results were in line with expectations. Our stores -- store platform in Colorado was again cash flow positive during the third quarter and moving towards overall profitability. Current plans include opening approximately 10 stores by the end of 2018. We'll provide some more color on this during our Q&A.

At this point, I'd like to open up the call for your questions.

(Operator Instructions) And our first question comes from the line of Rick Nelson with Stephens Inc.

This is Nick Zangler on for Rick here. First off, I'd like to commend some of your efforts that I've read about, post the hurricane. But looking into -- diving into that, post the hurricane, I guess both in Houston and in the Florida markets, how would you describe the replacement demand between the 2 immediately after? And if you could comment on how that demand has continued into October and if that's tempered off a bit or if it has remained strong quarter to date?

It's Jeff Dyke. Two different stories when it comes to Florida and Houston because in Houston, there were so many flood cars that were damaged and those counts were all over the board. But immediately after, the business couldn't have been more robust. We were selling more cars than we've ever sold in the marketplace. Gross was good. And business continues to be strong today, although it's not as strong as it was in the last couple of weeks of September and the first week of October, but still not bad.

Florida, we really didn't see a major pickup there afterwards. A little bit but nothing real, real strong, it -- not anywhere near where Houston is. And business has returned to normal, other than little issues that we've had with facilities and electricity and stuff. But other than that, business was back to normal fairly quickly. And we lost service days there. We lost service days in both. I mean, I would say that's the worst thing that happened to us anyway in the Florida market.

Got you. Do you expect this replacement demand to have a long tail? Do you think that it's -- it benefits you going into 2018?

It's Jeff again. No, I mean look, I think it's going to have a benefit and it certainly did in September. It's going to have a benefit in October. It's going to wane off in November. And we expect to have, sort of, a normalized December. So it's a short-term effect, not some long-term, ongoing effect that we're going to get.

Got you. And the F&I per unit was really strong this quarter. Was that driven in part by the hurricanes? I guess, the sales post the hurricanes, are more customers willing to opt into, or are they taking advantage of the financing? Are they opting into protection plans? Is that what drove the upside there?

It's twofold. Our mix -- in Texas, our F&I numbers are stronger than anywhere in the country, so as the mix goes up, our F&I numbers go up. And that -- at the beginning of the year, we switched over to JM&A, which we announced back then. And we just continue to get better every single quarter, every month. So it was an all-time PR record for us, and we expect that to continue to grow.

Got you. And then finally, can you just update us on the challenges with BMW? And did the hurricane -- does that benefit you at all with -- in regards to that challenge? And what's just the outlook there, going forward?

You bet. It's Jeff again. We've got 2 big BMW stores in Houston, so that certainly helps. But BMW is at the bottom of their cycle in terms of product. And so while we've had the new 5 Series, there's a lot more product to come, as we get towards the middle to the end of 2018. So -- and as you're aware, it's 30% of our profit mix. And when they struggle, it's more difficult for us to overcome, but they've got a great leadership team, and we have a lot of confidence in them. And we are sitting on their dealer board -- we do a lot of things to work with them just because of how much they mean to our business. And we have all the confidence, they'll come back. But we expect that to continue to be a struggle for us through the middle part of next year.

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

Great. Can you just like put a estimate around the impact of the hurricane within the quarter? I mean, it sounds like -- doesn't seem like a big impact on overall volumes. I mean, if you assume 20% of your dealers are in Houston and it was down a week, maybe is that a 1.5%, 2% impact. Is that the right way to think about it on the full quarter? And then if you take out the Houston and impacted Florida markets, I mean, is parts and services more stable through the rest of your business? Is that down for all related to those markets?

Yes, Colin. This is Heath. It's hard to determine the exact impact, because you probably got -- even though we can determine the impact of closed days, you've got a lack of business leading up to the storm and then, obviously, after even they were open. But we estimate the impact of both of the storms on an EPS basis was between $0.04 and $0.07.

And then on a fixed operations basis, our fixed operations business is good. Certainly, the storm had a role to play. We had one less fixed operations day this year versus last year, and we do about $2.5 million. So if you adjust for that, we were about flat. If you adjust for the storm, we would be up normally. So fixed operations business is solid. Customer pay business was down about 1% for us overall for the quarter and warranty was up 6%. That's a problem we're all facing. The more warranty hours that are in the shop, it just takes hours away from customer pay, so that's something that we're dealing with operationally. But overall, our fixed operations business was solid.

Got it. And then just secondly, how should we think about the impact of EchoPark as you're -- I think you have 6 stores now, is that right? And then you're going to add another 10 next year, you're losing, I guess, roughly at a run rate of a little less than $0.30. I mean, does that increase next year or do those current dealer -- stores actually start turning profitable?

Yes. So the current stores, the original two, are profitable. And then -- and so we're in a cycle here where you open up a store, there's a run rate where it takes us some -- a few months to ramp up. Our Colorado Springs store ramped up in 90 days to cash flow positive, which was great. That's probably 6 to 9 months ahead of the fastest store that had done it previously. So we're going to have stores that have been on for a while that are making money, store -- new stores that are going to be ramping up. So I don't expect it to be any less or any more than what it was this year. It's probably going to be budgeted about the same for 2018.

Yes. And Colin, this is C.G. We're right in the middle of budgets, too. So we may have a little bit better color on the next quarter call.

Your next question comes from the line of John Murphy with Bank of America.

This is Aileen Smith, on for John. As you think about EchoPark and your expansion of those stores into markets outside of Colorado, do you believe it's necessary or even possible to establish a nationwide footprint for that brand or similar in geographic exposure to your core business? Or are there particular markets like Denver that just make more sense to operate in than others?

Well, there's certainly more particular markets than others -- this is Jeff, but absolutely, it's a national brand, a national footprint, and we'll be opening EchoParks in markets where we currently do not have Sonic Automotive new car stores. That's been our intention all along. And we're growing as quickly and efficiently as we can, but you can expect to see an EchoPark in most of the major metros with -- in used car markets across the country.

And I think -- this is Scott. I think if you look at the model that CarMax has had the last 25 years on the build-out, I think that would give you an idea of what the future looks like for us as far as a footprint in markets that we would be interested in moving into.

Great, that's helpful. And just switching gears on the core business. It appear that gross margins and gross profit per unit are starting to stabilize on the new vehicle side. And your slide deck had indicated that GPU support was aided by the Houston stores. Outside of Houston, are you seeing a similar trend in stabilization in GPUs across your dealerships? And do you think that GPUs might hold in at current levels, going forward given a more normalization of inventory levels in the quarter?

Yes, that's the million-dollar question. We actually said last quarter that we thought new car margins for us were stabilizing, and they are. They seem to be. If you look at the trend on the chart that we gave you, quarter after quarter after quarter, we're in and around the same number.

The margin's coming in from different ways, not so much how much you make on the car but more incentives that we're getting paid. So it's heavily dependent upon that, and that's a coin toss. That can change at any given time depending on what the manufacturer decides to do. So we'll see. Right now as we forecast 2018, we'll forecast stabilized new car margins, with Audi coming with new product, with Mercedes coming with new product and BMW, for the back half of the year, coming with new product, that's certainly going to help, because new product launches help margin.

But there are other brands that are certainly struggling, and we're going to look at '18, sort of, flat to this year, and we'll go from there. But it is the big tough question. Margins have been all over the board in a decreasing trend, they do seem the last couple of quarters to have stabilized.

Great. And one last one. The impact of the hurricanes in the quarter on your business and other dealer businesses appear pretty well understood at this point, but can you give us some color on the impact of the California wildfires on your business, if any, especially given your overexposure to the region?

Yes. Actually, our stores are further south than where the wildfires are, so we've had very little impact other than, we have had employees that we're focused on and making sure that they're taken care of, just like we did in Houston and in Florida. But overall to our business, there's not been a major impact.

Your next question comes from the line of Armintas Sinkevicius with Morgan Stanley.

When we look at guidance for the fourth quarter, it implies a bit of a step-up, relative to the third quarter and EPS more so than we've seen in the last couple of years. Can you walk us through the basic assumptions on how you see the fourth quarter playing out?

This is Heath. There's a couple of things, we do see additional volume in business that is related to making up at -- in Harvey in Houston, that's going to be a driver in October and November. And then December always is a very strong -- excuse me, a month for us. And so if we do the math based on our trends and based on historically what we see in December, those are the 2 biggest items that are increasing in our fourth quarter.

Okay. And then just generally, can you talk about the health of the consumer, what you're seeing perhaps outside of the hurricane markets?

The business is good. Look, at the end of the day, you have an anomaly in the SAAR here for the last quarter and the last month. We expect it to come back down. But business has been steady. I wouldn't tell you it's terrible. It's -- obviously, it's not as good as it was a few years ago, but it's certainly been steady. We've seen a lot worse times, and we're expecting to have a decent fourth quarter.

And this is Heath again. I'll add -- I want to add one more other point to the fourth quarter. We discussed that we do have an expense reduction initiative going on. If you look at September, we had our best SG&A as a percent of gross. And so that is another factor that is going to be impacted in fourth quarter.

(Operator Instructions) And our next question comes from the line of Bret Jordan with Jefferies.

It's David Kelley on for Bret. Just a quick follow-up on California. Could you provide some color, maybe, on your retail performance in that market and parts and service trends as well?

I mean, our California market, in particular in Northern California has been strong. Our business there is good. The retail business is -- from a used car perspective is up in both markets, I think one market's up 7%, the other, 4.3%, somewhere in that market. F&I is really strong. Fixed operations is good but stronger in Northern California than Southern California. And a little bit of that is because we have a big BMW mix in Southern California, and we've been struggling a little bit with BMW, and that's driving that.

Okay, great. Perfect. And also looking at your days supply inventory chart. Looks like supply has come down, both new and used here. Is the hurricane playing a role there? And, I guess, how do we think about day supply going forward, given some of the production cuts we're hearing from manufacturers these days?

Yes, a great question. I think we ended at 53 days, something like that on the new car side. And we've been steadily, if you follow the trend, dropping our new car days supply. One, dealing with interest rate hikes and the slower SAAR. And then on the pre-owned side, we've got a higher days supply in Texas, because we've moved, oh gosh, 1,500-plus cars pre-owned into the marketplace to support that inventory. We typically would have 2,500, 2,400 cars in the market, and I've got, maybe, 3,200 cars in the market. So from a day supply, that's driving that particular market upwards for just pulling up the country. I would expect our used day supply to continue to drop between now and the end of the year on the Sonic side.

And when we started adding EchoPark in stores and adding inventory there, that could play a role overall. And I would expect our new car inventory to actually come up a little bit in December as we peak for our growth selling season at the end of the year and then to begin to flatten out, January, February.

Okay, great. And do you see BMW as an outlier from that or is this kind of an all-inclusive, most-brand shift in days supply here?

Yes, that was total day supply. BMW is right in the middle of all that.

Okay, perfect. Last one for me and I'll pass it along here. I guess, could you update us on your EchoPark inventory procurement strategy? I guess, what have you learned? How is that evolving? And as we add some additional stores in 2018, how do we think about inventory procurement, going forward just for EchoPark here?

Yes, if I told you everything I've learned, I'd have to shoot you afterwards. We have -- we've learned a ton but I am going to keep that under my breath and hold that for ourselves. You'll see our inventory management on the Sonic side result from a pre-owned perspective and procurement has always been really strong. We've always controlled our days supply and our wholesale, and we've just carried over those best practices to EchoPark. We learned a lot from a pricing perspective and from a purchase perspective. And as we move down the road, we get bigger and more successful, we'll share some more of that.

And we have no further questions in queue at this time, and I would like to turn the call back over to our presenters.

Great. Well, I'd like to thank everyone for joining us today and hope that you have wonderful day. Thank you.

Thank you for your participation. This does conclude today's conference call, and you may now disconnect.